BIOLASE, INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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The following information should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Form 10-K. In
addition to historical information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties, and assumptions,
which could cause actual results to differ materially from management's
expectations. Please see the "Cautionary Statement Regarding Forward-Looking
Statements" section immediately preceding Part I, Item 1 of this Form 10-K and
the "Risk Factors" section in Part I, Item 1A of this Form 10-K.

Overview

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

We offer two categories of laser system products: Waterlase (all-tissue) systems
and diode (soft-tissue) systems. Our flagship brand, Waterlase, uses a patented
combination of water and laser energy and is FDA cleared for over 80 clinical
indications to perform most procedures currently performed using drills,
scalpels, and other traditional dental instruments for cutting soft and hard
tissue. For example, Waterlase safely debrides implants without damaging or
significantly affecting surface temperature and is the only effective, safe
solution to preserving sick implants. In addition, Waterlase disinfects root
canals more efficiently than some traditional chemical methods. We also offer
our diode laser systems to perform soft tissue, pain therapy, and cosmetic
procedures, including teeth whitening. As of December 31, 2021, we had
approximately 301 issued and 38 pending United States and international patents,
the majority of which are related to Waterlase technology. From 1982 through
December 31, 2021 we have sold over 43,300 laser systems in over 80 countries
around the world, and we believe that Waterlase iPlus is the world's
best-selling all-tissue dental laser. Since 1998, we have been the global
leading innovator, manufacturer, and marketer of dental laser systems.

RECENT DEVELOPMENTS

Series G Preferred Shares

On March 1, 2022, the Board declared a dividend of one one-thousandth of a share
of Series G Preferred Stock, par value $0.001 per share ("Series G Preferred
Stock"), for each outstanding share of Company common stock, par value $0.001
per share ("Common Stock"), to stockholders of record at 5:00 p.m. Eastern Time
on March 25, 2022.

Impact of the coronavirus (COVID-19) on our operations

In December 2019, a novel strain of coronavirus was reported to have surfaced in
Wuhan, China. The novel coronavirus spread to over 100 countries, including
every state in the United States. On March 11, 2020, the World Health
Organization declared COVID-19, the disease caused by the novel coronavirus, a
pandemic, and on March 13, 2020, the United States declared a national emergency
with respect to the coronavirus outbreak. This outbreak severely impacted global
economic activity, and many countries and many states in the United States have
reacted to the outbreak by instituting quarantines, mandating business and
school closures and restricting travel. These mandated business closures
included dental office closures in Europe and the United States for all but
emergency procedures. Our salespeople were unable to call on dental customers
during these closures. In addition, most dental shows and workshops scheduled in
2020 were canceled. Operations began to recover in 2021 and although there are
signs of recovery from the impact of COVID-19 both domestically and
internationally, no assurance can be provided that our sales will return to
normal levels during 2022 or at any time thereafter. See Item 1A - "Risk
Factors" for additional information regarding the potential impact of the
COVID-19 pandemic on our business, results of operations and financial
condition.

SWK loan modification

At November 18, 2021we have entered into the Eighth Amendment to the Credit Agreement (the “Eighth Amendment”) with Financing SWK, LLC. The Eighth Amendment amends the Credit Agreement by providing a new maturity date of May 31, 2025reduce

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the effective interest rate by 200 basis points, deleting the definitions of
"Key Person" and "Key Person Event," and amending the minimum aggregate revenue
and EBITDA requirements at the end of certain periods, to the extent that liquid
assets are less than $7.5 million.

NASDAQ Deficiency Letter

On May 24, 2021, we received a deficiency letter from the NASDAQ Stock Market,
LLC ("NASDAQ") notifying the Company that, for the 30 consecutive business days,
ending on May 21, 2021, the bid price for BIOLASE common stock had closed below
the minimum required by NASDAQ listing rule 5550(a)(2) (the "Minimum Bid Price
Rule"). In accordance with NASDAQ rules, we were provided an initial period of
180 calendar days, or until November 22, 2021, to regain compliance with the
Minimum Bid Price Rule. On November 23, 2021, we received a written letter from
NASDAQ that we were granted an additional 180 calendar days, or until May 23,
2022, to regain compliance with the Minimum Bid Price Rule.

If, at any time before May 23, 2022, the bid price of the Company's common stock
closes at or above $1.00 per share for a minimum of 10 consecutive business
days, NASDAQ will provide written notification that the Company has achieved
compliance with the Minimum Bid Price Rule. If compliance with the Minimum Bid
Price Rule cannot be demonstrated by May 23, 2022, NASDAQ will provide written
notification that the Company's common stock will be delisted. At that time, the
Company may appeal NASDAQ's determination to a hearings panel.

The Company continues to monitor the bid price for its common stock and expects to seek shareholder adoption of a charter amendment to effect a stock consolidation.

Cyber Incident

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

Critical accounting policies

The preparation of consolidated financial statements and related disclosures in
conformity with generally accepted accounting principles in the United States
("GAAP") requires us to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and the accompanying notes.
The following is a summary of those accounting policies that we believe are
necessary to understand and evaluate our reported financial results.

Revenue Recognition. Revenue for sales of products and services is derived from
contracts with customers. The products and services promised in customer
contracts include delivery of laser systems, imaging systems, and consumables as
well as certain ancillary services such as product training and support for
extended warranties. Contracts with each customer generally state the terms of
the sale, including the description, quantity and price of each product or
service. Payment terms are stated in the contract and vary according to the
arrangement. Because the customer typically agrees to a stated rate and price in
the contract that does not vary over the life of the contract, our contracts do
not contain variable consideration. We establish a provision for estimated
warranty expense. For further information on warranty, see the discussion under
"Warranty Cost" below.

At contract inception, we assess the products and services promised in our
contracts with customers. We then identify performance obligations to transfer
distinct products or services to the customers. In order to identify performance
obligations, we consider all of the products or services promised in the
contract regardless of whether they are explicitly stated or are implied by
customary business practices.

Revenue from products and services transferred to customers at a single point in
time accounted for 88%, 81% and 81% of net revenue for the years ended December
31, 2021, 2020, and 2019, respectively. The majority of the revenue recognized
at a point in time is for the sale of laser systems, imaging systems, and
consumables. Revenue from these contracts is recognized when the customer is
able to direct the use of and obtain substantially all of the benefits from the
product which generally coincides with title transfer during the shipping
process.

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Revenue from services transferred to customers over time accounted for 12%, 19%,
and 19% of net revenue for the years ended December 31, 2021, 2020, and 2019,
respectively. The majority of our revenue that is recognized over time relates
to training and extended warranties.

The transaction price for a contract is allocated to each distinct performance
obligation and recognized as revenue when, or as, each performance obligation is
satisfied. For contracts with multiple performance obligations, we allocate the
contract's transaction price to each performance obligation using the best
estimate of the standalone selling price of each distinct good or service in a
contract. The primary method used to estimate standalone selling price is the
observable price when the good or service is sold separately in similar
circumstances and to similar customers.

Revenue is recorded for extended warranties over time as the customer benefits
from the warranty coverage. This revenue will be recognized equally throughout
the contract period as the customer receives benefits from our promise to
provide such services. Revenue is recorded for product training as the customer
attends a training program or upon the expiration of the obligation.

We also have contracts that include both the product sales and product training
as performance obligations. In those cases, we record revenue for product sales
at the point in time when the product has been shipped. The customer obtains
control of the product when it is shipped, as all shipments are made FOB
shipping point, and after the customer selects its shipping method and pays all
shipping costs and insurance. We have concluded that control is transferred to
the customer upon shipment.

We perform our obligations under a contract with a customer by transferring
products and/or services in exchange for consideration from the customer. We
invoice our customers as soon as control of an asset is transferred and a
receivable due to us is established. We recognize a contract liability when a
customer prepays for goods and/or services and we have not transferred control
of the goods and/or services.

Accounts receivable are recorded at their estimated net realizable value. The allowance for doubtful accounts is based on an analysis of accounts receivable and our historical experience with debt write-offs.

Accounting for Stock-Based Payments. Stock-based compensation expense is
estimated at the grant date of the award, is based on the fair value of the
award and is recognized ratably over the requisite service period of the award.
For restricted stock units we estimate the fair value of the award based on the
number of awards and the fair value of our common stock on the grant date and
apply an estimated forfeiture rate. For stock options, we estimate the fair
value of the option award using the Black-Scholes option pricing model. This
option-pricing model requires us to make several assumptions regarding the key
variables used to calculate the fair value of its stock options. The risk-free
interest rate used is based on the U.S. Treasury yield curve in effect for the
expected lives of the options at their grant dates. Since July 1, 2005, we have
used a dividend yield of zero, as we do not intend to pay cash dividends on our
common stock in the foreseeable future. The most critical assumptions used in
calculating the fair value of stock options are the expected life of the option
and the expected volatility of our common stock. The expected life is calculated
in accordance with the simplified method, whereby for service-based awards, the
expected life is calculated as a midpoint between the vesting date and
expiration date. We use the simplified method, as there is not a sufficient
history of share option exercises. We believe the historic volatility of our
common stock is a reliable indicator of future volatility, and accordingly, a
stock volatility factor based on the historical volatility of our common stock
over a lookback period of the expected life is used in approximating the
estimated volatility of new stock options. Compensation expense is recognized
using the straight-line method for all service-based employee awards and graded
amortization for all performance-based awards. Compensation expense is
recognized only for those options expected to vest, with forfeitures estimated
at the date of grant based on historical experience and future expectations.
Forfeitures are estimated at the time of the grant and revised in subsequent
periods as actual forfeitures differ from those estimates.

Valuation of Inventory. Inventory is valued at the lower of cost or net
realizable value, with cost determined using the first-in, first-out method. We
periodically evaluate the carrying value of inventory and maintain an allowance
for excess and obsolete inventory to adjust the carrying value as necessary to
the lower of cost or net realizable value. We evaluate quantities on hand,
physical condition, and technical functionality, as these characteristics may be
impacted by anticipated customer demand for current products and new product
introductions. Unfavorable changes in estimates of excess and obsolete inventory
would result in an increase in cost of revenue and a decrease in gross profit.

Valuation of Long-Lived Assets. Property, plant, and equipment and certain
intangibles with finite lives are amortized over their estimated useful lives.
Useful lives are based on our estimate of the period that the assets will
generate revenue or otherwise productively support our business goals. We
monitor events and changes in circumstances that could indicate that the
carrying balances of long-lived assets may exceed the undiscounted expected
future cash flows from those assets. If such a condition were to exist, we would
determine if an impairment loss should be recognized by comparing the carrying
amount of the assets to their fair value.

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Valuation of Goodwill and Other Intangible Assets. Goodwill and other intangible
assets with indefinite lives are not subject to amortization but are evaluated
for impairment annually or whenever events or changes in circumstances indicate
that the asset might be impaired. We conducted our annual impairment analysis of
our goodwill as of September 30, 2021 and concluded there had been no impairment
in goodwill. We closely monitor our stock price and market capitalization and
perform such analysis when events or circumstances indicate that there may have
been a change to the carrying value of those assets.

Warranty Cost. We provide warranties against defects in materials and
workmanship of our laser systems for specified periods of time. For the years
ended December 31, 2021, 2020, and 2019 domestic sales of our Waterlase laser
systems were covered by our warranty for a period of up to one year and diode
systems were covered by our warranty for a period of up to two years from the
date of sale by us or the distributor to the end-user. Laser systems sold
internationally during the same periods were covered by our warranty for a
period of up to 24 months from the date of sale to the international
distributor. Estimated warranty expenses are recorded as an accrued liability
with a corresponding provision to cost of revenue. This estimate is recognized
concurrent with the recognition of revenue on the sale to the distributor or
end-user. Warranty expenses expected to be incurred after one year from the time
of sale to the distributor are classified as a long-term warranty accrual. Our
overall accrual is based on our historical experience and our expectation of
future conditions, taking into consideration the location and type of customer
and the type of laser, which directly correlate to the materials and components
under warranty, the duration of the warranty period, and the logistical costs to
service the warranty. Additional factors that may impact our warranty accrual
include changes in the quality of materials, leadership and training of the
production and services departments, knowledge of the lasers and workmanship,
training of customers, and adherence to the warranty policies. Additionally, an
increase in warranty claims or in the costs associated with servicing those
claims would likely result in an increase in the accrual and a decrease in gross
profit. We offer extended warranties on certain imaging products. However, all
imaging products are initially covered by the manufacturer's warranties.

Litigation and Other Contingencies. We regularly evaluate our exposure to
threatened or pending litigation and other business contingencies. Because of
the uncertainties related to the amount of loss from litigation and other
business contingencies, the recording of losses relating to such exposures
requires significant judgment about the potential range of outcomes. As
additional information about current or future litigation or other contingencies
becomes available, we assess whether such information warrants the recording of
expense relating to contingencies. To be recorded as expense, a loss contingency
must be both probable and reasonably estimable. If a loss contingency is
significant but is not both probable and estimable, we disclose the matter in
the notes to our consolidated financial statements.

Income Taxes. Based upon our operating losses for the years ended December 31,
2021, 2020, and 2019 and the available evidence, management has determined that
it is more likely than not that the deferred tax assets as of December 31, 2021
will not be realized in the near term. Consequently, we have established a
valuation allowance against our net deferred tax asset totaling $57.7 million
and $56.0 million as of December 31, 2021 and 2020, respectively. In this
determination, we considered factors such as our earnings history, future
projected earnings, and tax planning strategies. If sufficient evidence of our
ability to generate sufficient future taxable income tax benefits becomes
apparent, we may reduce our valuation allowance, resulting in tax benefits in
our statement of operations and in additional paid-in-capital. Management
evaluates the potential realization of our deferred tax assets and assesses the
need for reducing the valuation allowance periodically.

Recent accounting pronouncements

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

Fair value of financial instruments

Our financial instruments, consisting of cash and cash equivalents, accounts
receivable, accounts payable, and accrued liabilities, approximate fair value
because of the liquid or short-term nature of these items.

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

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Operating results

The following table presents certain data of our operating results, expressed in thousands and as a percentage of sales:

                                                           Years Ended December 31,
                                         2021                        2020                        2019
Net revenue                      $  39,188       100.0   %   $  22,780       100.0   %   $  37,799       100.0   %
Cost of revenue                     22,659        57.8   %      16,607        72.9   %      23,511        62.2   %
Gross profit                        16,529        42.2   %       6,173        27.1   %      14,288        37.8   %
Operating expenses:
Sales and marketing                 15,339        39.1   %      11,242        49.4   %      14,396        38.1   %
General and administrative          11,258        28.7   %       9,772        42.9   %      10,748        28.4   %
Engineering and development          6,048        15.4   %       3,695        16.2   %       4,765        12.6   %
Loss on patent litigation
settlement                             315         0.8   %           -           -   %           -           -   %
Total operating expenses            32,960        84.1   %      24,709       108.5   %      29,909        79.1   %
Loss from operations               (16,431 )     (41.9 ) %     (18,536 )     (81.4 ) %     (15,621 )     (41.3 ) %
Non-operating gain (loss), net         338         0.9   %       1,835         8.1   %      (2,278 )      (6.0 ) %
Loss before income tax
provision                          (16,093 )     (41.1 ) %     (16,701 )     (73.3 ) %     (17,899 )     (47.4 ) %
Income tax (provision) benefit         (65 )      (0.2 ) %        (128 )      (0.6 ) %          44         0.1   %
Net loss                         $ (16,158 )     (41.2 ) %   $ (16,829 )     (73.9 ) %   $ (17,855 )     (47.2 ) %



The following table summarizes our net revenues by category ($ in thousands):

                                                     Years Ended December 31,
                                      2021                     2020                     2019
Laser systems                 $ 25,023        63.9 %   $ 12,342        54.2 %   $ 22,842        60.4 %
Imaging systems                      -           -            -           -          619         1.6 %
Consumables and other            9,456        24.1 %      6,124        26.9 %      7,164        19.0 %
Services                         4,709        12.0 %      4,314        18.9 %      7,162        19.0 %
Total products and services     39,188       100.0 %     22,780       100.0 %     37,787       100.0 %
License fees and royalty             -           -            -           -           12           -
Net revenue                   $ 39,188       100.0 %   $ 22,780       100.0 %   $ 37,799       100.0 %




Non-GAAP Disclosure

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

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

Adjusted EBITDA

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

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The following table provides a reconciliation between non-GAAP adjusted EBITDA and GAAP net loss attributable to common shareholders (in thousands):

                                                          Years Ended 

the 31st of December,

                                                      2021          2020    

2019

GAAP net loss attributable to common shareholders ($16,704) ($34,207) ($17,855)
Deemed dividend on convertible preferred shares

            546        17,378             -
GAAP net loss                                       $ (16,158 )   $ (16,829 )   $ (17,855 )
Adjustments:
Interest expense, net                                   2,224         2,359         2,157
Income tax provision (benefit)                             65           128           (44 )
Depreciation and amortization                             400           499 

982

Change in allowance for doubtful accounts                (202 )       1,328 

1,695

Loss on patent litigation settlement                      315             -             -
Stock-based and other non-cash compensation             1,662         3,370         2,742
Other (income) expense, net                            (3,014 )      (4,215 )           -
Adjusted EBITDA                                     $ (14,708 )   $ (13,360 )   $ (10,323 )


Other (income) expense for the year ended December 31, 2021, is comprised of a
$3.0 million gain on the forgiveness of the loan received under the Paycheck
Protection Program under the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act").

Other (income) expense for the year ended December 31, 2020, is comprised of a
$5.8 million gain on the change in fair value of the 45,000,000 warrants sold by
the Company on July 23, 2020 through the Rights Offering (the "July 2020
Warrants") partially offset by the costs to issue the July 2020 Warrants of
approximately $1.6 million.

Comparison of operating results

Year ended December 31, 2021 Compared to the year ended December 31, 2020

Net Revenue. Net revenue for the year ended December 31, 2021 was $39.2 million,
an increase of $16.4 million, or 72%, as compared with net revenue of $22.8
million for the year ended December 31, 2020. Domestic revenues were $25.4
million, or 65% of net revenue, for the year ended December 31, 2021 compared to
$16.2 million, or 71% of net revenue, for the year ended December 31, 2020.
International revenues for year ended December 31, 2021 were $13.8 million, or
35% of net revenue, compared to $6.6 million, or 29% of net revenue for year
ended December 31, 2020.

Laser system net revenues increased by $12.7 million, or 103%, for the year
ended December 31, 2021 compared to the same period in 2020. Consumables and
other net revenue, which includes products such as disposable tips and shipping
revenue, increased $3.3 million, or 54%, for the year ended December 31, 2021,
as compared to the same period in 2020. Services revenue increased $0.4 million,
or 9%, for the year ended December 31, 2021, as compared to the same period in
2020.

The increase in year-over-year net revenue primarily resulted from the lifting
of governmental restrictions from the COVID-19 pandemic and the re-opening of
dental offices that had closed in 2020 resulting in increased opportunities for
procedures using BIOLASE lasers.

Cost of Revenue. Cost of revenue increased by $6.1 million, or approximately
36%, to $22.7 million, or 58% of net revenue for the year ended December 31,
2021, compared to cost of revenue of $16.6 million, or 73% of net revenue, for
the same period in 2020. The increase is primarily due to the increase in sales
for the year ended December 31, 2021.

Gross Profit. Gross profit as a percentage of revenue typically fluctuates with
product and regional mix, selling prices, product costs and revenue levels.
Gross profit for the year ended December 31, 2021 was $16.5 million, or 42% of
net revenue, an increase of $10.4 million, or 168%, as compared with gross
profit of $6.2 million, or 27% of net revenue, for the same period in 2020. The
increase in gross profit is commensurate with the increase in sales, the
favorable absorption of fixed expenses, higher average selling prices, and fewer
inventory write-offs and reserve adjustments.

Operating Expenses. Operating expenses for the year ended December 31, 2021 were
$33.0 million, or 84% of net revenue, an increase of $8.3 million, or 33%, as
compared with $24.7 million, or 108% of net revenue, for the same period in
2020. See the following expense categories for further explanations.

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Sales and Marketing Expense. Sales and marketing expense for the year ended
December 31, 2021 increased by $4.1 million, or 36%, to $15.3 million, or 39% of
net revenue, as compared with $11.2 million, or 49% of net revenue, for the same
period in 2020. The increase was primarily due to $1.1 million in compensation
expense and bonus incentives for achieving sales targets, $1.1 million in sales
commissions, $0.9 million in increased advertising expenses and related
consulting costs, and $0.8 million in increased travel and trade show related
expenses driven by a normalization in such expenses as compared to 2020. These
increases were partially offset by $0.6 million from the effect of Employee
Retention Credits under the CARES Act received during the year ended December
31, 2021.

General and Administrative Expense. General and administrative expense for the
year ended December 31, 2021 increased by $1.5 million, or 15%, to $11.3
million, or 29% of net revenue, as compared with $9.8 million, or 43% of net
revenue, for the same period in 2020. The increase in general and administrative
expense was primarily due to $2.1 million related to fees incurred in connection
with stockholder meetings held during the year, $0.4 million in severance
expense, and $0.3 million in legal and audit fees. These increases were
partially offset by a $1.5 million change in the allowance for doubtful
accounts.

Engineering and Development Expense. Engineering and development expense for the
year ended December 31, 2021 increased by $2.4 million, or 64%, to $6.0 million,
or 15% of net revenue, as compared with $3.7 million, or 16% of net revenue, for
the same period in 2020. The increase was primarily due to a $0.5 million
increase in legal and consulting fees and a $1.3 million increase in payroll
expenses driven by an increase in engineering projects for 2021 as compared to
2020. Although our primary focus will be on our sales and marketing efforts in
2022, we expect to continue our investment in engineering and development
activity during the period.

Loss on Patent Litigation Settlement. Loss on settlement of patent litigation for the year ended December 31, 2021 has been $0.3 million due to the change in fair value of the remaining accrued liabilities.

Non-operating profit (loss)

Loss on Foreign Currency Transactions. We recognized a loss of $0.5 million on
foreign currency transactions for the year ended December 31, 2021 compared to a
$21 thousand loss for the same period in 2020, due to exchange rate fluctuations
primarily between the U.S. dollar and the Euro.

Interest Expense, Net. Net interest expense decreased to $2.2 million for the
year ended December 31, 2021 compared to $2.4 million of net interest expense
for the same period in 2020. The decrease was due to the Eighth Amendment which
lowered the interest rate and extended the maturity date.

Gain on debt forgiveness. Gain on debt forgiveness was $3.0 million for the year
ended December 31, 2021 due to the approval of the Company's request for
forgiveness of the loan received under the Paycheck Protection Program under the
CARES Act (the "PPP Loan").

Other Income, Net. There was no Other Income (Expense) for the year ended
December 31, 2021. Other Income for the year ended December 31, 2020, is
comprised of a $5.8 million gain on the change in fair value to the 45,000,000
warrants sold by the Company on July 23, 2020 through the Rights Offering (the
"July 2020 Warrants") partially offset by the costs to issue the July 2020
Warrants of approximately $1.6 million.

(Provision) benefit for Income Taxes. Our provision for income taxes was a
provision of $65 thousand for the year ended December 31, 2021, an increase of
$63 thousand as compared with our provision for income taxes of $128 thousand
for the same period in 2020. The increase in our provision is primarily due to
an increase to our current income taxes in our European subsidiary.

Net Loss. For the reasons stated above, our net loss was $16.2 million for the
year ended December 31, 2021 compared to a net loss of $16.8 million for the
same period in 2020.

Year ended December 31, 2020 Compared to the year ended December 31, 2019

Net Revenue. Net revenue for the year ended December 31, 2020 was $22.8 million,
a decrease of $15.0 million, or 40%, as compared with net revenue of $37.8
million for the year ended December 31, 2019. Domestic revenues were $16.2
million, or 71% of net revenue, for the year ended December 31, 2020 compared to
$22.8 million, or 60% of net revenue, for the year ended December 31, 2019.
International revenues for year ended December 31, 2020 were $6.7 million, or
29% of net revenue, compared to $15.0 million, or 40% of net revenue for year
ended December 31, 2019.

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The year-over-year decline in net revenue was primarily due to dental practice closures due to the COVID-19 pandemic.

Laser system net revenues decreased by $10.5 million, or 46%, for the year ended
December 31, 2020 compared to the same period in 2019. The laser systems revenue
decrease was driven by a 29% decrease in domestic revenue and a 56% decrease in
international revenue. The decrease in revenue was primarily due to dental
office closures related to the COVID-19 pandemic.

Consumables and other net revenue, which includes products such as disposable
tips and shipping revenue, decreased $1.0 million, or 15%, for the year ended
December 31, 2020, as compared to the same period in 2019. The decrease was
driven primarily by dental office closures related to the COVID-19 pandemic
during 2020 along with an increase in expense associated with inventory
reserves.

Cost of Revenue. Cost of revenue decreased by $6.9 million, or approximately
29%, to $16.6 million, or 73% of net revenue for the year ended December 31,
2020, compared to cost of revenue of $23.5 million, or 62% of net revenue, for
the same period in 2019. The decrease in cost of revenue for the year ended
December 31, 2020 as compared to the same period in 2019 is primarily due to the
decline is sales for the year ended December 31, 2020.

Gross Profit. Gross profit as a percentage of revenue typically fluctuates with
product and regional mix, selling prices, product costs and revenue levels.
Gross profit for the year ended December 31, 2020 was $6.2 million, or 27% of
net revenue, a decrease of $8.1 million, or 57%, as compared with gross profit
of $14.3 million, or 38% of net revenue, for the same period in 2019. The
decrease in gross profit is commensurate with the decline in sales, while the
decrease in gross profit percentage was primarily due to unfavorable dilution of
fixed expenses and inventory write-offs.

Operating Expenses. Operating expenses for the year ended December 31, 2020 were
$24.7 million, or 109% of net revenue, a decrease of $5.2 million, or 17%, as
compared with $29.9 million, or 79% of net revenue, for the same period in 2019.
See the following expense categories for further explanations.

Sales and Marketing Expense. Sales and marketing expense for the year ended
December 31, 2020 decreased by $3.2 million, or 22%, to $11.2 million, or 49% of
net revenue, as compared with $14.4 million, or 38% of net revenue, during the
year ended December 31, 2019. The decrease for the year ended December 31, 2020
was primarily a result of decreases in payroll and consulting-related expense of
$0.9 million primarily due to lower sales commissions from lower revenue $0.5
million and travel and entertainment expenses of $2.2 million.

General and Administrative Expense. General and administrative expense for the
year ended December 31, 2020 decreased by $1.0 million, or 9%, to $9.8 million,
or 43% of net revenue, as compared with $10.7 million, or 28% of net revenue,
for the same period in 2019. The decrease in general and administrative expense
was primarily due to decreases in payroll and consulting-related expense of $0.5
million, a decrease in the provision for doubtful accounts of $0.4 million, and
a decrease in other expenses including bank fees of $0.3 million, partially
offset by an increase in stock based compensation expense of $0.4 million, as
compared to the same period in 2019.

Engineering and Development Expense. Engineering and development expense for the
year ended December 31, 2020 decreased by $1.1 million, or 22%, to $3.7 million,
or 16% of net revenue, as compared with $4.8 million, or 13% of net revenue, for
the same period in 2019. The decrease was primarily related to decreased payroll
and consulting-related expense of $0.8 million, and operating supplies expense
and other of $0.3 million as compared to the same period in 2019. We expect to
continue our investment in engineering and development activity.

Non-operating profit (loss)

Gain (Loss) on Foreign Currency Transactions. We recognized a loss of $21
thousand on foreign currency transactions for the year ended December 31, 2020
compared to a $0.1 million loss for the same period in 2019, due to exchange
rate fluctuations primarily between the U.S. dollar and the Euro.

Interest Expense, Net. Net interest expense increased by $0.2 million to $2.4
million for the year ended December 31, 2020 compared to $2.2 million of net
interest expense for the same period in 2019. During 2019, the increase in
interest expense was the result of the interest relating to the additional $2.5
million of principal amount drawn from the $12.5 million loan under the
five-year secured Credit Agreement entered into with SWK on November 9, 2018
("SWK Loan").

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Other (Income) Expense, Net. Other (Income) Expense for the year ended December
31, 2020, is comprised of a $5.8 million gain on the change in fair value to the
45,000,000 warrants sold by the Company on July 23, 2020 through the Rights
Offering (the "July 2020 Warrants") partially offset by the costs to issue the
July 2020 Warrants of approximately $1.6 million.

Provision (benefit) for Income Taxes. Our provision for income taxes was a
provision of $0.1 million for the year ended December 31, 2020, an increase of
$0.2 million as compared with our benefit for income taxes of $44 thousand for
the same period in 2019. The increase in our provision for 2020 is primarily due
to an increase to our current income taxes in our European subsidiary.

Net Loss. For the reasons stated above, our net loss was $16.8 million for the
year ended December 31, 2020 compared to a net loss of $17.9 million for the
same period in 2019.


Cash and capital resources

The Company has reported losses from operations of $16.4 million, $18.5 million,
and $15.6 million for the years ended December 31, 2021, 2020, and 2019,
respectively, and has not generated positive net cash from operations for the
same periods.

At December 31, 2021, we had $30.0 million in cash and cash equivalents.
Management defines cash and cash equivalents as highly liquid deposits with
original maturities of 90 days or less when purchased. The increase in our cash
and cash equivalents by $12.4 million from December 31, 2020 was primarily due
to cash provided by financing activities of $30.0 million, partially offset by
cash used in operating activities of $16.7 million and cash used in investing
activities of $0.7 million. The $16.7 million of net cash used in operating
activities in 2021 was primarily driven by our net loss of $16.2 million during
the year.

At December 31, 2021, we had $35.5 million in working capital. Our principal
sources of liquidity consisted of $30.0 million in cash and cash equivalents and
$4.2 million of net accounts receivable.

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

In order for us to continue operations beyond the next 12 months and be able to
discharge our liabilities and commitments in the normal course of business, we
must increase sales of our products, control or potentially reduce expenses, and
establish profitable operations in order to generate cash from operations or
obtain additional funds when needed.

We intend to improve our financial position and ultimately improve our financial results by increasing our revenues through the expansion of our product offerings, continuing to expand and grow our field sales and our relationships with distributors, both domestically and internationally, by forming strategic agreements within the dental and medical industries, educating dental and medical patients on the benefits of our advanced medical technologies and reducing expenses .

term loan

The information presented in Note 6 – Debt – Term Loan is incorporated herein by reference.

Revolving Credit Facility

The information presented in Note 6 – Debt – Lines of credit – Pacific Commercial Bank is incorporated herein by reference.

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Paycheck Protection Program Loan

The information presented in Note 6 – Debt – Paycheck Protection Program Loan is incorporated herein by reference.

EIDL loan

The information presented in Note 6 – Debt – EIDL Loan is incorporated herein by reference.

Public Placement of Common Shares and Private Placement of Unregistered Preferred Shares

The information set forth in Note 8 – Redeemable Preferred Shares and Equity – Public Offering of Common Shares and Private Placement of Unregistered Preferred Shares is incorporated herein by reference.

Concentration of credit risk

Financial instruments, which potentially expose us to a concentration of credit
risk, consist principally of cash and cash equivalents, restricted cash, and
trade accounts receivable. We maintain our cash and cash equivalents and
restricted cash with established commercial banks. At times, balances may exceed
federally insured limits. To minimize the risk associated with trade accounts
receivable, we perform ongoing credit evaluations of customers' financial
condition and maintain relationships with our customers that allow us to monitor
changes in business operations so we can respond as needed. We do not,
generally, require customers to provide collateral before we sell them our
products. However, we have required certain distributors to make prepayments for
significant purchases of our products.

Receivables and provision for bad debts

Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is our best estimate of the amount
of probable credit losses in the existing accounts receivable. We determine the
allowance based on a quarterly specific account review of past due balances. All
other balances are reviewed on a pooled basis by age of receivable. Account
balances are charged off against the allowance when it is probable the
receivable will not be recovered. We do not have any off-balance-sheet credit
exposure related to our customers.

Consolidated cash flows

The following table summarizes our statements of cash flows (in thousands):

                                                Years Ended December 31,
                                            2021          2020          

2019

Net cash (used in) provided by:
Operating activities                      $ (16,710 )   $ (12,795 )   $ (12,746 )
Investing activities                           (707 )         (96 )        (207 )
Financing activities                         29,954        24,349        10,721
Effect of exchange rates on cash               (238 )         317           

(23) Net change in cash and cash equivalents $12,299 $11,775 ($2,255)

Year ended December 31, 2021 Compared to the year ended December 31, 2020

Net cash used in operating activities for the year ended December 31, 2021
totaled $16.7 million and was primarily comprised of our net loss of $16.2
million, and gain on the PPP Loan forgiveness of $3.0 million, partially offset
by non-cash adjustments for stock-based compensation of $1.7 million,
depreciation and amortization expenses of $0.4 million, and amortization of debt
issuance costs of $0.4 million.

Net cash used in investing activities for the year ended December 31, 2021 was
$0.7 million and was primarily driven by our capital expenditures. We expect
cash flows from investing activities to increase somewhat in 2022 due to the
completion of our new training facility.

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Net cash provided by financing activities for the year ended December 31, 2021
was $30.0 million primarily due to the sale of common stock from our equity
offering in February 2021 for net proceeds of $13.3 million and $16.6 million
from the exercise of common stock warrants.

The $0.2 million effect of exchange rate on cash for the year ended December 31,
2021 was due to a recognized gain on foreign currency transactions, primarily
driven by changes in the Euro during the year.

Year ended December 31, 2020 Compared to the year ended December 31, 2019

Net cash used in operating activities consisted of our net loss, adjusted for
our non-cash charges, plus or minus working capital changes. Cash used in
operating activities for the year ended December 31, 2020 totaled $12.8 million
and was primarily comprised of our net loss of $16.8 million and a gain on the
change in fair value of the July 2020 Warrants of $5.9 million, partially offset
by non-cash adjustments for depreciation and amortization expenses of $0.5
million, stock-based compensation expenses of $3.4 million, our provision for
bad debt of $1.3 million, inventory disposals of $1.3 million, issuance costs
for the July 2020 Warrants of $1.6 million, and a net increase in our operating
assets and liabilities. The net increase in our operating assets and liabilities
was primarily due to a $4.3 million decrease in accounts receivable primarily
due to the impact of the COVID-19 pandemic on our revenues, partially offset by
a decrease in accounts payable and accrued liabilities of $2.1 million.

Cash flows used in investing activities for the year ended December 31, 2020 was minimal and primarily attributable to our capital expenditures related to the relocation of our head office and manufacturing facility.

Net cash provided by financing activities for the year ended December 31, 2020
was $24.3 million primarily due to the funds borrowed on the PPP Loan and the
sale of common stock from our registered direct private placement and sale of
preferred stock. See Note 6 - Debt and Note 8 - Redeemable Preferred Stock and
Stockholders' Equity for additional information.

The $0.3 million effect of exchange rate on cash for the year ended December 31,
2020 was due to a recognized gain on foreign currency transactions, primarily
driven by changes in the Euro during the year ended December 31, 2019.

Contractual obligations

Leases

On January 22, 2020, the Company entered into a five-year real property lease
agreement for an approximately 11,000 square foot facility in Corona, California
where it moved its manufacturing operations. The lease commenced on July 1,
2020. On December 10, 2021, the Company entered into an additional three and a
half year lease at this location to expand the leased space by an additional
15,000 square feet to meet growing manufacturing needs. The additional lease
commenced on February 1, 2022. Future minimum rent payments under these leases
are approximately $1.1 million.

On February 4, 2020, the Company also entered into a sixty-six month real
property lease agreement for office space of approximately 12,000 square feet of
office space in Lake Forest, California. The lease commenced on July 1, 2020.
Future minimum rent payments under this lease are approximately $1.6 million.

SWK loan

On November 9, 2018, we entered into the Credit Agreement with SWK, which
provides us with the SWK Loan, a variable-rate term loan. The Credit Agreement
has been amended multiple times with the most recent being effective November
18, 2021 for total outstanding principal of $14.3 million. Refer to Note 6 -
Debt for further details.

EIDL Loan

On May 22, 2020, the Company executed the standard loan documents required for
securing a loan from the United States Small Business Administration under its
Economic Injury Disaster Loan (the "EIDL Loan") assistance program in light of
the impact of the COVID-19 pandemic on our business. The principal amount of the
EIDL Loan is $150,000, with proceeds to be used for working capital purposes.
The information set forth in Note 6 - Debt - EIDL Loan is hereby incorporated
herein by reference.

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Purchase obligation

Purchase obligations relate to purchase orders with suppliers that we expect to
complete primarily during the year ended December 31, 2021. In conformity with
current GAAP, purchase obligations that have not met the recognition criteria
are not reported in the consolidated balance sheet as of December 31, 2021.

The following table presents our expected cash requirements for contractual
obligations outstanding for the years ended as indicated below (in thousands):

                               Less Than      1 to 3       3 to 5       More Than
                                1 Year         Years       Years         5 years        Total
Operating lease obligations   $       610     $ 1,233     $    489     $         -     $  2,332
Purchase obligations               18,309         561            -               -       18,870
Loan interest (1)                   1,494       2,610        1,864              83        6,051
Loan principal                          -       4,900        9,404             146       14,450
Total                         $    20,413     $ 9,304     $ 11,757     $       229     $ 41,703



(1)

estimated using LIBOR rates at December 31, 2021

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements as defined in Regulation SK Item 303(A)(4)(ii).

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