UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-36385

 

BIOLASE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

87-0442441

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

4 Cromwell

Irvine, California 92618

(Address of principal executive offices) (Zip code)

(949) 361-1200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes      No  

Securities registered pursuant to Section 12(b) of the Act

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock at par value $0.001 per share

 

BIOL

 

The NASDAQ Stock Market LLC

(NASDAQ Capital Market)

As of May 7, 2019, the registrant had 21,293,736 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

BIOLASE, INC.

INDEX

 

 

  

 

  

Page

PART I.

  

FINANCIAL INFORMATION

  

 

Item 1.

  

Financial Statements (Unaudited):

  

3

 

  

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

  

3

 

  

Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and March 31, 2018

  

4

 

 

Consolidated Statements of Stockholders’ Equity as of March 31, 2019 and December 31, 2018

 

5

 

  

Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and March 31, 2018

  

6

 

  

Notes to Consolidated Financial Statements

  

7

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

25

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

35

Item 4.

  

Controls and Procedures

  

35

PART II

  

OTHER INFORMATION

  

35

Item 1.

  

Legal Proceedings

  

35

Item 1A.

  

Risk Factors

  

35

Item 5

 

Other Information

 

35

Item 6.

  

Exhibits

  

37

Signatures

 

40

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM  1.

FINANCIAL STATEMENTS

 

 

BIOLASE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,956

 

 

$

8,044

 

Restricted cash

 

 

312

 

 

 

312

 

Accounts receivable, less allowance of $869 and $850 in 2019 and

   2018, respectively

 

 

11,743

 

 

 

11,112

 

Inventory

 

 

12,023

 

 

 

12,248

 

Prepaid expenses and other current assets

 

 

1,815

 

 

 

1,591

 

Total current assets

 

 

28,849

 

 

 

33,307

 

Property, plant, and equipment, net

 

 

1,733

 

 

 

1,975

 

Goodwill

 

 

2,926

 

 

 

2,926

 

Other assets

 

 

302

 

 

 

308

 

Total assets

 

$

33,810

 

 

$

38,516

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

5,894

 

 

 

5,953

 

Accrued liabilities

 

 

6,713

 

 

 

7,538

 

Deferred revenue, current portion

 

 

2,513

 

 

 

2,476

 

Total current liabilities

 

 

15,120

 

 

 

15,967

 

Deferred income taxes, net

 

 

72

 

 

 

77

 

Warranty accrual

 

 

577

 

 

 

447

 

Other liabilities

 

 

162

 

 

 

100

 

Term loan

 

 

10,906

 

 

 

10,836

 

Total liabilities

 

 

26,837

 

 

 

27,427

 

Commitments and contingencies Note 11

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.001 per share; 1,000 shares authorized; 0

   shares issued and outstanding as of March 31, 2019 and December 31,

   2018, respectively

 

 

 

 

 

 

Common stock, par value $0.001 per share; 40,000 shares authorized,

   21,294 and 21,072 shares issued and outstanding as of March 31, 2019

   and December 31, 2018, respectively

 

 

21

 

 

 

21

 

Additional paid-in-capital

 

 

229,269

 

 

 

228,430

 

Accumulated other comprehensive loss

 

 

(725

)

 

 

(670

)

Accumulated deficit

 

 

(221,592

)

 

 

(216,692

)

Total stockholders' equity

 

 

6,973

 

 

 

11,089

 

Total liabilities and stockholders' equity

 

$

33,810

 

 

$

38,516

 

 

See accompanying notes to unaudited consolidated financial statements.

3


 

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Products and services revenue

 

$

10,323

 

 

$

10,017

 

License fees and royalty revenue

 

 

3

 

 

 

3

 

Net revenue

 

 

10,326

 

 

 

10,020

 

Cost of revenue

 

 

6,804

 

 

 

6,987

 

Gross profit

 

 

3,522

 

 

 

3,033

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

3,879

 

 

 

3,891

 

General and administrative

 

 

2,393

 

 

 

3,037

 

Engineering and development

 

 

1,424

 

 

 

1,289

 

Change in fair value of patent litigation settlement liability

 

 

190

 

 

 

 

Total operating expenses

 

 

7,886

 

 

 

8,217

 

Loss from operations

 

 

(4,364

)

 

 

(5,184

)

Loss (gain) on foreign currency transactions

 

 

43

 

 

 

(207

)

Interest expense

 

 

478

 

 

 

12

 

Non-operating loss (income), net

 

 

521

 

 

 

(195

)

Loss before income tax provision

 

 

(4,885

)

 

 

(4,989

)

Income tax provision

 

 

15

 

 

 

32

 

Net loss

 

 

(4,900

)

 

 

(5,021

)

Other comprehensive income item:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(55

)

 

 

84

 

Comprehensive loss

 

$

(4,955

)

 

$

(4,937

)

Net loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.23

)

 

$

(0.25

)

Diluted

 

$

(0.23

)

 

$

(0.25

)

Shares used in the calculation of net loss per share:

 

 

 

 

 

 

 

 

Basic

 

 

21,134

 

 

 

20,469

 

Diluted

 

 

21,134

 

 

 

20,469

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

4


 

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Total stockholders' equity,  beginning balances

 

$

11,089

 

 

$

29,260

 

Common stock and additional paid-in capital:

 

 

 

 

 

 

 

 

Beginning balance

 

 

228,451

 

 

 

225,012

 

Issuance of common stock upon exercise of options

 

 

3

 

 

 

2

 

Settlement of liability awards

 

 

202

 

 

 

Stock offering costs

 

 

 

 

 

(38

)

Stock-based compensation expense

 

 

634

 

 

 

650

 

Ending balance

 

 

229,290

 

 

 

225,626

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Beginning balance

 

 

(670

)

 

 

(576

)

Other comprehensive (loss) income

 

 

(55

)

 

 

84

 

Ending balance

 

 

(725

)

 

 

(492

)

Accumulated deficit

 

 

 

 

 

 

 

 

Beginning balance

 

 

(216,692

)

 

 

(195,176

)

Net loss

 

 

(4,900

)

 

 

(5,021

)

Ending balance

 

 

(221,592

)

 

 

(200,197

)

Total stockholders' equity, ending balances

 

$

6,973

 

 

$

24,937

 

 

See accompanying notes to unaudited consolidated financial statements.

5


 

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)  

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,900

)

 

$

(5,021

)

Adjustments to reconcile net loss to net cash and cash equivalents used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

258

 

 

 

264

 

Provision for bad debts, net

 

 

19

 

 

 

200

 

Provision for sales allowance

 

 

 

 

 

4

 

Amortization of discounts on lines of credit

 

 

38

 

 

 

 

Amortization of debt issuance costs

 

 

49

 

 

 

7

 

Stock-based compensation

 

 

757

 

 

 

701

 

Deferred income taxes

 

 

(5

)

 

 

2

 

Earned interest income, net

 

 

(1

)

 

 

(1

)

Change in fair value of patent litigation settlement liability

 

 

190

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(650

)

 

 

186

 

Inventory

 

 

225

 

 

 

(1,103

)

Prepaid expenses and other current assets

 

 

463

 

 

 

(20

)

Accounts payable and accrued liabilities

 

 

(1,514

)

 

 

460

 

Deferred revenue

 

 

37

 

 

 

(441

)

Net cash and cash equivalents used in operating activities

 

 

(5,034

)

 

 

(4,762

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchases of property, plant, and equipment

 

 

(8

)

 

 

(102

)

Net cash and cash equivalents used in investing activities

 

 

(8

)

 

 

(102

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Principal payments under capital lease obligation

 

 

 

 

 

(46

)

Borrowings under lines of credit

 

 

 

 

 

1,823

 

Payments of debt issuance costs

 

 

 

 

 

(74

)

Payments of equity offering costs

 

 

 

 

 

(81

)

Proceeds from exercise of stock options

 

 

3

 

 

 

2

 

Net cash and cash equivalents provided by financing activities

 

 

3

 

 

 

1,624

 

Effect of exchange rate changes

 

 

(49

)

 

 

74

 

Decrease in cash, cash equivalents and restricted cash

 

 

(5,088

)

 

 

(3,166

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

8,356

 

 

 

11,896

 

Cash, cash equivalents and restricted cash, end of period

 

$

3,268

 

 

$

8,730

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

430

 

 

$

 

Cash paid for income taxes

 

$

31

 

 

$

24

 

Cash paid for operating leases

 

$

189

 

 

$

 

Non-cash accrual for capital expenditures

 

$

24

 

 

$

4

 

Non-cash right-of-use assets obtained in exchange for lease obligation

 

$

824

 

 

$

 

 

See accompanying notes to unaudited consolidated financial statements.

6


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

The Company

BIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company”) is  a medical device company that develops, manufactures, markets, and sells laser systems in dentistry and medicine and also markets, sells, and distributes dental imaging equipment, including three-dimensional CAD/CAM intra-oral scanners and digital dentistry software.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of BIOLASE and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December 31, 2018 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments and the elimination of all material intercompany transactions and balances, necessary to fairly present the information set forth therein. These unaudited, interim, consolidated financial statements do not include all the footnotes, presentations, and disclosures normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements.

The consolidated results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018, included in BIOLASE’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2019 (the “2018 Form 10-K”).

Liquidity and Management’s Plans

The Company incurred a loss from operations and a net loss, and used cash in operating activities for the three months ended March 31, 2019. The Company’s recurring losses, level of cash used in operations, and potential need for additional capital, along with uncertainties surrounding the Company’s ability to raise additional capital, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

As of March 31, 2019, the Company was not in compliance with certain of its loan covenants relating to the SWK Loan (as defined below). In May 2019,SWK Funding, LLC granted the Company a waiver of such covenants. On May 7, 2019, the Company entered into an amendment of its Credit Agreement with SWK Funding, LLC to increase the total loan commitment in the SWK Loan from $12.5 million to $15.0 million, to revise certain of the financial covenants and to issue additional warrants to purchase the Company’s common stock. See Note 15 for additional information.

As of March 31, 2019, the Company had working capital of approximately $13.7 million. The Company’s principal sources of liquidity as of March 31, 2019 consisted of approximately $3.3 million in cash, cash equivalents and restricted cash and $11.7 million of accounts receivable.  

In order for the Company to continue operations beyond the next 12 months and be able to discharge its liabilities and commitments in the normal course of business, it must sell its products directly to end users and through distributors, establish profitable operations through increased sales, decrease expenses, generate cash from operations, or obtain additional funds when needed. The Company intends to improve its financial condition and ultimately improve its financial results by increasing revenues through expansion of its product offerings, continuing to expand and develop its field sales force and distributor relationships both domestically and internationally, forming strategic arrangements within the dental and medical industries, educating dental and medical patients as to the benefits of its advanced medical technologies, and reducing expenses.

7


 

Additional capital requirements may depend on many factors, including, among other things, continued losses, the rate at which the Company’s business grows, demands for working capital, manufacturing capacity, and any acquisitions that the Company may pursue. From time to time, the Company could be required, or may otherwise attempt, to raise capital, through either equity or debt offerings, or enter into an additional line of credit facility.

Reverse Stock Split

Except as the context otherwise requires, all share numbers and share price amounts (including exercise prices and closing market prices) contained in the unaudited financial statements and notes thereto reflect the one-for-five reverse stock split (“the Reverse Stock Split”) effectuated by the Company on May 10, 2018. See Note 4 below for additional information.

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of these unaudited consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates in these unaudited consolidated financial statements include allowances on accounts receivable, inventory, and deferred taxes, as well as estimates for accrued warranty expenses, goodwill and the ability of goodwill to be realized, revenue deferrals, effects of stock-based compensation and warrants, contingent liabilities, and the provision or benefit for income taxes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.

Critical Accounting Policies

Information with respect to the Company’s critical accounting policies, which management believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the 2018 Form 10-K. Management believes that there have been no significant changes during the three months ended March 31, 2019 in the Company’s critical accounting policies from those disclosed in Item 7 of the 2018 Form 10-K.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market (or, if none exists, the most advantageous market) for the specific asset or liability at the measurement date (referred to as the “exit price”). The fair value is based on assumptions that market participants would use, including a consideration of non-performance risk. Under the accounting guidance for fair value hierarchy, there are three levels of measurement inputs. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable, either directly or indirectly. Level 3 inputs are unobservable due to little or no corroborating market data.

The Company’s financial instruments, consisting of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, and the SWK Loan as discussed in Note 9, approximate fair value because of the liquid or short-term nature of these items.

Concentration of Credit Risk, Interest Rate Risk and Foreign Currency Exchange Rate

Financial instruments which potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents, restricted cash, and trade accounts receivable. The Company maintains its cash and cash equivalents and restricted cash with established commercial banks. At times, balances may exceed federally insured limits. To minimize the risk associated with trade accounts receivable, management performs ongoing credit evaluations of customers’ financial condition and maintains relationships with the Company’s customers that allow management to monitor current changes in business operations so the Company can respond as needed. The Company does not, generally, require customers to provide collateral before it sells them its products. However, the Company has required certain distributors to make prepayments for significant purchases of products.

8


 

Substantially all of the Company’s revenue is denominated in U.S. dollars, including sales to international distributors. Only a small portion of its revenue and expenses is denominated in foreign currencies, principally the Euro and Indian Rupee. The Company’s foreign currency expenditures primarily consist of the cost of maintaining offices, consulting services, and employee-related costs. During the periods ended March 31, 2019 and 2018, the Company did not enter into any hedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of the Company’s products outside the U.S.

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.

The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined not to be applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.

Adopted Accounting Pronouncements

In February 2016, the FASB established ASU Topic 842 – Leases, by issuing ASU Topic No. 2016-02 (“Topic 842”), which requires lessees to recognize lease on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU Topic 2018-11 – Targeted Improvements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and a lease liability for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

The Company adopted Topic 842 in the first quarter of 2019 utilizing the modified retrospective transition method and a cumulative effect adjustment at the beginning of the first quarter of 2019. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date, and (3) initial direct costs for any existing leases as of the adoption date. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of the right-to-use assets. The adoption of Topic 842 resulted in the recognition of right-of use assets of approximately $0.8 million after a $0.2 million adjustment for deferred rent, and lease liabilities for operating leases of approximately $1.0 million, and no cumulative effect adjustment on retained earnings on its unaudited Consolidated Balance Sheets nor material impact to its unaudited Consolidated Statements of Operations and Comprehensive Loss in the period of adoption. Right-of-use assets are included in Prepaid and other assets, and lease liabilities are included in Accrued liabilities or Other liabilities in the unaudited consolidated balance sheet for the period ended March 31, 2019. See Note 10 — Leases, for additional information.

Recently Issued Accounting Standards

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted beginning January 1, 2019. We are currently evaluating the impact of this standard on the Company’s consolidated financial statements, including accounting policies, processes, and systems.

 

9


 

NOTE 3 – REVENUE RECOGNITION

Contracts with Customers

Revenue for sales of products and services is derived from contracts with customers. The products and services promised in customer contracts include delivery of laser systems, imaging systems, and consumables as well as certain ancillary services such as training and extended warranties. Contracts with each customer generally state the terms of the sale, including the description, quantity and price of each product or service. Payment terms are stated in the contract and vary according to the arrangement. Because the customer typically agrees to a stated rate and price in the contract that does not vary over the life of the contract, the Company’s contracts do not contain variable consideration. The Company establishes a provision for estimated warranty expense.

Performance Obligations

At contract inception, the Company assesses the products and services promised in its contracts with customers. The Company then identifies performance obligations to transfer distinct products or services to the customers. In order to identify performance obligations, the Company considers all of the products or services promised in contracts regardless of whether they are explicitly stated or are implied by customary business practices.

Revenue from products and services transferred to customers at a single point in time accounted for 84% and 83% of net revenue for the three months ended March 31, 2019 and March 31, 2018, respectively. The majority of the Company’s revenue recognized at a point in time is for the sale laser systems, imaging systems, and consumables. Revenue from these contracts is recognized when the customer is able to direct the use of and obtain substantially all of the benefits from the product which generally coincides with title transfer during the shipping process.

Revenue from services transferred to customers over time accounted for 16% and 17% of net revenue for the three months ended March 31, 2019 and March 31, 2018, respectively. The majority of the Company’s revenue that is recognized over time relates to product training and extended warranties. Deferred revenue attributable to undelivered elements, which primarily consists of product training, totaled approximately $0.6 million and $0.7 million as of March 31, 2019 and December 31, 2018, respectively.

Transaction Price Allocation

The transaction price for a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in a contract. The primary method used to estimate standalone selling price is the observable price when the good or service is sold separately in similar circumstances and to similar customers.

Significant Judgments

Revenue is recorded for extended warranties over time as the customer benefits from the warranty coverage. This revenue will be recognized equally throughout the contract period as the customer receives benefits from the Company's promise to provide such services. Revenue is recorded for product training as the customer attends a training program or upon the expiration of the obligation, which is generally after nine months.

The Company also has contracts that include both the product sales and product training as performance obligations. In those cases, the Company records revenue for product sales at the point in time when the product has been shipped. The customer obtains control of the product when it is shipped, as all shipments are made FOB shipping point, and after the customer selects its shipping method and pays all shipping costs and insurance. The Company has concluded that control is transferred to the customer upon shipment.

10


 

Accounts Receivable

Accounts receivable are stated at estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and the Company’s historical experience with accounts receivable write-offs.

Contract Liabilities

The Company performs its obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the customer. The Company typically invoices its customers as soon as control of an asset is transferred and a receivable for the Company is established. The Company, however, recognizes a contract liability when a customer prepays for goods and/or services and the Company has not transferred control of the goods and/or services. The opening and closing balances of the Company’s contract liabilities are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Undelivered elements (training, installation, product

   and support services)

 

 

625

 

 

 

730

 

Extended warranty contracts

 

 

1,879

 

 

 

1,735

 

Deferred royalties

 

 

9

 

 

 

11

 

Total deferred revenue

 

 

2,513

 

 

 

2,476

 

Less long-term portion of deferred revenue

 

 

 

 

 

 

Total deferred revenue — long -term

 

 

 

 

 

 

Deferred revenue — current

 

$

2,513

 

 

$

2,476

 

 

The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables at March 31, 2019 and December 31, 2018.

The amount of revenue recognized during the three months ended March 31, 2019 that was included in the opening contract liability balance related to undelivered elements was $0.3 million, related to extended warranty contracts was $0.7 million and deferred royalties was $3,000.

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into geographical regions and by the timing of when goods and services are transferred. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors.

The Company’s revenues related to the following geographic areas were as follows for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

United States

 

$

6,116

 

 

$

5,693

 

International

 

 

4,210

 

 

 

4,327

 

 

 

$

10,326

 

 

$

10,020

 

 

11


 

Information regarding revenues disaggregated by the timing of when goods and services are transferred is as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenue recognized over time

 

$

1,698

 

 

$

1,700

 

Revenue recognized at a point in time

 

 

8,628

 

 

 

8,320

 

Total

 

$

10,326

 

 

$

10,020

 

 

The Company’s sales by end market were as follows for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

End-customer

 

$

6,346

 

 

$

6,107

 

Distributors

 

 

3,980

 

 

 

3,913

 

 

 

$

10,326

 

 

$

10,020

 

 

The Company acts as the principal in all its imaging equipment distribution sales. The Company takes possession and control of the equipment before they are sold and transferred to the customer. The Company provides the equipment and any related services directly to the customer. The Company has inventory risk before the equipment is transferred to a customer. The Company purchases and obtains the goods before obtaining a contract with a customer. The Company also has discretion in establishing the price sold to the customer for the equipment.

The percentages of the Company’s sales by product line were as follows for the periods indicated:

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2019

 

 

2018

 

 

Waterlase (laser systems)

 

31.8

 

%

 

35.0

 

%

Diodes (laser systems)

 

 

26.0

 

%

 

22.0

 

%

Imaging systems

 

 

5.3

 

%

5.8

 

%

Consumables and other

 

 

20.5

 

%

20.3

 

%

Services

 

16.4

 

%

16.9

 

%

License fees and royalties

 

 

 

%

 

 

%

 

 

 

100.0

 

%

 

100.0

 

%

 

Shipping and Handling Costs and Revenues

Shipping and freight costs are treated as fulfillment costs. For shipments to end-customers, the customer bears the shipping and freight costs and has control of the product upon shipment. For shipments to distributors, the distributor bears the shipping and freight costs, including insurance, tariffs and other import/export costs.

 

12


 

NOTE 4—STOCKHOLDERS’ EQUITY

Reverse Stock Split

At BIOLASE’s annual meeting of stockholders on May 9, 2018 (the “2018 Annual Meeting”), BIOLASE stockholders approved an amendment to BIOLASE’s Restated Certificate of Incorporation, as amended, to effect a reverse stock split of BIOLASE common stock and on May 10, 2018, the Company filed an amendment (the “Amendment”) to its Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to effect the Reverse Stock Split, effective as of 11:59 p.m. on May 10, 2018. The Amendment also reduced the authorized shares of common stock from 200,000,000 shares to 40,000,000 shares. Prior year share and per share amounts have been adjusted to reflect the impact of the reverse stock split.

Stock-Based Compensation

2002 Stock Incentive Plan

The 2002 Stock Incentive Plan (as amended effective as of May 26, 2004, November 15, 2005, May 16, 2007, May 5, 2011, June 6, 2013, October 30, 2014, April 27, 2015, and May 6, 2016, the “2002 Plan”) was replaced by the 2018 Plan (as defined below) with respect to future equity awards. Persons eligible to receive awards under the 2002 Plan included officers, employees, and directors of the Company, as well as consultants. As of March 31, 2019, a total of approximately 3.1 million shares of the Company’s common stock have been authorized for issuance under the 2002 Plan, of which approximately 1.0 million shares of the Company’s common stock have been issued pursuant to options that were exercised and restricted stock units (“RSUs”) that were settled in common stock and 1.6 million shares of common stock have been reserved for outstanding options and unvested RSUs, and no shares are available for future grants.

2018 Stock Incentive Plan

At the 2018 Annual Meeting, the Company’s stockholders approved the 2018 Long-Term Incentive Plan (as amended, the “2018 Plan”) which was amended by Amendment No. 1 to the 2018 Plan, approved by the Company’s stockholders at a special meeting on September 21, 2018. The purposes of the 2018 Plan are (i) to align the interests of the Company’s stockholders and recipients of awards under the 2018 Plan by increasing the proprietary interest of such recipients in the Company’s growth and success; (ii) to advance the interests of the Company by attracting and retaining non-employee directors, officers, other employees, consultants, independent contractors and agents; and (iii) to motivate such persons to act in the long-term best interests of the Company and its stockholders.

Subject to the terms and conditions of the 2018 Plan, the number of shares authorized for grants under the 2018 Plan is 3.3 million. As of March 31, 2019, a total 1.9 million shares of the Company’s common stock have been reserved for outstanding options and unvested RSUs, and 1.4 million shares of common stock remain available for future grants.

The Company recognized stock-based compensation expense of $0.8 million and $0.7 million, for the three months ended March 31, 2019 and 2018, respectively, based on the grant-date fair value. Stock-based compensation expense for the three months ended March 31, 2019 and 2018 includes the reversal of $0.1 million and $0.0 million, respectively, resulting from the reassessment of certain performance-based equity awards. The net impact of stock-based compensation expense to earnings was $(0.04), and $(0.03) per basic and diluted share for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019, the Company had approximately $2.1 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested share-based compensation arrangements. The Company expects that expense to be recognized over a weighted-average period of 2.0 years.

13


 

The following table summarizes the income statement classification of compensation expense associated with share-based payments (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cost of revenue

 

$

82

 

 

$

57

 

Sales and marketing

 

 

160

 

 

 

80

 

General and administrative

 

 

441

 

 

 

467

 

Engineering and development

 

 

74

 

 

 

97

 

 

 

$

757

 

 

$

701

 

 

The stock option fair values were estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Expected term

 

6.1 years

 

 

5.9 years

 

Volatility

 

 

86.2

%

 

 

81.4

%

Annual dividend per share

 

$

 

 

$

 

Risk-free interest rate

 

 

2.64

%

 

 

2.46

%

 

A summary of option activity for the three months ended March 31, 2019 is as follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

Average

 

 

Contractual

 

 

Intrinsic

 

 

Shares

 

 

Exercise

Price

 

 

Term

(Years)

 

 

Value(1)

 

Options outstanding, December 31, 2018

 

1,623

 

 

$

6.54

 

 

 

 

 

 

$

 

Granted at fair market value

 

40

 

 

$

2.08

 

 

 

 

 

 

 

 

 

Exercised

 

(2

)

 

$

2.10

 

 

 

 

 

 

 

 

 

Forfeited, cancelled, or expired

 

(93

)

 

$

6.00

 

 

 

 

 

 

 

 

 

Options outstanding at March 31, 2019

 

1,568

 

 

$

6.46

 

 

 

5.71

 

 

$

 

Options exercisable at March 31, 2019

 

1,159

 

 

$

7.69

 

 

 

4.85

 

 

$

 

Vested options expired during the quarter

   ended March 31, 2019

 

11

 

 

$

12.88

 

 

 

 

 

 

 

 

 

(1) The intrinsic value calculation does not include negative values. This can occur when the fair market value on the reporting date is less than the exercise price of the grant.

 

A summary of unvested stock option activity for the three months ended March 31, 2019 is as follows (in thousands, except per share data):

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average Grant

 

 

Shares

 

 

Date Fair Value

 

Unvested options at December 31, 2018

 

522

 

 

$

2.11

 

Granted

 

40

 

 

$

1.53

 

Vested

 

(97

)

 

$

3.52

 

Forfeited or cancelled

 

(56

)

 

$

3.00

 

Unvested options at March 31, 2019

 

409

 

 

$

1.59

 

 

14


 

Cash proceeds, along with fair value disclosures related to grants, exercises and vested options are as follows (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Proceeds from stock options exercised

 

$

3

 

 

$

2

 

Tax benefit related to stock options exercised (1)

 

N/A

 

 

N/A

 

Intrinsic value of stock options exercised (2)

 

$

 

 

$

 

Weighted-average fair value of options granted during period

 

$

1.53

 

 

$

1.45

 

Total fair value of shares vested during the period

 

$

342

 

 

$

520

 

 

(1) Excess tax benefits received related to stock option exercises are presented as operating cash inflows. The Company currently does not receive a tax benefit related to the exercise of stock options due to the Company’s net operating losses.

(2) The intrinsic value of stock options exercised is the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant.

Restricted Stock Units

There were no material grants made during the three months ended March 31, 2019.

A summary of unvested RSU activity for the three months ended March 31, 2019 is as follows (in thousands, except per share amounts):

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average Grant

 

 

Shares

 

 

Date Fair Value

 

Unvested RSUs at December 31, 2018

 

2,037

 

 

$

1.84

 

Granted

 

40

 

 

$

2.08

 

Vested

 

(220

)

 

$

2.28

 

Forfeited or cancelled

 

(64

)

 

$

2.62

 

Unvested RSUs at March 31, 2019

 

1,793

 

 

$

1.76

 

 

Warrants

The Company issues warrants to acquire shares of the Company’s common stock as approved by the Board. A summary of warrant activity for the three months ended March 31, 2019 is as follows (in thousands, except exercise price amounts):

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

Shares

 

 

Exercise Price

 

Warrants outstanding, December 31, 2018

 

1,934

 

 

$

6.62

 

Granted or Issued

 

 

 

$

 

Exercised

 

 

 

$

 

Forfeited, cancelled, or expired

 

 

 

$

 

Warrants outstanding at March 31, 2019

 

1,934

 

 

$

6.62

 

Warrants exercisable at March 31, 2019

 

1,906

 

 

$

6.43

 

Vested warrants expired during the quarter

   ended March 31, 2019

 

 

 

$

 

 

See Note 9 for additional information on the Western Alliance Warrants, the SWK Warrants, and the DPG Warrants (each as defined below).

15


 

Net Loss Per Share – Basic and Diluted

Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted-average number of shares of the Company’s common stock outstanding for the period. In computing diluted net loss per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities.

Outstanding stock options, RSUs and warrants to purchase approximately 5.7 million shares were not included in the calculation of diluted loss per share for the three months ended March 31, 2019, as their effect would have been anti-dilutive. For the same 2018 periods, anti-dilutive outstanding stock options and warrants to purchase 3.8 million shares were not included in the computation of diluted loss per share.

 

NOTE 5—INVENTORY

Inventory is valued at the lower of cost or net realizable value and is comprised of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Raw materials

 

$

4,007

 

 

$

3,590

 

Work-in-process

 

 

1,306

 

 

 

1,435

 

Finished goods

 

 

6,710

 

 

 

7,223

 

Inventory, net

 

$

12,023

 

 

$

12,248

 

 

Inventory includes write-downs for excess and obsolete inventory totaling approximately $1.1 million and $1.1 million as of March 31, 2019 and December 31, 2018, respectively.

 

NOTE 6—PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment, net is comprised of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Building

 

$

209

 

 

$

213

 

Leasehold improvements

 

 

2,004

 

 

 

2,004

 

Equipment and computers

 

 

7,291

 

 

 

7,277

 

Furniture and fixtures

 

 

634

 

 

 

634

 

Construction in progress

 

 

32

 

 

 

25

 

 

 

 

10,170

 

 

 

10,153

 

Accumulated depreciation and amortization

 

 

(8,599

)

 

 

(8,344

)

 

 

 

1,571

 

 

 

1,809

 

Land

 

 

162

 

 

 

166

 

Property, plant, and equipment, net

 

$

1,733

 

 

$

1,975

 

 

Depreciation and amortization expense related to property, plant, and equipment totaled $0.3 million and $0.3 million for the three months ended March 31, 2019 and March 31, 2018, respectively.

 

 

16


 

NOTE 7—INTANGIBLE ASSETS AND GOODWILL

The Company conducted its annual impairment test of goodwill as of June 30, 2018 and determined that there was no impairment. The Company also tests its intangible assets and goodwill between the annual impairment tests if events occur or circumstances change that would more likely than not reduce the fair value of the Company or its assets below their carrying amounts. For intangible assets subject to amortization, the Company performs its impairment test when indicators, such as reductions in demand or significant economic slowdowns, are present. No events have occurred since June 30, 2018 through the date of these unaudited consolidated financial statements that would trigger further impairment testing of the Company’s intangible assets and goodwill.

As of March 31, 2019 and December 31, 2018, the Company had goodwill (indefinite life) of $2.9 million. As of March 31, 2019 and December 31, 2018, all intangible assets have been fully amortized and no amortization expense was recognized during the three months ended March 31, 2019 and 2018.

 

 

NOTE 8—ACCRUED LIABILITIES

Accrued liabilities are comprised of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Payroll and benefits

 

$

2,122

 

 

$

2,400

 

Patent litigation settlement

 

 

1,190

 

 

 

1,500

 

Warranty accrual, current portion

 

 

807

 

 

 

861

 

Lease liability

 

 

718

 

 

 

 

Accrued professional services

 

 

791

 

 

 

1,044

 

Taxes

 

 

476

 

 

 

714

 

Accrued insurance premium

 

 

189

 

 

 

328

 

Customer deposits

 

 

28

 

 

 

21

 

Other

 

 

392

 

 

 

670

 

Total accrued liabilities

 

$

6,713

 

 

$

7,538

 

 

Changes in the initial product warranty accrual and the expenses incurred under the Company’s initial and extended warranties for the three months ended March 31, 2019 and 2018 are included within accrued liabilities on the Consolidated Balance Sheets and were as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Balance, January 1

 

$

1,308

 

 

$

1,190

 

Provision for estimated warranty cost

 

 

239

 

 

 

246

 

Warranty expenditures

 

 

(163

)

 

 

(222

)

Balance, March 31

 

 

1,384

 

 

 

1,214

 

Less warranty accrual, long-term

 

 

577

 

 

 

124

 

Total warranty accrual, current portion

 

$

807

 

 

$

1,090

 

 

The Company’s Waterlase laser systems sold worldwide are covered by a warranty against defects in material and workmanship for a period of up to 16 months domestically and up to 28 months internationally, from the date of sale by the Company or a distributor to the end-user. The Company’s Diode systems sold worldwide are covered by a warranty against defects in material and workmanship for a period of up to 28 months from the date of sale by the Company or a distributor to the end-user.

 

17


 

NOTE 9—DEBT

 

The following table presents the details of the principal outstanding and unamortized discount (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Term loan

 

$

12,500

 

 

$

12,500

 

Discount and debt issuance costs on term loan

 

 

(1,594

)

 

 

(1,664

)

Total long-term debt, net

 

$

10,906

 

 

$

10,836

 

 

Line of Credit

On March 6, 2018, the BIOLASE and two of its wholly-owned subsidiaries (such subsidiaries, together with BIOLASE, the “Borrower”) entered into the Business Financing Agreement (the “Business Financing Agreement”) with Western Alliance Bank (“Western Alliance”). Pursuant to the terms and conditions of the Business Financing Agreement, Western Alliance agreed to provide the Borrower a secured revolving line of credit permitting the Borrower to borrow or receive letters of credit up to the lesser of $6.0 million (the “Domestic Revolver”) (subject to a $6.0 million credit limit relating to domestic eligible accounts receivable (the “domestic credit limit”) and a $3.0 million credit limit relating to export-related (the “EXIM Revolver”) eligible accounts receivable (the “EXIM credit limit”)) and the borrowing base, which is defined as the sum of the domestic borrowing base (up to 75% of the Borrower’s eligible domestic accounts receivable less such reserves as Western Alliance may deem proper and necessary) and the export-related borrowing base (up to 85% of the Borrower’s eligible export-related accounts receivable less such reserves as Western Alliance may deem proper and necessary). The Business Financing Agreement was set to expire on March 6, 2020, and the Borrower’s obligations thereunder were secured by a security interest in all of the Borrower’s assets.

The Business Financing Agreement required the Company to maintain compliance with certain financial and non-financial covenants, as defined therein. Western Alliance had the right to declare the amounts outstanding under the Business Financing Agreement immediately due and payable upon a default.

Amounts outstanding under the Business Financing Agreement bore interest at a per annum floating rate equal to the greater of 4.5% or the “Prime Rate” published in the Money Rates section of the Western Edition of The Wall Street Journal (or such other rate of interest publicly announced from time to time by Western Alliance as its “Prime Rate”), plus 1.5% with respect to advances made under the line of credit, plus an additional 5.0% during any period that an event of default occurred and was continuing. The commitment fee under the Business Financing Agreement was 0.25% of the domestic credit limit and 1.75% of the EXIM credit limit, payable on March 6, 2018 and each anniversary thereof. 

Pursuant to the Business Financing Agreement, the Company paid the first of two annual commitment fees totaling $67,500, being 0.25% of the aggregate $6.0 million commitment for the Domestic Revolver and 1.75% of the aggregate $3.0 million commitment for the EXIM Revolver. The commitment fees and the legal costs associated with acquiring the credit facilities were capitalized and were amortized on a straight-line basis as interest expense over the term of the Business Financing Agreement.

As additional consideration for the lines of credit, the Company also issued to Western Alliance warrants (the (“Original Western Alliance Warrants”). The fair value of the Western Alliance Warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 10 years; volatility of 91.49%; annual dividend per share of $0.00; and risk-free interest rate of 2.88%; and resulted in an estimated fair value of $0.1 million, which was recorded as a liability and resulted in a discount to the credit facilities at issuance. The discount was expensed to interest expense at the time the Business Financing Agreement was terminated, as discussed below.

18


 

On August 13, 2018, the Borrower and Western Alliance entered into a Waiver and Business Financing Modification Agreement, pursuant to which Western Alliance waived certain of the Borrower’s covenants under the Business Financing Agreement and provided an advance of $1.5 million, which advance was due by September 27, 2018.

On September 27, 2018, the Borrower and W