BIOLASE(BIOL) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis of BIOLASE, Inc. Item 1. Financial Statements (Unaudited) This section presents BIOLASE, Inc.'s unaudited consolidated financial statements and detailed notes for the periods ended September 30, 2023, and December 31, 2022 Consolidated Balance Sheets This table provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of September 30, 2023, and December 31, 2022 Consolidated Balance Sheets | ASSETS (in thousands) | September 30, 2023 (unaudited) | December 31, 2022 | | :-------------------- | :----------------------------- | :---------------- | | Cash and cash equivalents | $7,809 | $4,181 | | Accounts receivable, net | $4,388 | $5,841 | | Inventory | $13,824 | $15,884 | | Total current assets | $27,782 | $28,959 | | Property, plant, and equipment, net | $6,049 | $4,278 | | Total assets | $38,745 | $38,186 | | LIABILITIES & EQUITY (in thousands) | September 30, 2023 (unaudited) | December 31, 2022 | | :-------------------- | :----------------------------- | :---------------- | | Accounts payable | $7,178 | $5,786 | | Accrued liabilities | $7,613 | $9,210 | | Total current liabilities | $19,782 | $17,807 | | Non-current term loans, net of discount | $11,307 | $13,091 | | Total liabilities | $32,861 | $33,297 | | Total mezzanine equity | $5,552 | $0 | | Total stockholders' equity | $332 | $4,889 | | Total liabilities, convertible redeemable preferred stock and stockholders' equity | $38,745 | $38,186 | Consolidated Statements of Operations and Comprehensive Loss This statement details the company's financial performance, including net revenue, gross profit, operating expenses, and net loss for specified periods Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share data) | (In thousands, except per share data) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net revenue | $10,921 | $12,010 | $35,674 | $34,411 | | Cost of revenue | $7,175 | $9,565 | $22,474 | $22,096 | | Gross profit | $3,746 | $2,445 | $13,200 | $12,315 | | Total operating expenses | $7,443 | $10,096 | $26,061 | $29,226 | | Loss from operations | $(3,697) | $(7,651) | $(12,861) | $(16,911) | | Net loss | $(4,589) | $(8,387) | $(15,306) | $(18,773) | | Comprehensive loss | $(4,694) | $(8,539) | $(15,292) | $(19,188) | | Net loss per share (Basic and Diluted)| $(3.89) | $(110.36) | $(22.28) | $(287.73) | Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders' Equity This statement tracks changes in the company's convertible redeemable preferred stock and stockholders' equity over the reporting periods - The company's total stockholders' equity decreased significantly from $4,889 thousand as of December 31, 2022, to $332 thousand as of September 30, 2023, primarily due to a net loss of $15,306 thousand and the reclassification of preferred stock to mezzanine equity[15][19] - Mezzanine equity, consisting of Series H and Series J Convertible Preferred Stock, increased from $0 as of December 31, 2022, to $5,552 thousand as of September 30, 2023, reflecting new issuances[15][19] Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities for the specified periods Consolidated Statements of Cash Flows (in thousands) | (In thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash flows used in operating activities | $(11,808) | $(21,179) | | Net cash flows used in investing activities | $(1,126) | $(3,256) | | Net cash flows provided by financing activities | $16,549 | $4,635 | | Effect of exchange rate changes | $13 | $(415) | | Increase (decrease) in cash, cash equivalents and restricted cash | $3,628 | $(20,215) | | Cash, cash equivalents and restricted cash, beginning of period | $4,181 | $30,175 | | Cash and cash equivalents, end of period | $7,809 | $9,960 | - Cash used in operating activities decreased significantly from $(21,179) thousand in 2022 to $(11,808) thousand in 2023, primarily due to a lower net loss and changes in working capital[26][217] - Net cash provided by financing activities increased substantially to $16,549 thousand in 2023 from $4,635 thousand in 2022, driven by proceeds from public offerings of common stock, pre-funded warrants, and convertible preferred stock[26][219] Notes to Consolidated Financial Statements These notes provide detailed explanations of the company's accounting policies, revenue recognition, equity, debt, and other financial disclosures NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION This note describes BIOLASE, Inc.'s core business, significant events like the reverse stock split, and the going concern assessment - BIOLASE, Inc. is a leading provider of advanced laser systems for the dental industry, developing, manufacturing, marketing, and selling laser systems for minimally invasive dental procedures[29] - The company effected a one-for-one hundred (1:100) reverse stock split on July 27, 2023, retroactively adjusting all common stock share numbers and prices[32][33] - The company's recurring losses and cash usage in operations raise substantial doubt about its ability to continue as a going concern, necessitating additional capital[34][215] Liquidity Position (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :----- | :----------------- | :---------------- | | Working Capital | $8,000 | $11,200 | | Cash and cash equivalents | $7,800 | $4,200 | | Net accounts receivable | $4,400 | $5,800 | NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's key accounting policies, including recent adoptions and fair value measurements of financial instruments - The company adopted ASU 2016-13 (Credit Losses) effective January 1, 2023, which did not have a significant impact on its consolidated financial statements[51] - Financial instruments like cash, accounts receivable, accounts payable, accrued liabilities, warrants, and the SWK Loan approximate fair value due to their short maturity or market interest rates[41] NOTE 3—REVENUE RECOGNITION This note details the company's revenue recognition policies, breaking down revenue by timing of transfer and geographic area - Revenue from products and services transferred at a single point in time (primarily laser systems and consumables) accounted for 87% and 89% of net revenue for the three and nine months ended September 30, 2023, respectively[52] - Revenue from services transferred over time (product training and extended warranties) accounted for 13% and 11% of net revenue for the three and nine months ended September 30, 2023, respectively[53] Net Revenue by Geographic Area (in thousands) | Geographic Area | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $7,298 | $8,413 | $24,797 | $24,290 | | International | $3,623 | $3,597 | $10,877 | $10,121 | | Total Net Revenue | $10,921 | $12,010 | $35,674 | $34,411 | Net Revenue by Timing of Transfer (in thousands) | Timing of Transfer | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Over time | $1,366 | $2,076 | $3,950 | $4,406 | | At a point in time | $9,555 | $9,934 | $31,724 | $30,005 | | Total Net Revenue | $10,921 | $12,010 | $35,674 | $34,411 | NOTE 4—CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY This note describes the company's convertible redeemable preferred stock issuances, their classification, and stock-based compensation expenses - In September 2023, the company sold 75,000 Units of Series J Convertible Redeemable Preferred Stock and Series J Warrants, generating gross proceeds of $4.5 million; the Series J Preferred Stock is mandatorily redeemable by September 13, 2024[67][68][69] - In May 2023, the company sold 175,000 Units of Series H Convertible Redeemable Preferred Stock and Series H Warrants, generating gross proceeds of $4.6 million; the Series H Preferred Stock is mandatorily redeemable by May 24, 2025[74][75][76] - Both Series J and Series H Convertible Preferred Stock are classified as mezzanine equity due to contingent redeemability and holder conversion options[71][77] - Stock-based compensation expense for the nine months ended September 30, 2023, was $1.1 million, down from $1.7 million in the same period of 2022[92][95] NOTE 5—INVENTORY This note provides a breakdown of inventory composition and details adjustments for excess and obsolete amounts Inventory Composition (in thousands) | Category | September 30, 2023 | December 31, 2022 | | :-------------- | :----------------- | :---------------- | | Raw materials | $6,566 | $6,697 | | Work-in-process | $1,850 | $1,871 | | Finished goods | $5,408 | $7,316 | | Total Inventory | $13,824 | $15,884 | - Inventory was reduced by estimates for excess and obsolete amounts totaling $1.7 million as of September 30, 2023, a decrease from $2.2 million as of December 31, 2022[116] NOTE 6—PROPERTY, PLANT, AND EQUIPMENT This note details the composition of property, plant, and equipment, along with associated depreciation expenses Property, Plant, and Equipment, Net (in thousands) | Category | September 30, 2023 | December 31, 2022 | | :------------------------ | :----------------- | :---------------- | | Total (before land) | $16,565 | $12,661 | | Accumulated depreciation | $(10,669) | $(8,538) | | Property, plant, and equipment, net | $6,049 | $4,278 | - Depreciation expense for the nine months ended September 30, 2023, was $2.1 million, a significant increase from $0.4 million in the same period of 2022, partly due to a cumulative adjustment for laser equipment transferred for marketing[121][122] NOTE 7—INTANGIBLE ASSETS AND GOODWILL This note discusses the company's intangible assets and goodwill, including impairment tests and amortization policies - The company performed annual and additional quantitative impairment tests for goodwill as of September 30, 2023, and March 31, 2023, respectively, and determined no impairment[123][125] - Goodwill remained at $2.9 million as of September 30, 2023, and December 31, 2022; all intangible assets have been fully amortized, with no amortization expense recognized[126] NOTE 8—ACCRUED LIABILITIES This note provides a detailed breakdown of accrued liabilities, including payroll, preferred stock warrant liability, and warranty accruals Accrued Liabilities (in thousands) | Category | September 30, 2023 | December 31, 2022 | | :---------------------------- | :----------------- | :---------------- | | Payroll and benefits | $2,541 | $4,674 | | Preferred stock warrant liability | $1,529 | $0 | | Warranty accrual, current portion | $1,364 | $1,293 | | Total Accrued Liabilities | $7,613 | $9,210 | - The preferred stock warrant liability of $1.5 million is a new item in September 2023, reflecting the liability classification of warrants issued in recent public offerings[127] - The warranty accrual balance increased to $1,827 thousand as of September 30, 2023, from $1,653 thousand at the beginning of the nine-month period[127] NOTE 9—DEBT This note outlines the company's debt structure, including term loans, interest expense, and repayment schedules Debt Details (in thousands) | Debt Type | September 30, 2023 | December 31, 2022 | | :-------- | :----------------- | :---------------- | | SWK Loan | $14,650 | $14,650 | | EIDL Loan | $150 | $150 | | Discount and debt issuance costs | $(693) | $(1,009) | | Total | $14,107 | $13,791 | | Current term loans, net of discount | $2,800 | $700 | | Non-current term loans, net of discount | $11,307 | $13,091 | - Interest expense increased by 41% to $0.6 million for the three months ended September 30, 2023, and by 39% to $1.8 million for the nine months, primarily due to rising interest rates on the term loan[131][198][209] - Principal repayments for the SWK Loan are set to begin in November 2023, with quarterly payments of $0.7 million until maturity in May 2025[133] NOTE 10—LEASES This note details the company's lease liabilities, including remaining lease terms and discount rates - The company's weighted-average remaining lease term is 2.0 years, with a weighted-average discount rate of 12.3% as of September 30, 2023[140] Maturities of Lease Liabilities (in thousands) | Year | September 30, 2023 | | :---------------- | :----------------- | | 2024 | $1,047 | | 2025 | $875 | | 2026 | $207 | | Total lease liabilities | $1,872 | NOTE 11—SEGMENT INFORMATION This note confirms the company operates in a single business segment and provides a breakdown of revenue by geographic area - The company operates in a single business segment; for the nine months ended September 30, 2023, U.S. sales accounted for 70% of net revenue, and international sales for 30%[145] NOTE 12—CONCENTRATIONS This note discusses revenue concentrations by product category and customer, and highlights reliance on single suppliers Revenue by Product Category (in thousands) | Product Category | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :---------------- | :------------------------------ | :----------------------------- | | Laser systems | $6,647 (60.9%) | $21,666 (60.7%) | | Consumables and other | $2,908 (26.6%) | $10,058 (28.2%) | | Services | $1,366 (12.5%) | $3,950 (11.1%) | | Net Revenue | $10,921 (100.0%) | $35,674 (100.0%) | - No individual customer represented more than 10% of revenue for the three and nine months ended September 30, 2023 or 2022[151] - The company relies on single suppliers for certain key components, posing a risk of manufacturing delays and sales loss if suppliers change[153] NOTE 13—INCOME TAXES This note details the company's income tax provision and explains the factors contributing to its effective tax rate - The company recorded an income tax provision of $15 thousand and $46 thousand for the three and nine months ended September 30, 2023, respectively, with an effective tax rate of 0.3%[156] - The effective tax rate differs from the statutory rate of 21% primarily due to a full valuation allowance against net deferred tax assets and current liabilities from estimated state and foreign income tax liabilities[157] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, operational results, and future outlook Overview This overview introduces BIOLASE as a dental laser systems provider and highlights key financial performance indicators - BIOLASE is a leading provider of advanced laser systems for the dental industry, offering Waterlase (all-tissue) and diode (soft-tissue) systems for minimally invasive procedures[164][166] - The company also manufactures and sells consumable products and accessories, which accounted for approximately 39% of total sales during the quarter ended September 30, 2023[167] Key Financial Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :------------ | :------------------------------ | :----------------------------- | | Net Revenues | $10,900 | $35,700 | | Net Losses | $(4,600) | $(15,300) | Business and Outlook This section outlines the company's strategic focus on market awareness, product expansion, and revenue growth forecasts - The company's strategy focuses on increasing awareness and demand for its products among dental practitioners and patients, and growing consumables revenue[172] - BIOLASE plans to expand its product line and clinical applications through enhancements and transformational innovations, including exploring adjacent medical applications[173] - The company forecasts revenue for fiscal year 2023 to be above fiscal year 2022, driven by new customers and increased consumable sales[174][175] Recent Developments This section highlights recent corporate actions, including a public offering of preferred stock and warrants - On September 13, 2023, BIOLASE completed a public offering of Series J Convertible Redeemable Preferred Stock and warrants, raising $4.5 million in gross proceeds[176] Critical Accounting Policies This section confirms no significant changes to the company's critical accounting policies during the reporting period - No significant changes occurred in the company's critical accounting policies during the nine months ended September 30, 2023, from those disclosed in the 2022 Form 10-K[177] Results of Operations This section provides a detailed comparison of the company's financial performance for the three and nine months ended September 30, 2023, versus 2022 Consolidated Operating Results (in thousands, as % of net revenue) | Metric | 3M Sep 2023 | 3M Sep 2022 | 9M Sep 2023 | 9M Sep 2022 | | :------------------------ | :---------- | :---------- | :---------- | :---------- | | Net revenue | $10,921 (100.0%) | $12,010 (100.0%) | $35,674 (100.0%) | $34,411 (100.0%) | | Gross profit | $3,746 (34.3%) | $2,445 (20.4%) | $13,200 (37.0%) | $12,315 (35.8%) | | Total operating expenses | $7,443 (68.2%) | $10,096 (84.1%) | $26,061 (73.0%) | $29,226 (84.9%) | | Loss from operations | $(3,697) (33.9%) | $(7,651) (63.7%) | $(12,861) (36.0%) | $(16,911) (49.1%) | | Net loss | $(4,589) (42.0%) | $(8,387) (69.8%) | $(15,306) (42.8%) | $(18,773) (54.6%) | Adjusted EBITDA Reconciliation (in thousands) | Metric | 3M Sep 2023 | 3M Sep 2022 | 9M Sep 2023 | 9M Sep 2022 | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | | GAAP net loss attributable to common stockholders | $(4,589) | $(8,387) | $(15,306) | $(18,990) | | Adjustments (e.g., Interest, Depreciation, Stock-based comp) | $1,440 | $2,851 | $5,166 | $5,157 | | Adjusted EBITDA | $(3,149) | $(5,623) | $(9,910) | $(13,616) | Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022 This subsection compares the company's financial results for the three-month periods, highlighting changes in revenue, gross profit, and operating expenses - Net revenue decreased by 9% to $10.9 million, primarily due to lower U.S. laser system sales impacted by the macro-economic environment and reduced product training revenue, partially offset by increased consumables sales[191] - Gross profit increased by 53% to $3.7 million, with gross margin improving by 14 percentage points to 34%, driven by improved supply chain, lower inventory charges, and a favorable mix towards higher-margin consumables[192] - Total operating expenses decreased by 26.3% to $7.4 million, mainly due to reductions in sales and marketing (32% decrease), general and administrative (14% decrease), and engineering and development (31% decrease) expenses, reflecting cost-saving initiatives[194][195][196] - Net loss improved to $(4.6) million from $(8.4) million in the prior year period[200] Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022 This subsection compares the company's financial results for the nine-month periods, detailing trends in revenue, gross profit, and operating expenses - Net revenue increased by 4% to $35.7 million, primarily driven by a 20% increase in worldwide consumables and other revenue, partially offset by a decrease in product training revenue[202] - Gross profit increased by 7% to $13.2 million, with gross margin improving by 1 percentage point to 37%, attributed to resolving supply chain issues, lower inventory charges, and a favorable mix from higher-margin consumables[203] - Total operating expenses decreased by 10.8% to $26.1 million, reflecting lower sales and marketing (7% decrease), general and administrative (15% decrease), and engineering and development (16% decrease) expenses due to cost-saving initiatives[205][206][207] - Net loss improved to $(15.3) million from $(18.8) million in the prior year period[212] Liquidity and Capital Resources This section discusses the company's cash position, financing activities, and ongoing concerns about its ability to fund operations - Cash and cash equivalents increased to $7.8 million as of September 30, 2023, from $4.2 million at December 31, 2022, primarily due to $15.7 million in net proceeds from public offerings and warrant exercises[213] - The company's recurring losses and cash usage in operations continue to raise substantial doubt about its ability to continue as a going concern, necessitating additional capital or increased sales and expense control[215][224] - Future liquidity needs depend on business growth, working capital demands, manufacturing capacity, and potential acquisitions, requiring the company to raise capital through equity or debt offerings[222] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective with no material changes in internal controls - The company's disclosure controls and procedures were effective as of September 30, 2023[239] - No material changes in internal control over financial reporting occurred during the period[240] PART II. OTHER INFORMATION This section includes legal proceedings, updated risk factors, and other required disclosures for the reporting period Item 1. Legal Proceedings This section incorporates by reference the legal proceedings information from the company's 2022 Form 10-K Item 1A. Risk Factors This section updates the risk factors, emphasizing the substantial doubt about the company's ability to continue as a going concern and redemption obligations - The company received a deficiency letter from Nasdaq regarding its common stock bid price falling below the $1.00 minimum requirement, but subsequently regained compliance after a one-for-one hundred reverse stock split effective July 27, 2023[244][246][247][248] - Recurring losses and negative cash flow from operations raise substantial doubt about the company's ability to continue as a going concern, requiring additional capital or increased sales and expense reduction[249][251] - The company has an accumulated deficit of $311.5 million as of September 30, 2023, and has experienced net losses for the past three years and the current nine-month period[253] - The company's ability to meet redemption obligations for Series J and Series H Preferred Stock (due September 2024 and May 2025, respectively) depends on earnings and cash flows, with no assurance of sufficient funds[255][256] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities This section states that there were no unregistered sales of equity securities, use of proceeds, or issuer purchases during the period Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company Item 5. Other Information This section indicates that there is no other information to report Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various amendments and certifications