NOTE 3—STOCK-BASED AWARDS AND PER SHARE INFORMATION

Stock-Based Compensation

The Company currently has one stock-based compensation 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 and April 27, 2015) (the “2002 Plan”), which will expire on May 5, 2019. Persons eligible to receive awards under the 2002 Plan include officers, employees, and directors of the Company, as well as consultants. As of September 30, 2015, a total of 11,550,000 shares have been authorized for issuance under the 2002 Plan, of which 3,068,000 shares of Biolase common stock have been issued pursuant to options that were exercised and restricted stock units that were settled in common stock, 5,442,000 shares of Biolase common stock have been reserved for outstanding options and unvested restricted stock units, and 3,040,000 shares of Biolase common stock remain available for future grants.

Stock-based compensation cost recognized in operating results totaled approximately $621,000 and $301,000 for the three months ended September 30, 2015 and 2014, respectively, and $2.3 million and $887,000 for the nine months ended September 30, 2015 and 2014, respectively. The net impact to earnings were $(0.01) and $(0.01) per basic and diluted share for the three months ended September 30, 2015 and 2014, respectively, and $(0.04) and $(0.02) per basic and diluted share for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015, the Company had approximately $5.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements. The Company expects that cost to be recognized over a weighted-average period of 2.7 years.

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

 

 

The stock option fair values, under the 2002 Plan, were estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

A summary of option activity under the 2002 Plan for the nine months ended September 30, 2015 is as follows:

 

 

(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.

Cash proceeds along with fair value disclosures related to grants, exercises, and vested options under the 2002 Plan are provided in the following table (in thousands, except per share amounts):

 

 

(1) Excess tax benefits received related to stock option exercises are presented as financing 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.

On January 2, 2015, the Compensation Committee of Biolase’s board of directors (the “Board”) granted non-qualified stock options to purchase 1,365,702 shares of Biolase common stock to six officers of the Company and one consultant in connection with the Company’s compensation plan for 2015. These options were granted at an exercise price of $2.64, the closing price of Biolase common stock on the grant date. These options expire ten years from the grant date and vest as follows: (i) as to one-half of the options, one-fourth on the first anniversary of the grant date and the remaining three-fourths, ratably over the next thirty-six month period, commencing on the thirteenth month from the grant date, and (ii) as to the other half of the options, upon the achievement of specific annual Company performance criteria. On August 12, 2015, the Compensation Committee of the Board approved a modification to the performance criteria applicable to the unvested options. As a result of this modification, the fair value of the awards decreased by $661,000, and the Company recognized additional compensation expense of $154,000 for the three and nine months ended September 30, 2015.

Restricted Stock Units

In accordance with the 2002 Plan, the Company issues restricted stock units (“RSUs”) to acquire shares of Biolase common stock as approved by the Board. As of September 30, 2015, 37,000 shares of Biolase common stock have been issued in connection with the settlement of the RSUs.

Effective July 13, 2015, the Compensation Committee of the Board awarded 870,000 common stock-settled RSUs to its President and Chief Executive Officer in connection with his employment agreement with the Company. The RSUs are valued at $1.64 per share and vest upon the achievement of specific interim and annual Company performance criteria.

Warrants

The Company issues warrants to acquire shares of Biolase common stock underlying such warrants as approved by the Board.

A summary of warrant activity for the nine months ended September 30, 2015 is as follows:  

 

 

No warrants were exercised during the three months ended September 30, 2015 or 2014 and during the nine months ended September 30, 2015. During the nine months ended September 30, 2014, Comerica Bank exercised warrants issued in connection with the Company’s prior lines of credit on a cashless basis pursuant to the terms of the warrant, resulting in a net issuance of 38,708 shares of common stock.

Other Stock-Based Awards

Effective March 9, 2015, the Compensation Committee of the Board granted non-qualified stock options to purchase up to 871,710 shares of Biolase common stock to its Chief Financial Officer in connection with his employment agreement with Biolase. These options were granted at an exercise price of $1.99 per share, the closing price of Biolase common stock on the grant date. These options expire ten years from the grant date and vest in two tranches as follows: (i) as to options to purchase 523,026 shares (the “First Tranche”), options to purchase 130,757 shares vest and become exercisable on March 9, 2016, and options to purchase 10,896 shares vest and become exercisable each month following March 9, 2016 for a period of 35 consecutive months, and options to purchase 10,909 shares vest and become exercisable on March 9, 2019, and (ii) as to options to purchase 348,684 shares (the “Second Tranche”), 248,684 of such shares vest and become exercisable on March 9, 2025. In June 2015, the Compensation Committee accelerated the vesting of 100,000 of the Second Tranche options that had previously been scheduled to vest on March 9, 2025, such that such options vested and became exercisable as of June 23, 2015. The fair value of the First Tranche of $1.48 per share was estimated using the Black-Scholes option-pricing model with assumptions of 6.1 years for expected term, 88.79% volatility and 1.83% risk-free interest rate. The fair value of the Second Tranche of $1.70 per share was estimated using the Black-Scholes option-pricing model with assumptions of 10.0 years for expected term, 87.87% volatility and 2.19% risk-free interest rate.

Effective July 13, 2015, the Compensation Committee of the Board granted non-qualified stock options to purchase up to 870,000 shares of Biolase common stock to the Company’s President and Chief Executive Officer in connection with his employment agreement with Biolase. These options were granted at an exercise price of $1.64 per share, the closing price of Biolase common stock on the grant date. These options expire ten years from the grant date and vest over four years, with options to purchase 217,500 shares vesting and becoming exercisable on July 13, 2016 and options to purchase 18,125 shares vesting and becoming exercisable each month following July 13, 2016 for a period of 36 consecutive months. The fair value of $1.19 per share was estimated using the Black-Scholes option-pricing model with assumptions of 6.1 years for expected term, 85.83% volatility and 1.93% risk-free interest rate.

Net Loss Per Share – Basic and Diluted

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

Outstanding stock options and warrants to purchase 15,536,000 shares (including 9,206,000 shares underlying warrants issued in connection with the private placement completed by the Company on November 7, 2014) were not included in the computation of diluted loss per share for the three and nine months ended September 30, 2015 as a result of their anti-dilutive effect. For the same 2014 period, anti-dilutive outstanding stock options and warrants to purchase 4,703,000 shares were not included in the computation of diluted loss per share.

Retirement of Treasury Stock

On July 18, 2014, the Company retired all 1,963,500 shares of stock held in treasury at that date. The Company recorded the cost of the treasury stock retired as a $2,000 reduction to common stock and a $16,397,000 reduction in additional paid in capital.

Stock Dividend

In February 2014, the Board declared a one-half percent stock dividend payable March 28, 2014, to stockholders of record on March 14, 2014. During 2015, the Board has not declared any stock dividends. There is no assurance, with respect to the amount or frequency, that any stock dividend will be declared in the future.