NOTE 8 — STOCKHOLDERS’ EQUITY

Preferred Stock

The Board, without further stockholder authorization, may issue from time to time up to 1,000,000 shares of the Company’s preferred stock. Of the 1,000,000 shares of preferred stock, 500,000 shares are designated as Series B Junior Participating Cumulative Preferred Stock. As of December 31, 2015, 2014, and 2013, none of the preferred stock was outstanding.

The Company adopted a stockholder rights plan, as amended (the “Rights Plan”) under which one preferred stock purchase right (“Right”) was distributed on January 11, 1999 with respect to each share of common stock outstanding at the close of business on December 31, 1998 and with respect to each share of common stock issued by the Company since then.  On November 10, 2015, the Company terminated the Rights Plan.  No Rights were executed, traded, or redeemed under the Rights Plan.

Common Stock

At December 31, 2015, the Company had 58,228,000 shares of BIOLASE common stock issued and outstanding. BIOLASE currently has 100,000,000 shares of Company common stock authorized for issuance.

2014 Common Stock Issuances

On November 7, 2014, the Company completed a private placement (the “November 2014 Private Placement”) with several institutional and individual investors, and certain of its directors and officers, under which the Company agreed to sell an aggregate of 14,162,873 unregistered shares of BIOLASE common stock at the price of $2.39 per share, the closing price of BIOLASE common stock on November 3, 2014, and warrants to purchase up to an aggregate of 9,205,862 unregistered shares of its common stock at an exercise price of $4.00 per share. Gross proceeds from the sale totaled $35.0 million, and net proceeds, after offering expenses of approximately $235,000, were approximately $34.8 million. The warrants became exercisable on May 7, 2015, six months after the closing of the private placement, and have a term of three years from the date of issuance. The Company is using the proceeds for working capital and general corporate purposes. In connection with the registration rights granted to these investors, the Company filed a registration statement on Form S-3 with the SEC, which was declared effective on December 12, 2014.

On July 22, 2014, the Company completed a private placement with several institutional and individual investors, and several of its directors and officers, wherein the Company sold 6,250,000 unregistered shares of BIOLASE common stock at a price of $1.92 per share (the closing price of BIOLASE common stock on July 18, 2014). Gross proceeds from the sale totaled $12.0 million, and net proceeds, after offering expenses of approximately $462,000, were approximately $11.5 million. The Company used the proceeds to repay the Company’s lines of credit with Comerica Bank and for working capital and general corporate purposes. In connection with the registration rights granted to these investors, the Company filed a registration statement on Form S-3 with the SEC, which was declared effective on September 18, 2014.

On February 10, 2014, the Company entered into a subscription agreement with Oracle Partners L.P., Oracle Institutional Partners, L.P., and Oracle Ten Fund Master, L.P., under which the Company offered an aggregate of 1,945,525 unregistered shares of BIOLASE common stock in a private placement at a price of $2.57 per share. Gross proceeds from the sale totaled $5.0 million and net proceeds, after offering expenses of approximately $188,000, totaled approximately $4.8 million. The Company used the proceeds for working capital and general corporate purposes.

2013 Common Stock Issuances

On December 19, 2013, the Company entered into a subscription agreement with Oracle Ten Fund Master, LP under which the Company offered an aggregate of 340,000 unregistered shares of BIOLASE common stock in a private placement at a price of $1.80 per share. Gross proceeds from the sale totaled $612,000, and net proceeds, after offering expenses of approximately $30,000, totaled approximately $582,000. The Company used the proceeds for working capital and general corporate purposes.

On July 26, 2013, the Company filed a registration statement on Form S-3, File No. 333-190158 (“2013 Registration Statement”) with the SEC to register an indeterminate number of shares of BIOLASE common stock, preferred stock, and warrants with a total offering price not to exceed $5 million. The 2013 Registration Statement was declared effective by the SEC on September 19, 2013. On September 23, 2013, the Company entered into an agreement with Northland Securities, Inc. (“Northland”), pursuant to which Northland acted as placement agent in connection with the sale of 2,688,172 shares of its common stock at a price of $1.86 per share. Gross proceeds from the sale totaled $5 million, and net proceeds after offering expenses of $408,000, which included Northland’s fee, totaled approximately $4.6 million.

Stock Dividends

There were no dividends paid or declared in 2015.  The following table sets forth certain information relating to the Company’s stock dividends declared during 2014:

 

 

Warrants

BIOLASE issues warrants for the sale of its common stock as approved by its Board. Warrants to purchase up to an aggregate of 9,205,862 unregistered shares of BIOLASE common stock at an exercise price of $4.00 per share were issued in connection with the November 2014 Private Placement and are accounted for within stockholders’ equity on the Consolidated Balance Sheets in accordance with U.S. GAAP.  In addition to the aforementioned warrants issued in connection with common stock transactions, the Company has issued warrants in connection with strategic initiatives as follows:

On July 12, 2013, the Company entered into a strategic agreement with Valam, Inc. (“Valam”) to develop, market, and sell office-based laser systems to otolaryngologists (also known as “Ear, Nose, and Throat” or “ENT” doctors) (the “Valam Agreement”). The Valam Agreement provides the Company with an exclusive worldwide license to Valam’s ENT related patents and pending patents which complement the Company’s patent portfolio and support the Company’s launch into the ENT laser market beginning in late 2013. In connection with the Valam Agreement, the Company issued Valam a warrant to purchase up to 165,000 shares of BIOLASE common stock, at a modified price per share of $4.00 (the “Valam Warrant”), which is a decrease from the original agreed upon price per share of $6.00. The Valam Warrant is performance-based and vests as follows: 30,000 warrants upon the launch of the Company’s first ENT laser; 55,000 warrants upon the receipt of certain specified clearances required from the U.S. Food and Drug Administration (the “FDA”); 40,000 warrants upon achieving $5 million in ENT laser revenues for a 12-month period; and 40,000 warrants upon achieving $10 million in ENT laser revenues for a 12-month period. Vested warrants may be exercised with a cash payment, or on a cashless basis. The Valam Warrant expires on July 14, 2020. As of December 31, 2015, 2014 and 2013, in connection with the Valam Warrant, 30,000 warrants have been earned and stock-based compensation costs of approximately $41,000 have been recognized.

On April 26, 2013, the Company issued a warrant to Sun Dental Laboratories, LLC (“Sun Dental Labs”) to purchase up to 500,000 shares of BIOLASE common stock, at a price per share of $5.90 (the “Sun Dental Warrant”). The Sun Dental Warrant was performance-based and vested at a rate of 1,000 shares per each 3Shape A/S (“3Shape”) Trios intra-oral scanner (“Trios IOS”) that Sun Dental Labs assists in selling in conjunction with the agreement. The Sun Dental Warrant expired on April 24, 2014. The Company recorded no stock-based compensation expense during the years ended December 31, 2015 and 2014 less than $1,000 related to the Sun Dental Warrant during the year ended December 31, 2013.

On April 18, 2013, the Company issued to an investor relations firm a warrant (the “2013 IR Warrant”) to purchase up to 60,000 shares of Company common stock at a price per share of $5.10. The 2013 IR Warrant vests and becomes exercisable only if the closing price of Company common stock on NASDAQ reaches or exceeds $7.50 per share. In July 2014, the Company ceased its relationship with the investor relations firm and cancelled the 2013 IR Warrant. For the years ended December 31, 2015, 2014 and 2013, no stock-based compensation was recognized.

On March 23, 2013, the Company issued to a consultant two tranches of warrants to purchase up to 100,000 shares of BIOLASE common stock, at a price per share of $4.50 (the “CMR Warrant”). The first tranche of 50,000 warrants vests and becomes exercisable only if BIOLASE common stock closing price on NASDAQ reaches or exceeds $6.00 per share. The first tranche of 50,000 warrants was cancelled during the year ended December 31, 2014 and the second tranche of 50,000 warrants was cancelled during the year ended December 31, 2013. As of December 31, 2015, 2014, and 2013, no stock-based compensation had been recognized for the CMR Warrant.

On November 8, 2012, the Company issued to an investor relations consultant a warrant (the “2012 IR Warrant”) to purchase up to 50,000 shares of BIOLASE common stock, at a price per share of $2.50. The 2012 IR Warrant was subject to a vesting and exercisability condition which would have been met upon closing price of BIOLASE common stock on NASDAQ reaching or exceeding $7.00 per share by November 7, 2013. Furthermore, the 2012 IR Warrant called for immediate vesting of 25,000 shares upon early termination of the arrangement. The Company terminated the arrangement during the year ended December 31, 2013 and therefore recognized stock-based compensation of approximately $64,000 and issued 9,296 net shares of BIOLASE common stock pursuant to the 2012 IR Warrant during the same period.

 

 

The Company also issued warrants to its lenders. However, none of these warrants remain outstanding. See Note 5 — Lines of Credit and Other Borrowings for further discussion.

Stock Options

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, August 27, 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 certain officers and employees of the Company, directors of the Company, and consultants. As of December 31, 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, 4,493,000 shares of Company common stock have been reserved for options that are outstanding, and 3,989,000 shares of BIOLASE common stock remain available for future grant.

Stock options may be granted as incentive or non-qualified options; however, no incentive stock options have been granted to date. The exercise price of options is at least equal to the market price of the stock as of the date of grant. Options may vest over various periods but typically vest on a quarterly basis over four years. Options expire after five years, ten years, or within a specified time from termination of employment, if earlier. The Company issues new shares of BIOLASE common stock upon the exercise of stock options. The following table summarizes option activity:

 

 

The following table summarizes additional information for those options that are outstanding and exercisable as of December 31, 2015:

 

 

Cash proceeds, along with fair value disclosures related to grants, exercises, and vesting options, are as follows for the years ended December 31 (in thousands, except per share amounts):

 

 

On January 2, 2015, the Compensation Committee of the Board granted non-qualified stock options to purchase 1,365,702 shares of BIOLASE common stock to certain officers of the Company in connection with a compensation plan for 2015 and 86,000 shares of BIOLASE common stock to members of the Dental Professional Advisory Board (“DPAB”) as consultants for the Company. These options were granted at an exercise price of $2.64, the closing market price of the Company’s stock on grant date. Options granted to certain officers of the Company expire ten years from grant date and vest as follows: (i) as to 50% of the options, one-fourth on the one year anniversary of the grant date and the remaining three-fourths, ratably over the next 36 month period, commencing on the thirteenth month from grant date over a requisite service period of four years, and (ii) as to 50% of the options, upon achievement of specific annual Company performance criteria with a requisite service period of one year. Options granted to the DPAB fully vest and become exercisable upon the achievement of specified performance conditions, as defined in the consulting agreements, and expires five years from grant date.

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 year ended December 31, 2015.  The vesting schedule and requisite service period of the award remained unchanged by the modification.  

On December 31, 2015 the performance criteria related to the officer grants on January 2, 2015 was partially achieved and 80% of the performance-based options will vest January 2, 2016.  As a result 122,038 shares were returned to the plan on December 31, 2015 and 488,170 will vest on January 2, 2016.

On June 6, 2013, the Board granted stock options to purchase 350,000 shares of BIOLASE common stock to Alexander K. Arrow in connection with his appointment to President and Chief Operating Officer. These stock options were granted at an exercise price of $4.00 per share and vest and become exercisable in equal quarterly amounts over a four-year period beginning on June 6, 2014. During the year ended December 31, 2014, Mr. Arrow ceased employment with the Company and forfeited 306,250 unvested stock options. His stock options expired on February 28, 2016.

Restricted Stock Units

On August 27, 2014, each non-employee director of the Company was granted 9,217 restricted stock units (“RSUs”), totaling 37,000 RSUs valued at $2.17 per share, which vested over a 12-month period.  As of December 31, 2015 all RSUs have been released and 37,000 shares of BIOLASE common stock had been issued in connection with this settlement.  

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

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 the first anniversary of March 9, 2015, 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”), all such shares vest and become exercisable on March 9, 2025 or based on the Company’s achievement of certain enumerated financial performance targets or other milestones, at the discretion of the Compensation Committee. 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.

On June 23, 2015 the Board elected to accelerate options to purchase 100,000 shares in the second tranche of the Chief Financial Officer’s award.  As of December 31, 2015, 100,000 shares are vested and exercisable and the remaining 248,684 shares will vest and become exercisable on March 9, 2025.  

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 its 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.    

On July 13, 2014, the Compensation Committee of the Board of the Company approved the previous Chief Executive Officer’s stock-based compensation consisting of non-qualified stock options to purchase 172,282 shares of BIOLASE common stock at an exercise price of $1.98 per share and 37,879 RSUs valued at $1.98 per share. At December 31, 2015 all of the non-qualified stock options are vested and outstanding, and all of the RSUs have been released.