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 ☒ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of ~~October 27, 2017,~~May 7, 2019, the registrant had ~~76,019,373~~21,293,736 shares of common stock, $0.001 par value per share, outstanding.

							March 31,			December 31,
	September 30,			December 31,			2019			2018
	2017			2016			(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,454		$	8,924		$	2,956		$	8,044
Restricted cash equivalent		251			251
Accounts receivable, less allowance of $1,078 in 2017 and $1,209 in 2016		9,708			9,784
Inventory, net		14,102			13,523
Restricted cash								312			312
Accounts receivable, less allowance of $869 and $850 in 2019 and 2018, respectively								11,743			11,112
Inventory								12,023			12,248
Prepaid expenses and other current assets		1,225			1,505			1,815			1,591
Total current assets		29,740			33,987			28,849			33,307
Property, plant, and equipment, net		4,350			4,478			1,733			1,975
Goodwill		2,926			2,926			2,926			2,926
Other assets		335			550			302			308
Total assets	$	37,351		$	41,941		$	33,810		$	38,516
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	7,679		$	9,125			5,894			5,953
Accrued liabilities		4,713			5,778			6,713			7,538
Customer deposits		69			101
Deferred revenue, current portion		2,564			3,010			2,513			2,476
Total current liabilities		15,025			18,014			15,120			15,967
Deferred income taxes, net		843			798			72			77
Deferred revenue, long-term		14			23
Warranty accrual, long-term		107			773
Other liabilities, long-term		197			268
Warranty accrual								577			447
Other liabilities								162			100
Term loan								10,906			10,836
Total liabilities		16,186			19,876			26,837			27,427
Commitments, contingencies, and subsequent events (Notes 8 and 12)
Commitments and contingencies — Note 11
Stockholders' equity:
Preferred stock, par value $0.001 per share; 1,000,000 shares authorized; 80,644 and 80,494 shares issued in 2017 and 2016, respectively; no shares outstanding in 2017 and 2016, respectively		—			—
Common stock, par value $0.001 per share; 200,000,000 and 100,000,000 shares authorized in 2017 and 2016, respectively; 76,019,373 and 67,565,951 shares issued and outstanding in 2017 and 2016, respectively		76			68
Preferred stock, par value $0.001 per share; 1,000 shares authorized; 0 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively								—			—
Common stock, par value $0.001 per share; 40,000 shares authorized, 21,294 and 21,072 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively								21			21
Additional paid-in-capital		213,022			201,198			229,269			228,430
Accumulated other comprehensive loss		(599	)		(876	)		(725	)		(670	)
Accumulated deficit		(191,334	)		(178,325	)		(221,592	)		(216,692	)
Total stockholders' equity		21,165			22,065			6,973			11,089
Total liabilities and stockholders' equity	$	37,351		$	41,941		$	33,810		$	38,516

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2017			2016			2017			2016			2019			2018
Products and services revenue	$	10,774		$	13,199		$	34,196		$	37,933		$	10,323		$	10,017
License fees and royalty revenue		32			30			96			116			3			3
Net revenue		10,806			13,229			34,292			38,049			10,326			10,020
Cost of revenue		7,951			7,624			22,780			23,144			6,804			6,987
Gross profit		2,855			5,605			11,512			14,905			3,522			3,033
Operating expenses:
Sales and marketing		4,000			4,260			12,718			12,552			3,879			3,891
General and administrative		2,015			2,778			7,271			7,700			2,393			3,037
Engineering and development		1,601			1,715			4,840			5,501			1,424			1,289
Change in fair value of patent litigation settlement liability														190			—
Total operating expenses		7,616			8,753			24,829			25,753			7,886			8,217
Loss from operations		(4,761	)		(3,148	)		(13,317	)		(10,848	)		(4,364	)		(5,184	)
Gain (loss) on foreign currency transactions		174			24			390			(30	)
Interest income, net		10			18			29			51
Non-operating income, net		184			42			419			21
Loss (gain) on foreign currency transactions														43			(207	)
Interest expense														478			12
Non-operating loss (income), net														521			(195	)
Loss before income tax provision		(4,577	)		(3,106	)		(12,898	)		(10,827	)		(4,885	)		(4,989	)
Income tax provision		35			40			111			117			15			32
Net loss		(4,612	)		(3,146	)		(13,009	)		(10,944	)		(4,900	)		(5,021	)
Other comprehensive income items:
Other comprehensive income item:
Foreign currency translation adjustment		90			24			277			69			(55	)		84
Comprehensive loss	$	(4,522	)	$	(3,122	)	$	(12,732	)	$	(10,875	)	$	(4,955	)	$	(4,937	)

Net loss	$	(4,612	)	$	(3,146	)	$	(13,009	)	$	(10,944	)
Deemed dividend on convertible preferred stock		—			(2,184	)		(3,978	)		(2,184	)
Net loss attributable to common shareholders	$	(4,612	)	$	(5,330	)	$	(16,987	)	$	(13,128	)

Net loss per share attributable to common shareholders:
Net loss per share:
Basic	$	(0.06	)	$	(0.09	)	$	(0.24	)	$	(0.23	)	$	(0.23	)	$	(0.25	)
Diluted	$	(0.06	)	$	(0.09	)	$	(0.24	)	$	(0.23	)	$	(0.23	)	$	(0.25	)
Shares used in the calculation of net loss per share:
Basic		75,985			58,551			70,489			58,346			21,134			20,469
Diluted		75,985			58,551			70,489			58,346			21,134			20,469

Nine Months Ended

September 30,

2017

2016

Cash Flows from Operating Activities:

Net loss
$
(13,009
)

$
(10,944
)
Adjustments to reconcile net loss to net cash and
�� cash equivalents used in operating activities:

Depreciation and amortization

887

776

Provision (recovery) for bad debts, net

54

(72
)
Provision for inventory excess and obsolescence

348

—

Stock-based compensation

1,604

2,468

Deferred income taxes

45

45

Earned interest income, net

(29
)

(52
)
Changes in operating assets and liabilities:

Restricted cash

—

(51
)
Accounts receivable

52

(863
)
Inventory

(914
)

(1,359
)
Prepaid expenses and other current assets

495

688

Customer deposits

(32
)

(7
)
Accounts payable and accrued liabilities

(3,202
)

2,120

Deferred revenue

(455
)

(202
)
Net cash and cash equivalents used in operating activities

(14,156
)

(7,453
)
Cash Flows from Investing Activities:

Purchases of property, plant, and equipment

(825
)

(1,055
)
Net cash and cash equivalents used in investing activities

(825
)

(1,055
)
Cash Flows from Financing Activities:

Principal payments under capital lease obligation

(128
)

(143
)
Proceeds from equity offering, net of expenses

10,395

9,541

Proceeds from exercise of stock options

3

1

Net cash and cash equivalents provided by financing activities

10,270

9,399

Effect of exchange rate changes

241

60

(Decrease) increase in cash and cash equivalents

(4,470
)

951

Cash and cash equivalents, beginning of period

8,924

11,699

Cash and cash equivalents, end of period
$
4,454

$
12,650

Supplemental cash flow disclosure - Cash Paid:

Interest paid
$
1

$
3

Income taxes paid
$
166

$
66

Supplemental cash flow disclosure - Non-cash:

Accrued capital expenditures and tenant improvement allowance
$
60

$
114

	Three Months Ended
	March 31,
	2019			2018
Total stockholders' equity, beginning balances	$	11,089		$	29,260
Common stock and additional paid-in capital:
Beginning balance		228,451			225,012
Issuance of common stock upon exercise of options		3			2
Settlement of liability awards		202		—
Stock offering costs		—			(38	)
Stock-based compensation expense		634			650
Ending balance		229,290			225,626
Accumulated other comprehensive loss:
Beginning balance		(670	)		(576	)
Other comprehensive (loss) income		(55	)		84
Ending balance		(725	)		(492	)
Accumulated deficit
Beginning balance		(216,692	)		(195,176	)
Net loss		(4,900	)		(5,021	)
Ending balance		(221,592	)		(200,197	)
Total stockholders' equity, ending balances	$	6,973		$	24,937

	Three Months Ended
	March 31,
	2019			2018
Cash Flows from Operating Activities:
Net loss	$	(4,900	)	$	(5,021	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation and amortization		258			264
Provision for bad debts, net		19			200
Provision for sales allowance		—			4
Amortization of discounts on lines of credit		38			—
Amortization of debt issuance costs		49			7
Stock-based compensation		757			701
Deferred income taxes		(5	)		2
Earned interest income, net		(1	)		(1	)
Change in fair value of patent litigation settlement liability		190			—
Changes in operating assets and liabilities:
Accounts receivable		(650	)		186
Inventory		225			(1,103	)
Prepaid expenses and other current assets		463			(20	)
Accounts payable and accrued liabilities		(1,514	)		460
Deferred revenue		37			(441	)
Net cash and cash equivalents used in operating activities		(5,034	)		(4,762	)
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment		(8	)		(102	)
Net cash and cash equivalents used in investing activities		(8	)		(102	)
Cash Flows from Financing Activities:
Principal payments under capital lease obligation		—			(46	)
Borrowings under lines of credit		—			1,823
Payments of debt issuance costs		—			(74	)
Payments of equity offering costs		—			(81	)
Proceeds from exercise of stock options		3			2
Net cash and cash equivalents provided by financing activities		3			1,624
Effect of exchange rate changes		(49	)		74
Decrease in cash, cash equivalents and restricted cash		(5,088	)		(3,166	)
Cash, cash equivalents and restricted cash, beginning of period		8,356			11,896
Cash, cash equivalents and restricted cash, end of period	$	3,268		$	8,730
Supplemental cash flow disclosure:
Cash paid for interest	$	430		$	—
Cash paid for income taxes	$	31		$	24
Cash paid for operating leases	$	189		$	—
Non-cash accrual for capital expenditures	$	24		$	4
Non-cash right-of-use assets obtained in exchange for lease obligation	$	824		$	—

BIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company”)~~, incorporated in Delaware in 1987,~~ is a medical device company that develops, manufactures, markets, and sells laser systems in dentistry and medicine and also markets, sells, and distributes dental imaging equipment, including ~~cone beam digital x-rays and~~ three-dimensional CAD/CAM intra-oral ~~scanners.~~ scanners and digital dentistry software.

The unaudited consolidated financial statements include the accounts of BIOLASE and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December 31, ~~2016~~2018 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments and the elimination of all material intercompany transactions and balances, necessary to fairly present the information set forth therein. These unaudited, interim, consolidated financial statements do not include all the footnotes, presentations, and disclosures normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements. ~~Certain amounts have been reclassified to conform to current period presentations.~~

The consolidated results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 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, ~~2016,~~2018, included in BIOLASE’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 filed with the Securities and Exchange Commission (the “SEC”) on March ~~10, 2017~~8, 2019 (the ~~“2016~~“2018 Form 10-K”).

The Company incurred a loss from operations ~~incurred~~and a net loss, and used cash in operating activities for the three ~~and nine~~ months ended ~~September 30, 2017. The Company has also suffered recurring losses from operations during the three years ended December~~March 31, ~~2016.~~2019. The Company’s recurring losses, level of cash used in operations, and potential need for additional capital, along with uncertainties surrounding the Company’s ability to raise additional capital, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

As ~~discussed in Note 3, on April 18, 2017,~~of March 31, 2019, the Company ~~completed a private placement~~was not in compliance with ~~several institutional and individual investors, and~~ certain of its ~~directors and officers, pursuant~~loan covenants relating to ~~which~~the SWK Loan (as defined below). In May 2019,SWK Funding, LLC granted the Company ~~generated gross proceeds~~a waiver of ~~approximately $10.5 million,~~ ~~and net proceeds, after offering expenses of approximately $0.2 million, of approximately$10.3 million.~~

~~The Company is using the proceeds from the private placement for working capital and general corporate purposes. In connection with the registration rights granted to these investors,~~such covenants. On May 7, 2019, the Company ~~filed~~entered into an amendment of its Credit Agreement with SWK Funding, LLC to increase the ~~SEC a registration statement on Form S-3, which was declared effective on August 24, 2017.~~

~~As discussed~~total loan commitment in ~~Note 3,~~ the ~~Company has filed with~~SWK Loan from $12.5 million to $15.0 million, to revise certain of the ~~SEC an amended registration statement relating~~financial covenants and to ~~a proposed public offering of non-transferable subscription rights~~issue additional warrants to purchase ~~shares of BIOLASE~~the Company’s common stock. As of the date of the filing of the quarterly report on Form 10-Q of which these financial statements are a part, such registration statement has not yet become effective. If the proposed rights offering is consummated, the Company expects to receive gross proceeds of approximately $8.0 million to $12.0 million before expenses.See Note 15 for additional information.

As of ~~September 30, 2017,~~March 31, 2019, the Company had working capital of approximately ~~$14.7~~$13.7 million. The Company’s principal sources of liquidity as of ~~September 30, 2017~~March 31, 2019 consisted of approximately ~~$4.7~~$3.3 million in cash, ~~and~~ cash equivalents and restricted cash and ~~$9.7~~$11.7 million of accounts receivable.

In order for the Company to continue operations beyond the next 12 months and be able to discharge its liabilities and commitments in the normal course of business, ~~the Company~~it must ~~increase sales of~~sell its products directly to ~~end-users~~end users and through distributors, establish profitable operations through ~~the combination of~~ increased sales, ~~and decreased~~decrease expenses, 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~~develop its field 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.

Additional capital requirements may depend on many factors, including, among other things, continued losses, 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, or enter into aan additional line of credit facility. ~~As discussed~~

Except as the context otherwise requires, all share numbers and share price amounts (including exercise prices and closing market prices) contained in ~~Note 3,~~the unaudited financial statements and notes thereto reflect the one-for-five reverse stock split (“the Reverse Stock Split”) effectuated by the Company has filed with the SEC an amended registration statement relating to a proposed public offering of non-transferable subscription rights to purchase shares of BIOLASE common stock. As of the date of the filing of this quarterly report on Form 10-Q, such registration statement has not yet become effective. If the proposed rights offering is consummated, the Company expects to receive gross proceeds of approximately $8.0 million to $12.0 million before expenses and to use such proceedsMay 10, 2018. See Note 4 below for the Company’s general working capital needs. The Company cannot provide assurance that it will be able to successfully consummate the rights offering, any other equity financing or any debt financing or enter into any line of credit facility in the future. The Company also cannot provide assurance 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.

The preparation of these unaudited 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 unaudited consolidated financial statements include allowances on accounts receivable, inventory, and deferred taxes, as well as estimates for accrued warranty expenses, goodwill and the ability of goodwill to be realized, revenue deferrals, 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.

Information with respect to the Company’s critical accounting policies, which management believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the ~~2016~~2018 Form 10-K. Management believes that there have been no significant changes during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 in the Company’s critical accounting policies from those disclosed in Item 7 of the ~~2016~~2018 Form 10-K.

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~~non-performance 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 ~~reflect input other than quoted prices included in Level 1 that~~ are observable, either directly or ~~through collaboration with observable market data, other than Level 1.~~indirectly. Level 3 inputs are unobservable due to little or no corroborating market data.

The Company’s financial instruments, consisting of cash, ~~and~~ cash equivalents, restricted cash, accounts receivable, accounts payable, ~~and~~ accrued liabilities, and the SWK Loan as discussed in Note 9, approximate fair value because of the ~~short maturity~~liquid or short-term nature of these items.

Concentration of Credit Risk, Interest Rate Risk and Foreign Currency Exchange Rate

Financial instruments which potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents, restricted cash, and trade accounts receivable. The Company maintains its cash and cash equivalents and restricted cash with established commercial banks. At times, balances may exceed federally insured limits. To minimize the risk associated with trade accounts receivable, management performs ongoing credit evaluations of customers’ financial condition and maintains relationships with the Company’s customers that allow management to monitor current changes in business operations so the Company can respond as needed. The Company does not, generally, require customers to provide collateral before it sells them its products. However, the Company has required certain distributors to make prepayments for significant purchases of products.

Substantially all of the Company’s revenue is denominated in U.S. dollars, including sales to international distributors. Only a small portion of its revenue and expenses is denominated in foreign currencies, principally the Euro and Indian Rupee. The Company’s foreign currency expenditures primarily consist of the cost of maintaining offices, consulting services, and employee-related costs. During the periods ended March 31, 2019 and 2018, the Company did not enter into any hedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of the Company’s products outside the U.S.

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

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

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), as part of its simplification initiative. The standard requires inventory within the scope of ASU 2015-11 to be measured using the lower of cost and net realizable value. The changes apply to all types of inventory, except those measured using the last-in, first-out method or the retail inventory method. ASU 2015-11 applies to all entities and is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2015-11 as of January 1, 2017. The adoption of ASU 2015-11 did not have a material effect on the Company’s consolidated financial statements.

In November 2015, FASB issued ASU 2015-17, Income Taxes (Topic 740) (“ASC 2015-17”). Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement of financial position. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years with early adoption permitted. The Company adopted ASU 2015-17 as of January 1, 2017. The adoption of ASU 2015-17 did not have a material effect on the Company’s consolidated financial statements.

~~In March~~February 2016, the FASB ~~issued~~established ASU ~~2016-09, Compensation~~Topic 842 – ~~Stock Compensation (Topic 718)~~Leases, by issuing ASU Topic No. 2016-02 (“ASU 2016-09”). The updated standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. ASU 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted. The Company adopted ASU 2016-09 as of January 1, 2017, and made the accounting policy election to estimate the number of awards expected to vest for stock-based compensation expense. The adoption of ASU 2016-09 and related accounting policy election did not have a material effect on the Company’s consolidated financial statements.

~~In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”~~Topic 842”), which ~~supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is~~requires lessees to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle,lease on-balance sheet and ~~in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.~~

The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company has completed a scoping analysis of the effect of the standard to identify the revenue streams that may be affecteddisclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2014-09. The Company is evaluating if the adoption could result in a change in the timing of recognizing revenue for certain deliverables and the impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial statements. The Company is currently evaluating which transition approach to use and will adopt this standard beginning January 1, 2018.

~~In February 2016, FASB issued ASU 2016-02, Leases (“ASU 2016-02”).~~Topic 2018-11 – Targeted Improvements. The new standard establishes a right-of-use model (“ROU”) ~~model~~ that requires a lessee to ~~record~~recognize a ROU asset and a lease liability ~~on the balance sheet~~ for all leases with ~~terms~~a term longer than 12 months. Leases will be classified as ~~either~~ finance or operating, with classification affecting the pattern and classification of expense recognition in the ~~income statement.~~ statement of operations.

The ~~new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A~~Company adopted Topic 842 in the first quarter of 2019 utilizing the modified retrospective transition ~~approach is required for lessees for capital~~method and ~~operating leases existing~~a cumulative effect adjustment at ~~or entered into after,~~ the beginning of the ~~earliest comparative period presented~~first quarter of 2019. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date, and (3) initial direct costs for any existing leases as of the adoption date. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of the right-to-use assets. The adoption of Topic 842 resulted in the ~~financial statements,~~recognition of right-of use assets of approximately $0.8 million after a $0.2 million adjustment for deferred rent, and lease liabilities for operating leases of approximately $1.0 million, and no cumulative effect adjustment on retained earnings on its unaudited Consolidated Balance Sheets nor material impact to its unaudited Consolidated Statements of Operations and Comprehensive Loss in the period of adoption. Right-of-use assets are included in Prepaid and other assets, and lease liabilities are included in Accrued liabilities or Other liabilities in the unaudited consolidated balance sheet for the period ended March 31, 2019. See Note 10 — Leases, for additional information.

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with ~~certain practical expedients available.~~a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company iswill be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted beginning January 1, 2019. We are currently evaluating the impact of ~~its pending adoption of ASU 2016-02~~this standard on ~~its~~the Company’s consolidated financial ~~statements.~~statements, including accounting policies, processes, and systems.

Revenue for sales of products and services is derived from contracts with customers. The products and services promised in customer contracts include delivery of laser systems, imaging systems, and consumables as well as certain ancillary services such as training and extended warranties. Contracts with each customer generally state the ~~FASB issued ASU 2016-15, Statement~~terms of ~~Cash Flows (Topic 230) (“ASU 2016-15”). The updated standard addresses eight specific cash flow issues with~~ the ~~objective~~sale, including the description, quantity and price of ~~reducing diversity~~each product or service. Payment terms are stated in practice. ASU 2016-15 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted.the contract and vary according to the arrangement. Because the customer typically agrees to a stated rate and price in the contract that does not vary over the life of the contract, the Company’s contracts do not contain variable consideration. The Company ~~is assessing~~establishes a provision for estimated warranty expense.

At contract inception, the ~~impact~~Company assesses the products and services promised in its contracts with customers. The Company then identifies performance obligations to transfer distinct products or services to the customers. In order to identify performance obligations, the Company considers all of the ~~adoption~~products or services promised in contracts regardless of ~~ASU 2016-15 on~~whether they are explicitly stated or are implied by customary business practices.

Revenue from products and services transferred to customers at a single point in time accounted for 84% and 83% of net revenue for the three months ended March 31, 2019 and March 31, 2018, respectively. The majority of the Company’s revenue recognized at a point in time is for the sale laser systems, imaging systems, and consumables. Revenue from these contracts is recognized when the customer is able to direct the use of and obtain substantially all of the benefits from the product which generally coincides with title transfer during the shipping process.

Revenue from services transferred to customers over time accounted for 16% and 17% of net revenue for the three months ended March 31, 2019 and March 31, 2018, respectively. The majority of the Company’s revenue that is recognized over time relates to product training and extended warranties. Deferred revenue attributable to undelivered elements, which primarily consists of product training, totaled approximately $0.6 million and $0.7 million as of March 31, 2019 and December 31, 2018, respectively.

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

Revenue is recorded for extended warranties over time as the customer benefits from the warranty coverage. This revenue will be recognized equally throughout the contract period as the customer receives benefits from the Company's ~~consolidated financial statements.~~promise to provide such services. Revenue is recorded for product training as the customer attends a training program or upon the expiration of the obligation, which is generally after nine months.

The Company also has contracts that include both the product sales and product training as performance obligations. In ~~May 2017,~~those cases, the ~~FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) (“ASU 2017-09”).~~Company records revenue for product sales at the point in time when the product has been shipped. The ~~updated standard clarifies~~customer obtains control of the product when it is shipped, as all shipments are made FOB shipping point, and after the customer selects its shipping method and pays all shipping costs and insurance. The Company has concluded that control is transferred to the customer upon shipment.

Accounts receivable are stated at estimated net realizable value. The allowance for doubtful accounts is based on an ~~entity must apply modification accounting to changes~~analysis of customer accounts and the Company’s historical experience with accounts receivable write-offs.

The Company performs its obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the customer. The Company typically invoices its customers as soon as control of an asset is transferred and a receivable for the Company is established. The Company, however, recognizes a contract liability when a customer prepays for goods and/or services and the Company has not transferred control of the goods and/or services. The opening and closing balances of the Company’s contract liabilities are as follows (in thousands):

The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables at March 31, 2019 and December 31, 2018.

The amount of revenue recognized during the three months ended March 31, 2019 that was included in the ~~terms or conditions~~opening contract liability balance related to undelivered elements was $0.3 million, related to extended warranty contracts was $0.7 million and deferred royalties was $3,000.

Disaggregation of a share-based payment award. ASU 2017-09 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted.Revenue

The Company ~~does not expect~~disaggregates revenue from contracts with customers into geographical regions and by the timing of when goods and services are transferred. The Company determined that disaggregating revenue into these categories depicts how the ~~adoption~~nature, amount, timing and uncertainty of ~~this standard will have a material effect on its consolidated financial statements.~~revenue and cash flows are affected by regional economic factors.

~~On April 18, 2017, the Company completed a private placement with several institutional and individual investors, and certain of its directors and officers,~~ under which the Company sold an aggregate of 80,644 shares of BIOLASE Series D Participating Convertible Preferred Stock, par value $0.001 per share (“Preferred Stock”), and warrants (the “Warrants”) to purchase up to an aggregate of 3,925,871 unregistered shares of BIOLASE common stock at an exercise price of $1.80 per share (the “Exercise Price”), subject to customary anti-dilution adjustments. Each share of Preferred Stock converted automatically into 100 shares of BIOLASE common stock upon receipt of stockholder approval on June 30, 2017, reflecting a conversion price equal to $1.24 per share, which is the closing price of BIOLASE common stock quoted on the NASDAQ Capital Market on April 10, 2017. ~~On June 30, 2017, BIOLASE’s stockholders also approved the issuance of common stock~~The Company’s revenues related to the ~~exercise~~following geographic areas were as follows for the periods indicated (in thousands):

Information regarding revenues disaggregated by the timing of when goods and services are transferred is as follows (in thousands):

The Company’s sales by end market were as follows for the periods indicated (in thousands):

The Company acts as the principal in all its imaging equipment distribution sales. The Company takes possession and control of the ~~Warrants by certain holders whose Warrants were subject~~equipment before they are sold and transferred to the customer. The Company provides the equipment and any related services directly to the customer. The Company has inventory risk before the equipment is transferred to a ~~beneficial ownership limitation. Also~~customer. The Company purchases and obtains the goods before obtaining a contract with a customer. The Company also has discretion in establishing the price sold to the customer for the equipment.

The percentages of the Company’s sales by product line were as follows for the periods indicated:

Shipping and freight costs are treated as fulfillment costs. For shipments to end-customers, the customer bears the shipping and freight costs and has control of the product upon shipment. For shipments to distributors, the distributor bears the shipping and freight costs, including insurance, tariffs and other import/export costs.

At BIOLASE’s annual meeting of stockholders on ~~June 30, 2017, BIOLASE’s~~ May 9, 2018 (the “2018 Annual Meeting”), BIOLASE stockholders approved ~~the~~an amendment to ~~the Company's~~BIOLASE’s Restated Certificate of Incorporation, as amended, to ~~increase the number of authorized shares~~effect a reverse stock split of BIOLASE common stock ~~from 100,000,000 shares to 200,000,000 shares.~~

~~The Warrants became exercisable~~and on October 18, 2017 and expire on April 18, 2022 five years after the date of issuance, or, if earlier, five business days after the Company delivers notice that the closing price per share of BIOLASE common stock exceeded the Exercise Price for 30 consecutive trading days during the exercise period. Gross proceeds from the sale were approximately $10.5 million, ~~and net proceeds, after offering expenses of approximately $0.2 million, were approximately$10.3 million.The Company is using the proceeds from the private placement for working capital and general corporate purposes. In connection with the registration rights granted to these investors,~~May 10, 2018, the Company filed an amendment (the “Amendment”) to its Restated Certificate of Incorporation, as amended, with the ~~SEC a registration statement on Form S-3, which was declared effective on August 24, 2017.~~

~~In accordance with applicable accounting standards, the $10.5 million gross proceeds from the private placement described above were allocated to the Preferred Stock and Warrants in the amount~~Secretary of ~~$8.2 million and $2.3 million, respectively. The allocation was based on the relative fair values~~State of the ~~underlying~~State of Delaware to effect the Reverse Stock Split, effective as of 11:59 p.m. on May 10, 2018. The Amendment also reduced the authorized shares of common stock from 200,000,000 shares to 40,000,000 shares. Prior year share and ~~Warrants as~~per share amounts have been adjusted to reflect the impact of the commitment date, with the fair value of the Warrants determined using a Black Scholes model. Assumptions used in the Black-Scholes model include an expected term of five years, a risk-free rate of 1.90% and a dividend yield of 0%. This transaction resulted in a discount from allocation of proceeds to separable instruments of $2.0 million and a beneficial conversion to commonreverse stock ~~with a value of $2.0 million, which have been reflected as a deemed distribution to preferred shareholders for the nine months ended September 30, 2017.~~

On September 29, 2017, the Company filed a registration statement on Form S-1 with the SEC for a proposed rights offering to its existing shareholders. The registration statement was amended on October 10, 2017, but, as of the date of the filing of the quarterly report on Form 10-Q of which these financial statements are a part, the registration statement has not yet become effective. The proposed rights offering consists of a public offering of non-transferable subscription rights to purchase shares of BIOLASE common stock. If the Company proceeds with the proposed rights offering, its stockholders will receive (a) basic subscription rights to purchase their pro rata portion of the shares of BIOLASE common stock offered in the proposed rights offering and (b) over-subscription privileges, which will entitle the holders thereof who exercise their basic subscription rights in full the opportunity to purchase additional shares of BIOLASE common stock unclaimed by other holders of basic subscription rights in the proposed rights offering, subject to certain limitations and subject to allotment. Certain affiliates of Larry Feinberg and certain affiliates of Jack Schuler have each agreed with the Company to exercise their respective basic subscription rights and any available over-subscription privilege pursuant to the rights offering in an amount not less than $3.0 million each. The record date of the rights offering will be ~~5:00 p.m., Eastern Time on November 8, 2017~~.

If the rights offering is consummated, the Company expects to receive gross proceeds of approximately $8.0 million to $12.0 million before expenses. The purpose of the rights offering is to raise equity capital in a cost-effective manner that gives all of the Company’s existing stockholders the opportunity to participate on a pro rata basis. There can be no assurance that the Company will be successful in completing the rights offering, any other equity financing or any debt financing.

The ~~Company currently has one stock-based compensation plan, the~~ 2002 Stock Incentive Plan (as amended effective as of May 26, 2004, November 15, 2005, May 16, 2007, May 5, 2011, June 6, 2013, October 30, 2014, April 27, 2015, and May 6, ~~2016) (the~~2016, the “2002 Plan”)~~, which will expire on May 5, 2019.~~ was replaced by the 2018 Plan (as defined below) with respect to future equity awards. Persons eligible to receive awards under the 2002 Plan ~~include~~included officers, employees, and directors of the Company, as well as consultants. As of ~~September 30, 2017,~~March 31, 2019, a total of ~~15,550,000~~approximately 3.1 million shares of ~~BIOLASE~~the Company’s common stock have been authorized for issuance under the 2002 Plan, of which ~~3,946,000~~approximately 1.0 million shares of ~~BIOLASE~~the Company’s common stock have been issued pursuant to options that were exercised and restricted stock units (“RSUs”) that were settled in common stock ~~9,437,000~~and 1.6 million shares of ~~BIOLASE~~ common stock have been reserved for outstanding options and unvested RSUs, and ~~2,167,000~~no shares are available for future grants.

At the 2018 Annual Meeting, the Company’s stockholders approved the 2018 Long-Term Incentive Plan (as amended, the “2018 Plan”) which was amended by Amendment No. 1 to the 2018 Plan, approved by the Company’s stockholders at a special meeting on September 21, 2018. The purposes of the 2018 Plan are (i) to align the interests of the Company’s stockholders and recipients of awards under the 2018 Plan by increasing the proprietary interest of such recipients in the Company’s growth and success; (ii) to advance the interests of the Company by attracting and retaining non-employee directors, officers, other employees, consultants, independent contractors and agents; and (iii) to motivate such persons to act in the long-term best interests of the Company and its stockholders.

Subject to the terms and conditions of the 2018 Plan, the number of shares authorized for grants under the 2018 Plan is 3.3 million. As of March 31, 2019, a total 1.9 million shares of ~~BIOLASE~~the Company’s common stock have been reserved for outstanding options and unvested RSUs, and 1.4 million shares of common stock remain available for future grants.

The Company recognized stock-based compensation expense of ~~$464,000~~$0.8 million and ~~$688,000,~~$0.7 million, for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively, ~~and $1.6 million and $2.5 million, for the nine months ended September 30, 2017 and 2016 respectively,~~ based on the grant-date fair value. Stock-based compensation expense for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and 2018 includes the reversal of ~~$640,000~~$0.1 million and $0.0 million, respectively, resulting from the reassessment of certain ~~performance based~~performance-based equity awards. The net impact of stock-based compensation expense to earnings was ~~$(0.01)~~$(0.04), and ~~$(0.01)~~$(0.03) per basic and diluted share for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016, respectively~~ ~~and $(0.02) and $(0.04) per basic and diluted share for the nine months ended September 30, 2017 and 2016, respectively~~.2018, respectively. At ~~September 30, 2017,~~March 31, 2019, the Company had approximately ~~$4.1~~$2.1 million of total unrecognized compensation ~~cost,~~expense, net of estimated forfeitures, related to unvested share-based compensation arrangements. The Company expects that ~~cost~~expense to be recognized over a weighted-average period of ~~2.1~~2.0 years.

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

	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2019		2018
Cost of revenue	$	69	$	29	$	176	$	198	$	82	$	57
Sales and marketing		53		89		219		410		160		80
General and administrative		279		522		978		1,614		441		467
Engineering and development		63		48		231		246		74		97
	$	464	$	688	$	1,604	$	2,468	$	757	$	701

The stock option fair values ~~under the 2002 Plan,~~ were estimated using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2017			2016			2017			2016			2019			2018
Expected term	5.3 years			5.9 years			5.5 years			5.8 years			6.1 years			5.9 years
Volatility		80.5	%		86.6	%		78.7	%		85.5	%		86.2	%		81.4	%
Annual dividend per share	$	—		$	—		$	—		$	—		$	—		$	—
Risk-free interest rate		1.76	%		1.30	%		1.95	%		1.32	%		2.64	%		2.46	%

A summary of option activity ~~under the 2002 Plan~~ for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 is as follows ~~(in~~(in thousands, except per share data):

Weighted Average

Weighted

Remaining

Aggregate

Average

Contractual

Intrinsic

Shares

Exercise Price

Term (Years)

Value(1)

Options outstanding, December 31, 2016

6,612

$
2.06

7.70

$
178

Granted at fair market value

1,355

1.30

Exercised

(3
)

0.86

Forfeited, cancelled, or expired

(750
)

1.85

Options outstanding at September 30, 2017

7,214

$
1.94

6.95

$
4

Options exercisable at September 30, 2017

4,014

$
2.29

5.35

$
—

Vested options expired during the quarter
ended September 30, 2017

5

$
2.50

						Weighted Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Shares			Exercise Price		Term (Years)		Value(1)
Options outstanding, December 31, 2018		1,623		$	6.54			$	—
Granted at fair market value		40		$	2.08
Exercised		(2	)	$	2.10
Forfeited, cancelled, or expired		(93	)	$	6.00
Options outstanding at March 31, 2019		1,568		$	6.46		5.71	$	—
Options exercisable at March 31, 2019		1,159		$	7.69		4.85	$	—
Vested options expired during the quarter ended March 31, 2019		11		$	12.88

(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.

A summary of unvested stock option activity ~~under the 2002 Plan~~ for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 is as follows (in thousands, except per share data):

				Weighted					Weighted
				Average Grant					Average Grant
	Shares			Date Fair Value		Shares			Date Fair Value
Unvested options at December 31, 2016		3,259		$	1.16
Unvested options at December 31, 2018							522		$	2.11
Granted		1,355		$	0.86		40		$	1.53
Vested		(921	)	$	1.08		(97	)	$	3.52
Forfeited or cancelled		(494	)	$	1.03		(56	)	$	3.00
Unvested options at September 30, 2017		3,199		$	1.08
Unvested options at March 31, 2019							409		$	1.59

Cash proceeds, along with fair value disclosures related to grants, exercises and vested options ~~under the 2002 Plan~~ are as follows ~~for the three and nine months ended September 30~~ (in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Proceeds from stock options exercised
$
—

$
1

$
3

$
1

Tax benefit related to stock options
   exercised (1)
N/A

N/A

N/A

N/A

Intrinsic value of stock options exercised (2)
$
—

$
—

$
1

$
—

Weighted-average fair value of options granted
   during period
$
0.86

$
1.13

$
0.39

$
0.99

Total fair value of shares vested during
   the period
$
302

$
317

$
1,000

$
1,370

	Three Months Ended
	March 31,
	2019		2018
Proceeds from stock options exercised	$	3	$	2
Tax benefit related to stock options exercised (1)	N/A		N/A
Intrinsic value of stock options exercised (2)	$	—	$	—
Weighted-average fair value of options granted during period	$	1.53	$	1.45
Total fair value of shares vested during the period	$	342	$	520

(1) Excess tax benefits received related to stock option exercises are presented as ~~financing~~operating 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.

Effective February 6, 2017, the Compensation Committee of the BIOLASE board of directors (the “Board”) issued 611,000 non-qualified stock options to purchase shares of BIOLASE common stock to certain employees of the Company. These awards were issued at $1.55 per share, the closing market price of BIOLASE common stock on the grant date, and expire 10 years from the grant date. Vesting periods for options are as follows: (i) for the 586,000 options awarded to existing employees, one-half vest on the first anniversary of grant date and one-half vest on the second anniversary of the grant date and (ii) for the 25,000 options awarded to new employees, 25% vest on February 6, 2018 and the remainder vest ratably over the 36-month period, commencing on March 6, 2018.

On May 10, 2017, non-employee directors of the Company were granted a total of 525,528 non-qualified stock options to purchase shares of BIOLASE common stock. These awards were issued at $1.21 per share, the closing market price of BIOLASE common stock on the grant date, and expire 10 years from the grant date. The total grant vests in equal installments over a consecutive 12-month period, commencing on June 10, 2017.

On September 1, 2017, Paul N. Clark resigned from the Board, effective September 11, 2017, and as Chairman of the Board, effective September 1, 2017. Effective September 1, 2017, Dr. Jonathan T. Lord was appointed Chairman of the Board. On September 11, 2017, the Compensation Committee of the Board approved a modification to expiration dates applicable to Mr. Clark’s vested options. As a result of the modification, the Company recognized additional compensation expense of $44,000 for the three and nine months ended September 30, 2017. On September 11, 2017, Dr. Lord was granted 65,385 non-qualified stock options to purchase shares of BIOLASE common stock at $0.54 per share, the closing market price of BIOLASE common stock on the grant date, and expiring 10 years from grant date. On September 12, 2017, Dr. Lord was granted 65,891 non-qualified stock options to purchase shares of BIOLASE common stock at $0.61 per share, the closing market price of BIOLASE common stock on the grant date, and expiring 10 years from grant date. Both grants vest in equal installments over an eight-month period, commencing on October 10, 2017.

On March 13, 2017, and as amended on April 19, 2017, in connection with the hiring of a new Vice President of Sales, the Compensation Committee of the Board awarded non-qualified stock options to purchase 400,000 shares of BIOLASE common stock. This award was issued at $1.17 per share, the closing market price of BIOLASE common stock on the grant date, and expires 10 years from the grant date. Vesting periods for the options are as follows: (i) two-fifths of the total grant is subject to time vesting with 25% vesting as of March 13, 2018 and the remaining 75% vesting ratably monthly over a 36-month period commencing on March 13, 2018, and (ii) three-fifths of the total grant is subject to specific 2017 and 2018 performance criteria, with vesting upon satisfaction of the applicable performance criteria.

On March 27, 2017, in connection with the hiring of a new Senior Vice President and Chief Financial Officer, the Compensation Committee of the Board awarded non-qualified stock options to purchase 600,000 shares of BIOLASE common stock. This award was issued at $1.28 per share, the closing market price of BIOLASE common stock on the grant date, and expires 10 years from the grant date. Vesting periods for the options are as follows: (i) two-thirds of the total grant is subject to time vesting with 25% vesting as of March 27, 2018 and the remaining 75% vesting ratably monthly over a 36-month period commencing on March 27, 2018, and (ii) one-third of the total grant is subject to specific 2017 and 2018 performance criteria, with vesting upon satisfaction of the applicable performance criteria. This award was forfeited upon the departure of the Senior Vice President and Chief Financial Officer in May 2017.

On July 13, 2015, the Compensation Committee of the Board awarded 870,000 stock-settled RSUs to the Company’s President and Chief Executive Officer in connection with his employment agreement with BIOLASE. The RSUs were valued at $1.64 per share and vest upon the achievement of specific interim and annual Company performance criteria. As of September 30, 2017, no stock-settled RSUs remain outstanding.

~~Effective February 6, 2017, the Compensation Committee of the Board approved the grant of the following awards:~~

On May 9, 2017 and in connection with the 2017 compensation plan, 500,000 RSUs were awarded to certain employees and consultants of the Company. These awards were valued at $1.22 per share, the closing market price of BIOLASE common stock on the grant date. The RSUs vest as follows: (i) one-half of the total grant is subject to time vesting with 50% vesting on May 9, 2018 and the remaining 50% vesting on May 9, 2019, and (ii) one-half of the total grant is subject to specific 2017 and 2018 performance criteria, with vesting upon satisfaction of the applicable performance criteria.

On May 10, 2017, non-employee directors of the Company were granted a total of 175,176 RSUs valued at $1.21 per share, the closing market price of BIOLASE common stock on the grant date. These awards vest on May 10, 2018. ~~On September 1, 2017, Paul N. Clark resigned from the Board, effective September 11, 2017, and as Chairman of the Board, effective September 1, 2017.~~ On September 11, 2017, the Compensation Committee of the Board approved a modification to the vesting criteria applicable to Mr. Clark’s unvested RSUs. As a result of the modification, the Company recognized additional compensation expense of $12,000 forno material grants made during the three ~~and nine~~ months ended ~~September 30, 2017.~~

On September 11, 2017, members of the executive management team of the Company agreed to receive performance based RSUs in lieu of cash salary compensation totaling $265,000 for the period from September 3, 2017 through March 3, 2018. These RSUs vest on September 11, 2018 subject to satisfaction of Company specific performance criteria, and the quantity of RSUs granted will be calculated at vesting based on the closing price of BIOLASE common stock on the vesting date. As the Company may settle the value of compensation equivalent by issuing a variable number of RSUs at the vesting date, this award is classified as a liability, specifically within accrued liabilities, on the Company’s Consolidated Balance Sheets as of September 30, 2017.

A summary of unvested RSU activity ~~under the 2002 Plan~~ for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 is as follows ~~(in~~(in thousands, except per share amounts):

				Weighted					Weighted
				Average Grant					Average Grant
	Shares			Date Fair Value		Shares			Date Fair Value
Unvested restricted stock units at December 31, 2016		419		$	1.23
Unvested RSUs at December 31, 2018							2,037		$	1.84
Granted		2,321		$	1.23		40		$	2.08
Vested		(387	)	$	1.28		(220	)	$	2.28
Forfeited or cancelled		(130	)	$	0.98		(64	)	$	2.62
Unvested restricted stock units at September 30, 2017		2,223		$	1.23
Unvested RSUs at March 31, 2019							1,793		$	1.76

The Company issues warrants to acquire shares of ~~BIOLASE~~the Company’s common stock as approved by the Board. A summary of warrant activity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 is as follows (in thousands, except exercise price amounts):

Weighted

Average

Shares

Exercise Price

Warrants outstanding, December 31, 2016

11,406

$
3.64

Granted or Issued

3,926

$
1.80

Exercised

—

$
—

Forfeited, cancelled, or expired

—

$
—

Warrants outstanding at September 30, 2017

15,332

$
3.17

Warrants exercisable at September 30, 2017

11,271

$
3.64

Vested warrants expired during the quarter
ended September 30, 2017

—

$
—

			Weighted
	��		Average
	Shares		Exercise Price
Warrants outstanding, December 31, 2018		1,934	$	6.62
Granted or Issued		—	$	—
Exercised		—	$	—
Forfeited, cancelled, or expired		—	$	—
Warrants outstanding at March 31, 2019		1,934	$	6.62
Warrants exercisable at March 31, 2019		1,906	$	6.43
Vested warrants expired during the quarter ended March 31, 2019		—	$	—

See ~~“2017 Private Placement” above~~Note 9 for ~~a description of~~additional information on the ~~private placement transaction in which 3,925,871~~Western Alliance Warrants, ~~were issued.~~the SWK Warrants, and the DPG Warrants (each as defined below).

Basic net ~~income (loss)~~loss per share is computed by dividing ~~income (loss)~~net loss available to common stockholders by the weighted-average number of shares of ~~BIOLASE~~the Company’s common stock outstanding for the period. In computing diluted net ~~income (loss)~~loss per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities.

Outstanding stock options, RSUs and warrants to purchase approximately ~~26,834,243~~5.7 million shares were not included in the calculation of diluted loss per share for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2019, as their effect would have been anti-dilutive. For the same ~~2016~~2018 periods, anti-dilutive outstanding stock options and warrants to purchase ~~17,636,132~~3.8 million shares were not included in the computation of diluted loss per share.

Inventory is valued at the lower of cost or ~~market, with cost determined using the first-in, first-out method,~~net realizable value and is comprised of the following (in thousands):

	September 30,		December 31,		March 31,		December 31,
	2017		2016		2019		2018
Raw materials	$	4,810	$	4,837	$	4,007	$	3,590
Work-in-process		1,676		2,261		1,306		1,435
Finished goods		7,616		6,425		6,710		7,223
Inventory, net	$	14,102	$	13,523	$	12,023	$	12,248

Inventory ~~is net of a provision~~includes write-downs for excess and obsolete inventory totaling ~~$1.7~~approximately $1.1 million and $1.1 million as of ~~both September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~

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

	September 30,			December 31,			March 31,			December 31,
	2017			2016			2019			2018
Building	$	220		$	196		$	209		$	213
Leasehold improvements		2,005			2,003			2,004			2,004
Equipment and computers		6,731			6,163			7,291			7,277
Furniture and fixtures		634			599			634			634
Construction in progress		1,711			1,590			32			25
		11,301			10,551			10,170			10,153
Accumulated depreciation and amortization		(7,122	)		(6,225	)		(8,599	)		(8,344	)
		4,179			4,326			1,571			1,809
Land		171			152			162			166
Property, plant, and equipment, net	$	4,350		$	4,478		$	1,733		$	1,975

Depreciation and amortization expense related to property, plant, and equipment totaled ~~$310,000~~$0.3 million and ~~$887,000~~$0.3 million for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2019 and ~~$274,000 and $734,000 for the three and nine months ended September 30, 2016,~~March 31, 2018, respectively.

The cost basis of assets held under capital lease was $378,000 and the accumulated depreciation related to assets held under capital lease was $340,000 as of September 30, 2017. For additional information on the capital lease, see Note 8 – Commitments and Contingencies.

The Company conducted its annual impairment test of goodwill as of June 30, ~~2017~~2018 and determined that there was no impairment. The Company also tests its intangible assets and goodwill between the annual impairment tests 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. For intangible assets subject to amortization, the Company performs its impairment test when indicators, such as reductions in demand or significant economic slowdowns, are present. No events have occurred since June 30, ~~2017~~2018 through the date of these unaudited consolidated financial statements that would trigger further impairment testing of the Company’s intangible assets and goodwill.

As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the Company had goodwill (indefinite life) of $2.9 million. As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, all intangible assets have been fully ~~amortized. There was~~amortized and no amortization expense ~~for~~was recognized during the three ~~and nine~~ months ended ~~September 30, 2017. Amortization expenses for the three~~March 31, 2019 and ~~nine months ended September 30, 2016 totaled $14,000 and $42,000, respectively.~~ 2018.

	September 30,		December 31,		March 31,		December 31,
	2017		2016		2019		2018
Payroll and benefits	$	2,200	$	2,147	$	2,122	$	2,400
Patent litigation settlement						1,190		1,500
Warranty accrual, current portion		1,043		933		807		861
Lease liability						718		—
Accrued professional services						791		1,044
Taxes		428		638		476		714
Accrued professional services		652		782
Accrued capital lease obligations, current portion		32		159
Accrued insurance premium		61		906		189		328
Customer deposits						28		21
Other		297		213		392		670
Total accrued liabilities	$	4,713	$	5,778	$	6,713	$	7,538

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, 2017~~March 31, 2019 and ~~2016~~2018 are included within accrued liabilities on the Consolidated Balance Sheets and were as follows (in thousands):

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2017			2016			2017			2016			2019			2018
Initial warranty accrual, beginning balance	$	1,285		$	1,919		$	1,706		$	2,188
Balance, January 1													$	1,308		$	1,190
Provision for estimated warranty cost		190			282			192			379			239			246
Warranty expenditures		(325	)		(224	)		(748	)		(590	)		(163	)		(222	)
		1,150			1,977			1,150			1,977
Balance, March 31														1,384			1,214
Less warranty accrual, long-term		107			955			107			955			577			124
Total warranty accrual, current portion	$	1,043		$	1,022		$	1,043		$	1,022		$	807		$	1,090

The Company’s Waterlase laser systems ~~and Diode systems~~ sold ~~domestically~~worldwide are covered by a warranty against defects in material and workmanship for a period of up to ~~two years~~16 months domestically and up to 28 months internationally, from the date of sale by the Company or a distributor to the end-user. ~~In 2017, for Waterlase~~The Company’s Diode systems sold ~~domestically~~worldwide are covered by a warranty against defects in material and ~~purchased in 2017 or later,~~workmanship for a period of up to 28 months from the date of sale by the Company ~~decreased~~or a distributor to the ~~warranty from two years to one year.~~end-user.

~~Deferred revenue is comprised~~The following table presents the details of the ~~following~~principal outstanding and unamortized discount (in thousands):

On March 6, 2018, the BIOLASE and two of its wholly-owned subsidiaries (such subsidiaries, together with BIOLASE, the “Borrower”) entered into the Business Financing Agreement (the “Business Financing Agreement”) with Western Alliance Bank (“Western Alliance”). Pursuant to the terms and conditions of the Business Financing Agreement, Western Alliance agreed to provide the Borrower a secured revolving line of credit permitting the Borrower to borrow or receive letters of credit up to the lesser of $6.0 million (the “Domestic Revolver”) (subject to a $6.0 million credit limit relating to domestic eligible accounts receivable (the “domestic credit limit”) and a $3.0 million credit limit relating to export-related (the “EXIM Revolver”) eligible accounts receivable (the “EXIM credit limit”)) and the borrowing base, which is defined as the sum of the domestic borrowing base (up to 75% of the Borrower’s eligible domestic accounts receivable less such reserves as Western Alliance may deem proper and necessary) and the export-related borrowing base (up to 85% of the Borrower’s eligible export-related accounts receivable less such reserves as Western Alliance may deem proper and necessary). The Business Financing Agreement was set to expire on March 6, 2020, and the Borrower’s obligations thereunder were secured by a security interest in all of the Borrower’s assets.

The Business Financing Agreement required the Company to maintain compliance with certain financial and non-financial covenants, as defined therein. Western Alliance had the right to declare the amounts outstanding under the Business Financing Agreement immediately due and payable upon a default.

Amounts outstanding under the Business Financing Agreement bore interest at a per annum floating rate equal to the greater of 4.5% or the “Prime Rate” published in the Money Rates section of the Western Edition of The Wall Street Journal (or such other rate of interest publicly announced from time to time by Western Alliance as its “Prime Rate”), plus 1.5% with respect to advances made under the line of credit, plus an additional 5.0% during any period that an event of default occurred and was continuing. The commitment fee under the Business Financing Agreement was 0.25% of the domestic credit limit and 1.75% of the EXIM credit limit, payable on March 6, 2018 and each anniversary thereof.

Pursuant to the Business Financing Agreement, the Company paid the first of two annual commitment fees totaling $67,500, being 0.25% of the aggregate $6.0 million commitment for the Domestic Revolver and 1.75% of the aggregate $3.0 million commitment for the EXIM Revolver. The commitment fees and the legal costs associated with acquiring the credit facilities were capitalized and were amortized on a straight-line basis as interest expense over the term of the Business Financing Agreement.

As additional consideration for the lines of credit, the Company also issued to Western Alliance warrants (the (“Original Western Alliance Warrants”). The fair value of the Western Alliance Warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 10 years; volatility of 91.49%; annual dividend per share of $0.00; and risk-free interest rate of 2.88%; and resulted in an estimated fair value of $0.1 million, which was recorded as a liability and resulted in a discount to the credit facilities at issuance. The discount was expensed to interest expense at the time the Business Financing Agreement was terminated, as discussed below.

On August 13, 2018, the Borrower and Western Alliance entered into a Waiver and Business Financing Modification Agreement, pursuant to which Western Alliance waived certain of the Borrower’s covenants under the Business Financing Agreement and provided an advance of $1.5 million, which advance was due by September 27, 2018.

On September 27, 2018, the Borrower and Western Alliance entered into a second Business Financing Modification Agreement which reduced the credit limit under the Business Financing Agreement to $2.5 million and extended the due date of the $1.5 million advance to March 6, 2019. In connection with the agreement, the Original Western Alliance Warrants were terminated, and the Company issued to Western Alliance new warrants (the “Western Alliance Warrants”) to purchase up to 56,338 shares of the Company’s common stock. The Western Alliance Warrants are immediately exercisable and expire on September 27, 2028. These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issue shares at a price less than the $2.13 per share exercise price.

On October 22, 2018, the Borrower and Western Alliance entered into a third Business Financing Modification Agreement, pursuant to which Western Alliance waived BIOLASE’s non-compliance with certain financial operating covenants as set forth in the Business Financing Agreement, and the Borrower agreed to certain amended covenants contained in the Business Financing Agreement, including a $300,000 minimum unrestricted cash balance covenant and a waiver of reporting items required to be delivered by BIOLASE to Western Alliance under the Business Financing Agreement.

On November 9, 2018, all outstanding borrowings, accrued interest and fees under the Business Financing Agreement were repaid with a portion of the proceeds under the Credit Agreement (as defined and described below), and the Business Financing Agreement was terminated. The Company recorded approximately $0.1 million of interest expense including unamortized debt issuance costs that were written-off upon extinguishment of the debt. As of March 31, 2019 and December 31, 2018, the Western Alliance Warrants remain outstanding and are classified in equity in the consolidated balance sheet.

On November 9, 2018, the Company entered into a five-year secured Credit Agreement (the “Credit Agreement”) with SWK Funding LLC (“SWK”), pursuant to which the Company has borrowed $12.5 million (the “SWK Loan”). The Company’s obligations under the Credit Agreement are secured by substantially all of the Company’s assets. Under the terms of the Credit Agreement, repayment of the loan is interest-only for the first two years, paid quarterly with the option to extend the interest-only period. Principal repayments will begin in the first quarter of 2021 and will be approximately $0.7 million quarterly until the loan matures in the fourth quarter of 2023. The loan bears interest at London Interbank Bank Offered Rate (“LIBOR”) plus 10% or another index that approximates LIBOR as close as possible if and when LIBOR no longer exists. Approximately $0.9 million of the proceeds from the SWK Loan were used to pay off all amounts owed to Western Alliance under the Business Financing Agreement. The Company plans to use the remaining proceeds to provide additional working capital to fund its growth initiatives, such as broadening its customer base and increasing the utilization of its products to drive recurring higher margin consumables revenue.

The Credit Agreement contains financial and non-financial covenants requiring the Company to, among other things, (i) maintain unencumbered liquid assets of no less than $1.5 million or the sum of aggregate cash flow from operations less capital expenditures, ii) achieve certain revenue and EBITDA levels during the first two years of the loan, (iii) limit future borrowing, investments and dividends, and (iv) submit monthly and quarterly financial reporting.

In connection with the SWK Loan, the Company paid approximately $1.0 million in debt issuance costs, including a $0.2 million loan origination fee, a $0.4 million finder’s fee, and $0.4 million in legal and other fees. These costs were recognized as a discount on the SWK Loan and are being amortized on a straight-line basis over the loan term which approximates the effective-interest method.

The Company recognized approximately $0.5 million in interest expense relating to the SWK Loan for the period ended March 31, 2019. The weighted-average interest rate for the three months ended March 31, 2019 was 12.7%.

As of March 31, 2019, the Company was not in compliance with certain covenants in the Credit Agreement. In May 2019, SWK granted the Company a waiver of such covenants. On May 7, 2019, the Company and SWK agreed to amend the Credit Agreement to increase the total commitment in the SWK Loan from $12.5 million to $15.0 million and to revise certain of the financial covenants. Further details of the amendment are described in Note 15 below.

In connection with the Credit Agreement, the Company issued warrants to SWK (the “SWK Warrants”) on November 9, 2018, to purchase up to 372,023 shares of the Company’s common stock. The SWK Warrants are immediately exercisable and expire on November 9, 2026. The exercise price of the SWK Warrants is $1.34, which was the average closing price of the Company’s common stock for the ten trading days immediately preceding November 9, 2018. These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issue shares at a price per share less than the exercise price. The fair value of the SWK Warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 8 years; volatility of 81.79%; annual dividend per share of $0.00; and risk-free interest rate of 3.13%; and resulted in an estimated fair value of $0.4 million.

In connection with the SWK Loan, the Company paid a finder’s fee to Deal Partners Group of $0.4 million cash and issued warrants to purchase up to 279,851 shares of common stock (the “DPG Warrants”). The DPG Warrants were issued on November 14, 2018, were exercisable immediately, and expire on November 9, 2026. The exercise price of the DPG Warrants is $1.34 which was the average closing price of the Company’s common stock for the ten trading days immediately preceding November 9, 2018. These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issue shares at a price per share less than the exercise price. The fair value of the DPG Warrants of $0.3 million was estimated using the Black Scholes option pricing model with the following assumptions: expected term of 8 years; volatility of 81.79%; annual dividend per share of $0.00; and risk-free interest rate of 3.13%.

The value of both the SWK Warrants and the DPG Warrants was recognized as a discount on the SWK Loan and are being amortized on a straight-line basis which approximates the effective-interest method, over the loan term of five years. Additionally, based on the adoption of ASU 2017-11 in the fourth quarter of 2018, these warrants are classified as equity in the consolidated balance sheet as of March 31, 2019.

The future minimum principal and interest payments as of March 31, 2019 are as follows (in thousands):

The Company enters into operating leases primarily for real estate, office equipment, and fleet vehicles. Lease terms generally range from one to five years, and often include options to renew for one year. On January 1, 2019, the Company adopted Topic 842, using the modified-retrospective approach as discussed in Note 2, and as a result recognized a right-of-use asset of approximately $0.8 million as adjusted for deferred rent at the date of adoption of $0.2 million, and a lease liability of approximately $1.0 million. No cumulative-effect adjustment to retained earnings was required upon adoption of Topic 842. Right-of-use assets are recorded in Prepaid and other assets and lease liabilities are included in Accrued liabilities or Other liabilities depending on whether they are current or noncurrent. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate (“IBR”) to determine the present value of the lease payments and on the date of adoption, the Company determined its IBR to be 12.78%. This rate was based on the Company’s financing of the SWK Loan which is a collateralized loan, and was based on prevailing market rates during the fourth quarter of 2018.

Information related to the Company’s right-of-use assets and related liabilities were as follows (in thousands):

The Company allocates lease cost amongst lease and non-lease components. The Company excludes short-term leases (those with lease terms of less than one year at inception) from the measurement of lease liabilities or right-of-use assets.

Maturities of lease liabilities as of March 31, 2019 were as follows (in thousands):

As of March 31, 2019, right-of-use assets were $0.7 million and lease liabilities were $0.8 million. During the three months ended March 31, 2019, the Company did not enter into any new lease arrangements, nor did it have any arrangements that had not commenced.

The Company leases its 57,000 square foot corporate headquarters and manufacturing facility located at 4 Cromwell, Irvine, California. In March 2015, the corporate headquarters and manufacturing facility lease was amended to extend the term through April 30, 2020, modify provisions for a tenant improvement allowance of up to $398,000, and adjust the basic rent terms. Future minimum rental commitments under operating lease agreements with non-cancelable terms greater than one year for the years ending December 31 are listed below. The Company also leases certain office equipment and automobiles under various operating lease arrangements.

In February 2015, the Company entered into a 30-month capital lease agreement for information technology equipment. Future minimum lease payments (using a 1.6% interest rate) under the capital lease, together with the present value of the net minimum lease payments and net of a $14,000 prepayment, for the year ending December 31, 2017 is $17,000. The current obligation with respect to the present value of net minimum lease payments is reflected in the Consolidated Balance Sheets classified as an accrued liability, ~~and there was no remaining portion of the present value of net minimum lease payments classified as a long-term obligation within capital lease obligations as of September 30, 2017.~~

Future minimum rental commitments under lease agreements, ~~including both operating and capital leases (principle and interest),~~as of December 31, 2018, with non-cancelable terms greater than one year for each of the years ending December 31 are as follows (in thousands):

2017	$	210
2018		775
			Year Ended
			December 31, 2018
2019		697	$	802
2020		235		313
Thereafter		—
2021				33
2022 and thereafter				—
Total future minimum lease obligations	$	1,917	$	1,148

Certain members of management are entitled to severance benefits payable upon termination following a change in control, which would approximate $1.3 million, in the aggregate, at September 30, 2017. The Company also has agreements with certain employees to pay bonuses based on targeted performance criteria. As of September 30, 2017, approximately $67,000 was accrued for performance bonuses, which is included in accrued liabilities in the Consolidated Balance Sheets.

The Company generally purchases components and subassemblies for its products from a limited group of third-party suppliers through purchase orders. As of September 30, 2017, the Company had $12.8 million of purchase commitments for which the Company has not received certain goods or services that are 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. Although open purchase orders are considered enforceable and legally binding, the Company may be able to cancel, reschedule or adjust requirements prior to supplier fulfillment.

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

On April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against ~~the Company~~BIOLASE in the District of Utah ~~for patent infringement of~~alleging that BIOLASE’s ezlase dental laser infringes on U.S. Patent No. 7,485,116 (the “116 Patent”) ~~regarding the Company’s ezlase dental laser.~~. On September 9, 2012, CAO ~~filed~~amended its ~~First Amended Complaint, which added~~complaint, adding 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~~BIOLASE issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO and its diode product. The ~~First Amended Complaint~~amended complaint sought injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. Until January 24, 2018, this lawsuit was stayed in connection with United States Patent and Trademark Office proceedings relating to the 116 Patent, which proceedings ultimately culminated in a January 27, 2017 decision by the United States Court of Appeals for the Federal Circuit, affirming the findings of the Patent Trial and Appeal Board, which were generally favorable to the Company. On January 25, 2018, CAO moved for leave to file a second amended complaint to add certain claims, which filing the Company is not opposing.

On January 23, 2018, CAO filed a lawsuit against BIOLASE in the Central District of California alleging that BIOLASE’s diode lasers infringe on U.S. Patent Nos. 8,337,097, 8,834,497, 8,961,040 and 8,967,883. The complaint seeks injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest.

On ~~November 13,~~January 25, 2019 (the “Effective Date”), BIOLASE. entered into a settlement agreement (the “Settlement Agreement”) with CAO. Pursuant to the Settlement Agreement, CAO agreed to dismiss with prejudice the lawsuits filed by CAO against the Company in April 2012 and January 2018. In addition, CAO granted to the ~~court stayed~~Company and its affiliates a non-exclusive, non-transferable (except as provided in the ~~lawsuit~~Settlement Agreement), royalty-free, fully-paid, worldwide license to the licensed patents for ~~120 days~~use in the licensed products and agreed not to ~~allow~~sue the ~~United States Patent and Trademark Office (the “USPTO”) to consider the Company’s request~~Company, its affiliates or any of its manufacturers, distributors, suppliers or customers for ~~reexamination~~use of the ~~patent-in-suit.~~licensed patents in the licensed products, and the parties agreed to a mutual release of claims. The ~~USPTO granted the request~~Company has agreed (i) to ~~reexamine the asserted claims~~pay to CAO, within five days of the ~~patent-in-suit and on February 28, 2013, the court stayed the lawsuit until the termination~~Effective Date, $500,000 in cash, (ii) to issue to CAO, within 30 days of the ~~reexamination proceedings. On April 23, 2013, the USPTO issued an office action rejecting all~~Effective Date, 500,000 restricted shares of common stock of the ~~asserted claims over the prior art,~~Company (the “Stock Consideration”), and (iii) to pay to CAO, ~~responded~~within 30 days of December 31, 2021, an amount in cash equal to the ~~office action. On August 28, 2013,~~difference (if positive) between $1,000,000 and the ~~USPTO issued an Action Closing Procedure, rejecting all~~value of ~~CAO’s patent claims. CAO responded~~the Stock Consideration on December 31, 2021. The Stock Consideration vests and becomes transferrable on December 31, 2021, subject to the ~~USPTO’s ruling~~terms of a restricted stock agreement to be entered into between the parties. The Company considered this a Type I subsequent event and recognized a $1.5 million contingent loss on patent litigation settlement in its statement of operations for the year ended December ~~10, 2013,~~31, 2018. In January 2019, the ~~USPTO issued a Right~~Company paid CAO $500,000 in cash. On January 31, 2019, the case was dismissed with prejudice. During the three-month period ended March 31, 2019, the Company recorded an additional loss on patent litigation of ~~Appeal Notice, finally rejecting some claims~~$0.2 million which represents the change in fair value of the ~~116 Patent while finding that other claims appeared~~restricted stock to be ~~patentable. The Company appealed the USPTO’s findings on January 9, 2014 and on January 27, 2014, the USPTO declined~~issued to ~~reconsider the finding~~CAO, resulting in a total $1.2 million accrued liability as of ~~certain claims as patentable and instructed the parties to proceed to appeal to the Patent Trial and Appeal Board (the “Patent Board”). 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. On May 30, 2014, both parties filed rebuttal briefs in support of their appeals. On June 30, 2014, the Company requested an oral hearing before the Patent Board. On July 1, 2014, the Patent Board noted that request and docketed the case for consideration. A hearing on reconsideration was held in November 2014. On July 1, 2015, the Patent Board issued a decision that was generally favorable to the Company. On July 31, 2015, CAO requested a rehearing of the decision. On November 27, 2015, the Patent Board issued its decision regarding CAO’s request for rehearing, partially granting CAO’s request. On January 27, 2016, CAO filed its Notice of Appeal to the United States Court of Appeals for the Federal Circuit for review of the Patent Board’s decision dated July 1, 2015 and the Patent Board’s decision regarding CAO’s request for rehearing. CAO filed its opening appeal brief on June 1, 2016, and BIOLASE filed its responsive brief on July 25, 2016. CAO filed its reply brief on August 11, 2016. Oral argument before the Federal Circuit was held on January 11, 2017, and, on January 27, 2017, an order was entered by the Federal Circuit affirming all of the Patent Board’s findings. On February 9, 2017, the parties jointly filed a document with the court in the Utah litigation notifying it of the Federal Circuit’s decision and requesting that the stay remain in place until a reexamination certificate issues. The reexamination certificate issued on July 6, 2017, so the parties are preparing to notify the court and to request that the stay be lifted.2019.

The Company currently operates in a single business segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. For the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2019, sales to customers in the United States accounted for approximately ~~63% and 64%~~59% of net revenue ~~respectively,~~ and international sales accounted for approximately 37% and 36% of net revenue, respectively. For the three and nine months ended September 30, 2016, sales to customers in the United States accounted for approximately 66% and 63% of net revenue, respectively, and international sales accounted for approximately 34% and 37%41% of net revenue, respectively. No individual country, other than the United States, represented more than 10% of total net revenue during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 or ~~2016.~~2018.

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

	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2019		2018
United States	$	6,804	$	8,768	$	21,840	$	24,155	$	6,116	$	5,693
International		4,002		4,461		12,452		13,894		4,210		4,327
	$	10,806	$	13,229	$	34,292	$	38,049	$	10,326	$	10,020

Property, plant, and equipment by geographic location was as follows (in thousands):

	September 30,		December 31,		March 31,		December 31,
	2017		2016		2019		2018
United States	$	4,021	$	4,176	$	1,440	$	1,673
International		329		302		293		302
	$	4,350	$	4,478	$	1,733	$	1,975

Revenue from the Company’s products for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 are as ~~follows:~~ follows (dollars in thousands):

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2017			2016			2017			2016			2019				2018
Laser systems		58.6	%		71.9	%		61.3	%		68.7	%	$	5,964	57.8	%	$	5,703	57.0	%
Imaging systems		10.2	%		2.6	%		7.8	%		4.5	%		552	5.3	%		583	5.8	%
Consumables and other		16.2	%		12.4	%		16.0	%		13.5	%		2,112	20.5	%		2,034	20.3	%
Services		14.7	%		12.9	%		14.6	%		13.0	%		1,695	16.4	%		1,697	16.9	%
License fees and royalties		0.3	%		0.2	%		0.3	%		0.3	%		3	—	%		3	—	%
Total revenue		100.0	%		100.0	%		100.0	%		100.0	%	$	10,326	100.0	%	$	10,020	100.0	%

No individual customer represented more than 10% of the Company’s revenue for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 or ~~2016.~~2018.

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.

NoOne individual customer represented more than 10% of the Company’s accounts receivable at ~~September 30, 2017 or~~March 31, 2019 and December 31, ~~2016.~~2018.

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

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

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 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 for unrecognized tax benefits, including related estimates of penalties and interest, the Company did not record a liability for unrecognized tax benefits for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018. The Company does not expect any changes to its unrecognized tax benefit for the next 12 months that would materially impact its consolidated financial statements.

During the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2019 and 2018, the Company recorded an income tax provision of ~~$35,000~~$15,000 and ~~$111,000,~~$32,000, respectively, resulting in an effective tax rate of ~~0.8%~~0.3% and ~~0.9%~~0.6%, respectively. During the three and nine months ended September 30, 2016, the Company recorded an income tax provision of $40,000 and $117,000, respectively, resulting in an effective tax rate of 1.3% and 1.1%, respectively. The income tax provisions for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 were calculated using the discrete year-to-date method. The effective tax rate differs from the statutory tax rate of ~~34%~~21% 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 foreign tax liability.

As of March 31, 2019, the Company was not in compliance with certain covenants in the Credit Agreement, as described in Note 9. In May 2019, SWK granted the Company a waiver of such covenants. On May 7, 2019, the Company and SWK agreed to amend the Credit Agreement to increase the total commitment from $12.5 million to $15.0 million, and to revise the financial covenants to (a) adjust minimum revenue and EBITDA levels, (b) require the Company to have a shelf registration statement declared effective by the SEC before September 30, 2019, with a proposed maximum aggregate offering price of at least $10.0 million if the Company does not reach set minimum revenue levels for the three-month period ended June 30, 2019, and (c) require minimum liquidity of $1.5 million at all times and if aggregate minimum revenue and EBITDA levels are not achieved by September 30, 2019, the minimum liquidity requirement will be increased to $3.0 million, until the Company has obtained additional equity or debt funding of no less than $5.0 million.

~~On October 2, 2017, in~~In connection with the ~~hiring~~amendment, the Company will pay to SWK loan origination and other fees of ~~a new Senior Vice President~~approximately $0.2 million payable in cash and ~~Chief Financial Officer, the Compensation Committee of the Board awarded 600,000 non-qualified stock options~~approximately $0.3 million in additional SWK Warrants to purchase ~~shares of BIOLASE~~the Company’s common stock. ~~This award was issued at $0.59 per share, the closing market price of BIOLASE common stock on the grant date,~~The Company will also pay an additional finder’s fee to DPG, as defined and expires 10 years from the grant date. Vesting periods for the options are as follows: (i) two-thirds of the total grant is subject to time vesting with 25% vesting as of October 2, 2018 and the remaining 75% vesting ratably monthly over a 36-month period commencing on October 2, 2018, and (ii) one-third of the total grant is subject to specific 2018 and 2019 performance criteria. For additional information regarding stock-based compensation, see Note 3 – Stockholders’ Equity.

~~As discussed~~described in Note ~~3, the Company has filed with the SEC an amended registration statement relating to a proposed public offering~~9, of ~~non-transferable subscription rights~~approximately $0.1 million in cash and $0.1 million in additional DPG Warrants to purchase ~~shares of BIOLASE~~the Company’s common stock. As of the date of the filing of the quarterly report on Form 10-Q of which these financial statements are a part, such registration statement has not yet become effective. If the proposed rights offering is consummated, the Company expects to receive gross proceeds of approximately $8.0 million to $12.0 million before expenses.

The following information should be read in conjunction with the unaudited consolidated financial statements and related notes of BIOLASE, Inc. (“BIOLASE”) and its consolidated subsidiaries (together with BIOLASE, the “Company,” “we,” “our,” or “us”) included elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and our audited consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 filed with the Securities and Exchange Commission (the “SEC”) on March ~~10, 2017~~8, 2019 (the ~~“2016~~“2018 Form 10-K”). In addition to historical information, this discussion and analysis 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 (the “Exchange Act”). Such forward-looking statements include ~~any~~ statements, predictions, or expectations regarding market opportunities, our plans to expand our product line and clinical applications, plans to explore potential collaborations, statements regarding ~~our proposed rights offering and the use of proceeds therefrom,~~ the effects of seasonality ~~affecting~~on revenue, operating expenses, anticipated use of proceeds from debt financing, anticipated cash needs, needs for additional financing, ~~plans to explore potential collaborations, market opportunities,~~ and any other statement that is not historical fact. Forward-looking statements are identified by the use of words such as “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “continue,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “outlook,” “potential,” “plan,” “seek,” and similar expressions and variations or the negatives of these terms or other comparable terminology.

The forward-looking statements contained in this Form 10-Q are based on the expectations, estimates, projections, beliefs, and assumptions of our management based on information available to management as of the date on which this Form 10-Q was filed with the SEC, all of which are subject to change. Forward-looking statements are subject to risks, uncertainties, and other factors that are difficult to predict and could cause actual results to differ materially from those stated or implied by our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to:

Further information about factors that could materially affect the Company, including our results of operations and financial condition, is contained under “Risk Factors” in Item 1A in the ~~2016~~2018 Form ~~10-K.~~10-K and in Item 1A to this Form 10-Q. Except as required by law, we undertake no obligation to revise or update any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise.

We are a medical device company that develops, manufactures, markets, and sells laser systems in dentistry and medicine and also markets, sells, and distributes dental imaging equipment, ~~including three-dimensional CAD/CAM intra-oral scanners~~ and digital dentistry ~~software.~~ software. Our products advance the practice of dentistry and medicine for patients and health care professionals. Our proprietary dental laser systems allow dentists, periodontists, endodontists, oral surgeons, and other dental specialists to perform a broad range of minimally invasive dental procedures, including cosmetic, restorative, and complex surgical applications. Our laser systems are designed to provide clinically superior results for many types of dental procedures compared to those achieved with drills, scalpels, and other conventional instruments. We have clearance from the FDA to market and sell our laser systems in the United States and also have the necessary registration to market and sell our laser systems in Canada, the European Union, and many other countries outside the United States. Additionally, our in-licensed imaging equipment and related products improve diagnoses, applications, and procedures in dentistry and medicine.

We offer two categories of laser system products: ~~Waterlase~~Waterlase (all-tissue) systems and Diode (soft-tissue) systems. Our flagship brand, the Waterlase, uses a patented combination of water and laser energy to perform most procedures currently performed using drills, scalpels, and other traditional dental instruments for cutting soft and hard tissue. We also offer our Diode laser systems to perform soft tissue, pain therapy, and cosmetic procedures, including teeth whitening. We have approximately ~~220~~255 issued and 9073 pending ~~United States~~U.S. and international patents, the majority of which are related to Waterlase technology. From 1998 through ~~September 30, 2017~~March 31, 2019, we sold over ~~35,500~~39,600 laser systems in over 9080 countries around the world. Contained in this total are ~~over 12,200~~approximately 13,100 Waterlase systems, including ~~approximately 7,800~~over 8,900 Waterlase MD, MDX, Express and iPlus systems.

Our Waterlase systems precisely cut hard tissue, bone, and soft tissue with minimal or no damage to surrounding tissue and dental structures. Our Diode systems, which include the Epic system, are designed to complement our Waterlase systems, and are used only in soft tissue procedures, pain therapy, hygiene, and cosmetic applications, including teeth whitening. The Diode systems, together with our Waterlase systems, offer practitioners a broad product line with a range of features and price points.

We also manufacture and sell consumable products and accessories for our laser systems. Our Waterlase and Diode systems use disposable laser tips of differing sizes and shapes depending on the procedure being performed. We also market flexible fibers and hand pieces that dental practitioners replace at some point after initially purchasing laser systems. For our Epic systems, we sell teeth whitening gel kits.

Due to the limitations associated with traditional and alternative dental instruments, we believe there is a large market opportunity for all-tissue dental laser systems that provide superior clinical outcomes, reduce the need to use anesthesia, help reduce trauma, pain, and discomfort associated with dental procedures, and increase patient acceptance for treatment protocols. We also believe there is a large market opportunity for digital radiography systems and CAD/CAM intra-oral scanners that improve practice efficiency and accuracy of diagnosis, leading to superior treatment planning, increased practice revenue, and healthier outcomes for patients.

Our strategy is to increase awareness and demand for (i) our products among dental practitioners by educating dental practitioners and patients about the clinical benefits of our product suite and (ii) our laser systems among patients by educating patients about the clinical benefits of the Waterlase and Diode systems. An important goal of ours is to increase consumables revenue by selling more single-use accessories used by dental practitioners when performing procedures using our dental laser systems. In the short term, we are striving for operating excellence through lean enterprise initiatives, with a specific focus on our sales strategy and cash flow management, coupled with optimizing our engineering capabilities to develop innovative new products.

We also seek to create value through innovation and leveraging existing technologies into adjacent medical applications. We plan to expand our product line and clinical applications by developing enhancements and transformational innovations, including new clinical solutions for dental applications and for other adjacent medical applications. In particular, we believe that our existing technologies can provide significant improvements over existing standards of care in fields including ophthalmology, otolaryngology, orthopedics, podiatry, pain management, aesthetics/dermatology, veterinary, and consumer products. We plan to continue to explore potential collaborations to apply our proprietary laser technologies with expanded FDA-cleared indications to other medical applications in the future.

~~Consistent~~As of March 31, 2019, we were not in compliance with ~~our goal~~certain covenants relating to ~~focus our energies~~the SWK Loan as defined and described in Part I, Item I, Note 9 above. In May 2019, SWK Funding, LLC (“SWK”) granted us a waiver of such covenants by SWK. Additionally, on ~~strengthening our leadership, and worldwide competitiveness and increasing the amount of attention~~May 7, 2019, we ~~pay~~entered into an amendment to our ~~professional customers and their patients, we have made strategic personnel additions~~Credit Agreement with SWK to ~~our senior management team. In March 2017, we appointed a new Vice President of Sales for~~increase the ~~Americas with more than 24 years of experience~~total commitment in ~~medical device sales and sales leadership in start-up, turnaround and high-growth~~ ~~environments. In September 2017, we named Jonathan T. Lord, M.D. as our new Chairman~~the SWK Loan from $12.5 million to $15.0 million, to revise certain of the ~~Board. Dr. Lord has served on the Board of Directors since 2014~~financial covenants and also serves as Chairman of the Compensation Committee and a member of the Nominating and Corporate Governance Committee. He is a board-certified forensic pathologist and Fellow of the College of American Pathologists. Dr. Lord brings extensive innovation, executive management and board experience to his new role of Chairman. Effective October 1, 2017, we appointed a new Senior Vice President and Chief Financial Officer with proven leadership and technical experience in finance and business management in both public and private companies. Effective November 1, 2017, we appointed Richard B. Lanman, M.D. to the Board of Directors, a well-known healthcare innovator and entrepreneur who specializes in the development and adoption of novel healthcare technologies.

On September 29, 2017, we filed a registration statement on Form S-1 with the SEC for a proposed rights offering to its existing shareholders. The registration statement was amended on October 10, 2017, but, as of the date of the filing of the quarterly report on Form 10-Q of which these financial statements are a part, the registration statement has not yet become effective. The proposed rights offering consists of a public offering of non-transferable subscription rightsissue additional warrants to purchase shares of BIOLASE common stock. If we proceed with the proposed rights offering, our stockholders will receive (a) basic subscription rights to purchase their pro rata portion of the shares of BIOLASE common stock offered in the proposed rights offering and (b) over-subscription privileges, which will entitle the holders thereof who exercise their basic subscription rights in full the opportunity to purchaseSee Part I, Item I, Note 15 for additional shares of BIOLASE common stock unclaimed by other holders of basic subscription rights in the proposed rights offering, subject to certain limitations and subject to allotment. Certain affiliates of Larry Feinberg and certain affiliates of Jack Schuler have each agreed with us to exercise their respective basic subscription rights and any available over-subscription privilege pursuant to the rights offering in an amount not less than $3.0 million each. The record date of the rights offering will be 5:00 p.m., Eastern Time on November 8, 2017.

If the rights offering is consummated, we expect to receive gross proceeds of approximately $8.0 million to $12.0 million before expenses. The purpose of the rights offering is to raise equity capital in a cost-effective manner that gives all of our existing stockholders the opportunity to participate on a pro rata basis. We plan to use any net proceeds from the rights offering for our general working capital needs. There can be no assurance that we will be successful in completing the rights offering, any other equity financing or any debt financing.

In January 2017, we received FDA clearance for, and launched, Epic Pro, a powerful and innovative dental diode laser system, making it available for sale in the United States, as well as in select countries in Europe, the Middle East and Asia. In June 2017, we received the Canadian License from Health Canada, making the Epic Pro available for sale in Canada. The Epic Pro, which offers more power than most diode lasers in dentistry, is the first product to be introduced resulting from our strategic development agreement with IPG Medical. The newest addition to the Epic family of dental soft-tissue lasers, the Epic Pro features several new innovations, such as a new super pulse technology for more precise, enhanced laser tissue cutting; real-time automatic power control to enhance speed and consistency when performing surgery; and pre-initiated, bendable, disposable tips with new smart tip technology to ensure tip performance and quality. The Epic Pro laser system has FDA clearance for dental and surgical operations and is intended for use in contact and non-contact techniques for incision, excision, vaporization, ablation, hemostasis, or coagulation of intraoral and extra-oral soft tissue (including marginal and interdental gingiva and epithelial lining of free gingiva).

In February 2017, we launched the fifth-generation Waterlase Express all-tissue laser system. Waterlase Express represents the newest addition to our Waterlase portfolio of Er,Cr:YSGG all-tissue lasers. Waterlase Express was exhibited at the Chicago Dental Society’s mid-winter meeting in February 2017. Designed for easy and intuitive operation, integrated learning, and portability, Waterlase Express is our next-generation Waterlase system. Waterlase Express has FDA clearance for commercial distribution, and is available for sale to dentists in the United States as well as select countries in Europe, the Middle East, Latin America and Asia.information.

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses reported during the period. Information with respect to our critical accounting policies that we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the ~~2016~~2018 Form 10-K. There have been no significant changes during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 in our critical accounting policies from those disclosed in Item 7 of the ~~2016~~2018 Form 10-K.

Effective May 10, 2018, the Company effectuated a one-for-five reverse stock split (the “Reverse Stock Split”). In connection with the Reverse Stock Split, the number of authorized shares of BIOLASE common stock was reduced from 200,000,000 shares to 40,000,000 shares. All prior period share and per share amounts (including exercises and closing market prices) contained in this discussion have been adjusted to reflect the impact of the Reverse Stock Split.

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

	Three Months Ended						Nine Months Ended						Three Months Ended							Three Months Ended
	September 30,						September 30,						March 31,							March 31,
	2017			2016			2017			2016			2019							2018
Products and services revenue		99.7	%		99.8	%		99.7	%		99.7	%
License fees and royalty revenue		0.3	%		0.2	%		0.3	%		0.3	%
Products and services													$	10,323			100.0		%	$	10,017			100.0		%
License fees and royalty														3		—			%		3		—			%
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%		10,326			100.0		%		10,020			100.0		%
Cost of revenue		73.6	%		57.6	%		66.4	%		60.8	%		6,804			65.9		%		6,987			69.7		%
Gross profit		26.4	%		42.4	%		33.6	%		39.2	%		3,522			34.1		%		3,033			30.3		%
Operating expenses:
Sales and marketing		37.0	%		32.2	%		37.1	%		33.0	%		3,879			37.6		%		3,891			38.8		%
General and administrative		18.6	%		21.0	%		21.2	%		20.2	%		2,393			23.2		%		3,037			30.3		%
Engineering and development		14.8	%		13.0	%		14.1	%		14.5	%		1,424			13.8		%		1,289			12.9		%
Change in fair value of patent litigation settlement liability														190			1.8		%		—			0.0		%
Total operating expenses		70.4	%		66.2	%		72.4	%		67.7	%		7,886			76.4		%		8,217			82.0		%
Loss from operations		(44.0	%)		(23.8	%)		(38.8	%)		(28.5	%)		(4,364	)		(42.3	)	%		(5,184	)		(51.7	)	%
Non-operating loss, net		1.7	%		0.3	%		1.2	%		0.1	%
Loss before income tax provision		(42.3	%)		(23.5	%)		(37.6	%)		(28.4	%)
Non-operating loss (income), net														521			5.0		%		(195	)		1.9		%
Loss before income taxes														(4,885	)		(47.3	)	%		(4,989	)		(49.8	)	%
Income tax provision		0.3	%		0.3	%		0.3	%		0.3	%		15			0.1		%		32			0.3		%
Net loss		(42.6	%)		(23.8	%)		(37.9	%)		(28.7	%)	$	(4,900	)		(47.4	)	%	$	(5,021	)		(50.1	)	%

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

Management believes that the presentation of this non-GAAP financial information provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provides a more complete understanding of our financial performance, competitive position, and prospects for the future. However, the non-GAAP financial measures presented in this Form 10-Q 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 similarly named 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 compensation) in its evaluation of the Company’s core 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, provides a more complete understanding of factors and trends affecting our business. The following table contains a reconciliation of non-GAAP net loss to GAAP net loss attributable to common ~~shareholders~~stockholders (in thousands).:

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2017			2016			2017			2016			2019			2018
GAAP net loss attributable to common shareholders	$	(4,612	)	$	(5,330	)	$	(16,987	)	$	(13,128	)
GAAP net loss attributable to common stockholders													$	(4,900	)	$	(5,021	)
Deemed dividend on convertible preferred stock		—			2,184			3,978			2,184			—			—
GAAP net loss	$	(4,612	)	$	(3,146	)	$	(13,009	)	$	(10,944	)	$	(4,900	)	$	(5,021	)
Adjustments:
Interest income, net		(10	)		(18	)		(29	)		(51	)
Interest expense, net														478			12
Income tax provision		35			40			111			117			15			32
Depreciation and amortization		310			288			887			776			258			264
Stock-based compensation		464			688			1,604			2,468
Change in fair value of patent litigation settlement liability														190			—
Stock-based and other non-cash compensation														757			701
Non-GAAP net loss	$	(3,813	)	$	(2,148	)	$	(10,436	)	$	(7,634	)	$	(3,202	)	$	(4,012	)

Three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~March 31, 2018

Net Revenue: The following table summarizes our unaudited net revenues by category, including each category’s percentage of our total revenue, for the three months ended ~~September 30, 2017 (the “Third Quarter 2017”)~~March 31, 2019 and ~~the three months ended September 30, 2016 (the “Third Quarter 2016”),~~March 31, 2018, as well as the amount of change and percentage of change in each revenue category (dollars in thousands):

	Three Months Ended				Three Months Ended										Three Months Ended					Three Months Ended
	September 30,				September 30,				Amount			Percent			March 31,					March 31,
	2017				2016				Change			Change			2019					2018
Laser systems	$	6,335	58.6	%	$	9,506	71.9	%	$	(3,171	)		(33.4	%)	$	5,964		57.8	%	$	5,703		57.0	%
Imaging systems		1,103	10.2	%		349	2.6	%		754			216.0	%		552		5.3	%		583		5.8	%
Consumables and other		1,751	16.2	%		1,635	12.4	%		116			7.1	%		2,112		20.5	%		2,034		20.3	%
Services		1,585	14.7	%		1,709	12.9	%		(124	)		(7.3	%)		1,695		16.4	%		1,697		16.9	%
Total products and services		10,774	99.7	%		13,199	99.8	%		(2,425	)		(18.4	%)		10,323		100.0	%		10,017		100.0	%
License fees and royalty		32	0.3	%		30	0.2	%		2			6.7	%		3	—		%		3	—		%
Net revenue	$	10,806	100.0	%	$	13,229	100.0	%	$	(2,423	)		(18.3	%)	$	10,326		100.0	%	$	10,020		100.0	%

Typically, we experience fluctuations in revenue from quarter to quarter due to seasonality. Revenue in the first quarter typically is lower than average, and revenue in the fourth quarter typically is stronger than average, due to the buying patterns of dental practitioners. We believe that this trend exists because a significant number of dentists purchase their capital equipment towards the end of the calendar year in order to maximize their practice earnings while seeking to minimize their taxes. They often use certain tax incentives, such as accelerated depreciation methods for purchasing capital equipment, as part of their year-end tax planning. In addition, revenue in the third quarter may be affected by vacation patterns which can cause revenue to be flat or lower than in the second quarter of the year. Our historical seasonal fluctuations may also be impacted by sales promotions used by large dental distributors that encourage end-of-quarter and end-of-year buying in our industry.

~~Total~~The following table summarizes our unaudited net revenue by geographic location based on the location of customers for the ~~Third Quarter 2017~~three months ended March 31, 2019 and ~~Third Quarter 2016,~~March 31, 2018, as well as the amount of change and percentage of change in each geographic revenue category, ~~were as follows~~ (dollars in thousands):

	Three Months Ended				Three Months Ended										Three Months Ended				Three Months Ended
	September 30,				September 30,				Amount			Percent			March 31,				March 31,				Amount			Percent
	2017				2016				Change			Change			2019				2018				Change			Change
United States	$	6,804	63.0	%	$	8,768	66.3	%	$	(1,964	)		(22.4	%)	$	6,116	59.2	%	$	5,693	56.8	%	$	423			7.4		%
International		4,002	37.0	%		4,461	33.7	%		(459	)		(10.3	%)		4,210	40.8	%		4,327	43.2	%		(117	)		(2.7	)	%
Net revenue	$	10,806	100.0	%	$	13,229	100.0	%	$	(2,423	)		(18.3	%)	$	10,326	100.0	%	$	10,020	100.0	%	$	306			3.1		%

~~The $2.4~~Total net revenue increased by $0.3 million or ~~18%, overall decrease~~3.1% during the three months ended March 31, 2019 as compared to the same period in ~~quarter-over-quarter~~2018. In the U.S., net revenue ~~resulted~~increased by $0.4 million, or 7.4%, primarily from laser systems sales, which ~~decreased~~increased by ~~$3.2~~$0.4 million, or ~~33%~~18%, induring the ~~Third Quarter 2017~~three months ended March 31, 2019 compared to the ~~Third Quarter 2016 and~~same period in 2018. Outside the ~~impact of natural disasters in Florida and Texas of approximately $700,000. Sales of our core laser products decreased~~U.S., net revenue declined by ~~47% domestically and 13% internationally. Services revenue, which consists of~~ ~~extended warranty service contracts, advanced training programs, and other services, decreased~~ ~~by $124,000,~~$0.1 million, or ~~7%,~~ in2.7% during the ~~Third Quarter 2017~~three months ended March 31, 2019 as compared to the ~~Third Quarter 2016,~~ ~~driven by a 8% decrease~~same period in ~~domestic services revenue.~~

~~Partially offsetting decreases~~2018, primarily due to the decline in sales of our laser ~~systems revenue and services revenue were increases to imaging systems revenue, consumables and other revenue and license fees and royalty revenue. Imaging systems revenue increased by $754,000,~~products outside the U.S. of $0.1 million, or ~~216%~~3.5%, induring the ~~Third Quarter 2017~~three months ended March 31, 2019 compared to the ~~Third Quarter 2016, driven by improved domestic and international imaging sales. Consumables~~same period in 2018. Sales of consumables and other revenue, which consists of consumable products such as disposable tips, increased by ~~$116,000,~~$0.1 million, or ~~7%,~~ in4% domestically, and $0.1 million, or 3.5% internationally during the ~~Third Quarter 2017~~three months ended March 31, 2019 as compared to the ~~Third Quarter 2016. License fees~~same period in 2018.

Partially offsetting increases in laser systems revenue and ~~royalty~~consumables and other revenue ~~also increased~~was a decrease in imaging systems revenue. Imaging systems revenue decreased by ~~$2,000,~~$0.1 million or ~~7%, in~~5.3% during the ~~Third Quarter 2017~~three months ended March 31, 2019 as compared to the ~~Third Quarter 2016.~~same period in 2018, primarily driven by our continued focus on laser sales.

Cost of Revenue and Gross Profit: The following table summarizes our unaudited cost of revenue and gross profit for the ~~Third Quarter 2017~~for the three months ended March 31, 2019 and ~~the Third Quarter 2016,~~March 31, 2018, as well as the amount of change and percentage of change (dollars in thousands):

	Three Months Ended				Three Months Ended										Three Months Ended				Three Months Ended
	September 30,				September 30,				Amount			Percent			March 31,				March 31,				Amount			Percent
	2017				2016				Change			Change			2019				2018				Change			Change
Net revenue	$	10,806	100.0	%	$	13,229	100.0	%	$	(2,423	)		(18.3	%)	$	10,326	100.0	%	$	10,020	100.0	%	$	306			3.1		%
Cost of revenue		7,951	73.6	%		7,624	57.6	%		327			4.3	%		6,804	65.9	%		6,987	69.7	%		(183	)		(2.6	)	%
Gross profit	$	2,855	26.4	%	$	5,605	42.4	%	$	(2,750	)		(49.1	%)	$	3,522	34.1	%	$	3,033	30.3	%	$	489			16.1		%

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, product costs and revenue levels. The ~~49% decline~~3.8% increase in gross profit as a percentage of revenue for the ~~Third Quarter 2017,~~three months ended March 31, 2019, as compared to the ~~Third Quarter 2016, reflected~~three months ended March 31, 2018, reflects new customer growth and a favorable change in product mix with an increase in laser sales, which have a higher margin than our other product offerings, partially offset by a decrease in imaging ~~revenue, which has lower product distribution margins than~~sales, as laser ~~systems revenue, promotional introductory pricing of Waterlase Express, and lower revenue resulting in unabsorbed fixed costs.~~sales typically have higher margins.

Operating Expenses: The following table summarizes our unaudited operating expenses ~~as a percentage of net revenue~~ for the ~~Third Quarter 2017~~for the three months ended March 31, 2019 and ~~Third Quarter 2016,~~March 31, 2018, as well as the amount of change and percentage of change (dollars in thousands):

	Three Months Ended				Three Months Ended										Three Months Ended				Three Months Ended
	September 30,				September 30,				Amount			Percent			March 31,				March 31,				Amount			Percent
	2017				2016				Change			Change			2019				2018				Change			Change
Sales and marketing	$	4,000	37.0	%	$	4,260	32.2	%	$	(260	)		(6.1	%)	$	3,879	38.7	%	$	3,891	38.8	%	$	(12	)		(0.3	)	%
General and administrative		2,015	18.6	%		2,778	21.0	%		(763	)		(27.5	%)		2,393	23.9	%		3,037	30.3	%		(644	)		(21.2	)	%
Engineering and development		1,601	14.8	%		1,715	13.0	%		(114	)		(6.6	%)		1,424	14.2	%		1,289	12.9	%		135			10.5		%
Change in fair value of patent litigation settlement liability																190	1.9	%		—	—	%		190			100.0		%
Total operating expenses	$	7,616	70.4	%	$	8,753	66.2	%	$	(1,137	)		(13.0	%)	$	7,886	78.7	%	$	8,217	82.0	%	$	(331	)		(4.0	)	%

In August 2017, we streamlined operations by reducing payroll-related and consulting-related expenses by approximately $2.5 million on an annualized basis and reduced planned discretionary spending for the remainder of 2017 and 2018. The quarter-over-quarter total operating expenses are explained in the following expense categories:

Sales and Marketing Expense. Sales and marketing expenses during the three months ended March 31, 2019 were consistent with the same period in ~~the Third Quarter 2017 compared to the Third Quarter 2016 decreased by $260,000, or 6%,~~2018, primarily due to ~~decreased commissions expense of $336,000 from lower sales in the Third Quarter 2017, partially offset by increased payroll and consulting-related expenses of $173,000. The increase~~a decrease in payroll and ~~consulting-related~~consulting related expenses ~~was due to a $167,000 increase in severance expenses relating to a reduction in the work force during Third Quarter 2017, partially~~of $0.3 million, offset by ~~decreased~~increases of $0.1 million in media materials, advertising and printing expenses, $0.1 million in stock-based compensation expense, ~~of $36,000.~~ and $0.1 million in travel expenses. As we ~~continued into 2017,~~ we have maintained our focus on (i) enhancing customer acquisition, customer retention and global brand awareness, and (ii) rebuilding and restructuring through in-depth training and development of our sales and marketing team domestically and internationally. In strivingcontinue efforts to transform and ~~maintain~~drive to revenue growth, we expect sales and marketing expenses to ~~remain consistent~~decrease as a percentage of ~~revenue for the remainder of 2017.~~revenue.

General and Administrative Expense. General and administrative expenses induring the ~~Third Quarter 2017~~three months ended March 31, 2019 decreased by $0.6 million or 21.2% compared to the ~~Third Quarter 2016 decreased by $763,000, or 28%,~~same period in 2018, primarily due to ~~decreased~~a decrease in patent and legal ~~expenses~~fees of ~~$301,000 relating to our efforts to protect our intellectual property during Third Quarter 2016~~$0.4 million, $0.2 million in provision for doubtful accounts, and ~~decreased~~ ~~payroll and consulting-related expenses of $436,000. The decrease~~$0.1 million in payroll and ~~consulting-related expenses was primarily due to decreases in recruiting expenses of $165,000 and stock-based compensation expense of $244,000~~consulting related ~~to the reassessment of certain performance based equity awards.~~expenses. We expect general and administrative expenses to decrease as a percentage of revenue through the remainder of ~~2017.~~2019.

Engineering and Development Expense. Engineering and development expenses induring the ~~Third Quarter 2017~~three months ended March 31, 2019 increased by $0.1 million or 10.5% compared to the ~~Third Quarter 2016 decreased by $114,000, or 7%,~~same period in 2018, primarily due to a ~~$181,000 decrease~~$0.2 million increase in payroll and consulting-related expenses ~~driven by decreased consulting expenses of $263,000,~~ partially offset by ~~increased severance~~decreases in operating expenses ~~relating to a reduction in the work force during Third Quarter 2017~~ of ~~$42,000 and increased stock-based compensation expense of $15,000.~~ approximately $0.1 million. We expect engineering and development expenses to decrease as a percentage of revenue through the remainder of ~~2017.~~2019.

Change in fair value of patent litigation settlement liability. We recognized a $0.2 million loss on patent litigation settlement with CAO Group, Inc., as described in Part I, Item I, Note 11 above, due to the change in fair value of the restricted stock which is pending issuance. We expect the restricted stock to be issued during the second quarter of 2019; however, until the shares are issued we may be required to adjust the contingent liability to match the fluctuation in our share price.

Gain (Loss) on Foreign Currency Transactions. We realized a ~~$174,000~~$43,000 loss on foreign currency transactions during the three months ended March 31, 2019 compared to a $0.2 million gain on foreign currency transactions during the ~~Third Quarter 2017, compared to a $24,000 gain on foreign currency transactions during the Third Quarter 2016,~~three months ended March 31, 2018, primarily due to exchange rate fluctuations between the U.S. dollar and ~~other currencies, primarily the Euro.~~

~~Interest Income, Net.~~ Interest income during the Third Quarter 2017 represented interest recognized from the discounted present value of the settlement in connection with the patent infringement lawsuit against Fotona Proizvodnja Optoelektronskih Naprav D.D. and Fotona LLC (collectively, “Fotona”). We filed the lawsuit in Düsseldorf District Court in April 2012 alleging infringement with respect to the Fotona Fidelis dental laser system. ~~Interest income, net totaled $10,000 for Third Quarter 2017, as compared to $18,000 for Third Quarter 2016.~~

~~Income Tax Provision.~~ ~~We use a discrete year-to-date method in calculating quarterly provision for income taxes.~~Our provision for income taxes was $35,000 for the Third Quarter 2017, compared to a provision of $40,000 for the Third Quarter 2016. For additional information regarding income taxes, see Part I, Item I, Note 11 – Income Taxes.

~~Net Loss.~~ Our net loss totaled approximately $4.6 million for the Third Quarter 2017 compared to a net loss of $3.1 million for the Third Quarter 2016. The $1.5 million, or 47%, increase in net loss was due to a $2.8 million, or 49%, reduction in gross profit, partially offset by a $1.1 million, or 13%, decrease in total operating expenses.

~~Net Revenue:~~ The following table summarizes our net revenues by category, including each category’s percentage of our total revenue, for the nine months ended September 30, 2017 (“YTD Third Quarter 2017”) and the nine months ended September 30, 2016 (“YTD Third Quarter 2016”),Euro, as well as ~~the amount of change and percentage of change in each revenue category (dollars in thousands):~~other foreign currencies.

Nine Months Ended

Nine Months Ended

September 30,

September 30,

Amount

Percent

2017

2016

Change

Change

Laser systems
$
21,026

61.3
%

$
26,140

68.7
%

$
(5,114
)

(19.6
%)
Imaging systems

2,683

7.8
%

1,728

4.5
%

955

55.3
%
Consumables and other

5,494

16.0
%

5,132

13.5
%

362

7.1
%
Services

4,993

14.6
%

4,933

13.0
%

60

1.2
%
Total products and services

34,196

99.7
%

37,933

99.7
%

(3,737
)

(9.9
%)
License fees and royalty

96

0.3
%

116

0.3
%

(20
)

(17.2
%)
Net revenue
$
34,292

100.0
%

$
38,049

100.0
%

$
(3,757
)

(9.9
%)

~~Total revenue by geographic location based on~~Interest Expense, Net. Interest expense during the location of customers for YTD Third Quarter 2017 and YTD Third Quarter 2016, as well as the amount of change and percentage of change in each geographic revenue category, was as follows (dollars in thousands):

The $3.8 million, or 10%, overall decrease in period-over-period net revenue resulted primarily from laser systems sales, which decreased by $5.1 million, or 20%, in YTD Third Quarter 2017 compared to YTD Third Quarter 2016 ~~and the impact of natural disasters in Florida and Texas of approximately $700,000. The laser systems revenue decrease was driven by a 28% decline in domestic revenue and a 9% decline in international revenue.~~ ~~License fees and royalty revenue also decreased by $20,000, or 17%,~~ ~~in YTD Third Quarter 2017 compared to YTD Third Quarter 2016.~~

~~Partially offsetting the decreased laser systems revenue and~~ ~~license fees and royalty revenue were increases to imaging systems revenue, consumables and other revenue and services revenue. Imaging systems revenue~~three months ended March 31, 2019 increased by ~~$955,000, or 55%, in the YTD Third Quarter 2017 compared to YTD Third Quarter 2016, driven by improved domestic imaging sales. Consumables and other revenue, which consists of~~ ~~consumable products such as disposable tips, increased by $362,000, or 7%,~~ ~~in YTD Third Quarter 2017 compared to YTD Third Quarter 2016. Services revenue, which consists of~~ ~~extended warranty service contracts, advanced training programs, and other services, increased~~ ~~$60,000, or 1%,~~ ~~in YTD Third Quarter 2017 compared to YTD Third Quarter 2016,~~ ~~driven by a 2% increase in domestic services revenue.~~

~~Cost of Revenue and Gross Profit:~~ The following table summarizes our cost of revenue and gross profit for YTD Third Quarter 2017 and YTD Third Quarter 2016, as well as the amount of change and percentage of change (dollars in thousands):

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, product costs and revenue levels. The 23% decline in gross profit as a percentage of revenue for YTD Third Quarter 2017, as compared to YTD Third Quarter 2016, reflected an increase in imaging revenue, which has lower product distribution margins than laser systems revenue, promotional introductory pricing of Waterlase Express, and lower revenue resulting in unabsorbed fixed costs.

~~Operating Expenses:~~ The following table summarizes our operating expenses as a percentage of net revenue for YTD Third Quarter 2017 and YTD Third Quarter 2016, as well as the amount of change and percentage of change (dollars in thousands):

~~In August 2017, we streamlined operations by reducing payroll-related and consulting-related expenses by approximately $2.5~~$0.5 million ~~on an annualized basis and reduced planned discretionary spending for the remainder of 2017 and 2018. The period-over-period total operating expenses are explained in the following expense categories:~~

~~Sales and Marketing Expense. Sales and marketing expenses in YTD Third Quarter 2017 compared to YTD Third Quarter 2016 increased by $166,000, or 1%,~~ primarily due to ~~increases~~the interest and amortization of debt issuance costs relating to the SWK Loan we entered into in ~~convention-related expenses of $355,000, payroll~~ ~~and consulting-related expenses of $133,000 and travel expenses of $160,000, partially offset by decreased commissions expense of $510,000. In~~ the ~~first~~fourth quarter of ~~2017, we participated in the International Dental Show in Cologne, Germany, which led to higher convention-related expenses and travel expenditures.~~ ~~The increase in payroll and consulting-related expenses is comprised of increases in wages and salaries of $188,000 and increased severance expense of $167,000~~ ~~relating to a reduction in the work force during Third Quarter 2017, partially offset by decreased stock-based compensation expense of $162,000.~~ ~~The decrease in commissions was driven by decreased sales in YTD Third Quarter 2017 compared to YTD Third Quarter 2016.~~ ~~As we continued into 2017,~~ we have maintained our focus on (i) enhancing customer acquisition, customer retention, and global brand awareness, and (ii) rebuilding and restructuring through in-depth training and development of our sales and marketing team domestically and internationally. In striving to transform and maintain revenue growth, we expect sales and marketing expenses to ~~remain consistent~~ ~~as a percentage of revenue for the remainder of 2017.~~

~~General and Administrative Expense. General and administrative expenses in YTD Third Quarter 2017 compared to YTD Third Quarter 2016 decreased by $429,000, or 6%, primarily due to decreased~~ ~~payroll and consulting-related expenses of $629,000, partially offset by increased provision for~~ ~~doubtful accounts of $130,000 and increase bank fees of $91,000.~~ The decrease in payroll and consulting-related expenses is primarily due to decreased stock-based compensation expense of $636,000 related to the reassessment of certain performance based equity awards.2018. We expect ~~general and administrative expenses~~interest expense to ~~decrease as a percentage of revenue~~fluctuate depending on the movement in LIBOR through the remainder of ~~2017.~~

~~Engineering and Development Expense~~. Engineering and development expenses in YTD Third Quarter 2017 compared to YTD Third Quarter 2016 decreased by $661,000, or 12%, primarily due to a $546,000 decrease in payroll and consulting-related expenses. The decrease in payroll and consulting-related expenses was driven by decreased consulting expenses of $675,000 and decreased stock-based compensation expense of $45,000, partially offset by an increase in wages and salaries of $80,000 and an increase in severance expense of $42,000. ~~We expect engineering and development expenses to decrease as a percentage of revenue through the remainder of 2017.~~

~~Gain (Loss) on Foreign Currency Transactions.~~ We realized a $390,000 gain on foreign currency transactions during YTD Third Quarter 2017, compared to a $30,000 loss on foreign currency transactions during YTD Third Quarter 2016, due to exchange rate fluctuations between the U.S. dollar and other currencies, primarily the Euro.

~~Interest Income, Net.~~ Interest income during YTD Third Quarter 2017 represented interest recognized from the discounted present value of the settlement in connection with the patent infringement lawsuit against Fotona. We filed the lawsuit in Düsseldorf District Court in April 2012 alleging infringement with respect to the Fotona Fidelis dental laser system. ~~Interest income, net totaled $29,000 for YTD Third Quarter 2017, as compared to $51,000 for YTD Third Quarter 2016.~~2019.

Income Tax Provision. We use a discrete year-to-date method in calculating quarterly provision for income taxes.Our provision for income taxes was ~~$111,000~~$15,000 for ~~YTD Third Quarter 2017,~~the three months ended March 31, 2019 as compared to a provision of ~~$117,000~~$32,000 for ~~YTD Third Quarter 2016.~~the same period in the prior year. For additional information regarding income taxes, see Part I, Item I, Note 1114 – Income Taxes.

Net Loss. Our net loss totaled approximately ~~$13.0~~$4.9 million for ~~YTD Third Quarter 2017~~the three months ended March 31, 2019 compared to a net loss of ~~$10.9~~$5.0 million for YTD Third Quarter 2016. The $2.1 million, or 19%, increase in net loss was due to a $3.4 million, or 23%, reduction in gross profit, partially offset by a $924,000, or 4%, decrease in total operating expenses and $420,000 increase in gain on foreign currency transactions. the three months ended March 31, 2018.

At ~~September 30, 2017, the Company~~March 31, 2019, we had approximately ~~$4.7~~$3.3 million in cash, ~~and~~ cash equivalents ~~including~~and restricted ~~cash equivalents.~~cash. Management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. The decrease in our cash, ~~and~~ cash equivalents and restricted cash of ~~$4.5~~$5.1 million at ~~September 30, 2017~~March 31, 2019 as compared to December 31, ~~2016,~~2018, was primarily due to net cash used in operating ~~and investing~~ activities of ~~$14.2 million and $825,000, respectively, partially offset by cash provided by financing activities of $10.3~~$5.1 million. The ~~$14.2~~$5.1 million of net cash used in operating activities was primarily driven by ~~the Company’s~~our net loss of ~~$13.0~~$4.9 million for the ~~nine~~three months ended ~~September 30, 2017.~~ March 31, 2019.

The following table summarizes our change in cash, ~~and~~ cash equivalents and restricted cash (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 the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 totaled ~~$14.2~~$5.0 million and was primarily comprised of our net loss of ~~$13.0~~$4.9 million, partially offset by non-cash adjustments for depreciation and amortization expenses of ~~$887,000, provision for bad debts of $54,000, provision for inventory excess~~$0.3 million and ~~obsolescence of $348,000,~~ stock-based compensation expenses of ~~$1.6 million, deferred income taxes of $45,000 and earned interest income, net of $29,000.~~$0.8 million. The ~~$4.1~~$1.4 million net decrease in our operating assets and liabilities was primarily due to a decrease in accounts payable and accrued liabilities of ~~$3.2~~$1.5 million related to the timing of our payments ~~a decrease~~and $0.5 million paid as part of ~~$455,000 in deferred revenue resulting from less deferred services revenue, a decrease in customer deposits of $32,000,~~the patent litigation settlement with CAO Group, Inc. and an increase in ~~inventory~~accounts receivable of ~~$914,000 resulting from new product inventory,~~$0.7 million, partially offset by a decrease in ~~accounts receivable~~inventory of ~~$52,000 related to the timing of our collections~~$0.2 million and ~~a decrease in~~ prepaid expenses and other current assets of ~~$495,000.~~$0.5 million.

Cash used in investing activities for ~~YTD Third Quarter 2017 consisted~~the three months ended March 31, 2019 were minimal. We expect cash flows from investing activities to remain consistent through the remainder of ~~$825,000 of capital expenditures.~~ ~~The period-over-period decrease was primarily due to capital expenditures for the implementation of a new enterprise resource planning system, which has been put on hold in 2017.~~2019.

Net cash provided by financing activities for ~~YTD Third Quarter 2017 of $10.3~~the three months ended March 31, 2019 decreased by approximately $1.6 million ~~resulted from proceeds received from our private placement in April 2017, net of expenses, partially offset by payments on our capital lease obligations of $128,000.~~primarily due to the rights offering activities that occurred during the three months ended March 31, 2018.

The ~~$241,000~~ effect of exchange rate on cash for ~~YTD Third Quarter 2017~~the three months ended March 31, 2019 was $49,000 and primarily due to ~~a recognized gain on foreign currency transactions, primarily~~fluctuations between the ~~Euro currency conversion rates during 2017.~~U.S. Dollar and the Euro.

As of ~~September 30, 2017, the Company~~March 31, 2019, we had working capital of approximately ~~$14.7~~$13.7 million. Our principal sources of liquidity as of ~~September 30, 2017~~March 31, 2019 consisted of approximately ~~$4.7~~$3.3 million in cash, cash equivalents and restricted cash and ~~$9.7~~$11.7 million of net accounts receivable.

On November 9, 2018, BIOLASE entered into a five-year secured Credit Agreement (the “Credit Agreement”) with SWK, pursuant to which BIOLASE has borrowed $12.5 million (the “SWK Loan”). $0.9 million of the proceeds from the SWK Loan have been used to pay off all amounts owed to Western Alliance Bank under the Business Financing Agreement (as amended on October 26, 2018), and we plan to use the remaining proceeds to provide additional working capital to fund its growth initiatives, such as broadening its customer base and increasing the utilization of its products to drive recurring higher margin consumables revenue.

As of March 31, 2019, we were not in compliance with certain covenants in the Credit Agreement. In May 2019, SWK granted the Company a waiver of such covenants. On May 7, 2019, we entered into an amendment to the Credit Agreement with SWK to increase our total commitment in the SWK Loan from $12.5 million to $15.0 million and to revise certain of the financial covenants to (a) adjust minimum revenue and EBITDA levels, (b) to require us to have a shelf registration statement declared effective by the SEC before September 30, 2019, with a proposed maximum aggregate offering price of at least $10.0 million, if we do not reach set minimum revenue levels for the three-month period ended June 30, 2019, and (c) require us to maintain minimum liquidity of $1.5 million at all times and if aggregate minimum revenue and EBITDA levels are not achieved by September 30, 2019, the minimum liquidity requirement will be increased to $3.0 million, until we have obtained additional equity or debt funding of no less than $5.0 million.

In connection with the amendment, we will pay to SWK loan origination and other fees of approximately $0.2 million payable in cash and approximately $0.3 million warrants to purchase shares of BIOLASE common stock. We will also pay an additional finder’s fee to DPG, as defined and described in Note 9 to the unaudited consolidated financial statements of approximately $0.1 million in cash and $0.1 million in warrants to purchase shares of BIOLASE common stock.

In order for us to continue operations beyond the next 12 months and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales of our products directly to end-users and through distributors, establish profitable operations through the combination of increased sales and decreased expenses, 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 of our product offerings, continuing to expand and develop our fields sales force and distribution 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 reducing expenses. Additional capital requirements may depend on many factors, including, among other things, continued losses, 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, or enter into aanother line of credit facility. As discussed above, we have filed with the SEC an amended registration statement relating to a proposed public offering of non-transferable subscription rights to purchase shares of BIOLASE common stock. As of the date of the filing of this quarterly report on Form 10-Q, such registration statement hasWe may not yet become effective. If the proposed rights offering is consummated, we expect to receive gross proceeds of approximately $8.0 million to $12.0 million before expenses and to use such proceeds for our general working capital needs. We cannot provide assurance that we will be able to successfully consummate ~~the rights offering,~~ any ~~other~~ equity ~~financing~~ or ~~any~~ debt ~~financing~~financings or enter into any other line of credit facility in the ~~future. We also cannot provide assurance~~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.

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

BIOLASE^®, ZipTip^®, ezlase^®, eztips^®, ~~MD Flow~~^®, ComfortPulse^®, Waterlase^®, Waterlase Dentistry^®, Waterlase Express^®, iLase^®, iPlus^®, Epic^®, Epic Pro^®, WCLI^®, World Clinical Laser Institute^®, Waterlase MD^®, Waterlase Dentistry^®, ~~Proprietary MD~~^®, and EZLase ~~It’s So Easy~~^® are registered trademarks of BIOLASE, 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™, Epic Pro™, Dermalase™, Deltalaser™, Delta™, iStarlaser™, iStar™, Biolase DaVinci Imaging™, Oculase™, Waterlase MDX™, Total Technology Solution™, Geyserlaser™, Geyser™, eplus™, elase™ and Galaxy BioMill™ are trademarksPedolase™ is a trademark of BIOLASE. All other product and company names are registered trademarks or trademarks of their respective owners.

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 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 the quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The disclosure contained in ~~the first paragraph of~~ Part I, Item 1, Note 811 – Commitments and ~~Contingencies—Litigation—Intellectual Property Litigation~~Contingencies is hereby incorporated herein by reference.

There have been no material changes to the risk factors as disclosed in Part I, Item 1A “Risk Factors” in the ~~2016~~2018 Form 10-K.

The information below is reported in lieu of information that would be reported under Items 1.01 and 2.03 under Form 8-K.

On May 7, 2019 BIOLASE entered into an amendment to the Credit Agreement (the “First Amendment”) with SWK to increase the total commitment in the SWK Loan from $12.5 million to $15.0 million and to revise the financial covenants to (a) adjust minimum revenue and EBITDA levels, (b) require the Company to have a shelf registration statement declared effective by the SEC before September 30, 2019, with a proposed maximum aggregate offering price of at least $10.0 million if the Company does not achieve set minimum revenue levels for the three-month period ended June 30, 2019, and (c) require minimum liquidity of $1.5 million at all times and if aggregate minimum revenue and EBITDA levels are not achieved by September 30, 2019, the minimum liquidity requirement will be increased to $3.0 million, until the Company has obtained additional equity or debt funding of no less than $5.0 million.

The additional commitment will bear the same interest rate of LIBOR plus 10% and hold the same maturity date of November 9, 2023 as the original Credit Agreement. In connection with the First Amendment, BIOLASE paid to SWK an origination fee in the amount of $187,500 on May 7, 2019.

On May 7, 2019, in connection with the First Amendment, BIOLASE issued to SWK or its assignees (collectively with SWK, the “Holder”) warrants (the “Additional SWK Warrants”) to purchase up to 115,175 shares of BIOLASE common stock. The exercise price of the SWK Warrants is $2.17 per share, which was the average closing price of BIOLASE common stock for the ten trading days immediately preceding May 7, 2019. The Additional SWK Warrants are immediately exercisable, expire on May 7, 2027 and contain a “cashless exercise feature.” Subject to certain limitations, the Holder has certain piggyback registration rights with respect to the shares that are issued upon exercise of the SWK Warrants.

The description of the First Amendment and the Additional SWK Warrants set forth above are qualified in their entirety by reference to the First Amendment to Credit Agreement and Warrant to Purchase Stock filed as Exhibit 10.8 and Exhibit 4.7, respectively, to this Quarterly Report on Form 10-Q, which exhibits are hereby incorporated herein by reference.

Incorporated by Reference

Exhibit

Description

Filed
Herewith

Form

Period
Ending/Date
of Report

Exhibit

Filing
Date

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

S-1,
Amendment
No. 1

12/23/2005

3.1

12/23/2005

3.1.2

Amendment to Restated Certificate of Incorporation

8-K

05/10/2012

3.1

05/16/2012

Amendment to Restated Certificate of Incorporation

8-K

05/10/2012

3.1

05/16/2012

3.1.3

Second Amendment to Restated Certificate of Incorporation

8-A/A

11/04/2014

3.1.3

11/04/2014

Second Amendment to Restated Certificate of Incorporation

8-A/A

11/04/2014

3.1.3

11/04/2014

3.1.4

Certificate of Elimination of Series B Junior Participating Cumulative Preferred Stock

8-K

11/10/2015

3.1

11/12/2015

Third Amendment to Restated Certificate of Incorporation

S-3

07/21/2017

3.4

07/21/2017

3.1.5

Certificate of Designations, Preferences and Rights of Series C Participating Convertible Preferred Stock of the Registrant

8-K

08/08/2016

3.1

08/08/2016

Fourth Amendment to Restated Certificate of Incorporation

8-K

05/10/2018

3.1

05/11/2018

3.1.6

Certificate of Elimination of Series C Participating Convertible Preferred Stock of the Registrant

8-K

04/18/2017

3.1

04/20/2017

Certificate of Elimination of Series B Junior Participating Cumulative Preferred Stock

8-K

11/10/2015

3.1

11/12/2015

3.1.7

Certificate of Designations, Preferences and Rights of Series D Participating Convertible Preferred Stock of the Registrant

8-K

04/18/2017

3.2

04/20/2017

Certificate of Designations, Preferences and Rights of Series C Participating Convertible Preferred Stock of the Registrant

8-K

08/08/2016

3.1

08/08/2016

3.1.8

Third Amendment to Restated Certificate of Incorporation

S-3

07/21/2017

3.4

07/21/2017

Certificate of Elimination of Series C Participating Convertible Preferred Stock of the Registrant

8-K

04/18/2017

3.1

04/20/2017

3.1.9

Certificate of Designations, Preferences and Rights of Series D Participating Convertible Preferred Stock of the Registrant

8-K

04/18/2017

3.2

04/20/2017

3.2

Sixth Amended and Restated Bylaws of the Registrant, adopted on June 26, 2014

8-K

06/26/2014

3.1

06/30/2014

Seventh Amended and Restated Bylaws of the Registrant, adopted on October 8, 2018

8-K

10/08/2018

3.1

10/09/2018

4.1

Form of Warrant

DEF14A

05/19/2017

Form of Warrant Issued on November 7, 2014

8-K

11/03/2014

99.1

11/07/2014

10.1

Commitment Letter, dated September 26, 2017, between each of Oracle Partners, LP, Oracle Institutional Partners, LP and Oracle Ten Fund Master, LP and BIOLASE, Inc.

S-1

09/29/2017

10.23

09/29/2017

Incorporated by Reference

Exhibit

Description

Filed
Herewith

Form

Period
Ending/Date
of Report

Exhibit

Filing
Date

Description

Filed

Herewith

Form

Period

Ending/Date

of Report

Exhibit

Filing

Date

10.2

Commitment Letter, dated September 26, 2017, between each of Renate Schuler, Jack W. Schuler Living Trust and Schuler Family Foundation and BIOLASE, Inc.

S-1

09/29/2017

10.24

09/29/2017

4.2

Form of Warrant issued on August 8, 2016

8-K

08/01/2016

99.1

08/02/2016

4.3

Form of Warrant issued April 18, 2017

DEF14A

05/19/2017

4.4

Warrant to Purchase Stock issued on March 6, 2018 to Western Alliance Bank

10-K

12/31/2017

4.4

03/14/2018

4.5

Warrant to Purchase Stock issued on September 27, 2018 to Western Alliance Bank

10-Q

09/30/2018

4.1

11/14/2018

4.6

Warrant to Purchase Stock issued on September 27, 2018 to SWK Funding, LLC

10-Q

09/30/2019

4.2

11/14/2018

4.7

Warrant to Purchase Stock issued on May 7, 2019 to SWK Funding, LLC

10.7

Confidential Settlement Agreement, dated January 25, 2019, by and between the Registrant and CAO, Group, Inc.

10-K

12/31/2018

10.28

03/08/19

10.8

First Amendment to Credit Agreement, dated as of May 7, 2019, by and between the Registrant and SWK Funding LLC

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 September 30, 2017, 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 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	☐
Non-accelerated filer	☐ ~~(Do not check if a smaller reporting company)~~☒	Smaller reporting company	☒
		Emerging growth company	☐

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):	3
	Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018	3
	Consolidated Statements of Operations and Comprehensive Loss for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~September 30, 2016~~March 31, 2018	4
	Consolidated Statements of ~~Cash Flows for the nine months ended September 30, 2017~~Stockholders’ Equity as of March 31, 2019 and ~~September 30, 2016~~ December 31, 2018	5
	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and March 31, 2018	6
	Notes to Consolidated Financial Statements	67
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2125
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3435
Item 4.	Controls and Procedures	3435
PART II	OTHER INFORMATION	35
Item 1.	Legal Proceedings	3435
Item 1A.	Risk Factors	3435
Item 5	Other Information	35
Item 6.	Exhibits	3537
Signatures		3740

	September 30,		December 31,
	2017		2016
Undelivered elements (training, installation, and product and support services)	$	1,066	$	1,404
Extended warranty contracts		1,460		1,487
Deferred royalties		52		142
Total deferred revenue		2,578		3,033
Less long-term amounts:
Deferred royalties		14		23
Total deferred revenue - long-term		14		23
Total deferred revenue - current	$	2,564	$	3,010

	Principal		Interest⁽¹⁾
2019	$	—	$	1,171
2020		700		1,554
2021		2,800		1,314
2022		2,800		964
2023		6,200		493
Total future payments	$	12,500	$	5,496

(1) estimated using LIBOR rates as at March 31, 2019

	Three Months
	Ended
	March 31, 2019
Cash paid for operating lease liabilities	$	189
Right-of-use assets obtained in exchange for new operating lease obligations		803
Weighted-average remaining lease term	1.6 years
Weighted-average discount rate		12.8	%

Due in 12-month period ended March 31,
2020	$	812
2021		192
Thereafter		—
	$	1,004
Less imputed interest		(180	)
Total lease liabilities	$	824

Current operating lease liabilities		718
Non-current lease liabilities		106
Total lease liabilities	$	824