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~~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):

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,~~April 30, 2014, was ~~34,851,648~~37,626,535 shares.

	September 30, 2013			December 31, 2012			March 31, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	4,151		$	2,543		$	1,835		$	1,440
Accounts receivable, less allowance of $554 in 2013 and $304 in 2012		10,802			11,680
Accounts receivable, less allowance of $807 in 2014 and $573 in 2013								8,556			11,127
Inventory, net		11,745			11,142			11,891			11,378
Prepaid expenses and other current assets		1,062			1,552			1,288			1,909
Total current assets		27,760			26,917			23,570			25,854

Property, plant, and equipment, net		1,711			1,509			1,749			1,826
Intangible assets, net		200			300			165			183
Goodwill		2,926			2,926			2,926			2,926
Deferred tax asset		16			16
Other assets		246			305			247			249
Total assets	$	32,859		$	31,973		$	28,657		$	31,038

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	5,534		$	1,637		$	2,878		$	4,633
Accounts payable		9,346			7,663			7,776			8,560
Accrued liabilities		4,484			6,267			4,941			4,997
Customer deposits		174			582			150			285
Deferred revenue, current portion		3,184			3,226			3,275			3,464
Total current liabilities		22,722			19,375			19,020			21,939

Deferred tax liabilities		602			663
Other liabilities, long-term		34			141
Deferred income taxes								632			617
Deferred revenue, long-term								—			1
Total liabilities		23,358			20,179			19,652			22,557

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
Commitments and contingencies, and subsequent events (Notes 8, 9, and 13)
Stockholders’ equity:
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, 39,590 and 37,336 shares issued in 2014 and 2013, respectively; 37,626 and 35,372 shares outstanding in 2014 and 2013, respectively.								40			38
Additional paid-in capital		147,676			140,747			154,274			148,866
Accumulated other comprehensive loss		(297	)		(320	)		(273	)		(274	)
Accumulated deficit		(121,516	)		(112,268	)		(128,637	)		(123,750	)
		25,900			28,193			25,404			24,880
Treasury stock (cost of 1,964 shares repurchased)		(16,399	)		(16,399	)		(16,399	)		(16,399	)
Total stockholders’ equity		9,501			11,794
Total Stockholders’ equity								9,005			8,481
Total liabilities and stockholders’ equity	$	32,859		$	31,973		$	28,657		$	31,038

~~CONSOLIDATEDSTATEMENTS~~CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
Products and services revenue	$	12,311		$	13,710		$	41,008		$	38,147
Product and services revenue													$	11,479		$	14,489
License fees and royalty revenue		34			71			181			129			39			108
Net revenue		12,345			13,781			41,189			38,276			11,518			14,597
Cost of revenue		8,516			7,500			26,005			20,688			7,577			8,803
Gross profit		3,829			6,281			15,184			17,588			3,941			5,794
Operating expenses:
Sales and marketing		4,164			3,635			13,554			11,383			4,455			5,252
General and administrative		2,460			1,839			7,305			6,271			3,083			2,247
Engineering and development		977			1,195			2,987			3,657			973			1,005
Excise tax		89			—			308			—			65			107
Total operating expenses		7,690			6,669			24,154			21,311			8,576			8,611
Loss from operations		(3,861	)		(388	)		(8,970	)		(3,723	)		(4,635	)		(2,817	)
Gain (loss) on foreign currency transactions		16			(28	)		(74	)		(137	)		2			(99	)
Interest expense, net		(182	)		(98	)		(386	)		(140	)		(230	)		(87	)
Non-operating loss, net		(166	)		(126	)		(460	)		(277	)		(228	)		(186	)
Loss before income tax (benefit) provision		(4,027	)		(514	)		(9,430	)		(4,000	)
Income tax (benefit) provision		22			34			(182	)		97
Loss before income tax provision (benefit)														(4,863	)		(3,003	)
Income tax provision (benefit)														24			(372	)
Net loss		(4,049	)		(548	)		(9,248	)		(4,097	)		(4,887	)		(2,631	)

Other comprehensive income (loss) items:
Foreign currency translation adjustments		88			38			23			(14	)
Other comprehensive (loss) income items:
Foreign currency translation adjustment														1			(56	)
Comprehensive loss	$	(3,961	)	$	(510	)	$	(9,225	)	$	(4,111	)	$	(4,886	)	$	(2,687	)

Net loss per share:
Basic	$	(0.13	)	$	(0.02	)	$	(0.29	)	$	(0.13	)	$	(0.13	)	$	(0.08	)
Diluted	$	(0.13	)	$	(0.02	)	$	(0.29	)	$	(0.13	)	$	(0.13	)	$	(0.08	)
Shares used in the calculation of net loss per share:
Basic		32,367			31,890			32,062			31,803			36,455			32,167
Diluted		32,367			31,890			32,062			31,803			36,455			32,167

	Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2014			2013
Cash Flows From Operating Activities:
Cash Flows from Operating Activities:
Net loss	$	(9,248	)	$	(4,097	)	$	(4,887	)	$	(2,631	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation and amortization		439			373			175			145
(Gain) loss on disposal of property, plant, and equipment, net								(1	)		—
Provision for bad debts		270			193			268			(11	)
Provision for inventory excess and obsolescence		1,000			—			261			—
Amortization of discounts on lines of credit		79			25			120			18
Amortization of debt issuance costs		152			53			57			38
Stock-based compensation		1,239			1,280			310			368
Other equity instruments compensation		64			23			—			64
Other non-cash compensation		187			187			61			62
Deferred income taxes		(61	)		—			15			(107	)
Incurred but unpaid interest expense								12			—
Changes in operating assets and liabilities:
Accounts receivable		608			(1,603	)		2,301			1,047
Inventory		(1,671	)		112			(774	)		(779	)
Prepaid expenses and other assets		59			599			2			23
Customer deposits		(408	)		87			(135	)		(304	)
Accounts payable and accrued liabilities		240			(1,593	)		(392	)		(659	)
Deferred revenue		(43	)		834			(190	)		(96	)
Net cash and cash equivalents used in operating activities		(7,094	)		(3,527	)		(2,797	)		(2,822	)
Cash Flows From Investing Activities:
Cash Flows from Investing Activities:
Additions to property, plant, and equipment		(464	)		(715	)		(86	)		(139	)
Proceeds from disposal of long-lived assets		—			124
Proceeds from disposal of property, plant, and equipment								1			—
Purchased other intangible assets		(10	)		—			—			(10	)
Net cash and cash equivalents used in investing activities		(474	)		(591	)		(85	)		(149	)
Cash Flows From Financing Activities:
Cash Flows from Financing Activities:
Borrowings under lines of credit		27,300			9,500			7,570			8,350
Payments under lines of credit		(23,403	)		(7,311	)		(9,325	)		(6,726	)
Payment of debt issuance costs		(34	)		(304	)
Payment of stock repurchase costs		—			(235	)
Payment of debt issue costs								(10	)		—
Proceeds from equity offering, net of expenses		4,592			—			4,793			—
Proceeds from exercise of stock options and warrants		707			461
Proceeds from exercise of stock options								248			76
Net cash and cash equivalents provided by financing activities		9,162			2,111			3,276			1,700
Effect of exchange rate changes		14			(5	)		1			(43	)
Change in cash and cash equivalents		1,608			(2,012	)		395			(1,314	)
Cash and cash equivalents, beginning of period		2,543			3,307			1,440			2,543
Cash and cash equivalents, end of period	$	4,151		$	1,295		$	1,835		$	1,229

Supplemental cash flow disclosures:
Interest paid	$	165		$	45
Supplemental cash flow disclosure:
Interest Paid							$	67		$	31
Income taxes paid	$	51		$	51		$	5		$	45

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~~dental imaging equipment, including cone beam digital x-rays and CAD/CAM intra-oral ~~scanners;~~scanners, and in-office, chair-side milling machines and 3-D printers. The Company’s products ~~that~~ are focused on technologies that advance the practice of dentistry and medicine.

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~~2013 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~~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~~March 31, 2014 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,~~2013, included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013 (“~~2012~~2013 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March ~~15,~~17, 2014.

The Company suffered recurring losses from operations during the three years ended December 31, 2013. The Company also incurred a loss from operations, a net loss, and used cash in operating activities for the three months ended March 31, 2014. The available borrowing capacity on the lines of credit with Comerica Bank and the net proceeds from the below mentioned equity offering have been the principal sources of liquidity during the three months ended March 31, 2014. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates that the Company will continue in operation for the next twelve months and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The financial statements do not include any adjustments to reflect the possible future effects of recoverability and classifications of assets or the amounts and classifications of liabilities that may result from the Company’s inability to continue as a going concern.

At March 31, 2014, the Company had approximately $4.6 million in working capital. The Company’s principal sources of liquidity at March 31, 2014 consisted of approximately $1.8 million in cash and cash equivalents, $8.6 million of net accounts receivable, and approximately $2.1 million of available borrowings under two revolving credit facility agreements with Comerica Bank. The credit facilities expired May 1, 2014, and the Company is considering alternative solutions, including potentially entering a new line of credit arrangement and/or issuing equity or debt securities, to mitigate any future liquidity constraints these covenants, restrictions, and maturities may impose on it.

The Company has two revolving credit facility agreements with Comerica Bank that require the Company to maintain compliance with certain monthly financial and non-financial covenants, as defined therein. Any noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the amounts outstanding immediately due and payable. On March 4, 2014, the Company received a waiver from Comerica Bank (the “March Waiver”) to waive noncompliance with certain financial and nonfinancial covenants as of January 31, 2014 and December 31, 2013. In connection with the March Waiver, Comerica Bank reduced the total aggregate available borrowings on the lines of credit to $ 5.0 million. On April 10, 2014, the Company and Comerica Bank finalized a forbearance agreement which addressed the Company’s non-compliance with a financial covenant at February 28, 2014 and reduced the total aggregate available borrowings on the lines of credit to $4 million. The Company was not in compliance with a financial covenant at March 31, 2014 and did not repay the lines of credit in full on May 1, 2014, at which date any remaining borrowings and accrued interest under the lines of credit became due and payable. As a result, on May 5, 2014, the Company and Comerica Bank agreed to Amendment No. 1 to Forbearance Agreement (“Amendment No. 1”) which extended the end of the forbearance period from May 1, 2014 to June 1, 2014. In connection with Amendment No. 1, the maturity date of the revolving lines of credit was extended to June 1, 2014 and the Company paid a fee of $10,000.

In order for the Company to continue operations and be able to discharge its liabilities and commitments in the normal course of business, the Company must sell its products directly to end-users and through distributors, establish profitable operations through increased sales, decrease expenses, and generate cash from operations or obtain additional funds when needed. 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 expand and 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 reducing expenses.

On February 10, 2014, the Company entered into a Subscription Agreement with Oracle Partners L.P., Oracle Institutional Partners, L.P., and Oracle Ten Fund Master L.P., under which the Company offered an aggregate of 1,945,525 unregistered shares of common stock in a private placement at a price of $2.57 per share. Gross proceeds from the sale totaled $5 million, and net proceeds, after offering expenses of approximately $208,000, totaled approximately $4.8 million. The Company used the proceeds to repay the Company’s lines of credit and for working capital and general corporate purposes.

In February 2014, the Company streamlined operations and reduced payroll and payroll related expenses by approximately $1.3 million, net, on an annualized basis.The Company is also working on rationalizing certain of its marketing and advertising activities. We expect that we will begin to realize the impact of these cost saving measures in the quarter ending June 30, 2014.

On January 17, 2014, the Company filed a universal shelf registration statement (the “January 2014 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 $12.5 million. The January 2014 Registration Statement was declared effective by the SEC on January 29, 2014.

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

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.

The Company cannot guarantee that it will be able to increase sales, reduce expenses, or obtain additional funds when needed. If the Company is unable to increase sales, reduce expenses, or raise sufficient additional capital, it may be unable to continue to fund its operations, develop its products, or realize value from its assets and discharge its liabilities in the normal course of business. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.

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,~~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.

~~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. SeeNote 2 – Recent Accounting Pronouncements~~ ~~for adoption of updated authoritative guidance.~~

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.

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

The Company’s financial instruments, consisting of cash and cash equivalents, and 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.

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.

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.

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.

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~~.

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.

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.

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~~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~~The adoption of this guidance ~~will~~did 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.8

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~~March 31, 2014, 2,957,000 shares of common stock have been issued pursuant to options that were exercised, ~~4,374,000~~4,400,000 shares of common stock have been reserved for options that are outstanding, and ~~536,000~~393,000 shares of common stock remain available for future grant.

Compensation cost related to stock options recognized in operating results totaled approximately ~~$491,000~~$310,000 and ~~$357,000~~$368,000 for the three months ended ~~September 30,~~March 31, 2014 and 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)~~$(0.01) and $(0.01) per basic and diluted share, ~~and $(0.04) and $(0.04) per basic and diluted share,~~ respectively. At ~~September 30, 2013,~~March 31, 2014, the Company had approximately ~~$2.7~~$2.2 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,				Three Months Ended March 31,
	2013		2012		2013		2012		2014		2013
Cost of revenue	$	73	$	67	$	227	$	183	$	46	$	80
Sales and marketing		154		134		443		375		125		139
General and administrative		225		103		459		586		115		115
Engineering and development		39		53		110		136		24		34
	$	491	$	357	$	1,239	$	1,280	$	310	$	368

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,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
Expected term (in years)		3.70			3.70			3.66			3.80
Expected term														3.6 years			3.7 years
Volatility		83	%		97	%		83	%		101	%		98.37	%		92.70	%
Annual dividend per share	$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00
Risk-free interest rate		1.54	%		0.68	%		0.99	%		0.81	%		1.65	%		0.80	%

A summary of option activity under the Company’s stock option plan for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 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.

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value(1)
Options outstanding at December 31, 2013		4,441,000		$	3.51		3.83	$	1,574,000
Granted at fair market value		23,000		$	2.99
Granted at above fair market value		290,000		$	3.06
Exercised		(116,000	)	$	2.14
Forfeited, cancelled, or expired		(244,000	)	$	3.71
Options outstanding at March 31, 2014		4,394,000		$	3.50		3.62	$	717,000
Options exercisable at March 31, 2014		2,666 ,000		$	3.50		2.91	$	678,000
Vested options expired during the quarter ended March 31, 2014		85,000		$	5.13

~~On June 6, 2013,~~(1) The intrinsic value calculation does not include negative values. This can occur when 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 anfair market value on the reporting date is less than the 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.~~the grant.

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.

	Three Months Ended March 31,
	2014		2013
Proceeds from stock options exercised	$	248	$	76
Tax benefit related to stock options exercised (1)		N/A		N/A
Intrinsic value of stock options exercised (2)	$	82	$	23
Weighted-average fair value of options granted during period	$	1.86	$	1.84
Total fair value of shares vested during the period	$	346	$	314

~~On July 12, 2013, the Company entered into a strategic agreement with Valam, Inc. (“Valam”)~~(1) Excess tax benefits received related to ~~develop, market, and sell office-based laser systems to otolaryngologists (also known~~stock option exercises are presented 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 afinancing 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.inflows. The Company ~~recorded stock-based compensation expense of less than $1,000~~currently does not receive a tax benefit related to the ~~Sun Dental Warrant~~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.

The Company issues warrants to acquire shares of its common stock underlying such warrants as approved by its Board of Directors (the “Board”).

No warrants were exercised during the ~~nine~~three 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~~31, 2014. Warrants issued in connection with the lines of credit with Comerica Bank ~~was~~were exercised during the ~~nine~~three months ended ~~September 30,~~March 31, 2013. ~~In connection with amendments to the lines of credit, the Company issued additional warrants to Comerica Bank during September 2013 and November 2013.~~ SeeNote 8 – Lines of Credit and Other Borrowingsfor further discussion.

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~~the effect of potentially dilutive securities.

Outstanding stock options and warrants to purchase ~~6,022,000~~5,998,000 shares were not included in the computation of diluted loss per share for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 as a result of their anti-dilutive effect. For the same ~~2012 periods,~~2013 period, anti-dilutive outstanding stock options and warrants to purchase ~~4,504,000~~5,060,000 shares were not included in the computation of diluted loss per share.

~~The Company intends to pay~~In February 2014, the Board announced a 2% annual stock dividend policy for 2014, payable in quarterly installments, ~~for the year ending December 31, 2013.~~ and declared a one-half percent stock dividend payable March 28, 2014, to stockholders of record on March 14, 2014.

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~~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.

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		March 31, 2014		December 31, 2013
Raw materials	$	3,474	$	4,017	$	2,850	$	3,094
Work-in-process		1,752		1,949		1,759		1,727
Finished goods		6,519		5,176		7,282		6,557
Inventory, net	$	11,745	$	11,142	$	11,891	$	11,378

Inventory is net of a provision for excess and obsolete inventory totaling ~~$2.7~~$3.0 million and ~~$1.9~~$2.8 million as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, respectively.

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

	September 30, 2013			December 31, 2012			March 31, 2014			December 31, 2013
Land	$	196		$	191
Building		251			246		$	256		$	256
Leasehold improvements		1,207			1,193			1,207			1,207
Equipment and computers		5,824			5,219			6,075			6,078
Furniture and fixtures		1,049			1,046			1,049			1,049
Construction in progress		7			132			83			8
		8,534			8,027			8,670			8,598
Accumulated depreciation and amortization		(6,823	)		(6,518	)		(7,120	)		(6,971	)
								1,550			1,627
Land								199			199
Property, plant, and equipment, net	$	1,711		$	1,509		$	1,749		$	1,826

Depreciation and amortization expense related to property, plant, and equipment totaled ~~$124,000~~$157,000 and ~~$339,000~~$99,000 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013, ~~respectively, and $93,000 and $275,000 for the three and nine months ended September 30, 2012,~~ respectively.

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. No events have occurred since June 30, 2013, that would trigger further impairment testing of the Company’s intangible assets and goodwill.

Amortization expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013 totaled ~~$17,000~~$18,000 and ~~$100,000, respectively, and $33,000 and $98,000, respectively, for the same periods in 2012.~~$46,000, respectively. Other intangible assets primarily include acquired customer lists and non-compete agreements.

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

	As of September 30, 2013									As of December 31, 2012									As of March 31, 2014									As of December 31, 2013
	Gross		Accumulated Amortization			Impairment		Net		Gross		Accumulated Amortization			Impairment		Net		Gross		Accumulated Amortization			Impairment		Net		Gross		Accumulated Amortization			Impairment		Net
Patents (4-10 years)	$	1,914	$	(1,891	)	$	—	$	23	$	1,914	$	(1,833	)	$	—	$	81	$	1,914	$	(1,898	)	$	—	$	16	$	1,914	$	(1,895	)	$	—	$	19
Trademarks (6 years)		69		(69	)		—		—		69		(69	)		—		—		69		(69	)		—		—		69		(69	)		—		—
Other (4 to 6 years)		817		(640	)		—		177		817		(598	)		—		219		817		(668	)		—		149		817		(653	)		—		164
Total	$	2,800	$	(2,600	)	$	—	$	200	$	2,800	$	(2,500	)	$	—	$	300	$	2,800	$	(2,635	)	$	—	$	165	$	2,800	$	(2,617	)	$	—	$	183
Goodwill (Indefinite life)	$	2,926						$	2,926	$	2,926						$	2,926	$	2,926						$	2,926	$	2,926						$	2,926

	September 30, 2013		December 31, 2012		March 31, 2014		December 31, 2013
Payroll and benefits	$	1,703	$	2,326	$	1,594	$	1,898
Warranty accrual		1,330		1,699
Sales tax		166		640
Warranty accrual, current portion						1,025		1,096
Sales and excise tax						163		322
Accrued professional services		940		502		1,366		912
Accrued insurance premium		—		751		276		428
Other		345		349		517		341
Accrued liabilities	$	4,484	$	6,267
Total accrued liabilities					$	4,941	$	4,997

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,~~March 31, 2014 and 2013 ~~and 2012~~ were as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
Initial warranty accrual, beginning balance	$	1,518		$	1,980		$	1,699		$	2,218		$	1,096		$	1,699
Provision for estimated warranty cost		69			337			429			711			148			337
Warranty expenditures		(257	)		(387	)		(798	)		(999	)		(219	)		(281	)
Initial warranty accrual, ending balance		1,330			1,930			1,330			1,930
														1,025			1,755
Total warranty accrual, long-term		—			—			—			—			—			—
Total warranty accrual, current portion	$	1,330		$	1,930		$	1,330		$	1,930		$	1,025		$	1,755

~~During the year ended December 31,~~On May 24, 2012, the Company entered into ~~and amended~~ two revolving credit facility agreements with Comerica Bank (the “Credit Agreements”), as amended, 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 Credit Agreements require the Company ~~amended~~to maintain compliance with certain monthly financial and non-financial covenants, as defined therein. Any noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the ~~Credit Agreements (“Amendment No. 2”~~amounts outstanding immediately due and payable. On March 4, 2014, the Company received a waiver from Comerica Bank to waive noncompliance with certain financial and nonfinancial covenants as of January 31, 2014 and December 31, 2013. In connection with this waiver, the Company incurred a fee of $10,000 and Comerica Bank reduced the total aggregate available borrowings on the lines of credit to $5.0 million. The Company was not in compliance with a financial covenant as of February 28, 2014 and, as such, entered into a forbearance agreement (the “Forbearance Agreement”) with Comerica Bank ~~to increase~~on April 10, 2014. The Company paid a fee of $10,000 in connection with 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”) withForbearance Agreement and Comerica Bank ~~which decreased~~reduced the ~~borrowing capacity under the Domestic Revolver from $6.0 million~~total aggregate available borrowings to $4.0 ~~million, resulting~~million.

The Company was not in compliance with a ~~combined aggregate commitment of borrowings up to $8.0 million. The lines of credit mature on May 1,~~financial covenant at March 31, 2014 ~~at which date any remaining borrowings~~ and ~~accrued interest under~~did not repay the lines of credit ~~become due~~in full on the maturity date of May 1, 2014. As a result, on May 5, 2014, the Company and ~~payable.~~Comerica Bank agreed to Amendment No. 1 to the Forbearance Agreement (“Amendment No. 1”) which extended the end of the forbearance period from May 1, 2014 to June 1, 2014. In connection with Amendment No. 1, the maturity date of the revolving lines of credit was extended to June 1, 2014 and the Company paid an administrative fee of $10,000. As of ~~September 30, 2013,~~March 31, 2014, the Company had ~~aggregate~~ outstanding borrowings totaling approximately ~~$5.5~~$2.9 million, which included ~~$3.5~~$0.8 million under the Domestic Revolver and ~~$2.0~~$2.1 million under the Ex-Im Revolver.

The outstanding principal balances of the Credit Agreements bear interest at annual percentage rates equal to the daily prime rate, plus 2.00% for the Domestic Revolver ~~as compared~~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 months ended March 31, 2014 and 2013, the Company incurred $229,000 and $84,000, respectively, of interest expense associated with ~~aggregate outstanding borrowings totaling~~the credit facilities, including $57,000 and $38,000, respectively, of amortization of deferred debt issuance costs and $120,000 and $18,000, respectively, of amortization of the discount on lines of credit. Interest expense payable totaled approximately ~~$1.6 million as of~~$12,000 and $20,000 at March 31, 2014 and December 31, ~~2012.~~2013, respectively, and was included in accrued liabilities in the accompanying consolidated financial statements.

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~~March 31, 2014 and December 31, ~~2012,~~2013, 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~~quarters ended March 31, 2014 and ~~nine months ended September 30,~~ 2013, the Company incurred ~~interest expense~~$10,000 and $0, respectively, of commitment fees and legal costs associated with the ~~credit facilities of $181,000~~various waivers and ~~$381,000, respectively, including $71,000~~amendments. Commitment fees and ~~$152,000, respectively, of amortization of deferred debt issuance~~legal 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 acquiring and maintaining the credit facilities ~~of $98,000~~are capitalized 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.

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 toas 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.

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~~March 31, ~~2012, $0 and $379,000~~2014, $123,000 was outstanding under this arrangement at an annual interest rate of ~~3.0%~~2.85%, ~~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~~$2,000 during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013, ~~respectively, and approximately $0 and $4,000 during the three and nine months ended September 30, 2012,~~ respectively.

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,~~$516,000 and ~~$192,000,~~$204,000, respectively.

Certain members of management are entitled to severance benefits payable upon termination following a change in control, which would approximate ~~$716,000~~$567,000 at ~~September 30, 2013.~~March 31, 2014. 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.~~March 31, 2014.

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~~$12.2 million of purchase commitments as of ~~September 30, 2013,~~March 31, 2014, 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.

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~~actual outcome of such matters could differ materially from management’s estimates.

On August 23, 2013, ~~and August 26, 2013, two putative securities~~a purported class action ~~lawsuits were~~lawsuit entitled Brady Adams v. Biolase, Inc., et al., Case No. 13-CV-1300 JST (FFMx) was filed ~~against the Company and certain of its officers and directors~~ in the United States District Court for the Central District of California ~~one~~against BIOLASE and its current executive officers Federico Pignatelli and Frederick D. Furry. On August 26, 2013, a purported class action lawsuit entitled Ralph Divizio v. Biolase, Inc., et al., Case No. 13-CV-1317 DMG (MRWx) was filed in the same court against BIOLASE, Messrs. Pignatelli and Furry, and current executive officer Alexander K. Arrow. Each of ~~which seeks unspecified damages on behalf~~the lawsuits alleges violations 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~~asserts causes of action against the ~~putative class periods. On October 22, 2013, four individual plaintiffs each filed motions to consolidate these actions~~defendants under Sections 10(b) and ~~to be appointed as lead plaintiff pursuant to~~20(a) of the Securities Exchange Act of 1934. In accordance with the Private Securities Litigation Reform Act of ~~1995. Those motions are currently scheduled to be heard~~1995, on December ~~13, 2013. No other dates have been set. As of September 30,~~10, 2013, the court entered an order consolidating the lawsuits, appointing a lead plaintiff and approving lead plaintiff’s selection of lead counsel. On February 24, 2014, lead plaintiff filed a consolidated complaint against BIOLASE and Messrs. Pignatelli, Furry, and Arrow, alleging violations of the federal securities laws and asserting causes of action against the defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

On November 19, 2013, BIOLASE’s Board received a letter from attorneys for purported shareholder David T. Long, demanding that the Board investigate, institute litigation, and take measures to redress and prevent alleged wrongdoing concerning the dissemination of certain allegedly false and misleading public disclosures made by the Company ~~has accrued~~between January 2013 and August 2013.

The Company paid $250,000 for legal costs expected to be incurred in connection with these ~~matters.~~matters during the year ended December 31, 2013. The Company believes that the claims contained in the lawsuits are without merit and intends to vigorously defend ~~against~~against the claims.

On March 3 and 6, 2014, the Company disclosed that the Board had appointed Paul N. Clark and Jeffrey M. Nugent to the Board and Dr. Alexander K. Arrow and Dr. Samuel B. Low had tendered their resignations. Subsequent to these disclosures, questions were raised as to whether these changes were effected.

On March 11, 2014, Oracle Partners L.P. (“Oracle”) filed a lawsuit in the Delaware Court of Chancery seeking a determination of the composition of the Company’s Board and a temporary restraining order that would preclude the Board from taking any action without the approval of the four purported directors whose directorships Oracle and the Company claim to be undisputed. On March 20, 2014, the Court of Chancery issued a Status Quo Order which fixed the Board at four members, consisting of Messrs. Federico Pignatelli and James R. Talevich and Drs. Norman J. Nemoy and Frederic H. Moll, pending further decision in the litigation.

A trial was held on April 24 and 25, 2014 and the Company is currently awaiting the Court of Chancery’s decision.

On April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against the Company in the District of Utah for patent infringement of U.S. Patent No. 7,485,116 (the “116 Patent”) regarding ~~BIOLASE’s EZlase~~the Company’s ezlase dental laser. On September 9, 2012, CAO filed its First Amended Complaint, which added claims for (1) business disparagement/injurious falsehood under common law and (2) unfair competition under 15 U.S.C. Section 1125(a). The additional claims stem from a press release that the Company issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO and its diode product. The First Amended Complaint seeks injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. On November 13, 2012, the Court stayed the lawsuit for 120 days to allow the United States Patent and Trademark Office (“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.~~ruling and on December 10, 2013, the USPTO issued a Right of Appeal Notice, finally rejecting some claims of the 116 Patent while finding that other claims appeared to be patentable. Both parties are permitted to appeal the USPTO’s findings to the Patent Trial and Appeal Board (the “PTAB”). The Company appealed the USPTO’s findings on January 9, 2014 and on January 27, 2014, the USPTO declined to reconsider the finding of certain claims as patentable and instructed the parties to proceed to appeal to the PTAB. On March 17, 2014, the Company filed its brief in support of its appeal of the USPTO’s decision not to reject certain claims of the 116 Patent. On March 24, 2014, CAO filed its brief in support of its appeal of the USPTO’s decision to reject certain claims of the 116 patent. On April 18, 2014, the Company filed a respondent brief in opposition to the CAO’s appeal arguments.

The Company filed a patent infringement lawsuit against Fotona dd. (“Fotona”) in Düsseldorf District Court (the “Düsseldorf Court”) on April 12, 2012 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. Fotona filed a rejoinder on February 3, 2014, including its counterplea on nullity.

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

The Company filed a false advertising lawsuit against Fotona and Technology4Medicine L.L.C., two of its competitors (together "the Defendants") in United States District Court for the Central District of California. The lawsuit alleges six causes of action, and claims that the Defendants have made false and misleading statements regarding the Company's products, technology, and management. The lawsuit, filed on February 20, 2014, seeks both cash damages and injunctive relief.

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

The Company currently operates in a single reportable segment. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014, sales in the United States accounted for approximately 58% of net revenue and international sales accounted for approximately 42% of net revenue. For the three months ended March 31, 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,				Three Months Ended March 31,
	2013		2012		2013		2012		2014		2013
United States	$	7,602	$	9,433	$	25,735	$	25,842	$	6,709	$	9,048
International		4,743		4,348		15,454		12,434		4,809		5,549
	$	12,345	$	13,781	$	41,189	$	38,276	$	11,518	$	14,597

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

Long-lived assets located outside of the United States at our foreign subsidiaries totaled ~~$442,000~~$426,000 and ~~$412,000~~$430,000 as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, respectively.

Revenue from laser systems, the Company’s core ~~product,~~products which ~~includes~~include the iPlus, MD Turbo, and Epic, comprised ~~66%~~61% and ~~68%~~70% of total net revenues for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013, ~~respectively, and 74% and 73% of total net revenue, respectively, for the same periods in 2012.~~respectively. Revenue from consumables and other comprised ~~13%~~14% and ~~12%~~11% of total revenue for the ~~same periods in~~three months ended March 31, 2014 and 2013, ~~and 11% and 12% for the same periods in 2012,~~ respectively. Revenue from imaging systems comprised 8%10% and 8%7% of total net revenue for the ~~same periods in~~three months ended March 31, 2014 and 2013, ~~and 5% and 5% for the same periods in 2012,~~ respectively. Revenue from services comprised ~~13%~~15% and ~~12%~~11% of total net revenue for the ~~same periods in~~three months ended March 31, 2014 and 2013, ~~and 10% and 10% for the same periods in 2012,~~ respectively. Revenue from license fees and royalties comprised 0% and 0%1% of total net revenue for the ~~same periods in~~three months ended March 31, 2014 and 2013, ~~and 0% and 0% for the same periods in 2012,~~ respectively.

No individual customer represented more than 10% of the Company’s revenue infor the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 and ~~2012.~~2013.

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.~~ 17

No individual customer represented more than 10% of the Company’s accounts receivable at March 31, 2014 and December 31, ~~2012.~~2013.

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 inin manufacturing and a possible loss of sales, which could adversely affect the Company’s results of operations.

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~~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,~~de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has elected to classify interest and penalties as a component of its income tax provision. With respect to the ~~liability~~liability for unrecognized tax benefits, including related estimates of penalties and interest, the Company ~~recorded increases of $0 and $1,000~~did not record a liability for unrecognized tax benefits for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013, ~~respectively, and $2,000 and $4,000~~respectively. The Company does not expect any changes to its unrecognized tax benefit for the next twelve months that would materially impact its consolidated financial statements.

During the three ~~and nine~~ months ended ~~September 30, 2012, respectively.~~

~~For the three and nine months ended September 30, 2013,~~March 31, 2014, 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$24,000 resulting in an ~~overall~~effective tax ~~benefit~~rate of ~~$214,000. Management does not expect to record additional significant~~(0.54)%. The effective tax ~~benefits in the foreseeable future.~~

~~The tax expense~~rate differs from ~~expense derived from~~the statutory tax rate of 34% primarily due to the existence of valuation allowances against net deferred tax assets and current liabilities resulting from the estimated state income tax liabilities and federal alternative minimum tax liability.

The income tax provision for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 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.

On ~~November 8, 2013,~~April 10, 2014, the Company ~~amended the Credit Agreements with~~and Comerica Bank finalized a Forbearance Agreement which addressed the Company’s non-compliance with a financial covenant at February 28, 2014 and resulting default and reduced the total aggregate available borrowings on the lines of credit to ~~waive its noncompliance~~$4 million. The Company was not in compliance with a financial covenant at March 31, 2014 and did not repay the ~~minimum EBITDA covenant for~~lines of credit in full on the ~~quarter ended September 30, 2013, reset~~maturity date of May 1, 2014. As a result, on May 5, 2014, the ~~EBITDA covenant for~~Company and Comerica Bank entered into Amendment No. 1 to Forbearance Agreement and agreed to extend the ~~quarter ending December 31, 2013, and establish covenants for~~forbearance period on the ~~remaining term of the agreements.~~Company’s two revolving credit facility agreements from May 1, 2014 to June 1, 2014. In connection with ~~this amendment,~~Amendment No. 1, the maturity date of the revolving lines of credit was extended to June 1, 2014 and the Company ~~issued Comerica Bank the November 2013 Comerica Warrant and incurred an amendment~~paid a fee of $10,000.

See Note ~~Note~~ 8 – Lines of Credit and Other Borrowings for further discussion.

On May 9, 2014, the Company filed a motion to dismiss the consolidated complaint for the purported class action lawsuits pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, which is pending.

The Company is currently awaiting the Delaware Court of Chancery’s decision for the trial held on April 24 and 25, 2014 regarding the shareholder lawsuit filed by Oracle.

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~~2013 (the ~~“2012~~“2013 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March ~~15, 2013.~~17, 2014. 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.

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”)~~dental imaging equipment, including cone beam digital x-rays and CAD/CAM intra-oral scanners, and in-office, chair-side milling machines and three-dimensional (“3-D”) ~~digital imaging equipment and CAD/CAM intra-oral scanners;~~printers; products that are focused on technologies that advance the practice of dentistry and medicine. Our proprietary dental laser systems allow dentists, periodontists, endodontists, oral surgeons, and other specialists to perform a broad range of dental procedures, including cosmetic, restorative, 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~~conventional 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~~registration 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~~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~~180 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~~From 1998 through March 31, 2014, we have sold over ~~10,000~~25,500 laser systems in over 70 countries around the world. Contained in this total is over 10,300 WaterLase systems, ~~including~~which includes more than ~~6,000~~6,300 WaterLase MD^® and iPlus^® ~~systems, and more than 23,900 laser systems in over 70 countries around the world.~~systems.

On February 10, 2014, 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~~Company entered into a ~~letter of commitment~~Subscription Agreement with ~~Auris Surgical Robotics, Inc. ("Auris") to co-develop a cataract-removal ophthalmologic robot utilizing our WaterLase technology~~Oracle Partners L.P., Oracle Institutional Partners, L.P., 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~~Oracle Ten Fund Master L.P., under which we ~~continue to seek strategic partnerships to assist~~offered an aggregate of 1,945,525 unregistered shares of common stock in ~~our entry into~~a private placement at a price of $2.57 per share. Gross proceeds from the ~~ophthalmology laser market.~~sale totaled $5 million, and net proceeds, after offering expenses of approximately $208,000, totaled approximately $4.8 million.

On January 17, 2014, 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~~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~~$12.5 million. WeThe registration statement was 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~~Securities and Exchange Commission.

In February 2014, we agreed to distribute Stratasys Ltd.’s (“Stratasys’”) Objet30 OrthoDesk and a number of its Design Series 3-D printers. The Objet30 OrthoDesk combines precise 3-D printing technology with a small footprint. It is easy to use, and includes specialized dental printing materials in convenient sealed cartridges. Dentists can fabricate stone models, orthodontic appliances, delivery and positioning trays, models for clear aligners, retainers and surgical guides on ~~September 19, 2013.~~ their desktop. We believe that 3-D printing will be an important factor in dental restorations in the new digital era of dentistry.

In November 2013, we introduced the Galaxy BioMill™ CAD/CAM system which enables dental practitioners to scan, design, mill, and finish crowns, inlays, onlays, and veneers in the dental office in a single appointment. The Galaxy BioMill was developed and designed by us in conjunction with German-based imes-icore GmbH for their milling technologies and Copenhagen-based 3Shape Corporation (“3Shape”) for their CAD/CAM intra-oral scanning technologies. We expect to begin shipping these systems in the second quarter of 2014. Also termed “chair-side” milling, the Galaxy BioMill System will utilize 3Shape’s Trios intra-oral scanner to capture high resolution 3-D digital images of the teeth and crown-preparation site, which are then processed through a CAD/CAM software program to design the dental restoration. The design is then transferred to the Galaxy BioMill to mill the crown.

We believe that the addition of the Galaxy BioMill and Objet30 OrthoDesk and Design Series 3-D printers to our suite of advanced technology solutions differentiates us as compared to other fragmented product offerings in the marketplace and are an integral part of our strategy of becoming the premier Total Technology Solution™ provider in dentistry. By combining high-end digital imaging, first in class laser tissue management, intra-oral scanning, CAD/CAM design, chair-side milling, and 3-D printing, dental offices can accurately and rapidly produce a wide range of restorations and appliances.

On ~~September 23, 2013,~~May 24, 2012, we entered into antwo revolving credit facility agreements with Comerica Bank (the “Credit Agreements”), as amended, which provide for borrowings against certain domestic accounts receivable and inventory (the “Domestic Revolver”) and certain export related accounts receivable and inventory (the “Ex-Im Revolver”).

The Credit Agreements require us to maintain compliance with certain monthly financial and non-financial covenants, as defined therein. Any noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the amounts outstanding immediately due and payable. On March 4, 2014, we received a waiver for noncompliance with certain financial and nonfinancial covenants as of January 31, 2014 and December 31, 2013, which reduced the aggregate borrowing limits on the Credit Agreements to $5.0 million. We were not in compliance with a financial covenant as of February 28, 2014 and, as such, entered into a forbearance agreement with ~~Northland Securities, Inc. (“Northland”), pursuant~~Comerica Bank on April 10, 2014 which reduced the total aggregate available borrowings to ~~which Northland acted as placement agent~~$4.0 million. We were not in ~~connection~~compliance with a financial covenant at March 31, 2014 and did not repay the ~~sale~~lines of ~~shares~~credit in full on the maturity date of ~~our common stock in~~May 1, 2014. As 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,result, on May 5, 2014, we entered into ~~a subscription agreement~~Amendment No. 1 to Forbearance Agreement (“~~2013 Subscription Agreement”~~Amendment No. 1”) with ~~Camber Capital Management, LLC, pursuant~~Comerica Bank which extended the end of the forbearance period from May 1, 2014 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 inJune 1, 2014. In connection with Amendment No. 1, the ~~2013 Subscription Agreement were issued pursuant to a prospectus supplement to~~maturity date of the ~~2013 Registration Statement, which was filed with the SEC September 26, 2013.~~

~~On September 6, 2013 and November 8, 2013, we amended our~~revolving lines of credit ~~with Comerica Bank. Further discussion~~was extended to June 1, 2014 and we paid an administrative fee of ~~the amendments is included in our discussion onLiquidity and Capital Resources—Future Liquidity Needs~~.$10,000.

As of March 31, 2014, we had outstanding borrowings totaling approximately $2.9 million, which included $0.8 million under the Domestic Revolver and $2.1 million under the Ex-Im Revolver.

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~~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 4843 to 5145 in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s ~~2012~~2013 Form 10-K. We believe that there have been no significant changes during the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 in our critical accounting policies from those disclosed in Item 7 of the ~~2012~~2013 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, 2013.10-K.

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

	Three Months Ended March 31,
	2014			2013
Products and services		99.7	%		99.3	%
License fees and royalty		0.3			0.7
Net revenue		100.0			100.0
Cost of revenue		65.8			60.3
Gross profit		34.2			39.7
Operating expenses:
Sales and marketing		38.7			36.0
General and administrative		26.8			15.4
Engineering and development		8.4			6.9
Excise tax		0.5			0.7
Total operating expenses		74.4			59.0
Loss from operations		(40.2	)		(19.3	)
Non-operating loss, net		(2.0	)		(1.3	)
Loss before income tax provision		(42.2	)		(20.6	)
Income tax provision		0.2			(2.6	)
Net loss		(42.4	)%		(18.0	)%

In addition to the financial information prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), we provide certain historical non-GAAP financial information. Management believes that adjustments for these items assist investors in making comparisons of period-to-period operating results and that these items are not indicative of the Company’s on-going core operating performance.

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

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

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
)%

	Three Months Ended March 31,
	Three Months Ended March 31,
	2014			2013
GAAP net loss, as reported	$	(4,887	)	$	(2,631	)
Adjustments:
Interest expense		230			87
Income tax provision (benefit)		24			(372	)
Depreciation and amortization		175			145
Stock-based, other equity instruments, and other non-cash compensation		371			494
Non-GAAP net loss	$	(4,087	)	$	(2,277	)

Approximately $682,000 related to the defense of the director dispute and resulting shareholder litigation brought by Oracle is included in both the Company’s GAAP net loss and non-GAAP net loss for the three months ended March 31, 2014 (please refer to “Litigation and Contingencies”).

Net Revenue: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
%

~~Net Revenue. Net~~including each category’s percentage of our total revenue, for the three months ended ~~September 30,~~March 31, 2014 and 2013, ~~(“Third Quarter 2013”) totaled $12.3 million, a decrease~~as well as the amount of ~~approximately $1.5 million, or 10%, as compared with net~~change and percentage of change in each revenue category (dollars in thousands):

	Three Months Ended March 31,								Amount Change			Percent Change
	2014				2013				Amount Change			Percent Change
Laser systems	$	6,955	60.4	%	$	10,138	69.5	%	$	(3,183	)		(31.4	)%
Imaging systems		1,196	10.4	%		1,028	7.0	%		168			16.3	%
Consumables and other		1,603	13.9	%		1,630	11.2	%		(27	)		(1.7	)%
Services		1,725	15.0	%		1,693	11.6	%		32			1.9	%
Total products and services		11,479	99.7	%		14,489	99.3	%		(3,010	)		(20.8	)%
License fees and royalty		39	0.3	%		108	0.7	%		(69	)		(63.9	)%
Net revenue	$	11,518	100.0	%	$	14,597	100.0	%	$	(3,079	)		(21.1	)%

Net revenue by geographic location based on the location of ~~$13.8 million~~customers, including each category’s percentage of our total revenue, for the three months ended ~~September 30, 2012 (“Third Quarter 2012”). Domestic revenues totaled $7.6 million, or 62%~~March 31, 2014 and 2013, as well as the amount of ~~net~~change and percentage of change in each geographic 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,~~category, was as ~~compared with $4.3 million, or 32% of net revenue, for Third Quarter 2012.~~ follows (dollars in thousands):

The overall decrease in period-over-period net revenue resulted from decreases in domestic and international laser system revenue ~~which declined 32%,~~and consumables and other net revenue, 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~~$3.2 million, or ~~20%~~31.4%, in the ~~Third~~First Quarter ~~2013~~2014 compared to the same period of ~~2012. We expect improved sales~~2013. Our domestic laser revenue was negatively impacted by the director dispute and resulting shareholder litigation filed against us by Oracle Partners, L.P. (“Oracle”), the unusually severe winter throughout the first quarter, and the uncertainty over the status of accelerated and bonus depreciation for tax purposes under Internal Revenue Code (“IRC”) Section 179.

This decline in our ~~core laser systems moving into~~domestic revenues was offset to some extent by our sustained efforts to increase our number of international markets and distributors, including continuously upgrading our existing international distributors, with the ~~quarter ending December 31, 2013, as we believe many dentists purchase capital equipment during the fourth quarter~~intent of driving international growth.

The continued growth 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~~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~~the increases in our product offerings at various ~~value propositions.~~price points. We have made two recent additions to our imaging products: the Galaxy BioMill, a chair-side milling machine, and several Stratasys 3-D printers. We expect to begin shipping the Galaxy BioMill and Stratasys 3-D printers in the second quarter of 2014.

Consumables and other net revenue, which includes consumable products such as disposable tips and shipping revenue, ~~increased by approximately $123,000, or 8%,~~remained relatively unchanged for ~~Third~~First Quarter ~~2013~~2014 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.~~2013.

Services net revenue, which consists of extended warranty service contracts, advanced training programs, and other services, increased ~~by approximately $217,000,~~nominally $32,000, or ~~16%,~~1.9% for ~~Third Quarter 2013,~~the three months ended March 31, 2014, as compared to the same period of ~~2012. The increased revenue was~~2013, largely due ~~largely~~ to increased follow-on sales related to our growing laser customer base ~~and~~and increased sales and marketing efforts in this part of our business.

License fees and royalty revenue ~~remained relatively flat~~decreased for the ~~Third~~First Quarter ~~2013~~2014 as compared to the same period of ~~2012.~~2013 due to the timing of revenues. We received a settlement in First Quarter 2013 that included certain royalties from prior periods.

Cost of Revenue and Gross Profit:~~. 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~~ The following table summarizes our cost of revenue and gross profit for the three months ended March 31, 2014 and 2013, as well as the amount of ~~$7.5 million, or 54%~~change and percentage of ~~net revenue, for Third Quarter 2012.~~ change (dollars in thousands):

The increased cost of revenue as a percentage of revenue is a result of lower laser system sales and slightly increased percentage of international sales. Our laser systems generally have significantly higher margins than our licensed imaging systems and our domestic laser sales generally have higher margins than our international laser sales. ~~We also recorded~~As 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~~result, gross profit decreased from ~~46%~~39.7% of net revenue for ~~Third~~First Quarter ~~2012~~2013 to ~~31%~~34.2% of net revenue for ~~Third~~First Quarter ~~2013.~~2014.

Operating Expenses: The ~~decrease was primarily due to lower laser system sales~~following table summarizes our operating expenses for the three months ended March 31, 2014 and 2013, as well as the ~~provision for excess~~amount of change and ~~obsolete inventory.~~percentage of change (dollar

	Three Months Ended March 31,								Amount Change			Percent Change
	2014				2013				Amount Change			Percent Change
Sales and marketing	$	4,455	38.7	%	$	5,252	36.0	%		(797	)		(15.2	)%
General and administrative		3,083	26.8	%		2,247	15.4	%		836			37.2	%
Engineering and development		973	8.4	%		1,005	6.9	%		(32	)		(3.2	)%
Excise tax		65	0.5	%		107	0.7	%		(42	)		(39.3	)%
Total operating expenses	$	8,576	74.4	%	$	8,611	59.0	%	$	(35	)		(0.4	)%

~~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~~change in operating expense is explained in the following expense categories:

Sales and Marketing Expense. ~~Sales~~The decrease to 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 increaseexpense was primarily a result of decreased convention costs of $490,000, decreased media and advertising expenses of $295,000, and decreased commission expenses of $215,000, offset by 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.$241,000.

General and Administrative Expense. ~~General~~The increase to general and administrative expenses ~~for Third Quarter 2013 increased by approximately $621,000, or 34%,~~was primarily due 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,~~$662,000 and an increase to our provision for doubtful accounts of ~~which $250,000~~$277,000, offset by decreased patent and patent defense costs of $107,000. The increase to legal expenses was driven by approximately $682,000 related to the defense of ~~class action lawsuits (refer below~~the director dispute and resulting shareholder litigation brought by Oracle (please refer to “Litigation and Contingencies”),. We expect that the ongoing shareholder litigation will result in increased ~~provision for doubtful accounts of $300,000,~~legal fees that will continue to impact our general and ~~increased investor relations~~administrative expenses ~~of $66,000, offset by decreased patent defense costs of $337,000. During~~during the ~~Third Quarter 2013, we insourced various patent filing related work which reduced patent attorney fees but increased payroll costs.~~year ending December 31, 2014.

Engineering and Development Expense. Engineering and development expenses remained relatively unchanged for ~~Third~~the First Quarter ~~2013 decreased by approximately $218,000, or 18%, to $977,000, or 8% of net revenue,~~2014 as compared ~~with $1.2 million, or 9%~~to the same period of ~~net revenue,~~2013 due to our continued efforts in new product development and sustaining projects 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.~~our existing products.

Excise Tax Expense. ~~Beginning January 1, 2013, the~~The Patient Protection and Affordable Care Act ~~imposed~~imposes a 2.3% medical device excise tax on certain product sales to customers located in the U.S. We incurred excise tax expenses of ~~$89,000,~~$65,000, or 1%0.5% of net revenue, for ~~Third~~First Quarter 2014 as compared to $107,000, or 0.7% of net revenue, for First Quarter 2013.

(Gain) Loss on Foreign Currency ~~Transactions~~Transactions.. We realized a ~~$16,000~~$2,000 gain on foreign currency transactions for ~~Third~~First Quarter ~~2013,~~2014, compared to a ~~$28,000~~$99,000 loss on foreign currency transactions for ~~Third~~ First Quarter ~~2012~~2013 due to exchange rate fluctuations between the U.S. dollar and other currencies.

Interest Expense, ~~Net~~Net.. Interest expense consisted primarily of interest on our revolving credit facilities and amortization of debt issuance costs and debt ~~discount.~~discount. Interest expense totaled approximately ~~$182,000~~$230,000 and ~~$98,000~~$87,000 for ~~Third~~First Quarter ~~2013~~2014 and ~~2012,~~2013, respectively. The increase was a result of higher borrowings under lines of credit that provided the necessary liquidity to ~~increase~~continue operations.

Income Tax (Benefit) ~~Provision~~Provision.. Our provision for income taxes was an expense of ~~$22,000~~$24,000 for ~~Third~~First 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~~2014, compared to a ~~net loss of $548,000 for Third Quarter 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.

~~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.

~~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~~$372,000 for ~~the nine months ended September 30, 2013, compared to an expense of $97,000 for the nine months ended September 30, 2012.~~First Quarter 2013. During ~~the nine months ended September 30,~~First Quarter 2013, we reversed certain deferred tax liabilities associated with ~~unrecognized tax benefits related to~~ international operations ~~due to expiring statutes~~ and ~~recognized~~research and development credits resulting in a tax ~~benefits~~benefit of ~~$107,000. In addition,~~approximately $214,000 and 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~~benefit of ~~$32,000~~$158,000 based on our projected annual effective tax rate of 4.9% for the ~~current~~ year ended December 31, 2013. We do not expect to record additional significant tax ~~provision.~~benefits in the foreseeable future.

Net ~~Loss~~Loss.. For the reasons stated above, our net loss ~~was $9.2~~totaled approximately $4.9 million for ~~the nine months ended September 30, 2013,~~First Quarter 2014 compared to a net loss of ~~$4.1~~$2.7 million for ~~the nine months ended September 30, 2012.~~First Quarter 2013.

At ~~September 30, 2013,~~March 31, 2014, we had approximately ~~$5.0 million in working capital. Our principal sources of liquidity at September 30, 2013, consisted of approximately $4.2~~$1.8 million in cash and cash equivalents. Management defines cash and cash equivalents ~~$10.8~~as highly liquid deposits with original maturities of 90 days or less when purchased. The increase in our cash and cash equivalents by $395,000 at March 31, 2014 as compared to December 31, 2013, was primarily due to net cash used in operating and investing activities of $2.8 million and $85,000, respectively, offset by cash provided by financing activities of ~~net accounts receivable, and $2.5 million of available borrowings under our revolving credit facility agreements.~~ $3.3 million.

The following table summarizes our ~~statements of~~change in cash ~~flows~~and cash equivalents (in thousands):

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,~~First Quarter 2014, totaled ~~$7.1~~$2.8 million and was primarily comprised of ~~non-cash adjusted~~our net loss ~~excluding changes in operating assets and liabilities,~~ of ~~$5.9~~$4.9 million plus ~~increases~~an increase in inventory of ~~$1.7 million~~$774,000 and decreases in accounts payable and accrued liabilities of $392,000, customer deposits of ~~$408,000,~~$135,000, and deferred revenue of $190,000, offset by ~~decreases~~a decrease in accounts receivable of ~~$608,000.~~$2.3 million.

Cash used in investing activities for ~~the nine months ended September 30, 2013,~~First Quarter 2014 consisted primarily of ~~$464,000~~$86,000 of capital expenditures. For fiscal ~~2013,~~2014, we expect capital expenditures to total approximately $650,000 and we expect depreciation and amortization to total approximately $600,000.

Net cash provided by financing activities for ~~the nine months ended September 30, 2013 was $9.2~~First Quarter 2014 of $3.3 million related primarily to net proceeds from the sale of unregistered common stock to Oracle Partners L.P., Oracle Institutional Partners, L.P., and Oracle Ten Fund Master L.P. (collectively “Oracle”) of ~~$4.6~~$4.8 million, as discussed in Future Liquidity Needs below, ~~plus~~less net ~~borrowings under~~repayments on the lines of credit of ~~$3.9~~$1.8 million.

We incurred a loss from operations for the three months ended March 31, 2014 and have 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~~2013. Our level of cash from operations, the potential need for additional capital, and the uncertainties surrounding our ability to raise additional capital, raises substantial doubt about our ability to continue as a ~~net loss,~~going concern. Accordingly, the accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates that we will continue in operation for the next twelve months and ~~used cash~~will be able to realize our assets and discharge our liabilities and commitments in ~~operating activities.~~ the normal course of business. The financial statements do not include any adjustments to reflect the possible future effects of recoverability and classifications of assets or the amounts and classifications of liabilities that may result from our inability to continue as a going concern.

The available borrowing capacity on our lines of credit with Comerica Bank, as amended, and ~~the~~ net proceeds from ~~the below mentioned~~ equity ~~offering~~transactions have been principal sources of liquidity during the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and the year ended December 31, 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. TheseOur credit facilities expired May 1, 2014, and we are considering alternative solutions, including potentially entering into a new line of credit and/or issuing alternative equity or debt securities, to mitigate any future liquidity constraints these covenants and restrictions may impose on us. ~~Further discussion~~We were not in compliance with a financial covenant at March 31, 2014 and did not repay the lines of credit in full on the maturity date of May 1, 2014. As a result, on May 5, 2014, we entered into Amendment No. 1 to Forbearance Agreement (“Amendment No. 1”) with Comerica Bank which extended the end of the ~~amendments is included in Note 8~~forbearance period from May 1, 2014 to June 1, 2014. In connection with Amendment No. 1, the ~~Consolidated Financial Statements in Part I, Item~~maturity date of the revolving lines of credit was extended to June 1, 2014 and we paid an administrative fee of ~~this Quarterly Report on Form 10-Q, which is incorporated herein by reference.~~$10,000.

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.~~business.

In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must sell our products directly to end-users and through distributors, establish profitable operations through increased sales, decrease expenses, and generate cash from operations or obtain additional funds when needed. We intend to improve our financial condition and ultimately improve our financial results by increasing revenues through ~~expansion~~expansion of our product offerings, continuing to expand and 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.~~reducing expenses.

We expect that ~~the~~our working capital, proceeds from equity transactions, and borrowings available under ~~the~~our lines of credit or alternative debt securities 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 a new line of credit and/or the issuance of equity, debt, or ~~equity~~hybrid 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~~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,~~February 10, 2014, we entered into a Subscription Agreement with Oracle Partners L.P., Oracle Institutional Partners, L.P., and Oracle Ten Fund Master L.P., under which we offered an aggregate of 1,945,525 unregistered shares of common stock in a private placement at a price of $2.57 per share. Gross proceeds from the sale totaled $5 million, and net proceeds, after offering expenses of approximately $208,000, totaled approximately $4.8 million. We used the proceeds for working capital and general corporate purposes.

In February 2014, we streamlined operations and reduced payroll and payroll related expenses by approximately $1.3 million, net, on an annualized basis. We are currently working on rationalizing certain marketing and advertising activities. We expect that we will begin to realize the impact of these cost saving measures in the quarter ending June 30, 2014.

On January 17, 2014, we filed ~~the 2013~~a universal shelf registration statement on Form S-3, File No. 333-193426 (the “January 2014 Registration ~~Statement~~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~~$12.5 million. The ~~2013~~January 2014 Registration Statement ~~as amended,~~ was declared effective by the SEC on ~~September 19, 2013. On September 23, 2013,~~January 29, 2014.

We may not be able to increase sales, reduce expenses, or obtain additional funds when needed or guarantee that such funds, if available, will be obtainable on terms satisfactory to us. If we ~~entered into an agreement with Northland, pursuant~~are unable to ~~which Northland acted as placement agent in connection with the sale of shares of~~increase sales, reduce expenses, or raise sufficient additional capital, we may be unable to continue to fund our ~~common stock~~ operations, develop our products, or realize value from our assets and discharge our liabilities in the ~~September 2013 Registered Direct Offering pursuant~~normal course of business. These uncertainties raise substantial doubt about our ability to continue as a going concern. As a result, the opinion we have received from our independent registered public accounting firm on our consolidated financial statements contains an explanatory paragraph stating that there is a substantial doubt regarding our ability to continue as a going concern.

The accompanying financial statements have been prepared on a going concern basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include adjustments relating to the ~~2013 Registration Statement and paid Northland~~recoverability of recorded asset amounts or the amounts or classification of liabilities that might be necessary should we be unable to continue as a ~~fee of 5.0% of the aggregate gross proceeds in connection therewith. On September 23, 2013,~~going concern. At March 31, 2014, 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 werehad approximately $4.6 million ~~after deducting associated costs, inclusive~~in working capital. Our principal sources of ~~Northland’s fee,~~liquidity at March 31, 2014, consisted of ~~$408,000. The shares~~approximately $1.8 million in cash and cash equivalents, $8.6 million of ~~common stock sold in connection with the 2013 Subscription Agreement were issued pursuant to a prospectus supplement to the 2013 Registration Statement,~~net accounts receivable, and $2.1 million of available borrowings under our revolving credit facility agreements, which ~~was filed with the SEC September 26, 2013.~~expire on June 1, 2014, as amended.

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~~March 31, 2014, $123,000 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~~$567,000 at ~~September 30, 2013.~~March 31, 2014. 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.~~March 31, 2014.

The Company has purchase obligations totaling approximately ~~$12.8~~$12.2 million related to purchase orders with suppliers that we expect to complete during the next twelve months.

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

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,~~March 31, 2014, we are not involved in any material unconsolidated SPEs.

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 the Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by this reference.

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.

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,~~2013, which is incorporated herein by reference. Our exposure to market risk has not changed materially since December 31, ~~2012.~~2013.

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.

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

Set forth below and elsewhere in this Form 10-Q and in other documents we file with the SEC (including those 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, 2013) are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q.

Our involvement in class action, shareholder derivative, and shareholder litigation could divert our resources and management’s attention and harm our business.

On August 23, 2013, a purported class action lawsuit entitled Brady Adams v. Biolase, Inc., et al. was filed in the United States District Court for the Central District of California against the Company and its current executive officers. On November 19, 2013, our Board received a letter from attorneys for purported shareholder David T. Long, demanding that the Board investigate, institute litigation, and take measures to redress and prevent alleged wrongdoing concerning the dissemination of certain allegedly false and misleading public disclosures made by the Company between January 2013 and August 2013. On March 11, 2014, Oracle Partners, L.P. (“Oracle”), a shareholder of the Company, filed a lawsuit in the Delaware Court of Chancery seeking a determination of the composition of the Company’s Board and a related temporary restraining order regarding directors whose directorships Oracle and the Company claim to be undisputed. Securities related class action litigation, derivative shareholder litigation, and shareholder litigation such as the foregoing often is expensive and diverts management’s attention and our financial resources, which could adversely affect our business.

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

~~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.~~

On February 10, 2014, we entered into a Subscription Agreement with Oracle Partners L.P., Oracle Institutional Partners, L.P., and Oracle Ten Fund Master L.P., under which we offered an aggregate of 1,945,525 unregistered shares of common stock in a private placement at a price of $2.57 per share. Gross proceeds from the sale totaled $5 million, and net proceeds, after offering expenses of approximately $208,000, totaled approximately $4.8 million. The Company used the proceeds for repaying its lines of credit and for working capital and general corporate purposes.

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

~~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~~

~~32.1~~

~~Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~

~~32.2~~

~~Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~

~~101~~

The following unaudited financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended September 30, 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

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

10.1

Amendment No. 1 to Forbearance Agreement, dated May 5, 2014, by and between Comerica Bank and the Registrant

10.2

Amendment No. 1 to Master Revolving Note, dated May 5, 2014, by and between Comerica Bank and the Registrant

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

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

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following unaudited financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended March 31, 2014, 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

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.

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

Large accelerated filer	¨	Accelerated filer	x

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

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):
				3
	Consolidated Balance Sheets as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012~~2013		3

	Consolidated Statements of Operations and Comprehensive Loss for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and March 31, 2013 ~~and September 30, 2012~~		4

	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and March 31, 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
				31
Item 3.	Defaults Upon Senior Securities		30
				31
Item 4.	Mine Safety Disclosures		30
				31
Item 5.	Other Information		30
				31
Item 6.	Exhibits		31	32
Signatures
~~Signatures~~			33

	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

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

	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.

	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.

	March 31, 2014		December 31, 2013
	March 31, 2014		December 31, 2013
Undelivered elements (training, installation and product and support services)	$	1,645	$	1,823
Extended warranty contracts		1,630		1,642
Total deferred revenue		3,275		3,465
Less long-term amounts:
Extended warranty contracts		—		(1	)
Total deferred revenue, long-term		—		(1	)
Total deferred revenue, current portion	$	3,275	$	3,464