10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2013

OR

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

For the transition period from ______ to ______

Commission File Number 000-19627

BIOLASE, INC.

(Exact name of registrant as specified in its charter)

Delaware	87-0442441
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4 Cromwell

Irvine, California 92618

(Address of principal executive offices, including zip code)

(949) 361-1200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding, as of October 18, 2013, was 34,851,648 shares.

                       

BIOLASE, INC.

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012		3
	Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2013 and September 30, 2012		4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and September 30, 2012		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		30
Item 1A.	Risk Factors		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	Mine Safety Disclosures		30
Item 5.	Other Information		30
Item 6.	Exhibits		31
Signatures			33

   

 2 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BIOLASE, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except per share data)

	September 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	4,151		$	2,543
Accounts receivable, less allowance of $554 in 2013 and $304 in 2012		10,802			11,680
Inventory, net		11,745			11,142
Prepaid expenses and other current assets		1,062			1,552
Total current assets		27,760			26,917
Property, plant, and equipment, net		1,711			1,509
Intangible assets, net		200			300
Goodwill		2,926			2,926
Deferred tax asset		16			16
Other assets		246			305
Total assets	$	32,859		$	31,973
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Lines of credit	$	5,534		$	1,637
Accounts payable		9,346			7,663
Accrued liabilities		4,484			6,267
Customer deposits		174			582
Deferred revenue, current portion		3,184			3,226
Total current liabilities		22,722			19,375
Deferred tax liabilities		602			663
Other liabilities, long-term		34			141
Total liabilities		23,358			20,179
Commitments and contingencies (Notes 8, 9, and 13)
Stockholders’ equity (deficit):
Preferred stock, par value $0.001, 1,000 shares authorized, no shares issued and outstanding		—			—
Common stock, par value $0.001, 50,000 shares authorized; 36,815 and 33,248 shares issued in 2013 and 2012, respectively; and 34,852 and 31,284 shares outstanding in 2013 and 2012, respectively		37			34
Additional paid-in capital		147,676			140,747
Accumulated other comprehensive loss		(297	)		(320	)
Accumulated deficit		(121,516	)		(112,268	)
		25,900			28,193
Treasury stock (cost of 1,964 shares repurchased)		(16,399	)		(16,399	)
Total stockholders’ equity		9,501			11,794
Total liabilities and stockholders’ equity	$	32,859		$	31,973

See accompanying notes to consolidated financial statements.

 3 

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Products and services revenue	$	12,311		$	13,710		$	41,008		$	38,147
License fees and royalty revenue		34			71			181			129
Net revenue		12,345			13,781			41,189			38,276
Cost of revenue		8,516			7,500			26,005			20,688
Gross profit		3,829			6,281			15,184			17,588
Operating expenses:
Sales and marketing		4,164			3,635			13,554			11,383
General and administrative		2,460			1,839			7,305			6,271
Engineering and development		977			1,195			2,987			3,657
Excise tax		89			—			308			—
Total operating expenses		7,690			6,669			24,154			21,311
Loss from operations		(3,861	)		(388	)		(8,970	)		(3,723	)
Gain (loss) on foreign currency transactions		16			(28	)		(74	)		(137	)
Interest expense, net		(182	)		(98	)		(386	)		(140	)
Non-operating loss, net		(166	)		(126	)		(460	)		(277	)
Loss before income tax (benefit) provision		(4,027	)		(514	)		(9,430	)		(4,000	)
Income tax (benefit) provision		22			34			(182	)		97
Net loss		(4,049	)		(548	)		(9,248	)		(4,097	)
Other comprehensive income (loss) items:
Foreign currency translation adjustments		88			38			23			(14	)
Comprehensive loss	$	(3,961	)	$	(510	)	$	(9,225	)	$	(4,111	)
Net loss per share:
Basic	$	(0.13	)	$	(0.02	)	$	(0.29	)	$	(0.13	)
Diluted	$	(0.13	)	$	(0.02	)	$	(0.29	)	$	(0.13	)
Shares used in the calculation of net loss per share:
Basic		32,367			31,890			32,062			31,803
Diluted		32,367			31,890			32,062			31,803

See accompanying notes to consolidated financial statements.

 4 

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2013			2012
Cash Flows From Operating Activities:
Net loss	$	(9,248	)	$	(4,097	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation and amortization		439			373
Provision for bad debts		270			193
Provision for inventory excess and obsolescence		1,000			—
Amortization of discounts on lines of credit		79			25
Amortization of debt issuance costs		152			53
Stock-based compensation		1,239			1,280
Other equity instruments compensation		64			23
Other non-cash compensation		187			187
Deferred income taxes		(61	)		—
Changes in operating assets and liabilities:
Accounts receivable		608			(1,603	)
Inventory		(1,671	)		112
Prepaid expenses and other assets		59			599
Customer deposits		(408	)		87
Accounts payable and accrued liabilities		240			(1,593	)
Deferred revenue		(43	)		834
Net cash and cash equivalents used in operating activities		(7,094	)		(3,527	)
Cash Flows From Investing Activities:
Additions to property, plant, and equipment		(464	)		(715	)
Proceeds from disposal of long-lived assets		—			124
Purchased other intangible assets		(10	)		—
Net cash and cash equivalents used in investing activities		(474	)		(591	)
Cash Flows From Financing Activities:
Borrowings under lines of credit		27,300			9,500
Payments under lines of credit		(23,403	)		(7,311	)
Payment of debt issuance costs		(34	)		(304	)
Payment of stock repurchase costs		—			(235	)
Proceeds from equity offering, net of expenses		4,592			—
Proceeds from exercise of stock options and warrants		707			461
Net cash and cash equivalents provided by financing activities		9,162			2,111
Effect of exchange rate changes		14			(5	)
Change in cash and cash equivalents		1,608			(2,012	)
Cash and cash equivalents, beginning of period		2,543			3,307
Cash and cash equivalents, end of period	$	4,151		$	1,295
Supplemental cash flow disclosures:
Interest paid	$	165		$	45
Income taxes paid	$	51		$	51

See accompanying notes to consolidated financial statements.

 5 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—BASIS OF PRESENTATION

The Company

BIOLASE, Inc., (the “Company”) incorporated in Delaware in 1987, is a biomedical company operating in one reportable business segment that develops, manufactures, and markets proprietary lasers in dentistry and medicine and also markets and distributes two-dimensional (“2-D”) and three-dimensional (“3-D”) digital imaging equipment and CAD/CAM intra-oral scanners; products that are focused on technologies that advance the practice of dentistry and medicine.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of BIOLASE, Inc. and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December 31, 2012 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments and the elimination of all material intercompany transactions and balances, necessary to fairly present the information set forth therein. These unaudited, interim, consolidated financial statements do not include all the footnotes, presentations, and disclosures normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements. Certain amounts have been reclassified to conform to current period presentations.

The consolidated results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”) filed with the Securities and Exchange Commission on March 15, 2013.

Use of Estimates

The preparation of these consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates in these consolidated financial statements include allowances on accounts receivable, inventory, and deferred taxes, as well as estimates for accrued warranty expenses, indefinite-lived intangible assets, and the ability of goodwill to be realized, revenue deferrals for multiple element arrangements, effects of stock-based compensation and warrants, contingent liabilities, and the provision or benefit for income taxes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.

Update to Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies which are described in the Company’s 2012 Form 10-K, except as noted below. See Note 2 – Recent Accounting Pronouncements for adoption of updated authoritative guidance.

Excise Tax

Commencing January 1, 2013, certain of the Company’s product sales are subject to the newly enacted medical device excise tax. The Company has included such taxes separately as a component of operating expense.

Income Tax

The income tax provision for the three and nine months ended September 30, 2013 was calculated using the discrete year-to-date method, which management determined to be more appropriate than the annual effective rate method which was used to calculate the income tax provision for the quarter ended March 31, 2013. See Note 12 – Income Taxes for additional disclosures related to the Company’s income tax.

 6 

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.

Liquidity and Management’s Plans

The Company suffered recurring losses from operations during the three years ended December 31, 2012. The Company also incurred a loss from operations, a net loss, and used cash in operating activities for the three and nine months ended September 30, 2013. The available borrowing capacity on our lines of credit with Comerica Bank and the net proceeds from the below mentioned equity offering have been principal sources of liquidity during the nine months ended September 30, 2013. These credit facilities were amended in November 2013, as discussed further below, and expire May 1, 2014. At September 30, 2013, the Company had approximately $5.0 million in working capital. The Company’s principal sources of liquidity at September 30, 2013 consisted of approximately $4.2 million in cash and cash equivalents, $10.8 million of net accounts receivable, and $2.5 million of available borrowings under two revolving credit facility agreements.

The Company’s ability to meet its obligations in the ordinary course of business is dependent upon the Company’s ability to sell its products directly to end-users and through distributors, establish profitable operations through increased sales, decrease expenses, and to generate cash from operations or obtain additional funds when needed. If the Company is unsuccessful in its efforts to improve its financial position, there may be substantial doubt about its ability to adequately fund the minimum requirements of its business.

The Company intends to improve its financial condition and ultimately improve its financial results by increasing revenues through expansion of its product offerings, continuing to develop its direct sales force and distributor relationships both domestically and internationally, forming strategic arrangements within the dental and medical industries, educating dental and medical patients as to the benefits of its advanced medical technologies, and continuing cost reduction initiatives.

Management expects that the working capital and future borrowings available under the lines of credit should be sufficient to fund the minimum requirements of the Company; however, the Company cannot guarantee that it will be able to increase sales, reduce expenses, or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. Management will continue to monitor the liquidity of the Company and is prepared to implement cash saving measures or potentially issue debt or equity securities in the event that its plans to grow revenue do not materialize in the timeline anticipated by management.

Sale of common stock

On July 26, 2013, the Company filed a registration statement on Form S-3, File No. 333-190158 (“2013 Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register an indeterminate number of shares of common stock, preferred stock, and warrants with a total offering price not to exceed $30 million. The Company subsequently amended the 2013 Registration Statement and lowered the total not to exceed offering price to $5 million. The 2013 Registration Statement, as amended, was declared effective by the SEC on September 19, 2013. On September 23, 2013, the Company entered into an agreement with Northland Securities, Inc. (“Northland”), pursuant to which Northland acted as placement agent in connection with the sale of shares of the Company’s common stock in a registered direct offering (the “September 2013 Registered Direct Offering”) pursuant to the 2013 Registration Statement and paid Northland a fee of 5.0% of the aggregate gross proceeds in connection therewith. On September 23, 2013, the Company entered into a subscription agreement (“2013 Subscription Agreement”) with Camber Capital Management, LLC, pursuant to which the Company agreed to sell 2,688,172 shares of its common stock at a price per share of $1.86 for gross proceeds of $5 million. The net proceeds to the Company were $4.6 million, after deducting associated costs of $408,000, which included Northland’s fee. The shares of common stock sold in connection with the 2013 Subscription Agreement were issued pursuant to a prospectus supplement to the 2013 Registration Statement, which was filed with the SEC September 26, 2013.

 7 

Lines of credit

On September 6, 2013 and November 8, 2013, the Company amended its lines of credit with Comerica Bank. The amendments waive noncompliance with certain financial covenants, subject to additional requirements, and establish future covenants, restrictions, and penalties. The amendment on November 8, 2013 includes liquidity ratio and liquid asset covenants, and an equity raise requirement that established March 1, 2014 as the latest date by which the Company is required to raise at least $3.0 million. Any future noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the amounts outstanding immediately due and payable. Management is considering alternative financing solutions, including potentially issuing alternative debt securities, to mitigate any future liquidity constraints these covenants and restrictions may impose on the Company. Further discussion of the amendments is included in Note 8 – Lines of Credit and Other Borrowings.     

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASU’s”) to the FASB’s Accounting Standards Codification (“ASC”).

The Company considers the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to not be applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.

Newly Adopted Accounting Standards

In July 2012, the FASB simplified guidance for testing for impairment of indefinite-lived intangible assets other than goodwill. The changes are intended to reduce compliance costs. The revised guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the recently issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued guidance for reporting of amounts reclassified out of accumulated other comprehensive income. The revised guidance requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. The guidance is effective prospectively for reporting periods beginning after December 15, 2012. The adoption did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Not Yet Adopted

In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon de-recognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The revised guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

 8 

In July 2013, the FASB issued guidance to address the diversity in practice related to the financial statement presentation of unrecognized tax benefits as either a reduction of a deferred tax asset or liability when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

NOTE 3—STOCK-BASED AWARDS AND PER SHARE INFORMATION

Stock-Based Compensation

The Company currently has one stock-based compensation plan, the 2002 Stock Incentive Plan (the “2002 Plan”) which will expire on May 5, 2019. Eligible persons under the 2002 Plan include certain officers and employees of the Company, and directors of the Company, as well as consultants. Under the 2002 Plan, 7,750,000 shares of common stock have been authorized for issuance. As of September 30, 2013, 2,840,000 shares of common stock have been issued pursuant to options that were exercised, 4,374,000 shares of common stock have been reserved for options that are outstanding, and 536,000 shares of common stock remain available for future grant.

Compensation cost related to stock options recognized in operating results totaled approximately $491,000 and $357,000 for the three months ended September 30, 2013 and 2012, respectively; and $1.2 million and $1.3 million for the nine months ended September 30, 2013 and 2012, respectively. The net impact to earnings for those periods was $(0.02) and $(0.01) per basic and diluted share, and $(0.04) and $(0.04) per basic and diluted share, respectively. At September 30, 2013, the Company had approximately $2.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements granted under the 2002 Plan. The Company expects that cost to be recognized over a weighted-average period of 1.5 years.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of revenue	$	73	$	67	$	227	$	183
Sales and marketing		154		134		443		375
General and administrative		225		103		459		586
Engineering and development		39		53		110		136
	$	491	$	357	$	1,239	$	1,280

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Expected term (in years)		3.70			3.70			3.66			3.80
Volatility		83	%		97	%		83	%		101	%
Annual dividend per share	$	0.00		$	0.00		$	0.00		$	0.00
Risk-free interest rate		1.54	%		0.68	%		0.99	%		0.81	%

 9 

A summary of option activity under the Company’s stock option plan for the nine months ended September 30, 2013 is as follows:

	Shares			Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value(1)
Options outstanding at December 31, 2012		3,860,000		$	3.48
Plus: Options granted		1,516,000		$	3.90
Less: Options exercised		(342,000	)	$	2.07
Options forfeited, canceled, or expired		(660,000	)	$	4.34
Options outstanding at September 30, 2013		4,374,000		$	3.55		4.02	$	171,000
Options exercisable at September 30, 2013		2,480,000		$	3.57		3.39	$	166,000
Vested options expired during the quarter ended  September 30, 2013		66,000		$	10.28
(1) The intrinsic value calculation does not include negative values. This can occur when the fair market value on the reporting date is less than the exercise price of the grant.

On June 6, 2013, the Board of Directors (the “Board”) granted stock options to purchase 350,000 shares of common stock to Alexander K. Arrow in connection with his appointment to President and Chief Operating Officer. These stock options were granted at an exercise price of $4.00 per share, vest and become exercisable in equal quarterly amounts over a four-year period beginning on June 6, 2014, and expire on June 6, 2020.

Cash proceeds along with fair value disclosures related to grants, exercises, and vesting options are provided in the following table (in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Proceeds from stock options exercised	$	10	$	33	$	707	$	455
Tax benefit related to stock options exercised (1)		N/A		N/A		N/A		N/A
Intrinsic value of stock options exercised (2)	$	6	$	0	$	860	$	91
Weighted-average fair value of options granted during period	$	3.31	$	1.02	$	3.90	$	1.55
Total fair value of shares vested during the period	$	437	$	398	$	1,155	$	1,410
(1) Excess tax benefits received related to stock option exercises are presented as financing cash inflows. The Company currently does not receive a tax benefit related to the exercise of stock options due to the Company’s net operating losses.
(2) The intrinsic value of stock options exercised is the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant.

Warrants

On July 12, 2013, the Company entered into a strategic agreement with Valam, Inc. (“Valam”) to develop, market, and sell office-based laser systems to otolaryngologists (also known as “Ear, Nose, and Throat” or “ENT” doctors) (the “Valam Agreement”). The Valam Agreement provides the Company with an exclusive worldwide license to Valam’s ENT related patents and pending patents which complements the Company’s patent portfolio and supports the Company’s planned launch into the ENT laser market in late 2013. In connection with the Valam Agreement, the Company issued a warrant to Valam to purchase up to 165,000 shares of the Company’s common stock, at a price per share of $6.00 (the “Valam Warrant”). The Valam Warrant is performance-based and will vest as follows: 30,000 warrant shares upon the launch of the Company’s first ENT laser; 55,000 warrant shares upon the receipt of certain specified clearances required from the U.S. Food and Drug Administration (the “FDA”); 40,000 warrant shares upon achieving $5 million in ENT laser revenues for a 12-month period; and 40,000 warrant shares upon achieving $10 million in ENT laser revenues for a 12-month period. Vested warrant shares may be exercised with a cash payment, or, in lieu of a cash payment, Valam may convert the vested warrant shares into a net number of whole common shares. The Valam Warrant expires on July 14, 2020. As of September 30, 2013, performance requirements for the Valam Warrant have not been achieved and no stock-based compensation has been recognized.

 10 

On April 26, 2013, the Company issued a warrant to Sun Dental Laboratories, LLC (“Sun Dental Labs”) to purchase up to 500,000 shares of the Company’s common stock, at a price per share of $5.90 (the “Sun Dental Warrant”). The Sun Dental Warrant is performance-based and will vest at a rate of 1,000 shares per each 3Shape A/S (“3Shape”) Trios intraoral scanner (“Trios IOS”) that Sun Dental Labs assists in selling in conjunction with the agreement. For the purposes of the Sun Dental Warrant, a sale is defined as a Trios IOS that has been installed at the customer's place of business and is fully operational, where the customer has been trained, and the Trios IOS has been paid for in full by the customer. Any unvested warrant shares will expire on April 24, 2014. Vested warrant shares may be exercised with a cash payment, or, in lieu of a cash payment, Sun Dental Labs may convert the vested warrant shares into a net number of whole common shares. The Company recorded stock-based compensation expense of less than $1,000 related to the Sun Dental Warrant during the nine months ended September 30, 2013.

On April 18, 2013, the Company issued a warrant to purchase up to 60,000 shares of the Company’s common stock to an investor relations firm, at a price per share of $5.10 (the “IR Warrant”). The IR Warrant vests and becomes exercisable only if the Company’s common stock closing price on NASDAQ reaches or exceeds $7.50. The IR Warrant expires April 17, 2018.  As of September 30, 2013, no stock-based compensation has been recognized for the IR Warrant. The Company will reassess whether achievement of the contingent exercise provisions are probable on a quarterly basis and recognize stock-based compensation when it is probable that the market performance requirements will be achieved.

On March 23, 2013, the Company issued two tranches of warrants to purchase up to 100,000 shares of the Company’s common stock to a consultant, at a price per share of $4.50 (the “CMR Warrant”). The first tranche of 50,000 warrant shares vests and becomes exercisable only if the Company’s common stock closing price on NASDAQ reaches or exceeds $7.50. The second tranche of 50,000 warrant shares vests and becomes exercisable only if the Company’s common stock closing price on NASDAQ reaches or exceeds $10.00. The CMR Warrant expires March 22, 2018. As of September 30, 2013, no stock-based compensation has been recognized for the CMR Warrant. The Company will reassess whether achievement of the contingent exercise provision is probable on a quarterly basis and recognize stock-based compensation when it is probable that the market performance requirements will be achieved.

The initial warrant issued in connection with the lines of credit with Comerica Bank was exercised during the nine months ended September 30, 2013. In connection with amendments to the lines of credit, the Company issued additional warrants to Comerica Bank during September 2013 and November 2013. See Note 8 – Lines of Credit and Other Borrowings for further discussion.

Net Loss Per Share – Basic and Diluted

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

Outstanding stock options and warrants to purchase 6,022,000 shares were not included in the computation of diluted loss per share for the three and nine months ended September 30, 2013 as a result of their anti-dilutive effect. For the same 2012 periods, anti-dilutive outstanding stock options and warrants to purchase 4,504,000 shares were not included in the computation of diluted loss per share.

Stock Dividends

The Company intends to pay a 2% annual stock dividend, in quarterly installments, for the year ending December 31, 2013. Stock dividends are discussed quarterly by the Board and management. The actual declaration of future stock dividends and the establishment of the record and payment dates are subject to final determination by the Board after its review of the Company’s financial performance, the expected results of future operations, availability of shares, and other factors that the Board may deem relevant. The Company’s dividend policy may be changed at any time by the Board, and there is no assurance, with respect to the amount or frequency, that any stock dividend will be declared in the future.

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The Board declared one-half percent stock dividends during each of the first three quarters of 2013. The stock dividend declared during the quarter ended September 30, 2013 was payable September 13, 2013 to shareholders of record on August 30, 2013, the stock dividend declared during the quarter ended June 30, 2013 was payable June 28, 2013 to shareholders of record on June 14, 2013, and the stock dividend declared during the quarter ended March 31, 2013 was payable March 29, 2013 to shareholders of record on March 15, 2013. All stock information presented, other than that related to stock options and warrants, has been adjusted to reflect the effects of stock dividends.

NOTE 4—INVENTORY

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

	September 30, 2013		December 31, 2012
Raw materials	$	3,474	$	4,017
Work-in-process		1,752		1,949
Finished goods		6,519		5,176
Inventory, net	$	11,745	$	11,142

Inventory is net of a provision for excess and obsolete inventory totaling $2.7 million and $1.9 million as of September 30, 2013 and December 31, 2012, respectively.

NOTE 5—PROPERTY, PLANT, AND EQUIPMENT

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

	September 30, 2013			December 31, 2012
Land	$	196		$	191
Building		251			246
Leasehold improvements		1,207			1,193
Equipment and computers		5,824			5,219
Furniture and fixtures		1,049			1,046
Construction in progress		7			132
		8,534			8,027
Accumulated depreciation and amortization		(6,823	)		(6,518	)
Property, plant, and equipment, net	$	1,711		$	1,509

Depreciation and amortization expense related to property, plant, and equipment totaled $124,000 and $339,000 for the three and nine months ended September 30, 2013, respectively, and $93,000 and $275,000 for the three and nine months ended September 30, 2012, respectively.

NOTE 6—INTANGIBLE ASSETS AND GOODWILL

The Company conducted its annual impairment test of intangible assets and goodwill as of June 30, 2013, and determined that there was no impairment. The Company also tests its intangible assets and goodwill between the annual impairment test if events occur or circumstances change that would more likely than not reduce the fair value of the Company or its assets below their carrying amounts.

Amortization expense for the three and nine months ended September 30, 2013 totaled $17,000 and $100,000, respectively, and $33,000 and $98,000, respectively, for the same periods in 2012. Other intangible assets primarily include acquired customer lists and non-compete agreements.

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

	As of September 30, 2013									As of December 31, 2012
	Gross		Accumulated Amortization			Impairment		Net		Gross		Accumulated Amortization			Impairment		Net
Patents (4-10 years)	$	1,914	$	(1,891	)	$	—	$	23	$	1,914	$	(1,833	)	$	—	$	81
Trademarks (6 years)		69		(69	)		—		—		69		(69	)		—		—
Other (4 to 6 years)		817		(640	)		—		177		817		(598	)		—		219
Total	$	2,800	$	(2,600	)	$	—	$	200	$	2,800	$	(2,500	)	$	—	$	300
Goodwill (Indefinite life)	$	2,926						$	2,926	$	2,926						$	2,926

NOTE 7—ACCRUED LIABILITIES AND DEFERRED REVENUE

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

	September 30,  2013		December 31,  2012
Payroll and benefits	$	1,703	$	2,326
Warranty accrual		1,330		1,699
Sales tax		166		640
Accrued professional services		940		502
Accrued insurance premium		—		751
Other		345		349
Accrued liabilities	$	4,484	$	6,267

Changes in the initial product warranty accrual, and the expenses incurred under the Company’s initial and extended warranties, for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Initial warranty accrual, beginning balance	$	1,518		$	1,980		$	1,699		$	2,218
Provision for estimated warranty cost		69			337			429			711
Warranty expenditures		(257	)		(387	)		(798	)		(999	)
Initial warranty accrual, ending balance		1,330			1,930			1,330			1,930
Total warranty accrual, long-term		—			—			—			—
Total warranty accrual, current portion	$	1,330		$	1,930		$	1,330		$	1,930

Deferred revenue is comprised of the following (in thousands):

	September 30,  2013			December 31,  2012
Undelivered elements (training, installation, and product and support services)	$	1,661		$	1,723
Extended warranty contracts		1,524			1,506
Total deferred revenue		3,185			3,229
Less long-term amounts:
Extended warranty contracts		(1	)		(3	)
Total deferred revenue, long-term		(1	)		(3	)
Total deferred revenue, current portion	$	3,184		$	3,226

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NOTE 8—LINES OF CREDIT AND OTHER BORROWINGS

Lines of Credit

During the year ended December 31, 2012, the Company entered into and amended two revolving credit facility agreements with Comerica Bank (the “Credit Agreements”), which provide for borrowings against certain domestic accounts receivable and inventory, as set forth in the $4.0 million revolving credit facility agreement (the “Domestic Revolver”), and borrowings against certain export related accounts receivable and inventory, as set forth in the $4.0 million revolving credit facility agreement (the “Ex-Im Revolver”), for a combined aggregate commitment of borrowings up to $8.0 million. On May 7, 2013, the Company amended the Credit Agreements (“Amendment No. 2”) with Comerica Bank to increase the borrowing capacity under the Domestic Revolver from $4.0 million to $6.0 million, resulting in a combined aggregate commitment of borrowings up to $10.0 million. On September 6, 2013, the Company amended the Credit Agreements (“Amendment No. 3”) with Comerica Bank which decreased the borrowing capacity under the Domestic Revolver from $6.0 million to $4.0 million, resulting in a combined aggregate commitment of borrowings up to $8.0 million. The lines of credit mature on May 1, 2014, at which date any remaining borrowings and accrued interest under the lines of credit become due and payable. As of September 30, 2013, the Company had aggregate outstanding borrowings totaling approximately $5.5 million, which included $3.5 million under the Domestic Revolver and $2.0 million under the Ex-Im Revolver, as compared with aggregate outstanding borrowings totaling approximately $1.6 million as of December 31, 2012.

Lockbox arrangements under the revolving bank facilities provide that substantially all of the income generated is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of Comerica Bank. Cash is disbursed from Comerica Bank to the Company only after payment of the applicable debt service and principal. At September 30, 2013 and December 31, 2012, there were no restricted cash amounts. The Company’s obligations are generally secured by substantially all of the Company’s assets now owned or hereinafter acquired.

The outstanding principal balance of the Credit Agreements bears interest at annual percentage rates equal to the daily prime rate, plus 2.00% for the Domestic Revolver and 1.50% for the Ex-Im Revolver. The daily prime rate is subject to a floor of the daily adjusting LIBOR rate plus 2.50% per annum, or if LIBOR is undeterminable, 2.50% per annum. The Company is also required to pay an unused commitment fee of 0.25% based on a portion of the undrawn lines of credit, payable quarterly in arrears. During the three and nine months ended September 30, 2013, the Company incurred interest expense associated with the credit facilities of $181,000 and $381,000, respectively, including $71,000 and $152,000, respectively, of amortization of deferred debt issuance costs and $43,000 and $79,000, respectively, of amortization of the discount on lines of credit. During the three and nine months ended September 30, 2012, the Company incurred interest expense associated with the credit facilities of $98,000 and $133,000, respectively, including $38,000 and $53,000, respectively, of amortization of deferred debt issuance costs and $18,000 and $25,000, respectively, of amortization of the discount on lines of credit. Interest expense payable was approximately $9,000 and $19,000 at September 30, 2013 and December 31, 2012, respectively, and was included in accrued liabilities in the accompanying consolidated financial statements.

The Credit Agreements require the Company to maintain compliance with certain financial and non-financial covenants, as defined therein. Amendment No. 3 resulted in certain new and amended financial covenants for the quarters ending September 30, 2013 and December 31, 2013. As of September 30, 2013, the Company was in compliance with these covenants with the exception of the earnings before income tax, depreciation, and amortization (“EBITDA”) covenant. On November 8, 2013, the Company amended the Credit Agreements (“Amendment No. 4”) with Comerica Bank to waive the noncompliance with the minimum EBITDA covenant, reset the EBITDA covenant for the quarter ending December 31, 2013, and establish covenants for the remaining term of the agreements. Amendment No. 4 includes liquidity ratio and liquid asset covenants, and an equity raise requirement that established March 1, 2014 as the latest date the Company is required to raise at least $3.0 million. Any future noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the amounts outstanding immediately due and payable. Management is considering alternative financing solutions to mitigate any future liquidity constraints this may impose on the Company.  

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During the year ended December 31, 2012, the Company issued and amended a warrant to Comerica Bank (“2012 Comerica Warrant”) to purchase up to 80,000 shares of the Company’s common stock at an amended exercise price per share of $2.00. During the three months ended March 31, 2013, Comerica Bank exercised all 80,000 of the 2012 Comerica Warrant shares on a cashless basis pursuant to the Notice of Exercise resulting in a net issuance of 40,465 shares of common stock.

On September 6, 2013, the Company issued an additional warrant to Comerica Bank (the “September 2013 Comerica Warrant”) to purchase up to 100,000 shares of the Company’s common stock at an exercise price per share of $2.00. The September 2013 Comerica Warrant vests in four equal quarterly tranches commencing on December 31, 2013 and shares are exercisable once vested. The 2013 Comerica Warrant may be exercised with a cash payment from Comerica Bank, or, in lieu of a cash payment, Comerica Bank may convert the warrant shares into a number of shares, in whole or in part. These warrant shares will expire if unexercised on September 6, 2018. The fair value of the September 2013 Comerica Warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 5.00 years; volatility of 105.32%; annual dividend per share of $0.00; and risk-free interest rate of 1.77%; and resulted in an estimated fair value of $143,000 which was recorded as equity and resulted in a discount to the credit facilities at issuance. The discount is being amortized on a straight-line basis to interest expense over the remaining term of the Credit Agreements.

In connection with Amendment No. 4, the Company incurred an amendment fee of $10,000 and issued an additional warrant to Comerica Bank (the “November 2013 Comerica Warrant”) to purchase up to 100,000 shares of the Company’s common stock at an exercise price per share of $2.00. The November 2013 Comerica Warrant includes an accelerated vesting clause that may be triggered by certain events described therein, but otherwise vests in four equal quarterly tranches commencing on December 31, 2013, and shares are exercisable once vested. The November 2013 Comerica Warrant may be exercised with a cash payment from Comerica Bank, or, in lieu of a cash payment, Comerica Bank may convert the warrant shares into a number of shares, in whole or in part. These warrant shares will expire if unexercised on November 8, 2018.

Other Borrowings

The Company finances a portion of its annual insurance premiums which it pays in installments over nine months. As of September 30, 2013 and December 31, 2012, $0 and $379,000 at an annual interest rate of 3.0%, respectively, was outstanding under this arrangement and was included in accrued liabilities in the accompanying consolidated financial statements. The Company incurred interest expense associated with the financed insurance premiums of approximately $1,000 and $5,000 during the three and nine months ended September 30, 2013, respectively, and approximately $0 and $4,000 during the three and nine months ended September 30, 2012, respectively.

NOTE 9—COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its corporate headquarters and manufacturing facility in Irvine, California and also leases certain other facilities, office equipment, and automobiles under various operating lease arrangements. Future minimum rental commitments under operating lease agreements with non-cancelable terms greater than one year for the years ending December 31, 2013, 2014, and 2015, is $408,000, $661,000, and $192,000, respectively.

Employee arrangements and other compensation

Certain members of management are entitled to severance benefits payable upon termination following a change in control, which would approximate $716,000 at September 30, 2013. The Company also has agreements with certain employees to pay bonuses based on targeted performance criteria. No amount was required to be accrued at September 30, 2013.

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Purchase commitments

The Company generally purchases components and subassemblies for its products from a limited group of third party suppliers through purchase orders. The Company had $12.8 million of purchase commitments as of September 30, 2013, for which the Company has not received the goods or services and which is expected to be purchased within one year. These purchase commitments were made to secure better pricing and to ensure the Company will have the necessary parts to meet anticipated near term demand.

Litigation

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

Class Action Lawsuits

On August 23, 2013 and August 26, 2013, two putative securities class action lawsuits were filed against the Company and certain of its officers and directors in the United States District Court for the Central District of California, one of which seeks unspecified damages on behalf of a putative class of persons who purchased or otherwise acquired the Company’s common stock between January 7, 2013 and August 12, 2013, and the other of which seeks similar remedies on behalf of a putative class of persons who purchased or otherwise acquired the Company's common stock between November 5, 2012 and August 12, 2013. Both complaints allege that the Company and certain of its officers and directors violated the federal securities laws by making allegedly materially false and misleading statements and/or material omissions during the putative class periods. On October 22, 2013, four individual plaintiffs each filed motions to consolidate these actions and to be appointed as lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995. Those motions are currently scheduled to be heard on December 13, 2013. No other dates have been set. As of September 30, 2013, the Company has accrued $250,000 for legal costs expected to be incurred in connection with these matters. The Company believes that the claims contained in the lawsuits are without merit and intends to vigorously defend against the claims.

Intellectual Property Litigation

On April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against the Company in the District of Utah for patent infringement of U.S. Patent No. 7,485,116 regarding BIOLASE’s EZlase dental laser. On September 9, 2012, CAO filed its First Amended Complaint, which added claims for (1) business disparagement/injurious falsehood under common law and (2) unfair competition under 15 U.S.C. Section 1125(a). The additional claims stem from a press release that the Company issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO and its diode product. The First Amended Complaint seeks injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. On November 13, 2012, the Court stayed the lawsuit for 120 days to allow the United States Patent and Trademark Office (“USPTO”) to consider the Company’s request for reexamination of the patent-in-suit. The USPTO granted the request to reexamine the asserted claims of the patent-in-suit and, on February 28, 2013, the Court stayed the lawsuit until the termination of the reexamination proceedings. On April 23, 2013, the USPTO issued an office action rejecting all of the asserted claims over the prior art, and CAO responded to the office action. On August 28, 2013, the USPTO issued an Action Closing Procedure, rejecting all of CAO’s patent claims. CAO has responded to the USPTO’s latest ruling.

The Company filed a patent infringement lawsuit against Fotona dd. (“Fotona”) in Düsseldorf District Court alleging infringement with respect to the Fotona Fidelis dental laser system. Oral proceedings are currently scheduled for spring 2014. Fotona denies liability and seeks the reimbursement of statutory fees from the Company. Together with its response brief, Fotona also filed a nullity action against the patent in dispute, patent number EP 1 560 470. The nullity action is pending at the German Federal Patent Court (the “Patent Court”), Docket No. 1 Ni 58/13 (EP). On September 2, 2013, the Company filed its counterplea in the infringement proceedings and phrased its arguments defending the validity of the patent. These arguments were also the subject of the defense brief to the Patent Court in the parallel nullity action proceedings. On September 9, 2013, the Company filed its response to the Patent Court.

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Other Matters

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

NOTE 10—SEGMENT INFORMATION

The Company currently operates in a single reportable segment. For the three and nine months ended September 30, 2013, sales in the United States accounted for approximately 62% of net revenue and international sales accounted for approximately 38% of net revenue. For the three and nine months ended September 30, 2012, sales in the United States accounted for approximately 68% of net revenue and international sales accounted for approximately 32% of net revenue.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
United States	$	7,602	$	9,433	$	25,735	$	25,842
International		4,743		4,348		15,454		12,434
	$	12,345	$	13,781	$	41,189	$	38,276

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

Long-lived assets located outside of the United States at our foreign subsidiaries totaled $442,000 and $412,000 as of September 30, 2013 and December 31, 2012, respectively.

NOTE 11—CONCENTRATIONS

Revenue from laser systems, the Company’s core product, which includes the iPlus, MD Turbo, and Epic, comprised 66% and 68% of total net revenues for the three and nine months ended September 30, 2013, respectively, and 74% and 73% of total net revenue, respectively, for the same periods in 2012. Revenue from consumables and other comprised 13% and 12% of total revenue for the same periods in 2013, and 11% and 12% for the same periods in 2012, respectively. Revenue from imaging systems comprised 8% and 8% of total net revenue for the same periods in 2013, and 5% and 5% for the same periods in 2012, respectively. Revenue from services comprised 13% and 12% of total net revenue for the same periods in 2013, and 10% and 10% for the same periods in 2012, respectively. Revenue from license fees and royalties comprised 0% and 0% of total net revenue for the same periods in 2013, and 0% and 0% for the same periods in 2012, respectively.

No individual customer represented more than 10% of the Company’s revenue in the three and nine months ended September 30, 2013 and 2012.

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

As of September 30, 2013, one distributor represented 10% of the Company’s accounts receivable. No individual customer represented more than 10% of the Company’s accounts receivable at December 31, 2012.

 17 

The Company currently purchases certain key components of its products from single suppliers. Although there are a limited number of manufacturers of these key components, management believes that other suppliers could provide similar key components on comparable terms. A change in suppliers, however, could cause delays in manufacturing and a possible loss of sales, which could adversely affect the Company’s results of operations.

NOTE 12—INCOME TAXES

The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered, and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that a full valuation allowance against the Company’s net deferred tax assets is appropriate.

As of September 30, 2013, the Company had net operating loss (“NOL”) carryforwards for federal and state purposes of approximately $83.7 million and $59.5 million, respectively, which begin to expire in 2013. The utilization of NOL and credit carryforwards may be limited under the provisions of the Internal Revenue Code (“IRC”) Section 382 and similar state provisions. IRC Section 382 generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. During the year ended December 31, 2006, the Company completed an analysis to determine the potential applicability of any annual limitations imposed by IRC Section 382. Based on the analysis, management determined that there was no significant IRC Section 382 limitation. The Company has not assessed whether any ownership changes have occurred since the completion of the 2006 analysis. As of September 30, 2013, the Company had research and development tax credit carryforwards for federal and state purposes of approximately $1.3 million and $815,000, respectively, which will begin to expire in 2018 for federal purposes and will carryforward indefinitely for state purposes. An updated analysis may be required at the time the Company begins utilizing any of its net operating losses to determine if there is an IRC Section 382 limitation.

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has elected to classify interest and penalties as a component of its income tax provision. With respect to the liability for unrecognized tax benefits, including related estimates of penalties and interest, the Company recorded increases of $0 and $1,000 for the three and nine months ended September 30, 2013, respectively, and $2,000 and $4,000 for the three and nine months ended September 30, 2012, respectively.    

For the three and nine months ended September 30, 2013, the Company recorded an income tax provision of $22,000 and benefit of $182,000, respectively, related to the current year tax provision. For the three and nine months ended September 30, 2012, the Company recorded an income tax provision of $34,000 and $97,000, respectively. During the nine months ended September 30, 2013, the Company reversed certain deferred tax liabilities associated with unrecognized tax benefits related to international operations due to expiring statutes and recognized tax benefits of $107,000 and recognized deferred tax assets related to certain indefinite lived assets (federal alternative minimum tax credits and California R&D credits) that were used to offset deferred tax liabilities related to indefinite-lived intangible assets of $107,000 resulting in an overall tax benefit of $214,000. Management does not expect to record additional significant tax benefits in the foreseeable future.

 18 

The tax expense differs from expense derived from statutory rate of 34% primarily due to the existence of valuation allowances against net deferred tax assets and current liabilities resulting from the estimated state income tax liabilities and federal alternative minimum tax liability. The income tax provision for the three and nine months ended September 30, 2013 was calculated using the discrete year-to-date method, which management determined to be more appropriate than the annual effective rate method which was used to calculate the income tax provision for the quarter ended March 31, 2013.

Recently enacted tax laws may also affect the tax provision on the Company’s financial statements. The state of California requires the use of a single sales factor apportionment formula for tax years beginning on or after January 1, 2013. During the nine months ended September 30, 2013, the Company’s state deferred tax assets were revalued to account for the change in the tax law; however, the Company records a full valuation allowance against the state deferred tax assets therefore the California apportionment mandate did not have a material impact on the Company’s consolidated financial statements.

NOTE 13—SUBSEQUENT EVENT

Credit Agreements

On November 8, 2013, the Company amended the Credit Agreements with Comerica Bank to waive its noncompliance with the minimum EBITDA covenant for the quarter ended September 30, 2013, reset the EBITDA covenant for the quarter ending December 31, 2013, and establish covenants for the remaining term of the agreements. In connection with this amendment, the Company issued Comerica Bank the November 2013 Comerica Warrant and incurred an amendment fee of $10,000. See Note 8 – Lines of Credit and Other Borrowings for further discussion.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains” forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of Biolase, Inc. (the “Company,” “we”, “us” or “our” ) to differ materially and adversely from those expressed or implied by such forward-looking statements. Such forward-looking statements include any statements, predictions, and expectations regarding our earnings, revenue, sales and operations, operating expenses, anticipated cash needs, capital requirements and capital expenditures, needs for additional financing, use of working capital, plans for future products and services and for enhancements of existing products and services, anticipated growth strategies, ability to attract customers, sources of net revenue, anticipated trends and challenges in our business and the markets in which we operate, the adequacy of our facilities, the impact of economic and industry conditions on our customers and our business, customer demand, our competitive position, the outcome of any litigation against us, the perceived benefits of any technology acquisitions, critical accounting policies, the impact of recent accounting pronouncements, statements pertaining to financial items, plans, strategies, expectations or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact. Forward-looking statements are often identified by the use of words such as “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “continue,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “potential,” “plan,” “seek” and similar expressions and variations or the negativities of these terms or other comparable terminology. These forward-looking statements are based on the beliefs and assumptions of our management based upon information currently available to management. Such forward looking statements are subject to risks, uncertainties, and other factors that could cause actual results and the timing of certain events to differ materially and adversely from future results expressed or implied from such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2013. Such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements for any reason except as otherwise required by law.

Overview

We are a biomedical company that develops, manufactures, and markets proprietary lasers in dentistry and medicine and also markets and distributes two-dimensional (“2-D”) and three-dimensional (“3-D”) digital imaging equipment and CAD/CAM intra-oral scanners; products that are focused on technologies that advance the practice of dentistry and medicine. Our dental laser systems allow dentists, periodontists, endodontists, oral surgeons, and other specialists to perform a broad range of dental procedures, including cosmetic and complex surgical applications. Our systems are designed to provide clinically superior performance for many types of dental procedures with less pain and faster recovery times than are generally achieved with drills, scalpels, and other dental instruments. We have clearance from the U.S. Food and Drug Administration (the “FDA”) to sell our laser systems in the United States and also have the necessary approvals to sell our laser systems in Canada, the European Union, and various other international markets. Our licensed dental imaging equipment and other related products are designed to improve diagnoses, applications, and procedures in dentistry and medicine.

We offer two categories of laser system products: WaterLase^® systems and Diode systems. Our flagship product category, the WaterLase system, uses a patented combination of water and laser energy to perform most procedures currently performed using dental drills, scalpels, and other traditional dental instruments for cutting soft and hard tissue. We also offer our Diode laser systems to perform soft tissue, pain therapy, and cosmetic procedures, including teeth whitening. We currently have approximately 170 issued and 130 pending U.S. and international patents, the majority of which are related to our core WaterLase technology and dental and medical lasers. Since 1998, we have sold over 10,000 WaterLase systems, including more than 6,000 WaterLase MD^® and iPlus^® systems, and more than 23,900 laser systems in over 70 countries around the world.

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During the nine months ended September 30, 2013, we unveiled and began selling the new Epic^TM V-Series diode laser system which we believe will be a leading technology in the evolution of dental and medical treatments available in the veterinary market. We also received FDA clearance for both the Diolase 10S and Epic 10S for over 80 different procedures in 19 additional medical markets, including general surgery, ophthalmology, dermatology, plastic surgery, ENT, oral surgery, arthroscopy, gastroenterology, podiatry, GI/GU, gynecology, neurosurgery, pulmonary surgery, cardiac surgery, thoracic surgery, urology, aesthetics, and vascular surgery. We continue to invest in our intellectual property and were granted several new patents covering the use of laser technologies for treating various conditions of the eye, including presbyopia, glaucoma, retinal disorders, and cataracts, several new patents for our laser delivery system configurations, and a new patent for our non-contact hand piece for cutting both hard and soft tissue with our WaterLase all-tissue lasers. The FDA also cleared the WaterLase iPlus all-tissue laser for use as a surgical instrument for soft-tissue procedures in orthopedic and podiatric surgery.

We are actively seeking strategic partnerships for our patented advanced technologies and recently entered into a letter of commitment with Auris Surgical Robotics, Inc. ("Auris") to co-develop a cataract-removal ophthalmologic robot utilizing our WaterLase technology and a robotic operating system manufactured by Auris. We also have a strategic agreement with Valam, Inc. (“Valam”) to develop, market, and sell office-based laser systems to otolaryngologists (also known as "Ear, Nose, and Throat" or "ENT" doctors) (the “Valam Agreement”). The Valam Agreement provides us with an exclusive worldwide license to Valam’s ENT related patents and patent applications which complement our patent portfolio and supports our expected launch into the ENT laser market in late 2013. We are also engaged in collaboration with Procter and Gamble Company (“P&G”) to commercialize a consumer product utilizing our patents. Recently we launched the OCCULASE^TM website as a marketing tool for our ophthalmology technologies for which we continue to seek strategic partnerships to assist in our entry into the ophthalmology laser market.

During the nine months ended September 30, 2013, we expanded our line of digital imaging equipment with the newly FDA cleared NewTom Biolase VG3 (“VG3”), a readily upgradeable 2-D/3-D hybrid system manufactured by Cefla Dental Group, which we began distributing in the United States. We also entered into an affiliation agreement with Sun Dental Laboratories, LLC (“Sun Dental”) by which we leverage Sun Dental’s existing relationships with dentists, laboratory associates, and dental practice customers to enhance sales of our imaging systems.

On July 26, 2013, we filed a registration statement on Form S-3, File No. 333-190158 (“2013 Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register an indeterminate number of shares of common stock, preferred stock, and warrants with a total offering price not to exceed $30 million. We subsequently amended the 2013 Registration Statement and lowered the total not to exceed offering price to $5 million. The 2013 Registration Statement, as amended, was declared effective by the SEC on September 19, 2013. On September 23, 2013, we entered into an agreement with Northland Securities, Inc. (“Northland”), pursuant to which Northland acted as placement agent in connection with the sale of shares of our common stock in a registered direct offering (the “September 2013 Registered Direct Offering”) pursuant to the 2013 Registration Statement and paid Northland a fee of 5.0% of the aggregate gross proceeds in connection therewith. On September 23, 2013, we entered into a subscription agreement (“2013 Subscription Agreement”) with Camber Capital Management, LLC, pursuant to which we agreed to sell 2,688,172 shares of our common stock at a price per share of $1.86 for gross proceeds of $5 million. The net proceeds to the Company were $4.6 million, after deducting associated costs of $408,000, which included Northland’s fee. The shares of common stock sold in connection with the 2013 Subscription Agreement were issued pursuant to a prospectus supplement to the 2013 Registration Statement, which was filed with the SEC September 26, 2013.

On September 6, 2013 and November 8, 2013, we amended our lines of credit with Comerica Bank. Further discussion of the amendments is included in our discussion on Liquidity and Capital Resources—Future Liquidity Needs.

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Critical Accounting Policies

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses reported during the period. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 48 to 51 in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s 2012 Form 10-K. We believe that there have been no significant changes during the nine months ended September 30, 2013 in our critical accounting policies from those disclosed in Item 7 of the 2012 Form 10-K, except for our income tax provision for the three and nine months ended September 30, 2013 which was calculated using the discrete year-to-date method, which we determined to be more appropriate than the annual effective rate method which was used to calculate the income tax provision for the quarter ended March 31, 2013.

Results of Operations

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Products and services		99.7	%		99.5	%		99.6	%		99.7	%
License fees and royalty		0.3			0.5			0.4			0.3
Net revenue		100.0			100.0			100.0			100.0
Cost of revenue		69.0			54.4			63.1			54.0
Gross profit		31.0			45.6			36.9			46.0
Operating expenses:
Sales and marketing		33.7			26.4			32.9			29.7
General and administrative		20.0			13.3			17.7			16.4
Engineering and development		7.9			8.7			7.3			9.6
Excise tax		0.7			—			0.8			—
Total operating expenses		62.3			48.4			58.7			55.7
Loss from operations		(31.3	)		(2.8	)		(21.8	)		(9.7	)
Non-operating loss, net		(1.3	)		(0.9	)		(1.1	)		(0.7	)
Loss before income taxes		(32.6	)		(3.7	)		(22.9	)		(10.4	)
Income tax (benefit) provision		0.2			0.3			(0.4	)		0.3
Net loss		(32.8	)%		(4.0	)%		(22.5	)%		(10.7	)%

The following table summarizes our net revenues by category for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):

	Three Months Ended September 30,								Nine Months Ended September 30,
	2013				2012				2013				2012
Laser systems	$	8,126	66	%	$	10,151	74	%	$	27,950	68	%	$	27,860	73	%
Imaging systems		961	8	%		675	5	%		3,349	8	%		1,722	5	%
Consumables and other		1,627	13	%		1,504	11	%		4,909	12	%		4,508	12	%
Services		1,597	13	%		1,380	10	%		4,800	12	%		4,057	10	%
Total products and services		12,311	100	%		13,710	100	%		41,008	100	%		38,147	100	%
License fees and royalty		34	—	%		71	—	%		181	—	%		129	—	%
Net revenue	$	12,345	100	%	$	13,781	100	%	$	41,189	100	%	$	38,276	100	%

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Three months ended September 30, 2013 and 2012

Net Revenue. Net revenue for the three months ended September 30, 2013, (“Third Quarter 2013”) totaled $12.3 million, a decrease of approximately $1.5 million, or 10%, as compared with net revenue of $13.8 million for the three months ended September 30, 2012 (“Third Quarter 2012”). Domestic revenues totaled $7.6 million, or 62% of net revenue, for Third Quarter 2013 versus $9.4 million, or 68% of net revenue, for Third Quarter 2012. International revenues for Third Quarter 2013 totaled $4.7 million, or 38% of net revenue, as compared with $4.3 million, or 32% of net revenue, for Third Quarter 2012. The decrease in period-over-period net revenue resulted from decreases in domestic laser system revenue, which declined 32%, offset by increases in imaging systems, consumables and other, and services revenue. We believe that these results were primarily due to inadequate execution within our sales force and subpar marketing efforts in connection with our transition from only selling WaterLase dental lasers to selling a wide range of hard- and soft-tissue dental and medical lasers and other technological solutions for dentists, including digital radiography and CAD/CAM intra-oral scanners. With continued growth in international sales and entrance into new product markets we recently changed sales and marketing leadership responsibilities in efforts to more effectively deploy our resources and improve overall revenue as well as our gross margin.

Laser system net revenue, as a result of the aforementioned reasons, decreased by approximately $2.0 million, or 20%, in the Third Quarter 2013 compared to the same period of 2012. We expect improved sales of our core laser systems moving into the quarter ending December 31, 2013, as we believe many dentists purchase capital equipment during the fourth quarter in order to maximize their earnings and minimize their taxes through utilizing certain tax incentives, such as accelerated depreciation methods for purchased capital equipment, as part of their year-end tax planning.

Imaging system net revenue increased by approximately $286,000, or 42%, in the Third Quarter 2013, compared to the same period of 2012. The increase was driven by increased sales and marketing efforts and increased offerings at various value propositions.

Consumables and other net revenue, which includes consumable products such as disposable tips and shipping revenue, increased by approximately $123,000, or 8%, for Third Quarter 2013 as compared to the same period of 2012. This increase in consumables and other net revenue was primarily a result of auxiliary sales to our growing laser customer base.

Services net revenue, which consists of extended warranty service contracts, advanced training programs, and other services, increased by approximately $217,000, or 16%, for Third Quarter 2013, as compared to the same period of 2012. The increased revenue was due largely to increased follow-on sales related to our growing laser customer base and increased sales and marketing efforts in this part of our business.

License fees and royalty revenue remained relatively flat for the Third Quarter 2013 as compared to the same period of 2012.

Cost of Revenue. Cost of revenue for Third Quarter 2013 increased by approximately $1.0 million, or 14%, to $8.5 million, or 69% of net revenue, compared with cost of revenue of $7.5 million, or 54% of net revenue, for Third Quarter 2012. The increased cost as a percentage of revenue is a result of lower laser system sales and slightly increased international sales. Our laser systems generally have significantly higher margins than our licensed imaging systems and our domestic sales generally have higher margins than our international sales. We also recorded a provision of $1.0 million for excess and obsolete inventory during Third Quarter 2013 related to negative market trends and the decreased velocity of our inventory which significantly increased our cost of revenues.

Gross Profit. Gross profit for Third Quarter 2013 decreased by approximately $2.5 million, or 39%, to $3.8 million, as compared to $6.3 million for Third Quarter 2012. Gross profit decreased from 46% of net revenue for Third Quarter 2012 to 31% of net revenue for Third Quarter 2013. The decrease was primarily due to lower laser system sales and the provision for excess and obsolete inventory.

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Operating Expenses. Operating expenses for Third Quarter 2013 increased by approximately $1.0 million, or 15%, to $7.7 million as compared to $6.7 million for Third Quarter 2012. The period-over-period increase in expense is explained in the following expense categories:

Sales and Marketing Expense. Sales and marketing expenses for Third Quarter 2013 increased by approximately $529,000, or 15%, to $4.2 million, or 34% of net revenue, as compared with $3.6 million, or 26% of net revenue, for Third Quarter 2012. The increase was primarily a result of increased payroll and consulting related expenses of $428,000, increased convention costs of $137,000, and increased media and advertising expenses of $127,000, offset by decreased commission expenses of $213,000. As such, we expect costs to increase slightly as a percentage of revenue for the year ending December 31, 2013 as compared with the previous year. As a result, we have recently changed our sales and marketing leadership to address these negative trends.

General and Administrative Expense. General and administrative expenses for Third Quarter 2013 increased by approximately $621,000, or 34%, to $2.5 million, or 20% of net revenue, as compared with $1.8 million, or 13% of net revenue, for Third Quarter 2012. We experienced increased payroll and consulting related expenses of $316,000, increased legal expenses of $295,000, of which $250,000 related to the defense of class action lawsuits (refer below to “Litigation and Contingencies”), increased provision for doubtful accounts of $300,000, and increased investor relations expenses of $66,000, offset by decreased patent defense costs of $337,000. During the Third Quarter 2013, we insourced various patent filing related work which reduced patent attorney fees but increased payroll costs.

Engineering and Development Expense. Engineering and development expenses for Third Quarter 2013 decreased by approximately $218,000, or 18%, to $977,000, or 8% of net revenue, as compared with $1.2 million, or 9% of net revenue, for Third Quarter 2012. The decrease was primarily related to decreased payroll and consulting related expenses of $172,000 and decreased supplies costs of $53,000.

Excise Tax Expense. Beginning January 1, 2013, the Patient Protection and Affordable Care Act imposed a 2.3% medical device excise tax on certain product sales to customers located in the U.S. We incurred excise tax expenses of $89,000, or 1% of net revenue, for Third Quarter 2013.

Non-Operating Loss, Net

Loss on Foreign Currency Transactions. We realized a $16,000 gain on foreign currency transactions for Third Quarter 2013, compared to a $28,000 loss on foreign currency transactions for Third Quarter 2012 due to exchange rate fluctuations between the U.S. dollar and other currencies.

Interest Expense, Net. Interest expense consisted primarily of interest on our revolving credit facilities and amortization of debt issuance costs and debt discount. Interest expense totaled approximately $182,000 and $98,000 for Third Quarter 2013 and 2012, respectively. The increase was a result of higher borrowings under lines of credit that provided the necessary liquidity to increase operations.

Income Tax (Benefit) Provision. Our provision for income taxes was an expense of $22,000 for Third Quarter 2013, compared to an expense of $34,000 for Third Quarter 2012.

Net Loss. For the reasons stated above, our net loss was approximately $4.0 million for Third Quarter 2013 compared to a net loss of $548,000 for Third Quarter 2012.

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Nine months ended September 30, 2013 and 2012

Net Revenue. Net revenue for the nine months ended September 30, 2013, totaled $41.2 million, an increase of approximately $2.9 million, or 8%, as compared with net revenue of $38.3 million for the nine months ended September 30, 2012. Domestic revenues totaled approximately $25.7 million, or 62% of net revenue, for the nine months ended September 30, 2013, versus $25.9 million, or 68% of net revenue, for the nine months ended September 30, 2012. International revenues for the nine months ended September 30, 2013, totaled $15.5 million, or 38% of net revenue, as compared with $12.4 million, or 32% of net revenue, for the nine months ended September 30, 2012. The increase in period-over-period net revenue was primarily attributable to increases in imaging revenue, which grew 94%, as well as increases in services and consumables and other revenue, which increased 13% due to auxiliary sales to our growing laser customer base.

Laser system net revenue remained relatively flat for the nine months ended September 30, 2013, compared to the same period of 2012. We expect improved sales of our core laser systems moving into the quarter ending December 31, 2013, as we believe many dentists purchase capital equipment during the fourth quarter in order to maximize their earnings and minimize their taxes through utilizing certain tax incentives, such as accelerated depreciation methods for purchased capital equipment, as part of their year-end tax planning.

Imaging system net revenue increased by approximately $1.6 million, or 94%, in the nine months ended September 30, 2013, compared to the same period of 2012. The increase was driven by increased sales and marketing efforts and increased offerings at various value propositions.

Consumables and other net revenue, which includes consumable products, such as disposable tips and shipping revenue, increased by approximately $401,000, or 9%, for the nine months ended September 30, 2013, as compared to the same period of 2012. This increase in consumables and other net revenue was primarily a result of auxiliary sales to our growing laser customer base.

Services net revenue, which consists of extended warranty service contracts, advanced training programs, and other services, increased by approximately $743,000, or 18%, for the nine months ended September 30, 2013, as compared to the same period of 2012. The increased revenue was due largely to increased follow-on sales related to our growing laser customer base and increased sales and marketing efforts in this part of our business.

License fees and royalty revenue increased by $52,000 or 40% for the nine months ended September 30, 2013, as compared to the same period of 2012.

Cost of Revenue. Cost of revenue for the nine months ended September 30, 2013, increased by approximately $5.3 million, or approximately 26%, to $26.0 million, or 63% of net revenue, compared with cost of revenue of $20.7 million, or 54% of net revenue, for the nine months ended September 30, 2012. This increase was primarily attributable to a higher percentage of revenue generated from lower margin products, which include imaging systems, and international sales. Our laser systems generally have significantly higher margins than our licensed imaging products and our domestic laser sales generally have higher margins than our international laser sales. The increase in international revenue as a percentage of total revenue has also adversely impacted the cost of revenue due to additional costs such as import duties, taxes, and customs clearance fees. We also recorded a provision of $1.0 million for excess and obsolete inventory during Third Quarter 2013 related to negative market trends and the decreased velocity of our inventory which significantly increased our cost of revenues.

Gross Profit. Gross profit for the nine months ended September 30, 2013, decreased by approximately $2.4 million, or approximately 14%, to $15.2 million, or 37% of net revenue, compared with gross profit of $17.6 million, or 46% of net revenue. The decrease was primarily due to higher sales of licensed imaging systems, which generally carry lower margins than our laser products, increased international laser sales, which generally carry a lower margin than our domestic laser sales, and the provision for excess and obsolete inventory.

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Operating Expenses. Operating expenses for the nine months ended September 30, 2013, increased by approximately $2.9 million, or 13%, to $24.2 million as compared to $21.3 million for the nine months ended September 30, 2012. The period-over-period increase in expense is explained in the following expense categories:

Sales and Marketing Expense. Sales and marketing expenses for the nine months ended September 30, 2013 increased by approximately $2.2 million, or 19%, to $13.6 million, or 33% of net revenue, as compared with $11.4 million, or 30% of net revenue, for the nine months ended September 30, 2012. The increase was primarily a result of increased payroll and consulting related expenses of $931,000, increased convention costs of $616,000, increased media and advertising expenses of $487,000, and a one-time benefit realized in the prior year related to the termination of a distributor arrangement of approximately $250,000, offset by decreased commission expenses of $188,000. As such, we expect costs to increase slightly as a percentage of revenue for the year ending December 31, 2013 as compared with the previous year. As a result, we have recently changed our sales and marketing leadership to address these negative trends.

General and Administrative Expense. General and administrative expenses for the nine months ended September 30, 2013 increased by approximately $1.0 million, or 16%, to $7.3 million, or 18% of net revenue, as compared with $6.3 million, or 16% of net revenue, for the nine months ended September 30, 2012. We experienced increased legal expenses of $426,000, of which $250,000 related to the defense of class action lawsuits (refer below to “Litigation and Contingencies”), increased payroll and consulting related expenses of $308,000, and increased investor relations expenses of $221,000.

Engineering and Development Expense. Engineering and development expenses for the nine months ended September 30, 2013, decreased by approximately $670,000, or 18%, to $3.0 million, or 7% of net revenue, as compared with $3.7 million, or 10% of net revenue, for the nine months ended September 30, 2012. The decrease was primarily related to decreased supplies costs of $386,000 and decreased payroll and consulting related expenses of $339,000.

Excise Tax Expense. Beginning January 1, 2013, the Patient Protection and Affordable Care Act imposed a 2.3% medical device excise tax on certain product sales to customers located in the U.S. We incurred excise tax expenses of $308,000, or 1% of net revenue, for the nine months ended September 30, 2013.

Non-Operating Loss, Net

Loss on Foreign Currency Transactions. We realized a $74,000 loss on foreign currency transactions for the nine months ended September 30, 2013, compared to a $137,000 loss on foreign currency transactions for the nine months ended September 30, 2012, due to exchange rate fluctuations between the U.S. dollar and other currencies.

Interest Expense, Net. Interest expense consists primarily of interest on our revolving credit facilities, amortization of debt issuance costs and debt discount, and the financing of our business insurance premiums. Interest expense totaled approximately $386,000 and $140,000 for the nine months ended September 30, 2013 and 2012, respectively. The increase was primarily a result of increased year-to-date borrowings under lines of credit for the nine months ended September 30, 2013.

Income Tax (Benefit) Provision. Our provision for income taxes was a benefit of $182,000 for the nine months ended September 30, 2013, compared to an expense of $97,000 for the nine months ended September 30, 2012. During the nine months ended September 30, 2013, we reversed certain deferred tax liabilities associated with unrecognized tax benefits related to international operations due to expiring statutes and recognized tax benefits of $107,000.  In addition, we recognized deferred tax assets related to certain indefinite lived assets (federal alternative minimum tax credits and California R&D credits) that were used to offset deferred tax liabilities related to indefinite-lived intangible assets. This resulted in additional tax benefits of $107,000. We also recorded an income tax expense of $32,000 for the current year tax provision.

Net Loss. For the reasons stated above, our net loss was $9.2 million for the nine months ended September 30, 2013, compared to a net loss of $4.1 million for the nine months ended September 30, 2012.

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Liquidity and Capital Resources

At September 30, 2013, we had approximately $5.0 million in working capital. Our principal sources of liquidity at September 30, 2013, consisted of approximately $4.2 million in cash and cash equivalents, $10.8 million of net accounts receivable, and $2.5 million of available borrowings under our revolving credit facility agreements. The following table summarizes our statements of cash flows (in thousands):

	Nine Months Ended September 30,
	2013			2012
Net cash flow provided by (used in):
Operating activities	$	(7,094	)	$	(3,527	)
Investing activities		(474	)		(591	)
Financing activities		9,162			2,111
Effect of exchange rate changes		14			(5	)
Net change in cash and cash equivalents	$	1,608		$	(2,012	)

Operating Activities

Net cash used in operating activities consists of our net loss, adjusted for our non-cash charges, plus or minus working capital changes. Cash used in operating activities for nine months ended September 30, 2013, totaled $7.1 million and was primarily comprised of non-cash adjusted net loss, excluding changes in operating assets and liabilities, of $5.9 million plus increases in inventory of $1.7 million and decreases in customer deposits of $408,000, offset by decreases in accounts receivable of $608,000.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2013, consisted primarily of $464,000 of capital expenditures. For fiscal 2013, we expect capital expenditures to total approximately $650,000 and we expect depreciation and amortization to total approximately $600,000.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2013 was $9.2 million related primarily to net proceeds from the sale of common stock of $4.6 million, as discussed in Future Liquidity Needs below, plus net borrowings under the lines of credit of $3.9 million.

Future Liquidity Needs

We suffered recurring losses from operations during the three years ended December 31, 2012. Although our revenues increased during the nine months ended September 30, 2013, as compared to the same period in 2012, we still incurred a loss from operations, a net loss, and used cash in operating activities. The available borrowing capacity on our lines of credit with Comerica Bank and the net proceeds from the below mentioned equity offering have been principal sources of liquidity during the nine months ended September 30, 2013.  On September 6, 2013 and November 8, 2013, we amended our lines of credit with Comerica Bank. These amendments waived noncompliance with certain financial covenants and established future covenants, restrictions, and potential penalties for noncompliance. The amendment on November 8, 2013, includes liquidity ratio and liquid asset covenants, and an equity raise requirement. These credit facilities expire May 1, 2014, and we are considering alternative solutions, including potentially issuing alternative debt securities, to mitigate any future liquidity constraints these covenants and restrictions may impose on us. Further discussion of the amendments is included in Note 8 to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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Our ability to meet our obligations in the ordinary course of business is dependent upon our ability to sell our products directly to end-users and through distributors, establish profitable operations through increased sales, decrease expenses, and to generate cash from operations or obtain additional funds when needed. If we are unsuccessful in our efforts to improve our financial position, there may be substantial doubt about our ability to adequately fund the minimum requirements of our business.

We intend to improve our financial condition and ultimately improve our financial results by increasing revenues through expansion of our product offerings, continuing to develop our direct sales force and distributor relationships both domestically and internationally, forming strategic arrangements within the dental and medical industries, educating dental and medical patients as to the benefits of our advanced medical technologies, and continuing cost reduction initiatives.

We expect that the working capital and borrowings available under the lines of credit should be sufficient to fund our minimum requirements; however, we cannot guarantee that we will be able to increase sales, reduce expenses, or obtain additional funds when needed or that such funds, if available, will be obtainable on satisfactory terms. We will also continue to monitor our liquidity and we are prepared to implement cash saving measures in the event that our plans to grow revenue or raise additional funds through issuance of debt or equity securities, or alternative transactions, do not materialize in the timeline that we anticipate.

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

On July 26, 2013, we filed the 2013 Registration Statement with the SEC to register an indeterminate number of shares of common stock, preferred stock, and warrants with a total offering price not to exceed $30 million. We subsequently amended the 2013 Registration Statement and lowered the total not to exceed offering price to $5 million. The 2013 Registration Statement, as amended, was declared effective by the SEC on September 19, 2013. On September 23, 2013, we entered into an agreement with Northland, pursuant to which Northland acted as placement agent in connection with the sale of shares of our common stock in the September 2013 Registered Direct Offering pursuant to the 2013 Registration Statement and paid Northland a fee of 5.0% of the aggregate gross proceeds in connection therewith. On September 23, 2013, we entered into the 2013 Subscription Agreement with Camber Capital Management, LLC, pursuant to which we agreed to sell 2,688,172 shares of our common stock at a price per share of $1.86 for gross proceeds of $5 million. The net proceeds to the Company were $4.6 million, after deducting associated costs, inclusive of Northland’s fee, of $408,000. The shares of common stock sold in connection with the 2013 Subscription Agreement were issued pursuant to a prospectus supplement to the 2013 Registration Statement, which was filed with the SEC September 26, 2013.

Contractual and Other Obligations

We lease our Irvine, California, facility under a lease that expires in April 2015.

We finance a portion of our annual insurance premiums which we pay in installments over nine months. As of September 30, 2013, $0 was outstanding under this arrangement.

Certain members of management are entitled to severance benefits payable upon termination following a change in control, which would total approximately $716,000 at September 30, 2013. The Company also has agreements with certain employees to pay bonuses based on targeted performance criteria. No amounts were accrued for these arrangements as of September 30, 2013.

The Company has purchase obligations totaling approximately $12.8 million related to purchase orders with suppliers that we expect to complete during the next twelve months.

 28 

Litigation and Contingencies

For more information on liabilities that may arise from litigation and contingencies, see Note 9 to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Off-Balance Sheet Arrangements

As part of our on-going business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2013, we are not involved in any material unconsolidated SPEs.

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 operation and financial condition, please refer to Part I, Item 1, Note 2 of the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by this reference.

Additional Information

BIOLASE^®, ZipTip^®, ezlase^®, eztips^®, MD Flow^®, Comfortpulse^®, Waterlase^®, iLase^®, iPlus^®, WCLI^®, World Clinical Laser Institute^®, Waterlase MD^®, Waterlase Dentistry^®, Proprietary MD^®, and EZLase It’s So Easy^® are registered trademarks of Biolase, Inc., and Diolase™, HydroPhotonics™, LaserPal™, HydroBeam™, Occulase™, Diolase 10™, Body Contour™, Radial Firing Perio Tips™, Deep Pocket Therapy with New Attachment™, 2R™, Comfortprep™, Rapidprep™, Bondprep™, Occulase iPlus™, Flavorflow™, Occulase MD™, Epic Laser™, Epic™, Dermalase™, Deltalaser™, Delta™, iStarlaser™, iStar™, Biolase DaVinci Imaging™, Oculase™, Waterlase MDX™, Total Technology Solution™, Geyserlaser™, Geyser™, eplus™, and elase™ are trademarks of BIOLASE, Inc. All other product and company names are registered trademarks or trademarks of their respective owners.

 29 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting the Company, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which is incorporated herein by reference. Our exposure to market risk has not changed materially since December 31, 2012.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of our legal proceedings, please refer to Part I, Item 1, Note 9 to the Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference in response to this Item.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors as disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 30 

ITEM 6. EXHIBITS

The exhibits listed below are hereby filed with the SEC as part of this Quarterly Report on Form 10-Q. Certain of the following exhibits have been previously filed with the SEC pursuant to the requirements of the Securities Act or the Exchange Act. Such exhibits are identified in the chart to the right of the Exhibit and are incorporated herein by reference.

			Incorporated by Reference
Exhibit	Description	Filed Herewith	Form	Period Ending/Date of Report	Exhibit	Filing Date
3.1.1	Restated Certificate of Incorporation, including, (i) Certificate of Designations, Preferences and Rights of 6% Redeemable Cumulative Convertible Preferred Stock of the Registrant; (ii) Certificate of Designations, Preferences and Rights of Series A 6% Redeemable Cumulative Convertible Preferred Stock of the Registrant; (iii) Certificate of Correction Filed to Correct a Certain Error in the Certificate of Designation of the Registrant; and (iv) Certificate of Designations of Series B Junior Participating Cumulative Preferred Stock of the Registrant.		S-1, Amendment No. 1	12/23/2005	3.1	12/23/2005
3.1.2	Fifth Amended and Restated Bylaws of The Registrant, adopted on July 1, 2010		8-K	07/02/2010	3.1	07/07/2010
4.2	Warrant to purchase Common Stock, dated September 6, 2013	X
4.3	Warrant to purchase Common Stock, dated November 8, 2013	X
10.1	Amendment No. 3 to Loan and Security Agreement, dated September 6, 2013, by and between the Registrant and Comerica Bank		8-K/A	09/19/2013	1	09/19/2013
10.2	Subscription Agreement, dated September 23, 2013, by and between the Registrant and the investor signatory thereto.		8-K	09/23/2013	2	09/27/2013
10.3	Engagement Agreement, dated September 23, 2013, by and between the Registrant and Northland Securities, Inc.		8-K	09/23/2013	1	09/27/2013
10.4	Amendment No. 4 to Loan and Security Agreement, dated November 8, 2013, by and between the Registrant and Comerica Bank	X
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended	X

 31 

			Incorporated by Reference
Exhibit	Description	Filed Herewith	Form	Period Ending/Date of Report	Exhibit	Filing Date
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended	X
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
101	The following unaudited financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended September 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Loss, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements	X

 32 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 12, 2013

BIOLASE, INC., a Delaware Corporation (registrant)
By:	/s/ FEDERICO PIGNATELLI
	Federico Pignatelli
	Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ FREDERICK D. FURRY
	Frederick D. Furry
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

 33 

EX-4

Exhibit 4.2

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS, AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 4 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO RULE 144 OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

WARRANT TO PURCHASE COMMON STOCK

Corporation:	Biolase, Inc., a Delaware corporation
Number of Shares:	100,000 (subject to Section 1.2)
Class of Stock:	Common
Warrant Price:	$2.00 per share
Issue Date:	September 6, 2013
Expiration Date:	September 6, 2018

This Warrant to Purchase Common Stock (this “Warrant”) certifies that, for good and valuable consideration, the receipt of which is hereby acknowledged, Comerica Bank, a Texas banking association, or its assignee (“Holder”), is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the “Shares”) of Biolase, Inc. (the “Company”) at the Warrant Price, all as set forth above and as adjusted pursuant to the terms of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.

ARTICLE 1
EXERCISE

1.1	Method of Exercise.
	1.1.1	Cash Exercise.  Holder may exercise this Warrant by a duly executed Notice of Exercise in substantially the form attached as Appendix I to the principal office of the Company (or such other appropriate location as Holder is so instructed by the Company).  Unless Holder is exercising the conversion right set forth in Section 1.1.2, Holder shall also deliver to the Company a check, wire transfer (to an account designated by the Company) or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased.
	1.1.2	Net Issue Exercise.  In lieu of exercising this Warrant as specified in Section 1.1.1, Holder may from time to time elect to exercise this Warrant by receiving Shares equal to the exchange value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with such notice of election, in which event the Company shall issue to the Holder a number of Shares computed as equaling the exchange value using the following formula:

X = Y*(A-B)/A

where:

X = the number of Shares to be issued to the Holder.

Y = the number of Shares purchasable under this Warrant.

A = the Fair Market Value (as determined pursuant to Section 1.6 below) of one Share.

B = the exercise price (as adjusted to the date of such calculation).

1.2Vesting.  This Warrant may only be exercised upon and after, and to the extent that, it has vested.  This Warrant shall vest and become exercisable in accordance with the following schedule:

Vesting Date	Incremental Vested Shares	Total Vested Shares
December 31, 2013	25,000	25,000
March 31, 2014	25,000	50,000
June 30, 2014	25,000	75,000
September 30, 2014	25,000	100,000

1.3Delivery of Certificate and New Warrant.  Within 30 days after Holder exercises this Warrant and the Company receives payment of the aggregate Warrant Price, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised and has not expired, a new warrant representing the Shares not so acquired.

1.4Replacement of Warrants.  In the case of loss, theft or destruction of this Warrant, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, upon surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor.  

1.5Acquisition of the Company.

1.5.1“Acquisition.”  For the purpose of this Warrant, “Acquisition” means (a) any sale, license, or other disposition of all or substantially all of the assets (including intellectual property) of the Company, or (b) any reorganization, consolidation, merger, sale of the voting securities of the Company or other transaction or series of related transactions where the holders of the Company’s securities before the transaction or series of related transactions beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction or series of related transactions.

1.5.2Treatment of Warrant in the Event of an Acquisition.  The Company shall give Holder written notice at least 20 days prior to the closing of any proposed Acquisition.  The Company will use commercially reasonable efforts to cause (i) the acquirer of the Company, (ii) successor or surviving entity or (iii) parent entity in an Acquisition (the “Acquirer”) to assume this Warrant as a part of the Acquisition.

(a)If the Acquirer assumes this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the  unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing.  The Warrant Price shall be adjusted accordingly, and the Warrant Price and number and class of Shares shall continue to be subject to adjustment from time to time in accordance with the provisions hereof.

(b)If the Acquirer refuses to assume this Warrant in connection with the Acquisition, the Company shall give Holder an additional written notice at least ten (10) days prior to the closing of the Acquisition of such fact.  In such event, notwithstanding any other provision of this Warrant to the contrary, Holder may immediately exercise this Warrant in the manner specified in this Warrant with such exercise effective immediately prior to closing of the Acquisition.  If Holder elects not to exercise this Warrant, then this Warrant will terminate immediately prior to the closing of the Acquisition.  Notwithstanding any other provision of this Warrant to the contrary if the Acquirer refuses to assume this Warrant in connection with such Acquisition, other than in connection with an Excluded Acquisition (as defined below), then effective as of the date that is ten (10) days prior to the closing of such Acquisition, the Holder shall have the option to elect to exercise this Warrant pursuant to Section 1.1.1 for a number of Shares determined using as the “Fair Market Value” the difference between the Acquisition consideration payable for one Share and the Warrant Price.  As used herein, an “Excluded Acquisition” means, an Acquisition where the consideration that the holders of the Shares are entitled to receive on account of the Shares consists entirely of cash and/or shares of common stock that are publicly traded on a national exchange and where the shares, if any, receivable by the Holder of this Warrant were the Holder to exercise this Warrant in full immediately prior to the closing of such Acquisition may be

Page  2  of 6

publicly re-sold by the Holder in their entirety within the three (3) months following such closing pursuant to Rule 144 or an effective registration statement under the Act.

1.6Fair Market Value.  If the Shares are traded regularly in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company’s stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company.  If the Shares are not regularly traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment.

Article 2
ADJUSTMENTS TO THE SHARES

2.1Stock Dividends, Splits, Etc.  If the Company declares or pays a dividend on its common stock payable in common stock, or other securities, other than duly declared stock dividends consistent with past practice, or subdivides the outstanding common stock into a greater amount of common stock, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred.

2.2Reclassification, Exchange or Substitution.  Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event.  Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company’s Certificate of Incorporation upon the closing of a registered public offering of the Company’s common stock.  The Company or its successor shall promptly issue to Holder a new warrant for such new securities or other property.  The new warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price, the number of securities or property issuable upon exercise of the new warrant and expiration date.  The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events.

2.3Adjustments for Combinations, Etc.  If the outstanding Shares are combined or consolidated, by reclassification, reverse split or otherwise, into a lesser Number of Shares, the Warrant Price shall be proportionately increased.  If the outstanding Shares are split or multiplied, by reclassification or otherwise, into a greater Number of Shares, the Warrant Price shall be proportionately decreased.

2.4Reserved.

2.5No Impairment.  The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder’s rights under this Article 2 against impairment.

2.6Certificate as to Adjustments.  Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate signed by its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based.  The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price.

2.7Fractional Shares.  No fractional Shares shall be issuable upon exercise of this Warrant and the Number of Shares to be issued shall be rounded down to the nearest whole Share.  If a fractional share interest arises upon any exercise of this Warrant, the Company shall eliminate such fractional share interest by paying Holder an amount computed by multiplying the fractional interest by the fair market value, as determined by the Company’s Board of Directors, of a full Share.

Page  3  of 6

Article 3
REPRESENTATIONS AND COVENANTS OF THE COMPANY

3.1Representations and Warranties.  The Company hereby represents and warrants to, and agrees with, the Holder as follows:

3.1.1All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.

3.1.2The Company’s capitalization table delivered to Holder as of the Issue Date is true and complete as of the Issue Date.

3.2Notice of Certain Events.  If the Company proposes at any time (a) to declare any dividend or distribution upon its stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of stock; or (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up, then, in connection with each such event, the Company shall give Holder written notice thereof at the same time and in the same manner as the Company gives notice thereof to the holders of the Company’s outstanding common stock.  Upon request, the Company shall provide Holder with such information reasonably necessary for Holder to evaluate its rights as a holder of this Warrant or the Shares in the case of matters referred to (a), (b), (c) and (d) herein above.

3.3Information Rights.  So long as the Holder holds this Warrant and/or any of the Shares, except to the extent that any of the following has been filed on the SEC’s EDGAR system, the Company shall deliver to the Holder (a) promptly after mailing, copies of all communications,  information and/or communiqués to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company’s quarterly, unaudited financial statements.  In addition, and without limiting the generality of the foregoing, so long as the Holder holds this Warrant and/or any of the Shares, the Company shall afford to the Holder the same access to information concerning the Company and its business and financial condition as would be afforded to a holder of the class of Shares under applicable state law and/or any agreement with any holder of the class of Shares.

3.4Reserved.

ARTICLE 4
MISCELLANEOUS

4.1Term; Exercise Upon Expiration.  This Warrant is exercisable in whole or in part, at any time and from time to time on or before the Expiration Date set forth above.  The Company agrees that Holder may terminate this Warrant, upon notice to the Company, at any time in its sole discretion.

4.2Legends.  This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form:

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS, AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 4 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO RULE 144 OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

Page  4  of 6

4.3Compliance with Securities Laws on Transfer.  This Warrant and the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee.  The Company shall not require Comerica Bank (“Bank”) or a Bank Affiliate (as defined herein) to provide an opinion of counsel or investment representation letter if the transfer is to Bank’s parent company, Comerica Incorporated (“Comerica”), or any other affiliate of Bank (“Bank Affiliate”), provided that such transferee is an “accredited investor” as defined in Regulation D promulgated under the Act.  

4.4Transfer Procedure.  After receipt of the executed Warrant, Bank will transfer all of this Warrant to Comerica Ventures Incorporated, a non-banking subsidiary of Comerica and a Bank Affiliate (“Ventures”).  Subject to the provisions of Section 4.3, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of this Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder, if applicable); provided, however, that Holder may transfer all or part of this Warrant to its affiliates, including, without limitation, Ventures, at any time without notice or the delivery of any other instrument to the Company, and such affiliate shall then be entitled to all the rights of Holder under this Warrant and any related agreements, and the Company shall cooperate fully in ensuring that any stock issued upon exercise of this Warrant is issued in the name of the affiliate that exercises this Warrant.  The terms and conditions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the holders hereof and their respective permitted successors and assigns.

4.5Notices.  All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, or sent via a nationally recognized overnight courier service, fee prepaid, or on the first business day after transmission by facsimile, at such address or facsimile number as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such Holder from time to time.  Effective upon the receipt of executed Warrant and initial transfer described in Article 5.4 above, all notices to the Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise:

Comerica Ventures Incorporated

Attn:  Warrant Administrator

1717 Main Street, 5^th Floor, MC 6406

Dallas, Texas 75201

Facsimile No. (214) 462-4459

All notices to the Company shall be addressed as follows:

Biolase, Inc.

4 Cromwell

Irvine, California 92618

4.6Amendments; Waiver.  This Warrant and any term hereof may be amended, changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such amendment, change, waiver, discharge or termination is sought.

4.7Attorneys’ Fees.  In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.

4.8Governing Law.  This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to its principles regarding conflicts of law.

[end of warrant – signature page follows]

Page  5  of 6

This Warrant to Purchase Common Stock is executed and delivered as of the Issue Date set forth above.

BIOLASE, INC.

By: /s/ Frederick D. Furry

Name: Frederick D. Furry

Title: Chief Financial Officer

       

Page  6  of 6

APPENDIX I

NOTICE OF EXERCISE

1. The undersigned hereby elects to purchase ______________ shares of the common stock of Biolase, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full.

2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below:

Comerica Ventures Incorporated

Attn:  Warrant Administrator

1717 Main Street, 5^th Floor, MC 6406

Dallas, Texas 75201

Facsimile No. (214) 462-4459

3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws.

COMERICA VENTURES INCORPORATED or Assignee

(Signature)

(Name and Title)

(Date)

       

Appendix I

Page  1 

EX-4

Exhibit 4.3

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS, AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 4 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO RULE 144 OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

WARRANT TO PURCHASE COMMON STOCK

Corporation:	Biolase, Inc., a Delaware corporation
Number of Shares:	100,000 (subject to Section 1.2)
Class of Stock:	Common
Warrant Price:	$2.00 per share
Issue Date:	November 8, 2013
Expiration Date:	November 8, 2018

This Warrant to Purchase Common Stock (this “Warrant”) certifies that, for good and valuable consideration, the receipt of which is hereby acknowledged, Comerica Bank, a Texas banking association, or its assignee (“Holder”), is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the “Shares”) of Biolase, Inc. (the “Company”) at the Warrant Price, all as set forth above and as adjusted pursuant to the terms of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.

Article 1
EXERCISE

1.1 Method of Exercise.  

1.1.1 Cash Exercise. Holder may exercise this Warrant by a duly executed Notice of Exercise in substantially the form attached as Appendix I to the principal office of the Company (or such other appropriate location as Holder is so instructed by the Company). Unless Holder is exercising the conversion right set forth in Section 1.1.2, Holder shall also deliver to the Company a check, wire transfer (to an account designated by the Company) or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased.

1.1.2 Net Issue Exercise. In lieu of exercising this Warrant as specified in Section 1.1.1, Holder may from time to time elect to exercise this Warrant by receiving Shares equal to the exchange value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with such notice of election, in which event the Company shall issue to the Holder a number of Shares computed as equaling the exchange value using the following formula:

X = Y*(A-B)/A

where:

X = the number of Shares to be issued to the Holder.

Y = the number of Shares purchasable under this Warrant.

A = the Fair Market Value (as determined pursuant to Section 1.6 below) of one Share.

B = the exercise price (as adjusted to the date of such calculation).

1.2 Vesting. This Warrant may only be exercised upon and after, and to the extent that, it has vested. This Warrant shall vest and become exercisable in accordance with the following schedule:

Vesting Date	Incremental Vested Shares	Total Vested Shares
December 31, 2013	25,000	25,000
March 31, 2014	25,000	50,000
June 30, 2014	25,000	75,000
September 30, 2014	25,000	100,000

1.3 Delivery of Certificate and New Warrant. Within 30 days after Holder exercises this Warrant and the Company receives payment of the aggregate Warrant Price, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised and has not expired, a new warrant representing the Shares not so acquired.

1.4 Replacement of Warrants. In the case of loss, theft or destruction of this Warrant, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, upon surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor.

1.5 Acquisition of the Company.

1.5.1 “Acquisition.” For the purpose of this Warrant, “Acquisition” means (a) any sale, license, or other disposition of all or substantially all of the assets (including intellectual property) of the Company, or (b) any reorganization, consolidation, merger, sale of the voting securities of the Company or other transaction or series of related transactions where the holders of the Company’s securities before the transaction or series of related transactions beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction or series of related transactions.

1.5.2 Treatment of Warrant in the Event of an Acquisition.  The Company shall give Holder written notice at least 20 days prior to the closing of any proposed Acquisition Notwithstanding Section 1.2, this Warrant shall be deemed fully vested as of the date that is ten (10) days prior to the closing of such Acquisition. The Company will use commercially reasonable efforts to cause (i) the acquirer of the Company, (ii) successor or surviving entity or (iii) parent entity in an Acquisition (the “Acquirer”) to assume this Warrant as a part of the Acquisition.

(a) If the Acquirer assumes this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly, and the Warrant Price and number and class of Shares shall continue to be subject to adjustment from time to time in accordance with the provisions hereof.

(b) If the Acquirer refuses to assume this Warrant in connection with the Acquisition, the Company shall give Holder an additional written notice at least ten (10) days prior to the closing of the Acquisition of such fact. In such event, notwithstanding any other provision of this Warrant to the contrary, Holder may immediately exercise this Warrant in the manner specified in this Warrant with such exercise effective immediately prior to closing of the Acquisition. If Holder elects not to exercise this Warrant, then this Warrant will terminate immediately prior to the closing of the Acquisition. Notwithstanding any other provision of this Warrant to the contrary if the Acquirer refuses to assume this Warrant in connection with such Acquisition, other than in connection with an Excluded Acquisition (as defined below), then effective as of the date that is ten (10) days prior to the closing of such Acquisition, the Holder shall have the option to elect to exercise this Warrant pursuant to Section 1.1.1 for a number of Shares determined using as the “Fair Market Value” the difference between the Acquisition consideration payable for one Share and the Warrant Price. As used herein, an “Excluded Acquisition” means, an Acquisition where the consideration that the holders of the Shares are entitled to receive on account of the Shares consists entirely of cash and/or shares of common stock that are publicly traded on a national exchange and where the shares, if any, receivable by the Holder of this Warrant were the Holder to exercise this Warrant in full immediately prior to the closing of such Acquisition may be publicly re-sold by the Holder in their entirety within the three (3) months following such closing pursuant to Rule 144 or an effective registration statement under the Act.

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1.6 Fair Market Value. If the Shares are traded regularly in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company’s stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not regularly traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment.

Article 2
ADJUSTMENTS TO THE SHARES

2.1 Stock Dividends, Splits, Etc.  If the Company declares or pays a dividend on its common stock payable in common stock, or other securities, other than duly declared stock dividends consistent with past practice, or subdivides the outstanding common stock into a greater amount of common stock, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred.

2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company’s Certificate of Incorporation upon the closing of a registered public offering of the Company’s common stock.  The Company or its successor shall promptly issue to Holder a new warrant for such new securities or other property.  The new warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price, the number of securities or property issuable upon exercise of the new warrant and expiration date. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events.

2.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification, reverse split or otherwise, into a lesser Number of Shares, the Warrant Price shall be proportionately increased. If the outstanding Shares are split or multiplied, by reclassification or otherwise, into a greater Number of Shares, the Warrant Price shall be proportionately decreased.

2.4 Reserved.

2.5 No Impairment.  The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder’s rights under this Article 2 against impairment.

2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate signed by its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based.  The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price.

2.7 Fractional Shares. No fractional Shares shall be issuable upon exercise of this Warrant and the Number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise of this Warrant, the Company shall eliminate such fractional share interest by paying Holder an amount computed by multiplying the fractional interest by the fair market value, as determined by the Company’s Board of Directors, of a full Share.

Page  3 

Article 3
REPRESENTATIONS AND COVENANTS OF THE COMPANY

3.1 Representations and Warranties. The Company hereby represents and warrants to, and agrees with, the Holder as follows:

3.1.1 All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.

3.1.2 The Company’s capitalization table delivered to Holder as of the Issue Date is true and complete as of the Issue Date.

3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of stock; or (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up, then, in connection with each such event, the Company shall give Holder written notice thereof at the same time and in the same manner as the Company gives notice thereof to the holders of the Company’s outstanding common stock.  Upon request, the Company shall provide Holder with such information reasonably necessary for Holder to evaluate its rights as a holder of this Warrant or the Shares in the case of matters referred to (a), (b), (c) and (d) herein above.

3.3 Information Rights.  So long as the Holder holds this Warrant and/or any of the Shares, except to the extent that any of the following has been filed on the SEC’s EDGAR system, the Company shall deliver to the Holder (a) promptly after mailing, copies of all communications,  information and/or communiqués to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company’s quarterly, unaudited financial statements.  In addition, and without limiting the generality of the foregoing, so long as the Holder holds this Warrant and/or any of the Shares, the Company shall afford to the Holder the same access to information concerning the Company and its business and financial condition as would be afforded to a holder of the class of Shares under applicable state law and/or any agreement with any holder of the class of Shares.

3.4 Reserved.

Article 4
MISCELLANEOUS

4.1 Term; Exercise Upon Expiration.  This Warrant is exercisable in whole or in part, at any time and from time to time on or before the Expiration Date set forth above.  The Company agrees that Holder may terminate this Warrant, upon notice to the Company, at any time in its sole discretion.

4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form:

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS, AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 4 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO RULE 144 OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

Page  4 

4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee. The Company shall not require Comerica Bank (“Bank”) or a Bank Affiliate (as defined herein) to provide an opinion of counsel or investment representation letter if the transfer is to Bank’s parent company, Comerica Incorporated (“Comerica”), or any other affiliate of Bank (“Bank Affiliate”), provided that such transferee is an “accredited investor” as defined in Regulation D promulgated under the Act.

4.4 Transfer Procedure. After receipt of the executed Warrant, Bank will transfer all of this Warrant to Comerica Ventures Incorporated, a non-banking subsidiary of Comerica and a Bank Affiliate (“Ventures”). Subject to the provisions of Section 4.3, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of this Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder, if applicable); provided, however, that Holder may transfer all or part of this Warrant to its affiliates, including, without limitation, Ventures, at any time without notice or the delivery of any other instrument to the Company, and such affiliate shall then be entitled to all the rights of Holder under this Warrant and any related agreements, and the Company shall cooperate fully in ensuring that any stock issued upon exercise of this Warrant is issued in the name of the affiliate that exercises this Warrant.  The terms and conditions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the holders hereof and their respective permitted successors and assigns.

4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, or sent via a nationally recognized overnight courier service, fee prepaid, or on the first business day after transmission by facsimile, at such address or facsimile number as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such Holder from time to time.  Effective upon the receipt of executed Warrant and initial transfer described in Article 5.4 above, all notices to the Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise:

Comerica Ventures Incorporated

Attn:  Warrant Administrator

1717 Main Street, 5^th Floor, MC 6406

Dallas, Texas 75201

Facsimile No. (214) 462-4459

All notices to the Company shall be addressed as follows:

Biolase, Inc.

4 Cromwell

Irvine, California 92618

4.6 Amendments; Waiver. This Warrant and any term hereof may be amended, changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such amendment, change, waiver, discharge or termination is sought.

4.7 Attorneys’ Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.

4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to its principles regarding conflicts of law.

[end of warrant – signature page follows]

Page  5 

This Warrant to Purchase Common Stock is executed and delivered as of the Issue Date set forth above.

BIOLASE, INC.

By: /s/ Frederick D. Furry

Name: Frederick D. Furry

Title: Chief Financial Officer

           

Page  6 

APPENDIX I

NOTICE OF EXERCISE

1. The undersigned hereby elects to purchase ______________ shares of the common stock of Biolase, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full.

2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below:

Comerica Ventures Incorporated

Attn:  Warrant Administrator

1717 Main Street, 5^th Floor, MC 6406

Dallas, Texas 75201

Facsimile No. (214) 462-4459

3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws.

COMERICA VENTURES INCORPORATED or Assignee

(Signature)

(Name and Title)

(Date)

       

Appendix I

Page  1 

EX-10

Exhibit 10.4

AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT

This Amendment No. 4 to Loan and Security Agreement (“Amendment”) is made on November 8, 2013 (“Amendment No. 4 Effective Date”) between Biolase, Inc., a Delaware corporation (“Borrower”) and Comerica Bank, a Texas banking association (“Bank”).

Borrower and Bank entered into a Loan and Security Agreement dated May 24, 2012, as amended by Amendment No. 1 to Loan and Security Agreement dated August 6, 2012, Amendment No. 2 to Loan and Security Agreement dated May 7, 2013, and Amendment No. 3 to Loan and Security Agreement dated September 6, 2013 (“Loan Agreement”) providing terms and conditions governing certain loans and other credit accommodations extended by Bank to Borrower (“Obligations”).  Borrower and Bank have agreed to amend the terms of the Loan Agreement as provided in this Amendment.  

Accordingly, Borrower and Bank agree as follows:

1. Capitalized Terms.  In this Amendment, capitalized terms that are used without separate definition shall have the meanings given to them in the Loan Agreement.

2. Amendments.  The Loan Agreement is amended as follows:

(a)  Section 6.7(a) is amended to read in its entirety as follows:

“(a) Liquidity.

(i) Liquidity Ratio.  As of the end of each month, commencing with the month ending November 30, 2013, a ratio of (i) cash plus Eligible Accounts plus Eligible Ex-Im Accounts plus Inventory Reliance Amount to (ii) the outstanding principal amount of the Obligations, at not less than the following for the associated measurement dates:

Measurement Dates	Liquidity Ratio
November 30, 2103 and December 31, 2013	2.00:1.00
January 31, 2014	2.25:1.00
February 28, 2014, and each succeeding month	2.75:1.00

For this purpose, “Inventory Reliance Amount” means, on any date of determination, the sum of (1) the amount determined under part (b) of the Borrowing Base (being the portion attributable to Eligible Inventory) plus (2) the amount available to be borrowed under the Ex-Im Facility Loans based upon Eligible Export-Related Inventory as defined in the Ex-Im Facility Documents.  

(ii) Liquid Assets. As of the end of each month, commencing with November 30, 2013, maintain Liquid Assets at not less than $1,000,000.00.  ”

(a) Section 6.7(b) is amended to read in its entirety as follows:

“(b) EBITDA.  As of the end of each fiscal quarter, commencing with the fiscal quarter ending December 31, 2013, an EBITDA of not less than the amount set forth below for the applicable measurement date, measured in each case for the three (3) months then-ending:

Measurement Date	Minimum EBITDA
December 31, 2013	-$500,000.00
March 31, 2014	-$2,000,000.00
June 30, 2014	-$2,000,000.00
September 30, 2014 and thereafter	[to be determined by Bank]”

       

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21,677,669.3\125055-01016

(a) Section 6.12 is amended to read in its entirety as follows:

“6.12 Minimum Equity Event.  Borrower shall receive New Equity totaling at least $3,000,000.00 after November 8, 2013, and before March 1, 2014.”

(b) Exhibit A is amended to add the following term and its definition in appropriate alphabetical order:

“Liquid Assets” means cash, cash equivalents, and readily marketable securities which are not subject to any security interest, lien or encumbrance.

(d) Exhibit E (the form of Compliance Certificate) is amended entirely to be in the form of attached Amended Exhibit E.

3. Representations.  Borrower represents and agrees that:

(a) Except as expressly modified in this Amendment, (i) the representations and warranties set forth in the Loan Agreement and in each of the Loan Documents remain true and correct in all respects, except to the extent that they expressly speak as of a specific prior date, and (ii) the covenants set forth in the Loan Agreement continue to be satisfied in all respects, and are legal, valid and binding obligations with the same force and effect as if entirely restated in this Amendment.

(b) When executed, this Amendment will be a duly authorized, legal, valid, and binding obligation of Borrower enforceable in accordance with its terms, and will not conflict with or violate any of Borrower’s organization documents or any agreement, instrument, law, or order to which Borrower or any material portion of its assets is subject or bound.  

(c) The corporate resolutions delivered to Bank on or about May 24, 2012 remain in full force and effect, have not been amended, repealed or rescinded in any respect and may continue to be relied upon by Bank until written notice to the contrary is received by Bank, the officers named therein continue to hold those offices, and Borrower continues to be in good standing under the laws of the State of Delaware.  

(d) Except for events or conditions for which Bank has given or is concurrently giving its written waiver, no Event of Default exists or has occurred and is continuing uncured or unwaived as of the Effective Date.  

4. Waiver.  Borrower acknowledges that it is not in compliance with the Loan Agreement because it has failed to comply with Section 6.7(b) [EBITDA] as of September 30, 2013 (“Identified Non-Compliance”).  Bank waives any default or Event of Default under the Loan Agreement arising out of the Identified Non-Compliance as of the stated date, but not at or for any subsequent time or period, provided, however, that if Borrower fails to comply with any of the provisions of Section 6.7 as of December 31, 2013 (a “2013 FYE Financial Covenant Default”) without limiting or restricting any other right or remedy that Bank may have in that event:

(a) Borrower will be obligated to pay Bank a default fee equal to the rate of interest that would have been applicable to the Revolving Line following the Identified Default minus the interest actually accrued and paid on the outstanding amount of the Revolving Line for the period from October 1, 2013, through December 31, 2013 (being 5.00% multiplied by the daily average outstanding amount under the Revolving Line during that period multiplied by 92 and divided by 360), such default fee to be payable on Bank’s demand; and   

(b) Effective on January 1, 2014, the outstanding amounts of the Revolving Line will bear interest at the rate applicable thereto after the occurrence of an Event of Default.

This provision is not a waiver of or consent to any other event, condition, transaction, act or omission whether related or unrelated to the Identified Non-Compliance, and the Bank does not intend to waive or consent to any subsequent defaults by Borrower for failure to company with Section 6.7(b) of the Loan Agreement.

5. Conditions Precedent.  The effectiveness of this Amendment is subject to Bank’s receipt of or Borrower’s satisfaction of all of the following:

(a) this Amendment;

(b) execution and delivery by the Guarantors of the Acknowledgement and Consent of Guarantors as set forth below;

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21,677,669.3\125055-01016

(c) execution and delivery by Borrower of a Warrant in favor Bank for the purchase of 100,000 shares of Borrower’s common stock with a term of five years and an exercise price of $2.00 per share.

(d) payment of an amendment fee of $10,000.00; and

(e) such other documents and completion of such other matters as Bank may reasonably deem necessary or appropriate.

6. No Other Changes.  Except as specifically provided in this Amendment, it does not vary the terms and provisions of any Loan Documents.  This Amendment shall not impair the rights, remedies, and security given in and by the Loan Documents.  The terms of this Amendment shall control any conflict between its terms and those of the Loan Agreement.

7. Ratification.  Except for the modifications under this Amendment, the parties ratify and confirm the Loan Agreement and the Loan Documents and agree that they remain in full force and effect.

8. Further Modification; No Reliance.  This Amendment may be altered or modified only by written instrument duly executed by Borrower and Bank.  In executing this Amendment, Borrower is not relying on any promise or commitment of Bank that is not in writing signed by Bank.  This Amendment shall not be more strictly construed against any one of the parties as compared to any other.  

9. Successors and Assigns.  This Amendment shall inure to the benefit of and be binding upon the parties and their respective successors and assigns.

10. Governing Law.  The parties agree that the terms and provisions of this Amendment shall be governed by and construed in accordance with the internal laws of the State of California, without regard to principles of conflicts of law.

11. No Defenses.  Borrower acknowledges, confirms, and warrants to Bank that as of the date hereof Borrower has absolutely no defenses, claims, rights of set-off, or counterclaims against Bank under, arising out of, or in connection with, this Amendment, the Loan Agreement, the Loan Documents and/or the individual advances under the Indebtedness, or against any of the indebtedness evidenced or secured thereby.  

12. Expenses.  Borrower shall promptly pay all reasonable and actually incurred out-of-pocket fees, costs, charges, expenses, and disbursements of Bank incurred in connection with the preparation, execution, and delivery of this Amendment, and the other documents contemplated by this Amendment.

13. Counterparts.  This Amendment may be executed in one or more counterparts, and by separate parties on separate counterparts, all of which shall constitute one and the same agreement.

[end of amendment—signature page follows]

               

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21,677,669.3\125055-01016

This Amendment No. 4 to Loan and Security Agreement is executed and delivered as of the Amendment No. 4 Effective Date.

Comerica Bank By: /s/ Lake T. McGuire Name: Lake T. McGuire Title: Vice President Biolase, Inc. By: /s/ Frederick D. Furry Name:  Frederick D. Furry Title:  Chief Financial Officer  

Acknowledgement and Consent of Guarantors

Each of the undersigned has guaranteed the payment and performance of the Obligations by Borrower pursuant to Guaranty dated May 24, 2012.  Each of the undersigned (a) acknowledges and consents to the execution, delivery and performance of the foregoing Amendment No. 4 to Loan and Security Agreement, and (b) agrees that (i) its guaranty remains in full force and effect and (ii) it has absolutely no defenses, claims, rights of set-off, or counterclaims against Bank under, arising out of, or in connection with, the foregoing Amendment No. 4 to the Loan and Security Agreement, the Loan Agreement, its guaranty, or the other Loan Documents.  Each of the undersigned further represents that it is in compliance with all of the terms and conditions of its guaranty.

Dated as of November 8, 2013.

BL II Acquisition Inc.     By: /s/ Frederick D. Furry Name:  Frederick D. Furry Title:  Chief Financial Officer   BL Acquisition Corp.     By: /s/ Frederick D. Furry Name:  Frederick D. Furry Title:  Chief Financial Officer  

       

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21,677,669.3\125055-01016

EX-31

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Federico Pignatelli, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2013 of BIOLASE, Inc.;

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

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

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

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

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

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

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

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

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

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

Date: November 12, 2013	By:	/s/ FEDERICO PIGNATELLI
		Federico Pignatelli
		Chief Executive Officer (Principal Executive Officer)

EX-31

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Frederick D. Furry, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2013 of BIOLASE, Inc.;

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

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

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

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

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

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

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

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

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

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

Date: November 12, 2013	By:	/s/ FREDERICK D. FURRY
		Frederick D. Furry
		Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32

Exhibit 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

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

In connection with the Quarterly Report of BIOLASE, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Federico Pignatelli, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

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

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

Date: November 12, 2013	/s/ FEDERICO PIGNATELLI
	Federico Pignatelli
	Chief Executive Officer (Principal Executive Officer)

EX-32

Exhibit 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

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

In connection with the Quarterly Report of BIOLASE, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frederick D. Furry, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

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

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

Date: November 12, 2013	/s/ FREDERICK D. FURRY
	Frederick D. Furry
	Chief Financial Officer (Principal Financial and Accounting Officer)

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Income Taxes

9 Months Ended

Sep. 30, 2013

Income Taxes

NOTE 12—INCOME TAXES

The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered, and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that a full valuation allowance against the Company’s net deferred tax assets is appropriate.

As of September 30, 2013, the Company had net operating loss (“NOL”) carryforwards for federal and state purposes of approximately $83.7 million and $59.5 million, respectively, which begin to expire in 2013. The utilization of NOL and credit carryforwards may be limited under the provisions of the Internal Revenue Code (“IRC”) Section382 and similar state provisions. IRC Section382 generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. During the year ended December31, 2006, the Company completed an analysis to determine the potential applicability of any annual limitations imposed by IRC Section382. Based on the analysis, management determined that there was no significant IRC Section382 limitation. The Company has not assessed whether any ownership changes have occurred since the completion of the 2006 analysis. As of September 30, 2013, the Company had research and development tax credit carryforwards for federal and state purposes of approximately $1.3 million and $815,000, respectively, which will begin to expire in 2018 for federal purposes and will carryforward indefinitely for state purposes. An updated analysis may be required at the time the Company begins utilizing any of its net operating losses to determine if there is an IRC Section382 limitation.

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has elected to classify interest and penalties as a component of its income tax provision. With respect to the liability for unrecognized tax benefits, including related estimates of penalties and interest, the Company recorded increases of $0 and $1,000 for the three and nine months ended September 30, 2013, respectively, and $2,000 and $4,000 for the three and nine months ended September 30, 2012, respectively.

For the three and nine months ended September 30, 2013, the Company recorded an income tax provision of $22,000 and benefit of $182,000, respectively, related to the current year tax provision. For the three and nine months ended September 30, 2012, the Company recorded an income tax provision of $34,000 and $97,000, respectively. During the nine months ended September30, 2013, the Company reversed certain deferred tax liabilities associated with unrecognized tax benefits related to international operations due to expiring statutes and recognized tax benefits of $107,000 and recognized deferred tax assets related to certain indefinite lived assets (federal alternative minimum tax credits and California R&D credits) that were used to offset deferred tax liabilities related to indefinite-lived intangible assets of $107,000resulting in an overall tax benefit of $214,000. Management does not expect to record additional significant tax benefits in the foreseeable future.

The tax expense differs from expense derived from statutory rate of34%primarily due to the existence of valuation allowances against net deferred tax assets and current liabilities resulting from the estimated state income tax liabilities and federal alternative minimum tax liability. The income tax provision for the three and nine months ended September 30, 2013 was calculated using the discrete year-to-date method, which management determined to be more appropriate than the annual effective rate method which was used to calculate the income tax provision for the quarter ended March 31, 2013.

Recently enacted tax laws may also affect the tax provision on the Company’s financial statements. The state of California requires the use of a single sales factor apportionment formula for tax years beginning on or after January1, 2013. During the nine months ended September 30, 2013, the Company’s state deferred tax assets were revalued to account for the change in the tax law; however, the Company records a full valuation allowance against the state deferred tax assets therefore the California apportionment mandate did not have a material impact on the Company’s consolidated financial statements.

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Consolidated Statements Of Operations And Comprehensive Loss (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Products and services revenue	$ 12,311	$ 13,710	$ 41,008	$ 38,147
License fees and royalty revenue	34	71	181	129
Net revenue	12,345	13,781	41,189	38,276
Cost of revenue	8,516	7,500	26,005	20,688
Gross profit	3,829	6,281	15,184	17,588
Operating expenses:
Sales and marketing	4,164	3,635	13,554	11,383
General and administrative	2,460	1,839	7,305	6,271
Engineering and development	977	1,195	2,987	3,657
Excise tax	89		308
Total operating expenses	7,690	6,669	24,154	21,311
Loss from operations	(3,861)	(388)	(8,970)	(3,723)
Gain (loss) on foreign currency transactions	16	(28)	(74)	(137)
Interest expense, net	(182)	(98)	(386)	(140)
Non-operating loss, net	(166)	(126)	(460)	(277)
Loss before income tax (benefit) provision	(4,027)	(514)	(9,430)	(4,000)
Income tax (benefit) provision	22	34	(182)	97
Net loss	(4,049)	(548)	(9,248)	(4,097)
Other comprehensive income (loss) items:
Foreign currency translation adjustments	88	38	23	(14)
Comprehensive loss	$ (3,961)	$ (510)	$ (9,225)	$ (4,111)
Net loss per share:
Basic	$ (0.13)	$ (0.02)	$ (0.29)	$ (0.13)
Diluted	$ (0.13)	$ (0.02)	$ (0.29)	$ (0.13)
Shares used in the calculation of net loss per share:
Basic	32,367	31,890	32,062	31,803
Diluted	32,367	31,890	32,062	31,803

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Property, Plant, and Equipment

9 Months Ended

Sep. 30, 2013

Property, Plant, and Equipment

NOTE 5—PROPERTY, PLANT, AND EQUIPMENT

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

	September30, 2013			December31, 2012
Land	$	196			$	191
Building		251				246
Leasehold improvements		1,207				1,193
Equipment and computers		5,824				5,219
Furniture and fixtures		1,049				1,046
Construction in progress		7				132
		8,534				8,027
Accumulated depreciation and amortization		(6,823	)			(6,518	)
Property, plant, and equipment, net	$	1,711			$	1,509

Depreciation and amortization expense related to property, plant, and equipment totaled $124,000 and $339,000 for the three and nine months ended September30, 2013, respectively, and $93,000 and $275,000 for the three and nine months ended September 30, 2012, respectively.

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Accrued Liabilities and Deferred Revenue (Tables)

9 Months Ended

Sep. 30, 2013

Components of Accrued Liabilities

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

	September30, 2013		December31, 2012
Payroll and benefits	$	1,703	$	2,326
Warranty accrual		1,330		1,699
Sales tax		166		640
Accrued professional services		940		502
Accrued insurance premium		—		751
Other		345		349
Accrued liabilities	$	4,484	$	6,267

Changes in Initial Product Warranty Accrual and Expenses Under Initial and Extended Warranties

Changes in the initial product warranty accrual, and the expenses incurred under the Company’s initial and extended warranties, for the three and nine months ended September30, 2013 and 2012 were as follows (in thousands):

	ThreeMonthsEnded September30,						Nine MonthsEnded September30,
	2013			2012			2013			2012
Initial warranty accrual, beginning balance	$	1,518		$	1,980		$	1,699		$	2,218
Provision for estimated warranty cost		69			337			429			711
Warranty expenditures		(257	)		(387	)		(798	)		(999	)
Initial warranty accrual, ending balance		1,330			1,930			1,330			1,930
Total warranty accrual, long-term		—			—			—			—
Total warranty accrual, current portion	$	1,330		$	1,930		$	1,330		$	1,930

Summary of Deferred Revenue

Deferred revenue is comprised of the following (in thousands):

	September30, 2013			December31, 2012
Undelivered elements (training, installation, and product and support services)	$	1,661		$	1,723
Extended warranty contracts		1,524			1,506
Total deferred revenue		3,185			3,229
Less long-term amounts:
Extended warranty contracts		(1	)		(3	)
Total deferred revenue, long-term		(1	)		(3	)
Total deferred revenue, current portion	$	3,184		$	3,226

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Subsequent Event

9 Months Ended

Sep. 30, 2013

Subsequent Event

NOTE 13—SUBSEQUENT EVENT

Credit Agreements

On November 8, 2013, the Company amended the Credit Agreements with Comerica Bank to waive its noncompliance with the minimum EBITDA covenant for the quarter ended September 30, 2013, reset the EBITDA covenant for the quarter ending December 31, 2013, and establish covenants for the remaining term of the agreements. In connection with this amendment, the Company issued Comerica Bank the November 2013 Comerica Warrant and incurred an amendment fee of $10,000. See Note 8 – Lines of Credit and Other Borrowings for further discussion.

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Components of Accrued Liabilities (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Schedule Of Accrued Liabilities [Line Items]
Payroll and benefits	$ 1,703	$ 2,326
Warranty accrual	1,330	1,699
Sales tax	166	640
Accrued professional services	940	502
Accrued insurance premium		751
Other	345	349
Accrued liabilities	$ 4,484	$ 6,267

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Classification of Compensation Expense Associated with Share-Based Payments (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Recognized Share Based Compensation Expense [Line Items]
Allocated Share-based Compensation Expense	$ 491	$ 357	$ 1,239	$ 1,280
Cost of Revenue
Recognized Share Based Compensation Expense [Line Items]
Allocated Share-based Compensation Expense	73	67	227	183
Sales and Marketing
Recognized Share Based Compensation Expense [Line Items]
Allocated Share-based Compensation Expense	154	134	443	375
General and Administrative Expense
Recognized Share Based Compensation Expense [Line Items]
Allocated Share-based Compensation Expense	225	103	459	586
Engineering and Development
Recognized Share Based Compensation Expense [Line Items]
Allocated Share-based Compensation Expense	$ 39	$ 53	$ 110	$ 136

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Basis of Presentation - Additional Information (Detail) (USD $)	9 Months Ended						0 Months Ended
	Sep. 30, 2013 Agreement Segment	Sep. 19, 2013	Jul. 26, 2013	Dec. 31, 2012	Sep. 30, 2012	Dec. 31, 2011	Nov. 08, 2013 Subsequent Event
Basis Of Presentation [Line Items]
Number of operating segment	1
Working capital	$ 5,000,000
Cash and cash equivalents	4,151,000			2,543,000	1,295,000	3,307,000
Net accounts receivable	10,802,000			11,680,000
Lines of credit remaining borrowing capacity	2,500,000
Number revolving credit facility agreements	2
Period of financial resources	Management expects that the working capital and future borrowings available under the lines of credit should be sufficient to fund the minimum requirements of the Company; however, the Company cannot guarantee that it will be able to increase sales, reduce expenses, or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. Management will continue to monitor the liquidity of the Company and is prepared to implement cash saving measures or potentially issue debt or equity securities in the event that its plans to grow revenue do not materialize in the timeline anticipated by management.
Maximum stock offering price			30,000,000
Amended maximum stock offering price		5,000,000
Placement agent fees, as a percentage of gross proceeds	5.00%
Common stock shares issued	2,688,172
Common stock issued, price per share	$ 1.86
Proceeds from equity offering, gross	5,000,000
Proceeds from equity offering, net of expenses	4,592,000
Payments of stock issuance costs	408,000
Minimum equity raise requirement by March 1, 2014 covenant							$ 3,000,000

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Income Taxes - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Income Tax Disclosure [Line Items]
Net operating loss carryforwards federal	$ 83,700,000		$ 83,700,000
Net operating loss carryforwards state	59,500,000		59,500,000
Operating loss carryforwards, expire beginning			2013
Income tax (benefit) provision	22,000	34,000	(182,000)	97,000
Tax benefit for federal alternative minimum tax credits and California R&D credits			107,000
Tax benefit on reversed certain deferred tax liabilities associated with international operations and research and development credits			214,000
Statutory tax rate			34.00%
Increase in liability for unrecognized tax benefit	0	2,000	1,000	4,000
Other Tax Benefits
Income Tax Disclosure [Line Items]
Tax benefit on reversed certain deferred tax liabilities associated with international operations			107,000
Federal
Income Tax Disclosure [Line Items]
Research and development tax credit carryforwards	1,300,000		1,300,000
Research and development tax credit carryforwards expire beginning			2018
State
Income Tax Disclosure [Line Items]
Research and development tax credit carryforwards	$ 815,000		$ 815,000

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Summary of Property, Plant, and Equipment (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Property Plant And Equipment Disclosure [Line Items]
Property, plant and equipment, gross	$ 8,534	$ 8,027
Accumulated depreciation and amortization	(6,823)	(6,518)
Property, plant, and equipment, net	1,711	1,509
Land
Property Plant And Equipment Disclosure [Line Items]
Property, plant and equipment, gross	196	191
Building
Property Plant And Equipment Disclosure [Line Items]
Property, plant and equipment, gross	251	246
Leasehold Improvements
Property Plant And Equipment Disclosure [Line Items]
Property, plant and equipment, gross	1,207	1,193
Equipment And Computers
Property Plant And Equipment Disclosure [Line Items]
Property, plant and equipment, gross	5,824	5,219
Furniture and Fixtures
Property Plant And Equipment Disclosure [Line Items]
Property, plant and equipment, gross	1,049	1,046
Construction in Progress
Property Plant And Equipment Disclosure [Line Items]
Property, plant and equipment, gross	$ 7	$ 132

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Summary of Deferred Revenue (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Deferred Revenue Arrangement [Line Items]
Undelivered elements (training, installation, and product and support services)	$ 1,661	$ 1,723
Extended warranty contracts	1,524	1,506
Total deferred revenue	3,185	3,229
Less long-term amounts:
Extended warranty contracts	(1)	(3)
Total deferred revenue, long-term	(1)	(3)
Total deferred revenue, current portion	$ 3,184	$ 3,226

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Stock Based Awards and Per Share Information - Additional Information (Detail) (USD $)	3 Months Ended				9 Months Ended			1 Months Ended					1 Months Ended		9 Months Ended		1 Months Ended					1 Months Ended
	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Apr. 26, 2013 Sun Dental Warrant	Apr. 26, 2013 Sun Dental Warrant Maximum	Apr. 18, 2013 IR Warrant 2	Apr. 18, 2013 IR Warrant 2 Maximum	Apr. 18, 2013 IR Warrant 2 Minimum	Mar. 23, 2013 CMR Warrant	Mar. 23, 2013 CMR Warrant Maximum	Sep. 30, 2013 2002 Stock Incentive Plan	Sep. 30, 2013 President and COO	Jul. 12, 2013 First Tranche	Mar. 23, 2013 First Tranche Minimum	Mar. 23, 2013 First Tranche CMR Warrant Maximum	Mar. 23, 2013 Second Tranche Minimum	Mar. 23, 2013 Second Tranche CMR Warrant Maximum	Jul. 12, 2013 Valam Warrant	Jul. 12, 2013 Fda Clearance	Jul. 12, 2013 Second Ent Laser	Jul. 12, 2013 Third Ent Laser
Stock Based Compensation Activity [Line Items]
Plan expiration date								Apr. 24, 2014		Apr. 17, 2018			Mar. 22, 2018		May 05, 2019	Jun. 06, 2020						Jul. 14, 2020
Common stock authorized for issuance under the 2002 Plan															7,750,000
Common stock issued pursuant to options exercised															2,840,000
Options outstanding	4,374,000				4,374,000		3,860,000								4,374,000
Options available for future grant															536,000
Compensation cost related to stock options	$ 491,000			$ 357,000	$ 1,239,000	$ 1,280,000
Net impact of share based compensation expense to earnings per basic share	$ (0.02)			$ (0.01)	$ (0.04)	$ (0.04)
Net impact of share based compensation expense to earnings per diluted share	$ (0.02)			$ (0.01)	$ (0.04)	$ (0.04)
Total unrecognized compensation cost	2,700,000				2,700,000
Unrecognized share based compensation cost to be recognized over weighted-average period						1 year 6 months
Options granted					1,516,000											350,000
Options granted exercise price per share					$ 3.90											$ 4.00
Options granted to President and COO, vesting period beginning June 6, 2014																4 years
Warrants issued to purchase common stock									500,000		60,000			100,000					50,000		50,000	165,000
Warrants price of warrants								5.90		5.10									4.50		4.50	6.00
Warrant vesting rate								1,000
Stock-based compensation					1,239,000	1,280,000			1,000
Minimum required closing price of common stock on the NASDAQ in order to exercise												$ 7.50						$ 7.50		$ 10.00
Outstanding stock options and warrants excluded from diluted loss per share	6,022,000			4,504,000	6,022,000	4,504,000
Special stock dividends intended for the year ended 12/31/2013					2.00%
Dividends declared, date of record	Aug. 30, 2013	Jun. 14, 2013	Mar. 15, 2013
Dividends declared, payable date	Sep. 13, 2013	Jun. 28, 2013	Mar. 29, 2013
Special Stock Dividends Declared	0.50%	0.50%	0.50%
Vesting of Valam warrant																	30,000						55,000	40,000	40,000
ENT laser revenues required during a 12-month period																								$ 5,000,000	$ 10,000,000

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Summary of Net Revenue by Geographic Location (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenue From External Customers By Geographic Area [Line Items]
Net revenue	$ 12,345	$ 13,781	$ 41,189	$ 38,276
United States
Revenue From External Customers By Geographic Area [Line Items]
Net revenue	7,602	9,433	25,735	25,842
International
Revenue From External Customers By Geographic Area [Line Items]
Net revenue	$ 4,743	$ 4,348	$ 15,454	$ 12,434

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2013

Summary of Net Revenue by Geographic Location

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

	ThreeMonthsEnded September30,				Nine Months Ended September30,
	2013		2012		2013		2012
United States	$	7,602	$	9,433	$	25,735	$	25,842
International		4,743		4,348		15,454		12,434
	$	12,345	$	13,781	$	41,189	$	38,276

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Basis of Presentation

9 Months Ended

Sep. 30, 2013

Basis of Presentation

NOTE 1—BASIS OF PRESENTATION

The Company

BIOLASE, Inc., (the “Company”) incorporated in Delaware in 1987, is a biomedical company operating in one reportable business segment that develops, manufactures, and markets proprietary lasers in dentistry and medicine and also markets and distributestwo-dimensional (“2-D”) andthree-dimensional (“3-D”) digital imaging equipment and CAD/CAM intra-oral scanners; products that are focused on technologies that advance the practice of dentistry and medicine.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of BIOLASE, Inc. and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December31, 2012 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments and the elimination of all material intercompany transactions and balances, necessary to fairly present the information set forth therein. These unaudited, interim, consolidated financial statements do not include all the footnotes, presentations, and disclosures normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements. Certain amounts have been reclassified to conform to current period presentations.

The consolidated results of operations for the three and nine months ended September30, 2013 are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December31, 2012, included in the Company’s Annual Report on Form 10-K for the year ended December31, 2012 (“2012 Form 10-K”) filed with the Securities and Exchange Commission on March15, 2013.

Use of Estimates

The preparation of these consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates in these consolidated financial statements include allowances on accounts receivable, inventory, and deferred taxes, as well as estimates for accrued warranty expenses, indefinite-lived intangible assets, and the ability of goodwill to be realized, revenue deferrals for multiple element arrangements, effects of stock-based compensation and warrants, contingent liabilities, and the provision or benefit for income taxes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.

Update to Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies which are described in the Company’s 2012 Form 10-K, except as noted below. See Note 2 – Recent Accounting Pronouncements for adoption of updated authoritative guidance.

Excise Tax

Commencing January1, 2013, certain of the Company’s product sales are subject to the newly enacted medical device excise tax. The Company has included such taxes separately as a component of operating expense.

Income Tax

The income tax provision for the three and nine months ended September 30, 2013 was calculated using the discrete year-to-date method, which management determined to be more appropriate than the annual effective rate method which was used to calculate the income tax provision for the quarter ended March 31, 2013. See Note 12 – Income Taxes for additional disclosures related to the Company’s income tax.

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.

Liquidity and Management’s Plans

The Company suffered recurring losses from operations during the three years ended December31, 2012. The Company also incurred a loss from operations, a net loss, and used cash in operating activities for the three and nine months ended September 30, 2013. The available borrowing capacity on our lines of credit with Comerica Bank and the net proceeds from the below mentioned equity offering have been principal sources of liquidity during the nine months ended September 30, 2013. These credit facilities were amended in November 2013, as discussed further below, and expire May 1, 2014. At September30, 2013, the Company had approximately $5.0 million in working capital. The Company’s principal sources of liquidity at September30, 2013 consisted of approximately $4.2 million in cash and cash equivalents, $10.8 million of net accounts receivable, and $2.5 million of available borrowings under two revolving credit facility agreements.

The Company’s ability to meet its obligations in the ordinary course of business is dependent upon the Company’s ability to sell its products directly to end-users and through distributors, establish profitable operations through increased sales, decrease expenses, and to generate cash from operations or obtain additional funds when needed.If the Company is unsuccessful in its efforts to improve its financial position, there may be substantial doubt about its ability to adequately fund the minimum requirements of its business.

The Company intends to improve its financial condition and ultimately improve its financial results by increasing revenues through expansion of its product offerings, continuing to develop its direct sales force and distributor relationships both domestically and internationally, forming strategic arrangements within the dental and medical industries, educating dental and medical patients as to the benefits of its advanced medical technologies, and continuing cost reduction initiatives.

Management expects that the working capital and future borrowings available under the lines of credit should be sufficient to fund the minimum requirements of the Company; however, the Company cannot guarantee that it will be able to increase sales, reduce expenses, or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. Management will continue to monitor the liquidity of the Company and is prepared to implement cash saving measures or potentially issue debt or equity securities in the event that its plans to grow revenue do not materialize in the timeline anticipated by management.

Sale of common stock

On July 26, 2013, the Company filed a registration statement on Form S-3, File No. 333-190158 (“2013 Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register an indeterminate number of shares of common stock, preferred stock, and warrants with a total offering price not to exceed $30 million. The Company subsequently amended the 2013 Registration Statement and lowered the total not to exceed offering price to $5 million. The 2013 Registration Statement, as amended, was declared effective by the SEC on September 19, 2013. On September 23, 2013, the Company entered into an agreement with Northland Securities, Inc. (“Northland”), pursuant to which Northland acted as placement agent in connection with the sale of shares of the Company’s common stock in a registered direct offering (the “September 2013 Registered Direct Offering”) pursuant to the 2013 Registration Statement and paid Northland a fee of 5.0% of the aggregate gross proceeds in connection therewith. On September 23, 2013, the Company entered into a subscription agreement (“2013 Subscription Agreement”) with Camber Capital Management, LLC, pursuant to which the Company agreed to sell 2,688,172 shares of its common stock at a price per share of $1.86 for gross proceeds of $5 million. The net proceeds to the Company were $4.6 million, after deducting associated costs of $408,000, which included Northland’s fee. The shares of common stock sold in connection with the 2013 Subscription Agreement were issued pursuant to a prospectus supplement to the 2013 Registration Statement, which was filed with the SEC September 26, 2013.

Lines of credit

On September 6, 2013 and November 8, 2013, the Company amended its lines of credit with Comerica Bank. The amendments waive noncompliance with certain financial covenants, subject to additional requirements, and establish future covenants, restrictions, and penalties. The amendment on November 8, 2013 includes liquidity ratio and liquid asset covenants, and an equity raise requirement that established March 1, 2014 as the latest date by which the Company is required to raise at least $3.0 million. Any future noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the amounts outstanding immediately due and payable. Management is considering alternative financing solutions, including potentially issuing alternative debt securities, to mitigate any future liquidity constraints these covenants and restrictions may impose on the Company. Further discussion of the amendments is included in Note 8 – Lines of Credit and Other Borrowings.

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Stock-Based Awards and Per Share Information

9 Months Ended

Sep. 30, 2013

Stock-Based Awards and Per Share Information

NOTE 3—STOCK-BASED AWARDS AND PER SHARE INFORMATION

Stock-Based Compensation

The Company currently has one stock-based compensation plan, the 2002 Stock Incentive Plan (the “2002 Plan”) which will expire on May 5, 2019. Eligible persons under the 2002 Plan include certain officers and employees of the Company, and directors of the Company, as well as consultants. Under the 2002 Plan, 7,750,000 shares of common stock have been authorized for issuance. As of September30, 2013, 2,840,000 shares of common stock have been issued pursuant to options that were exercised, 4,374,000 shares of common stock have been reserved for options that are outstanding, and 536,000 shares of common stock remain available for future grant.

Compensation cost related to stock options recognized in operating results totaled approximately $491,000 and $357,000 for the three months ended September30, 2013 and 2012, respectively; and $1.2 million and $1.3 million for the nine months ended September 30, 2013 and 2012, respectively. The net impact to earnings for those periods was $(0.02) and $(0.01) per basic and diluted share, and $(0.04) and $(0.04) per basic and diluted share, respectively. At September30, 2013, the Company had approximately $2.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements granted under the 2002 Plan. The Company expects that cost to be recognized over a weighted-average period of 1.5 years.

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

	ThreeMonthsEnded September30,				NineMonthsEnded September30,
	2013		2012		2013		2012
Cost of revenue	$	73	$	67	$	227	$	183
Sales and marketing		154		134		443		375
General and administrative		225		103		459		586
Engineering and development		39		53		110		136
	$	491	$	357	$	1,239	$	1,280

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

	ThreeMonthsEnded September30,								NineMonthsEnded September30,
	2013			2012				2013					2012
Expected term (in years)		3.70			3.70					3.66				3.80
Volatility		83	%		97	%				83	%			101	%
Annual dividend per share	$	0.00		$	0.00		$			0.00		$		0.00
Risk-free interest rate		1.54	%		0.68	%				0.99	%			0.81	%

A summary of option activity under the Company’s stock option plan for the nine months ended September30, 2013 is as follows:

	Shares				Weighted average exerciseprice		Weightedaverage remaining contractual term (years)			Aggregate intrinsic value(1)
Options outstanding at December31, 2012		3,860,000		$		3.48
Plus: Options granted		1,516,000		$		3.90
Less: Options exercised		(342,000	)	$		2.07
Options forfeited, canceled, or expired		(660,000	)	$		4.34
Options outstanding at September30, 2013		4,374,000		$		3.55		4.02	$		171,000
Options exercisable at September30, 2013		2,480,000		$		3.57		3.39	$		166,000
Vested options expired during the quarter ended  September30, 2013		66,000		$		10.28
(1) The intrinsic value calculation does not include negative values. This can occur when the fair market value on the reporting date is less than the exercise price of the grant.

On June 6, 2013, the Board of Directors (the “Board”) granted stock options to purchase 350,000 shares of common stock to Alexander K. Arrow in connection with his appointment to President and Chief Operating Officer. These stock options were granted at an exercise price of $4.00 per share, vest and become exercisable in equal quarterly amounts over a four-year period beginning on June 6, 2014, and expire on June 6, 2020.

Cash proceeds along with fair value disclosures related to grants, exercises, and vesting options are provided in the following table (in thousands, except per share amounts):

	ThreeMonthsEnded September30,					NineMonthsEnded September30,
	2013		2012			2013			2012
Proceeds from stock options exercised	$	10	$	33	$		707	$		455
Tax benefit related to stock options exercised (1)		N/A		N/A			N/A			N/A
Intrinsic value of stock options exercised (2)	$	6	$	0	$		860	$		91
Weighted-average fair value of options granted during period	$	3.31	$	1.02	$		3.90	$		1.55
Total fair value of shares vested during the period	$	437	$	398	$		1,155	$		1,410
(1) Excess tax benefits received related to stock option exercises are presented as financing cash inflows. The Company currently does not receive a tax benefit related to the exercise of stock options due to the Company’s net operating losses.
(2) The intrinsic value of stock options exercised is the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant.

Warrants

On July 12, 2013, the Company entered into a strategic agreement with Valam, Inc. (“Valam”) to develop, market, and sell office-based laser systems to otolaryngologists (also known as “Ear, Nose, and Throat” or “ENT” doctors) (the “Valam Agreement”). The Valam Agreement provides the Company with an exclusive worldwide license to Valam’s ENT related patents and pending patents which complements the Company’s patent portfolio and supports the Company’s planned launch into the ENT laser market in late 2013. In connection with the Valam Agreement, the Company issued a warrant to Valam to purchase up to 165,000 shares of the Company’s common stock, at a price per share of $6.00 (the “Valam Warrant”). The Valam Warrant is performance-based and will vest as follows: 30,000 warrant shares upon the launch of the Company’s first ENT laser; 55,000 warrant shares upon the receipt of certain specified clearances required from the U.S. Food and Drug Administration (the “FDA”); 40,000 warrant shares upon achieving $5 million in ENT laser revenues for a 12-month period; and 40,000 warrant shares upon achieving $10 million in ENT laser revenues for a 12-month period. Vested warrant shares may be exercised with a cash payment, or, in lieu of a cash payment, Valam may convert the vested warrant shares into a net number of whole common shares. The Valam Warrant expires on July 14, 2020. As of September 30, 2013, performance requirements for the Valam Warrant have not been achieved and no stock-based compensation has been recognized.

On April 26, 2013, the Company issued a warrant to Sun Dental Laboratories, LLC (“Sun Dental Labs”) to purchase up to 500,000 shares of the Company’s common stock, at a price per share of $5.90 (the “Sun Dental Warrant”). The Sun Dental Warrant is performance-based and will vest at a rate of 1,000 shares per each 3Shape A/S (“3Shape”) Trios intraoral scanner (“Trios IOS”) that Sun Dental Labs assists in selling in conjunction with the agreement. For the purposes of the Sun Dental Warrant, a sale is defined as a Trios IOS that has been installed at the customer's place of business and is fully operational, where the customer has been trained, and the Trios IOS has been paid for in full by the customer. Any unvested warrant shares will expire on April 24, 2014. Vested warrant shares may be exercised with a cash payment, or, in lieu of a cash payment, Sun Dental Labs may convert the vested warrant shares into a net number of whole common shares. The Company recorded stock-based compensation expense of less than $1,000 related to the Sun Dental Warrant during the nine months ended September 30, 2013.

On April 18, 2013, the Company issued a warrant to purchase up to 60,000 shares of the Company’s common stock to an investor relations firm, at a price per share of $5.10 (the “IR Warrant”). The IR Warrant vests and becomes exercisable only if the Company’s common stock closing price on NASDAQ reaches or exceeds $7.50. The IR Warrant expires April 17, 2018.  As of September 30, 2013, no stock-based compensation has been recognized for the IR Warrant. The Company will reassess whether achievement of the contingent exercise provisions are probable on a quarterly basis and recognize stock-based compensation when it is probable that the market performance requirements will be achieved.

On March 23, 2013, the Company issued two tranches of warrants to purchase up to 100,000 shares of the Company’s common stock to a consultant, at a price per share of $4.50 (the “CMR Warrant”). The first tranche of 50,000 warrant shares vests and becomes exercisable only if the Company’s common stock closing price on NASDAQ reaches or exceeds $7.50. The second tranche of 50,000 warrant shares vests and becomes exercisable only if the Company’s common stock closing price on NASDAQ reaches or exceeds $10.00. The CMR Warrant expires March 22, 2018. As of September 30, 2013, no stock-based compensation has been recognized for the CMR Warrant. The Company will reassess whether achievement of the contingent exercise provision is probable on a quarterly basis and recognize stock-based compensation when it is probable that the market performance requirements will be achieved.

The initial warrant issued in connection with the lines of credit with Comerica Bank was exercised during the nine months ended September 30, 2013. In connection with amendments to the lines of credit, the Company issued additional warrants to Comerica Bank during September 2013 and November 2013. See Note 8 – Lines of Credit and Other Borrowingsfor further discussion.

Net Loss Per Share – Basic and Diluted

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

Outstanding stock options and warrants to purchase 6,022,000 shares were not included in the computation of diluted loss per share for the three and nine months ended September30, 2013 as a result of their anti-dilutive effect. For the same 2012 periods, anti-dilutive outstanding stock options and warrants to purchase 4,504,000 shares were not included in the computation of diluted loss per share.

Stock Dividends

The Company intends to pay a 2% annual stock dividend, in quarterly installments, for the year ending December31, 2013. Stock dividends are discussed quarterly by the Boardand management. The actual declaration of future stock dividends and the establishment of the record and payment dates are subject to final determination by the Board after its review of the Company’s financial performance, the expected results of future operations, availability of shares, and other factors that the Board may deem relevant. The Company’s dividend policy may be changed at any time by the Board, and there is no assurance, with respect to the amount or frequency, that any stock dividend will be declared in the future.

The Board declared one-half percent stock dividends during each of the first three quarters of 2013. The stock dividend declared during the quarter ended September 30, 2013 was payable September 13, 2013 to shareholders of record on August 30, 2013, the stock dividend declared during the quarter ended June 30, 2013 was payable June 28, 2013 to shareholders of record on June 14, 2013, and the stock dividend declared during the quarter ended March 31, 2013 was payable March 29, 2013 to shareholders of record on March 15, 2013. All stock information presented, other than that related to stock options and warrants, has been adjusted to reflect the effects of stock dividends.

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Intangible Assets and Goodwill

9 Months Ended

Sep. 30, 2013

Intangible Assets and Goodwill

NOTE 6—INTANGIBLE ASSETS AND GOODWILL

The Company conducted its annual impairment test of intangible assets and goodwill as of June30, 2013, and determined that there was no impairment. The Company also tests its intangible assets and goodwill between the annual impairment test if events occur or circumstances change that would more likely than not reduce the fair value of the Company or its assets below their carrying amounts.

Amortization expense for the three and nine months ended September30, 2013 totaled $17,000 and $100,000, respectively, and $33,000 and $98,000, respectively, for the same periods in 2012. Other intangible assets primarily include acquired customer lists and non-compete agreements.

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

	As of September30, 2013													As of December31, 2012
	Gross			Accumulated Amortization				Impairment			Net				Gross			Accumulated Amortization				Impairment			Net
Patents (4-10 years)	$	1,914	$		(1,891	)	$		—	$		23	$			1,914	$		(1,833	)	$		—	$		81
Trademarks (6 years)		69			(69	)			—			—				69			(69	)			—			—
Other (4 to 6 years)		817			(640	)			—			177				817			(598	)			—			219
Total	$	2,800	$		(2,600	)	$		—	$		200	$			2,800	$		(2,500	)	$		—	$		300
Goodwill (Indefinite life)	$	2,926								$		2,926	$			2,926								$		2,926

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Inventory

9 Months Ended

Sep. 30, 2013

Inventory

NOTE 4—INVENTORY

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

	September30, 2013		December31, 2012
Raw materials	$	3,474		$	4,017
Work-in-process		1,752			1,949
Finished goods		6,519			5,176
Inventory, net	$	11,745		$	11,142

Inventory is net of a provision for excess and obsolete inventory totaling $2.7 million and $1.9 million as of September 30, 2013 and December31, 2012, respectively.

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Lines of Credit and Other Borrowings - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended				0 Months Ended	3 Months Ended		9 Months Ended				9 Months Ended		3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	May 07, 2013	Dec. 31, 2012	Nov. 08, 2013 Subsequent Event	Sep. 30, 2013 Line of Credit	Sep. 30, 2012 Line of Credit	Sep. 30, 2013 Line of Credit	Sep. 30, 2012 Line of Credit	Sep. 30, 2013 Comerica Bank	Sep. 06, 2013 Comerica Bank	Sep. 30, 2013 September 2013 Comerica Warrant	Sep. 06, 2013 September 2013 Comerica Warrant	Mar. 31, 2013 2012 Comerica Warrant	Dec. 31, 2012 2012 Comerica Warrant	Sep. 30, 2013 November 2013 Comerica Warrant Subsequent Event Warrant	Sep. 30, 2013 Domestic Revolver Credit Facility	Sep. 06, 2013 Domestic Revolver Credit Facility	May 07, 2013 Domestic Revolver Credit Facility	Dec. 31, 2012 Domestic Revolver Credit Facility	May 07, 2013 Domestic Revolver Credit Facility Prime rate	Sep. 30, 2013 Ex-Im Revolver	Dec. 31, 2012 Ex-Im Revolver	May 07, 2013 Ex-Im Revolver Prime rate
Line Of Credit Facility [Line Items]
Lines of credit maximum borrowing capacity					$ 10,000,000	$ 8,000,000							$ 8,000,000							$ 4,000,000	$ 6,000,000	$ 4,000,000			$ 4,000,000
Outstanding borrowings under lines of credit	5,500,000		5,500,000			1,600,000													3,500,000					2,000,000
Line of credit facility, expiration date			May 01, 2014
Interest on principal balance rate plus																							2.00%			1.50%
Prime floor rate based on undeterminable LIBOR rate					2.50%
Unused capacity commitment fee percentage								0.25%	0.25%	0.25%	0.25%
Interest expense incurred for lines of credit								181,000	98,000	381,000	133,000
Accrued Interest Payable	9,000		9,000			19,000
Amortization of deferred debt issuance costs	71,000	38,000	152,000	53,000
Amortization of discount on lines of credit	43,000	18,000	79,000	25,000
Minimum equity raise requirement by March 1, 2014 covenant							3,000,000
Warrants issued to purchase common stock															100,000		80,000	100,000
Warrants price of warrants															2.00		2.00	2.00
Number of Comerica Bank warrants exercised																80,000
Net issuance of common stock due to exercise of warrants																40,465
Expiration date of warrant shares if unexercised														Sep. 06, 2018				Nov. 08, 2018
Fair value warrants expected term														5 years
Fair value warrants volatility rate														105.32%
Fair value warrants dividend per share														$ 0.00
Fair value warrants risk free interest rate														1.77%
Fair value of warrants														143,000
Credit Agreements amendment fee							10,000					10,000
Financed insurance premium	0		0			379,000
Number of monthly insurance premium installments payable in 2013			Nine
Financial insurance premiums interest rate	3.00%		3.00%			3.00%
Interest expense incurred for financed insurance premiums	$ 1,000	$ 0	$ 5,000	$ 4,000

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Assumptions Used in Estimating Fair Value of Stock Options Granted (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Share Based Compensation Arrangement Assumptions Used To Estimate Fair Values Of Share Options Granted [Line Items]
Expected term (in years)	3 years 8 months 12 days	3 years 8 months 12 days	3 years 7 months 28 days	3 years 9 months 18 days
Volatility	83.00%	97.00%	83.00%	101.00%
Annual dividend per share	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Risk-free interest rate	1.54%	0.68%	0.99%	0.81%

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Components of Inventory (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Schedule Of Inventory [Line Items]
Raw materials	$ 3,474	$ 4,017
Work-in-process	1,752	1,949
Finished goods	6,519	5,176
Inventory, net	$ 11,745	$ 11,142

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Intangible Assets and Goodwill - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Intangible Assets And Goodwill [Line Items]
Amortization expense	$ 17,000	$ 33,000	$ 100,000	$ 98,000

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Concentrations - Additional Information (Detail)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2013 Customer	Sep. 30, 2012 Customer	Sep. 30, 2013 Customer	Sep. 30, 2012 Customer	Dec. 31, 2012 Customer
Concentration Risk [Line Items]
Number of customers which represented more than 10% of the Company's revenue	0	0	0	0
Number of customers which represented more than 10% of the Company's accounts receivable			1		0
Laser Systems
Concentration Risk [Line Items]
Percentage of net revenue	66.00%	74.00%	68.00%	73.00%
Consumables And Other
Concentration Risk [Line Items]
Percentage of net revenue	13.00%	11.00%	12.00%	12.00%
Imaging Systems
Concentration Risk [Line Items]
Percentage of net revenue	8.00%	5.00%	8.00%	5.00%
Services
Concentration Risk [Line Items]
Percentage of net revenue	13.00%	10.00%	12.00%	10.00%
License Fees And Royalties
Concentration Risk [Line Items]
Percentage of net revenue	0.00%	0.00%	0.00%	0.00%

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Allowance for accounts receivable	$ 554	$ 304
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	1,000	1,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	50,000	50,000
Common stock, shares issued	36,815	33,248
Common stock, shares outstanding	34,852	31,284
Treasury stock, shares repurchased	1,964	1,964

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies

NOTE 9—COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its corporate headquarters and manufacturing facility in Irvine, California and also leases certain other facilities, office equipment, and automobiles under various operating lease arrangements.Future minimum rental commitments under operating lease agreements with non-cancelable terms greater than one year for the years ending December31, 2013, 2014, and 2015, is $408,000, $661,000, and $192,000, respectively.

Employee arrangements and other compensation

Certain members of management are entitled to severance benefits payable upon termination following a change in control, which would approximate $716,000 at September30, 2013. The Company also has agreements with certain employees to pay bonuses based on targeted performance criteria. No amount was required to be accrued at September30, 2013.

Purchase commitments

The Company generally purchases components and subassemblies for its products from a limited group of third party suppliers through purchase orders. The Company had $12.8 million of purchase commitments as of September30, 2013, for which the Company has not received the goods or services and which is expected to be purchased within one year. These purchase commitments were made to secure better pricing and to ensure the Company will have the necessary parts to meet anticipated near term demand.

Litigation

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

Class Action Lawsuits

On August 23, 2013 and August 26, 2013, two putative securities class action lawsuits were filed against the Company and certain of its officers and directors in the United States District Court for the Central District of California, one of which seeks unspecified damages on behalf of a putative class of persons who purchased or otherwise acquired the Company’s common stock between January 7, 2013 and August 12, 2013, and the other of which seeks similar remedies on behalf of a putative class of persons who purchased or otherwise acquired the Company's common stock between November 5, 2012 and August 12, 2013. Both complaints allege that the Company and certain of its officers and directors violated the federal securities laws by making allegedly materially false and misleading statements and/or material omissions during the putative class periods. On October 22, 2013, four individual plaintiffs each filed motions to consolidate these actions and to be appointed as lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995. Those motions are currently scheduled to be heard on December 13, 2013. No other dates have been set. As of September 30, 2013, the Company has accrued $250,000 for legal costs expected to be incurred in connection with these matters.The Company believes that the claims contained in the lawsuits are without merit and intends to vigorously defend against the claims.

Intellectual Property Litigation

On April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against the Company in the District of Utah for patent infringement of U.S. Patent No. 7,485,116 regarding BIOLASE’s EZlase dental laser. On September 9, 2012, CAO filed its First Amended Complaint, which added claims for (1) business disparagement/injurious falsehood under common law and (2) unfair competition under 15 U.S.C. Section 1125(a). The additional claims stem from a press release that the Company issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO and its diode product. The First Amended Complaint seeks injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. On November 13, 2012, the Court stayed the lawsuit for 120 days to allow the United States Patent and Trademark Office (“USPTO”) to consider the Company’s request for reexamination of the patent-in-suit. The USPTO granted the request to reexamine the asserted claims of the patent-in-suit and, on February 28, 2013, the Court stayed the lawsuit until the termination of the reexamination proceedings. On April 23, 2013, the USPTO issued an office action rejecting all of the asserted claims over the prior art, and CAO responded to the office action. On August 28, 2013, the USPTO issued an Action Closing Procedure, rejecting all of CAO’s patent claims. CAO has responded to the USPTO’s latest ruling.

The Company filed a patent infringement lawsuit against Fotona dd. (“Fotona”) in Düsseldorf District Court alleging infringement with respect to the Fotona Fidelis dental laser system. Oral proceedings are currently scheduled for spring 2014. Fotona denies liability and seeks the reimbursement of statutory fees from the Company. Together with its response brief, Fotona also filed a nullity action against the patent in dispute, patent number EP 1 560 470. The nullity action is pending at the German Federal Patent Court (the “Patent Court”), Docket No. 1 Ni 58/13 (EP). On September 2, 2013, the Company filed its counterplea in the infringement proceedings and phrased its arguments defending the validity of the patent. These arguments were also the subject of the defense brief to the Patent Court in the parallel nullity action proceedings. On September 9, 2013, the Company filed its response to the Patent Court.

Other Matters

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

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Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash Flows From Operating Activities:
Net loss	$ (9,248)	$ (4,097)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation and amortization	439	373
Provision for bad debts	270	193
Provision for inventory excess and obsolescence	1,000
Amortization of discounts on lines of credit	79	25
Amortization of debt issuance costs	152	53
Stock-based compensation	1,239	1,280
Other equity instruments compensation	64	23
Other non-cash compensation	187	187
Deferred income taxes	(61)
Changes in operating assets and liabilities:
Accounts receivable	608	(1,603)
Inventory	(1,671)	112
Prepaid expenses and other assets	59	599
Customer deposits	(408)	87
Accounts payable and accrued liabilities	240	(1,593)
Deferred revenue	(43)	834
Net cash and cash equivalents used in operating activities	(7,094)	(3,527)
Cash Flows From Investing Activities:
Additions to property, plant, and equipment	(464)	(715)
Proceeds from disposal of long-lived assets		124
Purchased other intangible assets	(10)
Net cash and cash equivalents used in investing activities	(474)	(591)
Cash Flows From Financing Activities:
Borrowings under lines of credit	27,300	9,500
Payments under lines of credit	(23,403)	(7,311)
Payment of debt issuance costs	(34)	(304)
Payment of stock repurchase costs		(235)
Proceeds from equity offering, net of expenses	4,592
Proceeds from exercise of stock options and warrants	707	461
Net cash and cash equivalents provided by financing activities	9,162	2,111
Effect of exchange rate changes	14	(5)
Change in cash and cash equivalents	1,608	(2,012)
Cash and cash equivalents, beginning of period	2,543	3,307
Cash and cash equivalents, end of period	4,151	1,295
Supplemental cash flow disclosures:
Interest paid	165	45
Income taxes paid	$ 51	$ 51

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 4,151	$ 2,543
Accounts receivable, less allowance of $554 in 2013 and $304 in 2012	10,802	11,680
Inventory, net	11,745	11,142
Prepaid expenses and other current assets	1,062	1,552
Total current assets	27,760	26,917
Property, plant, and equipment, net	1,711	1,509
Intangible assets, net	200	300
Goodwill	2,926	2,926
Deferred tax asset	16	16
Other assets	246	305
Total assets	32,859	31,973
Current liabilities:
Lines of credit	5,534	1,637
Accounts payable	9,346	7,663
Accrued liabilities	4,484	6,267
Customer deposits	174	582
Deferred revenue, current portion	3,184	3,226
Total current liabilities	22,722	19,375
Deferred tax liabilities	602	663
Other liabilities, long-term	34	141
Total liabilities	23,358	20,179
Commitments and contingencies (Notes 8, 9, and 13)
Stockholders’ equity (deficit):
Preferred stock, par value $0.001, 1,000 shares authorized, no shares issued and outstanding
Common stock, par value $0.001, 50,000 shares authorized; 36,815 and 33,248 shares issued in 2013 and 2012, respectively; and 34,852 and 31,284 shares outstanding in 2013 and 2012, respectively	37	34
Additional paid-in capital	147,676	140,747
Accumulated other comprehensive loss	(297)	(320)
Accumulated deficit	(121,516)	(112,268)
Stockholders' equity excluding treasury stock	25,900	28,193
Treasury stock (cost of 1,964 shares repurchased)	(16,399)	(16,399)
Total stockholders’ equity	9,501	11,794
Total liabilities and stockholders’ equity	$ 32,859	$ 31,973

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Summary of Option Activity (Detail) (USD $)	9 Months Ended
	Sep. 30, 2013
Number of Shares
Beginning Balance	3,860,000
Plus: Options granted	1,516,000
Less: Options exercised	(342,000)
Options forfeited, canceled, or expired	(660,000)
Ending Balance	4,374,000
Options exercisable at September 30, 2013	2,480,000
Vested options expired during the quarter ended September 30, 2013	66,000
Weighted Average Exercise Price Per Share
Beginning Balance	$ 3.48
Plus: Options granted	$ 3.90
Less: Options exercised	$ 2.07
Options forfeited, canceled, or expired	$ 4.34
Ending Balance	$ 3.55
Options exercisable at September 30, 2013	$ 3.57
Vested options expired during the quarter ended September 30, 2013	$ 10.28
Weighted Average Remaining Contractual Life (In years)
Options outstanding	4 years 7 days
Options exercisable	3 years 4 months 21 days
Aggregate intrinsic value
Options outstanding	$ 171,000	[1]
Options exercisable	$ 166,000	[1]

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

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Intangible Assets and Goodwill (Tables)

9 Months Ended

Sep. 30, 2013

Summary of Intangible Assets, Related Accumulated Amortization and Goodwill

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

	As of September30, 2013													As of December31, 2012
	Gross			Accumulated Amortization				Impairment			Net				Gross			Accumulated Amortization				Impairment			Net
Patents (4-10 years)	$	1,914	$		(1,891	)	$		—	$		23	$			1,914	$		(1,833	)	$		—	$		81
Trademarks (6 years)		69			(69	)			—			—				69			(69	)			—			—
Other (4 to 6 years)		817			(640	)			—			177				817			(598	)			—			219
Total	$	2,800	$		(2,600	)	$		—	$		200	$			2,800	$		(2,500	)	$		—	$		300
Goodwill (Indefinite life)	$	2,926								$		2,926	$			2,926								$		2,926

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Segment Information - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 Foreign Subsidiaries	Dec. 31, 2012 Foreign Subsidiaries
Segment Reporting Information [Line Items]
Percentage of net sales in the United States	62.00%	68.00%	62.00%	68.00%
Percentage of net sales outside the United States	38.00%	32.00%	38.00%	32.00%
Countries representing > 10% of total net revenue			No individual country, other than the United States, represents more than 10% of total net revenue.
Long-lived assets outside of the United States					$ 442,000	$ 412,000

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Changes In Initial Product Warranty Accrual and Expenses Under Initial and Extended Warranties (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Accrued Liabilities [Line Items]
Initial warranty accrual, beginning balance	$ 1,518	$ 1,980	$ 1,699	$ 2,218
Provision for estimated warranty cost	69	337	429	711
Warranty expenditures	(257)	(387)	(798)	(999)
Initial warranty accrual, ending balance	1,330	1,930	1,330	1,930
Total warranty accrual, long term
Total warranty accrual, current portion	$ 1,330	$ 1,930	$ 1,330	$ 1,930

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Property, Plant, and Equipment - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Property Plant And Equipment Disclosure [Line Items]
Depreciation and amortization of property, plant and equipment	$ 124,000	$ 93,000	$ 339,000	$ 275,000

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Intangible Assets Related to Accumulated Amortization and Goodwill (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Intangible Assets And Goodwill [Line Items]
Intangible assets, gross	$ 2,800	$ 2,800
Intangible assets, accumulated amortization	(2,600)	(2,500)
Intangible assets, Impairment
Intangible assets, net	200	300
Useful life	Indefinite life
Goodwill, gross	2,926	2,926
Goodwill, net	2,926	2,926
Patents
Intangible Assets And Goodwill [Line Items]
Intangible assets, gross	1,914	1,914
Intangible assets, accumulated amortization	(1,891)	(1,833)
Intangible assets, Impairment
Intangible assets, net	23	81
Trademarks
Intangible Assets And Goodwill [Line Items]
Useful life	6 years
Intangible assets, gross	69	69
Intangible assets, accumulated amortization	(69)	(69)
Intangible assets, Impairment
Intangible assets, net
Other Intangible Assets
Intangible Assets And Goodwill [Line Items]
Intangible assets, gross	817	817
Intangible assets, accumulated amortization	(640)	(598)
Intangible assets, Impairment
Intangible assets, net	$ 177	$ 219
Minimum | Patents
Intangible Assets And Goodwill [Line Items]
Useful life	4 years
Minimum | Other Intangible Assets
Intangible Assets And Goodwill [Line Items]
Useful life	4 years
Maximum | Patents
Intangible Assets And Goodwill [Line Items]
Useful life	10 years
Maximum | Other Intangible Assets
Intangible Assets And Goodwill [Line Items]
Useful life	6 years

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Lines Of Credit and Other Borrowings

9 Months Ended

Sep. 30, 2013

Lines of Credit and Other Borrowings

NOTE 8—LINES OF CREDIT AND OTHER BORROWINGS

Lines of Credit

During the year ended December31, 2012, the Company entered into and amended two revolving credit facility agreements with Comerica Bank (the “Credit Agreements”), which provide for borrowings against certain domestic accounts receivable and inventory, as set forth in the $4.0 million revolving credit facility agreement (the “Domestic Revolver”), and borrowings against certain export related accounts receivable and inventory, as set forth in the $4.0 million revolving credit facility agreement (the “Ex-Im Revolver”), for a combined aggregate commitment of borrowings up to $8.0 million. On May 7, 2013, the Company amended the Credit Agreements (“Amendment No. 2”) with Comerica Bank to increase the borrowing capacity under the Domestic Revolver from $4.0 million to $6.0 million, resulting in a combined aggregate commitment of borrowings up to $10.0 million. On September 6, 2013, the Company amended the Credit Agreements (“Amendment No. 3”) with Comerica Bank which decreased the borrowing capacity under the Domestic Revolver from $6.0 million to $4.0 million, resulting in a combined aggregate commitment of borrowings up to $8.0 million. The lines of credit mature on May1, 2014, at which date any remaining borrowings and accrued interest under the lines of credit become due and payable. As of September30, 2013, the Company had aggregate outstanding borrowings totaling approximately $5.5 million, which included $3.5 million under the Domestic Revolver and $2.0 million under the Ex-Im Revolver, as compared with aggregate outstanding borrowings totaling approximately $1.6 million as of December 31, 2012.

Lockbox arrangements under the revolving bank facilities provide that substantially all of the income generated is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of Comerica Bank. Cash is disbursed from Comerica Bank to the Company only after payment of the applicable debt service and principal. At September30, 2013 and December 31, 2012, there were no restricted cash amounts. The Company’s obligations are generally secured by substantially all of the Company’s assets now owned or hereinafter acquired.

The outstanding principal balance of the Credit Agreements bears interest at annual percentage rates equal to the daily prime rate, plus 2.00% for the Domestic Revolver and 1.50% for the Ex-Im Revolver. The daily prime rate is subject to a floor of the daily adjusting LIBOR rate plus 2.50% per annum, or if LIBOR is undeterminable, 2.50% per annum. The Company is also required to pay an unused commitment fee of 0.25% based on a portion of the undrawn lines of credit, payable quarterly in arrears. During the three and nine months ended September30, 2013, the Company incurred interest expense associated with the credit facilities of $181,000 and $381,000, respectively, including $71,000 and $152,000, respectively, of amortization of deferred debt issuance costs and $43,000 and $79,000, respectively, of amortization of the discount on lines of credit. During the three and nine months ended September 30, 2012, the Company incurred interest expense associated with the credit facilities of $98,000 and $133,000, respectively, including $38,000and $53,000, respectively, of amortization of deferred debt issuance costs and $18,000and $25,000, respectively, of amortization of the discount on lines of credit. Interest expense payable was approximately $9,000and $19,000at September30, 2013 and December 31, 2012, respectively, and was included in accrued liabilitiesin the accompanying consolidated financial statements.

The Credit Agreements require the Company to maintain compliance with certain financial and non-financial covenants, as defined therein. Amendment No. 3 resulted in certain new and amended financial covenants for the quarters ending September 30, 2013 and December 31, 2013. As of September 30, 2013, the Company was in compliance with these covenants with the exception of the earnings before income tax, depreciation, and amortization (“EBITDA”) covenant. On November 8, 2013, the Company amended the Credit Agreements (“Amendment No. 4”) with Comerica Bank to waive the noncompliance with the minimum EBITDA covenant,reset the EBITDA covenant for the quarter ending December 31, 2013, and establish covenants for the remaining term of the agreements. Amendment No. 4 includes liquidity ratio and liquid asset covenants, and an equity raise requirement that established March 1, 2014 as the latest date the Company is required to raise at least $3.0 million. Any future noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the amounts outstanding immediately due and payable. Management is considering alternative financing solutions to mitigate any future liquidity constraints this may impose on the Company.

During the year ended December31, 2012, the Company issued and amended a warrant to Comerica Bank (“2012 Comerica Warrant”) to purchase up to 80,000 shares of the Company’s common stock at an amended exercise price per share of $2.00. During the three months ended March 31, 2013, Comerica Bank exercised all80,000of the 2012 Comerica Warrant shares on a cashless basis pursuant to the Notice of Exercise resulting in a net issuance of 40,465 shares of common stock.

On September 6, 2013, the Company issued an additional warrant to Comerica Bank (the “September 2013 Comerica Warrant”) to purchase up to 100,000 shares of the Company’s common stock at an exercise price per share of $2.00. The September 2013 Comerica Warrant vests in four equal quarterly tranches commencing on December 31, 2013 and shares are exercisable once vested. The 2013 Comerica Warrant may be exercised with a cash payment from Comerica Bank, or, in lieu of a cash payment, Comerica Bank may convert the warrant shares into a number of shares, in whole or in part. These warrant shares will expire if unexercised on September 6, 2018. The fair value of the September 2013 Comerica Warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 5.00 years; volatility of 105.32%; annual dividend per share of $0.00; and risk-free interest rate of 1.77%; and resulted in an estimated fair value of $143,000 which was recorded as equity and resulted in a discount to the credit facilities at issuance. The discount is being amortized on a straight-line basis to interest expense over the remaining term of the Credit Agreements.

In connection with Amendment No. 4, the Company incurred an amendment fee of $10,000 and issued an additional warrant to Comerica Bank (the “November 2013 Comerica Warrant”) to purchase up to 100,000 shares of the Company’s common stock at an exercise price per share of $2.00. The November 2013 Comerica Warrant includes an accelerated vesting clause that may be triggered by certain events described therein, but otherwise vests in four equal quarterly tranches commencing on December 31, 2013, and shares are exercisable once vested. The November 2013 Comerica Warrant may be exercised with a cash payment from Comerica Bank, or, in lieu of a cash payment, Comerica Bank may convert the warrant shares into a number of shares, in whole or in part. These warrant shares will expire if unexercised on November 8, 2018.

Other Borrowings

The Company finances a portion of its annual insurance premiums which it pays in installments over nine months. As of September30, 2013 and December 31, 2012, $0and $379,000 at an annual interest rate of 3.0%, respectively, was outstanding under this arrangement and was included in accrued liabilitiesin the accompanying consolidated financial statements. The Company incurred interest expense associated with the financed insurance premiums of approximately $1,000 and $5,000 during the three and nine months ended September30, 2013, respectively, and approximately $0 and $4,000 during the three and nine months ended September30, 2012, respectively.

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Cash Proceeds Along with Fair Value Disclosures Related to grants Exercises and Vesting Options (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2013		Sep. 30, 2012		Sep. 30, 2013		Sep. 30, 2012
Schedule Of Cash Proceeds And Weighted Average Fair Values Of Stock Options [Line Items]
Proceeds from stock options exercised	$ 10		$ 33		$ 707		$ 455
Tax benefit related to stock options exercised		[1]		[1]		[1]		[1]
Intrinsic value of stock options exercised	6	[2]	0	[2]	860	[2]	91	[2]
Weighted-average fair value of options granted during period	$ 3.31		$ 1.02		$ 3.90		$ 1.55
Total fair value of shares vested during the period	$ 437		$ 398		$ 1,155		$ 1,410

[1] Excess tax benefits received related to stock option exercises are presented as financing cash inflows. The Company currently does not receive a tax benefit related to the exercise of stock options due to the Company’s net operating losses.

[2] The intrinsic value of stock options exercised is the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant.

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Commitments and Contingencies - Additional Information (Detail) (USD $)	Sep. 30, 2013
Commitment And Contingencies [Line Items]
Future minimum lease obligations, for the year ended December 31, 2013	$ 408,000
Future minimum lease obligations, for the year ended December 31, 2014	661,000
Future minimum lease obligations, for the year ended December 31, 2015	192,000
Change in control, if occurs, may require severance benefits payable	716,000
Purchase commitments pending	12,800,000
Accrued legal costs	$ 250,000

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Concentrations

9 Months Ended

Sep. 30, 2013

Concentrations

NOTE 11—CONCENTRATIONS

Revenue from laser systems, the Company’s core product, which includes the iPlus, MD Turbo, and Epic, comprised 66% and 68% of total net revenues for the three and nine months ended September30, 2013, respectively, and 74% and 73% of total net revenue, respectively, for the same periods in 2012. Revenue from consumables and other comprised 13% and 12% of total revenue for the same periods in 2013, and 11% and 12% for the same periods in 2012, respectively. Revenue from imaging systems comprised 8% and 8% of total net revenue for the same periods in 2013, and 5% and 5% for the same periods in 2012, respectively. Revenue from services comprised 13% and 12% of total net revenue for the same periods in 2013, and 10% and 10% for the same periods in 2012, respectively. Revenue from license fees and royalties comprised 0% and 0% of total net revenue for the same periods in 2013, and 0% and 0% for the same periods in 2012, respectively.

No individual customer represented more than 10% of the Company’s revenue in the three and nine months ended September30, 2013 and 2012.

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

As of September 30, 2013, onedistributor represented 10% of the Company’s accounts receivable.No individual customer represented more than 10% of the Company’s accounts receivable at December 31, 2012.

The Company currently purchases certain key components of its products from single suppliers. Although there are a limited number of manufacturers of these key components, management believes that other suppliers could provide similar key components on comparable terms. A change in suppliers, however, could cause delays in manufacturing and a possible loss of sales, which could adversely affect the Company’s results of operations.

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Accrued Liabilities and Deferred Revenue

9 Months Ended

Sep. 30, 2013

Accrued Liabilities and Deferred Revenue

NOTE 7—ACCRUED LIABILITIES AND DEFERRED REVENUE

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

	September30, 2013		December31, 2012
Payroll and benefits	$	1,703	$	2,326
Warranty accrual		1,330		1,699
Sales tax		166		640
Accrued professional services		940		502
Accrued insurance premium		—		751
Other		345		349
Accrued liabilities	$	4,484	$	6,267

Changes in the initial product warranty accrual, and the expenses incurred under the Company’s initial and extended warranties, for the three and nine months ended September30, 2013 and 2012 were as follows (in thousands):

	ThreeMonthsEnded September30,						Nine MonthsEnded September30,
	2013			2012			2013			2012
Initial warranty accrual, beginning balance	$	1,518		$	1,980		$	1,699		$	2,218
Provision for estimated warranty cost		69			337			429			711
Warranty expenditures		(257	)		(387	)		(798	)		(999	)
Initial warranty accrual, ending balance		1,330			1,930			1,330			1,930
Total warranty accrual, long-term		—			—			—			—
Total warranty accrual, current portion	$	1,330		$	1,930		$	1,330		$	1,930

Deferred revenue is comprised of the following (in thousands):

	September30, 2013			December31, 2012
Undelivered elements (training, installation, and product and support services)	$	1,661		$	1,723
Extended warranty contracts		1,524			1,506
Total deferred revenue		3,185			3,229
Less long-term amounts:
Extended warranty contracts		(1	)		(3	)
Total deferred revenue, long-term		(1	)		(3	)
Total deferred revenue, current portion	$	3,184		$	3,226

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2013

Recent Accounting Pronouncements

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASU’s”) to the FASB’s Accounting Standards Codification (“ASC”).

The Company considers the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to not be applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.

Newly Adopted Accounting Standards

In July 2012, the FASB simplified guidance for testing for impairment of indefinite-lived intangible assets other than goodwill. The changes are intended to reduce compliance costs. The revised guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the recently issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September15, 2012. The adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued guidance for reporting of amounts reclassified out of accumulated other comprehensive income. The revised guidance requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. The guidance is effective prospectively for reporting periods beginning after December15, 2012. The adoption did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Not Yet Adopted

In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon de-recognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The revised guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance is effective prospectively for reporting periods beginning after December15, 2013. Early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued guidance to address the diversity in practice related to the financial statement presentation of unrecognized tax benefits as either a reduction of a deferred tax asset or liability when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

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Subsequent Event - Additional Information (Detail) (Comerica Bank, USD $)	9 Months Ended
	Sep. 30, 2013
Comerica Bank
Subsequent Event [Line Items]
Credit Agreements amendment fee	$ 10,000

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Inventory - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Schedule Of Inventory [Line Items]
Provision for excess inventory and obsolete inventory	$ 2.7	$ 1.9

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Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2013

Basis of Presentation

Basis of Presentation

The unaudited consolidated financial statements include the accounts of BIOLASE, Inc. and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December31, 2012 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments and the elimination of all material intercompany transactions and balances, necessary to fairly present the information set forth therein. These unaudited, interim, consolidated financial statements do not include all the footnotes, presentations, and disclosures normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements. Certain amounts have been reclassified to conform to current period presentations.

The consolidated results of operations for the three and nine months ended September30, 2013 are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December31, 2012, included in the Company’s Annual Report on Form 10-K for the year ended December31, 2012 (“2012 Form 10-K”) filed with the Securities and Exchange Commission on March15, 2013.

Use of Estimates

Use of Estimates

The preparation of these consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates in these consolidated financial statements include allowances on accounts receivable, inventory, and deferred taxes, as well as estimates for accrued warranty expenses, indefinite-lived intangible assets, and the ability of goodwill to be realized, revenue deferrals for multiple element arrangements, effects of stock-based compensation and warrants, contingent liabilities, and the provision or benefit for income taxes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.

Update to Significant Accounting Policies

Update to Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies which are described in the Company’s 2012 Form 10-K, except as noted below. See Note 2 – Recent Accounting Pronouncements for adoption of updated authoritative guidance.

Excise Tax

Excise Tax

Commencing January1, 2013, certain of the Company’s product sales are subject to the newly enacted medical device excise tax. The Company has included such taxes separately as a component of operating expense.

Income Tax

Income Tax

The income tax provision for the three and nine months ended September 30, 2013 was calculated using the discrete year-to-date method, which management determined to be more appropriate than the annual effective rate method which was used to calculate the income tax provision for the quarter ended March 31, 2013. See Note 12 – Income Taxes for additional disclosures related to the Company’s income tax.

Fair Value of Financial Instruments

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.

Liquidity and Management's Plans

Liquidity and Management’s Plans

The Company suffered recurring losses from operations during the three years ended December31, 2012. The Company also incurred a loss from operations, a net loss, and used cash in operating activities for the three and nine months ended September 30, 2013. The available borrowing capacity on our lines of credit with Comerica Bank and the net proceeds from the below mentioned equity offering have been principal sources of liquidity during the nine months ended September 30, 2013. These credit facilities were amended in November 2013, as discussed further below, and expire May 1, 2014. At September30, 2013, the Company had approximately $5.0 million in working capital. The Company’s principal sources of liquidity at September30, 2013 consisted of approximately $4.2 million in cash and cash equivalents, $10.8 million of net accounts receivable, and $2.5 million of available borrowings under two revolving credit facility agreements.

The Company’s ability to meet its obligations in the ordinary course of business is dependent upon the Company’s ability to sell its products directly to end-users and through distributors, establish profitable operations through increased sales, decrease expenses, and to generate cash from operations or obtain additional funds when needed.If the Company is unsuccessful in its efforts to improve its financial position, there may be substantial doubt about its ability to adequately fund the minimum requirements of its business.

The Company intends to improve its financial condition and ultimately improve its financial results by increasing revenues through expansion of its product offerings, continuing to develop its direct sales force and distributor relationships both domestically and internationally, forming strategic arrangements within the dental and medical industries, educating dental and medical patients as to the benefits of its advanced medical technologies, and continuing cost reduction initiatives.

Management expects that the working capital and future borrowings available under the lines of credit should be sufficient to fund the minimum requirements of the Company; however, the Company cannot guarantee that it will be able to increase sales, reduce expenses, or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. Management will continue to monitor the liquidity of the Company and is prepared to implement cash saving measures or potentially issue debt or equity securities in the event that its plans to grow revenue do not materialize in the timeline anticipated by management.

Sale of common stock

On July 26, 2013, the Company filed a registration statement on Form S-3, File No. 333-190158 (“2013 Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register an indeterminate number of shares of common stock, preferred stock, and warrants with a total offering price not to exceed $30 million. The Company subsequently amended the 2013 Registration Statement and lowered the total not to exceed offering price to $5 million. The 2013 Registration Statement, as amended, was declared effective by the SEC on September 19, 2013. On September 23, 2013, the Company entered into an agreement with Northland Securities, Inc. (“Northland”), pursuant to which Northland acted as placement agent in connection with the sale of shares of the Company’s common stock in a registered direct offering (the “September 2013 Registered Direct Offering”) pursuant to the 2013 Registration Statement and paid Northland a fee of 5.0% of the aggregate gross proceeds in connection therewith. On September 23, 2013, the Company entered into a subscription agreement (“2013 Subscription Agreement”) with Camber Capital Management, LLC, pursuant to which the Company agreed to sell 2,688,172 shares of its common stock at a price per share of $1.86 for gross proceeds of $5 million. The net proceeds to the Company were $4.6 million, after deducting associated costs of $408,000, which included Northland’s fee. The shares of common stock sold in connection with the 2013 Subscription Agreement were issued pursuant to a prospectus supplement to the 2013 Registration Statement, which was filed with the SEC September 26, 2013.

Lines of credit

On September 6, 2013 and November 8, 2013, the Company amended its lines of credit with Comerica Bank. The amendments waive noncompliance with certain financial covenants, subject to additional requirements, and establish future covenants, restrictions, and penalties. The amendment on November 8, 2013 includes liquidity ratio and liquid asset covenants, and an equity raise requirement that established March 1, 2014 as the latest date by which the Company is required to raise at least $3.0 million. Any future noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the amounts outstanding immediately due and payable. Management is considering alternative financing solutions, including potentially issuing alternative debt securities, to mitigate any future liquidity constraints these covenants and restrictions may impose on the Company. Further discussion of the amendments is included in Note 8 – Lines of Credit and Other Borrowings.

Newly Adopted Accounting Standards

Newly Adopted Accounting Standards

In July 2012, the FASB simplified guidance for testing for impairment of indefinite-lived intangible assets other than goodwill. The changes are intended to reduce compliance costs. The revised guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the recently issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September15, 2012. The adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued guidance for reporting of amounts reclassified out of accumulated other comprehensive income. The revised guidance requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. The guidance is effective prospectively for reporting periods beginning after December15, 2012. The adoption did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Not Yet Adopted

New Accounting Standards Not Yet Adopted

In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon de-recognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The revised guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance is effective prospectively for reporting periods beginning after December15, 2013. Early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued guidance to address the diversity in practice related to the financial statement presentation of unrecognized tax benefits as either a reduction of a deferred tax asset or liability when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

Inventory

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

Commitments and Contingencies

Litigation

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

Income Tax Uncertainties

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has elected to classify interest and penalties as a component of its income tax provision. With respect to the liability for unrecognized tax benefits, including related estimates of penalties and interest, the Company recorded increases of $0 and $1,000 for the three and nine months ended September 30, 2013, respectively, and $2,000 and $4,000 for the three and nine months ended September 30, 2012, respectively.

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Segment Information

9 Months Ended

Sep. 30, 2013

Segment Information

NOTE 10—SEGMENT INFORMATION

The Company currently operates in a single reportable segment. For the three and nine months endedSeptember 30, 2013, sales in the United States accounted for approximately 62% of net revenue and international sales accounted for approximately 38% of net revenue. For the three and nine months endedSeptember 30, 2012, sales in the United States accounted for approximately 68% of net revenue and international sales accounted for approximately 32%of net revenue.

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

	ThreeMonthsEnded September30,				Nine Months Ended September30,
	2013		2012		2013		2012
United States	$	7,602	$	9,433	$	25,735	$	25,842
International		4,743		4,348		15,454		12,434
	$	12,345	$	13,781	$	41,189	$	38,276

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

Long-lived assets located outside of the United States at our foreign subsidiaries totaled $442,000 and $412,000 as of September 30, 2013 and December31, 2012, respectively.

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Property, Plant, and Equipment (Tables)

9 Months Ended

Sep. 30, 2013

Summary of Property, Plant and Equipment

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

	September30, 2013			December31, 2012
Land	$	196			$	191
Building		251				246
Leasehold improvements		1,207				1,193
Equipment and computers		5,824				5,219
Furniture and fixtures		1,049				1,046
Construction in progress		7				132
		8,534				8,027
Accumulated depreciation and amortization		(6,823	)			(6,518	)
Property, plant, and equipment, net	$	1,711			$	1,509

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Stock-Based Awards and Per Share Information (Tables)

9 Months Ended

Sep. 30, 2013

Summary of Income Statement Classification of Compensation Expense

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

	ThreeMonthsEnded September30,				NineMonthsEnded September30,
	2013		2012		2013		2012
Cost of revenue	$	73	$	67	$	227	$	183
Sales and marketing		154		134		443		375
General and administrative		225		103		459		586
Engineering and development		39		53		110		136
	$	491	$	357	$	1,239	$	1,280

Assumptions on Estimation of Stock Option Fair Values

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

	ThreeMonthsEnded September30,								NineMonthsEnded September30,
	2013			2012				2013					2012
Expected term (in years)		3.70			3.70					3.66				3.80
Volatility		83	%		97	%				83	%			101	%
Annual dividend per share	$	0.00		$	0.00		$			0.00		$		0.00
Risk-free interest rate		1.54	%		0.68	%				0.99	%			0.81	%

Summary of Option Activity Under Stock Option Plan

A summary of option activity under the Company’s stock option plan for the nine months ended September30, 2013 is as follows:

	Shares				Weighted average exerciseprice		Weightedaverage remaining contractual term (years)			Aggregate intrinsic value(1)
Options outstanding at December31, 2012		3,860,000		$		3.48
Plus: Options granted		1,516,000		$		3.90
Less: Options exercised		(342,000	)	$		2.07
Options forfeited, canceled, or expired		(660,000	)	$		4.34
Options outstanding at September30, 2013		4,374,000		$		3.55		4.02	$		171,000
Options exercisable at September30, 2013		2,480,000		$		3.57		3.39	$		166,000
Vested options expired during the quarter ended  September30, 2013		66,000		$		10.28
(1) The intrinsic value calculation does not include negative values. This can occur when the fair market value on the reporting date is less than the exercise price of the grant.

Cash Proceeds Along with Fair Value Disclosures Related to Grants, Exercises, and Vesting Options

Cash proceeds along with fair value disclosures related to grants, exercises, and vesting options are provided in the following table (in thousands, except per share amounts):

	ThreeMonthsEnded September30,					NineMonthsEnded September30,
	2013		2012			2013			2012
Proceeds from stock options exercised	$	10	$	33	$		707	$		455
Tax benefit related to stock options exercised (1)		N/A		N/A			N/A			N/A
Intrinsic value of stock options exercised (2)	$	6	$	0	$		860	$		91
Weighted-average fair value of options granted during period	$	3.31	$	1.02	$		3.90	$		1.55
Total fair value of shares vested during the period	$	437	$	398	$		1,155	$		1,410
(1) Excess tax benefits received related to stock option exercises are presented as financing cash inflows. The Company currently does not receive a tax benefit related to the exercise of stock options due to the Company’s net operating losses.
(2) The intrinsic value of stock options exercised is the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Oct. 18, 2013
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3
Trading Symbol	BIOL
Entity Registrant Name	BIOLASE, INC
Entity Central Index Key	0000811240
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		34,851,648

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Inventory (Tables)

9 Months Ended

Sep. 30, 2013

Components of Inventory

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

	September30, 2013		December31, 2012
Raw materials	$	3,474		$	4,017
Work-in-process		1,752			1,949
Finished goods		6,519			5,176
Inventory, net	$	11,745		$	11,142