NOTE 4—REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

Common Stock

At the 2020 Annual Meeting, the Company’s stockholders approved a proposal to amend the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of BIOLASE common stock from 40,000,000 shares to 180,000,000 shares. On May 28, 2020, the  Company filed the amendment with the Secretary of State of the State of Delaware to effect such increase.

Preferred Stock

Series F Convertible Preferred Stock

On July 23, 2020, the Company consummated the sale of an aggregate of 18,000 shares of Series F Convertible Preferred Stock and 45,000,000 warrants (the “July 2020 Warrants”) through the Rights Offering. Each share of Series F Preferred Stock is convertible at the Company’s option at any time on or after July 22, 2021 or at the option of the holder at any time, into the number of shares of our common stock determined by dividing the $1,000 stated value per share of the Series F Preferred Stock by a conversion price of $0.40 per share.

The gross proceeds from the sale of Series F Convertible Preferred Stock and common stock warrants were $18.0 million, before broker fees and related expenses of approximately $1.9 million. Each share of Series F Convertible Preferred Stock is convertible into 2,500 shares of common stock and each July 2020 Warrant entitles the holder thereof to purchase one share of common stock at a conversion price of $0.40 per share.  

In accordance with applicable accounting standards, the $18.0 million gross proceeds from the Rights Offering described above were allocated to the Series F Convertible Preferred Stock and the July 2020 Warrants in the amount of $2.7 million and $15.3 million, respectively. The allocation was based on the fair value of the July 2020 warrants of $15.3 million as of the commitment date, with the residual proceeds of $2.7 million allocated to the Series F Convertible Preferred Stock.

The initial fair value of the July 2020 Warrants was estimated to be $0.34 per share using the Black-Scholes pricing model with an expected term of 5 years, market price of $0.44 per share, which is the last closing price of our common stock prior to the transaction date, volatility of 109.8%, a risk free rate of 0.27% and an expected dividend yield of 0. The July 2020 warrants were initially recognized as liability and on September 28, 2020, the Warrant Agreement was amended and was reevaluated for equity accounting and reclassified in permanent equity. On the effective date of the amendment, the July 2020 Warrants were remeasured and the change in fair value was recognized as a gain of approximately $5.8 million and is recorded in the consolidated statement of operations in Other (income) expense, net for the three and nine-months ended September 30, 2020. The fair value upon the amendment was estimated to be $0.21 per share using the Black-Scholes pricing model with an expected term of 5 years, a market price of $0.28 per share, which was the last closing price of our common stock prior to the amendment date, volatility of 109.5%, a risk free rate of 0.26% and an expected dividend yield of 0.

The Series F Convertible Preferred Stock contained a beneficial conversion feature which resulted in a deemed dividend to preferred stockholders of approximately $2.7 million. Additionally, the July 2020 Warrants were recognized as a discount to the Series F Convertible Preferred Stock and upon conversion of the Series F Convertible Preferred Stock to common stock, this discount was accreted and also recognized as a deemed dividend to preferred stockholders in the amount of $14.7 million for the three and nine month period ended September 30, 2020.

Issuance costs of $1.6 million relating to the July 2020 Warrants were recognized as an expense and is recorded in Other (income) expense, net in the consolidated statement of operations for the three and nine month period ended September 30 2020.  Approximately 17,000 of the Series F Convertible Preferred Stock had been converted to common stock as of September 30, 2020.

Redeemable Preferred Stock

Series E Participating Convertible 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, 69,565 shares have been designated as Series E Participating Convertible Preferred Stock, par value $0.001 per share (“Series E Preferred Stock”), and 18,000 shares have been designated as Series F Convertible Preferred Stock, par value $0.001 per share (“Series F Preferred Stock”).

In 2019, the Company sold 69,565 shares of Series E Preferred Stock in a private offering. All 69,565 shares of Series E Preferred Stock were automatically converted into 6,956,500 shares of Common Stock upon receipt of the requisite approval at the 2020 Annual Meeting. Upon the conversion, the net proceeds of approximately $4.0 million were reclassified from mezzanine equity to permanent equity. As of September 30, 2020 and December 31, 2019, 0 and 69,565 shares of Series E Preferred Stock were issued and outstanding, respectively.

The shares of Series E Preferred Stock were offered in reliance upon exemptions from registration under the Securities Act of 1933, as amended, afforded by Regulation D and corresponding provisions of state securities laws. The Company subsequently filed a registration statement with the SEC 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 September 30, 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 1.1 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 of stockholders, 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 and Amendment No. 3 to the 2018 Plan, as approved by the Company’s stockholders on May 13, 2020. 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 12.2 million. As of September 30, 2020 a total 5.3 million shares of the Company’s common stock have been reserved for issuance upon the exercise of outstanding options and or settlement of unvested RSUs, and 3.8 million shares of the Company’s common stock remain available for future grants.

The Company recognized stock-based compensation expense of $0.8 million and $0.8 million, for the three month period ended September 30, 2020 and 2019 and $2.4 million and $1.9 million for the nine month period ended September 30, 2020 and September 30, 2019 respectively. As of September 30, 2020, the Company had approximately $1.4 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 1.2 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 nine months ended September 30, 2020 is as follows (in thousands, except per share data):

A summary of unvested stock option activity for the nine months ended September 30, 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

During the nine months ended September, 30, 2020, the Company granted approximately 2.9 million RSUs  and the Company canceled approximately 1.0 million RSUs with performance based vesting due to non-achievement of the performance targets.

A summary of unvested RSU activity for the nine months ended September 30, 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.

Rights Offering

On July 23, 2020 the Company consummated the Rights Offering issuing 18,000 shares of Series F Convertible Preferred Stock par value $0.001 and 45,000,000 July 2020 warrants with an exercise price of $0.40 per share.

  Based on the terms and conditions of the warrants, the Company initially determined that liability classification was appropriate and recognized the fair value of the warrants as a liability. On September 28, 2020 the Warrant Agreement was amended to support classification as equity as described above. Upon the amendment to the Warrant Agreement, the Company remeasured the fair value of the July 2020 as described above and reclassified the value to equity. The Company allocated the net proceeds to the July 2020 Warrants based on their fair value at the commitment date. The initial fair value of the July 2020 Warrants was estimated to be at $0.34 per share using the Black-Scholes pricing model with an expected term of 5 years, market price of $0.44 per share, which is the last closing price of our common stock prior to the transaction date, volatility of 109.8%, a risk free rate of 0.27% and an expected dividend yield of 0. The fair value upon the amendment was estimated to be $0.21 per share using the Black-Scholes pricing model with an expected term of 5 years, a market price of $0.28 per share, which was the last closing price of our common stock prior to the amendment date, volatility of 109.5%, a risk free rate of 0.26% and an expected dividend yield of 0. Based on the fair value of the July 2020 warrants, the Company allocated approximately $2.7 million to the Series F Preferred Stock and $15.3 million to the July 2020 Warrants before issuance costs.

Registered Direct Offering and Concurrent Private Placement

On June 10, 2020, the Company consummated a registered direct offering of 10,800,000 shares of its common stock to certain accredited institutional investors and a concurrent private placement of warrants to purchase up to an aggregate of 10,800,000 shares of common stock with an exercise price of $0.515 per share (“the June 2020 Warrants”). The June 2020 Warrants are exercisable commencing on the date of their issuance and will expire on June 10, 2025. The combined purchase price for one Share and one June 2020 Warrant in the offering was $0.64. The Company received aggregate gross proceeds of approximately $6.9 million in the offering, before deducting fees to the placement agents and other offering expenses of approximately $0.7 million.

Based on the terms and conditions of the June 2020 Warrants, the Company determined that equity classification was appropriate and recognized the values of the commons stock and June 2020 Warrants in excess of par in Additional Paid-In Capital as of June 30, 2020. The Company allocated the net proceeds of $6.2 million to the common stock and June 2020 Warrants based on their relative fair values. The fair value of the June 2020 Warrants was estimated to be at $0.42 per share using the Black-Scholes pricing model with an expected term of 5 years, market price of $0.54 which is the last closing price of our common stock prior to the transaction date, volatility of 109.8% and a risk free rate of 0.45% and an expected dividend yield of 0. Based on the relative fair value of the June 2020 Warrants, the Company allocated approximately $3.9 million to the common stock and $3.0 million to the June 2020 Warrants before issuance costs.

A summary of warrant activity for the nine months ended September 30, 2020 is as follows (in thousands, except exercise price amounts):

See Note 9 for 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 and Series F Convertible Preferred Stock to purchase approximately 67.2 million shares were not included in the calculation of diluted loss per share for the three and nine months ended September 30, 2020, as their effect would have been anti-dilutive. For the same 2019 periods, anti-dilutive outstanding stock options and warrants to purchase 5.6 million shares were not included in the computation of diluted loss per share.