BIOLASE, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies (Policies)

Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2023

The Company considers all highly liquid investments with maturities of three months or less when purchased, as cash equivalents. Cash equivalents are carried at cost, which approximates fair market value.

Inventory

The Company values inventory at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. The carrying value of inventory is evaluated periodically for excess quantities and obsolescence. Management evaluates quantities on hand, physical condition, and technical functionality as these characteristics may be impacted by anticipated customer demand for current products and new product introductions. The allowance is adjusted based on such evaluation, with a corresponding provision included in cost of revenue. Abnormal amounts of idle facility expenses, freight, handling costs and wasted material are recognized as current period charges, and the Company’s allocation of fixed production overhead is based on the normal capacity of its production facilities.

Property, Plant and Equipment

Property, Plant, and Equipment

Property, plant, and equipment is stated at acquisition cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Upon sale or disposition of assets, any gain or loss is included in the consolidated statements of operations.

The cost of property, plant, and equipment is depreciated using the straight-line method over the following estimated useful lives of the respective assets, except for leasehold improvements, which are depreciated over the lesser of the estimated useful lives of the respective assets or the related lease terms.


Building		30 years
Leasehold improvements		3 to 5 years
Equipment and computers		3 to 5 years
Furniture and fixtures		5 years

Depreciation expense for the years ended December 31, 2023, 2022, and 2021 totaled $2.8 million, $0.5 million and $0.4 million, respectively. Refer to Note 3 - Supplementary Balance Sheet Information for further details.

Goodwill and Other Intangible Assets

Goodwill is not subject to amortization but is evaluated for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. The Company operates in one reporting segment and reporting unit; therefore, goodwill is tested for impairment at the consolidated level against the fair value of the Company. The fair value of a reporting unit refers to the amount at which the unit as a whole could be bought or sold in a current transaction between willing parties. Quoted market prices in active markets are the best evidence of fair value and are used as the basis for measurement, if available. Management assesses potential impairment on an annual basis and compares the Company’s market capitalization to its carrying amount, including goodwill. A significant decrease in the Company’s stock price could indicate a material impairment of goodwill which, after further analysis, could result in a material charge to operations. Inherent in the Company’s fair value determinations are certain judgments and estimates, including projections of future cash flows, the discount rate reflecting the inherent risk in future cash flows, the interpretation of current economic indicators and market valuations, and strategic plans with regard to operations. A change in these underlying assumptions could cause a change in the results of the tests, which could cause the fair value of the reporting unit to be less than its respective carrying amount.

Costs incurred to acquire and successfully defend patents, and costs incurred to acquire trademarks and trade names are capitalized. Costs related to the internal development of technologies that are ultimately patented are expensed as incurred. Intangible assets, except those determined to have an indefinite life, are amortized using the straight-line method or over management’s best estimate of the pattern of economic benefit over the estimated useful life of the assets. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Long-Lived Assets

The carrying values of long-lived assets are reviewed when indicators of impairment, such as reductions in demand or significant economic slowdowns, are present. Reviews are performed to determine whether carrying value of an asset is impaired based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using discounted expected future cash flows. Impairment is based on the excess of the carrying amount over the fair value of those assets.

Redeemable Preferred Stock

Convertible Redeemable Preferred Stock

The Company classifies convertible preferred stock that is redeemable at the stockholder’s discretion as mezzanine equity. On May 24, 2023, the Company consummated the sale of 175,000 Units (the "Units") with each Unit consisting of (A) one share of BIOLASE Series H Convertible Redeemable Preferred Stock, par value $0.001 per share and a stated value equal to $50.00 (the “Series H Convertible Preferred Stock”), and (B) one warrant (the “Series H Warrants”) to purchase one-half of one (0.50) share of Series H Convertible Preferred Stock, at a price to the public of $26.00 per Unit, less underwriting discounts and commissions. Each share of the Series H Preferred Stock is convertible into approximately 3.58 shares of BIOLASE common stock upon exercise. During the year ended December 31, 2023 40,000 Series H Warrants were exercised to 20,000 Series H Convertible Preferred Stock, and 190,000 Series H Convertible Preferred Stock were converted into approximately 679,542 shares of BIOLASE common stock. Upon exercise of the Series H Warrants to Series H Convertible Preferred Stock, the Company recorded an increase to Mezzanine Equity of approximately $1.4 million. Upon conversion of the Series H Convertible Preferred Stock to BIOLASE common stock, the Company recorded approximately $13.2 million for common stock, with no charge in retained earnings. As of December 31, 2023, there were 5,000 shares of Series H Convertible Preferred Stock issued and outstanding, and an additional 67,500 Series H Convertible Preferred Stock issuable upon the exercise of Series H Warrants. Additional details are discussed further in Note 8 to these consolidated financial statements.

On September 13, 2023, the Company consummated the sale of 75,000 Units (the "Units") with each Unit consisting of (A) one share of BIOLASE Series J Convertible Redeemable Preferred Stock, par value $0.001 per share and a stated value equal to $100.00 (the “Series J Convertible Preferred Stock”), and (B) one warrant (the “Series J Warrants”) to purchase one-half of one (0.50) share of Series J Convertible Preferred Stock, at a price to the public of $60.00 per Unit, less underwriting discounts and commissions. Each share of the Series J Preferred Stock is convertible into approximately 30.67 shares of BIOLASE common stock upon exercise. During the year ended December 31, 2023 5,960 Series J Warrants were exercised to 2,980 Series J Convertible Preferred Stock, 3,091 Series J Convertible Preferred Stock were issued upon PIK dividends, and 66,465 Series J Convertible Preferred Stock were converted into approximately 2,038,804 shares of BIOLASE common stock. Upon exercise of the Series J Warrants to Series J Convertible Preferred Stock, the Company recorded an increase to Mezzanine Equity of approximately $0.4 million. Upon conversion of the Series J Convertible Preferred Stock to BIOLASE common stock, the Company recorded approximately $8.9 million for common stock, with no charge in retained earnings. As of December 31, 2023, there were 14,606 shares of Series J Convertible

Preferred Stock issued and outstanding and an additional 34,520 Series J Convertible Preferred Stock issuable upon the exercise of Series J Warrants. Additional details are discussed further in Note 8 to these consolidated financial statements.

Other Comprehensive (Loss) Income

Other comprehensive (loss) income encompasses the change in equity from transactions and other events and circumstances from non-owner sources and is included as a component of stockholders’ equity (deficit) but is excluded from net (loss) income. Accumulated other comprehensive (loss) income is comprised of foreign currency translation adjustments.

Foreign Currency Translation and Transactions

Transactions of the Company’s German, Spanish, Australian, and Indian subsidiaries are denominated in their local currencies which have been determined to be their functional currencies. The results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end-of-period exchange rates. Translation gains or losses are shown as a component of accumulated other comprehensive (loss) income in stockholders’ equity (deficit). Income and losses resulting from foreign currency transactions which are denominated in a currency other than the entity’s functional currency, are included in the consolidated statements of operations.

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 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 89%, 88%, and 88% of net revenue for the years ended December 31, 2023, 2022, and 2021, respectively. The majority of the Company’s revenue recognized at a point in time is for the sale of laser 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 11%, 12%, and 12% of net revenue for the years ended December 31, 2023, 2022, and 2021, respectively. The majority of our 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 $0.4 million as of December 31, 2023 and 2022, 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 six 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.

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 a good and/or service 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):


	December 31,
	2023			2022
Undelivered elements (training and installation)	$	449		$	447
Extended warranty contracts		2,259			2,082
Total deferred revenue		2,708			2,529
Less: long-term portion of deferred revenue		(256	)		(418	)
Deferred revenue – current	$	2,452		$	2,111

The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables as of December 31, 2023 and 2022.

The amount of revenue recognized during the years ended December 31, 2023 and 2022 that was included in the opening contract liability balance related to undelivered elements was $0.4 million and $0.8 million, respectively. The revenue recognized during the year related to the opening extended warranty contracts balance was $1.3 million and $1.4 million, for the years ended December 31, 2023 and 2022, respectively.

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 (in thousands):


	Years Ended December 31,
	2023		2022		2021
United States	$	33,883	$	33,876	$	25,384
International		15,281		14,586		13,804
Net Revenue	$	49,164	$	48,462	$	39,188

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


	Years Ended December 31,
	2023		2022		2021
Revenue recognized over time	$	5,525	$	5,697	$	4,709
Revenue recognized at a point in time		43,639		42,765		34,479
Net Revenue	$	49,164	$	48,462	$	39,188

The Company’s sales by end market is as follows (in thousands):


	Years Ended December 31,
	2023		2022		2021
End-customer	$	33,883	$	33,876	$	25,384
Distributors		15,281		14,586		13,804
Net Revenue	$	49,164	$	48,462	$	39,188

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.

Provision for Warranty Expense

The Company provides warranties against defects in materials and workmanship of its laser systems for specified periods of time. For the years ended December 31, 2023, 2022, and 2021, domestic sales of the Waterlase laser systems were covered by the warranty for a period of up to one year and diode systems were covered by the warranty for a period of up to two years from the date of sale by the Company or the distributor to the end-user. Laser systems sold internationally are covered by the warranty for a period of up to 24 months from the date of sale to the international distributor. Estimated warranty expenses are recorded as an accrued liability with a corresponding provision to cost of revenue. This estimate is recognized concurrent with the recognition of revenue on the sale to the distributor or end-user. Warranty expenses expected to be incurred after one year from the time of sale to the distributor are classified as a long-term warranty accrual. The Company’s overall accrual is based on its historical experience and management’s expectation of future conditions, taking into consideration the location and type of customer and the type of laser, which directly correlate to the materials and components under warranty, the duration of the warranty period, and the logistical costs to service the warranty. Additional factors that may impact the Company’s warranty accrual include changes in the quality of materials, leadership and training of the production and services departments, knowledge of the lasers and workmanship, training of customers, and adherence to the warranty policies. Additionally, an increase in warranty claims or in the costs associated with servicing those claims would likely result in an increase in the accrual and a decrease in gross profit.

The current portion of the warranty accrual is included within accrued liabilities. Changes in the initial product warranty accrual and the expenses incurred under the Company’s initial and extended warranties were as follows (in thousands):


	Years Ended December 31,
	2023			2022			2021
Balance, beginning of period	$	1,653		$	1,086		$	1,132
Provision for estimated warranty cost		3,733			3,639			1,747
Warranty expenditures		(3,472	)		(3,072	)		(1,793	)
Balance, end of period		1,914			1,653			1,086
Less: long-term portion of warranty accrual		593			360			521
Current portion of warranty accrual	$	1,321		$	1,293		$	565

Advertising Costs

Advertising costs are expensed as incurred and totaled $0.8 million, $1.5 million and $1.4 million for the years ended December 31, 2023, 2022, and 2021, respectively.

Engineering and Development

Engineering and development expenses are generally expensed as incurred and consist of engineering personnel salaries and benefits, prototype supplies, contract services, and consulting fees related to product development.

Stock-Based Compensation

During the years ended December 31, 2023, 2022, and 2021, the Company recognized compensation cost related to share-based payments of $1.2 million, $2.3 million, and $1.7 million, respectively, based on the grant-date fair value. As of December 31, 2023 and December 31, 2022 approximately $0.6 million and $0.2 million of the stock compensation cost related to performance-based awards was recognized as a liability, respectively. The following table summarizes the income statement classification of compensation expense associated with share-based payments (in thousands):


	Years Ended December 31,
	2023		2022		2021
Cost of revenue	$	29	$	154	$	156
Sales and marketing		423		576		367
General and administrative		681		1,368		820
Engineering and development		99		205		319
Total	$	1,232	$	2,303	$	1,662

As of December 31, 2023 and 2022, the Company had $0.4 million and $1.0 million, respectively, of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements granted under its existing plans. The expense is expected to be recognized over a weighted-average period of 1.1 years as of December 31, 2023.

Stock-based compensation expense is estimated at the grant date of the award, is based on the fair value of the award and is recognized ratably over the requisite service period of the award. For restricted stock units (“RSUs”) the Company estimates the fair value of the award based on the number of awards and the fair value of BIOLASE common stock on the grant date, and applies an estimated forfeiture rate. For stock options, the Company estimates the fair value of the option award using the Black-Scholes option pricing model. This option-pricing model requires the Company to make several assumptions regarding the key variables used to calculate the fair value of its stock options. The risk-free interest rate used is based on the U.S. Treasury yield curve in effect for the expected lives of the options at their grant dates. Since July 1, 2005, the Company has used a dividend yield of zero, as it does not intend to pay cash dividends on its common stock in the foreseeable future. The most critical assumptions used in calculating the fair value of stock options is the expected life of the option and the expected volatility of BIOLASE common stock. The expected life is calculated in accordance with the simplified method, whereby for service-based awards the expected life is calculated as a midpoint between the vesting date and expiration date. The Company uses the simplified method, as there is not a sufficient history of share option exercises. For performance-based awards, the expected life equals the life of the award. Management believes that the historic volatility of the BIOLASE common stock is a reliable indicator of future volatility, and accordingly, a stock volatility factor based on the historical volatility of the BIOLASE common stock over a lookback period of the expected life is used in approximating the estimated volatility of new stock options. Compensation expense is recognized using the straight-line method for all service-based employee awards and graded amortization for all performance-based awards. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations. Forfeitures are estimated at the time of the grant and revised in subsequent periods as actual forfeitures differ from those estimates. The Company applied forfeiture rates of 7.87%, 30.38%, and 40.18% to awards granted during the year ended December 31, 2023 depending on the vesting terms and position of the grantee. The Company’s forfeiture rates applied to awards granted during the year ended December 31, 2022 were 10.87%, 10.91%, 28.25% and 37.49% and during the year ended December 31, 2021, were 10.91%, 25.91%, 40.21% and 49.45%, respectively.

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


	Years Ended December 31,
	2023	2022	2021
Expected term (years)	N/A	N/A		6.1
Volatility	N/A	N/A		111	%
Annual dividend per share	N/A	N/A	$	—
Risk-free interest rate	N/A	N/A		1.0	%

There were no stock options granted during the years ended December 31, 2023 and 2022.

Income Taxes

Based upon the Company’s operating losses during 2023, 2022, and 2021 and the available evidence, management has determined that it is more likely than not that the deferred tax assets as of December 31, 2023 will not be realized in the near term. Consequently, we have established a valuation allowance against our net deferred tax asset totaling $35.8 million and $31.2 million as of December 31, 2023 and 2022, respectively. In this determination, we considered factors such as our earnings history, future projected earnings, and tax planning strategies. If sufficient evidence of our ability to generate sufficient future taxable income tax benefits becomes apparent, we may reduce our valuation allowance, resulting in tax benefits in our statement of operations and in additional paid-in-capital. Management evaluates the potential realization of our deferred tax assets and assesses the need for reducing the valuation allowance periodically.

The company has elected to treat interest any penalties associated with uncertain tax positions as a component of income tax expense.

Net Loss Per Share-Basic and Diluted

Net Loss Per Share — Basic and Diluted

Basic net loss per share is computed by dividing loss attributable to common stockholders by the weighted-average number of common shares 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. Net loss is adjusted for any deemed dividends to preferred stockholders to compute income available to common stockholders.

Outstanding stock options, restricted stock units, preferred shares, and warrants to purchase approximately 4,061,000, 27,000, and 9,000 shares were not included in the calculation of diluted loss per share amounts for the years ended December 31, 2023, 2022, and 2021, respectively, as their effect would have been anti-dilutive.

Recent Accounting Pronouncements

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

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.

Accounting Standards Recently Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope and 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 is 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 Company adopted this guidance effective January 1, 2023, and the adoption of this standard did not have a significant impact on its consolidated financial statements.

Accounting Standards Not Yet Adopted

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures, to require enhanced income tax disclosures to provide information to assess how an entity’s operations and related tax risks, tax planning, and operational opportunities affect its tax rate and prospects for future cash flows. The amendments in this update provide that a business entity disclose (1) a tabular income tax rate reconciliation, using both percentages and amounts, (2) separate disclosure of any individual reconciling items that are equal to or greater than 5% of the amount computed by multiplying the income (loss) from continuing operations before income taxes by the applicable statutory income tax rate, and disaggregation of certain items that are significant and (3) amount of income taxes paid (net of refunds received) disaggregated by federal, state and foreign jurisdictions, including separate disclosure of any individual jurisdictions greater than 5% of total income taxes paid. These amendments are

effective for the Company for annual periods in 2025, applied prospectively, with early adoption and retrospective application permitted. The Company intends to adopt the amendments in this update prospectively in 2025. The impact of the adoption of the amendments in this update is not expected to be material to the Company’s consolidated financial position and results of operations, since the amendments require only enhancement of existing income tax disclosures in the footnotes to the Company’s consolidated financial statements.