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 ofDecember 31, 2021 , we had approximately 301 issued and 38 pendingUnited States and international patents, the majority of which are related to Waterlase technology. From 1982 throughDecember 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
OnMarch 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 at5:00 p.m. Eastern Time onMarch 25, 2022 .
Impact of the coronavirus (COVID-19) on our operations
InDecember 2019 , a novel strain of coronavirus was reported to have surfaced inWuhan, China . The novel coronavirus spread to over 100 countries, including every state inthe United States . OnMarch 11, 2020 , theWorld Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic, and onMarch 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 inthe 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 inEurope andthe 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
36 -------------------------------------------------------------------------------- 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
OnMay 24, 2021 , we received a deficiency letter from theNASDAQ Stock Market, LLC ("NASDAQ") notifying the Company that, for the 30 consecutive business days, ending onMay 21, 2021 , the bid price forBIOLASE 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 untilNovember 22, 2021 , to regain compliance with the Minimum Bid Price Rule. OnNovember 23, 2021 , we received a written letter from NASDAQ that we were granted an additional 180 calendar days, or untilMay 23, 2022 , to regain compliance with the Minimum Bid Price Rule. If, at any time beforeMay 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 byMay 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 InDecember 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 ofDecember 31, 2021 we recorded an accrued liability and an insurance receivable within prepaid expenses and other current assets of$0.4 million . InMarch 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 inthe 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 endedDecember 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. 37 -------------------------------------------------------------------------------- Revenue from services transferred to customers over time accounted for 12%, 19%, and 19% of net revenue for the years endedDecember 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 theU.S. Treasury yield curve in effect for the expected lives of the options at their grant dates. SinceJuly 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. 38 -------------------------------------------------------------------------------- Valuation ofGoodwill 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 ofSeptember 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 endedDecember 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 endedDecember 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 ofDecember 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 ofDecember 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.
39
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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
2021 2020
2019
GAAP net loss attributable to common shareholders
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 endedDecember 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 endedDecember 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 onJuly 23, 2020 through the Rights Offering (the "July 2020 Warrants") partially offset by the costs to issue theJuly 2020 Warrants of approximately$1.6 million .
Comparison of operating results
Year ended
Net Revenue. Net revenue for the year endedDecember 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 endedDecember 31, 2020 . Domestic revenues were$25.4 million , or 65% of net revenue, for the year endedDecember 31, 2021 compared to$16.2 million , or 71% of net revenue, for the year endedDecember 31, 2020 . International revenues for year endedDecember 31, 2021 were$13.8 million , or 35% of net revenue, compared to$6.6 million , or 29% of net revenue for year endedDecember 31, 2020 . Laser system net revenues increased by$12.7 million , or 103%, for the year endedDecember 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 endedDecember 31, 2021 , as compared to the same period in 2020. Services revenue increased$0.4 million , or 9%, for the year endedDecember 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 usingBIOLASE 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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. 41 -------------------------------------------------------------------------------- Sales and Marketing Expense. Sales and marketing expense for the year endedDecember 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 endedDecember 31, 2021 . General and Administrative Expense. General and administrative expense for the year endedDecember 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 endedDecember 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
Non-operating profit (loss)
Loss on Foreign Currency Transactions. We recognized a loss of$0.5 million on foreign currency transactions for the year endedDecember 31, 2021 compared to a$21 thousand loss for the same period in 2020, due to exchange rate fluctuations primarily between theU.S. dollar and the Euro. Interest Expense, Net. Net interest expense decreased to$2.2 million for the year endedDecember 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 endedDecember 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 endedDecember 31, 2021 . Other Income for the year endedDecember 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 onJuly 23, 2020 through the Rights Offering (the "July 2020 Warrants") partially offset by the costs to issue theJuly 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 endedDecember 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 endedDecember 31, 2021 compared to a net loss of$16.8 million for the same period in 2020.
Year ended
Net Revenue. Net revenue for the year endedDecember 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 endedDecember 31, 2019 . Domestic revenues were$16.2 million , or 71% of net revenue, for the year endedDecember 31, 2020 compared to$22.8 million , or 60% of net revenue, for the year endedDecember 31, 2019 . International revenues for year endedDecember 31, 2020 were$6.7 million , or 29% of net revenue, compared to$15.0 million , or 40% of net revenue for year endedDecember 31, 2019 . 42 --------------------------------------------------------------------------------
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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2020 as compared to the same period in 2019 is primarily due to the decline is sales for the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2019 . The decrease for the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2020 compared to a$0.1 million loss for the same period in 2019, due to exchange rate fluctuations primarily between theU.S. dollar and the Euro. Interest Expense, Net. Net interest expense increased by$0.2 million to$2.4 million for the year endedDecember 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 onNovember 9, 2018 ("SWK Loan"). 43 -------------------------------------------------------------------------------- Other (Income) Expense, Net. Other (Income) Expense for the year endedDecember 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 onJuly 23, 2020 through the Rights Offering (the "July 2020 Warrants") partially offset by the costs to issue theJuly 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 endedDecember 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 endedDecember 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 endedDecember 31, 2021 , 2020, and 2019, respectively, and has not generated positive net cash from operations for the same periods. AtDecember 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 fromDecember 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. AtDecember 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 –
44 --------------------------------------------------------------------------------
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
Year ended
Net cash used in operating activities for the year endedDecember 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 endedDecember 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. 45 -------------------------------------------------------------------------------- Net cash provided by financing activities for the year endedDecember 31, 2021 was$30.0 million primarily due to the sale of common stock from our equity offering inFebruary 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 endedDecember 31, 2021 was due to a recognized gain on foreign currency transactions, primarily driven by changes in the Euro during the year.
Year ended
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 endedDecember 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 theJuly 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 theJuly 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
Net cash provided by financing activities for the year endedDecember 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 endedDecember 31, 2020 was due to a recognized gain on foreign currency transactions, primarily driven by changes in the Euro during the year endedDecember 31, 2019 .
Contractual obligations
Leases
OnJanuary 22, 2020 , the Company entered into a five-year real property lease agreement for an approximately 11,000 square foot facility inCorona, California where it moved its manufacturing operations. The lease commenced onJuly 1, 2020 . OnDecember 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 onFebruary 1, 2022 . Future minimum rent payments under these leases are approximately$1.1 million . OnFebruary 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 inLake Forest, California . The lease commenced onJuly 1, 2020 . Future minimum rent payments under this lease are approximately$1.6 million .
SWK loan
OnNovember 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 effectiveNovember 18, 2021 for total outstanding principal of$14.3 million . Refer to Note 6 - Debt for further details. EIDL Loan OnMay 22, 2020 , the Company executed the standard loan documents required for securing a loan from theUnited 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$150,000 , with proceeds to be used for working capital purposes. The information set forth in Note 6 - Debt - EIDL Loan is hereby incorporated herein by reference. 46 --------------------------------------------------------------------------------
Purchase obligation
Purchase obligations relate to purchase orders with suppliers that we expect to complete primarily during the year endedDecember 31, 2021 . In conformity with current GAAP, purchase obligations that have not met the recognition criteria are not reported in the consolidated balance sheet as ofDecember 31, 2021 . The following table presents our expected cash requirements for contractual obligations outstanding for the years ended as indicated below (in thousands): Less Than 1 to 3 3 to 5 More Than 1 Year Years Years 5 years Total Operating lease obligations$ 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
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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