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 every Interactive Data File required to be submitted 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 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 ~~May 4,~~August 11, 2020, the registrant had ~~31,743,102~~92,190,630 shares of common stock, $0.001 par value per share, outstanding.

	March 31,			December 31,			June 30,			December 31,
	2020			2019			2020			2019
	(unaudited)			(audited)			(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,511		$	5,789		$	5,437		$	5,789
Restricted cash		312			312			312			312
Accounts receivable, less allowance of $3,560 and $2,531 in 2020 and 2019, respectively		4,749			8,760
Accounts receivable, less allowance of $3,581 and $2,531 in 2020 and 2019, respectively								4,119			8,760
Inventory		12,192			10,995			11,932			10,995
Prepaid expenses and other current assets		1,205			1,163			1,094			1,163
Total current assets		19,969			27,019			22,894			27,019
Property, plant, and equipment, net		1,017			1,193			781			1,193
Goodwill		2,926			2,926			2,926			2,926
Right of use asset		135			276			649			276
Other assets		484			433			506			433
Total assets	$	24,531		$	31,847		$	27,756		$	31,847
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,056		$	5,332		$	2,510		$	5,332
Accrued liabilities		4,079			4,744			3,549			4,744
Deferred revenue, current portion		1,982			2,237			1,486			2,237
Term loan (net of discount)		13,562			13,466			13,544			13,466
Total current liabilities		23,679			25,779			21,089			25,779
Deferred revenue		390			358			412			358
Warranty accrual		246			245			194			245
Non current term loans								3,140			—
Other liabilities		1,107			1,123			1,612			1,123
Total liabilities		25,422			27,505			26,447			27,505
Commitments and contingencies — Note 11
Redeemable preferred stock:
Preferred stock, par value $0.001 per share; 1,000 shares authorized, 70 and 70 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively		3,965			3,965
Preferred stock, par value $0.001 per share; 1,000 shares authorized, 0 and 70 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively								—			3,965
Total redeemable preferred stock		3,965			3,965			—			3,965
Stockholders' equity:
Common stock, par value $0.001 per share; 40,000 shares authorized, 31,582 and 31,439 shares issued and 31,537 and 31,439 outstanding as of March 31, 2020 and December 31, 2019, respectively		32			31
Common stock, par value $0.001 per share; 180,000 and 40,000 shares authorized, 50,387 and 31,439 shares issued and 50,342 and 31,439 outstanding as of June 30, 2020 and December 31, 2019, respectively								50			31
Additional paid-in-capital		236,384			235,594			247,155			235,594
Accumulated other comprehensive loss		(719	)		(701	)		(645	)		(701	)
Accumulated deficit		(240,553	)		(234,547	)		(245,251	)		(234,547	)
Total stockholders' (deficit) equity		(4,856	)		377
Total liabilities, redeemable preferred stock and stockholders' (deficit) equity	$	24,531		$	31,847
Total stockholders' equity								1,309			377
Total liabilities, redeemable preferred stock and stockholders' equity							$	27,756		$	31,847

	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2020			2019			2020			2019			2020			2019
Net revenue	$	4,783		$	10,326		$	2,938		$	8,645		$	7,721		$	18,971
Cost of revenue		3,430			6,804			1,997			5,265			5,427			12,070
Gross profit		1,353			3,522			941			3,380			2,294			6,901
Operating expenses:
Sales and marketing		2,704			3,879			2,093			3,272			4,797			7,151
General and administrative		3,010			2,393			2,137			2,511			5,147			4,903
Engineering and development		991			1,424			690			1,124			1,680			2,549
Change in fair value of patent litigation settlement liability		—			190			—			(190	)		—			—
Total operating expenses		6,705			7,886			4,920			6,717			11,624			14,603
Loss from operations		(5,352	)		(4,364	)		(3,979	)		(3,337	)		(9,330	)		(7,702	)
Loss on foreign currency transactions		84			43			40			5			126			48
Interest expense		589			478			625			529			1,214			1,007
Non-operating loss (income), net		673			521
Non-operating loss, net								665			534			1,340			1,055
Loss before income tax provision		(6,025	)		(4,885	)		(4,644	)		(3,871	)		(10,670	)		(8,757	)
Income tax provision		(19	)		15			53			28			34			42
Net loss		(6,006	)		(4,900	)		(4,697	)		(3,899	)		(10,704	)		(8,799	)
Other comprehensive income item:
Foreign currency translation adjustment		(18	)		(55	)		74			14			56			(41	)
Comprehensive loss	$	(6,024	)	$	(4,955	)	$	(4,623	)	$	(3,885	)	$	(10,648	)	$	(8,840	)
Net loss per share:
Basic	$	(0.19	)	$	(0.23	)	$	(0.12	)	$	(0.18	)	$	(0.31	)	$	(0.41	)
Diluted	$	(0.19	)	$	(0.23	)	$	(0.12	)	$	(0.18	)	$	(0.31	)	$	(0.41	)
Shares used in the calculation of net loss per share:
Basic		31,509			21,134			37,990			21,595			34,709			21,366
Diluted		31,509			21,134			37,990			21,595			34,709			21,366

Three Months Ended

March 31,

2020

2019

Total redeemable preferred stock, beginning balance

$
3,965

$
—

Issuance of Redeemable preferred stock

—

—

Total redeemable preferred stock, ending balance

$
3,965

$
—

Common stock and additional paid-in capital:

Beginning balance

235,625

228,451

Issuance of common stock upon exercise of options

—

3

Settlement of liability awards

151

202

Stock offering costs

—

—

Stock-based compensation expense

640

634

Ending balance

236,416

229,290

Accumulated other comprehensive loss:

Beginning balance

(701
)

(670
)
Other comprehensive loss

(18
)

(55
)
Ending balance

(719
)

(725
)
Accumulated deficit

Beginning balance

(234,547
)

(216,692
)
Net loss

(6,006
)

(4,900
)
Ending balance

(240,553
)

(221,592
)
Total stockholders' (deficit) equity, ending balance

$
(4,856
)

$
6,973

Three Months Ended

March 31,

2020

2019

Cash Flows from Operating Activities:

Net loss

$
(6,006
)

$
(4,900
)
Adjustments to reconcile net loss to net cash and cash equivalents used in
operating activities:

Depreciation and amortization

177

258

Provision for bad debts

987

19

Amortization of discounts on lines of credit

46

38

Amortization of debt issuance costs

50

49

Stock-based compensation

719

757

Deferred income taxes

(32
)

(5
)
Earned interest income, net

—

(1
)
Change in fair value of patent litigation settlement liability

—

190

Changes in operating assets and liabilities:

Accounts receivable

3,024

(650
)
Inventory

(1,197
)

225

Prepaid expenses and other current assets

(142
)

463

Accounts payable and accrued liabilities

(1,541
)

(1,514
)
Deferred revenue

(219
)

37

Net cash and cash equivalents used in operating activities

(4,134
)

(5,034
)
Cash Flows from Investing Activities:

Purchases of property, plant, and equipment

(9
)

(8
)
Net cash and cash equivalents used in investing activities

(9
)

(8
)
Cash Flows from Financing Activities:

Payments of equity offering costs

(117
)

—

Proceeds from exercise of stock options

—

3

Net cash and cash equivalents (used in) provided by financing activities

(117
)

3

Effect of exchange rate changes

(18
)

(49
)
Decrease in cash, cash equivalents and restricted cash

(4,278
)

(5,088
)
Cash, cash equivalents and restricted cash, beginning of period

6,101

8,356

Cash, cash equivalents and restricted cash, end of period

$
1,823

$
3,268

Supplemental cash flow disclosure:

Cash paid for interest

$
485

$
430

Cash paid for income taxes

$
28

$
31

Cash paid for operating leases

$
192

$
189

Non-cash accrual for capital expenditures

$
7

$
24

Non-cash right-of-use assets obtained in exchange for lease obligation

$
—

$
824

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
Total redeemable preferred stock, beginning balance	$	3,965		$	—		$	3,965		$	—
Conversion of redeemable preferred stock	$	(3,965	)	$	—		$	(3,965	)	$	—
Total redeemable preferred stock, ending balance	$	—		$	—		$	—		$	—

STOCKHOLDERS' EQUITY
Common stock		31			21			31			21
Issuance of common stock		19			1			19			1
Ending balance		50			22			50			22

Additional paid in capital
Beginning balance		236,386			229,268			235,595			228,429
Sale of common stock		3,861			—			3,861			—
Sale of common stock warrants		3,031			—			3,031			—
Conversion of Series E Participating Convertible Preferred Stock		3,965			—			3,965			—
Issuance of common stock upon exercise of options		—			—			—			3
Settlement of liability awards		—			7			151			209
Stock offering costs		(863	)		—			(863	)		—
Stock-based compensation expense		708			488			1,348			1,122
Warrants issued in connection with debt instruments		67			209			67			209
Ending balance		247,155			229,972			247,155			229,972
Accumulated other comprehensive loss:
Beginning balance		(719	)		(725	)		(701	)		(670	)
Other comprehensive loss		74			14			56			(41	)
Ending balance		(645	)		(711	)		(645	)		(711	)
Accumulated deficit
Beginning balance		(240,554	)		(221,592	)		(234,547	)		(216,692	)
Net loss		(4,697	)		(3,899	)		(10,704	)		(8,799	)
Ending balance		(245,251	)		(225,491	)		(245,251	)		(225,491	)
Total stockholders' equity, ending balance	$	1,309		$	3,792		$	1,309		$	3,792

	Six Months Ended
	June 30,
	2020			2019
Cash Flows from Operating Activities:
Net loss	$	(10,704	)	$	(8,799	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation and amortization		488			529
Provision for bad debts		1,008			111
Amortization of discounts on lines of credit		74			109
Amortization of debt issuance costs		121			86
Stock-based compensation		1,519			1,204
Deferred income taxes		—			(5	)
Changes in operating assets and liabilities:
Accounts receivable		3,633			1,263
Inventory		(937	)		(86	)
Prepaid expenses and other current assets		(14	)		644
Accounts payable and accrued liabilities		(3,835	)		(1,720	)
Deferred revenue		(692	)		37
Net cash and cash equivalents used in operating activities		(9,339	)		(6,627	)
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment		(81	)		(125	)
Net cash and cash equivalents used in investing activities		(81	)		(125	)
Cash Flows from Financing Activities:
Proceeds from the sale of common stock		3,881			—
Proceeds from the sale of common stock warrants		3,031			—
Payments of equity offering costs		(991	)		(38	)
Borrowings on other long-term loans		3,140			—
Borrowings under term loan		—			2,500
Borrowings on credit facility		3,000			—
Repayment of credit facility		(3,000	)		—
Fees paid for debt instruments		(50	)		—
Proceeds from exercise of stock options		—			4
Net cash and cash equivalents provided by financing activities		9,011			2,466
Effect of exchange rate changes		57			(38	)
Decrease in cash, cash equivalents and restricted cash		(352	)		(4,324	)
Cash, cash equivalents and restricted cash, beginning of period		6,101			8,356
Cash, cash equivalents and restricted cash, end of period	$	5,749		$	4,032
Supplemental cash flow disclosure:
Cash paid for interest	$	466		$	831
Cash paid for income taxes	$	26		$	12
Cash paid for operating leases	$	188		$	414
Non-cash accrual for capital expenditures	$	35		$	17
Non-cash right-of-use assets obtained in exchange for lease obligation	$	570		$	824
Warrants issued in connection with debt instruments	$	67		$	209

BIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company”) is a medical device company that develops, manufactures, markets, and sells laser systems in dentistry and medicine. The Company’s products advance the practice of dentistry and medicine for patients and health care professionals. The Company’s 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. The Company’s 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. The Company has clearance from the Food and Drug Administration (“FDA”) to market and sell its laser systems in the United States and also ~~have~~has the necessary registration to market and sell its laser systems in Canada, the European Union, and many other countries outside the United States.

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, 2019 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.

The consolidated results of operations for the three and six months ended ~~March 31,~~June 30, 2020 are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2019, included in BIOLASE’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020 (the “2019 Form 10-K”).

The Company incurred ~~a loss~~losses from operations and a net ~~loss,~~losses, and used cash in operating activities for the three and six months ended ~~March 31,~~June 30, 2020. The Company’s recurring losses, level of cash used in operations, and need for additional capital ~~along with~~in the future, including uncertainties surrounding the ~~Company’s ability to raise additional capital,~~impact of COVID-19, 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 of December 31, 2019, the Company was not in compliance with certain of its loan covenants under the Term Loan (as defined below). On March 25, 2020 the Company and SWK Funding, LLC entered into a Fourth Amendment to the Credit Agreement and granted the Company a waiver of such covenants through March 31, 2020. The Fourth Amendment included revisions to the financial covenants and to the warrant price for the SWK warrants. See Note 9 for additional information.

Due to the uncertainty surrounding the Company’s continued inability to meet debt covenants in addition to the uncertainties surrounding the impact of COVID-19 on the Company’s business, the Company is not forecasting compliance with its debt covenants in the next twelve months and has classified the Term Loan with SWK Funding, LLC (the “Term Loan”) as a short-term liability.

~~As of March 31, 2020, the Company had negative working capital of approximately $3.7 million. The Company’s principal sources of liquidity as of March 31, 2020 consisted of approximately $1.8~~ ~~million in cash, cash equivalents and restricted cash and $4.7 million of accounts receivable, net.~~

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 must increase sales of its products, control or potentially reduce expenses and establish profitable operations in order to generate cash from operations or obtain additional funds when needed.

Additional capital requirements may depend on many factors, including, among other things, the rate at which the Company’s business grows, the extent of the Company’s revenue from ventilator sales, the COVID-19 pandemic and the actions taken to contain it, demands for working capital, manufacturing capacity, and any acquisitions that the Company may pursue. From time to time, the Company could be required, or may otherwise attempt, to raise capital through either equity or debt offerings. The Company cannot provide assurance that it will be able to successfully enter into any such equity or debt financings in the future or that the required capital would be available on acceptable terms, if at all, or that any such financing activity would not be dilutive to its stockholders.

Additionally, on January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified theThe COVID-19 ~~outbreak as a~~ pandemic ~~based on the rapid increase in exposure globally and on March 13, 2020, the United States declared a national emergency with respect to the coronavirus outbreak. This outbreak~~ has severely impacted global economic activity, tax and many countries and many states in the United States have reacted to the ~~outbreak~~pandemic by instituting quarantines, mandating business and school closures and restricting travel. These mandated business closures have included dental office closures in Europe and the United States for all but emergency procedures. ~~Our~~The Company’s salespeople ~~have been~~were unable to call on dental customers during these closures. In addition, most dental shows and workshops scheduled in the first and second quarters of 2020 ~~have been~~were canceled. There is no assurance that the Company’s sales will return to normal levels during the second ~~quarter of~~half 2020 or at any time thereafter. ~~However, the~~The full impact of the COVID-19 outbreak continues to evolve and it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on ~~its~~the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce and ~~have~~has taken actions to mitigate the impact including among other things, temporary reductions in pay, furloughs of certain positions ~~along with~~and deferrals in payment for cash preservation. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security ~~(CARES) Act.”~~(the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.

~~We continue to examine~~As of the ~~impact that~~date of issuance of these unaudited financial statements, the ~~CARES Act may have on our business. Currently, we are~~Company is unable to determine ~~the~~any future impact that the CARES Act will have on our financial condition, results of operations, or liquidity.

On April 14, 2020, ~~Biolase,~~BIOLASE, Inc., was granted a loan from Pacific Mercantile Bank in the aggregate amount of ~~$2,980,000.00,~~$2.98 million, pursuant to the Paycheck Protection Program (the “PPP”) under ~~Division A, Title I of~~ the CARES ~~Act, which was enacted March 27, 2020.~~Act. See Note 9 for additional information.

The PPP Loan, which was in the form of a Note dated April 13, 2020 issued by the Company, matures on April 13, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 1, 2020. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire PPP Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. However, there can be no assurance that the PPP loan will be forgiven.

The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. For further information on the PPP loan see Note 9 to these unaudited consolidated financial statements.

On May 22, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the United States Small Business Administration (the “SBA”) under its Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. The ~~receipt~~principal amount of ~~these funds,~~the EIDL Loan is $150,000, with proceeds to be used for working capital purposes. Interest on the EIDL Loan accrues at the rate of 3.75% per annum and installment payments, including principal and interest, are due monthly beginning twelve months from the date of the EIDL Loan in the amount of $731.00. The balance of principal and interest is payable thirty years from the date of the promissory note. In connection with the EIDL Loan, the Company executed the EIDL Loan documents, which include the SBA Secured Disaster Loan Note, dated May 22, 2020, the Loan Authorization and Agreement, dated May 22, 2020, and the ~~forgiveness~~Security Agreement, dated May 22, 2020, each between the SBA and the Company. For further information on the EIDL loan see Note 9 to these unaudited consolidated financial statements.

As of December 31, 2019, the Company was not in compliance with its debt covenants under its credit agreement dated November 9, 2018 (as amended, the “Credit Agreement”) with SWK Funding, LLC (“SWK”). In March 2020, the Company entered into a Fourth Amendment dated as of March 25, 2020 to its Credit Agreement with SWK (the “Fourth Amendment”). Under the Fourth Amendment, the financial covenant is amended to require consolidated unencumbered liquid assets of no less than $3.0 million as of any date of determination. The Fourth Amendment also adjusted the Minimum Aggregate Revenue and EBITDA (as defined in the Credit Agreement) requirements. Pursuant to the Fourth Amendment to the Credit Agreement, SWK granted the Company a waiver of the ~~loan attendant~~Company’s noncompliance with certain financial covenants contained in the Credit Agreement through March 31, 2020.

On May 15, 2020, the Company entered into the Fifth Amendment to its Credit Agreement (the “Fifth Amendment”) with SWK. The Fifth Amendment amends the Credit Agreement by providing for minimum consolidated unencumbered liquid assets of $1.5 million prior to June 30, 2020 and $3.0 million on or after June 30, 2020; providing for a minimum aggregate revenue target of $41.0 million for the twelve month period ending June 30, 2020, a related waiver of such minimum revenue target in the event that the Company raises equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly revenue targets; and providing for a minimum EBITDA target of ($7.0 million) for the twelve month period ended June 30, 2020, a related waiver of such minimum EBIDTA target in the event that the Company raises equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly EBITDA targets. The Fifth Amendment contains representations, warranties, covenants, releases, and conditions customary for a credit agreement amendment of this type.

On June 8, 2020, SWK agreed to extend the deadline by which the Company is required to raise not less than $10.0 million in equity capital or subordinated debt to July 31, 2020 and agreed that the $6.9 million in proceeds from the offering completed on June 10, 2020 shall be counted toward the $10.0 million requirement. On July 22, 2020, the Company consummated the public offering of 18,000 units, each consisting of one share of Series F Convertible Preferred Stock, par value $0.001 per share (“Series F Convertible Preferred Stock”) and 2,500 warrants, each to purchase one share of Common Stock at an exercise price of $0.40 per share, for which it raised gross proceeds of $18,000,000 before the payment of dealer-manager fees and associated offering expenses of approximately $2.2 million. In connection with the Fifth Amendment, on May 15, 2020 the Company entered into the Third Consolidated, Amended and Restated Warrant pursuant to which the Company issued additional warrants to SWK to purchase 63,779 shares of the Company’s Common Stock with a warrant price per share of $0.39198, and adjusted the warrant price per share with respect to 487,198 existing warrant shares previously issued to SWK to $0.39198. For further information on the additional SWK warrants see Note 9 to these ~~funds, is dependent~~unaudited consolidated financial statements. Based on the extension of the compliance deadline to July 31, 2020, the Company ~~having initially qualified~~was in compliance with or received a waiver for debt covenants as of June 30, 2020.

Due to the uncertainty surrounding the Company’s ability to meet debt covenants in light of the short and long-term impact of COVID-19 on the Company’s business, the Company is not forecasting compliance with its debt covenants in the next twelve months and has classified the Term Loan with SWK Funding, LLC (the “Term Loan”) as a short-term liability.

On August 12, 2020, the Company entered into the Sixth Amendment to the Credit Agreement (“Sixth Amendment”). Under the Sixth Amendment, the interest only period on the loan is extended to May 2022, the loan maturity date is extended to May 9, 2024, the financial covenants are adjusted, and a $0.7 million repayment of the principal amount was required upon execution of the agreement. See Note 15 for additional information.

In April 2020, the Company borrowed $3.0 million in connection with its credit facility with Pacific Mercantile Bank under the PMB Loan (as defined below).

In May 2020 it was determined that the Company was not in compliance with the minimum unrestricted cash requirement under the PMB Loan’s existing covenants as of March 31, 2020. In July, 2020, the Company obtained a waiver for the covenant violation and entered into the First Amendment to the Loan and Security Agreement (the “First Amendment”). Under the First Amendment to the PMB Loan, the Company obtained a forbearance waiving non-compliance through August 1, 2020 subject to certain conditions. In addition, the First Amendment to the PMB Loan the loan covenants were modified to include (a) on or before July 31, 2020, the Borrower has received net cash proceeds in the amount of at least $8.0 million from the issuance of equity securities and ~~qualifying~~those funds are deposited into accounts maintained by PMB and (b) the Company maintains unrestricted cash at PMB in an aggregate amount of $1.5 million.

The Company repaid the $3.0 million and as of June 30, 2020, there was no balance outstanding under the PMB Loan.

On June 10, 2020, the Company consummated a registered direct offering of 10,800,000 shares of its common stock (the “Shares”) to certain accredited institutional investors and a concurrent private placement of warrants to purchase 10,800,000 shares of common stock with an exercise price of $0.515 per share (the “June 2020 Warrants”). The June 2020 Warrants are exercisable commencing on the date of their issuance and will expire on the five- year anniversary of the issuance date.

The combined purchase price for one Share and one June 2020 Warrant in the offering was $0.64. The Company received aggregate gross proceeds of approximately $6.9 million in the offering, before deducting approximately $0.8 million in fees to the placement agents and other offering expenses. For additional information regarding this transaction, see Note 4 to these unaudited consolidated financial statements.

On July 22, 2020, the Company completed its previously announced rights offering. Pursuant to the Rights Offering, the Company sold an aggregate of 18,000 units consisting of an aggregate of 18,000 shares of Series F Convertible Preferred Stock and 45,000,000 warrants, with each warrant exercisable for one share of Common Stock, resulting in net proceeds to the Company of approximately $15.8 million, after deducting expenses relating to the Rights Offering, including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants. For additional information regarding this transaction, see Note 15 to these unaudited consolidated financial statements.

As of June 30, 2020, the Company had working capital of approximately $1.8 million. The Company’s principal sources of liquidity as of June 30, 2020 consisted of approximately $5.7 million in cash, cash equivalents and restricted cash and $4.1 million of accounts receivable, net, and approximately $1.0 million of availability under the PMB Loan.

In order for the ~~forgiveness~~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 must increase sales of its products, control or potentially reduce expenses and establish profitable operations in order to generate cash from operations or obtain additional funds when needed.

Although the Company consummated an equity raise of gross proceeds of $6.9 million in the second quarter of 2020, the Company may still have to raise additional capital in the future. Additional capital requirements may depend on many factors, including, among other things, the rate at which the Company’s business grows, the COVID-19 pandemic and the actions taken to contain it, demands for working capital, manufacturing capacity, and any acquisitions that the Company may pursue. From time to time, the Company could be required, or may otherwise attempt, to raise capital through either equity or debt offerings. The Company cannot provide assurance that it will be able to successfully enter into any such ~~loan based~~equity or debt financings in the future or that the required capital would be available on ~~our future adherence~~acceptable terms, if at all, or that any such financing activity would not be dilutive to ~~the forgiveness criteria.~~its’ stockholders.

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States of America ~~(“GAAP”)~~ requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates in these consolidated financial statements include allowances on accounts receivable, inventory, and deferred taxes, as well as estimates for accrued warranty expenses, 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~~as discussed in ~~Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of~~ the Company’s 2019 audited financial statements included in the Company’s 2019 Form 10-K. Management believes that there have been no significant changes during the ~~three~~six months ended ~~March 31,~~June 30, 2020 in the Company’s critical accounting policies from those disclosed in Item 7 of the 2019 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~~��exit price”). The fair value is based on assumptions that market participants would use, including a consideration of non-performance risk. Under the accounting guidance for fair value hierarchy, there are three levels of measurement inputs. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable, either directly or indirectly. Level 3 inputs are unobservable due to little or no corroborating market data.

The Company’s financial instruments, consisting of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, and the SWK Loan as discussed in Note 9, approximate fair value because of the 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 ~~three-month~~three and six month periods ended ~~March 31,~~June 30, 2020 and 2019, 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 (the “FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards 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 March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. This ASU was issued because the London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons. ASU 2020-04 provides companies with optional guidance to ease the potential

accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022). The Company is currently evaluating alternative benchmark rates to replace LIBOR and is still in the process of evaluating the impact that adopting this new accounting standard will have on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope and to replace the incurred loss impairment methodology under current GAAP with 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 will 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, 2023, with early adoption permitted beginning January 1, 2019. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

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 terms of the sale, including the description, quantity and price of each product or service. Payment terms are stated in the contract and vary according to the arrangement. Because the customer typically agrees to a stated rate and price in the contract that does not vary over the life of the contract, the Company’s contracts do not contain variable consideration. The Company establishes a provision for estimated warranty expense.

At contract inception, the 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 products or services promised in contracts regardless of whether they are explicitly stated or are implied by customary business practices.

Revenue from products and services transferred to customers at a single point in time accounted for ~~74%~~66% and ~~84%~~71% of net revenue for the three and six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~81% and 82% for the three and six months ended June 30, 2019, 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 ~~26%~~34% and ~~16%~~29% of net revenue for the three and six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~19% and 18% for the three and six months ended June 30, 2019, 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 $0.5 million and $0.6 million as of ~~March 31,~~June 30, 2020 and December 31, 2019, 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 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 those cases, the Company records revenue for product sales at the point in time when the product has been shipped. The customer obtains control of the product when it is shipped, as all shipments are made FOB shipping point, and after the customer selects its shipping method and pays all shipping costs and insurance. 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 analysis of customer accounts and the Company’s historical experience with accounts receivable write-offs. During the first quarter of 2020, the Company recorded an additional allowance for doubtful accounts of approximately $1.0 million due to the uncertainties stemming from the impact of COVID-19.

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,~~June 30, 2020 and December 31, 2019.

The amount of revenue recognized during the ~~three months~~six month period ended ~~March 31,~~June 30, 2020 and June 30, 2019 that was included in the opening contract liability balance related to undelivered elements was ~~$0.1~~$0.4 million and $0.3 million, respectively and related to extended warranty contracts was ~~$1.0 million.~~$2.0 million and $0.4 million, respectively.

The Company 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 nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors.

The Company’s revenues related to the 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 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 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 revenue and percentages of revenue 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 the 2020 Annual Meeting, the Company’s stockholders’ approved a proposal to amend the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 40,000,000 shares to 180,000,000 shares. On May 28, 2020, the Company filed the amendment with the Secretary of State of the State of Delaware to effect such increase.

The board of directors of ~~Biolase~~BIOLASE (the “Board”), without further stockholder authorization, may from time to time authorize the issuance of up to 1,000,000 shares of the Company’s preferred stock. Of the 1,000,000 shares of preferred stock, ~~500,000~~69,565 shares ~~are~~have been designated as Series ~~B Junior~~E Participating ~~Cumulative~~Convertible Preferred ~~Stock.~~Stock, par value $0.001 per share (“Series E Preferred Stock”), and 18,000 shares have been designated as Series F Convertible Preferred Stock, par value $0.001 per share (“Series F Preferred Stock”). In 2019, the Company sold ~~Series E Convertible Preferred Shares in a private offering and as of March 31, 2020 and December 31, 2019,~~ 69,565 ~~of these shares were issued and outstanding.~~

~~The~~ shares of Series E Preferred Stock in a private offering. All 69,565 shares of Series E Preferred Stock were automatically ~~convert~~converted into 6,956,500 shares of Common Stock upon receipt of the ~~Requisite Stockholder Approval (as defined in~~requisite approval at the ~~Certificate~~2020 Annual Meeting. Upon the conversion, the net proceeds of ~~Designations, Preferences~~$4.0 million were reclassified from mezzanine equity to permanent equity. As of June 30, 2020 and ~~Rights of Series E Participating Convertible Preferred Stock. The~~December 31, 2019, 0 and 69,565 shares of Series E Preferred Stock ~~have no other conversion rights.~~

~~The Purchase Agreement contains customary representations, warranties~~were issued and covenants by the Company, customary indemnification obligations of the Company and the Investors, including for liabilities under the Securities Act, and other obligations of the parties. The representations, warranties and covenants contained in the Purchase Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement and may be subject to limitations agreed upon by the contracting parties.outstanding, respectively.

The shares of Series E Preferred Stock were offered in reliance upon exemptions from registration under the Securities Act of 1933, as amended, afforded by Regulation D and corresponding provisions of state securities laws. The Company ~~has agreed to use commercially reasonable efforts to file, within 30 days following receipt of the Requisite Stockholder Approval,~~subsequently filed a registration statement with the ~~U.S. Securities and Exchange Commission~~SEC to register the resale of the shares of Common Stock underlying the Series E Preferred Stock.

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 “2002 Plan”) was replaced by the 2018 Plan (as defined below) with respect to future equity awards. Persons eligible to receive awards under the 2002 Plan included officers, employees, and directors of the Company, as well as consultants. As of ~~March 31,~~June 30, 2020, a total of approximately 3.1 million shares of the Company’s common stock have been authorized for issuance under the 2002 Plan, of which approximately 1.0 million shares of 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 and ~~1.2~~1.1 million shares of common stock have been reserved for outstanding options and unvested RSUs, and no shares are available for future grants.

At the ~~2018 Annual Meeting,~~annual meeting of stockholders, 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 and Amendment No. 2 to the 2018 Plan, as approved by the Company’s stockholders on May 15, ~~2019.~~2019 and Amendment No. 3 to the 2018 Plan, as approved by the Company’s stockholders on May 15, 2020. 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 ~~5.0~~12.2 million. As of ~~March 31,~~June 30, 2020 a total ~~2.3~~4.1 million shares of the Company’s common stock have been reserved for issuance upon the exercise of outstanding options and or settlement of unvested RSUs, and ~~0.8~~8.1 million shares of the Company’s common stock remain available for future grants.

The Company recognized stock-based compensation expense of ~~$0.7~~$0.8 million and ~~$0.8~~$0.5 million, for the three months ended ~~March 31,~~June 30, 2020 and 2019 ~~respectively, based on the grant-date fair value. The net impact of stock-based compensation expense to earnings was $(0.02),~~ and ~~$(0.04) per basic~~$1.6 million and ~~diluted share~~$1.2 million for the ~~three months~~six month period ended ~~March 31,~~June 30, 2020 and June 30, 2019 respectively. ~~At March 31,~~As of June 30, 2020, the Company had approximately ~~$1.1~~$1.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested share-based compensation arrangements. The Company expects that expense to be recognized over a weighted-average period of ~~1.5~~1.2 years.

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

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

A summary of option activity for the ~~three~~six months ended ~~March 31,~~June 30, 2020 is as follows (in thousands, except per share data):

Weighted

Weighted
Average
Remaining

Average

Contractual

Aggregate

Shares

Exercise
Price

Term
(Years)

Intrinsic
Value(1)

Options outstanding, December 31, 2019

1,287

$
5.77

$
—

Granted at fair market value

20

$
0.77

Exercised

—

$
—

Forfeited, cancelled, or expired

(32
)

$
8.87

Options outstanding at March 31, 2020

1,275

$
5.61

5.68

$
—

Options exercisable at March 31, 2020

1,061

$
6.35

5.11

$
—

Vested options expired during the quarter
ended March 31, 2020

17

$
13.2

				Weighted		Weighted Average Remaining
				Average		Contractual		Aggregate
	Shares			Exercise Price		Term (Years)		Intrinsic Value(1)
Options outstanding at December 31, 2019		1,287		$	5.77			$	—
Granted at fair market value		1,241		$	0.38
Exercised		—		$	—
Forfeited, cancelled, or expired		(108	)	$	4.98
Options outstanding at June 30, 2020		2,420		$	3.04		7.62	$	108
Options exercisable at June 30, 2020		1,022		$	6.45		4.79	$	—
Vested options expired during the period ended June 30, 2020		17		$	13.2

A summary of unvested stock option activity for the ~~three~~six months ended ~~March 31,~~June 30, 2020 is as follows (in thousands, except per share data):

Cash proceeds, along with fair value disclosures related to grants, exercises and vested options are as follows (in thousands, except per share amounts):

~~There were no material grants made during~~During the ~~three~~six months ended ~~March 31,~~June, 30, 2020, the Company granted approximately 1.6 million RSUs and the Company canceled approximately ~~840,000 grants~~1.0 million RSUs with performance based vesting due to ~~non achievement~~non-achievement of the performance targets.

A summary of unvested RSU activity for the ~~three~~six months ended ~~March 31,~~June 30, 2020 is as follows (in thousands, except per share amounts):

The Company issues warrants to acquire shares of the Company’s common stock as approved by the Board.

On June 10, 2020, the Company consummated a registered direct offering of 10,800,000 shares of its common stock to certain accredited institutional investors and a concurrent private placement of warrants to purchase up to an aggregate of 10,800,000 shares of common stock with an exercise price of $0.515 per share. The June 2020 Warrants are exercisable commencing on the date of their issuance and will expire on the five- year anniversary of the issuance date. The combined purchase price for one Share and one June 2020 Warrant in the offering was $0.64. The Company received aggregate gross proceeds of approximately $6.9 million in the offering, before deducting fees to the placement agents and other offering expenses of approximately $0.7 million.

Based on the terms and conditions of the warrants, the Company determined that equity classification was appropriate and recognized the values of the commons stock and common stock warrants in excess of par in Additional Paid-In Capital as of June 30, 2020. The Company allocated the net proceeds of $6.2 million to the common stock and warrants based on their relative fair values. The fair value of the warrants was estimated to be at $0.42 per share using the Black-Scholes pricing model with an expected term of 5 years, market price of $0.54 which is the last closing price of our common stock prior to the transaction date, volatility of 109.8% and a risk free rate of 0.45% and an expected dividend yield of 0. Based on the relative fair value of the warrants, the Company allocated approximately $3.9 million to the common stock and $3.0 million to the warrants before issuance costs.

A summary of warrant activity for the ~~three~~six months ended ~~March 31,~~June 30, 2020 is as follows (in thousands, except exercise price amounts):

See Note 9 for ~~additional~~ information on the Western Alliance Warrants, the SWK Warrants, and the DPG Warrants (each as defined below).

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

Outstanding stock options, RSUs and warrants to purchase approximately ~~3.4~~18.5 million shares were not included in the calculation of diluted loss per share for the three and six months ended ~~March 31,~~June 30, 2020, as their effect would have been anti-dilutive. For the same 2019 periods, anti-dilutive outstanding stock options and warrants to purchase 5.7 million shares were not included in the computation of diluted loss per share.

Inventory is valued at the lower of cost or net realizable value and is comprised of the following (in thousands):

Inventory has been reduced by estimates for excess and obsolete amounts totaling $1.3 million and $1.3 million as of ~~March 31,~~June 30, 2020 and December 31, 2019, respectively.

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

Depreciation and amortization expense related to property, plant, and equipment totaled ~~$0.2~~$0.3 million and ~~$0.3~~$0.5 million for the three and six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~$0.3 million and $0.5 million for the three and six months ended June 30, 2019, respectively.

The Company conducted its annual impairment test of goodwill as of June 30, ~~2019~~2020 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. Due to the uncertainty surrounding the impact of COVID-19 on the Company’s business, the Company performed an assessment at March 31, 2020 which resulted in no impairment required. Beyond the impact of COVID-19, noNo events have occurred since June 30, ~~2019~~2020 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 ~~March 31,~~June 30, 2020 and December 31, 2019, the Company had goodwill (indefinite life) of $2.9 million. As of ~~March 31,~~June 30, 2020 and December 31, 2019, all intangible assets have been fully amortized and no amortization expense was recognized during the three and six months ended ~~March 31,~~June 30, 2020 and 2019.

Changes in the initial product warranty accrual and the expenses incurred under the Company’s initial and extended warranties for the three and six months ended ~~March 31,~~June 30, 2020 and 2019 are included within accrued liabilities onand other liabilities in the Consolidated Balance Sheets and were as follows (in thousands):

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

The following table presents the details of the principal outstanding and unamortized discount (in thousands):

On October 28, 2019, the Company entered into a loan and security agreement (the “Loan Agreement”) with Pacific Mercantile Bank, as lender (the “Lender”), which provides for a revolving line of credit (the “PMB Loan”) in a maximum principal amount not to exceed the lesser of (i) $3 million or (ii) the sum of 90% of the Eligible Accounts (as defined in the Loan Agreement) plus 75% of the Eligible Inventory (as defined in the Loan Agreement, and subject to certain limitations set forth therein); provided that the maximum principal amount of the PMB Loan may be reduced from time to time in the Lender’s good faith business judgment as set forth in the Loan Agreement. Borrowings under the PMB Loan may be used for working capital. The PMB Loan matures on October 28, 2021, unless earlier terminated.

The Company’s obligations under the Loan Agreement are secured by a security interest in substantially all of the Company’s property. No borrowings may be made under the Loan Agreement unless and until Exim Bank agrees to guarantee the PMB Loan and the Company has entered into a borrower agreement with Exim Bank.

Borrowings under the PMB Loan bear interest at a daily rate equal to the prime rate published in the Wall Street Journal, plus 1.5% per annum; provided, that the interest rate in effect on any day shall not be less than 6.0% per annum. Additionally, the Company was required to pay an initial fee and is required to pay an annual fee of $52,500 as well as a termination fee equal to $30,000 in the event the Loan Agreement is terminated on or prior to October 28, 2020.

The Loan Agreement requires the Company to maintain unrestricted cash at the Lender plus unused availability under the PMB Loan in an amount equal to at least the Burn Rate. “Burn Rate” means the Company’s net profit/net loss plus depreciation plus amortization plus stock-based compensation, measured on a trailing three month basis. In addition, the Loan Agreement contains customary affirmative and negative covenants for financings of its type (subject to customary exceptions).

In April, 2020, the Company drew $3.0 million under the PMB Loan and repaid the balance in full during the second quarter. Interest incurred on the loan was not material. In May 2020 it was determined that the Company was not in compliance with the minimum unrestricted cash requirement under the PMB Loan’s existing covenants as of March 31, 2020. In July, 2020, the Company obtained a waiver for the covenant violation and entered into the First Amendment to the Loan and Security Agreement (the “First Amendment”). Under the First Amendment to the PMB Loan, the Company obtained a forbearance waiving non-compliance through August 1, 2020 subject to certain conditions. In addition, the First Amendment to the PMB Loan the loan covenants were modified to include (a) on or before July 31, 2020, the Borrower has received net cash proceeds in the amount of at least $8.0 million from the issuance of equity securities and those funds are deposited into accounts maintained by PMB and (b) the Company maintains unrestricted cash at PMB in an aggregate amount of $1.5 million.

As of ~~March 31,~~June 30, 2020 and December 31, 2019, the Company had no borrowings outstanding and unused availability under this credit facility of ~~$3.0~~approximately $1.0 million and $2.7 million, ~~respectively. The Company was in compliance with all debt covenants at March 31, 2020.~~

~~In April 2020, the Company drew $3.0 million under the PMB Loan. Additional information is discussed in Note 15 – Subsequent Events.~~respectively

On November 9, 2018, the Company entered into a five-year secured Credit Agreement ~~(“Credit Agreement”)~~ with SWK Funding LLC (“SWK”), pursuant to which the Company has borrowed $12.5 million (“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 the 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 Bank under the business financing agreement entered into in 2018.

The Credit Agreement contains financial and non-financial covenants requiring the Company to, among other things, (i) maintain unencumbered liquid assets of (A) no less than $1.5 million or (B) 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.

As of March 31, 2019, the Company was not in compliance with certain covenants in the Credit Agreement and 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 (the “First Amendment) 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 Securities and Exchange Commission before September 30, 2019, with a proposed maximum aggregate offering price of at least $10.0 million if the Company did not reach set minimum revenue levels for the three-month period ended September 30, 2019, and (c) require minimum liquidity of $1.5 million at all times. The First Amendment provided that if aggregate minimum revenue and EBITDA levels were not achieved by September 30, 2019, the minimum liquidity requirement would be increased to $3.0 million, until the Company has obtained additional equity or debt funding of no less than $5.0 million. In 2019, the Company obtained additional equity financing greater than $5.0 million. The Company borrowed the additional $2.5 million during the year ended December 31, 2019.

In connection with the amendment, the Company paid to SWK loan origination and other fees of approximately $0.1 million payable in cash and approximately $0.2 million in additional SWK Warrants (as defined below) to purchase the Company’s common stock. The Company paid an additional finder’s fee to Deal Partners Group (“DPG”) of approximately $0.1 million in cash and $0.1 million in additional DPG Warrants to purchase the Company’s common stock. The Company accounted for the First Amendment as a modification to existing debt and as a result, recognized the amounts paid to SWK in cash and warrants as additional debt issuance costs.

On September 30, 2019, BIOLASE, Inc entered into the Second Amendment to Credit Agreement (the “Second Amendment”) with SWK, in connection with that certain Credit Agreement, by and among the Company, SWK, and the lender parties thereto. The Second Amendment amended the Credit Agreement to provide for a permitted inventory and accounts receivable revolving loan facility, secured by a first lien security interest in the Company’s inventory and accounts receivable, with a maximum principal amount of $5 million and with such other material terms and conditions acceptable to SWK in its commercially reasonable discretion. In addition, SWK agreed to waive the effect of the Company’s non-compliance with certain unencumbered liquid assets financial operating covenants as set forth in the Credit Agreement, and SWK agreed to forbear from exercising rights and remedies otherwise available to it in the event of such non-compliance through October 31, 2019, or earlier in the event that an additional equity or subordinated debt financing is consummated with gross proceeds of not less than $5 million, or in the event of a default under the Credit Agreement.

On November 6, 2019, the Company agreed to further amend the Credit Agreement. Pursuant to the Third Amendment, SWK granted the Company a waiver of the Company’s non-compliance with certain financial covenants in the Credit Agreement. Also pursuant to the Third Amendment, the Company and SWK agreed to (i) revise financial covenants to adjust minimum revenue and EBITDA levels and (ii) remove the automatic increase of the minimum liquidity requirement based on certain aggregate minimum revenue and EBITDA levels as of September 30, 2019 (which was added pursuant to the First Amendment). In connection with the Third Amendment, the Company consolidated the SWK Warrants issued to SWK on November 9, 2018 and May 7, 2019. The price was adjusted to $1.00 and the impact of this was de minimis.

As of December 31, 2019, the Company was not in compliance with the covenants under the Credit Agreement, as amended, and on March 25, 2020, the Company agreed to further amend the Credit Agreement (“Fourth Amendment”). Pursuant to the Fourth Amendment to the Credit Agreement, SWK granted the Company a waiver of the Company’s non-compliance with certain financial covenants contained in the Credit Agreement through March 31, 2020. Also pursuant to the Fourth Amendment, the Company and SWK agreed to (i) revise financial covenants to adjust minimum revenue and EBITDA levels and (ii) revise the financial covenant with respect to required unencumbered liquid assets.

On May 15, 2020, the Company entered into the Fifth Amendment to its Credit Agreement with SWK (the “Fifth Amendment”). The Fifth Amendment amended the Credit Agreement by providing for minimum consolidated unencumbered liquid assets of $1.5 million prior to June 30, 2020 and $3.0 million on or after June 30, 2020; providing for a minimum aggregate revenue target of $41.0 million for the twelve month period ending June 30, 2020, a related waiver of such minimum revenue target in the event that the Company raises equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly revenue targets; and providing for a minimum EBITDA target of ($7.0 million) for the twelve month period ended June 30, 2020, a related waiver of such minimum EBIDTA target in the event that the Company raises equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly EBITDA targets. The Fifth Amendment contains representations, warranties, covenants, releases, and conditions customary for a credit agreement amendment of this type. On June 8, 2020, SWK agreed to extend the deadline by which the Company is required to raise not less than $10.0 million in equity capital or subordinated debt to July 31, 2020 and agreed that the $6.9 million in proceeds from the offering completed on June 10, 2020 shall be counted toward the $10.0 million requirement On July 22, 2020, the Company consummated the public offering of 18,000 units, each consisting of one share of Series F Convertible Preferred Stock, par value $0.001 per share (“Series F Convertible Preferred Stock”) and 2,500 warrants, each to purchase one share of Common Stock at an exercise price of $0.40 per share, for which it raised gross proceeds of $18.0 million before the payment of dealer-manager fees and associated offering expenses. Based on the extension of the compliance deadline to July 31, 2020, the Company was in compliance with or received a waiver for debt covenants as of June 30, 2020.

The Company does not anticipate it will regain compliance with the financial covenants under the Credit Agreement by ~~June~~September 30, 2020 due to the uncertainty surrounding the impact of COVID-19 on its business. Therefore the Term Loan is classified as a current liability in the unaudited consolidated balance sheets.

The Company recognized approximately $0.6 million and $0.5 million and $1.2 million and $1.0 million in interest expense for the three and six months ending ~~March 31,~~June 30, 2020 and 2019, respectively. The weighted-average interest rate as of ~~March 31,~~June 30, 2020 was 12.25%.

On April 14, 2020, Biolase, Inc., was granted a loan from Pacific Mercantile Bank in the aggregate amount of $2,980,000.00, pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020.

The PPP Loan, which was in the form of a Note dated April 13, 2020 issued by the Company, matures on April 13, 2022 and bears interest at a rate of 1.0% per annum. Interest is payable monthly commencing on November 1, 2020. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire PPP Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. However, there can be no assurance that such PPP loan will be forgiven.

The Company recorded the principal amount of approximately $3.0 million due on the PPP Loan in Non current term loans in the unaudited consolidated balance sheet. Interest on the PPP Loan was not material.

In July 2020, the Company amended the terms of the PPP Loan. Details of the amendment are discussed in Note 15 to these unaudited consolidated financial statements.

On May 22, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the United States Small Business Administration (the “SBA”) under its Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the EIDL Loan is $150,000, with proceeds to be used for working capital purposes. Interest on the EIDL Loan accrues at the rate of 3.75% per annum and installment payments, including principal and interest, are due monthly beginning twelve months from the date of the EIDL Loan in the amount of $731 dollars. The balance of principal and interest is payable thirty years from the date of the promissory note. The principal amounts were recognized as Non current term loans in the consolidated balance sheet at June 30, 2020. Interest on the loan was not material.

On March 6, 2018, the Company issued to Western Alliance warrants (the “Original Western Alliance Warrants”) to purchase up to the number of shares of common stock equal to $120,000 divided by the applicable exercise price at the time such warrants are exercised. The Original Western Alliance Warrants are fully vested and exercisable. The Original Western Alliance Warrants may be exercised with a cash payment from Western Alliance, or, in lieu of a cash payment, Western Alliance may convert the warrants into a number of shares, in whole or in part. The initial exercise price of the warrants was $2.35 per share. On September 27, 2018, the Company entered into the Second Modification Agreement to amend the Original Business Financing Agreement. In connection with the Second Modification Agreement, the Original Western Alliance Warrants were terminated, and the Company issued new warrants (the “Western Alliance Warrants”) to purchase up to the number of shares of common stock equal to $120,000 divided by the exercise price of $2.13, which was the closing price of the Company’s common stock on September 27, 2018. 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 per share less than the exercise price. The sale of common stock in the second quarter of 2020 triggered an adjustment to the exercise price to approximately $0.60 per share. The impact of the adjustment to the exercise price was not material.

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 November 2019, these warrants were consolidated and the strike price was adjusted to $1.00, and in March 2020, the strike price was adjusted a second time to $0.49. The impact of both reprice events was de minimis to the unaudited consolidated financial statements. In connection with the Fifth Amendment, the Company entered into a Third Amendment to the SWK Warrant Agreement. Under this amendment, the Company granted to SWK 63,779 additional common stock warrants at an exercise price of approximately $0.39198. All other terms and conditions to the additional warrants were the same as those previously granted. The Company also revised the exercise price of the 487,198 common stock warrants held by SWK to $0.39198. The Company measured the fair value of the 63,779 warrants granted using the black-Scholes. The fair value of the additional warrants and the aggregate impact of the strike price adjustments in previous amendments to the Warrant Agreement were less than $0.1 million and not material to the unaudited consolidated financial statements. Due to the repricing that occurred in the second quarter of 2020, the down round features of these warrants was not triggered by the Company’s June 2020, sale of common stock.

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%. In November 2019, the exercise price of the DPG Warrants issued on November 9, 20 18 was adjusted from $1.34 per share to $0.8767 per share and the exercise price of the DPG Warrants issued on May, 2019 was adjusted from $2.17 per share to $1.4197 per share. The impact of the reprice was de minimis to the unaudited consolidated financial statements. The June 2020 sale of common stock triggered the down round features of these warrants and in August 2020, the Company adjusted the exercise price of these warrants to $0.62 and $0.38 per share the impact of this reprice was not material.

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,~~June 30, 2020.

The future minimum principal and interest payments as of ~~March 31,~~June 30, 2020 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 Accounting Standards Topic No. 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.~~adoption. 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.

In 2020, the Company entered into two real property leases in Foothill Ranch, California and Corona, California. The Foothill Ranch lease is a 11,936 square foot lease and will be used as the Company’s headquarters upon commencement on July 1, 2020. The Corona lease is for an 11,032 square foot facility for the Company’s manufacturing operations. The Corona lease commenced in June 2020 and as a result the Company recorded an right of use asset and offsetting liability in the amount of $0.6 million. Because the rate in each of the new leases is not readily determinable, the Company used the IBR of 12.25% to measure the present value of the lease liabilities. The IBR was based on the Company’s SWK Term Loan as amended, which the Company believes is indicative of prevailing market rates.

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,~~June 30, 2020 for leases that have commenced were as follows (in thousands):

As of ~~March 31,~~June 30, 2020, right-of-use assets were ~~$0.1~~$0.6 million and lease liabilities were ~~$0.1~~$0.6 million. ~~During the three months ended March 31, 2020, the Company entered into two new real property leases which will commence in July 1, 2020.~~ The Company expects to recognize ~~a right-of-use~~an additional right of use asset and ~~an offsetting~~ lease liability ~~in the amount~~ of ~~$1.8~~$1.3 million ~~in the unaudited consolidated balance sheet~~relating to its Foothill Ranch lease upon ~~lease commencement.~~commencement on July 1, 2020.

Future minimum rental commitments under lease agreements, as of ~~March 31,~~June 30, 2020, with non-cancelable terms greater than one year for each of the years ending December 31 are as follows (in thousands):

On April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against BIOLASE in the District of Utah alleging that BIOLASE’s ezlase dental laser infringes on U.S. Patent No. 7,485,116 (the “116 Patent”). On September 9, 2012, CAO amended its 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 BIOLASE issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO and its diode product. The 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 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 Company and its affiliates a non-exclusive, non-transferable (except as provided in the Settlement Agreement), royalty-free, fully-paid, worldwide license to the licensed patents for use in the licensed products and agreed not to sue the Company, its affiliates or any of its manufacturers, distributors, suppliers or customers for use of the licensed patents in the licensed products, and the parties agreed to a mutual release of claims. The Company agreed (i) to pay to CAO, within five days of the Effective Date, $500,000 in cash, (ii) to issue to CAO, within 30 days of the Effective Date, 500,000 restricted shares of common stock of the Company (the “Stock Consideration”), and (iii) to pay to CAO, within 30 days of December 31, 2021, an amount in cash equal to the difference (if positive) between $1,000,000 and the value of the Stock Consideration on December 31, 2021. The Stock Consideration vests and becomes transferrable on December 31, 2021, subject to the 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 31, 2018. In January 2019, the 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 $0.2 million which represented the change in fair value of the restricted stock to be issued to CAO at March 31, 2019. Subsequent to March 31,2019, the Company reversed the additional loss commensurate with the fluctuations in the Company’s share price. As of ~~March 31,~~June 30, 2020 and December 31, 2019, the accrued liability relating to this agreement was $1.0 million.

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 six months ended ~~March 31,~~June 30, 2020, sales to customers in the United States accounted for approximately ~~65%~~75% and 69% of net revenue and international sales accounted for approximately ~~35%~~25% and 31% of net revenue, respectively. For the three and six months ended June 30, 2019, sales to customer in the United States accounted for approximately 68% and 63% of net revenue and international sales accounted for 32% and 37%, respectively. No individual country, other than the United States, represented more than 10% of total net revenue during the three and six months ended ~~March 31,~~June 30, 2020 or 2019.

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

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

Revenue from the Company’s products for the three and six months ended ~~March 31,~~June 30, 2020 and 2019 are as follows (dollars in thousands):

	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2020				2019				2020				2019				2020				2019
Laser systems	$	2,051	42.9	%	$	5,964	57.8	%	$	1,091	37.1	%	$	4,917	56.9	%	$	3,142	40.7	%	$	10,880	57.4	%
Imaging systems		—	—	%		552	5.3	%		—	—	%		63	0.7	%		-	0.0	%		615	3.2	%
Consumables and other		1,472	30.8	%		2,112	20.5	%		862	29.3	%		2,084	24.1	%		2,334	30.2	%		4,196	22.1	%
Services		1,260	26.3	%		1,695	16.4	%		985	33.6	%		1,578	18.3	%		2,245	29.1	%		3,273	17.3	%
License fees and royalties		—	—	%		3	—	%		—	—	%		3	—	%		—	—	%		7	—	%
Total revenue	$	4,783	100.0	%	$	10,326	100.0	%	$	2,938	100.0	%	$	8,645	100.0	%	$	7,721	100.0	%	$	18,971	100.0	%

No individual customer represented more than 10% of the Company’s revenue for the three and six months ended ~~March 31,~~June 30, 2020 or 2019.

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.

One individual customer represented more than 10% of the Company’s accounts receivable at ~~March 31,~~June 30, 2020 and December 31, 2019.

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 six months ended ~~March 31,~~June 30, 2020 and 2019. 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 six months ended ~~March 31,~~June 30, 2020, the Company recorded an income tax provision of $53,000 and ~~March 31,~~a provision of $34,000 resulting in an effective tax rate of 0.3% and 0.3%, respectively. During the three and six months ended June 30, 2019, the Company recorded an income tax ~~benefit of $19,000 and a~~ provision of ~~$15,000, respectively,~~$28,000 and $42,000 resulting in an effective income tax rate of ~~0.2%~~0.5% and 0.3%, respectively. The income tax provisions for the three and six months ended ~~March 31,~~June 30, 2020 and 2019 were calculated using the discrete year-to-date method. The effective tax rate differs from the statutory tax rate of 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.

On July 22, 2020, the Company completed a Rights Offering wherein the Company sold an aggregate of 18,000 units consisting of an aggregate of 18,000 shares of Series F Convertible Preferred Stock and 45,000,000 warrants, with each warrant exercisable for one share of Common Stock, resulting in net proceeds to the Company of approximately $15.8 million, after deducting expenses relating to the Rights Offering, including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants.

On July 30, 2020, the Company entered into the First Amendment to the PMB Loan. Under the First Amendment to the PMB Loan, the Company obtained a forbearance waiving non-compliance through August 1, 2020 subject to certain conditions. In addition, the First Amendment to the PMB Loan modified the loan covenants to include requirements that (a) on or before July 31, 2020, the Borrower shall have received net cash proceeds in the amount of at least $8.0 million from the issuance of equity securities and those funds are deposited into accounts maintained by PMB and (b) the Company shall maintain unrestricted cash at PMB in an aggregate amount of $1.5 million

On April 14, 2020, Biolase, Inc., was granted a loan from Pacific Mercantile Bank in the aggregate amount of $2,980,000, pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020.

The PPP Loan, which was in the form of a Note dated April 13, 2020 issued by the Company, matures on April 13, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 1, 2020. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, amounts spent on authorized purchases over eight weeks after receiving the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

In ~~April~~July 2020, the Company ~~borrowed $3.0~~amended the provisions of its PPP loan. The amendment modifies the original payment deferment period from six months to the date that the SBA remits the Company’s loan forgiveness to PMB or if no forgiveness is requested to ten months after the end of the 24-week measurement period. The amendment also increases the amount of non-payroll costs eligible for loan forgiveness from 25% to 40%.

In August 2020, the Company granted approximately 1.2 million RSUs under the ~~PMB Loan.~~2018 Plan as part of its 2020 Employee Bonus plan. Approximately 1.0 million of these awards vest upon achievement of certain performance targets.

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, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020 (the “2019 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 statements, predictions, or expectations regarding market opportunities, general and administrative expenses, investments in engineering and development, interest rate fluctuations, future products and services and enhancements of existing products and services, potential collaborations, our use of proceeds from the PPP Loan (as defined below), seasonality and the reasons therefor, operating and other expenses, anticipated cash needs, our strategy 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 2019 Form 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 leading provider of advanced laser systems for the dental industry. We develop, manufacture, market, and sell laser systems that provide significant benefits for dental practitioners and their patients. Our proprietary systems allow dentists, periodontists, endodontists, oral surgeons, and other dental specialists to perform a broad range of minimally invasive dental procedures, including cosmetic, restorative, and complex surgical applications. Our laser systems are designed to provide clinically superior results for many types of dental procedures compared to those achieved with drills, scalpels, and other conventional instruments. Potential patient benefits include less pain, fewer shots, faster healing, decreased fear and anxiety, and fewer appointments. Potential practitioner benefits include improved patient care and the ability to perform a higher volume and wider variety of procedures and generate more patient referrals.

We offer two categories of laser system products: Waterlase (all-tissue) systems and diode (soft-tissue) systems. Our flagship brand, the Waterlase, uses a patented combination of water and laser energy and is FDA cleared for over 80 clinical indications to perform most procedures currently performed using drills, scalpels, and other traditional dental instruments for cutting soft and hard tissue. For example, Waterlase safely debrides implants without damaging or significantly affecting surface temperature and is the only effective, safe solution to preserving sick implants. In addition, Waterlase disinfects root canals more efficiently than some traditional chemical methods. We also offer our diode laser systems to perform soft tissue, pain therapy, and cosmetic procedures, including teeth whitening. As of ~~March 31,~~June 30, 2020 we have approximately ~~261~~257 issued and 5243 pending United States and international patents, the majority of which are related to Waterlase technology. From 1998 through ~~March 31,~~June 30, 2020, we sold over 41,200 laser systems in over 80 countries around the world. Contained in this total are approximately 13,400 Waterlase systems, including over 8,900 Waterlase MD, MDX, Express and iPlus systems.

Consistent with our goal to focus our energies on strengthening our leadership, and worldwide competitiveness and increasing the amount of attention we pay to our professional customers and their patients, we have made strategic personnel additions to our senior management team.

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.

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.

~~In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China.~~ The ~~novel coronavirus has since spread to over 100 countries, including every state in the United States. On March 11, 2020, the World Health Organization declared~~ COVID-19 ~~the disease caused by the novel coronavirus, a~~ pandemic ~~and on March 13, 2020, the United States declared a national emergency with respect to the coronavirus outbreak. This outbreak~~ has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak of the novel coronavirus by instituting quarantines, mandating business and school closures and restricting travel. These mandated business closures have included dental office closures worldwide for all but emergency procedures, for the most part. The ability of our salespeople to call on dental customers during these closures ~~has~~was been greatly limited. In addition, most dental shows and workshops scheduled in the first and second quarters of 2020 ~~have been~~were canceled. As a result of reduced sales due to the COVID-19 pandemic and actions taken to contain it, cash generated from our operations during the first ~~quarter~~half of 2020 were negatively impacted. The full impact of the COVID-19 outbreak continues to evolve and the full magnitude that the pandemic may have on our financial condition, liquidity, and future results of operations remains uncertain. There is no assurance that sales will return to normal levels during the second ~~quarter~~half of 2020 or at any time thereafter.

On March 31, 2020, BIOLASE received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying BIOLASE that, based on the BIOLASE’s stockholders’ equity of $377,000 as of December 31, 2019, as reported in the 2019 Form 10-K for the year ended December 31, 2019, BIOLASE is no longer in compliance with the minimum shareholders’ equity requirement for continued listing on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain shareholders’ equity of at least $2.5 million. BIOLASE has responded to Nasdaq with a specific plan to achieve and sustain compliance with the foregoing listing requirement. If the Company’s plan to regain compliance is accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the letter for the Company to evidence compliance. On June 4, 2020, Nasdaq granted the Company’s request for an extension of time to regain compliance to August 31, 2020 (the “Compliance Date”). In July 2020, the Company consummated a Rights Offering for gross proceeds of $18.0 million, while the Company believes this will resolve the deficiency related to the minimum stockholders’ equity requirement, there can be no assurance that the Company will regain compliance.

On December 3, 2019, BIOLASE received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market, LLC (“Nasdaq”) notifying BIOLASE that it violated the continued listing requirements of Nasdaq listing rule 5550(a)(2). In accordance with Nasdaq rules, BIOLASE has been provided an initial period of 180 calendar days, or until June 1, 2020, to regain compliance. In response to the COVID-19 pandemic and related extraordinary market conditions, Nasdaq has provided temporary relief from the continued listing requirements and the cure period for regaining compliance is tolled through June 30, 2020. Under the relief, companies will have additional time to regain compliance for these price-based requirements. Starting on July 1, 2020, companies will receive the balance of any pending compliance period exception to come back into compliance with the applicable requirement. This relief will move the Company’s date to submit a plan to regain compliance to August 15, 2020.

If BIOLASE does not regain compliance by the Compliance Date and is not eligible for an additional compliance period at that time, the Staff will provide written notification to BIOLASE that its common stock may be delisted. BIOLASE intends to monitor the closing bid price of its common stock and may, if appropriate, consider available options to regain compliance with the Bid Price Rule.

On April 14, 2020, BIOLASE was granted a loan from Pacific Mercantile Bank (the “PPP Loan”) in the aggregate amount of ~~$2,980,000,~~$2.98 million pursuant to the Paycheck Protection Program (the “PPP”) under ~~Division A, Title I of~~ the Coronavirus Aid Relief and Economic Securities ~~(CARES)~~ Act (the “CARES Act”), which was enacted March 27, 2020.

The PPP Loan, which was in the form of a Note dated April 13, 2020 issued by the Company, matures on April 13, 2022 and bears interest at a rate of 1.0% per ~~annum,~~annum. Interest is payable monthly commencing on November 1, 2020. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire PPP Loan amount for qualifying expenses. Under the terms of the PPP, amounts spent on authorized purchases over eight weeks after receiving the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

As of December 31, 2019, the Company was not in compliance with its debt covenants under its credit agreement dated November 9, 2018 (as ~~amended)~~amended, the “Credit Agreement”) with SWK Funding, LLC. In March 2020, the Company entered into a Fourth Amendment dated as of March 25, 2020 to its Credit Agreement with ~~SWK.~~SWK (the “Fourth Amendment”). Under ~~this~~the Fourth Amendment, the financial covenant is amended to require consolidated unencumbered liquid assets of no less than $3.0 million as of any date of determination. The ~~amendment~~Fourth Amendment also adjusted the Minimum Aggregate Revenue ( as defined in the Credit Agreement) requirements. Pursuant to the Fourth Amendment to the Credit Agreement, SWK granted the Company a waiver of the Company’s noncompliance with certain financial covenants contained in the Credit Agreement through March 31, 2020.

On August 12, 2020, we entered into the Sixth Amendment to the Credit Agreement (“Sixth Amendment”). Under the Sixth Amendment, the interest only period on the loan is extended to May 2022, the loan maturity date is extended to May 9, 2024, the financial covenants are adjusted, and a $0.7 million repayment of the principal amount was required upon execution of the agreement.

In April 2020, the Company borrowed $3.0 million in connection with its credit facility with Pacific Mercantile Bank (the “PMB Loan”). As of May 26, 2020, approximately $1.7 million was outstanding under the PMB Loan.

In May 2020 it was determined that the Company was not in compliance with the minimum unrestricted cash requirement under the PMB Loan’s existing covenants as of March 31, 2020. In July, 2020, the Company obtained a waiver for the covenant violation and entered into the First Amendment to the Loan and Security Agreement (the “First Amendment”). Under the First Amendment to the PMB Loan, the Company obtained a forbearance waiving non-compliance through August 1, 2020 subject to certain conditions. In addition, the First Amendment to the PMB Loan the loan covenants were modified to include (a) on or before July 31, 2020, the Borrower has received net cash proceeds in the amount of at least $8.0 million from the issuance of equity securities and those funds are deposited into accounts maintained by PMB and (b) the Company maintains unrestricted cash at PMB in an aggregate amount of $1.5 million.

InOn April 8, 2020, the Company ~~entered into a partnership~~announced that it had teamed up with MEKICS Co. Ltd, (“MEKICS”) an intensive care unit (ICU) equipment manufacturer based in the Republic of Korea, to supply MEKICS’s MTV-1000 ICU-grade portable ~~ventilators~~ventilator through BIOLASE’s ~~FDA-registered~~ manufacturing ~~facility.~~ facility in Irvine, California. The MTV-1000 ventilator received FDA authorization for emergency use in connection with the COVID-19 pandemic. Since the commencement of this relationship, the Company has received over $10 million in multiple purchase orders and has received authorization to manufacture and supply the MTV-1000 ventilator under FDA Emergency Use Authorization authority and an exemption from the State of California to operate, market and produce the MTV-1000 Ventilator, which was a critically needed product, at that time.

Subsequent to the above-referenced authorizations, MEKICS experienced supply chain disruptions for certain critical parts and was delayed in shipping ventilators to the Company. Although MEKICS is ready to ship ventilators at this time, the United States market for ventilator products has rapidly changed since early April, due to the effect and level of spread of COVID-19 infection throughout the nation and went from products of undersupply to products of oversupply. As an example, certain state governments are now cancelling pre-paid orders for ventilators.

Due to the foregoing, the Company’s customers that had placed orders with the Company currently no longer need this supply. As a result, the Company has determined not to purchase any MTV-1000 Ventilators from MEKICS at this time for resale to customers.

However, if there is a second wave of COVID-19, the Company expects there may be a return to peak demand for this product. If that occurs, the Company expects to be in position to be able to address this demand through its collaboration with MEKICS.

On May 22, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the United States Small Business Administration (the “SBA”) under its Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the EIDL Loan is $150,000.00, with proceeds to be used for working capital purposes. Interest on the EIDL Loan accrues at the rate of 3.75% per annum and installment payments, including principal and interest, are due monthly beginning twelve months from the date of the EIDL Loan in the amount of $731.00. The balance of principal and interest is payable thirty years from the date of the promissory note. In connection with the EIDL Loan, the Company executed the EIDL Loan documents, which include the SBA Secured Disaster Loan Note, dated May 22, 2020, the Loan Authorization and Agreement, dated May 22, 2020, and the Security Agreement, dated May 22, 2020, each between the SBA and the Company.

On May 13, 2020, our shareholders approved a proposal at our 2020 annual meeting of shareholders to amend the Company’s Restated Certificate of Incorporation (the “Certificate of Incorporation”) to increase the amount of authorized shares of the Company’s common stock, from 40,000,000 shares to 180,000,000 shares (the “Authorized Share Increase”). On May 28, 2020, the Company filed an amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the Authorized Share Increase.

The 69,565 shares of Series E Convertible Preferred Stock were automatically converted into 6,956,500 shares of common stock upon receipt of the requisite approval at the Annual Shareholders’ Meeting held in May 2020.

The Shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3 (File No. 333-233172), which was declared effective on August 23, 2019. The June 2020 Warrants and the shares of common stock issuable upon exercise of the June 2020 Warrants were issued in a concurrent private placement and have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and were offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act and Rule 506(b) promulgated thereunder. Maxim Group LLC, The Benchmark Company, LLC & Colliers Securities LLC acted as co-placement agents for the offering.

On July 22, 2020, the Company completed its previously announced rights offering pursuant to its effective registration statements on Form S-1, as amended (Registration Nos. 333-238914 and 333-239876), previously filed with and declared effective by the Securities and Exchange Commission (the “ SEC”) and a prospectus filed with the SEC (the “Rights Offering”). Pursuant to the Rights Offering, the Company sold an aggregate of 18,000 units consisting of an aggregate of 18,000 shares of Series F Convertible Preferred Stock and 45,000,000 warrants, with each warrant exercisable for one share of Common Stock, resulting in net proceeds to the Company of approximately $15.8 million, after deducting expenses relating to the Rights Offering, including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants.

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 2019 Form 10-K. There have been no significant changes during the ~~three~~six months ended ~~March 31,~~June 30, 2020 in our critical accounting policies from those disclosed in Item 7 of the 2019 Form 10-K.

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

	Three Months Ended						Three Months Ended						Three Months Ended						Three Months Ended						Six Months Ended						Six Months Ended
	March 31,						March 31,						June 30,						June 30,						June 30,						June 30,
	2020						2019						2020						2019						2020						2019
Products and services	$	4,783		100.0		%	$	10,326		100.0		%	$	2,938		100.0		%	$	8,645		100.0		%	$	7,721		100.0		%	$	18,971		100.0		%
Cost of revenue		3,430		71.7		%		6,804		65.9		%		1,997		68.0		%		5,265		60.9		%		5,427		70.3		%		12,070		63.6		%
Gross profit		1,353		28.3		%		3,522		34.1		%		941		32.0		%		3,380		39.1		%		2,294		29.7		%		6,901		36.4		%
Operating expenses:
Sales and marketing		2,704		56.5		%		3,879		37.6		%		2,093		71.2		%		3,272		37.9		%		4,797		62.1		%		7,151		37.8		%
General and administrative		3,010		62.9		%		2,393		23.2		%		2,137		72.7		%		2,511		29.0		%		5,147		66.7		%		4,903		25.8		%
Engineering and development		991		20.7		%		1,424		13.8		%		690		23.5		%		1,124		13.0		%		1,680		21.8		%		2,549		13.4		%
Change in fair value of patent litigation settlement liability		—		0.0		%		190		1.8		%		—		—		%		(190	)	(2.2	)	%		—		—		%		—		—		%
Total operating expenses		6,705		140.2		%		7,886		76.4		%		4,920		167.5		%		6,717		77.7		%		11,624		150.6		%		14,603		77.0		%
Loss from operations		(5,352	)	(111.9	)	%		(4,364	)	(42.3	)	%		(3,979	)	(135.4	)	%		(3,337	)	(38.6	)	%		(9,330	)	(120.8	)	%		(7,702	)	(40.6	)	%
Non-operating loss, net		673		14.1		%		521		5.0		%		665		22.6		%		534		6.2		%		1,340		17.4		%		1,055		5.6		%
Loss before income taxes		(6,025	)	(126.0	)	%		(4,885	)	(47.3	)	%		(4,644	)	(158.1	)	%		(3,871	)	(44.8	)	%		(10,670	)	(138.2	)	%		(8,757	)	(46.2	)	%
Income tax provision		(19	)	(0.4	)	%		15		0.1		%		53		1.8		%		28		0.3		%		34		0.4		%		42		0.2		%
Net loss	$	(6,006	)	(125.6	)	%	$	(4,900	)	(47.4	)	%	$	(4,697	)	(159.9	)	%	$	(3,899	)	(45.1	)	%	$	(10,704	)	(138.6	)	%	$	(8,799	)	(46.4	)	%

In addition to the financial information prepared in conformity with GAAP, we provide certain historical non-GAAP financial information. Management believes that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results and that, in some respects, are indicative of our ongoing core performance. In 2019, we revised our non-GAAP financial measures to include the change in allowance for doubtful accounts in an effort to better align Adjusted EBITDA with our loan covenants and how management evaluates business performance. ~~Prior year non-GAAP disclosures have been revised to conform to the current definition of Adjusted EBITDA.~~

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 us may be different from similarly named non-GAAP financial measures used by other companies.

Management uses Adjusted EBITDA in its evaluation of our core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Adjusted EBITDA is defined as net loss before interest, taxes, depreciation and amortization, stock-based compensation, allowance for doubtful accounts and the change in fair value of our patent litigation settlement liability. Management uses adjusted EBITDA in its evaluation of our core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by us may be different from similarly named non-GAAP financial measures used by other companies.

The following table contains a reconciliation of non-GAAP Adjusted EBITDA to GAAP net loss attributable to common stockholders (in thousands):

	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2020			2019			2020			2019			2020			2019
GAAP net loss attributable to common stockholders	$	(6,006	)	$	(4,900	)	$	(4,697	)	$	(3,899	)	$	(10,704	)	$	(8,799	)
Deemed dividend on convertible preferred stock		—			—			—			—			—			—
GAAP net loss	$	(6,006	)	$	(4,900	)	$	(4,697	)	$	(3,899	)	$	(10,704	)	$	(8,799	)
Adjustments:
Interest expense, net		589			478			625			529			1,214			1,007
Income tax (benefit) provision		(19	)		15
Income tax provision								53			28			34			42
Depreciation and amortization		177			258			307			268			488			529
Change in fair value of patent litigation settlement liability		—			190			—			(190	)		—			—
Change in allowance for doubtful accounts		987			—			22			—			1,008			—
Stock-based and other non-cash compensation		719			757			801			447			1,519			1,204
Adjusted EBITDA	$	(3,553	)	$	(3,202	)	$	(2,889	)	$	(2,817	)	$	(6,441	)	$	(6,017	)

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 ~~March 31,~~June 30, 2020 and ~~March 31,~~ 2019, 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
	March 31,					March 31,					June 30,				June 30,				Amount			Percent
	2020					2019					2020				2019				Change			Change
Laser systems	$	2,051		42.9	%	$	5,964		57.8	%	$	1,091	37.1	%	$	4,917	56.9	%	$	(3,826	)		(77.8	%)
Imaging systems		—		—	%		552		5.3	%		—	—	%		63	0.7	%		(63	)		(100.0	%)
Consumables and other		1,472		30.8	%		2,112		20.5	%		862	29.3	%		2,084	24.1	%		(1,222	)		(58.6	%)
Services		1,260		26.3	%		1,695		16.4	%		985	33.6	%		1,578	18.3	%		(593	)		(37.6	%)
Total products and services		4,783		100.0	%		10,323		100.0	%		2,938	100.0	%		8,642	100.0	%		(5,704	)		(66.0	%)
License fees and royalty		—	—		%		3	—		%		—	—	%		3	—	%		(3	)		(100.0	%)
Net revenue	$	4,783		100.0	%	$	10,326		100.0	%	$	2,938	100.0	%	$	8,645	100.0	%	$	(5,707	)		(66.0	%)

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 higher 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.

The following table summarizes our unaudited net revenue by geographic location based on the location of customers for the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~ 2019, as well as the amount of change and percentage of change in each geographic revenue category, (dollars in thousands):

Total net revenue decreased by ~~$5.5~~$5.7 million or ~~53.7%~~66% during the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 as compared to the same period in 2019 primarily due to ~~the impact~~decreases in sales as a results of the global COVID-19 pandemic. In the U.S., net revenue decreased by ~~$3.0~~$3.7 million, or ~~49%~~63% for the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 compared to the same period in 2019. Outside the U.S., net revenue declined by ~~$2.5~~$2.0 million, or ~~61%~~73% during the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 as compared to the same period in 2019. Because a majority of our sales are typically made in the last month of a quarter, our sales operations were particularly adversely affected by the stay-at-home orders issued in early to ~~mid-March.~~mid-March and extended into May, which impacted our first and second quarter results.

Cost of Revenue and Gross Profit: The following table summarizes our unaudited cost of revenue and gross profit for the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~ 2019, 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. Gross profit for the three-months ended June 30, 2020, was $0.9 million, or 32% of net revenue, a decrease of approximately $2.5 million, or 72% as compared with gross profit of $3.4 million or 39.1% of net revenue for the same period in 2019. The ~~62%~~72% decrease in gross profit ~~as a percentage of revenue for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019,~~ reflects the impact of the decrease in revenues from the COVID-19 pandemic and our fixed manufacturing costs.

Operating Expenses: The following table summarizes our unaudited operating expenses for the ~~for the three months~~three-months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~ 2019, 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
	March 31,				March 31,				Amount			Percent				June 30,				June 30,					Amount			Percent
	2020				2019				Change			Change				2020				2019					Change			Change
Sales and marketing	$	2,704	56.5	%	$	3,879	38.7	%	$	(1,175	)		(30.3	)	%	$	2,093	71.2	%	$	3,272		37.9	%	$	(1,179	)		(36.0	%)
General and administrative		3,010	62.9	%		2,393	23.9	%		617			25.8		%		2,137	72.7	%		2,511		29.0	%		(374	)		(14.9	%)
Engineering and development		991	20.7	%		1,424	14.2	%		(433	)		(30.4	)	%		690	23.5	%		1,124		13.0	%		(434	)		(38.6	%)
Change in fair value of patent litigation settlement liability		—	—	%		190	1.9	%		(190	)		(100.0	)	%		—	—	%		(190	)	(2.2	%)		190			(100.0	%)
Total operating expenses	$	6,705	140.2	%	$	7,886	78.7	%	$	(1,181	)		(15.0	)	%	$	4,920	167.5	%	$	6,717		77.7	%	$	(1,797	)		(26.8	%)

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~~three-months ended ~~March 31,~~June 30, 2020 decreased by $1.2 million or ~~30%~~36% as compared to the same period in 2019. This decrease is primarily due to decreases of ~~$0.4~~$0.2 million in sales commissions, ~~$0.2~~$0.3 million in travel and travel related expenses, ~~$0.2~~$0.4 million in trade show ~~and~~expenses, $0.1 million in advertising costs, and ~~$0.1~~$0.3 million in payroll and benefit costs which are primarily due to the impact of the COVID-19 pandemic on our business operations. ~~Additionally, g~~These decreases were offset by an increase of $0.1 million in stock based compensation. Given the recent reopening of dental ~~office closures,~~offices, we expect our ~~second~~third quarter sales and marketing expense to ~~be lower~~increase for the remainder of the year ended December 31, 2020.

General and Administrative Expense. General and administrative expenses during the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 ~~increased~~decreased by ~~$0.6~~$0.3 million or ~~26%~~15% compared to the same period in 2019, primarily due to a decrease in payroll and benefit costs of $0.5 million, a decrease in bank fees of $0.1 million and a decrease in patent and legal costs of $0.1 million partially offset by an increase in ~~our provision for bad debt~~stock based compensation of ~~$0.9~~$0.2 million ~~due to uncertainties surrounding our ability to collect on certain of our accounts receivable~~and $0.1 million in ~~light~~other expenses. The decrease in general and administrative costs was primarily driven by the cost reduction measures taken as a result of the COVID-19 pandemic. ~~The increase was offset primarily by a $0.1 million decrease in bank fees and a $0.2 million decrease in payroll and benefits and compensation expense.~~

Engineering and Development Expense. Engineering and development expenses during the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 decreased by $0.4 million or ~~30%~~39% compared to the same period in 2019, primarily due to a ~~$0.4~~$0.3 million decrease in payroll and consulting-related expenses driven by a reduction in engineering projects for 2020 as compared to 2019. We expect to continue our investment in engineering and development activity in the remainder of 2020. However, our primary focus will be on our sales and marketing efforts.

Change in fair value of patent litigation settlement liability. During the ~~three months~~three-months ended ~~March 31,~~June 30, 2019, we recognized a $0.2 million ~~loss~~gain on patent litigation settlement with CAO Group, Inc., as described in Part I, Item I, Note 11 – Commitments and Contingencies above, due to the change in fair value of the restricted stock which is pending issuance. We did not recognize a change in valuation for the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 as our stock price remained below $1.00 per share.

Gain (Loss) on Foreign Currency Transactions. We realized a ~~$84,000~~$40,000 loss on foreign currency transactions during the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 compared to a ~~$43,000~~$5,000 loss on foreign currency transactions during the ~~three months~~three-months ended ~~March 31,~~June 30, 2019, primarily due to exchange rate fluctuations between the U.S. dollar and Euro, as well as other foreign currencies.

Interest Expense, Net. Interest expense during the ~~three months~~three-months ended ~~March 31, 20,~~June 30, 2020 increased by $0.1 million primarily due to the additional interest from incremental borrowing of $2.5 million on the SWK Loan (as defined below) in the second quarter of 2019. We expect interest expense to fluctuate depending on the movement in ~~LIBOR~~the London Interbank Bank Offered Rate (“LIBOR”) through the remainder of 2020 and the outstanding balance of our PMB ~~Loan.~~Loan (if any).

Income Tax Provision. We use a discrete year-to-date method in calculating quarterly provision for income taxes. Our provision for income taxes was a ~~benefit~~expense of ~~$19,000~~$53,000 for the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 as compared to a provision of ~~$15,000~~$28,000 for the same period in the prior year. For additional information regarding income taxes, see Part I, Item I, Note 14 – Income Taxes.

Net Loss. Our net loss totaled approximately ~~$6.0~~$4.7 million for the ~~three months~~three-months ended ~~March 31,~~June 30, 2020 compared to a net loss of ~~$4.9~~$3.9 million for the ~~three~~three-months ended June 30, 2019.

Net Revenue: The following table summarizes our unaudited net revenues by category, including each category’s percentage of our total revenue, for the six-months ended June 30, 2020 and 2019, as well as the amount of change and percentage of change in each revenue category (dollars in thousands):

	Six Months Ended					Six Months Ended
	June 30,					June 30,					Amount			Percent
	2020					2019					Change			Change
Laser systems	$	3,142		40.7	%	$	10,880		56.9	%	$	(7,738	)		(71.1	)	%
Imaging systems		—		—	%		615		0.7	%		(615	)		(100.0	)	%
Consumables and other		2,334		30.2	%		4,196		24.1	%		(1,862	)		(44.4	)	%
Services		2,245		29.1	%		3,273		18.3	%		(1,028	)		(31.4	)	%
Total products and services		7,721		100.0	%		18,964		100.0	%		(11,243	)		(59.3	)	%
License fees and royalty		—	—		%		7	—		%	—			—			%
Net revenue	$	7,721		100.0	%	$	18,971		100.0	%	$	(11,243	)		(59.3	)	%

The following table summarizes our unaudited net revenue by geographic location based on the location of customers for the six-months ended June 30, 2020 and 2019, as well as the amount of change and percentage of change in each geographic revenue category, (dollars in thousands):

Total net revenue decreased by $11.3 million or 59% during the six-months ended June 30, 2020 as compared to the same period in 2019. In the U.S., net revenue decreased by $6.7 million, or 56% and outside the U.S., net revenue declined by $4.6 million, or 66% during the six-months ended June 30, 2020 as compared to the same period in 2019, primarily due to the impact of the global COVID-19 pandemic.

Cost of Revenue and Gross Profit: The following table summarizes our unaudited cost of revenue and gross profit for the for the six-months ended June 30, 2020 and 2019, 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. Gross profit for the six-months ended June 30, 2020, was $2.3 million, or 30% of net revenue, a decrease of approximately $4.6 million, or 67% as compared with gross profit of $6.9 million or 36% of net revenue for the same period in 2019. The 67% decrease in gross profit reflects the impact of the decrease in revenues from the COVID-19 pandemic and our fixed manufacturing costs.

Operating Expenses: The following table summarizes our unaudited operating expenses for the for the six- months ended ~~March 31,~~June 30, 2020 and June 30, 2019, as well as the amount of change and percentage of change (dollars in thousands):

The period-over-period total operating expenses are explained in the following expense categories:

Sales and Marketing Expense. Sales and marketing expenses during the six-months ended June 30, 2020 decreased by $2.4 million or 33% as compared to the same period in 2019, primarily due to the impact of the COVID-19 pandemic on sales operations resulting in decreased payroll and benefits of $0.4 million, sales commissions of $0.5 million, marketing and convention event related costs of $0.7 million and travel and entertainment expenses of $0.5 million. We expect sales and marketing expenses to increase as a percentage of revenue during the second half of 2020 as the stay-at-home restrictions are lifted.

General and Administrative Expense. General and administrative expenses during the six-months ended June 30, 2020 increased by $0.2 million or 5% compared to the same period in 2019, primarily due to an increase in provision for doubtful accounts of $1.0 million offset by decreases in payroll and consulting costs of $0.7 million and a $0.1 million increase in other expenses. We expect general and administrative expenses to increase as a percentage of revenue through the remainder of 2020 as the stay-at-home restrictions are lifted.

Engineering and Development Expense. Engineering and development expenses during the six-months ended June 30, 2020 decreased by $0.9 million or 34% compared to the same period in 2019, primarily due to a $0.7 million decrease in payroll and consulting-related expenses. We expect engineering and development expenses to decrease as a percentage of revenue through the remainder of 2020.

(Loss) Gain on Foreign Currency Transactions. We realized a $126,000 loss on foreign currency transactions during the six-months ended June 30, 2020 compared to a $48,000 loss on foreign currency transactions during the six months ended June 30, 2019, primarily due to exchange rate fluctuations between the U.S. dollar and Euro, as well as other foreign currencies.

Interest Expense. Interest expense during the six-months ended June 30, 2020 increased by $0.2 million primarily due to the interest and amortization of debt issuance costs relating to the increase of $2.5 million in principal borrowed on the SWK Loan in May 2019. We expect interest expense to fluctuate depending on the movement in LIBOR through the remainder of 2020.

Income Tax Provision. We use a discrete year-to-date method in calculating quarterly provision for income taxes. Our provision for income taxes was $34,000 for the six-months ended June 30, 2020 and $42,000 June 30, 2019. For additional information regarding income taxes, see Part I, Item I, Note 14 – Income Taxes.

Net Loss. Our net loss totaled approximately $10.8 million for the six-months ended June 30, 2020 compared to a net loss of $8.9 million for the six-months ended June 30, 2019.

At ~~March 31,~~June 30, 2020, we had approximately ~~$1.8~~$5.7 million in cash, cash equivalents and restricted 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, cash equivalents and restricted cash of ~~$4.3~~$0.4 million at ~~March 31,~~June 30, 2020 as compared to December 31, 2019 was primarily due to net cash used in operating activities of ~~$4.1~~$9.3 million. The ~~$4.1~~$9.3 million of net cash used in operating activities was primarily driven by our net loss of ~~$6.0~~$10.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2020.

The following table summarizes our change in cash, 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 ~~three~~six months ended ~~March 31,~~June 30, 2020 totaled ~~$4.1~~$9.3 million and was primarily comprised of our net loss of ~~$6.0~~$10.7 million, partially offset by non-cash adjustments for depreciation and amortization expenses of ~~$0.3~~$0.5 million and stock-based compensation expenses of ~~$0.7~~$1.5 million and our provision for bad debt of ~~$0.9~~$1.0 million. The ~~$1.4 million~~ net ~~increase~~decrease in our operating assets and liabilities was primarily due to a ~~$3.0~~$3.6 million decrease in accounts receivable primarily due to the impact of the COVID-19 pandemic on our revenues offset by an increase of ~~$1.2~~$1.0 million in inventory and a decrease in accounts payable of ~~$1.5~~$3.8 million.

Cash used in investing activities for the ~~three~~six months ended ~~March 31,~~June 30, 2020 ~~were minimal.~~was minimal and primarily driven by our capital expenditures related to the relocation of our headquarters and manufacturing facility. We expect cash flows from investing activities to remain consistent through the remainder of 2020.

Net cash ~~(used in)~~ provided by financing activities for the ~~three~~six months ended ~~March 31,~~June 30, 2020 ~~decreased by~~was approximately ~~$0.1~~$9.0 million primarily due to the ~~payment~~funds borrowed on the PPP Loan and the sale of ~~the~~ common stock ~~offering costs remaining~~ from ~~2019.~~our registered direct private placement as further described below.

The effect of exchange rate changes on cash for the ~~three~~six months ended ~~March 31,~~June 30, 2020 was ~~$18,000~~$57,000 and ($38,000), respectively primarily due to fluctuations between the U.S. Dollar and the Euro.

As of ~~March 31,~~June 30, 2020, we had ~~negative~~ working capital of approximately ~~$3.7 million primarily due to the reclassification of our Term Loan from a long-term liability to short-term. .~~$1.8 million. Our principal sources of liquidity as of ~~March 31,~~June 30, 2020 consisted of approximately ~~$1.8~~$5.7 million in cash, cash equivalents and restricted cash and ~~$4.7~~$4.1 million of net accounts receivable and any availability under our credit facility with Pacific Mercantile Bank.

We have reported recurring losses from operations and have not generated cash from operations for the three years ended December 31, 2019 and the ~~three months~~six-months ended ~~March 31,~~June 30, 2020. Our level of cash used in operations, the need for additional capital, and the uncertainties surrounding our future ability to raise additional capital and in light of the uncertainties and impact of COVID-19 on our business, raise substantial doubt about our ability to continue as a going concern. As a result of reduced sales due to the COVID-19 pandemic and actions taken to contain it, cash generated from our operations during the ~~first~~second half of 2020 ~~will~~may be less than we anticipated. There is no assurance that sales will return to normal levels during the second ~~quarter~~half of 2020 or at any time thereafter.

Furthermore, 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 sell our products directly to end users and through distributors, establish profitable operations through increased sales, decrease 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 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 our advanced medical technologies, and reducing expenses.

On November 9, 2018, we entered into a five-year secured Credit Agreement (“Credit Agreement”) with SWK Funding LLC (“SWK”), pursuant to which we borrowed $12.5 million (“SWK Loan”). Our obligations under the Credit Agreement are secured by substantially all of our 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 second 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 Bank. In connection with the Credit Agreement, we issued warrants to SWK (the “SWK Warrants”) on November 9, 2018 to purchase up to 372,023 shares of BIOLASE common stock and on May 7, 2019, to purchase up to 115,175 shares of BIOLASE common stock. The SWK Warrants were immediately exercisable and expire 7 years after the applicable issuance date. The exercise price of the SWK Warrants issued on November 9, 2018 is $1.34, and the exercise price of the SWK Warrants issued on May 7, 2019 is $2.17, both of which were based on the average closing price of BIOLASE common stock for the ten trading days immediately preceding the applicable issuance date.

The Credit Agreement contains financial and non-financial covenants requiring us to, among other things, (i) maintain unencumbered liquid assets of no less than $1.5 million or (B) 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.

As of March 31, 2019, we were not in compliance with certain covenants in the Credit Agreement, as described in Note 9 to the consolidated financial statements included in Item 1 of this 10-Q, and in May 2019, SWK granted us a waiver of such covenants. On May 7, 2019, we and SWK agreed to amend the Credit Agreement (the “First Amendment) to increase the total commitment from $12.5 million to $15.0 million, and to revise the financial covenants to (i) adjust minimum revenue and EBITDA levels, (ii) require the us to have a shelf registration statement declared effective by the Securities and Exchange Commission before September 30, 2019, with a proposed maximum aggregate offering price of at least $10.0 million if we did not reach set minimum revenue levels for the three-month period ended September 30, 2019, and (iii) require minimum liquidity of $1.5 million at all times. The First Amendment provides that 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 paid to SWK loan origination and other fees of approximately $0.1 million payable in cash and approximately $0.2 million in additional SWK Warrants to purchase BIOLASE common stock. In 2019, we borrowed the additional $2.5 million.

On September 30, 2019, we entered into the Second Amendment to Credit Agreement (the “Second Amendment”) with SWK, in connection with that certain Credit Agreement, by and among us, SWK, and the lender parties thereto. The Second Amendment amends the Credit Agreement to provide for a permitted inventory and accounts receivable revolving loan facility, secured by a first lien security interest in our inventory and accounts receivable, with a maximum principal amount of $5.0 million and with such other material terms and conditions acceptable to SWK in its commercially reasonable discretion. In addition, SWK agreed to waive the effect of our non-compliance with certain unencumbered liquid assets financial operating covenants as set forth in the Credit Agreement, and SWK agreed to forbear from exercising rights and remedies otherwise available to it in the event of such non-compliance through October 31, 2019, or earlier in the event that an additional equity or subordinated debt financing is consummated with gross proceeds of not less than $5.0 million, or in the event of a default under the Credit Agreement. The Second Amendment contains representations, warranties, covenants, releases, and conditions customary for a forbearance and credit agreement amendment of this type. In 2019 we obtained additional equity financing greater than $5.0 million.

On November 6, 2019, we agreed to further amend the Credit Agreement (the “Third Amendment”). Pursuant to the Third Amendment, SWK granted the us a waiver of our non-compliance with certain financial covenants in the Credit Agreement. Also pursuant to the Third Amendment, we and SWK agreed to (i) revise financial covenants to adjust minimum revenue and EBITDA levels and (ii) remove the automatic increase of the minimum liquidity requirement based on certain aggregate minimum revenue and EBITDA levels as of September 30, 2019 (which was added pursuant to the First Amendment). In connection with the Third Amendment, we consolidated the SWK Warrants issued to SWK on November 9, 2018 and May 7, 2019, and the exercise price was adjusted to $1.00.

As of December 31, 2019, we were not in compliance with our debt covenants under the Credit Agreement (as amended). In March 2020, we entered into a Fourth Amendment to the Credit Agreement. Under the Fourth Amendment, we obtained a waiver of our non-compliance with certain financial covenants contained in the Credit Agreement through March 31, 2020. Also pursuant to the Fourth Amendment, we agreed to revise (i) the financial covenants to adjust minimum revenue and EBITDA levels and (ii) revise the financial covenants with respect to unencumbered liquid assets. In connection with the Fourth Amendment, ~~the Company~~we amended the exercise price of the SWK Warrants to $0.49 per share.

On May 15, 2020, we entered into the Fifth Amendment to the Credit Agreement with SWK. The Fifth Amendment amends the Credit Agreement by providing for minimum consolidated unencumbered liquid assets of $1.5 million prior to June 30, 2020 and $3.0 million on or after June 30, 2020; providing for a minimum aggregate revenue target of $41.0 million for the twelve month period ending June 30, 2020, a related waiver of such minimum revenue target in the event that we raise equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly revenue targets; and providing for a minimum EBITDA target of ($7.0 million) for the twelve month period ended June 30, 2020, a related waiver of such minimum EBIDTA target in the event that we raise equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly EBITDA targets. The Fifth Amendment contains representations, warranties, covenants, releases, and conditions customary for a credit agreement amendment of this type.

On June 8, 2020, SWK agreed to extend the deadline by which we were required to raise not less than $10.0 million in equity capital or subordinated debt to July 31, 2020 and agreed that the $6.9 million in proceeds from the offering completed on June 10, 2020 shall be counted toward the $10.0 million requirement. On July 22, 2020, we consummated the public offering of 18,000 units, each consisting of one share of Series F Convertible Preferred Stock, par value $0.001 per share and 2,500 warrants, each to purchase one share of Common Stock at an exercise price of $0.40 per share, for which it raised gross proceeds of $18,000,000 before the payment of dealer-manager fees and associated offering expenses of approximately $2.2 million. In connection with the Fifth Amendment, on May 15, 2020 we entered into the Third Consolidated, Amended and Restated Warrant pursuant to which we issued additional warrants to SWK to purchase 63,779 shares of common stock with a warrant price per share of $0.39198, and adjusted the warrant price per share with respect to 487,198 existing warrant shares previously issued to SWK to $0.39198. Based on the extension of the compliance deadline to July 31, 2020, we were in compliance with or received a waiver for debt covenants as of June 30, 2020.

Public Offering of Common Shares and Private Placement of Unregistered Preferred Shares

On October 29, 2019, we consummated the sale of 7,820,000 shares of BIOLASE common stock at a price to the public of $0.5750 per share in an underwritten public offering and in addition, granted the underwriters a 30-day over-allotment option to purchase up to an additional 1,173,000 shares of BIOLASE common stock at the public offering price, less the underwriting discount.

On October 29, 2019, we also sold to existing investors affiliated with Jack W. Schuler and Oracle Investment Management, Inc., 69,565 unregistered shares of our Series E Preferred Stock at a price of $57.50 per share in a concurrent private placement. Each share of preferred stock is automatically convertible into 100 shares of common stock at a conversion price equal to $0.5750 per share, subject to customary anti-dilution adjustments, at such time as BIOLASE increases the amount of its authorized common stock to permit the full conversion.

At the closing, we received approximately $4.2 million in net proceeds from the common stock offering, after deducting the underwriting discount, and approximately $4.0 million in gross proceeds from the concurrent private placement, resulting in total net proceeds from the offering and private placement of approximately $8.2 million.

On November 5, 2019, the underwriters exercised their over-allotment option to purchase an additional 1,173,000 shares of BIOLASE common stock at a share price of $0.5750 per share for approximately $0.6 million in net proceeds, after deducting the underwriting discount.

On October 28, 2019, BIOLASE, Inc. entered into a loan and security agreement (the “Loan Agreement”) with Pacific Mercantile Bank, as lender (“Lender”), which provides for a revolving line of credit (the “PMB Loan”), secured by substantially all of the ~~Company’s~~our assets, with a maximum principal amount not to exceed the lesser of (i) $3 million or (ii) the sum of 90% of the Eligible Accounts (as defined in the Loan Agreement) plus 75% of the Eligible Inventory (as defined in the Loan Agreement, and subject to certain limitations set forth therein); provided that the maximum principal amount of the PMB Loan may be reduced from time to time in the Lender’s good faith business judgment as set forth in the Loan Agreement. Borrowings under the PMB Loan may be used for working capital. The PMB Loan matures on October 28, 2021, unless earlier terminated.

Our obligations under the Loan Agreement are secured by a security interest in substantially all of our property. No borrowings may be made under the Loan Agreement unless and until Exim Bank agrees to guarantee the PMB Loan and we have entered into a borrower agreement with Exim Bank. Borrowings under the PMB Loan bear interest at a daily rate equal to the prime rate published in the Wall Street Journal, plus 1.5% per annum; provided, that the interest rate in effect on any day shall not be less than 6.0% per annum. Additionally, we are required to pay an initial and annual fee of $52,500 to Exim Bank, as well as a termination fee equal to $30,000 in the event the Loan Agreement is terminated on or prior to October 28, 2020.

The Loan Agreement requires us to maintain unrestricted cash at Lender plus unused availability under the PMB Loan in an amount equal to at least the Burn Rate. “Burn Rate” means our net profit/net loss plus depreciation plus amortization plus stock-based compensation, measured on a trailing three month basis. In addition, the Loan Agreement contains customary affirmative and negative covenants for financings of its type (subject to customary exceptions).

The Loan Agreement provides that the occurrence of any of the following events (subject to applicable cure periods, if any) will constitute an event of default: payment default, loans in excess of the credit limit, breach of representation or warranty, covenant breach, incurrence of certain liens, certain events with respect to the collateral, cross-defaults to certain other indebtedness or obligations secured by liens, a Material Adverse Change (as defined in the Loan Agreement) or a breach of a material agreement that may reasonably result in a Material Adverse Change, final judgement in excess of a certain monetary threshold, certain events of bankruptcy or insolvency, any guarantee or pledge ceasing to be in effect, payment of certain subordinated debt, a Change in Control (as defined in the Loan Agreement), a change in our President, Chief Executive Officer, or Chief Financial Officer under certain circumstances, a change in two or more members of our Board of Directors within 90 days under certain circumstances, or any felony indictment of any of our directors, officers or significant stockholders. Upon the occurrence and during the continuation of an event of default, the Lender may exercise any remedies available to it, including accelerating the repayment of the PMB Loan.

AsIn May 2020 it was determined that the Company was not in compliance with the minimum unrestricted cash requirement under the PMB Loan’s existing covenants as of March 31, 2020. In July, 2020, the Company obtained a waiver for the covenant violation and entered into the First Amendment to the Loan and Security Agreement (the “First Amendment”). Under the First Amendment to the PMB Loan, the Company obtained a forbearance waiving non-compliance through August 1, 2020 subject to certain conditions. In addition, the First Amendment to the PMB Loan the loan covenants were modified to include (a) on or before July 31, 2020, the Borrower has received net cash proceeds in the amount of at least $8.0 million from the issuance of equity securities and those funds are deposited into accounts maintained by PMB and (b) the Company maintains unrestricted cash at PMB in an aggregate amount of $1.5 million.

As of June 30, 2020, we had no balances outstanding and had approximately ~~$3.0~~$0.8 million of ~~unused~~ availability under this ~~facility, and in April 2020, we borrowed $3.0 million on this~~ facility.

On April 14, 2020, ~~BIOLASE was~~we were granted a PPP Loan from Pacific Mercantile Bank in the aggregate amount of $2,980,000, pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020.

The PPP Loan, which was in the form of a Note dated April 13, 2020 issued by BIOLASE, matures on April 13, 2022 and bears interest at a rate of 1.0% per ~~annum,~~annum. Interest is payable monthly commencing on November 1, 2020. The Note may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. We intend to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

In July 2020, the Company amended the provisions of its Paycheck Protection Program loan. The amendment amends the original payment deferment period from six months to the date that the SBA remits the Company’s loan forgiveness to PMB or if no forgiveness is requested to ten months after the end of the 24-week measurement period. The amendment also increases the amount of non payroll costs eligible for loan forgiveness from 25% to 40%.

On May 22, 2020, the we executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the United States Small Business Administration (the “SBA”) under its Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic on the our business. The principal amount of the EIDL Loan is $150,000.00, with proceeds to be used for working capital purposes. Interest on the EIDL Loan accrues at the rate of 3.75% per annum and installment payments, including principal and interest, are due monthly beginning twelve months from the date of the EIDL Loan in the amount of $731.00. The balance of principal and interest is payable thirty years from the date of the promissory note. In connection with the EIDL Loan, we executed the EIDL Loan documents, which include the SBA Secured Disaster Loan Note, dated May 22, 2020, the Loan Authorization and Agreement, dated May 22, 2020, and the Security Agreement, dated May 22, 2020, each between us and the SBA.

On June 10, 2020, we consummated a registered direct offering of 10,800,000 shares of its common stock (the “Shares”) to certain accredited institutional investors and a concurrent private placement of warrants to purchase 10,800,000 shares of common stock with an exercise price of $0.515 per share (the “June 2020 Warrants”). The June 2020 Warrants are exercisable commencing on the date of their issuance and will expire on the five- year anniversary of the issuance date.

The combined purchase price for one Share and one June 2020 Warrant in the offering was $0.64. We received aggregate gross proceeds of approximately $6.9 million in the offering, before deducting approximately $0.7 million in fees to the placement agents and other offering expenses.

On July 22, 2020, we completed a Rights Offering under which we sold an aggregate of 18,000 units consisting of an aggregate of 18,000 shares of Series F Convertible Preferred Stock and 45,000,000 warrants, with each warrant exercisable for one share of Common Stock, resulting in net proceeds to us of approximately $15.8 million, after deducting expenses relating to the Rights Offering, including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants.

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^®, ComfortPulse^®, Waterlase^®, Waterlase Dentistry^®, Waterlase Express^®, iLase^®, iPlus^®, Epic^®, Epic Pro^®, WCLI^®, World Clinical Laser Institute^®, Waterlase MD^®, Waterlase Dentistry^®, and EZLase^® are registered trademarks of BIOLASE, and Pedolase™ 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 not effective as described below, 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.~~reporting, except for the material weaknesses and remediation discussed below.

We identified a material weakness in internal control related to ineffective financial statement close process controls as they relate to the accounting for our Series E Convertible Preferred Stock. During our review of the consolidated financial statements as of December 31, 2019, we determined that the classification of the Series E Convertible Preferred Stock on the consolidated balance sheet was incorrect and that due to the fact that the Series E Convertible Preferred Stock is redeemable at the control of the stockholder, it should have been classified as mezzanine equity pursuant to the accounting guidance in Accounting Standards Codification Topic 480 – “Distinguishing Liabilities from Equity,” and not a component of permanent equity. We believe that these control deficiencies were a result of a misinterpretation of the terms and conditions of the Certificate of Designations with respect to the Series E Convertible Preferred Stock Agreement which led to the misclassification. The error was corrected and the material weakness did not result in any misstatements to the consolidated financial statements, and the correction of the error did not result in any changes to previously released financial results. Based on this material weakness, the Company’s management concluded that at December 31, 2019, the Company’s internal control over financial reporting was not effective. As of ~~March 31,~~June 30, 2020, ~~the~~this material weakness in internal controls had not been remediated.

During the preparation of this Quarterly Report on Form 10-Q, we identified a material weakness in internal control related to ineffective financial statement close process controls as they relate to the accounting in the areas of management review of financial statement information and independent review of journal entries. Specifically, certain period end close transactions were not recorded correctly as of June 30, 2020. The errors were corrected, and the material weakness did not result in any misstatements to the unaudited consolidated financial statements, and the correction of the error did not result in any changes to previously released financial results. Based on this material weakness, the Company’s management concluded that at June 30, 2020, the Company’s internal control over financial reporting was not effective.

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated and operate, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) additional levels of review; (ii) additional training; ~~and~~ (iii) use of external consultants on highly technical accounting matters; (iv) assessment of departmental resources; and ~~(iv)~~(v) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors. We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2020.

The disclosure contained in Part I, Item 1, Note 11 – Commitments and Contingencies is hereby incorporated herein by reference.

Failure to meet ~~NASDAQ’s~~Nasdaq’s continued listing requirements could result in the delisting of our common stock, negatively impact the price of our common stock and negatively impact our ability to raise additional capital.

On March 31, 2020, BIOLASE received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying BIOLASE that, based on the BIOLASE’s stockholders’ equity of $377,000 as of December 31, 2019, as reported in its Annual Report on Form 10-K for the year ended December 31, 2019, BIOLASE iswas no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2.5 million. ~~BIOLASE has until May 15, 2020~~We responded to ~~provide~~ Nasdaq with a specific plan to achieve and sustain compliance with the foregoing listing requirement. ~~If the Company’s plan~~On June 4, 2020, Nasdaq granted our request for an extension of time to regain compliance ~~is accepted, Nasdaq may grant an extension of up~~ to ~~180 calendar days from the date of the letter for the Company to evidence compliance.~~August 31, 2020 (the “New Compliance Date”).

On December 3, 2019, we received a deficiency letter from the Listing Qualifications Department of ~~The NASDAQ~~Nasdaq stating that, for the preceding 30 consecutive business days, the bid price for ~~the Company’s common stock~~Common Stock had closed below the minimum $1.00 per share requirement for continued inclusion on the ~~NASDAQ~~Nasdaq pursuant to ~~NASDAQ~~Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with ~~NASDAQ~~Nasdaq rules, we ~~have been provided an initial period of 180 calendar days, or~~had until June 1, 2020 (the “Compliance Date”), to regain compliance with the Bid Price Rule. ~~If, at any time before~~In response to the ~~Compliance Date,~~COVID-19 pandemic and related extraordinary market conditions, Nasdaq provided temporary relief from the ~~bid price~~continued listing requirements and the cure period for ~~our common stock closes at $1.00 or more for~~regaining compliance was tolled through June 30, 2020. As a ~~minimum of 10 consecutive business days,~~result, the ~~Staff will provide written notification~~Company’s deadline to ~~us that it complies with the Bid Price Rule.~~regain compliance is August 15, 2020.

IfBecause we dodid not regain compliance with the Bid Price Rule by the Compliance Date, we ~~may be eligible for an additional 180 calendar day compliance period. To qualify, we would need to provide~~provided written notice of our intention to cure the deficiency during ~~the~~an additional 180 calendar day compliance period, by effecting a reverse stock split, if necessary, provided that ~~it meets~~we meet the continued listing requirement for the market value of publicly held shares and all other initial listing standards, with the exception of the bid price requirement.

If we do not regain compliance with the Bid Price Rule by the Compliance Date and are not eligible for an additional compliance period at that time, the Staff will provide written notification to us that our common stock may be delisted. At that time, we may appeal the Staff’s delisting determination to a ~~NASDAQ~~Nasdaq Listing Qualifications Panel.

We intend to monitor the closing bid price of our common stock and may, if appropriate, consider available options to regain compliance with the Bid Price Rule. However, we may not regain compliance with the Bid Price Rule or any of the other ~~NASDAQ~~Nasdaq continued listing requirements in the future. In July 2020, the Company consummated a Rights Offering for gross proceeds of $18.0 million, while the Company believes this will resolve the deficiency related to the minimum stockholders’ equity requirement, there can be no assurance that the Company will regain compliance.

If, in the future, we fail to comply with ~~NASDAQ’s~~Nasdaq’s continued listing requirements, our common stock will be subject to delisting. If that were to occur, our common stock would be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock. This would adversely affect the ability of investors to trade our common stock and would adversely affect the value of our common stock. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our common stock. If we seek to implement a further reverse stock split in order to remain listed on ~~NASDAQ,~~Nasdaq, the announcement or implementation of such a reverse stock split could negatively affect the price of our common stock.

Non-compliance with the objective and subjective criteria for the Paycheck Protection Program loan could have a material adverse effect on our business.

On April 14, 2020, BIOLASE ~~availed of~~obtained the PPP Loan from Pacific Mercantile Bank which was in the aggregate amount of $2,980,000, pursuant to the Paycheck Protection Program under ~~Division A, Title I of~~ the CARES Act, which was enacted March 27, 2020. The PPP Loan, which was in the form of a Note dated April 13, 2020 issued by the Company, matures on April 13, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 1, 2020. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act

Act. On April 23, 2020, the Secretary of the U.S. Department of the Treasury stated that the ~~SBA~~Small Business Administration will perform a full review of any PPP loan over $2.0 million before forgiving the loan. In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, the maintenance of our entire workforce, notwithstanding certain obvious “work-from-home” limitations associated with the nature of our business. We also took into account our need for additional funding to continue operations, and our ability to currently access alternative forms of capital in the ~~current~~then-current market environment. Following this analysis, we believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the objectives of the PPP of the CARES Act. If it is later determined that we were ineligible to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties and adverse publicity, which could have a material adverse effect on our business, results of operations, and financial condition.

The novel coronavirus outbreak and COVID-19 pandemic have already adversely affected, and are likely to continue to adversely affect, our business, results of operations and financial condition. In addition, similar risks related to health epidemics and other outbreaks or pandemics may adversely affect our business, results of operations and financial condition.

We face risks related to health epidemics and other outbreaks, including the global outbreak of the novel coronavirus and the disease caused by it, COVID-19. In the first quarter of 2020, the spread of the novel coronavirus has led to disruption and volatility in the global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets. In addition, efforts to contain the COVID-19 pandemic have led to travel restrictions, prohibitions on public gatherings and closures of dental offices and clinics throughout much of Europe and the United States. These mandated business closures have included dental office closures in Europe and the United States for the most part. The ability of our salespeople to call on denta l customers during these closures has been greatly limited. In addition, most dental shows and workshops scheduled in the first and second quarters of 2020 have been canceled. As a result of reduced sales due to the COVID-19 pandemic and actions taken to contain it, cash generated from our operations during the first half of 2020 were negatively impacted. The full impact of the COVID-19 outbreak continues to evolve and the full magnitude that the pandemic may have on our financial condition, liquidity, and future results of operations remains uncertain. There is no assurance that sales will return to normal levels during the third quarter of 2020 or at any time thereafter.

We have experienced net losses for each of the past three years and we could experience additional losses and have difficulty achieving profitability in the future.

We had an accumulated deficit of approximately $245.3 million at June 30, 2020 . We recorded net losses of approximately $10.7 million, $17.9 million, $21.5 million, and $16.9 million for the six months ended June 30, 2020 and the years ended December 31, 2019, 2018, and 2017, respectively. In order to achieve profitability, we must increase net revenue through new sales and control our costs. Failure to increase our net revenue and decrease our costs could cause our stock price to decline and could have a material adverse effect on our business, financial condition, and results of operations.

Continued failure to meet covenants in the Credit Agreement with SWK Funding LLC or with the Loan Agreement with Pacific Mercantile Bank could result in acceleration of our payment obligations thereunder, and we may not be able to find alternative financing.

Under the Credit Agreement dated November 9, 2018 (as amended from time to time, the “Credit Agreement”), between BIOLASE and SWK Funding, LLC (“SWK”), we are required to maintain a specified amount of consolidated unencumbered liquid assets as of the end of each fiscal quarter, generate minimum levels of revenue as of the end of each period specified in the Credit Agreement and maintain specified levels of consolidated EBITDA as of the end of each period specified in the Credit Agreement. Our ability to comply with these covenants

may be affected by factors beyond our control. Pursuant to the terms and conditions of the Second Amendment to the Credit Agreement, dated as of September 30, 2019, between BIOLASE and SWK, SWK agreed to waive the BIOLASE’s non-compliance with the consolidated unencumbered liquid assets requirement for the quarter ended September 30, 2019, subject to the satisfaction of certain conditions prior to October 31, 2019. In connection with such amendment, SWK agreed that we could enter into a revolving loan facility in an amount up to $5.0 million that would be secured by our inventory and accounts receivable, subject to the terms and conditions set forth in that amendment. On October 28, 2019, the Company entered into a loan and security agreement with Pacific Mercantile Bank (the “PMB Loan”), which provides a revolving line of credit. The PMB Loan requires the Company to maintain certain levels of liquidity and to raise at least $5.0 million through the sale of equity securities before December 31, 2019. In the fourth quarter of 2019, the Company consummated the sale of approximately 9.0 million shares of Common Stock for gross proceeds of $5.2 million and the sale of approximately 69,650 shares of its Series E Participating Convertible Preferred Stock, par value $0.001 per share (“Series E Preferred Stock”), for gross proceeds of approximately $4.0 million. On May 13, 2020, our stockholders approved the issuance of such number of shares of Common Stock as are issuable upon the full conversion of our Series E Preferred Stock. Our ability to comply with the covenants in our debt agreements may be affected by factors beyond our control, including, without limitation, the impact of the COVID-19 pandemic and efforts taken to contain it. Pursuant to five separate amendments to the Credit Agreement, SWK has agreed to waive BIOLASE’s non-compliance with certain financial covenants in the Credit Agreement as of March 31, 2019, September 30, 2019, December 31, 2019 and March 31, 2020. We were not in compliance with the financial covenants in the Credit Agreement as of March 31, 2020.

In March 2020, the Company entered into the Fourth Amendment to the Credit Agreement with SWK. Under the Fourth Amendment, the financial covenants were amended to require consolidated unencumbered liquid assets of no less than $3.0 million as of any date of determination. The Fourth Amendment also adjusted the Minimum Aggregate Revenue (as defined in the Credit Agreement) requirements. On May 15, 2020, the Company entered into the Fifth Amendment to its Credit Agreement with SWK. The Fifth Amendment modified the Credit Agreement by providing for minimum consolidated unencumbered liquid assets of $1.5 million prior to June 30, 2020 and $3.0 million on or after June 30, 2020; providing for a minimum aggregate revenue target of $41.0 million for the twelve month period ended June 30, 2020, a related waiver of such minimum revenue target in the event that the Company raised equity capital or issued subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly revenue targets; and providing for a minimum EBITDA target of ($7.0 million) for the twelve month period ended June 30, 2020, a related waiver of such minimum EBITDA target in the event that the Company raised equity capital or issued subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly EBITDA targets. The Fifth Amendment contains representations, warranties, covenants, releases, and conditions customary for a credit agreement amendment of this type. On June 8, 2020, SWK agreed to extend the deadline by which the Company was required to raise not less than $10.0 million in equity capital or subordinated debt to July 31, 2020 and agreed that the $6.9 million in proceeds from the offering completed on June 10, 2020 shall be counted toward the $10.0 million requirement. On June 8, 2020, SWK agreed to extend the deadline by which the Company was required to raise equity capital or issue subordinated debt of not less than $10.0 million to July 31, 2020 and agreed that the $6.9 million in proceeds from the June 2020 Offering would be counted toward the $10.0 million requirement. The Rights Offering was completed prior to July 31, 2020.

There is no assurance that we will be able to obtain similar waivers of non-compliance in the future. If we fail to comply with the covenants contained in the PMB Loan or the Credit Agreement or if the Required Lenders (as defined in the Credit Agreement) contend that we have failed to comply with these covenants or any other restrictions, it could result in an event of default under the PMB Loan or the Credit Agreement, as the case may be, which would permit or, in certain events, require PMB or SWK to declare all amounts outstanding thereunder to be immediately due and payable. There can be no assurances that we will be able to repay all such amounts or able to find alternative financing in an event of a default. Even if alternative financing is available in an event of a default

On March 31, 2020, BIOLASE received a deficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market notifying BIOLASE that, based on the BIOLASE’s stockholders’ equity of $377,000 as of December 31, 2019, as reported in its Annual Report on Form 10-K for the year ended December 31, 2019, BIOLASE is no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2.5 million. BIOLASE has until May 15, 2020 to provide Nasdaq with a specific plan to achieve and sustain compliance with the foregoing listing requirement. If the Company’s plan to regain compliance is accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the letter for the Company to evidence compliance.

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.

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited):	3
	Consolidated Balance Sheets as of ~~March 31,~~June 30, 2020 and December 31, 2019	3
	Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019	4
	Consolidated Statements of Redeemable Preferred Stock and Stockholders’ ~~(Deficit)~~ Equity ~~as of March 31,~~for the three and six months ended June 30, 2020 and ~~March 31,~~June 30, 2019	5
	Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2831
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4150
Item 4.	Controls and Procedures	4150
PART II	OTHER INFORMATION	4252
Item 1.	Legal Proceedings	4252
Item 1A.	Risk Factors	4252
Item 5	Other Information	4354
Item 6.	Exhibits	4455
Signatures		4759

	March 31,		December 31,		June 30,		December 31,
	2020		2019		2020		2019
Undelivered elements (training, installation, product and support services)	$	476	$	559	$	521	$	559
Extended warranty contracts		1,896		2,063		1,377		2,063
Total deferred revenue		2,372		2,622		1,898		2,622
Less long-term portion of deferred revenue		390		385		412		385
Total deferred revenue — long -term		390		385		412		385
Deferred revenue — current	$	1,982	$	2,237	$	1,486	$	2,237

	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2020			2019			2020			2019			2020			2019
Expected term	5.9 years			6.1 years
Expected term (years)								5.5			6.1			5.5			6.1
Volatility		82.2	%		86.2	%		103.1	%		85.0	%		102.8	%		85.8	%
Annual dividend per share	$	—		$	—		$	—		$	—		$	—		$	—
Risk-free interest rate		1.25	%		2.64	%		0.36	%		2.50	%		0.37	%		2.60	%

				Weighted					Weighted
				Average Grant					Average Grant
	Shares			Date Fair Value		Shares			Date Fair Value
Unvested options at December 31, 2019		254		$	1.44		254		$	1.44
Granted		20		$	0.54		1,242		$	0.29
Vested		(47	)	$	1.63		(82	)	$	1.62
Forfeited or cancelled		(14	)	$	2.61		(15	)	$	2.55
Unvested options at March 31, 2020		213		$	1.25
Unvested options at June 30, 2020							1,399		$	0.40

				Weighted					Weighted
				Average Grant					Average Grant
	Shares			Date Fair Value		Shares			Date Fair Value
Unvested RSUs at December 31, 2019		3,564		$	1.68		3,564		$	1.68
Granted		20		$	0.38		1,604		$	0.38
Vested		(416	)	$	0.67		(1,522	)	$	1.10
Forfeited or cancelled		(840	)	$	1.96		(962	)	$	1.38
Unvested RSUs at March 31, 2020		2,328			1.63
Unvested RSUs at June 30, 2020							2,684			1.63

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

	Three Months Ended				Three Months Ended				Six Months
	March 31,				June 30,				June 30,
	2020		2019		2020		2019		2020		2019
United States	$	3,129	$	6,116	$	2,195	$	5,898	$	5,324	$	12,014
International		1,654		4,210		743		2,747		2,397		6,957
	$	4,783	$	10,326	$	2,938	$	8,645	$	7,721	$	18,971

	Principal		Interest⁽¹⁾		Principal		Interest⁽¹⁾
2020		—		1,388
2020 (six months)						—		962
2021		2,100		1,793		2,100		1,828
2022		2,800		1,472		5,785		1,507
2023		10,100		2,455		10,109		2,460
2024						9		6
2025 and thereafter						137		122
Total future payments	$	15,000	$	7,108	$	18,140	$	6,885

(1) estimated using LIBOR rates as at March 31, 2020
(1) estimated using LIBOR rates as of June 30, 2020

	Three Months Ended,			Three Months Ended,
	March 31, 2020			June 30, 2020
Cash paid for operating lease liabilities	$	192		$	188
Right-of-use assets obtained in exchange for new operating lease obligations		—			570
Weighted-average remaining lease term		—		4.474 years
Weighted-average discount rate		0.0	%		12.3	%

Due in 12 month period ended March 31,
2020	$	138
Due in 12 month period ended June 30,
2021		7		$	212
Thereafter		—
2022					151
2023					154
2024					157
2025					161
	$	145		$	835
Less imputed interest		(5	)		(265	)
Total lease liabilities	$	140		$	570

Current operating lease liabilities		140			218
Non-current lease liabilities		—			352
Total lease liabilities	$	140		$	570

	Year Ended		Year Ended
	December 31,		December 31,
2020 (nine months)	$	217
2020 (six months)			$	152
2021		448		499
2022		481		522
2023		492		533
2024		503		545
2025 and thereafter		462
2025				504
Total future minimum lease obligations	$	2,603	$	2,755