NOTE 1 — BASIS OF
PRESENTATION
The
Company
BIOLASE, Inc.,
(the “Company”) incorporated in Delaware in 1987, is a
biomedical company operating in one business segment that develops,
manufactures, and markets lasers in dentistry and medicine
and also markets and distributes dental imaging equipment,
including cone beam digital x-rays and CAD/CAM intra-oral
scanners.
Basis of
Presentation
The
consolidated financial statements include the accounts of BIOLASE,
Inc. and its wholly-owned subsidiaries. The Company has eliminated
all material intercompany transactions and balances in the
accompanying consolidated financial statements. Certain amounts for
prior years have been reclassified to conform to the current year
presentation.
Use of
Estimates
The preparation
of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”) requires the Company to make estimates
and assumptions that affect amounts reported in the consolidated
financial statements and the accompanying notes. Significant
estimates in these consolidated financial statements include
allowances on accounts receivable, inventory and deferred taxes, as
well as estimates for accrued warranty expenses, indefinite-lived
intangible assets and the ability of goodwill to be realized,
revenue deferrals for multiple element arrangements, effects of
stock-based compensation and warrants, contingent liabilities and
the provision or benefit for income taxes. Due to the inherent
uncertainty involved in making estimates, actual results reported
in future periods may differ materially from those
estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments, consisting of cash and cash
equivalents, accounts receivable, accounts payable, and accrued
liabilities, approximate fair value because of the short maturity
of these items. Financial instruments consisting of lines of credit
approximate fair value, as the interest rates associated with the
lines of credit approximates the market rates for debt securities
with similar terms and risk characteristics.
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 should be based on assumptions that market
participants would use, including a consideration of nonperformance
risk. Level 1 measurement of fair value is quoted prices in active
markets for identical assets or liabilities.
Concentration of credit risk, interest rate risk and foreign
currency exchange rate risk
Financial
instruments which potentially expose the Company to a concentration
of credit risk consist principally of cash and cash equivalents,
restricted cash, and trade accounts receivable. The Company invests
its 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,
management performs ongoing credit evaluations of
customers’ financial condition and maintains relationships
with the Company’s customers which allow management to
monitor current changes in business operations respond as needed.
The Company does not, generally, require customers to provide
collateral before it sells them products; however is has required
certain distributors to make prepayments for significant purchases
of products. For the years ended December 31, 2012, 2011, and
2010, sales to Henry Schein, Inc. (“HSIC”) worldwide
accounted for approximately 3%, 19%, and 38%, respectively, of our
net sales.
Substantially
all of the Company’s revenue is denominated in
U.S. dollars, including sales to international distributors.
Only a small portion of its revenue and expenses is denominated in
foreign currencies, principally the Euro and Indian Rupee. The
Company’s
foreign currency expenditures primarily consist of the cost
of maintaining offices, including the facilities, consulting
services and employee-related costs. To date, the Company has not
entered into any hedging contracts. Future fluctuations in the
value of the U.S. dollar may, however, affect the price
competitiveness of the Company’s products outside the United
States.
Management’s primary objective in managing the
Company’s cash balances has been preservation of principal
and maintenance of liquidity to meet the Company’s operating
needs. Most of the Company’s excess cash balances are
invested in money market accounts in which there is minimal
interest rate risk. An increase in the LIBOR rate associated with
the Company’s lines of credit would increase the interest
expense the Company must pay. The Company’s risk associated
with fluctuation in interest expense is limited to its outstanding
lines of credit balances. The Company does not use interest rate
derivative instruments to manage exposure to interest rate
changes.
Liquidity
and Management’s Plans
Although the
Company generated $1.9 million of cash from operations during the
quarter ended December 31, 2012, the Company has suffered
recurring losses from operations and has not generated cash from
operations for the three years ended December 31, 2012. In
order for the Company to continue operations and discharge its
liabilities and commitments in the normal course of business, the
Company must sell its products directly to end-users and through
distributors; establish profitable operations through increased
sales and reduced operating expenses; and potentially raise
additional funds, principally through the additional sales of
securities or debt financings to meet its working capital
needs.
The Company
intends to increase sales by increasing its product offerings,
expanding its direct sales force and its distributor relationships
both domestically and internationally. Accordingly, the Company has
taken steps during Fiscal 2012 to improve its financial condition
and ultimately improve its financial results, including increasing
its product offerings with the launch of the new Epic diode laser
system, for which the Company received the CE Mark in late
September 2012 and FDA clearance in October 2012, executing a
definitive five-year agreement with Copenhagen-based 3Shape
Corporation (“3Shape”), making the Company a
distributor of 3Shape’s TRIOS intra-oral
CAD/CAM scanning technologies for digital impression-taking
solutions in the U.S. and Canada, expanding our direct sales force
and certain distributor relationships, and establishing two
revolving credit facilities to meet quarterly working capital
needs.
Management anticipates that the cash generated from
operations and the borrowings available under the lines of credit
with Comerica Bank will be sufficient to fund the working capital
requirements of the Company for 2013.
At
December 31, 2012, the Company had approximately $7.5 million
in working capital. The Company’s principal sources of
liquidity at December 31, 2012 consisted of approximately $2.5
million in cash and cash equivalents, $11.7 million of net accounts
receivable, and $6.4 million of available borrowings under two
revolving credit facility agreements.
On May 24,
2012, the Company entered into two revolving credit facility
agreements with Comerica Bank which provide for borrowings of up to
$8.0 million. The Company had approximately $1.6 million of
borrowings outstanding under these lines of credit as of
December 31, 2012. See Note 5 — Lines of Credit and
Other Borrowings for additional information.
