BIOLASE, INC - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

June 30, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36385

BIOLASE, INC.

(Exact name of registrant as specified in its charter)

Delaware

87-0442441

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

27042 Towne Centre Drive, Suite 270

Lake Forest, California 92610

(Address of principal executive offices) (Zip Code)

(949) 361-1200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

symbol(s)

Name of each exchange on which registered

Common stock at par value $0.001 per share

BIOL

The NASDAQ Stock Market LLC

(NASDAQ Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

As of August 4, 2022, the registrant had 6,854,771 shares of common stock, $0.001 par value per share, outstanding.

BIOLASE, INC.

INDEX


		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (Unaudited):	2
	Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021	2
	Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2022 and June 30, 2021	3
	Consolidated Statements of Redeemable Preferred Stock and Stockholders’ Equity for the three and six months ended June 30, 2022 and June 30, 2021	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and June 30, 2021	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II	OTHER INFORMATION	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 5	Other Information	37
Item 6.	Exhibits	38
Signatures		40

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BIOLASE, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)


	June 30,			December 31,
	2022			2021
ASSETS
Current assets:
Cash and cash equivalents	$	19,549		$	29,972
Restricted cash		—			203
Accounts receivable, less allowance of $2,286 and $2,154 as of June 30, 2022 and December 31, 2021, respectively		6,081			4,238
Inventory		16,573			12,929
Prepaid expenses and other current assets		2,064			2,012
Total current assets		44,267			49,354
Property, plant, and equipment, net		1,373			1,067
Goodwill		2,926			2,926
Right of use asset		2,047			1,717
Other assets		241			220
Total assets	$	50,854		$	55,284
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,961		$	3,309
Accrued liabilities		6,498			8,276
Deferred revenue, current portion		2,492			2,259
Total current liabilities		13,951			13,844
Deferred revenue		325			329
Warranty accrual		431			521
Non current term loans, net of discount		12,730			13,603
Non current operating lease liability		1,592			1,449
Other liabilities		210			330
Total liabilities		29,239			30,076
Commitments and contingencies — Note 11
Stockholders' equity:
Series F Preferred stock, par value $0.001 per share; 18 shares authorized, 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		—			34
Common stock, par value $0.001 per share; 180,000 shares authorized, 6,857 and 6,149 shares issued and 6,855 and 6,147 shares outstanding as of June 30, 2022 and December 31, 2021, respectively— Note 1		7			6
Additional paid-in capital		300,414			293,325
Accumulated other comprehensive loss		(886	)		(623	)
Accumulated deficit		(277,920	)		(267,534	)
Total stockholders' equity		21,615			25,208
Total liabilities, redeemable preferred stock and stockholders' equity	$	50,854		$	55,284

See accompanying notes to unaudited consolidated financial statements.

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited, in thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Net revenue	$	12,235		$	9,134		$	22,401		$	17,250
Cost of revenue		7,094			5,093			12,531			10,469
Gross profit		5,141			4,041			9,870			6,781
Operating expenses:
Sales and marketing		5,402			3,311			10,216			6,864
General and administrative		3,141			2,779			5,717			6,134
Engineering and development		1,653			1,162			3,197			2,966
Loss on patent litigation settlement		—			72			—			161
Total operating expenses		10,196			7,324			19,130			16,125
Loss from operations		(5,055	)		(3,283	)		(9,260	)		(9,344	)
Gain (loss) on foreign currency transactions		(103	)		69			(223	)		(136	)
Interest expense, net		(430	)		(582	)		(863	)		(1,157	)
Gain on debt forgiveness		—			3,014			—			3,014
Non-operating income (loss), net		(533	)		2,501			(1,086	)		1,721
Loss before income tax provision		(5,588	)		(782	)		(10,346	)		(7,623	)
Income tax (provision) benefit		(23	)		80			(40	)		20
Net loss		(5,611	)		(702	)		(10,386	)		(7,603	)
Other comprehensive loss items:
Foreign currency translation adjustments		(222	)		65			(263	)		(83	)
Comprehensive loss	$	(5,833	)	$	(637	)	$	(10,649	)	$	(7,686	)

Net loss	$	(5,611	)	$	(702	)	$	(10,386	)	$	(7,603	)
Deemed dividend on convertible preferred stock		—			(6	)		(217	)		(538	)
Net loss attributable to common stockholders	$	(5,611	)	$	(708	)	$	(10,603	)	$	(8,141	)

Net loss per share attributable to common stockholders:
Basic and Diluted - Note 1	$	(0.91	)	$	(0.12	)	$	(1.72	)	$	(1.43	)
Shares used in the calculation of net loss per share:
Basic and Diluted - Note 1		6,192			6,027			6,176			5,708

See accompanying notes to unaudited consolidated financial statements.

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(Unaudited, in thousands)


	Mezzanine Equity					Stockholders' Equity
	Series G Redeemable Preferred Stock					Common Stock				Additional Paid-in Capital			Series F Convertible Preferred Stock					Accumulated Other Comprehensive			Accumulated			Total Stockholders'
	Shares			Amount		Shares		Amount		Amount			Shares		Amount			Loss			Deficit			Equity
Balances, March 31, 2022		154		$	—		6,176	$	6	$	293,567			—	$	—		$	(664	)	$	(272,310	)	$	20,599
Sale of common stock, net of fees		—			—		679		1		5,848			—		—			—			—			5,849
Redemption of Series G Redeemable Preferred Stock		(154	)		—		—		—		—			—		—			—			—			—
Issuance of stock from RSUs, net		—			—		2		—		—			—		—			—			—			—
Liability award reclass		—			—		—		—		596			—		—			—			—			596
Stock-based compensation		—			—		—		—		403			—		—			—			—			403
Net loss		—			—		—		—		—			—		—			—			(5,611	)		(5,611	)
Foreign currency translation adjustment		—			—		—		—		—			—		—			(222	)		—			(222	)
Balances, June 30, 2022		—		$	—		6,857	$	7	$	300,414			—	$	—		$	(886	)	$	(277,920	)	$	21,615

Balances, December 31, 2021		—		$	—		6,149	$	6	$	293,325			—	$	34		$	(623	)	$	(267,534	)	$	25,208
Sale of common stock, net of fees		—			—		679		1		5,848			—		—			—			—			5,849
Issuance of Series G Redeemable Preferred Stock		154			—		—		—		—			—		—			—			—			—
Redemption of Series G Redeemable Preferred Stock		(154	)		—		—		—		—			—		—			—			—			—
Conversion of Series F Convertible Preferred Stock		—			—		25		—		251			—		(251	)		—			—			—
Deemed dividend on Series F Convertible Preferred Stock		—			—		—		—		(217	)		—		217			—			—			—
Issuance of stock from RSUs, net		—			—		4		—		—			—		—			—			—			—
Liability award reclass		—			—		—		—		596			—		—			—			—			596
Stock-based compensation		—			—		—		—		611			—		—			—			—			611
Net loss		—			—		—		—		—			—		—			—			(10,386	)		(10,386	)
Foreign currency translation adjustment		—			—		—		—		—			—		—			(263	)		—			(263	)
Balances, June 30, 2022		—		$	—		6,857	$	7	$	300,414			—	$	—		$	(886	)	$	(277,920	)	$	21,615

See accompanying notes to unaudited consolidated financial statements.

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(Unaudited, in thousands)


	Stockholders' Equity
	Common Stock				Additional Paid-in Capital			Series F Convertible Preferred Stock						Accumulated Other Comprehensive			Accumulated			Total Stockholders'
	Shares		Amount		Amount			Shares			Amount			Loss			Deficit			Equity
Balances, March 31, 2021		5,977	$	6	$	292,284			—		$	36		$	(533	)	$	(258,277	)	$	33,516
Sale of common stock		—		—		(1	)		—			—			—			—			(1	)
Conversion of Series F Convertible Preferred Stock		1		—		7			—			(7	)		—			—			—
Deemed dividend on Series F Convertible Preferred Stock		—		—		(6	)		—			6			—			—			—
Issuance of stock from RSUs, net		70		—		—			—			—			—			—			—
Stock-based compensation		—		—		366			—			—			—			—			366
Exercise of common stock warrants		1		—		12			—			—			—			—			12
Net loss		—		—		—			—			—			—			(702	)		(702	)
Foreign currency translation adjustment		—		—		—			—			—			65			—			65
Balances, June 30, 2021		6,049	$	6	$	292,662			—		$	35		$	(468	)	$	(258,979	)	$	33,256

Balances, December 31, 2020		3,908	$	4	$	261,667			1		$	118		$	(385	)	$	(251,376	)	$	10,028
Sale of common stock		560		1		13,290			—			—			—			—			13,291
Issuance of common stock for settlement of liability		20		—		510			—			—			—			—			510
Conversion of Series F Convertible Preferred Stock		62		—		621			(1	)		(621	)		—			—			—
Deemed dividend on Series F Convertible Preferred Stock		—		—		(538	)		—			538			—			—			—
Issuance of stock from RSUs, net		71		—		—			—			—			—			—			—
Stock-based compensation		—		—		2,062			—			—			—			—			2,062
Exercise of common stock warrants		1,428		1		15,050			—			—			—			—			15,051
Net loss		—		—		—			—			—			—			(7,603	)		(7,603	)
Foreign currency translation adjustment		—		—		—			—			—			(83	)		—			(83	)
Balances, June 30, 2021		6,049	$	6	$	292,662			—		$	35		$	(468	)	$	(258,979	)	$	33,256

See accompanying notes to unaudited consolidated financial statements.

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Six Months Ended
	June 30,
	2022			2021
Cash Flows from Operating Activities:
Net loss	$	(10,386	)	$	(7,603	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation and amortization		247			176
Provision for bad debts		143			(79	)
Inventory write-offs and disposals		(42	)		(103	)
Amortization of discount on lines of credit		47			84
Amortization of debt issuance costs		84			193
Patent litigation mark-to-market		—			161
Stock-based compensation		1,100			1,297
Gain on debt forgiveness		—			(3,014	)
Changes in operating assets and liabilities:
Accounts receivable		(1,986	)		(682	)
Inventory		(3,602	)		(1,455	)
Prepaid expenses and other current assets		(236	)		438
Accounts payable and accrued liabilities		(232	)		471
Deferred revenue		230			108
Net cash and cash equivalents used in operating activities		(14,633	)		(10,008	)
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment		(578	)		(311	)
Net cash and cash equivalents used in investing activities		(578	)		(311	)
Cash Flows from Financing Activities:
Proceeds from the sale of common stock		5,849			13,291
Payments of equity offering costs		—			(6	)
Principal payment on loan		(1,000	)		—
Proceeds from the exercise of common stock warrants		—			16,550
Payment of debt issuance costs		—			(24	)
Net cash and cash equivalents provided by financing activities		4,849			29,811
Effect of exchange rate changes		(264	)		(83	)
(Decrease) increase in cash, cash equivalents and restricted cash		(10,626	)		19,409
Cash, cash equivalents and restricted cash, beginning of period		30,175			17,876
Cash, cash equivalents and restricted cash, end of period	$	19,549		$	37,285
Supplemental cash flow disclosure:
Cash paid for interest	$	743		$	886
Cash received for interest	$	17		$	29
Cash paid for income taxes	$	46		$	130
Cash paid for operating leases	$	135		$	263
Non-cash settlement of liability	$	—		$	510
Non-cash right-of-use assets obtained in exchange for lease obligation	$	562		$	48
Deemed dividend on preferred stock	$	217		$	—

See accompanying notes to unaudited consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

The Company

BIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company”) is a leading provider of advanced laser systems for the dental industry. The Company develops, manufactures, markets, and sells laser systems that provide significant benefits for dental practitioners and their patients. The Company’s proprietary systems allow dentists, periodontists, endodontists, pediatric dentists, oral surgeons, and other dental specialists to perform a broad range of minimally invasive dental procedures, including cosmetic, restorative, and complex surgical applications. The Company’s laser systems are designed to provide clinically superior results for many types of dental procedures compared to those achieved with drills, scalpels, and other conventional instruments. Potential patient benefits include less pain, fewer shots, faster healing, decreased fear and anxiety, and fewer appointments. Potential practitioner benefits include improved patient care and the ability to perform a higher volume and wider variety of procedures and generate more patient referrals.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of BIOLASE and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December 31, 2021 audited consolidated financial statements, and include all material adjustments, consisting of normal recurring adjustments and the elimination of all material intercompany transactions and balances, necessary to fairly present the information set forth therein. The unaudited consolidated financial statements do not include all the footnotes, presentations, and disclosures normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements.

The unaudited consolidated results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2021, included in BIOLASE’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2022 (the “2021 Form 10-K”).

Except as the context otherwise requires, all common stock share numbers, share price amounts (including exercise prices, conversion prices, and closing market prices), and warrant numbers contained in the unaudited consolidated financial statements and notes thereto reflect the one-for-twenty-five (1:25) reverse stock split (the “Reverse Stock Split”) effectuated by the Company on April 28, 2022.

Liquidity and Management’s Plans

The Company incurred losses from operations and used cash in operating activities for the three and six months ended June 30, 2022 and for the years ended December 31, 2021, 2020, and 2019.

As of June 30, 2022, the Company had working capital of approximately $30.3 million. The Company’s principal sources of liquidity as of June 30, 2022 consisted of approximately $19.5 million in cash and cash equivalents and $6.1 million of net accounts receivable. As of December 31, 2021, the Company had working capital of approximately $35.5 million, $30.0 million in cash and cash equivalents and $4.2 million of net accounts receivable. The decrease in cash and cash equivalents since December 31, 2021 was primarily due to cash used in operating activities of $14.6 million, $0.6 million cash used in investing activities, and a $1.0 million payment on the SWK Loan (as defined below), partially offset by cash provided by the $5.8 million net proceeds from the June 2022 direct offering and private placement. The $14.6 million of net cash used in operating activities was primarily driven by our net loss of $10.4 million and net increase in operating assets and liabilities of $5.8 million.

Additional capital requirements may depend on many factors, including, among other things, the rate at which the Company’s business grows, the COVID-19 pandemic and the actions taken to contain it, demands for working capital, manufacturing capacity, and any acquisitions that the Company may pursue. From time to time, the Company could be required, or may otherwise attempt, to raise capital through either equity or debt offerings. The Company cannot provide assurance that it will be able to successfully enter into any such equity or debt financings in the future or that the required capital would be available on acceptable terms, if at all, or that any such financing activity would not be dilutive to its’ stockholders.

COVID-19 Risk and Uncertainties

The COVID-19 pandemic severely impacted global economic activity, and many countries and many states in the United States reacted to the pandemic by instituting quarantines, mandating business and school closures and restricting travel. These mandated business closures included dental office closures worldwide, in large part, for all but emergency procedures. As these quarantines and restrictions began to be lifted in 2021, the Company's sales began to return to pre-pandemic levels. However, there are still uncertainties regarding the ongoing and future effects of COVID-19, and there is no assurance that the Company's sales will not be further impacted in 2022 or at any time thereafter.

Reverse Stock Split

At the 2022 Annual Meeting, BIOLASE stockholders approved an amendment to BIOLASE’s Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), to effect a reverse stock split of BIOLASE common stock, at a ratio ranging from one-for-two (1:2) to one-for-twenty-five (1:25), with the final ratio to be determined by the Board. Immediately after the 2022 Annual Meeting, the Board approved a one-for-twenty-five (1:25) reverse stock split of the outstanding shares of BIOLASE common stock (the “Reverse Stock Split”). On April 28, 2022, BIOLASE filed an amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the Reverse Stock Split, which became effective on April 28, 2022. The amendment did not change the number of authorized shares of BIOLASE common stock.

Cyber Incident

In December 2021, the Company experienced a cybersecurity attack that caused a brief network disruption and impacted certain systems. Upon detection, the Company took immediate steps to address the incident, engaged third-party experts, and notified law enforcement. The Company has taken actions to strengthen its existing systems and implement additional prevention measures. The Company will continue to monitor and assess as needed. All liabilities were fully insured, and as of December 31, 2021 the Company recorded an accrued liability and an insurance receivable within prepaid expenses and other current assets of $0.4 million. In March 2022 the Company received the cash reimbursement from its insurance provider.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of these consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates in these consolidated financial statements include allowances on accounts receivable, inventory, and deferred taxes, as well as estimates for accrued warranty expenses, goodwill and the ability of goodwill to be realized, revenue deferrals, effects of stock-based compensation and warrants, contingent liabilities, and the provision or benefit for income taxes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.

Critical Accounting Policies

Information with respect to the Company’s critical accounting policies, which management believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management as discussed in the Company’s 2021 audited financial statements included in the 2021 Form 10-K. Management believes that there have been no significant changes during the six months ended June 30, 2022 in the Company’s critical accounting policies from those disclosed in the Company’s 2021 audited financial statements included in the 2021 Form 10-K.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market (or, if none exists, the most advantageous market) for the specific asset or liability at the measurement date (referred to as the “exit price”). The fair value is based on assumptions that market participants would use, including a consideration of non-performance risk. Under the accounting guidance for fair value hierarchy, there are three levels of measurement inputs. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable, either directly or indirectly. Level 3 inputs are unobservable due to little or no corroborating market data.

The Company’s financial instruments, consisting of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, and the SWK Loan (as defined below) as discussed in Note 9 – Debt, approximate fair value because of the relative short maturity of these items and the market interest rates the Company could obtain.

Concentration of Credit Risk, Interest Rate Risk and Foreign Currency Exchange Rate

Financial instruments which potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents, restricted cash, and trade accounts receivable. The Company maintains its cash and cash equivalents and restricted cash with established commercial banks. At times, balances may exceed federally insured limits. To minimize the risk associated with trade accounts receivable, management performs ongoing credit evaluations of customers’ financial condition and maintains relationships with the Company’s customers that allow management to monitor current changes in business operations so the Company can respond as needed. The Company does not, generally, require customers to provide collateral before it sells them its products. However, the Company has required certain distributors to make prepayments for significant purchases of its products.

Substantially all of the Company’s revenue is denominated in U.S. dollars, including sales to international distributors. Only a small portion of its revenue and expenses is denominated in foreign currencies, principally the Euro and Indian Rupee. The Company’s foreign currency expenditures primarily consist of the cost of maintaining offices, consulting services, and employee-related costs. During the three and six months ended June 30, 2022 and 2021, respectively, the Company did not enter into any hedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of the Company’s products outside the U.S.

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.

Recently Issued Accounting Standards

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces the number of accounting models for convertible debt instruments and convertible preferred stock and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, this ASU improves and amends the related earnings per share guidance. This standard became effective for the Company beginning on January 1, 2022. Adoption is either a modified retrospective method or a fully retrospective method of transition. The Company adopted this guidance effective January 1, 2022, and the adoption of this standard did not have a material impact on its consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This ASU clarifies the accounting for modifications or exchanges of freestanding equity-classified written call options (i.e. warrants) so that the transaction should be treated as an exchange of the original instrument for a new instrument. This standard is effective for fiscal years beginning after December 15, 2021 on a prospective basis, with early adoption permitted. The Company adopted this guidance effective January 1, 2022, and the adoption of this standard did not have a material impact on its consolidated financial statements.

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 will be 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 standard will be effective for the Company beginning January 1, 2023, with early adoption permitted beginning January 1, 2019. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

NOTE 3—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, imaging 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 90% of net revenue for the three and six months ended June 30, 2022 and 88% of net revenue for the three and six months ended June 30, 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 10% of net revenue for the three and six months ended June 30, 2022 and 12% of net revenue for the three and six months ended June 30, 2021, respectively. The majority of the Company’s 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 approximately $1.1 million and $0.8 million as of June 30, 2022 and December 31, 2021, 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 nine 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 an asset 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):


	June 30,			December 31,
	2022			2021
Undelivered elements (training, installation, product and support services)	$	1,103		$	835
Extended warranty contracts		1,714			1,753
Total deferred revenue		2,817			2,588
Less: long-term portion of deferred revenue		(325	)		(329	)
Deferred revenue — current	$	2,492		$	2,259

The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables at June 30, 2022 and December 31, 2021.

The amount of revenue recognized during the six months ended June 30, 2022 and 2021 that was included in the opening contract liability balance related to undelivered elements was $0.4 million and $0.1 million, respectively. The amounts related to extended warranty contracts was $1.0 million and $0.9 million, for the six months ended June 30, 2022 and 2021, 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):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
United States	$	8,899	$	5,865	$	15,877	$	11,086
International		3,336		3,269		6,524		6,164
Total net revenue	$	12,235	$	9,134	$	22,401	$	17,250

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Revenue recognized over time	$	1,210	$	1,056	$	2,331	$	2,115
Revenue recognized at a point in time		11,025		8,078		20,070		15,135
Net revenue	$	12,235	$	9,134	$	22,401	$	17,250

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
End-customer	$	8,899	$	5,865	$	15,877	$	11,086
Distributors		3,336		3,269		6,524		6,164
Net revenue	$	12,235	$	9,134	$	22,401	$	17,250

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.

NOTE 4—REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

BIOLASE's board of directors (the "Board"), without further stockholder authorization, may authorize the issuance from time to time of up to 1,000,000 shares of the Company’s preferred stock.

Preferred Stock

Series G Preferred Stock

On March 1, 2022, the Board declared a dividend of one one-thousandth of a share of Series G Preferred Stock, par value $0.001 per share ("Series G Preferred Stock"), of BIOLASE common stock outstanding as of March 25, 2022 (as calculated on a pre-Reverse Stock Split basis). The certificate of designation for the Series G Preferred Stock provided that all shares of Series G Preferred Stock not present in person or by proxy at the 2022 annual meeting of BIOLASE stockholders (the “2022 Annual Meeting”) immediately prior to the opening of the polls at the 2022 Annual Meeting would be automatically redeemed (the “Initial Redemption”) and that any outstanding shares of Series G Preferred Stock that have not been redeemed pursuant to the Initial Redemption would be redeemed in whole, but not in part, (i) if and when ordered by the Board or (ii) automatically upon the effectiveness of the amendment to the Certificate of Incorporation effecting the Reverse Stock Split that was subject to the vote at the 2022 Annual Meeting (the “Subsequent Redemption”). On April 28, 2022, both the Initial Redemption and the Subsequent Redemption occurred. As a result, no shares of Series G Preferred Stock remain outstanding. On June 6, 2022, the Series G Preferred Stock was eliminated.

Series F Convertible Preferred Stock

On July 23, 2020, the Company consummated the sale of an aggregate of 18,000 shares of Series F Preferred Stock, par value $0.001 per share ("Series F Preferred Stock"), and 1,800,000 warrants (the “July 2020 Warrants”), with each warrant exercisable for one share of BIOLASE common stock, through a registered rights offering the Company completed on July 22, 2020 (the “Rights Offering”). Each share of Series F Preferred Stock was 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 BIOLASE common stock determined by dividing the $1,000 stated value per share of the Series F Preferred Stock by a conversion price of $10.00 per share. Each share of Series F Preferred Stock was convertible into 100 shares of common stock, and each July 2020 Warrant entitled the holder thereof to purchase one share BIOLASE common stock at an exercise price of $10.00 per share.

In accordance with applicable accounting standards, the $18.0 million gross proceeds from the Rights Offering were allocated to the Series F 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 Preferred Stock.

The Series F Preferred Stock contained a beneficial conversion feature which resulted in a deemed dividend to preferred stockholders of approximately $2.7 million, upon immediate accretion. Additionally, the July 2020 Warrants were recognized as a discount to the Series F Preferred Stock. Upon conversion, including the conversion described below, this discount was accreted and also recognized as a deemed dividend to preferred stockholders in the amount of $0.2 million, $0.5 million and $14.7 million for the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020, respectively.

The remaining shares of Series F Preferred Stock were converted into shares of BIOLASE common stock in the first quarter of 2022 with none outstanding as of June 30, 2022. Approximately 251 shares of Series F Preferred Stock remained outstanding as of December 31, 2021. On March 3, 2022, the Series F Preferred Stock was eliminated.

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, 2017, 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, directors of the Company, and consultants to the Company. As of June 30, 2022, a total of 124,400 shares have been authorized for issuance under the 2002 Plan, of which approximately 41,000 shares of BIOLASE common stock have been issued pursuant to options that were exercised and restricted stock units ("RSUs") that were vested, approximately 24,000 shares of common stock have been reserved for options that are outstanding, and no shares of common stock remain 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 effective as of September 21, 2018, May 15, 2019, May 13, 2020, and June 11, 2021, the “2018 Plan”). 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.

Under the terms of the 2018 Plan, approximately 0.3 million shares of BIOLASE common stock are available for issuance as of June 30, 2022. As of June 30, 2022, a total of 1.5 million shares of common stock have been authorized for issuance under the 2018 Plan, of which approximately 0.9 million shares of the Company’s common stock have been reserved for issuance upon the exercise of outstanding options or stock appreciation rights ("SARS"), and/or settlement of unvested RSUs or phantom awards under the 2018 Plan.

The Company recognized stock-based compensation expense of $0.9 million and $1.1 million for the three and six months ended June 30, 2022, respectively, and $0.4 million and $1.3 million for the three and six months ended June 30, 2021, respectively. As of June 30, 2022 and 2021, the Company had approximately $2.0 million and $0.4 million, respectively, 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. As of June 30, 2022 and December 31, 2021, $0.5 million and $0.0 million of the total 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):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Cost of revenue	$	93	$	35	$	113	$	113
Sales and marketing		213		108		312		229
General and administrative		109		168		151		718
Engineering and development		475		55		524		237
Total	$	890	$	366	$	1,100	$	1,297

The fair values of stock options granted in the period were estimated using the Black-Scholes option-pricing model with the following assumptions:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Expected term (years)		—		N/A				—			6.1
Volatility		—	%		—	%		—	%		110	%
Annual dividend per share	N/A			N/A			N/A			N/A
Risk-free interest rate		—	%		—	%		—	%		0.69	%

A summary of option activity for the six months ended June 30, 2022 is as follows (in thousands, except per share data):


				Weighted		Weighted Average Remaining
				Average		Contractual		Aggregate
	Shares			Exercise Price		Term (Years)		Intrinsic Value(1)
Options outstanding at December 31, 2021		70		$	62.01		7.1	$	15
Forfeited, cancelled, or expired		(1	)	$	80.35
Options outstanding at June 30, 2022		69		$	61.65		6.6	$	—
Options exercisable at June 30, 2022		65		$	63.54		6.5	$	—
Vested options expired during the period ended June 30, 2022		—		$	—

(1)

The intrinsic value calculation does not include negative values, which can occur when the fair market value on the reporting date is less than the exercise price of the award.

A summary of unvested stock option activity for the six months ended June 30, 2022 is as follows (in thousands, except per share data):


				Weighted
				Average Grant
	Shares			Date Fair Value
Unvested options at December 31, 2021		5		$	17.31
Granted		—		$	—
Vested		(1	)	$	23.91
Forfeited or cancelled		(1	)	$	17.03
Unvested options at June 30, 2022		3		$	15.22

Fair value disclosures related to grants, exercises and vested options are as follows (in thousands, except per share amounts):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Weighted-average fair value of options granted per share	$	—	$	—	$	—	$	1.07
Total fair value of stock options vested during the period	$	10	$	365	$	24	$	387

(1)

Excess tax benefits received related to stock option exercises are presented as operating 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 exercise price of the options.

Restricted Stock Units

A summary of unvested RSU activity for the six months ended June 30, 2022 is as follows (in thousands, except per share amounts):


				Weighted
				Average Grant
	Shares			Date Fair Value
Unvested RSUs at December 31, 2021		94		$	15.64
Granted		299		$	4.19
Vested		(4	)	$	27.10
Forfeited or cancelled		(5	)	$	16.63
Unvested RSUs at June 30, 2022		384		$	6.59

Warrants

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

June 2022 Direct Offering and Private Placement

On June 27, 2022, the Company entered into a Securities Purchase Agreement with certain accredited institutional investors, pursuant to which the Company agreed to issue to the Purchasers (as defined therein), (i) in a registered direct offering, 678,745 shares of BIOLASE common stock, and pre-funded warrants to purchase 726,660 shares of BIOLASE common stock (the “June 2022 Pre-Funded Warrants”) with an exercise price of $0.001 per share, and (ii) in a concurrent private placement, warrants to purchase 1,405,405 shares of BIOLASE common stock (each a "Common Warrant" and together with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”). The combined purchase price for one share of BIOLASE common stock and one Common Warrant was $4.625, and the combined purchase price for one Pre-Funded Warrant and one Common Warrant was $4.624. In the offering and concurrent private placement, the Company received aggregate gross proceeds of approximately $6.5 million before deducting fees to the placement agent and other transaction expenses.

Based on the terms and conditions of the June 2022 Warrants, the Company determined that equity classification was appropriate and recognized the net proceeds in excess of par of $5.8 million in Additional Paid-In Capital.

July 2020 Rights Offering

On July 23, 2020, the Company consummated the Rights Offering issuing (i) 18,000 shares of Series F Preferred Stock and (ii) 45,000,000 July 2020 Warrants with an exercise price of $10.00 per share of BIOLASE common stock. The initial fair value of the July 2020 Warrants was estimated to be at $8.50 per share of BIOLASE common stock using the Black-Scholes pricing model with an expected term of 5 years, market price of $11.00 per share, which is the last closing price of BIOLASE 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. Based on the terms and conditions of the July 2020 Warrants, the Company initially determined that liability classification was appropriate and recognized the fair value of the July 2020 Warrants as a liability. 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. Issuance costs of $1.6 million relating to the July 2020 Warrants were recognized as an expense and were recorded in Other (income) expense, net in the consolidated statement of operations for the year ended December 31, 2020.

On September 28, 2020, the warrant agreement with respect to the July 2020 Warrants was amended. The amended terms of the July 2020 Warrants meet the requirements for the July 2020 Warrants’ classification as equity. The fair value upon the amendment was estimated to be $5.25 per share of BIOLASE common stock using the Black-Scholes pricing model with an expected term of 5 years, a market price of $7.00 per share of BIOLASE common stock, which was the last closing price of BIOLASE 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. On the effective date of the amendment to the warrant agreement, the Company remeasured the fair value of the July 2020 Warrants as described above, reclassified the value of $9.5 million to equity, and recognized the change in fair value as a gain of approximately $5.8 million in the consolidated statement of operations in Other (income) expense, net for the year ended December 31, 2020.

June 2020 Registered Direct Offering and Private Placement

On June 8, 2020, the Company entered into a Securities Purchase Agreement with certain accredited institutional investors, pursuant to which the Company agreed to issue to the Purchasers in a registered direct offering and concurrent private placement, 10,800,000 shares of BIOLASE common stock, and warrants to purchase 10,800,000 shares of BIOLASE common stock (the “ June 2020 Warrants”) with an exercise price of $0.515 per share. 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 of BIOLASE common stock and one June 2020 Warrant in the offering was $16.00. The Company received aggregate gross proceeds of approximately $6.9 million in the concurrent offerings, before deducting fees to the placement agents and other transaction 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 common stock and June 2020 Warrants in excess of par in Additional Paid-In Capital. 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 $10.5 per share using the Black-Scholes pricing model with an expected term of 5 years, market price of $13.5 which is the last closing price of BIOLASE 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 common stock and 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.

Western Alliance Warrants

On March 6, 2018, in connection with the execution of a business financing agreement with Western Alliance Bank ("Western Alliance"), the Company issued to Western Alliance warrants (the “Original Western Alliance Warrants”) to purchase up to the number of shares of BIOLASE common stock equal to $120,000 divided by the applicable exercise price at the time such warrants are exercised. The Original Western Alliance Warrants are fully vested and exercisable. The Original Western Alliance Warrants may be exercised with a cash payment from Western Alliance, or, in lieu of a cash payment, Western Alliance may convert the warrants into a number of shares, in whole or in part. The initial exercise price of the warrants was $58.75 per share. On September 27, 2018, the Company entered into the Second Modification Agreement to amend the Original Business Financing Agreement. In connection with the Second Modification Agreement, the Original Western Alliance Warrants were terminated, and the Company issued new warrants (the “Western Alliance Warrants”) to purchase up to the number of shares of BIOLASE common stock equal to $120,000 divided by the exercise price of $53.25, which was the closing price of BIOLASE common stock on September 27, 2018 (as adjusted for the Reverse Stock Split). The Western Alliance Warrants were immediately exercisable and expire on September 27, 2028. These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issue shares at a price per share less than the exercise price. The sale of common stock in the second quarter of 2020 triggered an adjustment to the exercise price to approximately $15.00 per share. The impact of the adjustment to the exercise price was not material.

SWK Warrants

On November 9, 2018, in connection with the Credit Agreement (as defined below), the Company issued to SWK warrants (the "SWK Warrants") to purchase up to 14,881 shares of BIOLASE common stock. The SWK Warrants were immediately exercisable and expire on November 9, 2026. The initial exercise price of the SWK Warrants was $33.50 per share, which was the average closing price of BIOLASE common stock for the ten trading days immediately preceding November 9, 2018 (as adjusted for the Reverse Stock Split). These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issue shares at a price per share less than the exercise price. The fair value of the SWK Warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 8 years; volatility of 81.79%; annual dividend per share of $0.00; and risk-free interest rate of 3.13%; and resulted in an estimated fair value of $0.4 million.

In November 2019, the SWK Warrants were consolidated and the exercise price was adjusted to $25.00 per share in connection with an amendment to the Credit Agreement, and in March 2020, the exercise price was adjusted a second time to $12.25. The impact of both reprice events was de minimis to the consolidated financial statements. In connection with the Fifth Amendment, the Company entered into a Third Amendment to the SWK Warrant Agreement. Under this amendment, the Company granted to SWK 2,551 additional common stock warrants at an exercise price of approximately $9.75. All other terms and conditions to the additional warrants were the same as those previously granted. The Company also revised the exercise price of the 19,488 common stock warrants held by SWK to $9.75. The Company measured the fair value of the 2,551 warrants granted using the Black-Scholes option-pricing model. The fair value of the additional warrants and the aggregate impact of the exercise price adjustments in previous amendments to the Warrant Agreement were less than $0.1 million and not material to the consolidated financial statements. Due to the repricing that occurred in the second quarter of 2020, the down round features of these warrants was not triggered by the Company’s June 2020 sale of common stock.

DPG Warrants

On November 14, 2018, in connection with the SWK Loan, the Company paid a finder’s fee to Deal Partners Group ("DPG") of $0.4 million cash and issued warrants to purchase up to 11,194 shares of BIOLASE common stock (the “DPG Warrants”). The DPG Warrants were exercisable immediately, and expire on November 9, 2026. The initial exercise price of the DPG Warrants was $33.50, which was the average closing price of the Company’s common stock for the ten trading days immediately preceding November 9, 2018 (as adjusted for the Reverse Stock Split). These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issue shares at a price per share less than the exercise price. The fair value of the DPG Warrants of $0.3 million was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 8 years; volatility of 81.79%; annual dividend per share of $0.00; and risk-free interest rate of 3.13%. In May 2019 the Company issued 5,989 warrants to purchase BIOLASE common stock at a weighted average exercise price of $54.25 to SWK and DPG.

In November 2019, the exercise price of the DPG Warrants issued on November 14, 2018 was adjusted from $33.50 per share to $22.00 per share and the exercise price of the DPG Warrants issued on May 7, 2019 was adjusted from $54.25 per share to $35.50 per share. The impact of the reprice was de minimis to the unaudited consolidated financial statements. The June 2020 sale of common stock triggered the down round features of these warrants, and in August 2020, the Company adjusted the exercise price of these warrants to $15.50 and $9.50 per share. The impact of this reprice was not material.

The value of both the SWK Warrants and the DPG Warrants was recognized as a discount on the SWK Loan and is being amortized on a straight-line basis, which approximates the effective-interest method, over the loan term of five years. Additionally, based on the adoption of ASU 2017-11 in the fourth quarter of 2018, these warrants are classified as equity in the consolidated balance sheet as of June 30, 2022 and December 31, 2021.

A summary of warrant activity for the six months ended June 30, 2022 is as follows (in thousands, except exercise price amounts):


				Weighted
				Average
	Shares			Exercise Price
Warrants outstanding, December 31, 2021		720		$	19.98
Granted or Issued		2,132		$	3.05
Exercised		—		$	—
Forfeited, cancelled, or expired		(31	)	$	225.00
Warrants outstanding at June 30, 2022		2,821		$	4.90
Warrants exercisable at June 30, 2022		2,821		$	4.90
Vested warrants expired during the period ended June 30, 2022		(31	)	$	225.00

Phantom Awards and Stock Appreciation Rights

During the six months ended June 30, 2022, the Company issued approximately 30,000 phantom RSUs in lieu of stock-settled RSUs historically granted for leadership bonuses and non-employee director service. During the year ended December 31, 2021, the Company issued approximately 400,000 phantom RSUs. The phantom RSUs have either time-based or performance-based vesting conditions and could be settled in cash in 2024 with the Company's option to settle the award in BIOLASE common stock at the sole discretion of the Board. These phantom RSUs were included as a component of long-term liability on the consolidated balance sheet and were not considered stock-based compensation due to the cash-settlement feature of the award and limitation on the number of remaining shares authorized for issuance. In the second quarter of 2022, as a result of the Reverse Stock Split, the phantom awards were reclassed to equity and included as a component of additional paid-in-capital in the amount of $0.1 million, with a portion remaining as a component of long-term liability on the consolidated balance sheet, and the expense subsequent to the remeasurement date considered stock-based compensation. The expense recognized during the three and six months ended June 30, 2022 was ($0.1 million) and $0.0 million due to decreases in fair values. As of June 30, 2022 $0.1 million was included in additional paid-in-capital and $0.1 million was included in long-term liabilities on the consolidated balance sheet. The balance included in long-term liabilities as of December 31, 2021, was $0.3 million.

During the year ended December 31, 2021, the Company issued approximately 40,000 SARs in lieu of stock-settled RSUs historically granted for non-employee director service. Upon exercise, the SARs could be settled in cash with the Company's option to settle in BIOLASE common stock at the sole discretion of the Board. These SARS were included in accrued liabilities on the consolidated balance sheet and not considered stock-based compensation due to the cash-settlement feature of the award and limitation on the number of remaining shares authorized for issuance. In the second quarter of 2022, as a result of the Reverse Stock Split, the SARs were reclassed to equity and included as a component of additional paid-in-capital on the consolidated balance sheet in the amount of $0.5 million. The expense recognized during the three and six months ended June 30, 2022 was $0.1 million and $0.3 million respectively and is included in additional paid-in-capital on the consolidated balance sheet as of June 30, 2022. The expense included in accrued liabilities on the consolidated balance sheet as of December 31, 2021 was $0.3 million.

Net Loss Per Share – Basic and Diluted

Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of BIOLASE common stock outstanding for the period. In computing diluted net loss per share, the weighted average number of shares of common stock outstanding is adjusted to reflect the effect of potentially dilutive securities. Net income (loss) is adjusted for any deemed dividends to preferred stockholders to compute net income attributable to common stockholders. The pre-funded warrants were included in the calculation of diluted loss per share for the period ended June 30, 2022.

Outstanding stock options, RSUs, and warrants to purchase approximately 2.6 million and 1.0 million shares were not included in the calculation of diluted loss per share amounts for the periods ended June 30, 2022 and June 30, 2021, respectively, as their effect would have been anti-dilutive. Also excluded in the calculation of diluted loss per share amount for the three and six months ended June 30, 2021, are the 652,500 shares of BIOLASE common stock issuable upon conversion of the 261 shares of Series F Preferred Stock outstanding as of June 30, 2021.

NOTE 5—INVENTORY

Inventory is valued at the lower of cost or net realizable value and is comprised of the following (in thousands):


	June 30,		December 31,
	2022		2021
Raw materials	$	5,454	$	4,444
Work-in-process		2,175		1,726
Finished goods		8,944		6,759
Inventory	$	16,573	$	12,929

Inventory has been reduced by estimates for excess and obsolete amounts totaling $1.0 million as of June 30, 2022 and December 31, 2021.

NOTE 6—PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment, net is comprised of the following (in thousands):


	June 30,			December 31,
	2022			2021
Building	$	197		$	211
Leasehold improvements		318			89
Equipment and computers		8,353			8,150
Furniture and fixtures		475			471
Construction in progress		153			31
Total		9,496			8,952
Accumulated depreciation and amortization		(8,284	)		(8,049	)
Property, plant, and equipment, net before land		1,212			903
Land		161			164
Property, plant, and equipment, net	$	1,373		$	1,067

Depreciation and amortization expense related to property, plant, and equipment totaled $0.1 million and $0.3 million for the three and six months ended June 30, 2022 and $0.1 million and $0.2 million for the three and six months ended June 30, 2021, respectively.

NOTE 7—INTANGIBLE ASSETS AND GOODWILL

The Company conducted its annual impairment test of goodwill as of September 30, 2021 and determined that there was no impairment. The Company also tests its intangible assets and goodwill between the annual impairment tests if events occur or circumstances change that would more likely than not reduce the fair value of the Company or its assets below their carrying amounts. For intangible assets subject to amortization, the Company performs its impairment test when indicators, such as reductions in demand or significant economic slowdowns, are present. No events have occurred since September 30, 2021 through the date of these unaudited consolidated financial statements that would trigger further impairment testing of the Company’s intangible assets and goodwill.

As of June 30, 2022 and December 31, 2021, the Company had goodwill of $2.9 million. As of June 30, 2022 and December 31, 2021, all intangible assets have been fully amortized and no amortization expense was recognized during the three and six months ended June 30, 2022 and 2021.

NOTE 8—ACCRUED LIABILITIES

Accrued liabilities are comprised of the following (in thousands):


	June 30,		December 31,
	2022		2021
Payroll and benefits	$	3,275	$	3,969
Warranty accrual, current portion		802		565
Accrued professional services		654		275
Lease liability		591		405
Taxes		547		558
Accrued insurance premium		171		600
Settlement accrual		—		805
Other		458		1,099
Accrued liabilities	$	6,498	$	8,276

The Coronavirus Aid, Relief, and Economic Security Act the ("CARES Act") allows employers to defer the deposit and payment of the employer's share of Social Security taxes from payroll periods through December 31, 2020. Under the CARES Act, the Company had deferred payments of $0.2 million outstanding as of June 30, 2022 and December 31, 2021. The deferred liability is included in accrued payroll and benefits.

Changes in the initial product warranty accrual and the expenses incurred under the Company’s initial and extended warranties are included within accrued liabilities and were as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Balance, beginning of period	$	1,138		$	1,396		$	1,086		$	1,132
Provision for estimated warranty cost		910			140			1,461			804
Warranty expenditures		(815	)		(478	)		(1,314	)		(878	)
Balance, end of period		1,233			1,058			1,233			1,058
Less: long-term portion of warranty accrual		431			507			431			507
Current portion of warranty accrual	$	802		$	551		$	802		$	551

The Company's Waterlase laser systems sold domestically are covered by a warranty against defects in material and workmanship for a period of up to one year from the date of sale to the end-user by the Company or a distributor. The Company's diode systems sold domestically are covered by a warranty against defects in material and workmanship for a period of up to two years from the date of sale to the end-user by the Company or a distributor. Waterlase systems and diode systems sold internationally are covered by a warranty against defects in material and workmanship for a period of up to 24 months from date of sale to the international distributor. The Company's laser systems warranty covers parts and service for sales in its North American territories and parts only for international distributor sales.

In North America and select international locations, the Company sells extended warranty contracts to its laser systems end-users that cover the period after the expiration of the Company's standard warranty coverage for its laser systems. Extended warranty coverage provided under the Company's service contracts varies by the type of system and the level of service desired by the customer. Products or accessories remanufactured, refurbished, or sold by unauthorized parties, voids all warranties in place for such products and exempts the Company from liability issues relating to the use of such products.

NOTE 9—DEBT

The following table presents the details of the principal outstanding and unamortized discount (in thousands):


	June 30,			December 31,
	2022			2021
SWK Loan	$	13,300		$	14,300
EIDL Loan		150			150
Discount and debt issuance costs on SWK Loan		(720	)		(847	)
Total		12,730			13,603
Current term loans, net of discount		—			—
Non current term loans, net of discount	$	12,730		$	13,603

The Company recognized approximately $0.4 million and $0.9 million in interest expense for the three and six months ended June 30, 2022 and $0.6 million and $1.2 million in interest expense for the three and six months ended June 30, 2021, respectively. The weighted-average interest rate as of June 30, 2022 was 10.25%.

The future minimum principal and interest payments as of June 30, 2022 are as follows (in thousands):


	Principal		Interest (1)
Remainder of 2022	$	—	$	725
2023		700		1,425
2024		2,800		1,242
2025		9,800		1,895
2026		—		9
2027 and thereafter		150		89
Total future payments	$	13,450	$	5,385

(1) Estimated using London Interbank Bank Offered Rate (“LIBOR”) as of June 30, 2022

Term Loan

On November 9, 2018, the Company entered into a five-year secured Credit Agreement (as amended, restated, and supplemented from time to time, the “Credit Agreement”) with SWK Funding LLC (“SWK”), pursuant to which the Company has borrowed $14.3 million (“SWK Loan”) as of June 30, 2022. The Company’s obligations under the Credit Agreement are secured by substantially all of the Company’s assets. Under the terms of the Credit Agreement and subsequent amendments as discussed in the Company’s 2021 Form 10-K and below, repayment of the SWK Loan is interest-only through May 2023, paid quarterly with the option to extend the interest-only period. On June 30, 2022 the Company entered into the ninth amendment to the Credit Agreement (the "Ninth Amendment"), which extended the interest-only period by two quarters from May 2023 to November 2023 and lowered the required minimum unencumbered liquid assets. In connection with the Ninth Amendment, the Company prepaid $1.0 million of the outstanding loan balance. Principal repayments begin in November 2023 and will be approximately $0.7 million quarterly until the SWK Loan matures in May 2025. The loan bears interest of 9% plus a LIBOR floor of 1.25% or another index that approximates LIBOR as close as possible if and when LIBOR no longer exists.

As of June 30, 2022, the Company was in compliance with the debt covenants of the Credit Agreement.

EIDL Loan

On May 22, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the Small Business Administration ("SBA") under its Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the EIDL Loan is $150,000, with proceeds to be used for working capital purposes. Interest on the EIDL Loan accrues at the rate of 3.75%, per annum and installment payments, including principal and interest, are due monthly beginning in July 2021 and are payable through July 2050. In April 2021, the SBA announced that it was extending the first payment due date for all loans until 2022, or 24 months from the loan execution date. In March 2022, the SBA announced that it was extending the first payment due date for all loans an additional six months, or 30 months from the loan execution date. The Company is obligated to begin making payments on the EIDL Loan starting in November 2022. Fixed payments are first applied to any accrued interest.

Paycheck Protection Program Loan

On April 14, 2020, the Company was granted a loan (the “PPP Loan”) under the Paycheck Protection Program from PMB in the aggregate amount of $2,980,000, pursuant to the Paycheck Protection Program under the CARES Act.

The PPP Loan, which was in the form of a note dated April 13, 2020 issued by BIOLASE, had a maturity date of April 13, 2022 and bore interest at a rate of 1.0% per annum. Interest was payable monthly commencing on November 1, 2020. Funds from the PPP Loan could only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. Under the terms of the PPP Loan, certain amounts of the PPP Loan could be forgiven if they were used for qualifying expenses as described in the CARES Act.

During 2020, the Company requested forgiveness of the PPP Loan in accordance with the application requirements.

In June 2021, the Company received a reply to its request, and the PPP Loan along with all accrued interest was forgiven by the SBA. The amount of loan forgiveness is presented as a component of non-operating (gain) loss on the Company's consolidated statement of operations for the year ended December 31, 2021. The SBA may undertake a review of a loan of any size during the six-year period following forgiveness of the loan. The review may include the loan forgiveness application, as well as whether the Company received the proper loan amount. There can be no assurance as to the result of any such SBA review.

NOTE 10—LEASES

The Company enters into operating leases primarily for real estate, office equipment, and fleet vehicles. Lease terms generally range from one to five years, and often include options to renew for one year. The Company leases its 11,000 square foot corporate headquarters pursuant to a lease that expires on December 31, 2025 and leases a manufacturing facility located in Corona, California, which expires on June 30, 2025. The Company also leases additional office space and certain office equipment under various operating lease arrangements.

On January 22, 2020, the Company entered into a five-year real property lease agreement for an approximately 11,000 square foot facility in Corona, California and moved its manufacturing operations. The lease commenced on July 1, 2020. On December 10, 2021, the Company entered a lease for an additional 15,000 square feet at its facility in Corona, California. This additional lease commenced on February 1, 2022 and expires on June 30, 2025.

On February 4, 2020, the Company also entered into a 66-month real property lease agreement for office space of approximately 11,000 square feet of office space in Lake Forest, California. The lease commenced on July 1, 2020.

Information related to the Company’s right-of-use assets and related liabilities were as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Cash paid for operating lease liabilities	$	69		$	197		$	135		$	263
Right-of-use assets obtained in exchange for new operating lease obligations	$	118		$	48		$	562		$	48
Weighted-average remaining lease term	3.2 years			4.2 years			3.2 years			4.2 years
Weighted-average discount rate		12.3	%		12.3	%		12.3	%		12.3	%

Lease expense consists of payments for real property, office copiers, and IT equipment. The Company recognizes payments for non-lease components such as common area maintenance in the period incurred. As of June 30, 2022, the Company had no significant leases that had not commenced.

The Company allocates lease cost amongst lease and non-lease components. The Company excludes short-term leases (those with lease terms of less than one year at inception) from the measurement of lease liabilities or right-of-use assets.

Maturities of lease liabilities as of June 30, 2022 for leases that have commenced are as follows (in thousands):


	June 30,
2023	$	832
2024		828
2025		703
2026		292
2027 and thereafter		—
Total future minimum lease obligations		2,655
Less imputed interest		(472	)
Total lease liabilities	$	2,183

Current operating lease liabilities, included in accrued liabilities	$	591
Non current lease liabilities		1,592
Total lease liabilities	$	2,183

As of June 30, 2022, right-of-use assets were $2.0 million and lease liabilities were $2.2 million.

Rent expense totaled $0.3 million and $0.5 million for the three and six months ended June 30, 2022 and $0.2 million and $0.4 million for the three and six months ended June 30, 2021.

Future minimum rental commitments under lease agreements, as of June 30, 2022, with non-cancelable terms greater than one year for each of the years ending December 31 are as follows (in thousands):


	Year Ended
	December 31,
Remainder of 2022	$	415
2023		834
2024		822
2025		584
2026 and thereafter		—
Total future minimum lease obligations		2,655
Less imputed interest		(472	)
Total lease liabilities	$	2,183

NOTE 11—COMMITMENTS AND CONTINGENCIES

On April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against BIOLASE in the District of Utah alleging that BIOLASE’s ezlase dental laser infringes on U.S. Patent No. 7,485,116 (the “116 Patent”). On September 9, 2012, CAO amended its complaint, adding claims for (1) business disparagement/injurious falsehood under common law and (2) unfair competition under 15 U.S.C. Section 1125(a). The additional claims stemmed from a press release that BIOLASE issued on April 30, 2012, which CAO claimed contained false statements that were disparaging to CAO and its diode product. The amended complaint sought injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. Until January 24, 2018, this lawsuit was stayed in connection with United States Patent and Trademark Office proceedings relating to the 116 Patent, which proceedings ultimately culminated in a January 27, 2017 decision by the United States Court of Appeals for the Federal Circuit, affirming the findings of the Patent Trial and Appeal Board, which were generally favorable to the Company. On January 25, 2018, CAO moved for leave to file a second amended complaint to add certain claims, which filing the Company did not oppose.

On January 23, 2018, CAO filed a lawsuit against BIOLASE in the Central District of California alleging that BIOLASE’s diode lasers infringe on U.S. Patent Nos. 8,337,097, 8,834,497, 8,961,040 and 8,967,883. The complaint sought injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest.

On January 25, 2019 (the “Effective Date”), BIOLASE entered into a settlement agreement (the “CAO Settlement Agreement”) with CAO. Pursuant to the CAO Settlement Agreement, CAO agreed to dismiss with prejudice the lawsuits filed by CAO against the Company in April 2012 and January 2018. In addition, CAO granted to the Company and its affiliates a non-exclusive, non-transferable (except as provided in the CAO Settlement Agreement), royalty-free, fully-paid, worldwide license to the licensed patents for use in the licensed products and agreed not to sue the Company, its affiliates or any of its manufacturers, distributors, suppliers or customers for use of the licensed patents in the licensed products, and the parties agreed to a mutual release of claims. The Company agreed (i) to pay to CAO, within five days of the Effective Date, $500,000 in cash, (ii) to issue to CAO, within 30 days of the Effective Date, 20,000 restricted shares of BIOLASE common stock (the “Stock Consideration”), and (iii) to pay to CAO, within 30 days of December 31, 2021, an amount in cash equal to the difference (if positive) between $1,000,000 and the value of the Stock Consideration on December 31, 2021. The Stock Consideration vested and became transferrable on December 31, 2021, subject to the terms of a restricted stock agreement entered into between the parties. The Company considered this a Type I subsequent event and recognized a $1.5 million contingent loss on patent litigation settlement in its consolidated statement of operations for the year ended December 31, 2018. In January 2019, the Company paid CAO $500,000 in cash. On January 31, 2019, the case was dismissed with prejudice. During the three-month period ended March 31, 2019, the Company recorded an additional loss on patent litigation of $0.2 million which represented the change in fair value of the restricted stock to be issued to CAO at March 31, 2019. Subsequent to March 31, 2019, the Company reversed the additional loss commensurate with the fluctuations in the Company’s share price. In August 2020, the Company signed a Letter Agreement to terminate the Manufacturing Agreement and purchase from CAO raw materials and other inventory held by CAO as part of the original CAO Settlement Agreement. During the year ended December 31, 2021, the Company recorded an additional loss on patent litigation of $0.3 million which represented the change in fair value of the liability to be paid to CAO.

In February 2021, the Company issued 20,000 restricted shares of common stock in satisfaction of its obligation to issue the Stock Consideration to CAO under the CAO Settlement Agreement and reduced the accrued liability to $0.6 million. As of December 31, 2021, the remaining accrued liability related to the CAO Settlement Agreement was included in current accrued liabilities in the amount of $0.8 million. In January 2022, the Company paid all amounts due to CAO and removed the liability.

NOTE 12—SEGMENT INFORMATION

The Company currently operates in a single business segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. For the three and six months ended June 30, 2022, sales to customers in the United States accounted for approximately 73% and 71% of net revenue and international sales accounted for approximately 27% and 29% of net revenue, respectively. For the three and six months ended June 30, 2021, sales to customers in the United States accounted for approximately 64% of net revenue and international sales accounted for approximately 36% of net revenue. No individual country, other than the United States, represented more than 10% of total net revenue during the three and six months ended June 30, 2022 or 2021.

Net revenue by geographic location based on the location of customers was as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
United States	$	8,899	$	5,865	$	15,877	$	11,086
International		3,336		3,269		6,524		6,164
Total net revenue	$	12,235	$	9,134	$	22,401	$	17,250

Property, plant, and equipment by geographic location was as follows (in thousands):


	June 30,		December 31,
	2022		2021
United States	$	1,126	$	797
International		247		270
Total	$	1,373	$	1,067

NOTE 13—CONCENTRATIONS

Revenue from the Company’s products are as follows (dollars in thousands):


	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2022				2021				2022				2021
Laser systems	$	7,987	65.3	%	$	5,720	62.6	%	$	14,322	63.9	%	$	10,540	61.1	%
Consumables and other		3,038	24.8	%		2,358	25.8	%		5,748	25.7	%		4,595	26.6	%
Services		1,210	9.9	%		1,056	11.6	%		2,331	10.4	%		2,115	12.3	%
Total net revenue	$	12,235	100.0	%	$	9,134	100.0	%	$	22,401	100.0	%	$	17,250	100.0	%

No individual customer represented more than 10% of the Company’s revenue for the three and six months ended June 30, 2022 or 2021.

The Company maintains its cash and cash equivalents in money market investment accounts with established commercial banks. Such cash deposits periodically exceed the Federal Deposit Insurance Corporation insured limit.

As of June 30, 2022 accounts receivable from one customer totaled approximately 12% of total gross accounts receivable. The entire balance is either current or outstanding for less than 30 days. No individual customer represented more than 10% of the Company’s accounts receivable at December 31, 2021.

The Company currently purchases certain key components of its products from single suppliers. Although there are a limited number of manufacturers of these key components, management believes that other suppliers could provide similar key components on comparable terms. A change in suppliers, however, could cause delays in manufacturing and a possible loss of sales, which could adversely affect the Company’s business, results of operations and financial condition.

NOTE 14—INCOME TAXES

The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered, and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be realized. Based on the Company’s net losses in prior years, management has determined that a full valuation allowance against the Company’s net deferred tax assets is appropriate.

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has elected to classify interest and penalties as a component of its income tax provision. With respect to the liability for unrecognized tax benefits, including related estimates of penalties and interest, the Company did not record a liability for unrecognized tax benefits for the three and six months ended June 30, 2022 and 2021. The Company does not expect any changes to its unrecognized tax benefit for the next 12 months that would materially impact its consolidated financial statements.

During the three and six months ended June 30, 2022, the Company recorded an income tax provision of $23,000 and $40,000, respectively resulting in an effective tax rate of 0.4%. During the three and six months ended June 30, 2021, the Company recorded an income tax benefit of $80,000 and $20,000, resulting in an effective tax rate of 10.2% and 0.3%, respectively. The income tax provisions and benefit for the three and six months ended June 30, 2022 and 2021 were calculated using the discrete year-to-date method. The effective tax rate differs from the statutory tax rate of 21% primarily due to the existence of valuation allowances against net deferred tax assets and current liabilities resulting from the estimated state income tax liabilities and foreign tax liability.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and our audited consolidated financial statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2021 (the “2021 Form 10-K”).

In addition to historical information, this discussion and analysis contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks, uncertainties, and assumptions, which could cause actual results to differ materially from management's expectations. Such forward-looking statements include statements, predictions, or expectations regarding expected investment activities, future liquidity, potential collaborations, market opportunities, plans with respect to products and services, future demand for improved dental care and dental laser equipment, seasonality and the reasons therefor, operating and other expenses, anticipated cash needs, our strategy and any other statement that is not historical fact. Forward-looking statements are identified by the use of words such as “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “continue,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “outlook,” “potential,” “plan,” “seek,” “forecast,” and similar expressions and variations or the negatives of these terms or other comparable terminology.

The forward-looking statements contained in this Form 10-Q are based on the expectations, estimates, projections, beliefs, and assumptions of our management based on information available to management as of the date on which this Form 10-Q was filed with the SEC, or as of the date on which the information incorporated by reference was filed with the SEC, as applicable, all of which are subject to change. Forward-looking statements are subject to risks, uncertainties, and other factors that are difficult to predict and could cause actual results to differ materially from those stated or implied by our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to:

•

the effects of the COVID-19 pandemic and the actions taken to contain it;

•

losses that we have experienced for each of the past three years;

•

global economic uncertainty and volatility in financial markets;

•

inability to raise additional capital on terms acceptable to us;

•

our relationships with, and the efforts of, third-party distributors;

•

failure in our efforts to train dental practitioners or to overcome the hesitation of dentists and patients to adopt laser technologies;

•

inconsistencies between future data and our clinical results;

•

competition from other companies, including those with greater resources;

•

our inability to successfully develop and commercialize enhanced or new products that remain competitive with products or alternative technologies developed by others;

•

the inability of our customers to obtain third-party reimbursement for their use of our products;

•

limitations on our ability to use net operating loss carryforwards;

•

problems in manufacturing our products;

•

warranty obligations if our products are defective;

•

adverse publicity regarding our technology or products;

•

adverse events to our patients during the use of our products, regardless of whether caused by our products;

•

issues with our suppliers, including the failure of our suppliers to supply us with a sufficient amount or adequate quality of materials;

•

rapidly changing standards and competing technologies;

•

our inability to effectively manage and implement our growth strategies;

•

risks associated with operating in international markets, including potential liabilities under the Foreign Corrupt Practices Act;

•

breaches of our information technology systems;

•

seasonality;

•

litigation, including the failure of our insurance policies to cover certain expenses relating to litigation;

•

disruptions to our operations at our primary manufacturing facility;

•

loss of our key management personnel or our inability to attract or retain qualified personnel;

•

risks and uncertainties relating to acquisitions, including difficulties integrating acquired businesses successfully into our existing operations and risks of discovering previously undisclosed liabilities;

•

failure to meet covenants in the Credit Agreement, dated as of November 9, 2018 (as amended from time to time, the “Credit Agreement”), by and between BIOLASE and SWK Funding LLC ("SWK") and related risks of foreclosure triggered by an event of default under the Credit Agreement;

•

interest rate risk, which could result in higher expense in the event of interest rate increases;

•

obligations to make debt payments under the Credit Agreement;

•

failure to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act of 2002, as amended or maintain adequate internal control over financial reporting;

•

climate change initiatives;

•

failure of our intellectual property rights to adequately protect our technologies and potential third-party claims that our products infringe their intellectual property rights;

•

changes in government regulation or the inability to obtain or maintain necessary governmental approvals;

•

our failure to comply with existing or new laws and regulations, including fraud and abuse and health information privacy and securities laws;

•

changes in the regulatory requirements of the Food and Drug Administration (“FDA”) applicable to laser products, dental devices, or both;

•

recall or other regulatory action concerning our products after receiving FDA clearance or approval;

•

our failure to comply with continued listing requirements of the NASDAQ Capital Market; and

•

risks relating to ownership of our common stock, including high volatility, and dilution.

Further information about factors that could materially affect the Company, including our results of operations and financial condition, is contained under “Risk Factors” in Item 1A in the 2021 Form 10-K. Except as required by law, we undertake no obligation to revise or update any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise.

Overview

BIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company,” “we,” “our” or “us”) is a leading provider of advanced laser systems for the dental industry. We develop, manufacture, market, and sell laser systems that provide significant benefits for dental practitioners and their patients. Our proprietary systems allow dentists, periodontists, endodontists, oral surgeons, and other dental specialists to perform a broad range of minimally invasive dental procedures, including cosmetic, restorative, and complex surgical applications. Our laser systems are designed to provide clinically superior results for many types of dental procedures compared to those achieved with drills, scalpels, and other conventional instruments. Potential patient benefits include less pain, fewer shots, faster healing, decreased fear and anxiety, and fewer appointments. Potential practitioner benefits include improved patient care and the ability to perform a higher volume and wider variety of procedures and generate more patient referrals.

We offer two categories of laser system products: Waterlase (all-tissue) systems and diode (soft-tissue) systems. Our flagship brand, Waterlase, uses a patented combination of water and laser energy and is FDA cleared for over 80 clinical indications to perform most procedures currently performed using drills, scalpels, and other traditional dental instruments for cutting soft and hard tissue. For example, Waterlase safely debrides implants without damaging or significantly affecting surface temperature and is the only effective, safe solution to preserving sick implants. In addition, Waterlase disinfects root canals more efficiently than some traditional chemical methods. We also offer our diode laser systems to perform soft tissue, pain therapy, and cosmetic procedures, including teeth whitening. As of June 30, 2022 we had approximately 302 issued and 31 pending United States and international patents, the majority of which are related to Waterlase technology. From 1998 through December 31, 2021, we sold over 43,300 laser systems in over 80 countries around the world.

Business and Outlook

Our Waterlase systems precisely cut hard tissue, bone, and soft tissue with minimal or no damage to surrounding tissue and dental structures. Our diode systems, which include the Epic system, are designed to complement our Waterlase systems, and are used only in soft tissue procedures, pain therapy, hygiene, and cosmetic applications, including teeth whitening. The diode systems, together with our Waterlase systems, offer practitioners a broad product line with a range of features and price points.

We also manufacture and sell consumable products and accessories for our laser systems. Our Waterlase and diode systems use disposable laser tips of differing sizes and shapes depending on the procedure being performed. We also market flexible fibers and hand pieces that dental practitioners replace at some point after initially purchasing laser systems. For our Epic systems, we sell teeth whitening gel kits.

Due to the limitations associated with traditional and alternative dental instruments, we believe there is a large market opportunity for all-tissue dental laser systems that provide superior clinical outcomes, reduce the need to use anesthesia, help reduce trauma, pain, and discomfort associated with dental procedures, and increase patient acceptance for treatment protocols.

Our strategy is to increase awareness and demand for (i) our products among dental practitioners by educating dental practitioners and patients about the clinical benefits of our product suite and (ii) our laser systems among patients by educating patients about the clinical benefits of the Waterlase and diode systems. An important goal of ours is to increase consumables revenue by selling more single-use accessories used by dental practitioners when performing procedures using our dental laser systems. In the short term, we are striving for operating excellence through lean enterprise initiatives, with a specific focus on our sales strategy and cash flow management, coupled with optimizing our engineering capabilities to develop innovative new products.

We also seek to create value through innovation and leveraging existing technologies into adjacent medical applications. We plan to expand our product line and clinical applications by developing enhancements and transformational innovations, including new clinical solutions for dental applications and for other adjacent medical applications. In particular, we believe that our existing technologies can provide significant improvements over existing standards of care in fields including ophthalmology, otolaryngology, orthopedics, podiatry, pain management, aesthetics/dermatology, veterinary, and consumer products. We plan to continue to explore potential collaborations to apply our proprietary laser technologies with expanded FDA-cleared indications to other medical applications in the future.

The Company experienced revenue growth of 34% and 30%for the three and six months ended June 30, 2022, respectively, compared to the same period in 2021, primarily due to the negative impact of COVID-19 during the first half of 2021 and high demand from new users for the Company's dental lasers. The Company is currently forecasting revenue for fiscal year 2022 to be significantly above fiscal year 2021, as the Company's strategy described above continues to generate sales to new customers.

To educate providers and increase patient access to our products, over the past 18 months, we have formed specialist training programs focused on expanding awareness of the benefits of our dental lasers among dental specialists. For example, during the second quarter of 2021, we launched the Waterlase Pediatric Dental Academy (the "WPDA") for pediatric dentists. This program provides clinicians with an immersive training experience through peer-led learning and best practice sharing to help ensure appropriate use of Waterlase technology in clinical practices. During the first quarter of 2021, we also launched an innovative and first-of-its-kind training program in the periodontal community. This program fosters peer-led learning about dental lasers from leading clinicians, featuring online meetings and case reviews by experts in the field. Additionally, during the fourth quarter of 2020, we launched the Waterlase Endo Academy, a community of leading endodontists dedicated to improving patient outcomes with new technology, and announced a collaboration with Einstein Healthcare Network’s Residency in Endodontics to train endodontics residents in the use of Waterlase dental lasers. In the fourth quarter of 2021, we launched the Epic Hygiene Academy which seeks to bring together leaders in the dental hygiene profession to provide improved continuing education in delivering superior patient care through laser technology.

In 2021, we designed, developed, received FDA clearance for, and began production of a laser using our proprietary Er,Cr:YSGG laser technology in partnership with EdgeEndo, a leading endodontic company. The EdgePro is a state-of-the-art microfluidic irrigation device designed to clean and disinfect root canals. The partnership with EdgeEndo is our first exclusive OEM agreement.

Recent Developments

Direct Offering and Private Placement

On June 27, 2022, BIOLASE entered into a Securities Purchase Agreement with certain accredited institutional investors, pursuant to which BIOLASE agreed to issue, (i) in a registered direct offering, 678,745 shares of BIOLASE common stock, par value $0.001 per share, and pre-funded warrants to purchase 726,660 shares of BIOLASE common stock (the “Pre-Funded Warrants”) with an exercise price of $0.001 per share, and (ii) in a concurrent private placement, warrants to purchase 1,405,405 shares of BIOLASE common stock (the “Common Warrants”). The combined purchase price for one share of common stock and one Common Warrant was determined to be $4.625, and the combined purchase price for one Pre-Funded Warrant and one Common Warrant was determined to be $4.624. BIOLASE received aggregate gross proceeds from the transactions of approximately $6.5 million, before deducting fees to the placement agent and other transaction expenses payable by BIOLASE. The 678,745 shares of BIOLASE's common stock, the Pre-Funded Warrants and the shares of BIOLASE common stock issuable upon exercise of the Pre-Funded Warrants were offered by BIOLASE pursuant to a shelf registration statement on Form S-3, which was declared effective on August 23, 2019.

Reverse Stock Split

On April 28, 2022, BIOLASE’s stockholders approved a proposal at BIOLASE’s 2022 annual meeting of stockholders (the “2022 Annual Meeting”) further amending BIOLASE’s Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), to effect a reverse stock split of BIOLASE common stock, par value $0.001 per share, at a ratio between one-for-two (1:2) and one-for-twenty-five (1:25), without reducing the authorized number of shares of BIOLASE common stock. Following the 2022 Annual Meeting, BIOLASE’s board of directors approved a final split ratio of one-for-twenty-five (1:25). Following such approval, the Company filed an amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the reverse stock split (the "Reverse Stock Split"), with an effective time of 11:59 p.m. Eastern Time on April 28, 2022. Except as the context otherwise requires, all common stock share numbers and common stock share price amounts in this Part II, Item 2 of this Form 10-Q have been adjusted to reflect the Reverse Stock Split.

Elimination of Series G Preferred Stock

On March 1, 2022, the Board declared a dividend of one one-thousandth of a share of Series G Preferred Stock, par value $0.001 per share (“Series G Preferred Stock”), for each share of BIOLASE common stock outstanding as of 5:00 p.m. Eastern Time on March 25, 2022 (as calculated on a pre-Reverse Stock Split basis). The certificate of designation for the Series G Preferred Stock provided that all shares of Series G Preferred Stock not present in person or by proxy at the 2022 Annual Meeting immediately prior to the opening of the polls at the 2022 Annual Meeting would be automatically redeemed (the “Initial Redemption”) and that any outstanding shares of Series G Preferred Stock that have not been redeemed pursuant to the Initial Redemption would be redeemed in whole, but not in part, (i) if and when ordered by the Board or (ii) automatically upon the effectiveness of the amendment to the Certificate of Incorporation effecting the reverse stock split that was subject to the vote at the 2022 Annual Meeting (the “Subsequent Redemption”). On April 28, 2022, both the Initial Redemption and the Subsequent Redemption occurred. As a result, no shares of Series G Preferred Stock remain outstanding. On June 6, 2022, the Series G Preferred Stock was eliminated.

Ninth Amendment to the Credit Agreement

On June 30, 2022, BIOLASE entered into the ninth amendment to Credit Agreement (the “Ninth Amendment”) with SWK. The Ninth Amendment extended the end of the interest only period of the loan by two quarters, from May 2023 to November 2023, reduced the required minimum consolidated unencumbered liquid assets from $7,500,000 to $3,000,000, reduced the minimum consolidated unencumbered liquid assets triggering the minimum aggregate revenue covenant from $7,500,000 to $5,000,000, and reduced the minimum consolidated unencumbered liquid assets triggering the minimum EBITDA covenant from $7,500,000 to $5,000,000. In connection with the Ninth Amendment, with some of the net proceeds from the June 2022 offering and private placement, the Company prepaid $1.0 million of the outstanding loan balance.

Critical Accounting Policies

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses reported during the period. Information with respect to our critical accounting policies that we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the 2021 Form 10-K. There have been no significant changes during the six months ended June 30, 2022 in our critical accounting policies from those disclosed in Item 7 of the 2021 Form 10-K.

Results of Operations

The following table sets forth certain data from our unaudited operating results, expressed in thousands and as percentages of net revenue:


	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2022				2021				2022				2021
Net revenue	$	12,235	100.0	%	$	9,134	100.0	%	$	22,401	100.0	%	$	17,250	100.0	%
Cost of revenue		7,094	58.0	%		5,093	55.8	%		12,531	55.9	%		10,469	60.7	%
Gross profit		5,141	42.0	%		4,041	44.2	%		9,870	44.1	%		6,781	39.3	%
Operating expenses:
Sales and marketing		5,402	44.2	%		3,311	36.2	%		10,216	45.6	%		6,864	39.8	%
General and administrative		3,141	25.7	%		2,779	30.4	%		5,717	25.5	%		6,134	35.6	%
Engineering and development		1,653	13.5	%		1,162	12.7	%		3,197	14.3	%		2,966	17.2	%
Loss on patent litigation settlement		—	0.0	%		72	0.8	%		—	0.0	%		161	0.9	%
Total operating expenses		10,196	83.4	%		7,324	80.2	%		19,130	85.4	%		16,125	93.5	%
Loss from operations		(5,055)	(41.4)	%		(3,283)	(35.9)	%		(9,260)	(41.3)	%		(9,344)	(54.2)	%
Non-operating income (loss), net		(533)	(4.4)	%		2,501	27.4	%		(1,086)	(4.8)	%		1,721	10.0	%
Loss before income tax provision		(5,588)	(37.0)	%		(782)	(8.6)	%		(10,346)	(36.5)	%		(7,623)	(44.2)	%
Income tax (provision) benefit		(23)	(0.2)	%		80	0.9	%		(40)	(0.2)	%		20	0.1	%
Net loss	$	(5,611)	(36.8)	%	$	(702)	(7.7)	%	$	(10,386)	(36.3)	%	$	(7,603)	(44.1)	%

Non-GAAP Disclosure

In addition to the financial information prepared in conformity with GAAP, we provide certain historical non-GAAP financial information. Management believes that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results and that, in some respects, are indicative of our ongoing core performance.

Management believes that the presentation of this non-GAAP financial information provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provides a more complete understanding of our financial performance, competitive position, and prospects for the future. However, the non-GAAP financial measures presented in this Form 10-Q have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by us may be different from similarly named non-GAAP financial measures used by other companies.

Adjusted EBITDA

Management uses Adjusted EBITDA in its evaluation of our core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Adjusted EBITDA is defined as net loss before interest, taxes, depreciation and amortization, patent litigation settlements, stock-based and other non-cash compensation, the change in allowance for doubtful accounts, and gain on debt forgiveness. Management uses adjusted EBITDA in its evaluation of our core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by us may be different from similarly named non-GAAP financial measures used by other companies.

The following table contains a reconciliation of non-GAAP Adjusted EBITDA to GAAP net loss attributable to common stockholders (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
GAAP net loss attributable to common stockholders	$	(5,611	)	$	(708	)	$	(10,603	)	$	(8,141	)
Deemed dividend on convertible preferred stock		—			6			217			538
GAAP net loss	$	(5,611	)	$	(702	)	$	(10,386	)	$	(7,603	)
Adjustments:
Interest expense, net		430			582			863			1,157
Income tax provision (benefit)		23			(80	)		40			(20	)
Depreciation and amortization		130			91			247			176
Change in allowance for doubtful accounts		59			27			143			(79	)
Loss on patent litigation settlement		—			72			—			161
Stock-based and other non-cash compensation		890			369			1,100			1,297
Gain on debt forgiveness		—			(3,014	)		—			(3,014	)
Adjusted EBITDA	$	(4,079	)	$	(2,655	)	$	(7,993	)	$	(7,925	)

Comparison of Results of Operations

Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021

Net Revenue: The following table summarizes our unaudited net revenue by category, including each category’s percentage of our total revenue, for the three months ended June 30, 2022 and 2021, as well as the amount of change and percentage of change in each revenue category (dollars in thousands):


	Three Months Ended
	June 30,								Amount		Percent
	2022				2021				Change		Change
Laser systems	$	7,987	65.3	%	$	5,720	62.6	%	$	2,267		39.6	%
Consumables and other		3,038	24.8	%		2,358	25.8	%		680		28.8	%
Services		1,210	9.9	%		1,056	11.6	%		154		14.6	%
Net revenue	$	12,235	100.0	%	$	9,134	100.0	%	$	3,101		34.0	%

The following table summarizes our unaudited net revenue by geographic location based on the location of customers for the three months ended June 30, 2022 and 2021, as well as the amount of change and percentage of change in each geographic revenue category (dollars in thousands):


	Three Months Ended
	June 30,								Amount		Percent
	2022				2021				Change		Change
United States	$	8,899	72.7	%	$	5,865	64.2	%	$	3,034		51.7	%
International		3,336	27.3	%		3,269	35.8	%		67		2.0	%
Net revenue	$	12,235	100.0	%	$	9,134	100.0	%	$	3,101		34.0	%

Typically, we experience fluctuations in revenue from quarter to quarter due to seasonality. Revenue in the first quarter typically is lower than average, and revenue in the fourth quarter typically is higher than average, due to the buying patterns of dental practitioners. We believe that this trend exists because a significant number of dentists purchase their capital equipment towards the end of the calendar year in order to maximize their practice earnings while seeking to minimize their taxes. They often use certain tax incentives, such as accelerated depreciation methods for purchasing capital equipment, as part of their year-end tax planning. In addition, revenue in the third quarter may be affected by vacation patterns which can cause revenue to be flat or lower than in the second quarter of the year. Our historical seasonal fluctuations may also be impacted by sales promotions used by large dental distributors that encourage end-of-quarter and end-of-year buying in our industry.

Total net revenue increased by $3.1 million, or 34%, during the three months ended June 30, 2022 as compared to the same period in 2021 primarily due to an increase in Waterlase sales to new customers and specialists in the U.S.. Outside the U.S., net revenue increased by $0.1 million, or 2%, during the three months ended June 30, 2022 as compared to the same period in 2021. We believe patient volume in many countries outside the U.S. is still lagging from pre-COVID-19 levels, but sales volume has improved in the first half of 2022.

Cost of Revenue and Gross Profit: The following table summarizes our unaudited cost of revenue and gross profit for the three months ended June 30, 2022 and 2021, as well as the amount of change and percentage of change (dollars in thousands):


	Three Months Ended
	June 30,								Amount		Percent
	2022				2021				Change		Change
Net revenue	$	12,235	100.0	%	$	9,134	100.0	%	$	3,101		34.0	%
Cost of revenue		7,094	58.0	%		5,093	55.8	%		2,001		39.3	%
Gross profit	$	5,141	42.0	%	$	4,041	44.2	%	$	1,100		27.2	%

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, product costs and revenue levels. Gross profit for the three months ended June 30, 2022, was $5.1 million, or 42% of net revenue, an increase of approximately $1.1 million, or 27%, as compared with gross profit of $4.0 million, or 44% of net revenue, for the same period in 2021. The increase in gross profit reflects the impact of higher sales volumes for the period combined with an increase in average selling prices for products sold in the U.S. during the second quarter of 2022 compared to the same period in 2021, partially offset by the impact of recent supply chain issues, the addition of lower margin OEM products launched at the beginning of 2022, and a $0.3 million Employee Retention Credit under the CARES Act received during the three months ended June 30, 2021 that did not occur in 2022.

Operating Expenses: The following table summarizes our unaudited operating expenses (including as a percentage of net revenue) for the three months ended June 30, 2022 and 2021, as well as the amount of change and percentage of change (dollars in thousands):


	Three Months Ended
	June 30,								Amount			Percent
	2022				2021				Change			Change
Sales and marketing	$	5,402	44.1	%	$	3,311	36.3	%	$	2,091			63.2	%
General and administrative		3,141	25.7	%		2,779	30.4	%		362			13.0	%
Engineering and development		1,653	13.5	%		1,162	12.7	%		491			42.3	%
Loss on patent litigation settlement		—	—	%		72	0.8	%		(72	)		-100.0	%
Total operating expenses	$	10,196	83.3	%	$	7,324	80.2	%	$	2,872			39.2	%

Sales and Marketing Expense. Sales and marketing expenses during the three months ended June 30, 2022 increased by $2.1 million, or 63%, as compared to the same period in 2021. This increase is primarily due to $0.9 million from compensation expense due to no open territories in 2022, commissions and bonus incentives for achieving sales targets, $0.7 million in higher travel and trade show related expenses incurred in the second quarter of 2022, $0.2 million in supplies and other expenses, and $0.3 million from an Employee Retention Credit under the CARES Act received during the three months ended June 30, 2021 that did not occur in 2022.

General and Administrative Expense. General and administrative expenses during the three months ended June 30, 2022 increased by $0.4 million, or 13%, compared to the same period in 2021. This increase is primarily due to expenses incurred in connection with the 2022 Annual Meeting. The annual stockholders meeting was significantly more expensive than in recent years due to the proposed reverse stock split.

Engineering and Development Expense. Engineering and development expenses during the three months ended June 30, 2022 increased by $0.5 million, or 42%, compared to the same period in 2021. This increase is primarily due to $0.6 million from compensation, legal and consulting expenses driven by more engineering projects for 2022 as compared to 2021, partially offset by $0.1 million for the impact of an Employee Retention Credit under the CARES Act received during the three months ended June 30, 2021 that did not occur in 2022.

Non-Operating Income (Loss)

Gain (Loss) on Foreign Currency Transactions. We realized an approximately $0.1 million loss on foreign currency transactions during the three months ended June 30, 2022 compared to an approximately $0.1 million gain on foreign currency transactions during the three months ended June 30, 2021, primarily due to exchange rate fluctuations between the U.S. dollar and Euro, as well as other foreign currencies.

Interest Expense, Net. Interest expense was $0.4 million during the three months ended June 30, 2022 compared to $0.6 million for the same period in 2021.

Income Tax (Provision) Benefit. We use a discrete year-to-date method in calculating quarterly provision for income taxes. Our provision for income taxes for the three months ended June 30, 2022 was consistent with the same period in 2021. For additional information regarding income taxes, see Part I, Item I, Note 14 – Income Taxes.

Net Loss. For the reasons stated above, our net loss totaled approximately $5.6 million for the three months ended June 30, 2022 compared to a net loss of $0.7 million for the three months ended June 30, 2021.

Comparison of Results of Operations

Six Months Ended June 30, 2022 Compared with Six Months Ended June 30, 2021

Net Revenue: The following table summarizes our unaudited net revenue by category, including each category’s percentage of our total revenue, for the six months ended June 30, 2022 and 2021, as well as the amount of change and percentage of change in each revenue category (dollars in thousands):


	Six Months Ended
	June 30,								Amount		Percent
	2022				2021				Change		Change
Laser systems	$	14,322	63.9	%	$	10,540	61.1	%	$	3,782		35.9	%
Consumables and other		5,748	25.7	%		4,595	26.6	%		1,153		25.1	%
Services		2,331	10.4	%		2,115	12.3	%		216		10.2	%
Net revenue	$	22,401	100.0	%	$	17,250	100.0	%	$	5,151		29.9	%

The following table summarizes our unaudited net revenue by geographic location based on the location of customers for the six months ended June 30, 2022 and 2021, as well as the amount of change and percentage of change in each geographic revenue category (dollars in thousands):


	Six Months Ended
	June 30,								Amount		Percent
	2022				2021				Change		Change
United States	$	15,877	70.9	%	$	11,086	64.3	%	$	4,791		43.2	%
International		6,524	29.1	%		6,164	35.7	%		360		5.8	%
Net revenue	$	22,401	100.0	%	$	17,250	100.0	%	$	5,151		29.9	%

Total net revenue increased by $5.2 million, or 30%, during the six months ended June 30, 2022 as compared to the same period in 2021 primarily due to an increase in Waterlase sales to new customers and specialists. In the U.S., net revenue increased by $4.8 million, or 43%, for the six months ended June 30, 2022 as compared to the same period in 2021. Outside the U.S., net revenue increased by $0.4 million, or 6%, during the six months ended June 30, 2022 as compared to the same period in 2021. We believe patient volume in many countries outside the U.S. is still lagging from pre-COVID-19 levels, but volume has improved in the first half of 2022.

Cost of Revenue and Gross Profit: The following table summarizes our unaudited cost of revenue and gross profit for the six months ended June 30, 2022 and 2021, as well as the amount of change and percentage of change (dollars in thousands):


	Six Months Ended
	June 30,								Amount		Percent
	2022				2021				Change		Change
Net revenue	$	22,401	100.0	%	$	17,250	100.0	%	$	5,151		29.9	%
Cost of revenue		12,531	55.9	%		10,469	60.7	%		2,062		19.7	%
Gross profit	$	9,870	44.1	%	$	6,781	39.3	%	$	3,089		45.6	%

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, product costs and revenue levels. Gross profit for the six months ended June 30, 2022, was $9.9 million, or 44% of net revenue, an increase of approximately $3.1 million, or 46%, as compared with gross profit of $6.8 million, or 39% of net revenue, for the same period in 2021. The increase in gross profit reflects the impact of higher sales volumes in the U.S., where margins are greater than our international business, an increase in average selling prices for products sold in the U.S. during the first half of 2022 compared to the same period in 2021, and the effect of favorable absorption of fixed expenses, partially offset by the impact of recent supply chain issues, the addition of lower margin OEM products launched at the beginning of 2022, and a $0.3 million Employee Retention Credit under the CARES Act received during the six months ended June 30, 2021 that did not occur in 2022.

Operating Expenses: The following table summarizes our unaudited operating expenses (including as a percentage of net revenue) for the six months ended June 30, 2022 and 2021, as well as the amount of change and percentage of change (dollars in thousands):


	Six Months Ended
	June 30,								Amount			Percent
	2022				2021				Change			Change
Sales and marketing	$	10,216	45.6	%	$	6,864	39.8	%	$	3,352			48.8	%
General and administrative		5,717	25.5	%		6,134	35.6	%		(417	)		-6.8	%
Engineering and development		3,197	14.3	%		2,966	17.2	%		231			7.8	%
Loss on patent litigation settlement		—	—	%		161	0.9	%		(161	)		-100.0	%
Total operating expenses	$	19,130	85.4	%	$	16,125	93.5	%	$	3,005			18.6	%

Sales and Marketing Expense. Sales and marketing expenses during the six months ended June 30, 2022 increased by $3.4 million, or 49%, as compared to the same period in 2021. This increase is primarily due to $1.4 million from compensation expense due to no open territories in 2022, commissions and bonus incentives for achieving sales targets, $1.2 million in higher travel and trade show related expenses incurred in the second quarter of 2022, $0.3 million in supplies and other expenses, $0.2 million in additional advertising expenses, and $0.3 million from an Employee Retention Credit under the CARES Act received during the six months ended June 30, 2021 that did not occur in 2022.

General and Administrative Expense. General and administrative expenses during the six months ended June 30, 2022 decreased by $0.4 million, or 7%, compared to the same period in 2021. This decrease is primarily due to $0.6 million in lower compensation expenses and $0.4 million in severance expense that did not occur in 2022. This increase is partially offset by a higher allowance for doubtful accounts of $0.2 million and $0.4 million in expenses incurred in connection with the 2022 Annual Meeting. The annual stockholders meeting was significantly more expensive than in recent years due to the proposed reverse stock split.

Engineering and Development Expense. Engineering and development expenses during the six months ended June 30, 2022 increased by $0.2 million, or 8%, compared to the same period in 2021. This increase is primarily due to $0.3 million from compensation, legal and consulting expenses driven by more engineering projects for 2022 as compared to 2021, partially offset by $0.1 million for the impact of an Employee Retention Credit under the CARES Act received during the six months ended June 30, 2021 that did not occur in 2022.

Non-Operating Income (Loss)

Loss on Foreign Currency Transactions. We realized an approximately $0.2 million loss on foreign currency transactions during the six months ended June 30, 2022 compared to an approximately $0.1 million loss on foreign currency transactions during the six months ended June 30, 2021, primarily due to exchange rate fluctuations between the U.S. dollar and Euro, as well as other foreign currencies.

Interest Expense, Net. Interest expense was $0.9 million during the six months ended June 30, 2022 compared to $1.2 million for the same period in 2021.

Income Tax (Provision) Benefit. We use a discrete year-to-date method in calculating quarterly provision for income taxes. Our provision for income taxes for the six months ended June 30, 2022 was consistent with the same period in 2021. For additional information regarding income taxes, see Part I, Item I, Note 14 – Income Taxes.

Net Loss. For the reasons stated above, our net loss totaled approximately $10.4 million for the six months ended June 30, 2022 compared to a net loss of $7.6 million for the six months ended June 30, 2021.

Liquidity and Capital Resources

At June 30, 2022, we had approximately $19.5 million in cash and cash equivalents compared to $30.0 million as of December 31, 2021. Management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. The decrease in cash and cash equivalents from December 31, 2021 was primarily due to a net loss of $10.4 million, a net increase in operating assets and liabilities of $5.8 million and a $1.0 million payment on the loan under the Credit Agreement ("SWK Loan") during the six months ended June 30, 2022, partially offset by $5.8 million net proceeds from the June 2022 direct offering and private placement.

The following table summarizes our change in cash, cash equivalents and restricted cash (in thousands):


	Six Months Ended
	June 30,
	2022			2021
Net cash flows used in operating activities	$	(14,633	)	$	(10,008	)
Net cash flows used in investing activities		(578	)		(311	)
Net cash flows provided by financing activities		4,849			29,811
Effect of exchange rate changes		(264	)		(83	)
Net change in cash, cash equivalents and restricted cash	$	(10,626	)	$	19,409

Operating Activities

Net cash used in operating activities consists of our net loss, adjusted for our non-cash charges, plus or minus working capital changes. Cash used in operating activities for the six months ended June 30, 2022 totaled $14.6 million and was primarily comprised of our net loss of $10.4 million, and a net decrease in operating assets and liabilities of $5.8 million, partially offset by $1.1 million of stock-based compensation costs. The net decrease in our operating assets and liabilities was primarily due to a $3.6 million increase in inventory as we have increased inventory levels to try to mitigate the impact of supply disruptions from potential product shortages and delivery delays due to COVID-19, and a $2.0 million increase in accounts receivable.

In January 2022, the Company paid all amounts due to CAO Group, Inc under the Settlement Agreement. Refer to Part I, Item 1, Note 11 - Commitments and Contingencies, for further details.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2022 totaled $0.6 million and was comprised of the purchase of property, plant, and equipment. We expect cash flows from investing activities to increase somewhat through the remainder of 2022 due to the completion of our new training facility.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2022 totaled $4.8 million and was primarily comprised of $5.8 million net proceeds from the June 2022 direct offering and private placement.

Effect of Exchange Rate

The $0.3 million effect of exchange rate on cash for the six months ended June 30, 2022 was due to recognized loss on foreign currency transactions, primarily driven by changes in the Euro during the period.

Future Liquidity Needs

As of June 30, 2022, we had working capital of approximately $30.3 million. Our principal sources of liquidity as of June 30, 2022 consisted of approximately $19.5 million in cash and cash equivalents and $6.1 million of net accounts receivable.

The Company may need to raise additional capital in the future. Additional capital requirements may depend on many factors, including, among other things, the rate at which the Company’s business grows, demands for working capital, manufacturing capacity, and any acquisitions that the Company may pursue. From time to time, the Company could be required, or may otherwise attempt, to raise capital through either equity or debt offerings. The Company cannot provide assurance that it will be able to successfully enter into any such equity or debt financings in the future or that the required capital will be available on acceptable terms, if at all, or that any such financing activity will not be dilutive to its stockholders.

The Company has historically experienced losses from operations and has used cash and cash equivalents in operating activities. To be able to discharge our liabilities and commitments in the normal course of business, we must increase sales of our products, control or potentially reduce expenses, and establish profitable operations in order to generate cash from operations or obtain additional funds when needed.

We intend to improve our financial condition and ultimately improve our financial results by increasing revenues through expansion of our product offerings, continuing to expand and develop our field sales force and distributor relationships both domestically and internationally, forming strategic arrangements within the dental and medical industries, educating dental and medical patients as to the benefits of our advanced medical technologies, and reducing expenses.

Term Loan

The information set forth in Part I, Item 1, Note 9 – Debt – Term Loan is hereby incorporated herein by reference.

EIDL Loan

The information set forth in Part I, Item 1, Note 9 – Debt – EIDL Loan is hereby incorporated herein by reference.

2021 Equity Offering

On February 10, 2021, BIOLASE issued and sold in an underwritten bought deal offering an aggregate of 560,000 shares of common stock at a price of $25.75 per share less underwriting discounts and commissions. The Company received gross proceeds of approximately $14.4 million before deducting underwriting discounts and commissions and estimated offering expenses.

2022 Offering and Private Placement

The information set forth in Part II, Item 2 – Recent Developments – Direct Offering and Private Placement is hereby incorporated herein by reference.

Recent Accounting Pronouncements

For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, please refer to Part I, Item 1, Note 2 – Summary of Significant Accounting Policies, which is incorporated herein by this reference.

Additional Information

BIOLASE®, ZipTip®, ezlase®, eztips®, ComfortPulse®, Waterlase®, Waterlase Dentistry®, Waterlase Express®, iLase®, iPlus®, Epic®, Epic Pro®, WCLI®, World Clinical Laser Institute®, Waterlase MD®, Waterlase Dentistry®, and EZLase® are registered trademarks of BIOLASE, and Pedolase™ is a trademark of BIOLASE. All other product and company names are registered trademarks or trademarks of their respective owners.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management has evaluated, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities. The results of litigation and claims cannot be predicted with certainty, and unfavorable resolutions are possible and could materially and adversely affect our results of operations, cash flows and financial position. In addition, regardless of the outcome, litigation could have an adverse impact on us because of defense costs, diversion of management resources and other factors. While the outcome of such proceedings and claims cannot be predicted with certainty, there are no matters, as of June 30, 2022, that, in the opinion of management, will have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors from those disclosed under “Risk Factors” in Part I, Item 1A of the 2021 Form 10-K. The risks and uncertainties described in the 2021 Form 10-K are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition, or results of operations.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit

Description

Filed

Herewith

Form

Period

Ending/Date

of Report

Exhibit

Filing

Date

3.1.1

Restated Certificate of Incorporation, including, (i) Certificate of Designations, Preferences and Rights of 6% Redeemable Cumulative Convertible Preferred Stock of the Registrant; (ii) Certificate of Designations, Preferences and Rights of Series A 6% Redeemable Cumulative Convertible Preferred Stock of the Registrant; (iii) Certificate of Correction Filed to Correct a Certain Error in the Certificate of Designation of the Registrant; and (iv) Certificate of Designations of Series B Junior Participating Cumulative Preferred Stock of the Registrant.

S-1,

Amendment
No. 1

12/23/2005

3.1

12/23/2005

3.1.2

Amendment to Restated Certificate of Incorporation

8-K

05/10/2012

3.1

05/16/2012

3.1.3

Second Amendment to Restated Certificate of Incorporation

8-A/A

11/04/2014

3.1.3

11/04/2014

3.1.4

Third Amendment to Restated Certificate of Incorporation

S-3

07/21/2017

3.4

07/21/2017

3.1.5

Fourth Amendment to Restated Certificate of Incorporation

8-K

05/10/2018

3.1

05/11/2018

3.1.6

Fifth Amendment to Restated Certificate of Incorporation

8-K

05/28/2020

3.1

06/01/2020

3.1.7

Sixth Amendment to Restated Certificate of Incorporation

8-K

04/28/2022

3.1

05/02/2022

3.1.8

Certificate of Elimination of Series D, Series E and Series F Preferred Stock of the Registrant

8-K

03/01/2022

3.3

03/03/2022

3.1.9

Certificate of Elimination of Series G Preferred Stock

8-A

06/08/2022

3.1

06/08/2022

3.2

Eighth Amended and Restated Bylaws of the Registrant adopted on March 1, 2022

8-K

03/01/2022

3.1

03/03/2022

4.1

Form of Warrant issued on July 15, 2020

8-K

07/15/2020

4.2

07/22/2020

4.2

Form of Pre-Funded Warrant issued on June 30, 2022

8-K

06/27/2022

4.1

06/29/2022

4.3

Form of Warrant to Purchase Common Stock issued on June 30, 2022

8-K

06/27/2022

4.2

06/29/2022

10.1

Ninth Amendment to Credit Agreement, dated as of June 30, 2022, by and between the Registrant and SWK Funding LLC

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following unaudited financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended June 30, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Loss, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Compensatory contract or arrangement

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		BIOLASE, INC.
		(Registrant)


August 11, 2022	By:	/s/ JOHN R. BEAVER
Date		John R. Beaver
		President and Chief Executive Officer
			(Principal Executive Officer)

August 11, 2022	By:	/s/ JENNIFER BRIGHT
Date		Jennifer Bright
		Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)