BIOLASE(BIOL) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's unaudited statements show a $10.7 million net loss for H1 2020, raising substantial doubt about its going concern status Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (unaudited) | December 31, 2019 (audited) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $5,437 | $5,789 | | Total current assets | $22,894 | $27,019 | | Total assets | $27,756 | $31,847 | | Liabilities & Equity | | | | Total current liabilities | $21,089 | $25,779 | | Total liabilities | $26,447 | $27,505 | | Total stockholders' equity | $1,309 | $377 | Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net revenue | $2,938 | $7,721 | | Gross profit | $941 | $2,294 | | Loss from operations | $(3,979) | $(9,330) | | Net loss | $(4,697) | $(10,704) | | Net loss per share (Basic & Diluted) | $(0.12) | $(0.31) | Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(9,339) | $(6,627) | | Net cash used in investing activities | $(81) | $(125) | | Net cash provided by financing activities | $9,011 | $2,466 | | Decrease in cash, cash equivalents and restricted cash | $(352) | $(4,324) | Note 1: Business Description, Liquidity, and COVID-19 Impact Recurring losses and the COVID-19 impact raise substantial doubt about the company's ability to continue as a going concern - The company's recurring losses, cash usage, and the impact of COVID-19 raise substantial doubt about its ability to continue as a going concern[20] - The COVID-19 pandemic severely impacted the company by causing dental office closures, which limited sales activities and led to the cancellation of dental shows and workshops[21] - The company obtained a Paycheck Protection Program (PPP) loan of $2.98 million and an Economic Injury Disaster Loan (EIDL) of $150,000 to support operations[25][28] - Due to non-compliance with debt covenants, the company entered into multiple amendments with its lender, SWK Funding, to obtain waivers and adjust terms[29][31][33] Note 3: Revenue Recognition Revenue from products and services declined significantly, prompting a $1.0 million allowance for doubtful accounts due to COVID-19 - In Q1 2020, the company recorded an additional allowance for doubtful accounts of approximately $1.0 million due to uncertainties from the impact of COVID-19[63] Revenue by Geographic Area (in thousands) | Region | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | United States | $2,195 | $5,898 | $5,324 | $12,014 | | International | $743 | $2,747 | $2,397 | $6,957 | | Total | $2,938 | $8,645 | $7,721 | $18,971 | Revenue by Product Line (Three Months Ended June 30, in thousands) | Product Line | 2020 | % of Total | 2019 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Laser systems | $1,091 | 37.1% | $4,917 | 56.9% | | Consumables and other | $862 | 29.3% | $2,084 | 24.1% | | Services | $985 | 33.6% | $1,578 | 18.3% | | Total Revenue | $2,938 | 100.0% | $8,645 | 100.0% | Note 4: Equity and Stock-Based Compensation The company increased authorized shares, converted preferred stock, and raised $6.9 million through a registered direct offering - Authorized common stock was increased from 40 million to 180 million shares in May 2020[75] - All outstanding Series E Preferred Stock was converted into 6,956,500 shares of Common Stock in May 2020, reclassifying $4.0 million from mezzanine equity to permanent equity[76] - On June 10, 2020, the company raised gross proceeds of approximately $6.9 million through a registered direct offering of 10.8 million shares of common stock and warrants to purchase an additional 10.8 million shares[93][38] Note 9: Debt Total debt includes a $15.0M term loan, a $3.0M PPP loan, and a $150k EIDL loan, with repeated covenant non-compliance - The company was not in compliance with its SWK Credit Agreement covenants as of December 31, 2019, and subsequently entered into the Fourth and Fifth Amendments in 2020 to obtain waivers and revise terms[122][123] - Due to uncertainty surrounding its ability to meet debt covenants, the company has classified its entire Term Loan with SWK as a current liability[124][33] - In April 2020, the company received a $2.98 million loan under the Paycheck Protection Program (PPP), which bears 1.0% interest and may be forgiven if used for qualifying expenses[126][127] - In May 2020, the company secured a $150,000 Economic Injury Disaster Loan (EIDL) from the SBA with a 3.75% interest rate and a 30-year term[131] Note 15: Subsequent Events Post-quarter, the company raised $15.8 million net from a Rights Offering and amended its SWK loan agreement to extend maturity - On July 22, 2020, the company completed a Rights Offering, selling 18,000 units of Series F Convertible Preferred Stock and 45,000,000 warrants, resulting in net proceeds of approximately $15.8 million[161][39] - On August 12, 2020, the company entered into the Sixth Amendment to the SWK Credit Agreement, extending the interest-only period to May 2022 and the loan maturity to May 2024, in exchange for a $0.7 million principal repayment and adjusted covenants[165][34] - In July 2020, the company amended its PPP loan to extend the payment deferment period and increase the amount of non-payroll costs eligible for forgiveness to 40%[164] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the severe COVID-19 impact, a 66% Q2 revenue decline, financing activities, and Nasdaq listing deficiencies - The COVID-19 pandemic severely impacted global economic activity, leading to dental office closures and cancellation of industry events, which negatively impacted sales and cash flow[183] - The company received a deficiency letter from Nasdaq for failing to meet the minimum stockholders' equity requirement of $2.5 million and the minimum bid price of $1.00 per share[184][186] Non-GAAP Adjusted EBITDA Reconciliation (in thousands) | Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | GAAP net loss | $(4,697) | $(10,704) | | Adjustments (Interest, Tax, D&A, etc.) | $1,808 | $4,263 | | Adjusted EBITDA | $(2,889) | $(6,441) | Results of Operations Q2 2020 net revenue fell 66% to $2.9 million and H1 2020 net revenue fell 59% to $7.7 million due to the COVID-19 pandemic Q2 2020 vs Q2 2019 Revenue Comparison (in thousands) | Category | Q2 2020 | Q2 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $2,938 | $8,645 | $(5,707) | (66.0%) | | Gross Profit | $941 | $3,380 | $(2,439) | (72.2%) | | Gross Margin | 32.0% | 39.1% | - | - | H1 2020 vs H1 2019 Revenue Comparison (in thousands) | Category | H1 2020 | H1 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $7,721 | $18,971 | $(11,250) | (59.3%) | | Gross Profit | $2,294 | $6,901 | $(4,607) | (66.8%) | | Gross Margin | 29.7% | 36.4% | - | - | - The decrease in gross profit for both the three and six-month periods was driven by lower revenues due to the COVID-19 pandemic combined with fixed manufacturing costs[222][236] Liquidity and Capital Resources Recurring losses and negative cash flow raise going concern doubts, addressed by multiple recent financing activities - The company has reported recurring losses and negative cash from operations, and its financial condition raises substantial doubt about its ability to continue as a going concern[253] - Net cash used in operating activities for the six months ended June 30, 2020 was $9.3 million, primarily driven by a net loss of $10.7 million[244][245] - Subsequent to the quarter end, the company raised approximately $15.8 million in net proceeds from a Rights Offering in July 2020 to bolster its liquidity[282][209] Quantitative and Qualitative Disclosures About Market Risk The company did not provide any quantitative or qualitative disclosures about market risk - No disclosures were made regarding market risk[286] Controls and Procedures Disclosure controls were deemed ineffective due to two material weaknesses in internal control over financial reporting - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were not effective as of June 30, 2020[287] - A material weakness was identified related to the incorrect classification of Series E Convertible Preferred Stock as permanent equity instead of mezzanine equity[289] - A second material weakness was identified related to ineffective financial statement close process controls, including management review and independent review of journal entries[290] - Management has implemented a remediation plan involving additional review levels, training, and external consultants, expecting to complete remediation by the end of fiscal 2020[292] PART II. OTHER INFORMATION Legal Proceedings The company settled patent infringement lawsuits with CAO Group, Inc, resulting in a remaining accrued liability of $1.0 million - The company refers to Note 11 for details on legal proceedings, which discusses the settlement of patent litigation with CAO Group, Inc[294][149] Risk Factors Key risks include potential Nasdaq delisting, COVID-19 impacts, PPP loan ineligibility, a history of net losses, and debt default - The company is at risk of being delisted from Nasdaq for failing to meet the minimum stockholders' equity requirement ($2.5M) and the minimum bid price rule ($1.00)[295][296][297] - There is a risk that the company could be required to repay its $2.98 million PPP loan and face penalties if it is later determined to have been ineligible, which could have a material adverse effect[303] - The COVID-19 pandemic has already adversely affected the business through dental office closures and event cancellations, and the full future impact on financial condition and liquidity remains uncertain[304] - The company has a history of net losses, with an accumulated deficit of $245.3 million as of June 30, 2020, and may have difficulty achieving profitability[305] Exhibits This section lists all exhibits filed with the Form 10-Q, including loan amendments and officer certifications