BIOLASE(BIOL) - 2022 Q4 - Annual Report

Part I Business BIOLASE, Inc. is a leading global provider of advanced dental laser systems, including Waterlase and diode products, consistently facing recurring net losses despite revenue growth - Key Financial Performance (2020-2022) | Metric | 2022 (in millions) | 2021 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | :--- | | Net Revenue | $48.5 | $39.2 | $22.8 | | Net Loss | $28.6 | $16.2 | $16.8 | | Total Assets (Year-End) | $38.2 | $55.3 | N/A | - The company operates in a single reportable business segment focused on advanced laser systems for the dental industry[35] - As of December 31, 2022, BIOLASE has sold over 45,500 laser systems in more than 80 countries and holds approximately 259 active and 24 pending patents, primarily for its Waterlase technology[34] - In 2022, laser system sales accounted for about 65% of total sales, with consumables, accessories, and services making up the remaining 35%[17] Overview BIOLASE offers minimally invasive Waterlase and diode dental laser systems, providing clinical benefits over traditional instruments, despite a history of net losses - The company's proprietary systems are designed for a broad range of minimally invasive dental procedures, aiming to offer superior clinical results with benefits like less pain, faster healing, and fewer appointments for patients[27] - BIOLASE offers two main categories of laser systems: Waterlase for all-tissue procedures and diode systems for soft tissue, pain therapy, and cosmetic applications[34] Our Products and Solutions The company's core product portfolio includes Waterlase all-tissue and Epic diode soft-tissue laser systems, alongside the EdgePro endodontic irrigation device developed via an OEM partnership - Waterlase All-Tissue Systems: These flagship products (Waterlase iPlus, Express, MDX) use proprietary technology combining laser and water to cut hard and soft tissue, often eliminating the need for anesthesia and improving healing times[22] - Diode Soft-Tissue Systems: The Epic series (Epic X, Epic Hygiene, Epic 10) are designed for soft tissue procedures, pain relief, and cosmetic applications like teeth whitening. The Epic Hygiene is specifically cleared for Laser Bacterial Reduction (LBR)[40] - BIOLASE developed the EdgePro, a microfluidic irrigation device for root canals, in its first exclusive OEM agreement with EdgeEndo, a leading endodontic company[6] Business Strategy BIOLASE's strategy focuses on increasing market penetration and adoption of its laser technologies through enhanced awareness, strengthened sales channels, improved product quality, and expanded offerings via OEM partnerships - Key strategic elements include: * Increasing awareness and education through webinars, tradeshows, and trial programs * Strengthening customer training, with plans for a new world-class training facility * Improving product quality, including ramping up in-house manufacturing of key components * Strengthening global sales and distribution capabilities, particularly in the U.S * Expanding the product portfolio and leveraging technology for adjacent medical applications through OEM partnerships[690][718][722] Marketing and Sales The company markets globally via a direct U.S. sales force and international distributors, focusing on clinical benefits and educational programs, with international sales at 30.1% in 2022 and a 12% customer concentration risk - Net Revenue by Geographic Location (in thousands) | Region | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | :--- | | United States | $33,876 | $25,384 | $16,195 | | International | $14,586 | $13,804 | $6,585 | | Total Net Revenue | $48,462 | $39,188 | $22,780 | - In the U.S., sales are primarily direct through a field sales force and an in-house team. Internationally, the company relies on a network of distributors[52][701] - As of December 31, 2022, one customer accounted for approximately 12% of total gross accounts receivable[762] Government Regulations BIOLASE's products are extensively regulated by the FDA and international agencies, requiring compliance with manufacturing, marketing clearance, and post-market surveillance, alongside healthcare fraud, privacy, and anti-bribery laws - Products are subject to extensive regulation by the FDA, including premarket clearance (510(k)) or approval (PMA), and compliance with Quality System Regulation (QSR) for manufacturing[57] - For sales in the European Union, the company must comply with the Medical Device Regulation (MDR) and affix a CE mark to its products, with different requirements based on device classification (Class I, IIa, IIb)[62][737] - The company is subject to federal and state anti-kickback statutes, which prohibit remuneration to induce referrals for items or services reimbursable by federal healthcare programs. Violations can lead to criminal fines, civil penalties, and exclusion from programs like Medicare and Medicaid[66] - As an international operator, BIOLASE is subject to the Foreign Corrupt Practices Act (FCPA), which prohibits bribery of non-U.S. officials[68] Information about Our Executive Officers As of March 28, 2023, BIOLASE's executive leadership team comprises the President and CEO, CFO, and COO, bringing diverse experience from medical device, finance, and commercial sectors - Executive Officers (as of March 28, 2023) | Name | Age | Title | | :--- | :-: | :--- | | John R. Beaver | 61 | President and Chief Executive Officer | | Jennifer Bright | 52 | Chief Financial Officer | | Steven Sandor | 42 | Chief Operating Officer | Risk Factors The company faces significant risks including going concern doubts, capital needs, NASDAQ delisting risk, reliance on third-party suppliers, regulatory compliance, and debt covenant adherence - Going Concern: Recurring losses, negative cash flow, and the need for additional capital raise substantial doubt about the company's ability to continue as a going concern[106] - Financial Performance: The company has a history of net losses, with an accumulated deficit of $296.2 million as of December 31, 2022[107] - Capital Needs: The company may need to raise additional capital, and there is no guarantee that funds will be available on acceptable terms, if at all[82] - NASDAQ Listing: The company received a deficiency letter from NASDAQ in January 2023 for its stock price closing below the $1.00 minimum bid price requirement, posing a risk of delisting[190] - Operational Risks: The company relies on third-party distributors for a significant portion of its sales and depends on single-source suppliers for key components of its Waterlase systems[83][800] - Debt Covenants: Failure to comply with financial covenants in its Credit Agreement with SWK could result in an event of default and acceleration of debt repayment[98][122] Unresolved Staff Comments The company reports no unresolved comments from the SEC staff - There are no unresolved staff comments[237] Properties As of December 31, 2022, BIOLASE leased approximately 52,000 square feet globally, including its Lake Forest headquarters and Corona manufacturing facility, deemed sufficient for current operations - The company leases its corporate headquarters in Lake Forest, CA (approx. 12,000 sq. ft.) and its manufacturing facility in Corona, CA (approx. 26,000 sq. ft.)[238] Legal Proceedings BIOLASE is involved in ongoing legal proceedings, notably a January 2023 patent infringement lawsuit filed by PIPStek, LLC concerning its Waterlase product, which the company intends to defend - On January 4, 2023, PIPStek, LLC (a Sonendo, Inc. subsidiary) filed a lawsuit against BIOLASE alleging patent infringement by the Waterlase dental laser product[213] - The company establishes reserves for legal actions deemed probable and estimable, but notes that the ultimate outcomes are uncertain[239] Mine Safety Disclosures This item is not applicable to the company - Not applicable[241] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities BIOLASE's common stock trades on NASDAQ under "BIOL", with no anticipated cash dividends due to growth retention and credit agreement restrictions - The company's common stock trades on the NASDAQ Capital Market under the symbol "BIOL"[216] - The company does not expect to pay cash dividends in the foreseeable future and is restricted from doing so by its credit agreement[216] Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a 24% revenue increase to $48.5 million in 2022, but a widened net loss of $28.6 million due to higher expenses and inventory charges, raising substantial doubt about the company's going concern ability - The company's financial condition, including recurring losses and negative cash flow, raises substantial doubt about its ability to continue as a going concern[311] - As of December 31, 2022, the company had $4.2 million in cash and cash equivalents, a significant decrease from $29.97 million at the end of 2021[336][427] - Recent developments include the acquisition of Med-Fiber LLC in September 2022 and a public equity raise of approximately $9.9 million in January 2023[220][672] Results of Operations Net revenue grew 24% in 2022 and 72% in 2021, but gross profit decreased in 2022 due to an inventory charge, leading to a significantly widened net loss of $28.6 million - Comparison of Results: 2022 vs. 2021 (in millions) | Metric | 2022 (in millions) | 2021 (in millions) | Change (in millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $48.5 | $39.2 | +$9.3 | +24% | | Gross Profit | $15.9 | $16.5 | -$0.6 | -4% | | Operating Expenses | $41.2 | $33.0 | +$8.2 | +25% | | Net Loss | ($28.6) | ($16.2) | ($12.4) | +77% | - 2022 vs 2021: The 24% revenue increase was driven by higher adoption and a new OEM product. The net loss widened due to a $2.7 million inventory charge, higher sales & marketing expenses ($6.3 million increase), and increased interest expense[295][296][324][326] - 2021 vs 2020: The 72% revenue increase was primarily due to the recovery from COVID-19 pandemic restrictions. Gross profit margin improved from 27% to 42% due to higher sales volume, better absorption of fixed costs, and a CARES Act employee retention credit[276][329] Liquidity and Capital Resources The company's liquidity is a major concern, with cash and cash equivalents decreasing to $4.2 million by year-end 2022 due to $26.8 million in operating cash outflow, raising substantial doubt about its going concern ability - Consolidated Cash Flows (in thousands) | Activity | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | :--- | | Operating Activities | ($26,761) | ($16,710) | ($12,795) | | Investing Activities | ($3,727) | ($707) | ($96) | | Financing Activities | $4,603 | $29,954 | $24,349 | - Cash used in operating activities in 2022 was $26.8 million, primarily driven by the net loss of $28.6 million and a $5.8 million increase in inventory[346] - Cash provided by financing activities in 2022 was $4.6 million, mainly from a $5.6 million direct offering, offset by a $1.0 million loan repayment[347] - Contractual Obligations as of Dec 31, 2022 (in thousands) | Obligation | Total (in thousands) | Less Than 1 Year (in thousands) | 1 to 3 Years (in thousands) | 3 to 5 Years (in thousands) | More Than 5 Years (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $2,239 | $833 | $1,406 | $— | $— | | Purchase obligations | $29,079 | $28,165 | $914 | $— | $— | | Loan principal & interest | $19,096 | $2,563 | $16,285 | $18 | $230 | | Total | $50,414 | $31,561 | $18,605 | $18 | $230 | Financial Statements and Supplementary Data This section incorporates by reference the company's consolidated financial statements and the independent registered public accounting firm's report, located at the end of the Form 10-K - All required financial statements are listed in Part IV, Item 15 and begin on page F-1 of the report[323] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants regarding accounting and financial disclosure - None reported[376] Controls and Procedures Management concluded that the company's disclosure controls and procedures, along with internal control over financial reporting, were effective as of December 31, 2022, with no material changes during the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[353] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO Framework (2013)[354] Other Information The company reported no other information for this item - None[356] Part III Directors, Executive Officers and Corporate Governance This section incorporates by reference information on directors, executive officers, and corporate governance from the 2023 Proxy Statement, with the Code of Business Conduct and Ethics available online - Information regarding directors and corporate governance is incorporated by reference from the 2023 Proxy Statement[359] - The company's Code of Business Conduct and Ethics applies to all employees, officers, and directors[382] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's 2023 Proxy Statement - Details on executive compensation are incorporated by reference from the 2023 Proxy Statement[383] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates security ownership information from the 2023 Proxy Statement and details equity compensation plans, including the 2018 Long-Term Incentive Plan, with 994,000 securities to be issued as of December 31, 2022 - Equity Compensation Plan Information as of December 31, 2022 | Plan Category | Securities to be Issued Upon Exercise/Vesting | Weighted-Average Exercise Price of Options | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Stockholders | 994,000 | $15.36 | 55,000 | | Not Approved by Stockholders | — | — | — | | Total | 994,000 | $15.36 | 55,000 | - The company's stockholders approved the 2018 Long-Term Incentive Plan, which replaced the 2002 Stock Incentive Plan for future equity awards[385] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related-party transactions, and director independence is incorporated by reference from the company's 2023 Proxy Statement - Details on related transactions and director independence are incorporated by reference from the 2023 Proxy Statement[387] Principal Accountant Fees and Services Information regarding fees paid to the principal accountant and services rendered is incorporated by reference from the company's 2023 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement[388] Part IV Exhibits, Financial Statement Schedules This section provides an index of financial statements, schedules, and exhibits filed with the Annual Report on Form 10-K, including various corporate and debt agreements - This section provides an index of all financial statements, schedules, and exhibits filed with the 10-K[402] Form 10-K Summary The company indicates no Form 10-K summary is provided in this report - None provided[391]