UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended September 30, 2015

OR

¨

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.)

4 Cromwell

Irvine, California 92618

(Address of principal executive offices, including zip code)

(949) 361-1200

(Registrant’s telephone number, including area code)

 

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding, as of October 30, 2015, was 58,227,539 shares.

 

 

 

 

 

 

 


BIOLASE, INC.

INDEX

 

 

  

 

  

Page

PART I.

  

FINANCIAL INFORMATION

  

 

Item 1.

  

Financial Statements (Unaudited):

  

3

 

  

Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

  

3

 

  

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2015 and September 30, 2014

  

4

 

  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and
September 30, 2014

  

5

 

  

Notes to Consolidated Financial Statements

  

6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

21

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

34

Item 4.

  

Controls and Procedures

  

34

PART II

  

OTHER INFORMATION

  

 

Item 1.

  

Legal Proceedings

  

34

Item 1A.

  

Risk Factors

  

34

Item 6.

  

Exhibits

  

35

Signatures

 

36

 

 

 

2


PART I. FINANCIAL INFORMATION

 

ITEM  1.

FINANCIAL STATEMENTS

 

BIOLASE, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except per share data)

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

15,194

 

 

$

31,560

 

Restricted cash equivalent

 

200

 

 

 

 

Accounts receivable, less allowance of $1,888 in 2015 and

   $1,711 in 2014

 

9,243

 

 

 

9,004

 

Inventory, net

 

14,119

 

 

 

12,508

 

Prepaid expenses and other current assets

 

1,526

 

 

 

1,726

 

Total current assets

 

40,282

 

 

 

54,798

 

Property, plant, and equipment, net

 

3,118

 

 

 

1,295

 

Intangible assets, net

 

65

 

 

 

114

 

Goodwill

 

2,926

 

 

 

2,926

 

Other assets

 

758

 

 

 

270

 

Total assets

$

47,149

 

 

$

59,403

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

9,309

 

 

$

8,357

 

Accrued liabilities

 

5,902

 

 

 

5,188

 

Customer deposits

 

105

 

 

 

112

 

Deferred revenue, current portion

 

2,984

 

 

 

2,494

 

Total current liabilities

 

18,300

 

 

 

16,151

 

Deferred income taxes

 

723

 

 

 

677

 

Deferred revenue, long-term

 

171

 

 

 

 

Capital lease obligation

 

201

 

 

 

 

Warranty accrual, long-term

 

1,059

 

 

 

519

 

Other liabilities, long-term

 

351

 

 

 

 

Total liabilities

 

20,805

 

 

 

17,347

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, par value $0.001; 1,000 shares authorized,

   no shares issued and outstanding

 

 

 

 

 

Common stock, par value $0.001; 100,000 shares

   authorized in 2015 and 2014, respectively;

   58,228 and 58,115 shares issued and outstanding in

   2015 and 2014, respectively

 

58

 

 

 

58

 

Additional paid-in-capital

 

187,529

 

 

 

185,231

 

Accumulated other comprehensive loss

 

(747

)

 

 

(557

)

Accumulated deficit

 

(160,496

)

 

 

(142,676

)

Total stockholders' equity

 

26,344

 

 

 

42,056

 

Total liabilities and stockholders' equity

$

47,149

 

 

$

59,403

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


BIOLASE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

(in thousands, except per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Products and services revenue

$

11,200

 

 

$

12,673

 

 

$

33,786

 

 

$

34,292

 

License fees and royalty revenue

 

34

 

 

 

41

 

 

 

172

 

 

 

126

 

Net revenue

 

11,234

 

 

 

12,714

 

 

 

33,958

 

 

 

34,418

 

Cost of revenue

 

7,853

 

 

 

7,321

 

 

 

23,666

 

 

 

21,355

 

Gross profit

 

3,381

 

 

 

5,393

 

 

 

10,292

 

 

 

13,063

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

4,039

 

 

 

3,862

 

 

 

13,536

 

 

 

11,886

 

General and administrative

 

2,860

 

 

 

3,474

 

 

 

9,363

 

 

 

11,867

 

Engineering and development

 

1,756

 

 

 

1,276

 

 

 

5,533

 

 

 

3,227

 

Excise tax

 

78

 

 

 

76

 

 

 

231

 

 

 

205

 

Legal settlement

 

 

 

 

 

 

 

(731

)

 

 

 

Total operating expenses

 

8,733

 

 

 

8,688

 

 

 

27,932

 

 

 

27,185

 

Loss from operations

 

(5,352

)

 

 

(3,295

)

 

 

(17,640

)

 

 

(14,122

)

Gain (loss) on foreign currency transactions

 

32

 

 

 

(135

)

 

 

(97

)

 

 

(166

)

Interest income (expense), net

 

21

 

 

 

(37

)

 

 

44

 

 

 

(452

)

Non-operating income (loss), net

 

53

 

 

 

(172

)

 

 

(53

)

 

 

(618

)

Loss before income tax provision

 

(5,299

)

 

 

(3,467

)

 

 

(17,693

)

 

 

(14,740

)

Income tax provision

 

44

 

 

 

28

 

 

 

127

 

 

 

81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(5,343

)

 

 

(3,495

)

 

 

(17,820

)

 

 

(14,821

)

Other comprehensive (loss) income items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

10

 

 

 

(173

)

 

 

(190

)

 

 

(181

)

Comprehensive loss

$

(5,333

)

 

$

(3,668

)

 

$

(18,010

)

 

$

(15,002

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.09

)

 

$

(0.08

)

 

$

(0.31

)

 

$

(0.38

)

Diluted

$

(0.09

)

 

$

(0.08

)

 

$

(0.31

)

 

$

(0.38

)

Shares used in the calculation of net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

58,204

 

 

 

42,403

 

 

 

58,177

 

 

 

38,851

 

Diluted

 

58,204

 

 

 

42,403

 

 

 

58,177

 

 

 

38,851

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

4


BIOLASE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)  

 

 

Nine Months Ended

 

 

September 30,

 

 

2015

 

 

2014

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net loss

$

(17,820

)

 

$

(14,821

)

Adjustments to reconcile net loss to net cash and

   cash equivalents used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

589

 

 

 

529

 

Loss (gain) on disposal of property, plant, and equipment, net

 

6

 

 

 

(1

)

Provision for bad debts

 

207

 

 

 

796

 

Provision for inventory excess and obsolescence

 

 

 

 

261

 

Provision for sales allowance

 

100

 

 

 

 

Amortization of discounts on lines of credit

 

 

 

 

200

 

Amortization of debt issuance costs

 

 

 

 

128

 

Stock-based compensation

 

2,256

 

 

 

887

 

Other non-cash compensation

 

 

 

 

123

 

Deferred income taxes

 

46

 

 

 

45

 

(Earned) incurred interest (income) expense, net

 

(44

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

(200

)

 

 

 

Accounts receivable

 

(500

)

 

 

1,065

 

Inventory

 

(1,611

)

 

 

(682

)

Prepaid expenses and other assets

 

(277

)

 

 

(19

)

Customer deposits

 

(7

)

 

 

(174

)

Accounts payable and accrued liabilities

 

1,640

 

 

 

2,423

 

Deferred revenue

 

661

 

 

 

(1,034

)

Net cash and cash equivalents used in operating activities

 

(14,954

)

 

 

(10,274

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Additions to property, plant, and equipment

 

(1,253

)

 

 

(194

)

Proceeds from disposal of property, plant, and equipment

 

25

 

 

 

1

 

Net cash and cash equivalents used in investing activities

 

(1,228

)

 

 

(193

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Principal payments under capital lease obligation

 

(24

)

 

 

 

Borrowings under lines of credit

 

 

 

 

16,875

 

Payments under lines of credit

 

 

 

 

(21,508

)

Payments of debt issue costs

 

 

 

 

(45

)

Proceeds from equity offering, net of expenses

 

 

 

 

16,302

 

Deposit on capital lease

 

(42

)

 

 

 

Proceeds from exercise of stock options and warrants

 

44

 

 

 

310

 

Net cash and cash equivalents (used) provided by financing activities

 

(22

)

 

 

11,934

 

Effect of exchange rate changes

 

(162

)

 

 

(148

)

Change in cash and cash equivalents

 

(16,366

)

 

 

1,319

 

Cash and cash equivalents, beginning of period

 

31,560

 

 

 

1,440

 

Cash and cash equivalents, end of period

$

15,194

 

 

$

2,759

 

Supplemental cash flow disclosure - Cash Paid:

 

 

 

 

 

 

 

Interest paid

$

2

 

 

$

143

 

Income taxes paid

$

53

 

 

$

45

 

Supplemental cash flow disclosure - Non-cash:

 

 

 

 

 

 

 

Assets acquired under capital lease

$

378

 

 

$

 

Accrued capital expenditures and tenant improvement allowance

$

791

 

 

$

 

See accompanying notes to unaudited consolidated financial statements.

5


NOT ES 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,” “we,” “our,” or “us”) incorporated in Delaware in 1987, is a medical device company that develops, manufactures, markets, and sells laser systems in dentistry and medicine and also markets, sells, and distributes dental imaging equipment, including digital x-rays, CAD/CAM intra-oral scanners and other imaging equipment.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of Biolase, Inc. and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December 31, 2014 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. These unaudited, interim, 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. Certain amounts have been reclassified to conform to current period presentations.

The consolidated results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2014, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2015, as amended on April 29, 2015 (the “2014 Form 10-K”).

Liquidity and Management’s Plans

The Company incurred a loss from operations and a net loss and used cash in operating activities for the three and nine months ended September 30, 2015. The Company has also suffered recurring losses from operations during the three years ended December 31, 2014.

As of September 30, 2015, the Company had working capital of approximately $22.0 million. The Company’s principal sources of liquidity at September 30, 2015 consisted of approximately $15.4 million in cash and restricted cash equivalent and $9.2 million of net accounts receivable.    

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, or enter into a line of credit facility. The Company cannot provide assurances that it will be able to successfully enter into any such equity or debt financings or line of credit facility 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.

 

 

6


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, indefinite-lived intangible assets, and the ability of goodwill to be realized, revenue deferrals for multiple element arrangements, 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 is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the 2014 Form 10-K. Management believes that there have been no significant changes during the three and nine months ended September 30, 2015 in the Company’s critical accounting policies from those disclosed in Item 7 of the 2014 Form 10-K, except with regard to restricted cash equivalent as set forth below.

Restricted Cash Equivalent

The restricted cash equivalent represents a revolving 90-day certificate of deposit maintained by the Company as collateral in connection with corporate credit cards. At September 30, 2015, the restricted cash equivalent balance was $200,000.

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 nonperformance 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 reflect input other than quoted prices included in Level 1 that are observable, either directly or through collaboration with observable market data, other than Level 1. Level 3 inputs are unobservable due to little or no corroborating market data.

The Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate fair value because of the short maturity of these items. Financial instruments consisting of lines of credit approximate fair value, as the interest rates associated with the lines of credit approximates the market rates for debt securities with similar terms and risk characteristics.

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.

7


Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.

The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard during the year ending December 31, 2018.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. The standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Company does not expect that the adoption of this standard will have a material effect on its financial statements.

In July 2015, the FASB recently issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), as part of its simplification initiative. The standard requires inventory within the scope of ASU 2015-11 to be measured using the lower of cost and net realizable value.  The changes apply to all types of inventory, except those measured using LIFO or the retail inventory method. ASU 2015-11 applies to all entities and is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company does not expect that the adoption of this standard will have a material effect on its financial statements.

 

 

NOTE 3—STOCK-BASED AWARDS AND PER SHARE INFORMATION

Stock-Based Compensation

The Company currently has one stock-based compensation 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 and April 27, 2015) (the “2002 Plan”), which will expire on May 5, 2019. Persons eligible to receive awards under the 2002 Plan include officers, employees, and directors of the Company, as well as consultants. As of September 30, 2015, a total of 11,550,000 shares have been authorized for issuance under the 2002 Plan, of which 3,068,000 shares of Biolase common stock have been issued pursuant to options that were exercised and restricted stock units that were settled in common stock, 5,442,000 shares of Biolase common stock have been reserved for outstanding options and unvested restricted stock units, and 3,040,000 shares of Biolase common stock remain available for future grants.

Stock-based compensation cost recognized in operating results totaled approximately $621,000 and $301,000 for the three months ended September 30, 2015 and 2014, respectively, and $2.3 million and $887,000 for the nine months ended September 30, 2015 and 2014, respectively. The net impact to earnings were $(0.01) and $(0.01) per basic and diluted share for the three months ended September 30, 2015 and 2014, respectively, and $(0.04) and $(0.02) per basic and diluted share for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015, the Company had approximately $5.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements. The Company expects that cost to be recognized over a weighted-average period of 2.7 years.

8


The following table summarizes the income statement classification of compensation expense (credit) associated with share-based payments (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cost of revenue

$

46

 

 

$

29

 

 

$

184

 

 

$

116

 

Sales and marketing

 

(42

)

 

 

91

 

 

 

445

 

 

 

328

 

General and administrative

 

594

 

 

 

162

 

 

 

1,442

 

 

 

378

 

Engineering and development

 

23

 

 

 

19

 

 

 

185

 

 

 

65

 

 

$

621

 

 

$

301

 

 

$

2,256

 

 

$

887

 

 

The stock option fair values, under the 2002 Plan, were estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Expected term

6.0 years

 

 

4.0 years

 

 

5.7 years

 

 

3.8 years

 

Volatility

86.17%

 

 

85.65%

 

 

88.98%

 

 

94.41%

 

Annual dividend per share

$

 

 

$

 

 

$

 

 

$

 

Risk-free interest rate

1.70%

 

 

1.65%

 

 

1.60%

 

 

1.66%

 

 

A summary of option activity under the 2002 Plan for the nine months ended September 30, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

Average

 

 

Contractual

 

 

Intrinsic

 

 

Shares

 

 

Exercise Price

 

 

Term (Years)

 

 

Value(1)

 

Options outstanding at December 31, 2014

 

3,391,000

 

 

$

3.11

 

 

 

2.97

 

 

$

1,063,000

 

Granted

 

3,271,000

 

 

$

2.32

 

 

 

 

 

 

 

 

 

Exercised

 

(38,000

)

 

$

1.15

 

 

 

 

 

 

 

 

 

Forfeited, cancelled, or expired

 

(1,182,000

)

 

$

3.14

 

 

 

 

 

 

 

 

 

Options outstanding at September 30, 2015

 

5,442,000

 

 

$

2.64

 

 

 

6.09

 

 

$

2,000

 

Options exercisable at September 30, 2015

 

2,696,000

 

 

$

2.89

 

 

 

3.43

 

 

$

2,000

 

Vested options expired during the quarter

   ended September 30, 2015

 

477,000

 

 

$

3.60

 

 

 

 

 

 

 

 

 

 

(1) The intrinsic value calculation does not include negative values. This can occur when the fair market value on the reporting date is less than the exercise price of the grant.

9


Cash proceeds along with fair value disclosures related t o grants, exercise s, and vested options under the 2002 Plan are provided in the following table (in thousands, except per share amounts):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Proceeds from stock options exercised

$

 

 

$

54

 

 

$

44

 

 

$

310

 

Tax benefit related to stock options

   exercised (1)

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Intrinsic value of stock options exercised (2)

$

 

 

$

13

 

 

$

52

 

 

$

108

 

Weighted-average fair value of options granted

   during period

$

1.22

 

 

$

1.35

 

 

$

1.45

 

 

$

1.62

 

Total fair value of shares vested during

   the period

$

482

 

 

$

273

 

 

$

1,204

 

 

$

921

 

 

(1) Excess tax benefits received related to stock option exercises are presented as financing 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 market price of the stock on the date of grant.

On January 2, 2015, the Compensation Committee of Biolase’s board of directors (the “Board”) granted non-qualified stock options to purchase 1,365,702 shares of Biolase common stock to six officers of the Company and one consultant in connection with the Company’s compensation plan for 2015. These options were granted at an exercise price of $2.64, the closing price of Biolase common stock on the grant date. These options expire ten years from the grant date and vest as follows: (i) as to one-half of the options, one-fourth on the first anniversary of the grant date and the remaining three-fourths, ratably over the next thirty-six month period, commencing on the thirteenth month from the grant date, and (ii) as to the other half of the options, upon the achievement of specific annual Company performance criteria. On August 12, 2015, the Compensation Committee of the Board approved a modification to the performance criteria applicable to the unvested options. As a result of this modification, the fair value of the awards decreased by $661,000, and the Company recognized additional compensation expense of $154,000 for the three and nine months ended September 30, 2015.

Restricted Stock Units

In accordance with the 2002 Plan, the Company issues restricted stock units (“RSUs”) to acquire shares of Biolase common stock as approved by the Board. As of September 30, 2015, 37,000 shares of Biolase common stock have been issued in connection with the settlement of the RSUs.

Effective July 13, 2015, the Compensation Committee of the Board awarded 870,000 common stock-settled RSUs to its President and Chief Executive Officer in connection with his employment agreement with the Company. The RSUs are valued at $1.64 per share and vest upon the achievement of specific interim and annual Company performance criteria.

Warrants

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

10


A summary of warrant activity for the nine months ended September 30 , 2015 is as follows:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

Shares

 

 

Exercise Price

 

 

Warrants outstanding at December 31, 2014

 

888,000

 

 

$

6.04

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited, cancelled, or expired

 

 

 

 

 

 

 

Warrants outstanding at September 30, 2015

 

888,000

 

 

$

6.04

 

 

Warrants exercisable at September 30, 2015

 

753,000

 

 

$

6.40

 

 

Vested warrants expired during the quarter

   ended September 30, 2015

 

 

 

N/A

 

 

 

No warrants were exercised during the three months ended September 30, 2015 or 2014 and during the nine months ended September 30, 2015. During the nine months ended September 30, 2014, Comerica Bank exercised warrants issued in connection with the Company’s prior lines of credit on a cashless basis pursuant to the terms of the warrant, resulting in a net issuance of 38,708 shares of common stock.

Other Stock-Based Awards

Effective March 9, 2015, the Compensation Committee of the Board granted non-qualified stock options to purchase up to 871,710 shares of Biolase common stock to its Chief Financial Officer in connection with his employment agreement with Biolase. These options were granted at an exercise price of $1.99 per share, the closing price of Biolase common stock on the grant date. These options expire ten years from the grant date and vest in two tranches as follows: (i) as to options to purchase 523,026 shares (the “First Tranche”), options to purchase 130,757 shares vest and become exercisable on March 9, 2016, and options to purchase 10,896 shares vest and become exercisable each month following March 9, 2016 for a period of 35 consecutive months, and options to purchase 10,909 shares vest and become exercisable on March 9, 2019, and (ii) as to options to purchase 348,684 shares (the “Second Tranche”), 248,684 of such shares vest and become exercisable on March 9, 2025. In June 2015, the Compensation Committee accelerated the vesting of 100,000 of the Second Tranche options that had previously been scheduled to vest on March 9, 2025, such that such options vested and became exercisable as of June 23, 2015. The fair value of the First Tranche of $1.48 per share was estimated using the Black-Scholes option-pricing model with assumptions of 6.1 years for expected term, 88.79% volatility and 1.83% risk-free interest rate. The fair value of the Second Tranche of $1.70 per share was estimated using the Black-Scholes option-pricing model with assumptions of 10.0 years for expected term, 87.87% volatility and 2.19% risk-free interest rate.

Effective July 13, 2015, the Compensation Committee of the Board granted non-qualified stock options to purchase up to 870,000 shares of Biolase common stock to the Company’s President and Chief Executive Officer in connection with his employment agreement with Biolase. These options were granted at an exercise price of $1.64 per share, the closing price of Biolase common stock on the grant date. These options expire ten years from the grant date and vest over four years, with options to purchase 217,500 shares vesting and becoming exercisable on July 13, 2016 and options to purchase 18,125 shares vesting and becoming exercisable each month following July 13, 2016 for a period of 36 consecutive months. The fair value of $1.19 per share was estimated using the Black-Scholes option-pricing model with assumptions of 6.1 years for expected term, 85.83% volatility and 1.93% risk-free interest rate.

Net Loss Per Share – Basic and Diluted

Basic net loss per share is computed by dividing loss available to common stockholders by the weighted-average number of shares outstanding for the period. In computing diluted net loss per share, the weighted average number of shares of Biolase common stock outstanding is adjusted to reflect the effect of potentially dilutive securities.

11


Outstanding stock options and warrants to purchase 15 , 536 ,000 shares (including 9,206,000 shares underlying warrants issued in connection with the private placement completed by the Company on November 7, 2014) were not included in the computation of diluted loss per share for the three and nine months ended September 30 , 2015 as a result of their anti-dilutive effect. For the same 201 4 period, anti-dilutive outstanding stock options and warrants to purchase 4,703 ,00 0 shares were not included in the computation of diluted loss per share.

Retirement of Treasury Stock

On July 18, 2014, the Company retired all 1,963,500 shares of stock held in treasury at that date. The Company recorded the cost of the treasury stock retired as a $2,000 reduction to common stock and a $16,397,000 reduction in additional paid in capital.

Stock Dividend

In February 2014, the Board declared a one-half percent stock dividend payable March 28, 2014, to stockholders of record on March 14, 2014. During 2015, the Board has not declared any stock dividends. There is no assurance, with respect to the amount or frequency, that any stock dividend will be declared in the future.  

 

 

NOTE 4—INVENTORY

Inventory is valued at the lower of cost or market (determined by the first-in, first-out method) and is comprised of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Raw materials

$

3,560

 

 

$

2,857

 

Work-in-process

 

1,734

 

 

 

1,348

 

Finished goods

 

8,825

 

 

 

8,303

 

Inventory, net

$

14,119

 

 

$

12,508

 

 

Inventory is net of a provision for excess and obsolete inventory totaling $1.9 million and $2.4 million as of September 30, 2015 and December 31, 2014, respectively.

 

 

NOTE 5—PROPERTY, PLANT, AND EQUIPMENT

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

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Building

$

209

 

 

$

226

 

Leasehold improvements

 

1,202

 

 

 

1,197

 

Equipment and computers

 

6,076

 

 

 

4,948

 

Furniture and fixtures

 

451

 

 

 

413

 

Construction in progress

 

1,177

 

 

 

4

 

 

 

9,115

 

 

 

6,788

 

Accumulated depreciation

 

(6,160

)

 

 

(5,669

)

 

 

2,955

 

 

 

1,119

 

Land

 

163

 

 

 

176

 

Property, plant, and equipment, net

$

3,118

 

 

$

1,295

 

 

12


The cost of leasehold improvements of $114,000 and tenant improvement allowance of $398,000 in connection with the Company’s corporate headquarters and manufacturing facility lease and the costs associated with certain operating and information technology equipment of $577,000 are included in the above as p art of construction in progress. For ad dit ional information on operating lease s , see Note 9 of the unaudited financial statements contained in this Form 10-Q . Depreciation expense related to property, plant, and equipment totaled $ 251 ,00 0 and $ 540 ,000 for the three and nine months ended Septemb er 30 , 2015 , respectively, and $160,000 and $ 47 7,000 for the three and nine months ended September 30, 2014, respectively .

 

 

NOTE 6—INTANGIBLE ASSETS AND GOODWILL

The Company conducted its annual impairment test of goodwill as of June 30, 2015 and determined that there was no impairment. The Company also tests its intangible assets and goodwill 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 for its products or significant economic slowdowns, are present. No events have occurred from June 30, 2015 through the date of these financial statements that have triggered further impairment testing of the Company’s intangible assets and goodwill.

Amortization expense for the three and nine months ended September 30, 2015 totaled $14,000 and $49,000, respectively, and $17,000 and $52,000, respectively, for the same periods in 2014. Other intangible assets primarily include acquired customer lists and non-compete agreements.

The following table presents details of the Company’s intangible assets, related accumulated amortization, and goodwill (in thousands):

 

 

As of September 30, 2015

 

 

As of December 31, 2014

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Amortization

 

 

Impairment

 

 

Net

 

 

Gross

 

 

Amortization

 

 

Impairment

 

 

Net

 

Patents (4-10 years)

$

1,914

 

 

$

(1,914

)

 

$

 

 

$

 

 

$

1,914

 

 

$

(1,907

)

 

$

 

 

$

7

 

Trademarks (6 years)

 

69

 

 

 

(69

)

 

 

 

 

 

 

 

 

69

 

 

 

(69

)

 

 

 

 

 

 

Other (4 to 6 years)

 

817

 

 

 

(752

)

 

 

 

 

 

65

 

 

 

817

 

 

 

(710

)

 

 

 

 

 

107

 

Total

$

2,800

 

 

$

(2,735

)

 

$

 

 

$

65

 

 

$

2,800

 

 

$

(2,686

)

 

$

 

 

$

114

 

Goodwill (Indefinite life)

$

2,926

 

 

 

 

 

 

 

 

 

 

$

2,926

 

 

$

2,926

 

 

 

 

 

 

 

 

 

 

$

2,926

 

 

 

NOTE 7—ACCRUED LIABILITIES AND DEFERRED REVENUE

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

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Payroll and benefits

$

2,381

 

 

$

1,905

 

Warranty accrual, current portion

 

1,276

 

 

 

930

 

Taxes

 

378

 

 

 

139

 

Accrued professional services

 

1,508

 

 

 

1,581

 

Accrued capital lease payments

 

142

 

 

 

 

Accrued insurance premium

 

 

 

 

450

 

Other

 

217

 

 

 

183

 

Total accrued liabilities

$

5,902

 

 

$

5,188

 

 

13


Changes in the initial product warranty accrual, and the expenses incurred under the Company’s initial and extended warranties, for the three and nine months ended September 30 , 2015 and 2014 were as follows (in thousands):

 

 

Three Months Ended

 

 

Nine Months   Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Initial warranty accrual, beginning balance

$

1,997

 

 

$

1,255

 

 

$

1,449

 

 

$

1,096

 

Provision for estimated warranty cost

 

608

 

 

 

310

 

 

 

1,604

 

 

 

919

 

Warranty expenditures

 

(270

)

 

 

(199

)

 

 

(718

)

 

 

(649

)

 

 

2,335

 

 

 

1,366

 

 

 

2,335

 

 

 

1,366

 

Less warranty accrual, long-term

 

1,059

 

 

 

367

 

 

 

1,059

 

 

 

367

 

Total warranty accrual, current portion

$

1,276

 

 

$

999

 

 

$

1,276

 

 

$

999

 

 

In June 2014, the Company extended the warranty for WaterLase systems from one year to two years for systems purchased after January 1, 2014.

Current portion of deferred revenue is comprised of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Undelivered elements (training, installation, and

   product and support services)

$

1,526

 

 

$

952

 

Extended warranty contracts

 

1,458

 

 

 

1,542

 

Deferred revenue, current portion

$

2,984

 

 

$

2,494

 

 

In connection with the Company’s initiatives to measure and improve customer satisfaction and concurrent with the launch of WaterLase iPlus 2.0 in February 2015, the Company introduced its exclusive Practice Growth Guarantee, which is a program that essentially guarantees growth in the Company’s clients’ dental practices through training on a select number of clinical procedures and with billing and marketing support for dentists included. Consistent with the Company’s standard terms and conditions applicable to all of its products, the Practice Growth Guarantee does not give the customer the right to return purchased laser systems or receive a refund of any amount of the purchase price. However, the Practice Growth Guarantee does provide for additional training opportunities and certain billing and marketing support activities to the customer. The Company has estimated additional deferred revenue related to the Practice Growth Guarantee for all WaterLase iPlus 2.0 system sales during the nine months ended September 30, 2015 to be approximately $133,000.

During the three months ended September 30, 2014, the Company performed a review of its training service policies and procedures and determined that substantially all of the training service for new customers was used within nine months of the product purchase. Accordingly, and consistent with this information on the exhaustion of training service, the Company changed the period over which deferred training service revenue is being recognized from an estimated period of 24 months to nine months.

 

 

NOTE 8—LINES OF CREDIT AND OTHER BORROWINGS

Lines of Credit

The Company entered into two revolving credit facility agreements with Comerica Bank (the “Credit Agreements”) on May 24, 2012. The revolving lines of credit provided for borrowings against certain domestic accounts receivable and inventory (the “Domestic Revolver”) and certain export-related accounts receivable and inventory (the “Ex-Im Revolver”).

On July 28, 2014, the Company repaid all amounts outstanding under the Credit Agreements, including principal, accrued interest, and fees which totaled, in the aggregate, approximately $2.9 million, and the Credit Agreements were terminated.

14


The Credit Agreements required the Company to maintain compliance with certain monthly financial and non-financial covenants, as defined therein. Any noncompliance with these covenants could have result ed in default interest rates and penalties, and Comerica Bank could have declared the amounts outstanding immediately due and payable. On March 4, 2014, the Company received a waiver of noncompliance with certain financial and nonfinancial covenants as of January 31, 2014 and December 31, 2013. In connection with this waiver, the Company incurred a fee of $10,000 , and Comerica Bank reduced the total aggregate available borrowings on the lines of credit to $5.0 million. The Company was not in compliance with a financial covenant as of February 28, 2014 and, as such, entered into a forbearance agreement (the “Forbearance Agreement”) with Comerica Bank on April 10, 2014.  The Company paid a fee of $10,000 in connection with the Forbearance Agreement , pursuant t o which Comerica Bank reduced the total aggregate available borrowings to $4.0 million.

The Company was not in compliance with a financial covenant at March 31, 2014 and did not repay the lines of credit in full on the original maturity date of May 1, 2014. As a result, on May 5, 2014, the Company and Comerica Bank agreed to Amendment No. 1 to the Forbearance Agreement (“Amendment No. 1”), which extended the end of the forbearance period from May 1, 2014 to June 1, 2014. In connection with Amendment No. 1, the maturity date of the revolving lines of credit was extended to June 1, 2014, and the Company paid an administrative fee of $10,000. On June 3, 2014, the Company and Comerica Bank agreed to Amendment No. 2 to Forbearance Agreement (“Amendment No. 2”), which extended the maturity date of the revolving lines of credit to August 1, 2014. In connection with Amendment No. 2, Comerica Bank increased the interest rates on the lines of credit by 0.50%, and the Company paid an administrative fee of $15,000. The Company was not in compliance with certain financial covenants as of May 31, 2014 and, as a result, agreed to Amendment No. 3 to Forbearance Agreement with Comerica Bank whereby the forbearance period was continued to August 1, 2014, and the Company paid an administrative fee of $10,000.   

The outstanding principal balances of the Credit Agreements, as amended June 3, 2014, bore interest at annual percentage rates equal to the daily prime rate, plus 2.50% for the Domestic Revolver and 2.00% for the Ex-Im Revolver. The daily prime rate was subject to a floor of the daily adjusting LIBOR rate plus 2.50% per annum, or if LIBOR was undeterminable, 2.50% per annum. The Company was also required to pay an unused commitment fee of 0.25% based on a portion of the undrawn lines of credit, payable quarterly in arrears. During the three and nine months ended September 30, 2014, the Company incurred $37,000 and $451,000, respectively, of interest expense associated with the credit facilities, including $0 and $128,000, respectively, of amortization of deferred debt issuance costs and $0 and $200,000, respectively, of amortization of the discount on lines of credit. There was no interest expense payable at December 31, 2014.

Lockbox arrangements under the revolving bank facilities provided that substantially all of the income generated was deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of Comerica Bank. Cash was disbursed from Comerica Bank to the Company only after payment of the applicable debt service and principal. At December 31, 2014, there were no restricted cash amounts. The Company’s obligations were generally secured by substantially all of the Company’s assets then owned or thereafter acquired.

During the three and nine months ended September 30, 2014, the Company incurred $10,000 and $55,000, respectively, of Comerica Bank commitment fees and legal costs associated with the various waivers and amendments. Commitment fees and legal costs associated with acquiring and maintaining the credit facilities were capitalized and amortized on a straight-line basis as interest expense over the remaining term of the Credit Agreements.

 

 

15


NOTE 9—COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its corporate headquarters and manufacturing facility in Irvine, California and also leases certain other facilities, office equipment, and automobiles under various operating or capital lease arrangements. In February 2015, the Company entered into a 30-month capital lease agreement for information technology equipment. Future minimum lease payments under the capital lease, together with the present value of the net minimum lease payments, for the years ending December 31, 2015, 2016 and 2017 are $32,000, $157,000, and $160,000, respectively. The amount necessary to reduce net minimum lease payments to present value calculated at the Company's incremental borrowing rate of 1.64% at the inception of the lease totaled $9,000. The present value of net minimum lease payments are reflected on the Consolidated Balance Sheets as current and noncurrent obligations of $142,000 within accrued liabilities and $201,000 within capital lease obligation, respectively.

In March 2015, the corporate headquarters and manufacturing facility lease was amended to extend the term through April 30, 2020, modify provisions for tenant improvement allowance of up to $398,000, and adjust the basic rent terms. Future minimum rental commitments under operating lease agreements with non-cancelable terms greater than one year for the years ending December 31, 2015, 2016, 2017, and 2018 and thereafter totaled $178,000, $694,000, $651,000, and $1.5 million, respectively.

Employee arrangements and other compensation

Certain members of management are entitled to severance benefits payable upon termination following a change in control, which would approximate $1.6 million, in the aggregate, at September 30, 2015. The Company also has agreements with certain employees to pay bonuses based on targeted performance criteria. As of September 30, 2015, approximately $198,000 was accrued for performance bonuses, which is included in accrued liabilities in the consolidated balance sheets.

Purchase commitments

The Company generally purchases components and subassemblies for its products from a limited group of third party suppliers through purchase orders. As of September 30, 2015, the Company had $11.0 million of purchase commitments for which the Company has not received certain goods or services that are expected to be purchased within one year. These purchase commitments were made to secure better pricing and to ensure the Company will have the necessary parts to meet anticipated near-term demand.

Litigation

The Company discloses material loss contingencies deemed to be reasonably possible and accrues for loss contingencies when, in consultation with its legal advisors, management concludes that a loss is probable and reasonably estimable. The ability to predict the ultimate outcome of such matters involves judgments, estimates, and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates.

16


Class Action Lawsuits

On August 23, 2013, a purported class action lawsuit entitled Brady Adams v. Biolase, Inc., et al., Case No. 13-CV-1300 JST (FFMx) was filed in the United States District Court for the Central District of California against Biolase, its then Chief Executive Officer, Federico Pignatelli, and its then Chief Financial Officer, Frederick D. Furry. On August 26, 2013, a purported class action lawsuit entitled Ralph Divizio v. Biolase, Inc., et al., Case No. 13-CV-1317 DMG (MRWx) was filed in the same court against Biolase, Messrs. Pignatelli and Furry, and its then President and Chief Operating Officer, Alexander K. Arrow. Each of the lawsuits alleges violations of the federal securities laws and asserts causes of action against the defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In accordance with the Private Securities Litigation Reform Act of 1995, on December 10, 2013, the court entered an order consolidating the lawsuits, appointing a lead plaintiff and approving the lead plaintiff’s selection of lead counsel. On February 24, 2014, the lead plaintiff filed a consolidated complaint against the Company and Messrs. Pignatelli, Furry, and Arrow, alleging violations of the federal securities laws and asserting causes of action against the defendants under Sections 10(b) and 20(a) of the Exchange Act.

On November 19, 2013, the Board received a letter from attorneys for purported shareholder David T. Long, demanding that the Board investigate, institute litigation, and take measures to redress and prevent alleged wrongdoing concerning the dissemination of certain allegedly false and misleading public disclosures made by the Company between January 2013 and August 2013.

On June 5, 2015, the United States District Court for the Central District of California approved, on a preliminary basis, the settlement of the consolidated securities class action lawsuit. On October 13, 2015, the court granted final approval of the settlement, and ordered the plaintiff to submit a proposed final judgment consistent with the court’s approval. On October 30, 2015, the court entered final judgment which formally released all claims against the Company.  As of the date of these financial statements, management does not expect the Company to incur additional expenses related to this matter due to certain insurance coverage in place.

Intellectual Property Litigation

On April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against the Company in the District of Utah for patent infringement of U.S. Patent No. 7,485,116 (the “116 Patent”) regarding the Company’s ezlase dental laser. On September 9, 2012, CAO filed its First Amended Complaint, which added 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 stem from a press release that the Company issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO and its diode product. The First Amended Complaint seeks injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. On November 13, 2012, the Court stayed the lawsuit for 120 days to allow the United States Patent and Trademark Office (the “USPTO”) to consider the Company’s request for reexamination of the patent-in-suit. The USPTO granted the request to reexamine the asserted claims of the patent-in-suit and, on February 28, 2013, the Court stayed the lawsuit until the termination of the reexamination proceedings. On April 23, 2013, the USPTO issued an office action rejecting all of the asserted claims over the prior art, and CAO responded to the office action. On August 28, 2013, the USPTO issued an Action Closing Procedure, rejecting all of CAO’s patent claims. CAO responded to the USPTO’s ruling and on December 10, 2013, the USPTO issued a Right of Appeal Notice, finally rejecting some claims of the 116 Patent while finding that other claims appeared to be patentable. The Company appealed the USPTO’s findings on January 9, 2014 and on January 27, 2014, the USPTO declined to reconsider the finding of certain claims as patentable and instructed the parties to proceed to appeal to the Patent Trial and Appeal Board. On March 17, 2014, the Company filed its brief in support of its appeal of the USPTO’s decision not to reject certain claims of the 116 Patent. On March 24, 2014, CAO filed its brief in support of its appeal of the USPTO’s decision to reject certain claims of the 116 patent. On April 18, 2014, the Company filed a respondent brief in opposition to the CAO’s appeal arguments. On May 30, 2014, both parties filed rebuttal briefs in support of their appeals.  On June 30, 2014, the Company requested an oral hearing before the Board.  On July 1, 2014, the Board noted that request and docketed the case for consideration. A hearing on reconsideration was held in November 2014.  The Patent Trial and Appeal Board issued its Decision on Appeal on July 1, 2015.  The Decision on Appeal rejected 38 of 42 patent claims.  Accordingly, CAO filed a Request for Rehearing on July 31, 2015.

17


The Company filed a patent infringement lawsuit against Fotona Proizvodnja Optoelektronskih Naprav D.D. and Fotona LLC ( collectively, “Fotona”) in Düsseldorf District Court (the “Düsseldorf Court”) on April 12, 2012 alleging infringement with respect to the Fotona Fidelis dental laser system. Fotona denies liability and seeks the reimbursement of statutory fees from the Company. Together with its response brief, Fotona also filed a nullity a ction against the patent in dispute, patent number EP 1 560 470. The nullity action is pending at the German Federal Patent Court (the “Patent Court”), Docket No. 1 Ni 58/13 (EP). On September 2, 2013, the Company filed its counterplea in the infringement proceedings and phrased its arguments defending the validity of the patent. These arguments were also the subject of the defense brief to the Patent Court in the parallel nullity action proceedings. On September 9, 2013, the Company filed its response to t he Patent Court. Fotona filed a rejoinder on February 3, 2014, including its counterplea on nullity.

On April 29, 2014, the Düsseldorf Court rendered a first instance decision whereby Fotona must cease and desist from selling its Fidelis and Lightwalker dental laser systems, render accounts on past sales, recall respective products, and pay damages on infringement. Additionally, the Company was awarded statutory fees, court costs, and attorney fees. Preliminary enforcement against Fotona is possible if the Company posts a bond totaling €500,000, which is designed to cover a portion of the potential damages, before a final instance decision is available. In Germany, damages can be calculated based on the profits made by the infringer after the formal announcement of the granting of a patent, in this case beginning January 1, 2009, without considering direct labor or any other operational costs. However, Fotona has yet to provide the details of its profits in order to allow the Company to calculate the damages. In the two additional first instance cases following the extension of the initial lawsuit against Fotona, the Düsseldorf Court also required the Company to provide a statutory bond totaling €146,000. Such bonds are traditionally imposed on foreign plaintiffs to cover all statutory, court, and attorney’s fees. Fotona submitted its responses to the action and filed respective invalidation actions against the rights of the Company.  

Subsequent to the foregoing responses, on March 24, 2015 the parties reached an agreement to settle the foregoing litigation and to dismiss the litigation with prejudice.  As part of the settlement, Fotona agreed to pay the Company a total of $1.4 million, with $550,000 payable within 10 days of March 24, 2015 and the remaining, $825,000 payable in three increments of $275,000 each to be paid no later than the first, second, and third anniversary of the effective date of the agreement. Pursuant to the settlement agreement, the Company (i) granted Fotona a three-year, non-exclusive, paid-up license in the United States market and a five-year, non-exclusive, paid-up license in markets outside of the United States and (ii) agreed to grant Fotona a non-exclusive, royalty-based license following the expiration of the paid-up licenses.  The Company calculated the present value of the settlement amount to be $1.2 million and allocated such amount to each significant element of the settlement on a relative fair value basis. $731,000 and $68,000 was allocated towards the recovery of the Company’s legal expenses and as settlement for the dismissal of the patent infringement lawsuit and are reflected as legal settlement and license fees and royalty revenue, respectively, on the Consolidated Statements of Operations and Comprehensive Loss. The remaining amount of $379,000 was allocated towards the three-year, non-exclusive, paid-up license in the United States market and the five-year, non-exclusive, paid-up license in markets outside of the United States which was reflected within other assets and long-term deferred revenue on the Consolidated Balance Sheets.  The deferred revenue is being recognized as license revenue over the terms of the paid-up licenses.

Other Matters

In the normal course of business, the Company may be subject to other legal proceedings, lawsuits, and other claims. Although the ultimate aggregate amount of probable monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, the Company’s management believes that any monetary liability or financial impact to the Company from these other matters, individually and in the aggregate, would not be material to the Company’s financial condition, results of operations, or cash flows. However, there can be no assurance with respect to such result, and monetary liability or financial impact to the Company from these other matters could differ materially from those projected.

 

 

18


NOTE 10—SEGMENT INFORMATION

The Company currently operates in a single reportable segment. For the three and nine months ended September 30, 2015, sales in the United States accounted for approximately 59% and 59% of net revenue, respectively, and international sales accounted for approximately 41% and 41% of net revenue, respectively. For the three and nine months ended September 30, 2014, sales in the United States accounted for approximately 66% and 62% of net revenue, respectively, and international sales accounted for approximately 34% and 38% of net revenue, respectively.

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

United States

$

6,598

 

 

$

8,367

 

 

$

19,914

 

 

$

21,404

 

International

 

4,636

 

 

 

4,347

 

 

 

14,044

 

 

 

13,014

 

 

$

11,234

 

 

$

12,714

 

 

$

33,958

 

 

$

34,418

 

 

No individual country, other than the United States, represented more than 10% of total net revenue.

Long-lived assets located outside of the United States at our foreign subsidiaries totaled $339,000 and $374,000 as of September 30, 2015 and December 31, 2014, respectively.

 

 

NOTE 11—CONCENTRATIONS

Revenue from the Company’s products for the three and nine months ended September 30, 2015 and 2014 are as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Laser systems

 

65.3

%

 

 

57.9

%

 

 

65.2

%

 

 

60.2

%

Imaging systems

 

6.4

%

 

 

11.0

%

 

 

4.7

%

 

 

9.5

%

Consumables and other

 

13.1

%

 

 

12.6

%

 

 

15.5

%

 

 

13.6

%

Services

 

14.9

%

 

 

18.2

%

 

 

14.1

%

 

 

16.3

%

License fees and royalties

 

0.3

%

 

 

0.3

%

 

 

0.5

%

 

 

0.4

%

Total revenue

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

No individual customer represented more than 10% of the Company’s revenue for the three and nine months ended September 30, 2015 or 2014.

The Company maintains its cash and cash equivalent accounts with established commercial banks. Such cash deposits periodically exceed the Federal Deposit Insurance Corporation insured limit.

As of September 30, 2015, one customer represented 11.4% of the Company’s accounts receivable. Amounts due are expected to be collected in full by the Company. No individual customer represented more than 10% of the Company’s accounts receivable at December 31, 2014.

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.

 

 

19


NOTE 12 —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 nine months ended September 30, 2015 and 2014, respectively. The Company does not expect any changes to its unrecognized tax benefit for the next twelve months that would materially impact its consolidated financial statements.

During the three and nine months ended September 30, 2015, the Company recorded an income tax provision of $44,000 and $127,000, respectively, resulting in an effective tax rate of (0.8)% and (0.7)%, respectively. During the three and nine months ended September 30, 2014, the Company recorded an income tax provision of $28,000 and $81,000, respectively, resulting in an effective tax rate of (0.8)% and (0.6)%, respectively. The income tax provisions for the three and nine months ended September 30, 2015 and 2014 were calculated using the discrete year-to-date method. The effective tax rate differs from the statutory tax rate of 34% 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 federal alternative minimum tax liability.

 

 

20


 

ITEM  2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPE RATIONS  

The following information should be read in conjunction with the unaudited consolidated financial statements and related notes of Biolase, Inc. (“Biolase”) and its consolidated subsidiaries (together with Biolase, the “Company”, “we”, “our”, or “us”)included elsewhere in this Form 10-Q and our audited consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2015, as amended on April 29, 2015 (the “2014 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”). Such forward-looking statements include any statements, predictions, or expectations regarding our earnings, revenue, sales and operations, operating expenses, anticipated cash needs, needs for additional financing, use of working capital, anticipated trends and challenges in our business and the markets in which we operate, plans to explore potential collaborations, effects of engineering and development efforts, critical accounting policies, the impact of recent accounting pronouncements, recording tax benefits or other financial items in the future, plans, strategies, expectations or objectives of management for future operations, our financial condition or prospects, 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,” “potential,” “plan,” “seek” and similar expressions and variations or the negativities of these terms or other comparable terminology.

The forward-looking statements contained in this Item 2 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:

 

·

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;

 

·

our inability to overcome the hesitation of dentists and patients to adopt laser technologies;

 

·

failure in our efforts to train dental practitioners;

 

·

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

 

·

failure of our intellectual property rights to adequately protect our technologies;

 

·

potential third-party claims that our products infringe their intellectual property rights;

 

·

warranty obligations if our products are defective;

 

·

litigation, including the failure of our insurance policies to cover certain expenses related to litigation or our inability to reach a final settlement related to certain litigation;

 

·

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

 

·

a change in suppliers, including our inability to purchase certain key components of our products from suppliers other than our current ones;

 

·

our inability to effectively manage and implement our growth strategies; and

 

·

failure of our efforts to emphasize the importance of our imaging products to translate into increased sales of the same.

21


 

Further information about factors that could materially affect the Compa ny, including our results of operations and financial condition, is contained under “Risk Factors” in Item 1A in the 2014 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

We are a medical device company that develops, manufactures, markets, and sells laser systems in dentistry and medicine and also markets, sells, and distributes dental imaging equipment, including digital x-rays and CAD/CAM scanners. Our products advance the practice of dentistry and medicine for patients and health care professionals. Our proprietary dental laser 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. We have clearance from the U.S. Food and Drug Administration (the “FDA”) to market and sell our laser systems in the United States and also have the necessary registrations to market and sell our laser systems in Canada, the European Union, and many other countries outside the U.S. Additionally, our in-licensed imaging equipment and related products improve diagnoses, applications, and procedures in dentistry and medicine.

We offer two categories of laser system products: WaterLase (all-tissue) systems and Diode (soft-tissue) systems. Our flagship brand, the WaterLase, uses a patented combination of water and laser energy to perform most procedures currently performed using drills, scalpels, and other traditional dental instruments for cutting soft and hard tissue. We also offer our Diode laser systems to perform soft tissue, pain therapy, and cosmetic procedures, including teeth whitening. As of September 30, 2015, we had approximately 260 issued and 100 pending U.S. and international patents, the majority of which are related to WaterLase technology. From 1998 through September 30, 2015, we sold approximately 29,700 laser systems in over 80 countries around the world. Contained in this total are approximately 11,100 WaterLase systems, including over 7,000 WaterLase MD and iPlus systems.

Business and Outlook

Our WaterLase systems precisely cut hard tissue (teeth and bone) and soft tissue (gums) with clinically superior results to surrounding tissue and dental structures as compared to scalpels or other conventional instruments. Our Diode systems are designed to complement our WaterLase systems and are used 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 periodically after initially purchasing our laser systems.

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, help reduce trauma, pain, and discomfort associated with dental procedures, and increase patient acceptance for treatment protocols. We also believe there is market opportunity for digital radiography systems that improve the accuracy of diagnosis, leading to superior treatment planning, and healthier outcomes for patients.

Our strategy is to increase awareness and demand for (i) our products among dental practitioners by creating value to growing dentist practices and (ii) our laser systems among patients through educational programs 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.

22


 

We also seek to create value through innovation and leveraging existing technologies into adjacent medical applications . In addition, w e seek 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. We are actively explo ring some medical markets , and we plan to continue to explore potential collaborations in the future to extend the use of our proprietary laser technologies to other medical application s.  

Recent Developments

Significant Leadership Changes

Consistent with our goal to refocus our energies on strengthening leadership, worldwide competitiveness and attention to our professional customers and their patients, we announced the appointment of a new Chief Financial Officer in March 2015 and a new President and Chief Executive Officer in July 2015. Collectively, they bring with them to Biolase decades of experience and expertise in the medical device, dental and healthcare fields. In September 2015, we completed a series of internal corporate organizational restructuring activities where we streamlined operations and reduced payroll, payroll-related and consulting-related expenses by approximately $2.4 million, net, on an annualized basis. Expenses related to this restructuring during the quarter ended September 30, 2015 totaled approximately $246,000. We will begin to realize the impact of these cost-saving measures in the fourth quarter of 2015 and throughout 2016.

New Product Offerings

In February 2015, we launched the WaterLase iPlus 2.0, our next generation minimally invasive all-tissue flagship laser, along with our exclusive Practice Growth Guarantee. The latter essentially guarantees growth in our clients’ dental practices through focused training on a select number of clinical procedures and with billing and marketing support for dentists included. In November 2015, we announced an upgrade to the WaterLase iPlus 2.0 to provide dental practitioners a clinical protocol and application to assist in the effective management of peri-implantitis. A growing problem in dentistry, peri-implantitis is a destructive inflammatory process affecting the soft and hard tissues surrounding dental implants. With the addition of the new clinical protocol, the WaterLase iPlus 2.0 now provides pre-programmed settings and step-by-step applications for more than 50 procedures and clinical indications.

The WaterLase iPlus 2.0 includes innovations and improvements designed to enhance patients’ and dentists’ experiences and generate practice growth for dental practitioners through routine use. During the second quarter of 2015, the Practice Growth Guarantee program was fully implemented in the United States. By partnering with our WaterLase iPlus 2.0 customers via the Practice Growth Guarantee program, we are actively and routinely soliciting feedback, providing them and us highly valuable information.

The WaterLase iPlus 2.0 also marks the debut of the SureFire YSGG Delivery System, which ensures greater uptime through enhanced precision, performance and reliability.  Building on the gold standard for comfortable laser delivery systems, SureFire has redesigned optics that efficiently deliver precise laser energy with a replaceable, disposable shield for better dependability.  Still the most flexible, tension-free delivery system available, SureFire offers improved clinical access and comfort with its minimally-invasive flagship dental laser system and exclusive contra-angle hand-piece. The significance of these improvements has been confirmed by positive feedback from new and existing customers alike, who have indicated that Surefire meets or exceeds their expectations for reliability.

In December 2014, we introduced the EPIC X diode laser, an enhanced soft-tissue laser system featuring upgrades and improvements from our EPIC 10, which was released in 2012. EPIC X includes enhancements to nearly every system component to optimize treatment speed and efficiency, including pre-initiated diode tips, allowing dentists to significantly reduce procedure time. In the second quarter of 2015, we saw an increase in demand for EPIC X, solidifying our leadership position in this category.  Dentists, hygienists, office staff, and patients are experiencing the clinical benefits provided by the EPIC X.

23


 

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 2014 Form 10-K. We believe that there have been no significant changes during the nine months ended September 30, 2015 in our critical accounting policies from those disclosed in Item 7 of the 2014 Form 10-K, except as disclosed in Note 2 of the unaudited financial statements in this Form 10-Q.

Results of Operations

The following table sets forth certain data from our consolidated statements of operations expressed as percentages of net revenue:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Products and services revenue

 

99.7

%

 

 

99.7

%

 

 

99.5

%

 

 

99.6

%

License fees and royalty revenue

 

0.3

%

 

 

0.3

%

 

 

0.5

%

 

 

0.4

%

Net revenue

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue

 

69.9

%

 

 

57.6

%

 

 

69.7

%

 

 

62.0

%

Gross profit

 

30.1

%

 

 

42.4

%

 

 

30.3

%

 

 

38.0

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

36.0

%

 

 

30.4

%

 

 

39.9

%

 

 

34.5

%

General and administrative

 

25.5

%

 

 

27.3

%

 

 

27.6

%

 

 

34.5

%

Engineering and development

 

15.6

%

 

 

10.0

%

 

 

16.3

%

 

 

9.4

%

Excise tax

 

0.7

%

 

 

0.6

%

 

 

0.7

%

 

 

0.6

%

Legal settlement

 

%

 

 

%

 

 

(2.2

%)

 

 

%

Total operating expenses

 

77.8

%

 

 

68.3

%

 

 

82.3

%

 

 

79.0

%

Loss from operations

 

(47.7

%)

 

 

(25.9

%)

 

 

(52.0

%)

 

 

(41.0

%)

Non-operating income (loss), net

 

0.5

%

 

 

(1.4

%)

 

 

(0.1

%)

 

 

(1.8

%)

Loss before income tax provision

 

(47.2

%)

 

 

(27.3

%)

 

 

(52.1

%)

 

 

(42.8

%)

Income tax provision

 

0.4

%

 

 

0.2

%

 

 

0.4

%

 

 

0.2

%

Net loss

 

(47.6

%)

 

 

(27.5

%)

 

 

(52.5

%)

 

 

(43.0

%)

 

Non-GAAP Disclosure

In addition to the financial information prepared in conformity with GAAP, we provide non-GAAP net loss financial information. Management believes that the presentation of non-GAAP net loss assists investors in making comparisons of period-to-period operating results and that, in some respects, this non-GAAP financial measure is more indicative of the Company’s ongoing core operating performance than its GAAP equivalent.

Management also believes that the presentation of non-GAAP net loss 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 provide a more complete understanding of our financial performance, competitive position, and prospects for the future. However, non-GAAP net loss information presented in this report has certain limitations in that it does 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 net loss in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, non-GAAP net loss presented by the Company may be different from non-GAAP net loss used by other companies.

24


 

Non-GAAP Net Loss

Management uses non-GAAP net loss (defined as net loss before interest, taxes, depreciation and amortization, stock-based compensation, other equity instruments, and other non-cash compensation) in its evaluation of the Company’s core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Management believes that this non-GAAP financial information reflects an additional way of viewing aspects of our business that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. The following table contains a reconciliation of non-GAAP net loss to GAAP net loss (in thousands).

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

GAAP net loss, as reported

$

(5,343

)

 

$

(3,495

)

 

$

(17,820

)

 

$

(14,821

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (income) expense, net

 

(21

)

 

 

37

 

 

 

(44

)

 

 

452

 

Income tax provision

 

44

 

 

 

28

 

 

 

127

 

 

 

81

 

Depreciation and amortization

 

265

 

 

 

177

 

 

 

589

 

 

 

529

 

Stock-based compensation, other equity

   instruments, and other non-cash compensation

 

621

 

 

 

301

 

 

 

2,256

 

 

 

1,010

 

Non-GAAP net loss

$

(4,434

)

 

$

(2,952

)

 

$

(14,892

)

 

$

(12,749

)

 

Comparison of Results of Operations

Three months ended September 30, 2015 and 2014

Net Revenue: The following table summarizes our net revenues by category, including each category’s percentage of our total revenue, for the three months ended September 30, 2015 (“Third Quarter 2015”) and 2014 (“Third Quarter 2014”), as well as the amount of change and percentage of change in each revenue category (dollars in thousands):

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

Amount

 

 

Percent

 

 

2015

 

 

2014

 

 

Change

 

 

Change

 

Laser systems

$

7,330

 

 

 

65.3

%

 

$

7,350

 

 

 

57.9

%

 

$

(20

)

 

 

(0.3

%)

Imaging systems

 

720

 

 

 

6.4

%

 

 

1,402

 

 

 

11.0

%

 

 

(682

)

 

 

(48.6

%)

Consumables and other

 

1,474

 

 

 

13.1

%

 

 

1,605

 

 

 

12.6

%

 

 

(131

)

 

 

(8.2

%)

Services

 

1,676

 

 

 

14.9

%

 

 

2,316

 

 

 

18.2

%

 

 

(640

)

 

 

(27.6

%)

Total products and services

 

11,200

 

 

 

99.7

%

 

 

12,673

 

 

 

99.7

%

 

 

(1,473

)

 

 

(11.6

%)

License fees and royalty

 

34

 

 

 

0.3

%

 

 

41

 

 

 

0.3

%

 

 

(7

)

 

 

(17.1

%)

Net revenue

$

11,234

 

 

 

100.0

%

 

$

12,714

 

 

 

100.0

%

 

$

(1,480

)

 

 

(11.6

%)

 

Net revenue by geographic location based on the location of customers, including each category’s percentage of our total revenue, for the three months ended September 30, 2015 and 2014, as well as the amount of change and percentage of change in each geographic revenue category, was as follows (dollars in thousands):

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

Amount

 

 

Percent

 

 

2015

 

 

2014

 

 

Change

 

 

Change

 

United States

$

6,598

 

 

 

58.7

%

 

$

8,367

 

 

 

65.8

%

 

$

(1,769

)

 

 

(21.1

%)

International

 

4,636

 

 

 

41.3

%

 

 

4,347

 

 

 

34.2

%

 

 

289

 

 

 

6.6

%

Net revenue

$

11,234

 

 

 

100.0

%

 

$

12,714

 

 

 

100.0

%

 

$

(1,480

)

 

 

(11.6

%)

 

25


 

The overall de crease in quarter-over-quarter net revenue resulted from de crease s in domesti c imaging systems net revenue, domestic and international services net revenue , consumables and other net revenue , and domestic license fees and royalty revenue . Laser systems revenue remained relatively unchanged for Third Quarter 2015 with a decrease of approximately $20,000, or 0.3 % , comp ared to Third Quarter 2014. We continued to focus our energies on strengthening leadership, worldwide competitiveness and attention to our professional customers and their patie nts in Third Quarter 2015. The third quarter is typically a relatively lo wer revenue quarter as dental practitioners take summer vacations throughout the U nited S tates and Europe , limiting our effective selling days. While r evenue generated from sales of o ur fla gship WaterLase laser systems decreased by 4.8% worldwide , we are encouraged by revenue generated from our diode laser systems , which increased 11.3% worldwide when co mpared to Third Quarter 2014.  

Imaging systems net revenue decreased by approximately $682,000, or 48.6%, in Third Quarter 2015 compared to Third Quarter 2014. The decrease in net revenue from imaging systems is attributable to our continuous primary focus on our flagship WaterLase laser systems.

Consumables and other net revenue, which includes consumable products such as disposable tips, decreased by approximately $131,000, or 8.2%, in Third Quarter 2015 compared to Third Quarter 2014. This decrease in consumables and other net revenue was primarily a result of seasonality and timing of customer sales.

Services net revenue, which consists of extended warranty service contracts, advanced training programs, and other services, decreased by approximately $640,000, or 27.6%, for Third Quarter 2015, as compared to Third Quarter 2014. The decrease consists of a net revenue increase of approximately $68,000, or 4.2%, during Third Quarter 2015 and a decrease resulting from a change in accounting estimate of approximately $708,000 during the Third Quarter 2014 related to changing our revenue recognition for deferred training service revenue from 24 months to nine months. The slight net revenue increase is primarily due to sales of laser systems, leading to increased demand for our training courses and the recognition of deferred revenue associated with the Practice Growth Guarantee program.

License fees and royalty revenue decreased by approximately $7,000, or 17.1%, to $34,000 in Third Quarter 2015 compared to $41,000 for Third Quarter 2014. License fees and royalty revenue are attributable to intellectual property related to our laser technologies and past-due royalty revenue recovered in connection with our patent infringement lawsuit settlement. For a detailed discussion of the intellectual property litigation and related settlement, see Note 9 of the unaudited financial statements contained in this Form 10-Q.

Cost of Revenue and Gross Profit: The following table summarizes our cost of revenue and gross profit for the three months ended September 30, 2015 and 2014, as well as the amount of change and percentage of change (dollars in thousands):

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

Amount

 

 

Percent

 

 

2015

 

 

2014

 

 

Change

 

 

Change

 

Net revenue

$

11,234

 

 

 

100.0

%

 

$

12,714

 

 

 

100.0

%

 

$

(1,480

)

 

 

(11.6

%)

Cost of revenue

 

7,853

 

 

 

69.9

%

 

 

7,321

 

 

 

57.6

%

 

 

532

 

 

 

7.3

%

Gross profit

$

3,381

 

 

 

30.1

%

 

$

5,393

 

 

 

42.4

%

 

$

(2,012

)

 

 

(37.3

%)

 

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, material costs and revenue levels. The decrease in gross profit as a percentage of revenue for Third Quarter 2015, as compared to Third Quarter 2014, was mainly attributable to increased promotions related to the launch of EPIC X and WaterLase iPlus 2.0 and the impact from the recognition of $708,000 in deferred training service revenues resulting from a change in estimate during Third Quarter 2014.

26


 

Operating Expenses: The following table summarizes our operating expenses as a percentage of net revenue for the three months ended September 30 , 2015 and 20 14 , as well as the amount of change and percentage of change (dollars in thousands):

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

Amount

 

 

Percent

 

 

2015

 

 

2014

 

 

Change

 

 

Change

 

Sales and marketing

$

4,039

 

 

 

36.0

%

 

$

3,862

 

 

 

30.4

%

 

$

177

 

 

 

4.6

%

General and administrative

 

2,860

 

 

 

25.5

%

 

 

3,474

 

 

 

27.3

%

 

 

(614

)

 

 

(17.7

%)

Engineering and development

 

1,756

 

 

 

15.6

%

 

 

1,276

 

 

 

10.0

%

 

 

480

 

 

 

37.6

%

Excise tax

 

78

 

 

 

0.7

%

 

 

76

 

 

 

0.6

%

 

 

2

 

 

 

2.6

%

Total operating expenses

$

8,733

 

 

 

77.8

%

 

$

8,688

 

 

 

68.3

%

 

$

45

 

 

 

0.5

%

 

The quarter-over-quarter change in operating expense is explained in the following expense categories:

Sales and Marketing Expense . The increase to sales and marketing expense was primarily a result of increased payroll and consulting-related expenses of $318,000, partially offset by decreased commissions of $84,000. The increase to payroll and consulting-related expenses (i) is attributable to the increased headcount in our sales and marketing team domestically and internationally for most of Third Quarter 2015 and (ii) includes an increase of $158,000 in severance-related expenses associated with our internal corporate organizational restructuring activities.

General and Administrative Expense . The decrease to general and administrative expense was primarily due to decreased legal expenses of $1.2 million and decreased investor relations expenses of $230,000, partially offset by increased payroll and consulting-related expenses of $680,000. The decrease in legal expenses resulted from the atypical defense of the director dispute and resulting shareholder litigation incurred during Third Quarter 2014. The decrease in investor relations expenses is due to the timing of our annual shareholder meeting, which was held in April of 2015 compared to August of 2014. The increase in payroll and consulting-related expenses resulted primarily from an increase of $432,000 in stock-based compensation primarily attributable to grants to existing and new employees.

Engineering and Development Expense . The increase to engineering and development expense was primarily due to increased payroll, consulting and temporary labor expenses of $253,000, and increased operating supplies cost of $58,000, resulting from our focused efforts to accelerate innovation of both our existing products and technologies as well as to develop new products and technologies, which we believe will further strengthen our worldwide leadership position. Our engineering and development expenses fluctuate as our specific programs supporting product development transition from one development phase to the next. Depending on the stage of completion and level of effort related to each development phase we undertake, we may experience variations in our engineering and development expense. We expense engineering and development expenses as they are incurred.

Excise Tax Expense . The Patient Protection and Affordable Care Act imposes a 2.3% medical device excise tax on certain product sales to customers located in the U.S. We incurred excise tax expenses of $78,000, or 0.7% of net revenue, for Third Quarter 2015 as compared to $76,000, or 0.6% of net revenue, for Third Quarter 2014. The slight increase of $2,000, or 2.6%, in excise tax expense was due to increased non-exempt laser systems sales in the United States of approximately $74,000 in Third Quarter 2015 when compared to Third Quarter 2014.

Gain (loss) on Foreign Currency Transactions. We realized a $32,000 gain on foreign currency transactions for Third Quarter 2015, compared to a $135,000 loss on foreign currency transactions for Third Quarter 2014 due to exchange rate fluctuations between the U.S. dollar and other currencies, primarily the Euro.

27


 

Interest Income ( Expense ) , Net . Interest income for Third Quarter 2015 represents interest recognized from the discounted present value of the settlement in connection with the Fotona i ntellectual property litigation, as described in Note 9 of the unaudited financial statements contained in this Form 10-Q. Interest expense for Third Quarter 2015 consists of interest incurred on our capital lease obligations in connection with the lease of information technology equipm ent. Interest expense for Third Quarter 2014 consisted primarily of interest on our revolving credit facilities and amortization of debt issuance costs and debt discount. Interest income (expense), net totaled approximately $2 1 ,000 of income , or 0.2% of net revenue, for Third Quarter 2015, as compared to $ 37 ,000 of interest expense for Third Quarter 2014 . The de crease was primarily a result of the Company paying down all amounts due under the revolving lines of credit with Come rica Bank in July 2014 .

Income Tax Provision. We use a discrete year-to-date method in calculating quarterly provision for income taxes. Our provision for income taxes was $44,000 for Third Quarter 2015, compared to a provision of $28,000 for Third Quarter 2014. The increase of $16,000, or 57.1%, in income tax provision was primarily due to increased international sales revenue, which accounted for $4.6 million of net revenue in Third Quarter 2015 and $4.3 million of net revenue in Third Quarter 2014. For additional information regarding income taxes, see Note 12 of the unaudited financial statements contained in this Form 10-Q.

Net Loss. Our net loss totaled approximately $5.3 million for Third Quarter 2015 compared to a net loss of $3.5 million for Third Quarter 2014. The increase in net loss of approximately $1.8 million, or 52.9%, was primarily due to a decrease in gross profit of $2.0 million, partially offset by an increase to total non-operating income (loss), net of $225,000.

Nine months ended September 30, 2015 and 2014

Net Revenue: The following table summarizes our net revenues by category, including each category’s percentage of our total revenue, for the nine months ended September 30, 2015 and 2014, as well as the amount of change and percentage of change in each revenue category (dollars in thousands):

  

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

Amount

 

 

Percent

 

2015

 

 

2014

 

 

Change

 

 

Change

Laser systems

$

22,124

 

 

 

65.2

%

 

$

20,713

 

 

 

60.2

%

 

$

1,411

 

 

 

6.8

 

%

Imaging systems

 

1,594

 

 

 

4.7

%

 

 

3,290

 

 

 

9.5

%

 

 

(1,696

)

 

 

(51.6

)

%

Consumables and other

 

5,266

 

 

 

15.5

%

 

 

4,668

 

 

 

13.6

%

 

 

598

 

 

 

12.8

 

%

Services

 

4,802

 

 

 

14.1

%

 

 

5,621

 

 

 

16.3

%

 

 

(819

)

 

 

(14.6

)

%

Total products and services

 

33,786

 

 

 

99.5

%

 

 

34,292

 

 

 

99.6

%

 

 

(506

)

 

 

(1.5

)

%

License fees and royalty

 

172

 

 

 

0.5

%

 

 

126

 

 

 

0.4

%

 

 

46

 

 

 

36.5

 

%

Net revenue

$

33,958

 

 

 

100.0

%

 

$

34,418

 

 

 

100.0

%

 

$

(460

)

 

 

(1.3

)

%

 

Net revenue by geographic location based on the location of customers, including each category’s percentage of our total revenue, for the nine months ended September 30, 2015 and 2014, as well as the amount of change and percentage of change in each geographic revenue category, was as follows (dollars in thousands):  

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

Amount

 

 

Percent

 

2015

 

 

2014

 

 

Change

 

 

Change

United States

$

19,914

 

 

 

58.6

%

 

$

21,404

 

 

 

62.2

%

 

$

(1,490

)

 

 

(7.0

)

%

International

 

14,044

 

 

 

41.4

%

 

 

13,014

 

 

 

37.8

%

 

 

1,030

 

 

 

7.9

 

%

Net revenue

$

33,958

 

 

 

100.0

%

 

$

34,418

 

 

 

100.0

%

 

$

(460

)

 

 

(1.3

)

%

 

28


 

The overall de crease in period-over-per iod net revenue resulted from de creases in domestic imaging systems net revenue and services revenue , partially offset by increases in domestic and international laser system net revenue, consumables and other net revenue and license fees and royalty revenue . Laser systems revenue increased by app roximately $1.4 million, or 6.8 %, while net revenue from imaging systems decreased by approximately $1. 7 million or 51.6 %. The period-over-period de crease in net revenue also resulted from a decrease in services net revenue due to a change in accounting estimate of approximately $708,000 recognized in Third Quarter 2014 related to a change in the period for recognizing deferred training service revenue from 24 to nine months. This was partially offset by an increase in consumables and other net revenue and license fees and royalty revenue.

As we continued building our worldwide leadership position in dental lasers by providing the best-in-class products and services to our professional customers and their patients, we have reversed the historical trend of declining WaterLase sales. For the nine months ended September 30, 2015, revenue generated from sales of our flagship WaterLase laser systems increased by 9.9% worldwide when compared to the same period in 2014, including increases of 8.0% and 12.2% for domestic and international sales, respectively. Period-over-period revenue generated from sales of our diode laser systems increased by 1.4% worldwide, including an increase of 14.9% for domestic sales and a decrease of 6.4% for international sales.

Consumables and other net revenue, which includes consumable products such as disposable tips, increased by approximately $598,000, or 12.8%, period-over-period. This increase in consumables and other net revenue was primarily a result of continued auxiliary sales to our growing laser customer base.

Services net revenue, which consists of extended warranty service contracts, advanced training programs, and other services, decreased by approximately $819,000, or 14.6%, period-over-period. The decrease was primarily due to the impact from the recognition of $708,000 in deferred training service revenues resulting from a change in estimate in the period over which deferred training service revenue is being recognized and the extension of our warranty for WaterLase systems from one year to two years for systems purchased after January 1, 2014, during the nine months ended September 30, 2014.

License fees and royalty revenue increased by approximately $46,000, or 36.5%, period-over-period. License fees and royalty revenue are attributable to intellectual property related to our laser technologies and past-due royalty revenue recovered in connection with our patent infringement lawsuit settlement. For a detailed discussion of the intellectual property litigation and related settlement, see Note 9 of the unaudited financial statements contained in this Form 10-Q.

Cost of Revenue and Gross Profit: The following table summarizes our cost of revenue and gross profit for the nine months ended September 30, 2015 and 2014, as well as the amount of change and percentage of change (dollars in thousands):  

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

Amount

 

 

Percent

 

2015

 

 

2014

 

 

Change

 

 

Change

Net revenue

$

33,958

 

 

 

100.0

%

 

$

34,418

 

 

 

100.0

%

 

$

(460

)

 

 

(1.3

)

%

Cost of revenue

 

23,666

 

 

 

69.7

%

 

 

21,355

 

 

 

62.0

%

 

 

2,311

 

 

 

10.8

 

%

Gross profit

$

10,292

 

 

 

30.3

%

 

$

13,063

 

 

 

38.0

%

 

$

(2,771

)

 

 

(21.2

)

%

 

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, material costs and revenue levels. The decrease in gross profit as a percentage of revenue for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014 was mainly attributable to increased promotions related to the launch of EPIC X and WaterLase iPlus 2.0 and the impact from the recognition of $708,000 in deferred training service revenues resulting from a change in estimate during Third Quarter 2014.

29


 

Operating Expenses: The following table summarizes our operating expenses as a percentage of net revenue for the nine months ended September 30, 2015 and 2014, as well as the amount of change and percentage of change (dollars in thousands):

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

Amount

 

 

Percent

 

2015

 

 

2014

 

 

Change

 

 

Change

Sales and marketing

$

13,536

 

 

 

39.9

%

 

$

11,886

 

 

 

34.5

%

 

$

1,650

 

 

 

13.9

 

%

General and administrative

 

9,363

 

 

 

27.6

%

 

 

11,867

 

 

 

34.5

%

 

 

(2,504

)

 

 

(21.1

)

%

Engineering and development

 

5,533

 

 

 

16.3

%

 

 

3,227

 

 

 

9.4

%

 

 

2,306

 

 

 

71.5

 

%

Excise tax

 

231

 

 

 

0.7

%

 

 

205

 

 

 

0.6

%

 

 

26

 

 

 

12.7

 

%

Legal settlement

 

(731

)

 

 

(2.2

%)

 

 

 

 

 

%

 

 

(731

)

 

N/A

 

 

Total operating expenses

$

27,932

 

 

 

82.3

%

 

$

27,185

 

 

 

79.0

%

 

$

747

 

 

 

2.7

 

%

 

The period-over-period change in operating expense is explained in the following expense categories:

Sales and Marketing Expense . The increase to sales and marketing expense was primarily a result of increased media and advertising expenses of $521,000 and increased payroll and consulting-related expenses of $1.8 million, partially offset by decreased convention-related expenses of $501,000 and decreased commissions expense of $158,000. The increase to media and advertising expenses are the result of our efforts to enhance customer acquisition, customer retention and global brand awareness. The increase to payroll and consulting-related expenses (i) is attributable to the increased headcount in our sales and marketing team both domestically and internationally, as we continued to expand into new and existing markets and (ii) includes an increase of $117,000 in stock-based compensation primarily attributable to grants to existing and new employees. The decrease in convention-related expenses is as a result of our period-over-period decrease in tradeshow attendance.

General and Administrative Expense . The decrease to general and administrative expense was primarily due to decreased legal expenses of $4.3 million and decreased provision for doubtful accounts of $482,000, partially offset by increased payroll and consulting-related expenses of $1.9 million. The decrease in legal expenses resulted from the atypical defense of the director dispute and resulting shareholder litigation incurred during the nine months ended September 30, 2015. The decrease in provision for doubtful accounts is due to our improvement in the collection process of receivables. The increase in payroll and consulting-related expenses resulted from a higher headcount in certain functions to support growth in our business, including an increase of $1.1 million in stock-based compensation primarily attributable to grants to directors and employees.

Engineering and Development Expense . The increase to engineering and development expense was primarily due to increased payroll, consulting and temporary labor expenses of $1.2 million and increased operating supplies cost of $702,000, resulting from our focused efforts to accelerate innovation of both our existing products and technologies as well as to develop new products and technologies, which we believe will further strengthen our worldwide leadership position. The increase in payroll, consulting and temporary labor expenses resulted from a higher headcount and includes an increase of $120,000 in stock-based compensation primarily attributable to grants to existing and new employees. Our engineering and development expenses fluctuate as our specific programs supporting product development transitions from one development phase to the next. Depending on the stage of completion and level of effort related to each development phase undertaken, we may reflect variations in our engineering and development expense. We expense engineering and development expenses as they are incurred.

Excise Tax Expense . The Patient Protection and Affordable Care Act imposes a 2.3% medical device excise tax on certain product sales to customers located in the U.S. We incurred excise tax expenses of $231,000, or 0.7% of net revenue, for the nine months ended September 30, 2015 as compared to $205,000, or 0.6% of net revenue, for the nine months ended September 30, 2014. The increase of $26,000, or 12.7%, in excise tax expense was primarily due to increased period-over-period laser systems revenue in the United States of approximately $989,000.

30


 

Legal Settlement . In April 2012, we filed a patent infringement lawsuit against Fotona Proizvodnja Optoelektronskih Naprav D.D. and Fotona LLC (collectively, “Fotona”) in Düsseldorf District Court alleging infringement with respect to the Fotona Fidelis dental laser system . On March 24, 2015, we entered into a settlement agreement with Fot ona.  We allocated $731,000 of the settlement amount toward the recovery of our legal expenses related to litigation. For a more detailed discussion of the intellectual property litigation, see Note 9 of the unau dited financial statements contained in this Form 10-Q.

(Loss) Gain on Foreign Currency Transactions. We realized a $97,000 loss on foreign currency transactions for the nine months ended September 30, 2015, compared to a $166,000 loss on foreign currency transactions for the nine months ended September 30, 2014 due to exchange rate fluctuations between the U.S. dollar and other currencies, primarily the Euro.

Interest Income (Expense), Net. Interest income during 2015 represents interest recognized from the discounted present value of the settlement in connection with the Fotona intellectual property litigation. Interest expense in 2015 consists of interest incurred on our capital lease obligations in connection with the lease of information technology equipment. Interest expense for 2014 consisted primarily of interest on our revolving credit facilities and amortization of debt issuance costs and debt discount. Interest income (expense), net totaled approximately $44,000 of income, or 0.1% of net revenue for the nine months ended September 30, 2015, as compared to an interest expense of $452,000 for the same prior year period. The decrease was primarily a result of the Company paying in full all amounts due under the revolving lines of credit with Comerica Bank in July 2014.

Income Tax Provision. Our provision for income taxes was $127,000 for the nine months ended September 30, 2015, compared to a provision of $81,000 for the nine months ended September 30, 2014. The increase of $46,000, or 56.8%, in income tax provision was primarily due to increased international sales revenue, which accounted for $14.0 million of net revenue in 2015 and $13.0 million of net revenue in 2014.

Net Loss. Our net loss for the nine months ended September 30, 2015 totaled approximately $17.8 million compared to a net loss of $14.8 million for the nine months ended September 30, 2014. The period-over-period increase in net loss of approximately $3.0 million, or 20.2%, was primarily due to a decrease in gross profit of $2.8 million and an increase in total operating expenses of $747,000, partially offset by a decrease in total non-operating net income of $565,000.

Liquidity and Capital Resources

At September 30, 2015, we had approximately $15.4 million in cash and restricted cash equivalent. Management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. The decrease in our cash and cash equivalents by $16.4 million at September 30, 2015 as compared to December 31, 2014, was primarily driven by cash used in operating activities of $15.0 million, cash used in investing activities of $1.2 million, cash used in financing activities of $22,000 and effect of exchange rate changes of $162,000.

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

 

 

Nine Months Ended

 

 

September 30,

 

 

2015

 

 

2014

 

Net cash flows used in operating activities

$

(14,954

)

 

$

(10,274

)

Net cash flows used in investing activities

 

(1,228

)

 

 

(193

)

Net cash flows (used) provided by financing activities

 

(22

)

 

 

11,934

 

Effect of exchange rate changes

 

(162

)

 

 

(148

)

Net change in cash and cash equivalents

$

(16,366

)

 

$

1,319

 

 

31


 

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 nine months ended September 30, 2015, totaled $15.0 million and was primarily comprised of our net loss of $17.8 million, partially offset by non-cash adjustments for stock-based compensation expense of $2.3 million, provision for bad debts of $207,000, provision for sales allowance of $100,000, deferred income taxes of $46,000, net interest income of $44,000 and depreciation and amortization expenses of $589,000. The $294,000 net decrease in our operating assets and liabilities was primarily due to a buildup of inventories of $1.6 million, an increase in accounts receivable of $500,000 related to the timing of our collections, an increase in restricted cash of $200,000 and an increase in prepaid expenses and other assets of $277,000 related to a legal settlement with a competitor during the first quarter of 2015, partially offset by an increase in accounts payable and accrued liabilities of $1.6 million related to the timing of our payments, a decrease in customer deposits of $7,000 and an increase in deferred revenue of $661,000 related to our Practice Growth Guaranteed program and a legal settlement with a competitor in the first quarter of 2015.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2015 consisted primarily of $1.3 million of capital expenditures, partially offset by proceeds from disposal of property, plant, and equipment of $25,000. The period-over-period increase is primarily due to increased capital expenditures in 2015 for operating equipment and information technology equipment. For fiscal 2015, we expect capital expenditures to total approximately $2.0 million and we expect depreciation and amortization to total approximately $800,000.

Financing Activities

Net cash used by financing activities for the nine months ended September 30, 2015 of $22,000 resulted from our deposit on capital lease of $42,000 and payments on our capital lease obligations of $24,000, partially offset by net proceeds received from stock options exercised of $44,000. In February 2014 and July 2014, we entered into two private placement transactions with investors providing net proceeds of approximately $4.8 million and $11.5 million, respectively. We did not enter into any private placements in 2015.

Effect of Exchange Rate

The $162,000 decrease in effect of exchange rate on cash was primarily due to a recognized $97,000 loss on foreign currency transactions due to a stronger U.S. dollar in 2015 than it was in 2014.

Future Liquidity Needs

As of September 30, 2015, we had working capital of approximately $22.0 million. Our principal sources of liquidity at September 30, 2015 consisted of approximately $15.4 million in cash and restricted cash equivalent and $9.2 million of net accounts receivable.

In September 2015, we streamlined operations and reduced payroll, payroll-related and consulting-related expenses by approximately $2.4 million, net, on an annualized basis. Total expenses related to this restructuring during Third Quarter 2015 totaled approximately $246,000. We will begin to realize the impact of these cost saving measures in the fourth quarter of 2015 and throughout 2016.

In order for us to continue operations and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales of our products directly to end-users and through distributors, establish profitable operations through the combination of increased sales and decreased expenses, and generate cash from operations or obtain additional funds when needed. We cannot guarantee that we will be able to increase sales, reduce expenses, or obtain additional funds if needed. If we are unable to increase sales, reduce expenses, or raise sufficient additional capital, we may be unable to continue to fund our operations, develop our products, or realize value from our assets and discharge our liabilities in the normal course of business.

32


 

Additional capital requirements may depend on many factors, including, among other things, the rate at which our business grows, demands for working capital, manufacturing c apacity, and any acquisitions that we may pursue. From time to time, we could be required, or may otherwise attempt, to raise capital through either equity or debt offerings or by entering into a line of credit facility . We cannot provide assurance that we will 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 our stockholders.

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 of the unaudited financial statements contained in this Form 10-Q, which is incorporated herein by this reference.

Additional Information

BIOLASE®, ZipTip®, ezlase®, eztips®, MD Flow®, Comfortpulse®, WaterLase®, iLase®, iPlus®, WCLI®, World Clinical Laser Institute®, WaterLase MD®, WaterLase Dentistry®, Galaxy BioMill®, Occulase iPlus®, Epic Diode Laser®, Waterlase MD®, Geyser®, Epic Laser®, Dermalase®, Occulase®, and Diolase® are registered trademarks of Biolase, Inc., and Diolase™, HydroPhotonics™, LaserPal™, HydroBeam™, Occulase MD™, Epic™, Deltalaser™, Delta™, Biolase DaVinci Imaging™, Oculase™, Practice Growth Guarantee™ and Practice Growth. Guaranteed™ are trademarks of Biolase, Inc.  All other product and company names are registered trademarks or trademarks of their respective owners.

 

 

 

33


 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in the 2014 Form 10-K.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our 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 (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any change in our internal control over financial reporting during the quarter 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

For a description of our legal proceedings, please refer to Part I, Item 1, Note 9 of the unaudited financial statements contained in this Form 10-Q, which is incorporated herein by reference in response to this Item.

ITEM  1A.

RISK FACTORS

There have been no material changes to the risk factors as disclosed in Part I, Item 1A “Risk Factors” in the 2014 Form 10-K.

 

 

 

34


 

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

  

 

  

3.1

  

12/23/2005

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1.2

 

Amendment to Restated Certificate of Incorporation, effective as of May 14, 2012

 

 

 

8-K

 

05/10/2012

 

3.1

 

05/16/2012

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1.3

 

Second Amendment to Restated Certificate of Incorporation, effective as of October 30, 2014

 

 

 

8-A/A

 

 

 

3.1.3

 

11/04/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2.1

  

Sixth Amended and Restated Bylaws of Biolase, Inc., adopted on June 26, 2014

  

 

  

8-K

  

06/26/2014

  

3.1

  

06/30/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

10.1

 

Inducement Restricted Stock Unit Award Agreement, dated July 14, 2015, by and between Harold C. Flynn, Jr. and Biolase, Inc.

 

 

 

8-K

 

07/12/2015

 

10.2

 

07/15/2015

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2

 

Form of Option Award Notice for California Employees under the Biolase, Inc. 2002 Stock Incentive Plan

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3

 

Form of Option Award Notice for Non-California Employees under the Biolase, Inc. 2002 Stock Incentive Plan

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.4

 

Form of Option Award Notice for Non-Employee Directors under the Biolase, Inc. 2002 Stock Incentive Plan

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.5

 

Form of Restricted Stock Unit Award Notice for Non-Employee Directors under the Biolase, Inc. 2002 Stock Incentive Plan

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

  

X

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

  

X

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2015, 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

  

X

  

 

  

 

  

 

  

 

 

*  Management compensatory plan or arrangement

+  Furnished herewith

 

 

 

35


 

SIGNA TURES

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.

Date: November 6, 2015

 

BIOLASE, INC.,

(Registrant)

 

By:

 

/s/ HAROLD C. FLYNN, JR. 

 

 

Harold C. Flynn, Jr.

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

By:

 

/s/ DAVID C. DREYER 

 

 

David C. Dreyer

 

 

Senior Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

36

 

Exhibit 10.2

Biolase, Inc.

2002 Stock Incentive Plan

Option Award Notice

[Name of Optionee]

You have been awarded an option to purchase shares of Common Stock of Biolase, Inc. (the “ Company ”) pursuant to the terms and conditions of the Biolase, Inc. 2002 Stock Incentive Plan (the “ Plan ”) and the Stock Option Agreement (together with this Award Notice, the “ Agreement ”).  The Stock Option Agreement is attached hereto and the Plan and Stock Option Agreement are available on Solium.  Capitalized terms not defined herein shall have the meanings specified in the Plan or the Agreement.

Option :

 

You have been awarded a Nonqualified Stock Option to purchase from the Company [____] shares of its Common Stock, par value $0.001 per share (the “ Common Stock ”), subject to adjustment as provided in Section 6.2 of the Agreement.

Option Date :

 

[____________________, _____]

Exercise Price :

 

$[______________] per share, subject to adjustment as provided in Section 6.2 of the Agreement.

Time-Based Vesting Schedule :

 

Except as otherwise provided in the Plan, the Agreement or any other agreement between the Company or any of its Subsidiaries and Optionee, [ __ %] of the number of shares of Common Stock subject to the Option on the Option Date shall vest (i) on the first anniversary of the Option Date with respect to one-fourth of the number of shares subject thereto on the Option Date and (ii) in monthly installments over a thirty-six month period, commencing on the thirteenth month following the Option Date, with respect to the remaining three-quarters of the number of shares subject thereto on the Option Date.

Performance-Based Vesting Schedule :

 

Except as otherwise provided in the Plan, the Agreement or any other agreement between the Company or any of its Subsidiaries and the Optionee, [  __ %] of the number of shares of Common Stock subject to the Option on the Option Date shall vest upon the achievement of specific annual Company performance criteria as follows:   [PERFORMANCE-BASED VESTING SCHEDULE] .

Termination of Employment :

 

(a) The time-based vesting schedule and performance-based vesting schedule shall each be subject to the requirement that you are, and have been, continuously (except for any absence for vacation, leave, etc. in accordance with the Company's or its Subsidiaries' policies): (A) employed by the Company or any of its Subsidiaries; (B) serving as a Non-Employee Director; or (C) providing services to the Company or any of its Subsidiaries as an independent contractor, in each case, from the Option Date through and including the applicable vesting date.

 


 

Expiration Date :

 

Except to the extent earlier terminated pursuant to Section 2.2 of the Agreement or earlier exercised pursuant to Section 2.3 of the Agreement, the Option shall terminate at 5:00 p.m., U.S. Pacific time, on the tenth anniversary of the Option Date.

 

BIOLASE, INC.

 

By: _______________________

 

 

 

 

Acknowledgment, Acceptance and Agreement :

 

By signing below and returning this Award Notice to Biolase, Inc. at the address stated herein, I hereby accept the Option granted to me and acknowledge and agree to be bound by the terms and conditions of this Award Notice, the Agreement and the Plan.

 

__________________________________

Optionee

 

__________________________________

Date


 

 

 

 

 

 

 

Biolase, Inc.

4 Cromwell

Irvine, California, 92618

Attention:  Director of Financial Reporting

 

 

2


 

Biolase, Inc.
2002 Stock Incentive Plan


Stock Option Agreement

Biolase, Inc., a Delaware corporation (the “ Company ”), hereby grants to the individual (“ Optionee ”) named in the award notice attached hereto (the “ Award Notice ”) as of the date set forth in the Award Notice (the “ Option Date ”), pursuant to the provisions of the Biolase, Inc. 2002 Stock Incentive Plan (the “ Plan ”), an option to purchase from the Company the number of shares of the Company’s Common Stock, par value $0.001 per share (“ Common Stock ”), set forth in the Award Notice at the price per share set forth in the Award Notice (the “ Exercise Price ”) (the “ Option ”), upon and subject to the terms and conditions set forth below, in the Award Notice and in the Plan.  Capitalized terms not defined herein shall have the meanings specified in the Plan.

2. Option Subject to Acceptance of Agreement .  The Option shall be null and void unless Optionee shall accept this Agreement by executing the Award Notice in the space provided therefor and returning an original execution copy of the Award Notice to the Company.  

3. Time and Manner of Exercise of Option .

3.1. Maximum Term of Option .  In no event may the Option be exercised, in whole or in part, after the expiration date set forth in the Award Notice (the “ Expiration Date ”).

3.2. Vesting and Exercise of Option .  The Option shall become vested and exercisable in accordance with the vesting schedules set forth in the Award Notice (collectively, the “ Vesting Schedule ”).  The period of time prior to the full vesting of the Option shall be referred to herein as the “ Vesting Period .”  Subject to Section 2.2(d), immediately upon the Optionee’s termination of employment for any reason, the Option shall terminate with respect to the unvested portion of the Option on the effective date of such termination of employment.  The Option shall be exercisable following a termination of Optionee’s employment according to the following terms and conditions:  

(a) Termination due to Death or Permanent Disability .  If Optionee’s employment with the Company terminates prior to the end of the Vesting Period by reason of Optionee’s death or a termination by the Company due to Permanent Disability, the Option, only to the extent vested on the effective date of such termination of employment, may thereafter be exercised by Optionee or Optionee’s executor, administrator, legal representative, guardian or similar person until and including the earlier to occur of (i) the date which is one year after the date of termination of employment and (ii) the Expiration Date.  

(b) Termination other than for Misconduct, Death or Permanent Disability .  Subject to Section 2.2(d) , if Optionee’s employment with the Company terminates prior to the end of the Vesting Period by reason of a termination of Optionee’s employment (i) by the Company for any reason other than for Misconduct, death or Permanent Disability or (ii) by the Optionee for any reason, the Option, only to the extent vested on the effective date of such termination of employment, may thereafter be exercised by Optionee until and including the earlier to occur of (i) the date which is ninety (90) days after the date of such termination of employment and (ii) the Expiration Date; provided , however , that if the Optionee terminates employment voluntarily and does not give the Company at least (y) 30 days notice if Optionee is a manager or (z) 14 days notice if Optionee is not a manager, then the Option shall terminate immediately upon such termination of employment.  

 


 

(c) Misconduct .  If Optionee’s employment with the Company terminates by reason of the Company’s termination of Optionee’s employment for Misconduct or if the Optionee otherwise engages in Misconduct (as determined by the Plan Administrator), then the Option, whether or not vested, shall terminate immediately upon such termination of employment.  

(d) Change in Control .  

(i) Immediately prior to the effective date of a Change in Control, the Option shall vest and become exercisable for all of the shares subject to the Option and may be exercised for any or all of those shares or, at the election of the Company, the Optionee shall receive, in full settlement for such Option, a cash payment in an amount equal to the aggregate number of shares of Common Stock then subject to the Option multiplied by the excess, if any, of the Fair Market Value of a share of Common Stock as of the date of the Change in Control, over the Exercise Price.  Notwithstanding anything herein to the contrary, the Option shall not vest and become exercisable on an accelerated basis if and to the extent: (i) the Option is assumed by the successor corporation (or parent thereof) or is otherwise continued in full force and effect pursuant to the terms of the Change in Control transaction or (ii) the Option is replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Change in Control on the shares subject to the Option that were not otherwise exercisable at the time of the Change in Control (the excess of the Fair Market Value of  such shares over the aggregate Exercise Price payable for such shares) and provides for subsequent payout of that spread no later than the time the Option would have vested and become exercisable for those shares.  

(ii) Immediately following the consummation of the Change in Control, the Option shall terminate, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in effect pursuant to the terms of the Change in Control transaction.

(iii) If the Option is assumed or otherwise continued in effect in connection with a Change in Control, then the Option shall be appropriately adjusted, upon such Change in Control, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Change in Control had the Option been exercised immediately prior to such Change in Control, and appropriate adjustments shall also be made to the Exercise Price, subject to Section 409A of the Code.  To the extent that the holders of Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation (or its parent) may, in connection with the assumption of this option, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control.  In the event the Option is assumed or otherwise continued pursuant to this Agreement and the terms of the Plan and the Company terminates Optionee’s employment due to an Involuntary Termination within 24 months following such Change in Control and Optionee executes and does not revoke a waiver and release of claims in the form prescribed by the Company within 60 days after the date of such termination, the Option shall be 100% vested upon such termination of employment, and the Option may thereafter be exercised by Optionee until and including the earlier to occur of (i) the date which is one year after the date of termination of employment and (ii) the Expiration Date.   

2


 

(iv) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.    

3.3. Method of Exercise .  Subject to the limitations set forth in this Agreement, the Option, to the extent vested, may be exercised by Optionee (a) by delivering to the Company an exercise notice in the form prescribed by the Company specifying the number of whole shares of Common Stock to be purchased and by accompanying such notice with payment therefor in full (or by arranging for such payment to the Company’s satisfaction) either (i) in cash, (ii) by delivery to the Company (either actual delivery or by attestation procedures established by the Company) of shares of Common Stock having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable pursuant to the Option by reason of such exercise, (iii) except as may be prohibited by applicable law, in cash by a broker-dealer acceptable to the Company to whom Optionee has submitted an irrevocable notice of exercise or (iv) by a combination of (i) or (ii), and (b) by executing such documents as the Company may reasonably request.  No share of Common Stock or certificate representing a share of Common Stock shall be issued or delivered until the full purchase price therefor and any withholding taxes thereon, as described in Section 6.1 , have been paid.

3.4. Termination of Option .  In no event may the Option be exercised after it terminates as set forth in this Section 2.4 .  The Option shall terminate, to the extent not earlier terminated pursuant to Section 2.2 or exercised pursuant to Section 2.3 , on the Expiration Date.  Upon the termination of the Option, the Option and all rights hereunder shall immediately become null and void.

4. Transfer Restrictions and Investment Representations .

4.1. Nontransferability of Option .  The Option may not be transferred by Optionee other than by will or the laws of descent and distribution or pursuant to the designation of one or more beneficiaries on the form prescribed by the Company.  Except to the extent permitted by the foregoing sentence, (i) during Optionee’s lifetime the Option is exercisable only by Optionee or Optionee’s legal representative, guardian or similar person and (ii) the Option may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process.  Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Option, the Option and all rights hereunder shall immediately become null and void.

4.2. Investment Representation .  Optionee hereby represents and covenants that (a) any shares of Common Stock purchased upon exercise of the Option will be purchased for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the “ Securities Act ”), unless such purchase has been registered under the Securities Act and any applicable state securities laws; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, Optionee shall submit a written statement, in a form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of any purchase of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable.  As a further condition precedent to any exercise of the Option, Optionee shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance or delivery of the shares and, in connection therewith, shall execute any documents which the Board or the Plan Administrator shall in its sole discretion deem necessary or advisable.

3


 

5. Covenants of Employee .  

4.1 Covenant Not to Compete . Optionee recognizes and acknowledges that it is essential for the proper protection of the business of the Company that Optionee be restrained from competing against the Company during the term of Optionee’s employment with the Company.  Therefore, in consideration for the Option and other good and valuable consideration, Optionee agrees that, during the term of the Optionee’s employment with the Company, Optionee will not engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder or otherwise, alone or in association with any other person, corporation or other entity, in any Competing Business.  For purposes of this Agreement, the term “ Competing Business ” shall mean:  (a) any person, corporation or other entity which sells or attempts to sell, or provides or attempts to provide any products and/or services which are the same as or similar to the products and/or services sold or provided by the Company; or (b) any person, corporation, or other entity that solicits, trades with, advises, calls upon or otherwise does or attempts to do, directly or indirectly, business with any clients, customers or accounts of the Company, its successors, assigns or affiliates that have done business with the Company at any time or from time to time; or (c) any person, corporation or other entity engaged in the same or similar business as the business of the Company.  

 

4.2 Covenant Not to Use Trade Secret Information to Solicit Customers or Clients. Optionee recognizes and acknowledges that the Company has expended and will expend considerable and significant amounts of time and money establishing relationships and good will with existing and prospective customers or clients and developing a list of its customers or clients and prospective customers or clients, which list is not available to the general public and which constitutes a Trade Secret under the California Uniform Trade Secret Act (California Civil Code § 3426, et seq.).  Optionee further recognizes and acknowledges that the aforesaid list may contain other information about the customers or clients and prospective customers or clients not available to the general public and that Optionee may be privileged to this list. Optionee also recognizes and acknowledges that many of the Company's competitors could not recreate this list without substantial efforts, that the Company's business would be irreparably and greatly damaged by the use of this information other than for its benefit, and that it is essential for the proper protection of the business of the Company that Optionee be restrained from soliciting the trade of or trading with the customers or clients of the Company.  Therefore, in consideration for the Option and other good and valuable consideration, Optionee agrees that Optionee will not, directly or indirectly use the Company’s trade secrets to solicit the trade of, or trade with, or do business with, or attempt to solicit the trade of any of the Company's customers or clients or prospective customers or clients except for the Company's benefit, and except to the extent that Optionee traded with or did business with any such customer or client or prospective customer or client prior to the date upon which said Optionee was engaged to perform services for and on behalf of the Company.  Optionee also agrees not to utilize in any manner other than for the benefit of the Company, or provide access to anyone in any Competing Business (as previously defined), the Company’s list of customers, or any information contained in that list.

 

4.3 Covenant Not to Solicit Employees . Optionee recognizes and acknowledges that the Company has expended and will expend considerable and significant amounts of time and money establishing relationships with and/or training its employees. Optionee recognizes and acknowledges that it is essential for the proper protection of the business of the Company that Optionee be restrained from soliciting any employee of the Company to leave the employ of the Company. Therefore, in consideration for the Option and other good and valuable consideration, Optionee agrees that, during the term of Optionee’s employment with the Company, and during the two (2) year period commencing on the date of termination of Optionee’s employment with the Company, Optionee will not solicit, or attempt to solicit, any employee of the Company to leave the Company for any reason whatsoever.

 

4.4 Covenant Not to Violate Corporate Confidences .

 

4


 

(a)   Optionee recognizes and acknowledges that (a) during the term of Optionee’s employment with the Company, it may be necessary for Optionee to acquire, and during the course of Optionee’s previous work for or on behalf of the Company prior to the commencement of this Agreement, Optionee may have already acquired, information which could include, in whole or in part, information concerning the Company’s sales, sales volume, sales methods, sales proposals, customers or clients and prospective customers or clients (including lists thereof), identity of customers or clients and prospective customers or clients, identity of key personnel in the employ of customers or clients and prospective customers or clients, amount or kind of customer's or client’s purchases from and/or transactions with the Company, the needs and requirements of any or all customers or clients, the terms and conditions under which the Company deals with customers or clients or prospective customers or clients, the terms and conditions under which the Company deals with vendors or suppliers or prospective vendors or suppliers, employee lists, the Company’s sources of supply, the Company’s billing rates, methods, techniques, compositions, ideas, creations, drawings, renderings, plans, improvements, inventions, computer programs and data, system documentation, special hardware, product hardware, related software development, correspondence, letters, notes, notebooks, reports, flowcharts, proposals, processes and/or any and all other trade secret, confidential or proprietary information belonging to the Company or relating to the Company’s business(es) and/or affairs, (collectively referred to herein as the “ Confidential and Proprietary Information ”); (b) this Confidential and Proprietary Information has been compiled by the Company at great expense and over a great amount of time; (c) this Confidential and Proprietary Information derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; (d) the Confidential and Proprietary Information is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; (e) the Confidential and Proprietary Information is the sole and exclusive property of the Company; (f) the use, misappropriation or disclosure of the Confidential and Proprietary Information by Optionee or otherwise would constitute a breach of trust and could cause irreparable injury to the Company; and (g) it is essential to the protection of the Company’s good will and to the maintenance of the Company’s competitive position that the Confidential and Proprietary Information be kept secret and that Optionee not disclose the Confidential and Proprietary Information to others or use the Confidential and Proprietary Information to Optionee’s own advantage or the advantage of others.    

 

(b) In consideration for the Option and other good and valuable consideration, and as a material inducement to the Company to disclose or allow to be known to Optionee some or all of the Confidential and Proprietary Information during the term of Optionee’s employment with the Company (at the Company’s sole and absolute discretion), Optionee hereby agrees that, throughout the term of Optionee’s employment with the Company and following the date of termination of Optionee’s employment with the Company, Optionee will hold and safeguard the Confidential and Proprietary Information in trust for the Company, and not misappropriate or divulge to any person that is not affiliated with the Company, or make available to anyone for use outside the Company’s organization at any time, either during the term of Optionee’s employment with the Company or subsequent to the termination of Optionee’s employment with the Company, except with the express written consent of the Company or as provided by this agreement, any of the Company's Confidential and Proprietary Information, whether or not developed or created by Optionee.

 

(c) Optionee further agrees that, upon termination of Optionee’s employment with the Company, or at any time upon request by the Company, Optionee shall surrender to the Company all Company property which said Optionee is then in possession, including any and all tangible evidence of such Confidential and Proprietary Information.  

 

4.5 Proprietary Rights .

 

(a)   Optionee agrees that all Work Product, as hereinafter defined, created solely or

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jointly by Optionee, arising from or relating to any services performed by Optionee for or on behalf of the Company, or in the course Optionee’s performance of Optionee’s duties as an Optionee of the Company, or previously performed by Optionee for or on behalf of the Company, shall be deemed “work made for hire” and shall be the sole and exclusive property of the Company.  Optionee shall execute all such assignments, oaths, declarations and other documents as may be prepared by the Company to effect the foregoing.  In addition, Optionee agrees that all other property, materials, papers, books, records, computer software and programs of the Company, as well as all reproductions thereof, relating to the business and affairs of the Company, or its customers or clients, whether or not prepared by Optionee, shall be the sole and exclusive property of the Company.  Without the prior written consent of the Company, Optionee agrees not to use any such Work Product or other property of the Company for any purpose other than to perform services for or on behalf of the Company.    

 

(b) For purposes of this Agreement, the term “ Work Product ” shall include but is not limited to all documentation, manuals, materials, creative works, methods, techniques, compositions, ideas, creations, drawings, renderings, plans, improvements, inventions, computer programs and data, system documentation, special hardware, product hardware, related software development, correspondence, letters, notes, notebooks, reports, flowcharts, proposals, financial calculations and formulae, know-how and other information, (including, without limitation, any Confidential and Proprietary Information (as defined herein)), which is created for or on behalf of the Company, in whole or in part, by Optionee, whether or not such Work Product is capable of being copyrighted, patented, trademarked or otherwise protected under applicable law.

 

(c) Optionee agrees that said Optionee shall assist in every lawful way in protecting or enforcing the Company's rights in and to the Work Product and/or other property of the Company, and in prosecuting and defending appeals, interferences, infringement suits and controversies relating thereto.  The provisions of this Section 4 shall survive the termination of Optionee’s employment with the Company.  

 

(d) Consistent with California Labor Code Section 2870, the provisions of Section 4.5 do not apply to invention that Optionee develops entirely on his or her own time without using the Company’s equipment, supplies, facilities, or trade secret information except for those inventions that either (a) relate at the time of conception or reduction to practice of the invention to the Company’s business, or actual or demonstrably anticipated research or development of the Company, or (b) result from any work performed by Optionee for the Company.

 

4.6 Non-disparagement .  In consideration for the Option and other good and valuable consideration,  Optionee agrees not to disparage the Company at any time during or following Optionee’s employment with the Company.  Prohibited actions include, but are not limited to, private or public comments, statements, or writings critical of the Company, any Subsidiary or any affiliate.

 

4.7 Exceptions . Notwithstanding this Section 4, nothing in this Agreement shall prohibit Optionee from participating in concerted activity under the National Labor Relations Act or disclosing information to government agencies/entities as legally required, and/or from reporting possible violations of federal or state law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the congress, and any agency inspector general, or making other disclosures that are protected under the whistleblower provisions of federal or state law or regulation.  Optionee does not need the prior authorization from the Company to make any such reports or disclosures and Optionee is not required to notify the Company that Optionee has made such reports or disclosures.

 

4.8 Reformation . If, at any time of enforcement of this Section 4 , a court or an arbitrator holds that the restrictions stated herein are unreasonable or unenforceable under circumstances

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then existing, the parties hereto agree that the court or arbitrator shall be allowed to revise the restrictions contained herein to cover the restrictions to the maximum extent permitted by law. This Agreement shall not authorize a court or arbitrator to increase or broaden any of the restrictions in this Section 4 .  

 

6. Clawback of Proceeds .

5.1. Clawback of Proceeds . If, during the one-year period following Optionee’s termination of employment Optionee materially violates any agreement between Optionee and the Company or its Subsidiaries with respect to Section 4 of this Agreement: (i) the Option shall be forfeited and (ii) the Optionee shall immediately remit a cash payment to the Company equal to the difference between (A) the Fair Market Value of a share of Common Stock on the date on which the Company first became aware of such violation or the date of Optionee’s termination of employment, whichever is greater, and (B) the per share Exercise Price, multiplied by (y) the number of shares of Common Stock purchased pursuant to the exercise of the Option. The remedy provided by this Section 5 shall be in addition to and not in lieu of any rights or remedies which the Company may have against the Optionee in respect of a breach by the Optionee of any duty or obligation to the Company.

5.2. Right of Setoff . The Optionee agrees that by accepting the Award Notice the Optionee authorizes the Company and its affiliates to deduct, to the extent permitted by applicable law, any amount or amounts owed by the Optionee pursuant to this Section 5 from any amounts payable by or on behalf of the Company or any affiliate to the Optionee, including, without limitation, any amount payable to the Optionee as salary, wages, vacation pay, bonus or the settlement of the Option or any stock-based award. This right of setoff shall not be an exclusive remedy and the Company’s or an affiliate’s election not to exercise this right of setoff with respect to any amount payable to the Optionee shall not constitute a waiver of this right of setoff with respect to any other amount payable to the Optionee or any other remedy.

 

7. Additional Terms and Conditions .    

7.1. Withholding Taxes .  (a) As a condition precedent to the issuance of Common Stock following the exercise of the Option, Optionee shall, upon request by the Company, pay to the Company in addition to the purchase price of the shares, such amount as the Company determines is required, under all applicable federal, state, local or other laws or regulations, to be withheld and paid over as income or other withholding taxes (the “ Required Tax Payments ”) with respect to such exercise of the Option.  If Optionee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Optionee.

(b) Optionee may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means:  (i) a cash payment to the Company; (ii) delivery to the Company (either actual delivery or by attestation procedures established by the Company) of previously owned whole shares of Common Stock having an aggregate Fair Market Value, determined as of the date on which such withholding obligation arises (the “ Tax Date ”), equal to the Required Tax Payments; (iii) except as may be prohibited by applicable law, a cash payment by a broker-dealer acceptable to the Company to whom Optionee has submitted an irrevocable notice of exercise or (iv) any combination of (i) or (ii).  Shares of Common Stock to be delivered or withheld may not have a Fair Market Value in excess of the minimum amount of the Required Tax Payments; provided , however , that if a fraction of a share of Common Stock would be required to satisfy the minimum amount of the Required Tax Payments, then the number of shares of Common Stock to be delivered or withheld may be rounded up to the next nearest whole share of Common Stock.    No share of Common Stock or certificate representing a

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share of Common Stock shall be issued or delivered until the Required Tax Payments have been satisfied in full.  

7.2. Adjustment .  If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Company’s receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to the number and/or class of securities subject to the Option and the Exercise Price. Such adjustments to the Option is to be effected in a manner that shall preclude the enlargement or dilution of rights and benefits under the Option and in accordance with Section 409A of the Code. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.  

7.3. Compliance with Applicable Law .  The Option is subject to the condition that if the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the purchase or issuance of shares hereunder, the Option may not be exercised, in whole or in part, and such shares may not be issued, unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company.  The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent, approval or other action.

7.4. Issuance or Delivery of Shares .  Upon the exercise of the Option, in whole or in part, the Company shall issue or deliver, subject to the conditions of this Agreement, the number of shares of Common Stock purchased against full payment therefor.  Such issuance shall be evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company.  The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such issuance, except as otherwise provided in Section 6.1 .

7.5. Option Confers No Rights as Stockholder .  Optionee shall not be entitled to any privileges of ownership with respect to shares of Common Stock subject to the Option unless and until such shares are purchased and issued upon the exercise of the Option, in whole or in part, and Optionee becomes a stockholder of record with respect to such issued shares.  Optionee shall not be considered a stockholder of the Company with respect to any such shares not so purchased and issued.

7.6. Option Confers No Rights to Continued Employment .  In no event shall the granting of the Option or its acceptance by Optionee, or any provision of this Agreement or the Plan, give or be deemed to give Optionee any right to continued employment by the Company, any Subsidiary or any affiliate of the Company or affect in any manner the right of the Company, any Subsidiary or any affiliate of the Company to terminate the employment of any person at any time.

7.7. Decisions of Board or Plan Administrator .  The Board or the Plan Administrator shall have the right to resolve all questions which may arise in connection with the Option or its exercise.  Any interpretation, determination or other action made or taken by the Board or the Plan Administrator regarding the Plan or this Agreement shall be final, binding and conclusive.

7.8. Successors .  This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of Optionee, acquire any rights hereunder in accordance with this Agreement or the Plan.

7.9. Notices .  All notices, requests or other communications provided for in this Agreement shall be made, if to the Company, to Biolase, Inc., Attn: Director of Financial Reporting, 4

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Cromwell, Irvine, California, 92618, and if to Optionee, to the last known mailing address of Optionee contained in the records of the Company.  All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery, (b) by facsimile or electronic mail with confirmation of receipt, (c) by mailing in the United States mails or (d) by express courier service.  The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile or electronic mail transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided , however , that if a notice, request or other communication sent to the Company is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company.  

7.10. Governing Law . This Agreement, the Option and all determinations made and actions taken pursuant hereto and thereto, to the extent not governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws.

7.11. Agreement Subject to the Plan .  This Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith.  In the event that the provisions of this Agreement and the Plan conflict, the Plan shall control.  The Optionee hereby acknowledges receipt of a copy of the Plan.

7.12. Entire Agreement .  This Agreement and the Plan constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and the Optionee.

7.13. Partial Invalidity .  The invalidity or unenforceability of any particular provision of this Agreement shall not effect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.

7.14. Amendment and Waiver .  The provisions of this Agreement may be amended or waived only by the written agreement of the Company and the Optionee, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement.

7.15. Counterparts .  The Award Notice may be executed in two counterparts, each of which shall be deemed an original and both of which together shall constitute one and the same instrument.

 

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Exhibit 10.3

Biolase, Inc.

2002 Stock Incentive Plan

Option Award Notice

[Name of Optionee]

You have been awarded an option to purchase shares of Common Stock of Biolase, Inc. (the “ Company ”) pursuant to the terms and conditions of the Biolase, Inc. 2002 Stock Incentive Plan (the “ Plan ”) and the Stock Option Agreement (together with this Award Notice, the “ Agreement ”).  The Stock Option Agreement is attached hereto and the Plan and Stock Option Agreement are available on Solium.  Capitalized terms not defined herein shall have the meanings specified in the Plan or the Agreement.

Option :

 

You have been awarded a Nonqualified Stock Option to purchase from the Company [____] shares of its Common Stock, par value $0.001 per share (the “ Common Stock ”), subject to adjustment as provided in Section 6.2 of the Agreement.

Option Date :

 

[____________________, _____]

Exercise Price :

 

$[______________] per share, subject to adjustment as provided in Section 6.2 of the Agreement.

Time-Based Vesting Schedule :

 

Except as otherwise provided in the Plan, the Agreement or any other agreement between the Company or any of its Subsidiaries and Optionee, [50%] of the number of shares of Common Stock subject to the Option on the Option Date shall vest (i) on the first anniversary of the Option Date with respect to one-fourth of the number of shares subject thereto on the Option Date and (ii) in monthly installments on the last day of each month over a thirty-six month period, commencing on the thirteenth month following the Option Date, with respect to the remaining three-quarters of the number of shares subject thereto on the Option Date.

Performance-Based Vesting Schedule :

 

Except as otherwise provided in the Plan, the Agreement or any other agreement between the Company or any of its Subsidiaries and the Optionee, [50%] of the number of shares of Common Stock subject to the Option on the Option Date shall vest upon the achievement of specific annual Company performance criteria as follows:   [PERFORMANCE-BASED VESTING SCHEDULE] .

Termination of Employment :

 

The time-based vesting schedule and performance-based vesting schedule shall each be subject to the requirement that you are, and have been, continuously (except for any absence for vacation, leave, etc. in accordance with the Company's or its Subsidiaries' policies): (A) employed by the Company or any of its Subsidiaries; (B) serving as a Non-Employee Director; or (C) providing services to the Company or any of its Subsidiaries as an independent contractor, in each case, from the Option Date through and including the applicable vesting date.

 


 

Expiration Date :

 

Except to the extent earlier terminated pursuant to Section 2.2 of the Agreement or earlier exercised pursuant to Section 2.3 of the

Agreement, the Option shall terminate at 5:00 p.m., U.S. Pacific time, on the tenth anniversary of the Option Date.

 

BIOLASE, INC.

 

By: _______________________

 

 

 

 

Acknowledgment, Acceptance and Agreement :

 

By signing below and returning this Award Notice to Biolase, Inc. at the address stated herein, I hereby accept the Option granted to me and acknowledge and agree to be bound by the terms and conditions of this Award Notice, the Agreement and the Plan.

 

__________________________________

Optionee

 

__________________________________

Date


 

 

 

 

 

 

 

Biolase, Inc.

4 Cromwell

Irvine, California, 92618

Attention:  Director of Financial Reporting

 

 

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Biolase, Inc.
2002 Stock Incentive Plan


Stock Option Agreement

Biolase, Inc., a Delaware corporation (the “ Company ”), hereby grants to the individual (“ Optionee ”) named in the award notice attached hereto (the “ Award Notice ”) as of the date set forth in the Award Notice (the “ Option Date ”), pursuant to the provisions of the Biolase, Inc. 2002 Stock Incentive Plan (the “ Plan ”), an option to purchase from the Company the number of shares of the Company’s Common Stock, par value $0.001 per share (“ Common Stock ”), set forth in the Award Notice at the price per share set forth in the Award Notice (the “ Exercise Price ”) (the “ Option ”), upon and subject to the terms and conditions set forth below, in the Award Notice and in the Plan.  Capitalized terms not defined herein shall have the meanings specified in the Plan.

1. Option Subject to Acceptance of Agreement .  The Option shall be null and void unless Optionee shall accept this Agreement by executing the Award Notice in the space provided therefor and returning an original execution copy of the Award Notice to the Company.  

2. Time and Manner of Exercise of Option .

2.1. Maximum Term of Option .  In no event may the Option be exercised, in whole or in part, after the expiration date set forth in the Award Notice (the “ Expiration Date ”).

2.2. Vesting and Exercise of Option .  The Option shall become vested and exercisable in accordance with the vesting schedules set forth in the Award Notice (collectively, the “ Vesting Schedule ”).  The period of time prior to the full vesting of the Option shall be referred to herein as the “ Vesting Period .”  Subject to Section 2.2(d), immediately upon the Optionee’s termination of employment for any reason, the Option shall terminate with respect to the unvested portion of the Option on the effective date of such termination of employment.  The Option shall be exercisable following a termination of Optionee’s employment according to the following terms and conditions:  

(a) Termination due to Death or Permanent Disability .  If Optionee’s employment with the Company terminates prior to the end of the Vesting Period by reason of Optionee’s death or a termination by the Company due to Permanent Disability, the Option, only to the extent vested on the effective date of such termination of employment, may thereafter be exercised by Optionee or Optionee’s executor, administrator, legal representative, guardian or similar person until and including the earlier to occur of (i) the date which is one year after the date of termination of employment and (ii) the Expiration Date.  

(b) Termination other than for Misconduct, Death or Permanent Disability .  Subject to Section 2.2(d) , if Optionee’s employment with the Company terminates prior to the end of the Vesting Period by reason of a termination of Optionee’s employment (i) by the Company for any reason other than for Misconduct, death or Permanent Disability or (ii) by the Optionee for any reason, the Option, only to the extent vested on the effective date of such termination of employment, may thereafter be exercised by Optionee until and including the earlier to occur of (i) the date which is ninety (90) days after the date of such termination of employment and (ii) the Expiration Date; provided , however , that if the Optionee terminates employment voluntarily and does not give the Company at least (y) 30 days notice if Optionee is a manager or (z) 14 days notice if Optionee is not a manager, then the Option shall terminate immediately upon such termination of employment.  

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(c) Misconduct .  If Optionee’s employment with the Company terminates by reason of the Company’s termination of Optionee’s employment for Misconduct or if the Optionee otherwise engages in Misconduct (as determined by the Plan Administrator), then the Option, whether or not vested, shall terminate immediately upon such termination of employment.  

(d) Change in Control .  

(i) Immediately prior to the effective date of a Change in Control, the Option shall vest and become exercisable for all of the shares subject to the Option and may be exercised for any or all of those shares or, at the election of the Company, the Optionee shall receive, in full settlement for such Option, a cash payment in an amount equal to the aggregate number of shares of Common Stock then subject to the Option multiplied by the excess, if any, of the Fair Market Value of a share of Common Stock as of the date of the Change in Control, over the Exercise Price.  Notwithstanding anything herein to the contrary, the Option shall not vest and become exercisable on an accelerated basis if and to the extent: (i) the Option is assumed by the successor corporation (or parent thereof) or is otherwise continued in full force and effect pursuant to the terms of the Change in Control transaction or (ii) the Option is replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Change in Control on the shares subject to the Option that were not otherwise exercisable at the time of the Change in Control (the excess of the Fair Market Value of  such shares over the aggregate Exercise Price payable for such shares) and provides for subsequent payout of that spread no later than the time the Option would have vested and become exercisable for those shares.  

(ii) Immediately following the consummation of the Change in Control, the Option shall terminate, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in effect pursuant to the terms of the Change in Control transaction.

(iii) If the Option is assumed or otherwise continued in effect in connection with a Change in Control, then the Option shall be appropriately adjusted, upon such Change in Control, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Change in Control had the Option been exercised immediately prior to such Change in Control, and appropriate adjustments shall also be made to the Exercise Price, subject to Section 409A of the Code.  To the extent that the holders of Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation (or its parent) may, in connection with the assumption of this option, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control.  In the event the Option is assumed or otherwise continued pursuant to this Agreement and the terms of the Plan and the Company terminates Optionee’s employment due to an Involuntary Termination within 24 months following such Change in Control and Optionee executes and does not revoke a waiver and release of claims in the form prescribed by the Company within 60 days after the date of such termination, the Option shall be 100% vested upon such termination of employment, and the Option may thereafter be exercised by Optionee until and including the earlier to occur of (i) the date which is one year after the date of termination of employment and (ii) the Expiration Date.   

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(iv) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.    

2.3. Method of Exercise .  Subject to the limitations set forth in this Agreement, the Option, to the extent vested, may be exercised by Optionee (a) by delivering to the Company an exercise notice in the form prescribed by the Company specifying the number of whole shares of Common Stock to be purchased and by accompanying such notice with payment therefor in full (or by arranging for such payment to the Company’s satisfaction) either (i) in cash, (ii) by delivery to the Company (either actual delivery or by attestation procedures established by the Company) of shares of Common Stock having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable pursuant to the Option by reason of such exercise, (iii) except as may be prohibited by applicable law, in cash by a broker-dealer acceptable to the Company to whom Optionee has submitted an irrevocable notice of exercise or (iv) by a combination of (i) or (ii), and (b) by executing such documents as the Company may reasonably request.  No share of Common Stock or certificate representing a share of Common Stock shall be issued or delivered until the full purchase price therefor and any withholding taxes thereon, as described in Section 6.1 , have been paid.

2.4. Termination of Option .  In no event may the Option be exercised after it terminates as set forth in this Section 2.4 .  The Option shall terminate, to the extent not earlier terminated pursuant to Section 2.2 or exercised pursuant to Section 2.3 , on the Expiration Date.  Upon the termination of the Option, the Option and all rights hereunder shall immediately become null and void.

3. Transfer Restrictions and Investment Representations .

3.1. Nontransferability of Option .  The Option may not be transferred by Optionee other than by will or the laws of descent and distribution or pursuant to the designation of one or more beneficiaries on the form prescribed by the Company.  Except to the extent permitted by the foregoing sentence, (i) during Optionee’s lifetime the Option is exercisable only by Optionee or Optionee’s legal representative, guardian or similar person and (ii) the Option may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process.  Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Option, the Option and all rights hereunder shall immediately become null and void.

3.2. Investment Representation .  Optionee hereby represents and covenants that (a) any shares of Common Stock purchased upon exercise of the Option will be purchased for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the “ Securities Act ”), unless such purchase has been registered under the Securities Act and any applicable state securities laws; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, Optionee shall submit a written statement, in a form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of any purchase of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable.  As a further condition precedent to any exercise of the Option, Optionee shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance or delivery of the shares and, in connection therewith, shall execute any documents which the Board or the Plan Administrator shall in its sole discretion deem necessary or advisable.

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4. Covenants of Employee .  

4.1 Covenant Not to Compete . Optionee recognizes and acknowledges that it is essential for the proper protection of the business of the Company that Optionee be restrained from competing against the Company during the term of Optionee’s employment with the Company and for a period of two years following Optionee’s employment with the Company (“ Noncompetition Period ”).  Therefore, in consideration for the Option and other good and valuable consideration, Optionee agrees that, during the Noncompetition Period, Optionee will not engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder or otherwise, alone or in association with any other person, corporation or other entity, in any Competing Business.  For purposes of this Agreement, the term “ Competing Business ” shall mean:  (a) any person, corporation or other entity which sells or attempts to sell, or provides or attempts to provide any products and/or services which are the same as or similar to the products and/or services sold or provided by the Company; or (b) any person, corporation, or other entity that solicits, trades with, advises, calls upon or otherwise does or attempts to do, directly or indirectly, business with any clients, customers or accounts of the Company, its successors, assigns or affiliates that have done business with the Company at any time or from time to time; or (c) any person, corporation or other entity engaged in the same or similar business as the business of the Company .   

 

4.2 Covenant Not to Use Trade Secret Information to Solicit Customers or Clients. Optionee recognizes and acknowledges that the Company has expended and will expend considerable and significant amounts of time and money establishing relationships and good will with existing and prospective customers or clients and developing a list of its customers or clients and prospective customers or clients, which list is not available to the general public and which constitutes a Trade Secret under the California Uniform Trade Secret Act (California Civil Code § 3426, et seq.).  Optionee further recognizes and acknowledges that the aforesaid list may contain other information about the customers or clients and prospective customers or clients not available to the general public and that Optionee may be privileged to this list. Optionee also recognizes and acknowledges that many of the Company's competitors could not recreate this list without substantial efforts, that the Company's business would be irreparably and greatly damaged by the use of this information other than for its benefit, and that it is essential for the proper protection of the business of the Company that Optionee be restrained from soliciting the trade of or trading with the customers or clients of the Company.  Therefore, in consideration for the Option and other good and valuable consideration, Optionee agrees that Optionee will not, directly or indirectly use the Company’s trade secrets to solicit the trade of, or trade with, or do business with, or attempt to solicit the trade of any of the Company's customers or clients or prospective customers or clients except for the Company's benefit, and except to the extent that Optionee traded with or did business with any such customer or client or prospective customer or client prior to the date upon which said Optionee was engaged to perform services for and on behalf of the Company.  Optionee also agrees not to utilize in any manner other than for the benefit of the Company, or provide access to anyone in any Competing Business (as previously defined), the Company’s list of customers, or any information contained in that list.

 

4.3 Covenant Not to Solicit Employees . Optionee recognizes and acknowledges that the Company has expended and will expend considerable and significant amounts of time and money establishing relationships with and/or training its employees. Optionee recognizes and acknowledges that it is essential for the proper protection of the business of the Company that Optionee be restrained from soliciting any employee of the Company to leave the employ of the Company. Therefore, in consideration for the Option and other good and valuable consideration, Optionee agrees that, during the term of Optionee’s employment with the Company, and during the Noncompetition Period, Optionee will not solicit, or attempt to solicit, any employee of the Company to leave the Company for any reason whatsoever.

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4.4 Extension .  Because the protection of the Company’s trade secret and confidential information requires that Optionee not perform the activities described in Sections 4.1 through 4.3 for the full Noncompetition Period, Optionee agrees that the Noncompetition Period provided in Section 4 shall be extended for any time during which Optionee breaches this Agreement, such that Optionee does not perform the proscribed activities for a time period equal to the full amount of time provided in Section 4 .

 

4.5 Covenant Not to Violate Corporate Confidences .

 

(a) Optionee recognizes and acknowledges that (a) during the term of Optionee’s employment with the Company, it may be necessary for Optionee to acquire, and during the course of Optionee’s previous work for or on behalf of the Company prior to the commencement of this Agreement, Optionee may have already acquired, information which could include, in whole or in part, information concerning the Company’s sales, sales volume, sales methods, sales proposals, customers or clients and prospective customers or clients (including lists thereof), identity of customers or clients and prospective customers or clients, identity of key personnel in the employ of customers or clients and prospective customers or clients, amount or kind of customer's or client’s purchases from and/or transactions with the Company, the needs and requirements of any or all customers or clients, the terms and conditions under which the Company deals with customers or clients or prospective customers or clients, the terms and conditions under which the Company deals with vendors or suppliers or prospective vendors or suppliers, employee lists, the Company’s sources of supply, the Company’s billing rates, methods, techniques, compositions, ideas, creations, drawings, renderings, plans, improvements, inventions, computer programs and data, system documentation, special hardware, product hardware, related software development, correspondence, letters, notes, notebooks, reports, flowcharts, proposals, processes and/or any and all other trade secret, confidential or proprietary information belonging to the Company or relating to the Company’s business(es) and/or affairs, (collectively referred to herein as the “ Confidential and Proprietary Information ”); (b) this Confidential and Proprietary Information has been compiled by the Company at great expense and over a great amount of time; (c) this Confidential and Proprietary Information derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; (d) the Confidential and Proprietary Information is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; (e) the Confidential and Proprietary Information is the sole and exclusive property of the Company; (f) the use, misappropriation or disclosure of the Confidential and Proprietary Information by Optionee or otherwise would constitute a breach of trust and could cause irreparable injury to the Company; and (g) it is essential to the protection of the Company’s good will and to the maintenance of the Company’s competitive position that the Confidential and Proprietary Information be kept secret and that Optionee not disclose the Confidential and Proprietary Information to others or use the Confidential and Proprietary Information to Optionee’s own advantage or the advantage of others.  

 

(b) In consideration for the Option and other good and valuable consideration, and as a material inducement to the Company to disclose or allow to be known to Optionee some or all of the Confidential and Proprietary Information during the term of Optionee’s employment with the Company (at the Company’s sole and absolute discretion), Optionee hereby agrees that, throughout the term of Optionee’s employment with the Company and following the date of termination of Optionee’s employment with the Company, Optionee will hold and safeguard the Confidential and Proprietary Information in trust for the Company, and not misappropriate or divulge to any person that is not affiliated with the Company, or make available to anyone for use outside the Company’s organization at any time, either during the term of Optionee’s employment with the Company or subsequent to the termination of Optionee’s employment with the Company, except with the express written consent of the

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Company or as provided by this agreement, any of the Company's Confidential and Proprietary Information, whether or not developed or created by Optionee.  

 

(c) Optionee further agrees that, upon termination of Optionee’s employment with the Company, or at any time upon request by the Company, Optionee shall surrender to the Company all Company property which said Optionee is then in possession, including any and all tangible evidence of such Confidential and Proprietary Information.  

 

4.6 Proprietary Rights .

 

(a) Optionee agrees that all Work Product, as hereinafter defined, created solely or jointly by Optionee, arising from or relating to any services performed by Optionee for or on behalf of the Company, or in the course Optionee’s performance of Optionee’s duties as an Optionee of the Company, or previously performed by Optionee for or on behalf of the Company, shall be deemed “work made for hire” and shall be the sole and exclusive property of the Company.  Optionee shall execute all such assignments, oaths, declarations and other documents as may be prepared by the Company to effect the foregoing.  In addition, Optionee agrees that all other property, materials, papers, books, records, computer software and programs of the Company, as well as all reproductions thereof, relating to the business and affairs of the Company, or its customers or clients, whether or not prepared by Optionee, shall be the sole and exclusive property of the Company.  Without the prior written consent of the Company, Optionee agrees not to use any such Work Product or other property of the Company for any purpose other than to perform services for or on behalf of the Company.  

 

(b) For purposes of this Agreement, the term “ Work Product ” shall include but is not limited to all documentation, manuals, materials, creative works, methods, techniques, compositions, ideas, creations, drawings, renderings, plans, improvements, inventions, computer programs and data, system documentation, special hardware, product hardware, related software development, correspondence, letters, notes, notebooks, reports, flowcharts, proposals, financial calculations and formulae, know-how and other information, (including, without limitation, any Confidential and Proprietary Information (as defined herein)), which is created for or on behalf of the Company, in whole or in part, by Optionee, whether or not such Work Product is capable of being copyrighted, patented, trademarked or otherwise protected under applicable law.

 

(c) Optionee agrees that said Optionee shall assist in every lawful way in protecting or enforcing the Company's rights in and to the Work Product and/or other property of the Company, and in prosecuting and defending appeals, interferences, infringement suits and controversies relating thereto.  The provisions of this Section 4 shall survive the termination of Optionee’s employment with the Company.

 

4.7 Non-disparagement .  In consideration for the Option and other good and valuable consideration,  Optionee agrees not to disparage the Company at any time during or following Optionee’s employment with the Company.  Prohibited actions include, but are not limited to, private or public comments, statements, or writings critical of the Company, any Subsidiary or any affiliate.

 

4.8 Exceptions .  Notwithstanding this Section 4, nothing in this Agreement shall prohibit Optionee from participating in concerted activity under the National Labor Relations Act or disclosing information to government agencies/entities as legally required, and/or from reporting possible violations of federal or state law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the congress, and any agency inspector general, or making other disclosures that are protected under the whistleblower provisions of federal or state law or regulation.  Optionee does not need the prior authorization from the

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Company to make any such reports or disclosures and Optionee is not required to notify the Company that Optionee has made such reports or disclosures.  

 

4.9 Reformation .  If, at any time of enforcement of this Section 4 , a court or an arbitrator holds that the restrictions stated herein are unreasonable or unenforceable under circumstances then existing, the parties hereto agree that the court or arbitrator shall be allowed to revise the restrictions contained herein to cover the restrictions to the maximum extent permitted by law. This Agreement shall not authorize a court or arbitrator to increase or broaden any of the restrictions in this Section 4 .

 

5. Clawback of Proceeds .

5.1. Clawback of Proceeds . If, during the one-year period following Optionee’s termination of employment Optionee materially violates any agreement between Optionee and the Company or its Subsidiaries with respect to Section 4 of this Agreement: (i) the Option shall be forfeited and (ii) the Optionee shall immediately remit a cash payment to the Company equal to the difference between (A) the Fair Market Value of a share of Common Stock on the date on which the Company first became aware of such violation or the date of Optionee’s termination of employment, whichever is greater, and (B) the per share Exercise Price, multiplied by (y) the number of shares of Common Stock purchased pursuant to the exercise of the Option. The remedy provided by this Section 5 shall be in addition to and not in lieu of any rights or remedies which the Company may have against the Optionee in respect of a breach by the Optionee of any duty or obligation to the Company.

5.2. Right of Setoff . The Optionee agrees that by accepting the Award Notice the Optionee authorizes the Company and its affiliates to deduct, to the extent permitted by applicable law, any amount or amounts owed by the Optionee pursuant to this Section 5 from any amounts payable by or on behalf of the Company or any affiliate to the Optionee, including, without limitation, any amount payable to the Optionee as salary, wages, vacation pay, bonus or the settlement of the Option or any stock-based award. This right of setoff shall not be an exclusive remedy and the Company’s or an affiliate’s election not to exercise this right of setoff with respect to any amount payable to the Optionee shall not constitute a waiver of this right of setoff with respect to any other amount payable to the Optionee or any other remedy.

 

6. Additional Terms and Conditions .    

6.1. Withholding Taxes .  

(a) As a condition precedent to the issuance of Common Stock following the exercise of the Option, Optionee shall, upon request by the Company, pay to the Company in addition to the purchase price of the shares, such amount as the Company determines is required, under all applicable federal, state, local or other laws or regulations, to be withheld and paid over as income or other withholding taxes (the “ Required Tax Payments ”) with respect to such exercise of the Option.  If Optionee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Optionee.

(b) Optionee may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means:  (i) a cash payment to the Company; (ii) delivery to the Company (either actual delivery or by attestation procedures established by the Company) of previously owned whole shares of Common Stock having an aggregate Fair Market Value, determined as of the date on which such withholding obligation arises (the “ Tax Date ”), equal to the Required Tax Payments;

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(iii) except as may be prohibited by applicable law, a cash payment by a broker-dealer acceptable to the Company to whom Optionee has submitted an irrevocable notice of exercise or (iv) any combination of (i) or (ii).  Shares of Common Stock to be delivered or withheld may not have a Fair Market Value in excess of the minimum amount of the Required Tax Payments; provided , however , that if a fraction of a share of Common Stock would be required to satisfy the minimum amount of the Required Tax Payments, then the number of shares of Common Stock to be delivered or withheld may be rounded up to the next nearest whole share of Common Stock.    No share of Common Stock or certificate representing a share of Common Stock shall be issued or delivered until the Required Tax Payments have been satisfied in full.  

6.2. Adjustment .  If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Company’s receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to the number and/or class of securities subject to the Option and the Exercise Price. Such adjustments to the Option is to be effected in a manner that shall preclude the enlargement or dilution of rights and benefits under the Option and in accordance with Section 409A of the Code. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.  

6.3. Compliance with Applicable Law .  The Option is subject to the condition that if the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the purchase or issuance of shares hereunder, the Option may not be exercised, in whole or in part, and such shares may not be issued, unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company.  The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent, approval or other action.

6.4. Issuance or Delivery of Shares .  Upon the exercise of the Option, in whole or in part, the Company shall issue or deliver, subject to the conditions of this Agreement, the number of shares of Common Stock purchased against full payment therefor.  Such issuance shall be evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company.  The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such issuance, except as otherwise provided in Section 6.1 .

6.5. Option Confers No Rights as Stockholder .  Optionee shall not be entitled to any privileges of ownership with respect to shares of Common Stock subject to the Option unless and until such shares are purchased and issued upon the exercise of the Option, in whole or in part, and Optionee becomes a stockholder of record with respect to such issued shares.  Optionee shall not be considered a stockholder of the Company with respect to any such shares not so purchased and issued.

6.6. Option Confers No Rights to Continued Employment .  In no event shall the granting of the Option or its acceptance by Optionee, or any provision of this Agreement or the Plan, give or be deemed to give Optionee any right to continued employment by the Company, any Subsidiary or any affiliate of the Company or affect in any manner the right of the Company, any Subsidiary or any affiliate of the Company to terminate the employment of any person at any time.

6.7. Decisions of Board or Plan Administrator .  The Board or the Plan Administrator shall have the right to resolve all questions which may arise in connection with the Option or its exercise.  Any interpretation, determination or other action made or taken by the Board or the Plan Administrator regarding the Plan or this Agreement shall be final, binding and conclusive.

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6.8. Successors .  This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of Optionee, acquire any rights hereunder in accordance with this Agreement or the Plan.  

6.9. Notices .  All notices, requests or other communications provided for in this Agreement shall be made, if to the Company, to Biolase, Inc., Attn: Director of Financial Reporting, 4 Cromwell, Irvine, California, 92618, and if to Optionee, to the last known mailing address of Optionee contained in the records of the Company.  All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery, (b) by facsimile or electronic mail with confirmation of receipt, (c) by mailing in the United States mails or (d) by express courier service.  The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile or electronic mail transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided , however , that if a notice, request or other communication sent to the Company is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company.

6.10. Governing Law . This Agreement, the Option and all determinations made and actions taken pursuant hereto and thereto, to the extent not governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws.

6.11. Agreement Subject to the Plan .  This Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith.  In the event that the provisions of this Agreement and the Plan conflict, the Plan shall control.  The Optionee hereby acknowledges receipt of a copy of the Plan.

6.12. Entire Agreement .  This Agreement and the Plan constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and the Optionee.

6.13. Partial Invalidity .  The invalidity or unenforceability of any particular provision of this Agreement shall not effect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.

6.14. Amendment and Waiver .  The provisions of this Agreement may be amended or waived only by the written agreement of the Company and the Optionee, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement.

6.15. Counterparts .  The Award Notice may be executed in two counterparts, each of which shall be deemed an original and both of which together shall constitute one and the same instrument.

 

 

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Exhibit 10.4

Biolase, Inc.

2002 Stock Incentive Plan

Option Award Notice

[Non-Employee Director]

You have been awarded an option to purchase shares of Common Stock of Biolase, Inc. (the “ Company ”) pursuant to the terms and conditions of the Biolase, Inc. 2002 Stock Incentive Plan (the “ Plan ”) and the Stock Option Agreement (together with this Award Notice, the “ Agreement ”).  The Stock Option Agreement is attached hereto and the Plan and Stock Option Agreement are available on Solium.  Capitalized terms not defined herein shall have the meanings specified in the Plan or the Agreement.

Option :

 

You have been awarded a Nonqualified Stock Option to purchase from the Company [insert amount] shares of its Common Stock, par value $0.001 per share (the “ Common Stock ”), subject to adjustment as provided in Section 4.1 of the Agreement.

Option Date :

 

[                           ,            ]

Exercise Price :

 

$[            ] per share , subject to adjustment as provided in Section 4.1 of the Agreement.

Time-Based Vesting Schedule :

 

Except as otherwise provided in the Plan, the Agreement or any other agreement between the Company or any of its Subsidiaries and Optionee, the shares of Common Stock subject to the Option on the Option Date shall vest in monthly installments over a twelve month period, commencing on the first month following the Option Date.

Termination of Service :

 

The time-based vesting schedule shall be subject to the requirement that you are, and have been, continuously (except for any absence for vacation, leave, etc. in accordance with the Company's or its Subsidiaries' policies): (A) employed by the Company or any of its Subsidiaries; (B) serving as a Non-Employee Director; or (C) providing services to the Company or any of its Subsidiaries as an independent contractor, in each case, from the Option Date through and including the applicable vesting date.

Expiration Date :

 

Except to the extent earlier terminated pursuant to Section 2.2 of the Agreement or earlier exercised pursuant to Section 2.3 of the Agreement, the Option shall terminate at 5:00 p.m., U.S. Pacific time, on the tenth anniversary of the Option Date.

 

BIOLASE, INC.

 

By: _______________________

        

 

 

 


 

 

 

Acknowledgment, Acceptance and Agreement :

 

By signing below and returning this Award Notice to Biolase, Inc. at the address stated herein, I hereby accept the Option granted to me and acknowledge and agree to be bound by the terms and conditions of this Award Notice, the Agreement and the Plan.

 

 

 

__________________________________

Optionee:

 

 

__________________________________

Date


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Biolase, Inc.

4 Cromwell

Irvine, California, 92618

Attention:  Director of Financial Reporting

 

 

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Biolase, Inc.
2002 Stock Incentive Plan


Stock Option Agreement

Biolase, Inc., a Delaware corporation (the “ Company ”), hereby grants to the individual (“ Optionee ”) named in the award notice attached hereto (the “ Award Notice ”) as of the date set forth in the Award Notice (the “ Option Date ”), pursuant to the provisions of the Biolase, Inc. 2002 Stock Incentive Plan (the “ Plan ”), an option to purchase from the Company the number of shares of the Company’s Common Stock, par value $0.001 per share (“ Common Stock ”), set forth in the Award Notice at the price per share set forth in the Award Notice (the “ Exercise Price ”) (the “ Option ”), upon and subject to the terms and conditions set forth below, in the Award Notice and in the Plan.  Capitalized terms not defined herein shall have the meanings specified in the Plan.

1. Option Subject to Acceptance of Agreement .  The Option shall be null and void unless Optionee shall accept this Agreement by executing the Award Notice in the space provided therefor and returning an original execution copy of the Award Notice to the Company.  

2. Time and Manner of Exercise of Option .

2.1. Maximum Term of Option .  In no event may the Option be exercised, in whole or in part, after the expiration date set forth in the Award Notice (the “ Expiration Date ”).

2.2. Vesting and Exercise of Option .  The Option shall become vested and exercisable in accordance with the vesting schedules set forth in the Award Notice (collectively, the “ Vesting Schedule ”).  The period of time prior to the full vesting of the Option shall be referred to herein as the “ Vesting Period .”  Immediately upon the Optionee’s termination of service for any reason, the Option shall terminate with respect to the unvested portion of the Option on the effective date of such termination of service.  The Option shall be exercisable following a termination of Optionee’s service according to the following terms and conditions:  

(a) Termination for any Reason .  If Optionee’s service with the Company terminates for any reason, the Option, only to the extent vested on the effective date of such termination of service, may thereafter be exercised by Optionee or Optionee’s executor, administrator, legal representative, guardian or similar person until and including the earlier to occur of (i) the date which is one year after the date of termination of service and (ii) the Expiration Date.  

(b) Change in Control .  

(i) Immediately prior to the effective date of a Change in Control, the Option shall vest and become exercisable for all of the shares subject to the Option and may be exercised for any or all of those shares or, at the election of the Company, the Optionee shall receive, in full settlement for such Option, a cash payment in an amount equal to the aggregate number of shares of Common Stock then subject to the Option multiplied by the excess, if any, of the Fair Market Value of a share of Common Stock as of the date of the Change in Control, over the Exercise Price.  Notwithstanding anything herein to the contrary, the Option shall not vest and become exercisable on an accelerated basis if and to the extent: (i) the Option is assumed by the successor corporation (or parent thereof) or is otherwise continued in full force and effect pursuant to the terms of the Change in Control transaction or (ii) the Option is replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Change in

 


 

Control on the shares subject to the Option that were not otherwise exercisable at the time of the Change in Control (the excess of the Fair Market Value of  such shares over the aggregate Exercise Price payable for such shares) and provides for subsequent payout of that spread no later than the time the Option would have vested and become exercisable for those shares.    

(ii) Immediately following the consummation of the Change in Control, the Option shall terminate, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in effect pursuant to the terms of the Change in Control transaction.

(iii) If the Option is assumed or otherwise continued in effect in connection with a Change in Control, then the Option shall be appropriately adjusted, upon such Change in Control, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Change in Control had the Option been exercised immediately prior to such Change in Control, and appropriate adjustments shall also be made to the Exercise Price, subject to Section 409A of the Code.  To the extent that the holders of Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation (or its parent) may, in connection with the assumption of this option, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control.  

(iv) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.  

2.3. Method of Exercise .  Subject to the limitations set forth in this Agreement, the Option, to the extent vested, may be exercised by Optionee (a) by delivering to the Company an exercise notice in the form prescribed by the Company specifying the number of whole shares of Common Stock to be purchased and by accompanying such notice with payment therefor in full (or by arranging for such payment to the Company’s satisfaction) either (i) in cash, (ii) by delivery to the Company (either actual delivery or by attestation procedures established by the Company) of shares of Common Stock having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable pursuant to the Option by reason of such exercise, (iii) except as may be prohibited by applicable law, in cash by a broker-dealer acceptable to the Company to whom Optionee has submitted an irrevocable notice of exercise or (iv) by a combination of (i) or (ii), and (b) by executing such documents as the Company may reasonably request.  No share of Common Stock or certificate representing a share of Common Stock shall be issued or delivered until the full purchase price therefor has been paid.

2.4. Termination of Option .  In no event may the Option be exercised after it terminates as set forth in this Section 2.4 .  The Option shall terminate, to the extent not earlier terminated pursuant to Section 2.2 or exercised pursuant to Section 2.3 , on the Expiration Date.  Upon the termination of the Option, the Option and all rights hereunder shall immediately become null and void.

3. Transfer Restrictions and Investment Representations .

3.1. Nontransferability of Option .  The Option may not be transferred by Optionee other than by will or the laws of descent and distribution or pursuant to the designation of one or more beneficiaries on the form prescribed by the Company.  Except to the extent permitted by the foregoing

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sentence, (i) during Optionee’s lifetime the Option is exercisable only by Optionee or Optionee’s legal representative, guardian or similar person and (ii) the Option may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process.  Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Option, the Option and all rights hereunder shall immediately become null and void.  

3.2. Investment Representation .  Optionee hereby represents and covenants that (a) any shares of Common Stock purchased upon exercise of the Option will be purchased for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the “ Securities Act ”), unless such purchase has been registered under the Securities Act and any applicable state securities laws; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, Optionee shall submit a written statement, in a form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of any purchase of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable.  As a further condition precedent to any exercise of the Option, Optionee shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance or delivery of the shares and, in connection therewith, shall execute any documents which the Board or the Plan Administrator shall in its sole discretion deem necessary or advisable.

 

4. Additional Terms and Conditions .    

4.1. Adjustment .  If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Company’s receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to the number and/or class of securities subject to the Option and the Exercise Price. Such adjustments to the Option is to be effected in a manner that shall preclude the enlargement or dilution of rights and benefits under the Option and in accordance with Section 409A of the Code. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.  

4.2. Compliance with Applicable Law .  The Option is subject to the condition that if the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the purchase or issuance of shares hereunder, the Option may not be exercised, in whole or in part, and such shares may not be issued, unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company.  The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent, approval or other action.

4.3. Issuance or Delivery of Shares .  Upon the exercise of the Option, in whole or in part, the Company shall issue or deliver, subject to the conditions of this Agreement, the number of shares of Common Stock purchased against full payment therefor.  Such issuance shall be evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company.  The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such issuance.

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4.4. Option Confers No Rights as Stockholder .  Optionee shall not be entitled to any privileges of ownership with respect to shares of Common Stock subject to the Option unless and until such shares are purchased and issued upon the exercise of the Option, in whole or in part, and Optionee becomes a stockholder of record with respect to such issued shares.  Optionee shall not be considered a stockholder of the Company with respect to any such shares not so purchased and issued.  

4.5. Option Confers No Rights to Continued Service .  In no event shall the granting of the Option or its acceptance by Optionee, or any provision of this Agreement or the Plan, give or be deemed to give Optionee any right to continued service by the Company, any Subsidiary or any affiliate of the Company or affect in any manner the right of the Company, any Subsidiary or any affiliate of the Company to terminate the service of any person at any time.

4.6. Decisions of Board or Plan Administrator .  The Board or the Plan Administrator shall have the right to resolve all questions which may arise in connection with the Option or its exercise.  Any interpretation, determination or other action made or taken by the Board or the Plan Administrator regarding the Plan or this Agreement shall be final, binding and conclusive.

4.7. Successors .  This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of Optionee, acquire any rights hereunder in accordance with this Agreement or the Plan.

4.8. Notices .  All notices, requests or other communications provided for in this Agreement shall be made, if to the Company, to Biolase, Inc., Attn: Director of Financial Reporting, 4 Cromwell, Irvine, California, 92618, and if to Optionee, to the last known mailing address of Optionee contained in the records of the Company.  All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery, (b) by facsimile or electronic mail with confirmation of receipt, (c) by mailing in the United States mails or (d) by express courier service.  The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile or electronic mail transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided , however , that if a notice, request or other communication sent to the Company is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company.

4.9. Governing Law . This Agreement, the Option and all determinations made and actions taken pursuant hereto and thereto, to the extent not governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws.

4.10. Agreement Subject to the Plan .  This Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith.  In the event that the provisions of this Agreement and the Plan conflict, the Plan shall control.  The Optionee hereby acknowledges receipt of a copy of the Plan.

4.11. Entire Agreement .  This Agreement and the Plan constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and the Optionee.

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4.12. Partial Invalidity .  The invalidity or unenforceability of any particular provision of this Agreement shall not effect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.  

4.13. Amendment and Waiver .  The provisions of this Agreement may be amended or waived only by the written agreement of the Company and the Optionee, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement.

4.14. Counterparts .  The Award Notice may be executed in two counterparts, each of which shall be deemed an original and both of which together shall constitute one and the same instrument.

 

5

 

Exhibit 10.5

Biolase, Inc.

2002 Stock Incentive Plan

Non-Employee Director

Restricted Stock Unit Award Notice

 

[Non-Employee Director]

You have been awarded a restricted stock unit award with respect to shares of Common Stock of Biolase, Inc. (the “ Company ”) pursuant to the terms and conditions of the Biolase, Inc. 2002 Stock Incentive Plan (the “ Plan ”) and the Restricted Stock Unit Award Agreement (together with this Award Notice, the “ Agreement ”).  The Restricted Stock Unit Award Agreement is attached hereto and the Plan and Restricted Stock Unit Award Agreement are available on Solium.  Capitalized terms not defined herein shall have the meanings specified in the Plan or the Agreement.

Restricted Stock Units :

You have been awarded a restricted stock unit award with respect to [insert amount] shares of Common Stock, par value $0.001 per share, subject to adjustment as provided in Section 6.1 of the Agreement (the “ Award ”).

Grant Date :

[                     ,         ]

Vesting Schedule :

Except as otherwise provided in the Plan or the Agreement, the Award shall vest on the first anniversary of the Grant Date, provided you continuously serve as a non-employee director of the Company through such vesting date.

 

BIOLASE, INC.

 

 

By:

Name:

Title:  

 


 


 

Acknowledgment, Acceptance and Agreement :

By signing below and returning this Award Notice to Biolase, Inc. at the address stated herein, I hereby accept the Award granted to me and acknowledge and agree to be bound by the terms and conditions of this Award Notice, the Agreement and the Plan.

__________________________________

Holder

__________________________________    

Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Biolase, Inc.

4 Cromwell

Irvine, California, 92618
Attention:  Director of Financial Reporting


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Biolase , Inc.

2002 Stock Incentive Plan

Non-Employee Director

R estricted Stock Unit Award Agreement

 

Biolase, Inc., a Delaware corporation (the “ Company ”), hereby grants to the individual (the “ Holder ”) named in the award notice attached hereto (the “ Award Notice ”) as of the date set forth in the Award Notice (the “ Grant Date ”), pursuant to the provisions of the Biolase, Inc. 2002 Stock Incentive Plan (the “ Plan ”), a restricted stock unit award (the “ Award ”) with respect to the number of shares of the Company’s Common Stock, par value $0.001 per share (“ Common Stock ”), set forth in the Award Notice, upon and subject to the restrictions, terms and conditions set forth below, in the Award Notice and in the Plan.  Capitalized terms not defined herein shall have the meanings specified in the Plan.  

 

1. Award Subject to Acceptance of Agreement .  The Award shall be null and void unless the Holder shall accept this Agreement by executing the Award Notice in the space provided therefor and returning an original execution copy of the Award Notice to the Company.  

2. Rights as a Stockholder .  The Holder shall not be entitled to any privileges of ownership with respect to the shares of Common Stock subject to the Award unless and until, and only to the extent, such shares become vested pursuant to Article 3 and the Holder becomes a stockholder of record with respect to such shares.

3. Restriction Period and Vesting .

3.1. Service-Based Vesting Condition .  The Award shall vest in accordance with the vesting schedule set forth in the Award Notice, provided the Holder continuously serves as a non-employee director through the vesting date.  The period of time prior to the vesting shall be referred to herein as the “ Restriction Period .”

3.2. Termination of Service .

3.2.1. Termination as a Result of Holder’s Death or Permanent Disability .  If the Holder’s service as a non-employee director terminates prior to the end of the Restriction Period by reason of the Holder’s death or Permanent Disability, then the Award shall be 100% vested upon such termination of service.  For purposes of this Agreement, “Permanent Disability” shall mean the inability of the Holder to perform his or her usual duties as a director by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of 12 months or more.  

3.2.2. Termination Other than for Death or Permanent Disability .  If the Holder’s service as a non-employee director with the Company terminates prior to the end of the Restriction Period for any reason other than death or Permanent Disability, the Award shall be immediately forfeited by the Holder and cancelled by the Company.

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3.2.3. Change in Control . Upon a Change in Control, the Restriction Period shall lapse and the Award shall become fully vested.  

4. Settlement of Award .  Subject to Article 6 , as soon as practicable (but not later than 30 days) after the vesting of the Award, the Company shall issue or transfer to the Holder (or such other person as is acceptable to the Company and designated in writing by the Holder) the number of shares of Common Stock underlying the vested Award.  The Company may effect such issuance or transfer either by the delivery of one or more stock certificates to the Holder or by making an appropriate entry on the books of the Company or the transfer agent of the Company.  The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such delivery or issuance.  Prior to the issuance or transfer to the Holder of the shares of Common Stock subject to the Award, the Holder shall have no direct or secured claim in any specific assets of the Company or in such shares of Common Stock, and will have the status of a general unsecured creditor of the Company.

5. Transfer Restrictions and Investment Representation .  

5.1. Nontransferability of Award .  The Award may not be transferred by the Holder other than by will or the laws of descent and distribution or pursuant to the designation of one or more beneficiaries on the form prescribed by the Company.  Except to the extent permitted by the foregoing sentence, the Award may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process.  Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Award, the Award and all rights hereunder shall immediately become null and void.

5.2. Investment Representation .  The Holder hereby represents and covenants that (a) any shares of Common Stock acquired upon the vesting of the Award will be acquired for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the “ Securities Act ”), unless such acquisition has been registered under the Securities Act and any applicable state securities laws; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of vesting of the Award with respect to any shares of Common Stock hereunder or (y) is true and correct as of the date of any sale of any such share, as applicable.  As a further condition precedent to the issuance or delivery to the Holder of any shares of Common Stock subject to the Award, the Holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance or delivery of the shares and, in connection therewith, shall execute any documents which the Board or the Plan Administrator shall in its sole discretion deem necessary or advisable.

 

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6. Additional Terms and Conditions of Award .  

6.1. Adjustment .  If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Company’s receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to the number and/or class of securities subject to the Award. Such adjustments to the Award are to be effected in a manner that shall preclude the enlargement or dilution of rights and benefits under the Award. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.

6.2. Compliance with Applicable Law .  The Award is subject to the condition that if the listing, registration or qualification of the shares subject to the Award upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the issuance or delivery of shares hereunder, the shares of Common Stock subject to the Award shall not be issued, unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company.  The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent, approval or other action.

6.3. Award Confers No Rights to Continued Service .  In no event shall the granting of the Award or its acceptance by the Holder, or any provision of this Agreement, give or be deemed to give the Holder any right to continued service as a non-employee director of the Company.

6.4. Decisions of Board or Plan Administrator .  The Board or the Plan Administrator shall have the right to resolve all questions which may arise in connection with the Award.  Any interpretation, determination or other action made or taken by the Board or the Plan Administrator regarding the Plan or this Agreement shall be final, binding and conclusive.  

6.5. Successors .  This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of Holder, acquire any rights hereunder in accordance with this Agreement or the Plan.  

6.6. Notices .  All notices, requests or other communications provided for in this Agreement shall be made, if to the Company, to Biolase, Inc., Attn: Director of Financial Reporting, 4 Cromwell, Irvine, California, 92618, and if to the Holder, to the last known mailing address of the Holder contained in the records of the Company.  All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery, (b) by facsimile or electronic mail with confirmation of receipt, (c) by mailing in the United States mails or (d) by express courier service.  The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile or electronic mail transmission or upon receipt by the party entitled thereto if by United States mail or express courier service;

5


 

provided , however , that if a notice, request or other communication sent to the Company is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company.  

6.7. Governing Law .  This Agreement, the Award and all determinations made and actions taken pursuant hereto and thereto, to the extent not governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws.

6.8. Agreement Subject to the Plan .  This Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith.  In the event that the provisions of this Agreement and the Plan conflict, the Plan shall control.  The Holder hereby acknowledges receipt of a copy of the Plan.

6.9. Entire Agreement .  This Agreement and the Plan constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Holder with respect to the subject matter hereof, and may not be modified adversely to the Holder’s interest except by means of a writing signed by the Company and the Holder.

6.10. Partial Invalidity .  The invalidity or unenforceability of any particular provision of this Agreement shall not effect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.

6.11. Amendment and Waiver .  The provisions of this Agreement may be amended or waived only by the written agreement of the Company and the Holder, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement.

6.12. Counterparts .  The Award Notice may be executed in two counterparts, each of which shall be deemed an original and both of which together shall constitute one and the same instrument.  

 

6

Exhibit 31.1

CERTIFICATION

I, Harold C. Flynn, Jr., certify that:

1.

I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2015 of Biolase, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 6, 2015

By:

/s/ HAROLD C. FLYNN, JR.

 

 

Harold C. Flynn, Jr.

 

 

President and Chief Executive Officer
(Principal Executive Officer)

 

Exhibit 31.2

CERTIFICATION

I, David C. Dreyer, certify that:

1.

I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2015 of Biolase, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.  

 

Date: November 6, 2015

By:

/s/ DAVID C. DREYER 

 

 

David C. Dreyer

 

 

Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

 

Exhibit 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. § 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Biolase, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2015 (the “Report”), I, Harold C. Flynn, Jr., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 6, 2015

 

/s/ HAROLD C. FLYNN, JR.

 

 

Harold C. Flynn, Jr.

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

Exhibit 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. § 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Biolase, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2015 (the “Report”), I, David C. Dreyer, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 6, 2015

 

/s/ DAVID C. DREYER 

 

 

David C. Dreyer

 

 

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)