NOTE 4—REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY

Redeemable Preferred Stock

The board of directors of Biolase (the “Board”), without further stockholder authorization, may from time to time authorize the issuance of 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. In 2019, the Company sold Series E Convertible Preferred Shares in a private offering and as of March 31, 2020 and December 31, 2019, 69,565 of these shares were issued and outstanding.

The shares of Series E Preferred Stock automatically convert into shares of Common Stock upon receipt of the Requisite Stockholder Approval (as defined in the Certificate of Designations, Preferences and Rights of Series E Participating Convertible Preferred Stock. The shares of Series E Preferred Stock have no other conversion rights.

The Purchase Agreement contains customary representations, warranties and covenants by the Company, customary indemnification obligations of the Company and the Investors, including for liabilities under the Securities Act, and other obligations of the parties. The representations, warranties and covenants contained in the Purchase Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement and may be subject to limitations agreed upon by the contracting parties.

The shares of Series E Preferred Stock were offered in reliance upon exemptions from registration under the Securities Act afforded by Regulation D and corresponding provisions of state securities laws. The Company has agreed to use commercially reasonable efforts to file, within 30 days following receipt of the Requisite Stockholder Approval, a registration statement with the U.S. Securities and Exchange Commission to register the resale of the shares of Common Stock underlying the Series E Preferred Stock.

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, 2020, 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 1.2 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 and Amendment No. 2 to the 2018 Plan, as approved by the Company’s stockholders on May 15, 2019. 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 5.0 million. As of March 31, 2020, a total 2.3 million shares of the Company’s common stock have been reserved for outstanding options and unvested RSUs, and 0.8 million shares of the Company’s common stock remain available for future grants.

The Company recognized stock-based compensation expense of $0.7 million and $0.8 million, for the three months ended March 31, 2020 and 2019, respectively, based on the grant-date fair value. The net impact of stock-based compensation expense to earnings was $(0.02), and $(0.04) per basic and diluted share for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, the Company had approximately $1.1 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 1.5 years.

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

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

A summary of option activity for the three months ended March 31, 2020 is as follows (in thousands, except per share data):

A summary of unvested stock option activity for the three months ended March 31, 2020 is as follows (in thousands, except per share data):

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

Restricted Stock Units

There were no material grants made during the three months ended March 31, 2020, and the Company canceled approximately 840,000 grants with performance based vesting due to non achievement of the performance targets.

A summary of unvested RSU activity for the three months ended March 31, 2020 is as follows (in thousands, except per share amounts):

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, 2020 is as follows (in thousands, except exercise price amounts):

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

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 3.4 million shares were not included in the calculation of diluted loss per share for the three months ended March 31, 2020, as their effect would have been anti-dilutive. For the same 2019 periods, anti-dilutive outstanding stock options and warrants to purchase 5.7 million shares were not included in the computation of diluted loss per share.