BIOLASE
Annual Report 2014

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2014OR¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 001-36385 BIOLASE, INC.(Exact Name of Registrant as Specified in Its Charter) Delaware 87-0442441(State or Other Jurisdictionof Incorporation or Organization) (I.R.S. EmployerIdentification No.)4 CromwellIrvine, California 92618(Address of Principal Executive Offices, including zip code)(949) 361-1200(Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: (Title of each class) (Name of each exchange on which registered)Common Stock, par value $0.001 per share The NASDAQ Stock Market LLC (NASDAQ Capital Market)Securities registered pursuant to Section 12(g) of the Act:None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 12months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller Reporting Company x (Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xThe aggregate market value of the Registrant’s common stock held by non-affiliates was $65,540,168 based on the last sale price of common stock on June 30, 2014.As of February 27, 2015, there were 58,152,792 shares of the Registrant’s common stock, par value $0.001 per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive proxy statement related to its 2015 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant toRegulation 14A within 120 days after the Registrant’s fiscal year ended December 31, 2014, are incorporated by reference into Part III of this Annual Report on Form 10-K. BIOLASE, INC.ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2014TABLE OF CONTENTS PART I Item 1. Business3 Executive Officers of the Registrant19Item 1A. Risk Factors21Item 1B. Unresolved Staff Comments34Item 2. Properties34Item 3. Legal Proceedings34Item 4. Mine Safety Disclosures36 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities36Item 6. Selected Financial Data39Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations40Item 7A. Quantitative and Qualitative Disclosures About Market Risk52Item 8. Financial Statements and Supplementary Data52Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure52Item 9A. Controls and Procedures52Item 9B. Other Information55 PART III Item 10. Directors, Executive Officers and Corporate Governance55Item 11. Executive Compensation55Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters55Item 13. Certain Relationships and Related Transactions, and Director Independence55Item 14. Principal Accountant Fees and Services55 PART IV Item 15. Exhibits and Financial Statement Schedules56 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTSThis Annual Report on Form 10-K (“Form 10-K”), particularly in Item 1, “Business,” and Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” and the documents incorporated by reference, includes “forward-looking statements” that involve risks anduncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause our results to differ materially from those expressed orimplied by such forward-looking statements. Examples of forward-looking statements include, but are not limited to any statements, predictions orexpectations regarding our strategy, the number of hard tissue and periodontal procedures for 2015, future demand for improved dental care, earnings,revenue, sales and operations, operating expenses, sales and marketing expenses, legal expenses and professional fees, planned investments in engineeringand development, excise tax expenses, anticipated cash needs, capital requirements and capital expenditures, needs for additional financing, use of workingcapital, plans for future products and services and for enhancements of existing products and services, plans to expand our direct sales force, intentions toimplement new software, anticipated growth strategies, ability to attract customers, sources of net revenue, anticipated trends and challenges in our businessand the markets in which we operate, the adequacy of our facilities, the impact of economic and industry conditions on our customers and our business,customer demand, our competitive position, the outcome of any litigation against us, the perceived benefits of any technology acquisitions, criticalaccounting policies and the impact of recent accounting pronouncements. Additional forward-looking statements include, but are not limited to, statementspertaining to plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is nothistorical fact. Forward-looking statements are often identified by the use of words such as “may,” “might,” “will,” “intend,” “should,” “could,” “can,”“would,” “continue,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “potential,” “plan,” “seek” and similar expressions.These forward-looking statements are based on the expectations, estimates, projections, beliefs and assumptions of our management based oninformation available to management as of the date on which this Form 10-K was filed with the Securities and Exchange Commission (the “SEC”) or as of thedate on which the information incorporated by reference was filed with the SEC, as applicable, all of which are subject to change. Forward-looking statementsare subject to risks, uncertainties and other factors that are difficult to predict and could cause actual results to differ materially from those stated or impliedby our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to:·global economic uncertainty and volatility in financial markets;·inability to raise additional capital on terms acceptable to us;·our relationships with, and the efforts of, third-party distributors;·our inability to overcome the hesitation of dentists and patients to adopt laser technologies;·failure in our efforts to train dental practitioners;·inconsistencies between future data and our clinical results;·competition from other companies, including those with greater resources;·our inability to successfully develop and commercialize enhanced or new products that remain competitive with products or alternativetechnologies developed by others;·the inability of our customers to obtain third-party reimbursement for their use of our products;·limitations on our ability to use net operating loss carryforwards;·failure of our intellectual property rights to adequately protect our technologies;·potential third-party claims that our products infringe their intellectual property rights;·our failure to comply with existing or new laws and regulations, including fraud and abuse and health information privacy and security laws;·delays or cancellation of our product sales or introductions as a result of the Food and Drug Administration (“FDA”) regulatory process;·recall of our products, even after receiving FDA clearance or approval;·problems in manufacturing our products;·warranty obligations if our products are defective;·adverse publicity regarding our technology or products;·litigation, including product liability claims against us;1·failure of our suppliers to supply us with a sufficient amount or adequate quality of materials;·rapidly changing standards and competing technologies;·our inability to effectively manage and implement our growth strategies;·risks associated with operating in international markets, including potential liabilities under the Foreign Corrupt Practices Act (“FCPA”);·breaches of our information technology systems;·seasonality;·disruptions to our operations at our primary facility;·loss of our key management personnel or our inability to attract or retain qualified personnel;·risks and uncertainties relating to acquisitions, including difficulties integrating acquired businesses successfully into our existing operationsand risks of discovering previously undisclosed liabilities; and·failure to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes Oxley Act of 2002 or maintain adequateinternal control over financial reporting.Further information about factors that could materially affect the Company, including our results of operations and financial condition, is containedunder “Risk Factors” in Item 1A in this Form 10-K. Except as required by law, we undertake no obligation to revise or update any forward-looking statementsto reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise. 2PART I Item 1. BusinessOverviewBIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company,” “we,” “our” or “us”) is medical device company thatdevelops, manufactures, markets, and sells laser systems in dentistry and medicine and also markets, sells, and distributes dental imaging equipment,including cone beam digital x-rays and CAD/CAM intra-oral scanners, in-office, chair-side milling machines and three-dimensional (“3-D”) printers. Ourproducts advance the practice of dentistry and medicine for patients and health care professionals. Our proprietary dental laser systems allow dentists,periodontists, endodontists, oral surgeons, and other dental specialists to perform a broad range of minimally invasive dental procedures, including cosmetic,restorative, and complex surgical applications. Our laser systems are designed to provide clinically superior results for many types of dental procedurescompared to those achieved with drills, scalpels, and other conventional instruments. We have clearance from the U.S. Food and Drug Administration (the“FDA”) to market and sell our laser systems in the United States and also have the necessary registrations to market and sell our laser systems in Canada, theEuropean Union, and many other countries outside the U.S. Additionally, our in-licensed imaging equipment and related products improve diagnoses,applications, and procedures in dentistry and medicine.We offer two categories of laser system products: WaterLase (all-tissue) systems and Diode (soft tissue) systems. Our flagship brand, WaterLase, uses apatented combination of water and laser energy to perform most procedures currently performed using drills, scalpels, and other traditional dental instrumentsfor cutting soft and hard tissue. We also offer our Diode laser systems to perform soft tissue, pain therapy, and cosmetic procedures, including teeth whitening.We have approximately 250 issued and 100 pending U.S. and international patents, the majority of which are related to WaterLase technology. From 1998through December 31, 2014, we sold approximately 27,600 laser systems in over 80 countries around the world. Contained in this total are over 10,600WaterLase systems, including more than 6,600 WaterLase MD and WaterLase iPlus systems. We were originally formed as Societe Endo Technic, SA (“SET”)in 1984 in Marseilles, France, to develop and market various endodontic and laser products. In 1987, SET merged into Pamplona Capital Corp., a publicholding company incorporated in Delaware. In 1994, we changed our name to BIOLASE Technology, Inc. and in 2012, we changed our name to BIOLASE,Inc. Since 1998, we have been the global leading innovator, manufacturer, and marketer of dental laser systems.We currently operate in a single reportable business segment. We had net revenues of $47.7 million, $56.4 million, and $57.4 million in 2014, 2013,and 2012, respectively, and we had net losses of $18.9 million, $11.5 million, and $3.1 million for the same periods.Recent DevelopmentsSignificant Leadership Changes and Capital InfusionsBeginning in the second half of 2014, we appointed new key personnel to management to lead our sales and marketing department, including a newVice President of Worldwide Sales and Account Management as well as a new Vice President and Chief Marketing Officer. Furthermore, in the fourth quarterof 2014, we enhanced our sales force domestically and internationally. We have also formed a new Dental Professional Advisory Board, made up of fourfounding members, who have made significant contributions to the specialties of periodontics, implantology, oral surgery, multi-stage restorative therapy,and peri-implantitis therapy. Our goal is to refocus our energies on strengthening leadership, worldwide competitiveness and attention to our professionalcustomers and their patients.We completed two private placements in the latter half of 2014 totaling approximately $46.3 million in net proceeds after offering expenses. We useda portion of the proceeds to pay off our lines of credit in July 2014. The remainder of the proceeds is being used for working capital and general corporatepurposes.New Product OfferingsIn February 2015, we launched the WaterLase iPlus 2.0 and introduced Practice Growth Guarantee, a guarantee to assure growth in dental practices.The WaterLase iPlus 2.0 includes innovations and improvements designed to enhance patient experience and generate practice growth for dentalpractitioners through routine use. WaterLase iPlus 2.0 also marks the debut of the SureFire YSGG Delivery System which ensures greater uptime and routineuse for dentists.In December 2014, we introduced the EPIC X diode laser, an enhanced soft-tissue laser system featuring upgrades and improvements from our EPIC10, that was released in 2012. EPIC X includes enhancements to nearly every system component to optimize treatment speed and efficiency, including pre-initiated diode tips, allowing dentists to significantly reduce procedure time.3Industry BackgroundGeneralDental procedures, including medical and cosmetic treatment, are performed on hard tissue, such as bone and teeth, and soft tissue, such as gum andother oral tissue.In the most recent update, a 2007 American Dental Association (“ADA”) Survey of Dental Services Rendered (the “ADA Study”) estimated that morethan 200 million hard tissue procedures are performed annually in the United States. Hard tissue procedures include cavity preparation, root canals, and otherprocedures involving bone or teeth. Moreover, iData Research, an international market research group that specializes in medical devices, projects 391million hard tissue procedures for 2015.The ADA Study also indicated that more than 1.2 million soft tissue procedures are performed annually in the United States. Soft tissue proceduresinclude cosmetic smile design, gingivectomies and frenectomies. According to the ADA Study, over 90% of hard tissue procedures and 60% of soft tissueprocedures in the United States are performed by general dentists and the rest are performed by oral surgeons, endodontists, periodontists, and otherspecialists. iData Research estimates 1.7 million periodontal procedures will be performed in 2015.The ADA estimated that the demand for dental services in the United States continues to grow due to population growth, aging demographics, thePatient Protection and Affordable Care Act (the “Affordable Care Act”) and increased awareness of the benefits of preventive dentistry in reducing theincidence of oral and systemic disease.We believe there is a growing awareness among consumers of the value and importance of oral health and its connections to overall systemic healthand wellness. Studies indicate a link between periodontitis and other health conditions such as heart disease, diabetes, and stroke. According to the 2013Distribution of Dentists in the U.S. by Region and State, there are 177,625 active private practitioners in the U.S. According to the World Health Organizationin 2012, there were 1.8 million dentists worldwide. As many developing nations continue to experience fiscal growth, we believe those nations will alsoexperience higher demand for improved dental care. Corresponding growth resulting from dental practices competing for patients could create furtherdemand for clinical solutions that enable dentists to perform minimally invasive dental procedures with less trauma, improved patient acceptance, andclinically superior results. We believe our product offerings align with this trend.Traditional Dental InstrumentsDentists and other specialists choose from a variety of instruments depending on the tissue involved and the type of procedure. Most proceduresrequire the use of multiple instruments to achieve desired results.High Speed Drills. Most dentists use conventional high speed drills for hard tissue procedures, such as preparing cavities for filling, gaining accessfor performing root canals, and shaving or contouring oral bone tissue. Potentially adverse effects associated with drills include thermal heat transfer,vibration, pressure and noise. The cutting and grinding action of high speed drills can cause damage, such as micro-fractures, to the patient’s teeth. Thetrauma can lead to longer recovery times and the need for future crowns and root canals. Additionally, this grinding action of high speed drills may weakenthe tooth’s underlying structure, leading to fractures and broken cusps. Procedures involving high-speed drills typically require anesthesia and are often thesource of patient anxiety and fear. Because many dentists do not recommend anesthetizing more than one or two sections of the mouth in a singleappointment, patients may need to return several times to complete their treatment plan.Cutting Instruments. Soft tissue procedures are typically performed by oral surgeons or periodontists using scalpels, scissors, and other surgical tools.Due to the pain, bleeding, post-operative swelling and discomfort associated with these instruments, most soft tissue procedures require the use of localanesthetic which may result in numbness and longer recovery time, and often require stitches. Bleeding can impair the practitioner’s visibility during theprocedure, thereby reducing efficiency and is a particular problem for patients with immune deficiencies or blood disorders and for patients taking blood-thinning medications.Film Radiography Equipment. Dentists have traditionally relied on radiographic images produced by exposing photographic film to X-ray radiationas part of the examination and diagnosis of patients. These X-ray images can help reveal tooth decay, periodontal disease, bone loss, infections, hiddendental structures, abscesses or cysts, developmental abnormalities, some types of tumors, and other issues that might not be detected during a visualexamination or upon probing with a handheld instrument. Due to the chemical development process required for film, however, this process is time-consuming, inefficient, costly for dental offices, and not environmentally friendly. Mistakes in the development process can require retakes which exposepatients to additional radiation. Film X-rays also restrict the ability of doctors to enhance or further manipulate images for easier and more accurate analysisand treatment planning. Furthermore, one of the most critical limitations of film is that it is restricted to two-dimensional images, which can potentially leadto misdiagnosis.4Alternative Dental InstrumentsAlternative technologies have been developed over the years to address the problems associated with traditional methods used in dentistry. Mostalternatives have addressed either hard or soft tissue applications but not both.Electrosurge Systems. Electrosurge systems use an electrical current to heat a shaped tip that simultaneously cuts and cauterizes soft tissue, resultingin less bleeding than occurs with scalpels. However, electrosurge systems are generally less precise than lasers and can damage surrounding tissue.Electrosurge systems are also not suitable for hard tissue procedures and, due to the depth of penetration, generally require anesthesia and a lengthy healingprocess. Electrosurge systems generally cannot be used in areas near metal fillings and dental implants. Finally, electrosurge systems generally cannot beused to treat patients with implanted pacemakers and defibrillators.Traditional Laser Systems. More recently, lasers have gained acceptance for use in general and cosmetic dentistry. Most lasers used in dentistry havebeen adapted from other medical applications, such as dermatology, but are not optimally designed to perform common dental procedures. Most dental lasersuse thermal energy to cut tissue and are used primarily for soft tissue procedures.ProductsCombining our laser system products with imaging solutions provides dental professionals capabilities for early diagnosis and minimally invasivetreatment. Our product offering consists of the following:WaterLase systems. Our all-tissue WaterLase dental laser systems currently consist of the WaterLase iPlus, the WaterLase MD Turbo, and theWaterLase MDX 300 and 450. Each of these systems features our patented YSGG Laser technology with a proprietary laser crystal, which contains theelements erbium and chromium doped with yttrium, scandium, gallium, and garnet (Er, Cr: YSGG). This unique crystal laser produces energy with specificabsorption and tissue interaction characteristics specifically designed for dental applications. It is minimally invasive and can precisely cut hard tissue, suchas bone and teeth, and soft tissue, such as gums and skin, without the heat, vibration, bleeding or pressure associated with traditional dental treatments. Bycombining the YSGG laser light and water, our WaterLase systems may eliminate the need for anesthesia and also result in faster healing times compared totraditional methods of treatment.The WaterLase systems incorporate an ergonomic hand-piece and a user-friendly digital interface with clinical applications to control the mix of laserenergy, air, and water, as well as the pulse rate. Each system also has been designed to be easily moved from operatory to operatory within a practice. Wedeveloped the WaterLase systems using internally developed intellectual property, as well as intellectual property obtained through various acquisitions.The WaterLase systems are FDA cleared in the United States and CE mark-approved in Europe.Diode systems. Our Diode (soft tissue) laser systems currently consist of the EPIC and iLase, semiconductor diode lasers that perform soft tissue,hygiene, cosmetic procedures, teeth whitening, and temporary pain relief. Each of these laser systems features our unique 940nm diode wavelength to deliversuccessful clinical outcomes for common surgical procedures. EPIC and iLase feature our proprietary pulse technology called ComfortPulse, which isdesigned for added patient comfort. iLase, released in 2010, was the first “personal” laser with no wires, footswitch, or cumbersome cables to manage. EPIC,released in 2012, is a portable, powerful diode laser that facilitates clinical versatility with surgical, pain therapy and whitening capabilities and provides anexceptional laser with an attractive value proposition. We developed the Diode systems using internally developed intellectual property, as well asintellectual property obtained through acquisitions. The iLase and Epic are FDA cleared in the United States and CE mark-approved in Europe.Imaging systems. Our imaging systems include in-licensed state-of-the-art extra-oral and intra-oral dental digital imaging devices. Our expansioninto digital imaging systems enables us to offer high quality diagnostic solutions to complement the minimally invasive dental treatment solutions offeredby our WaterLase and Diode systems. Our imaging systems provide both high-precision intuitive diagnosis and treatment planning solutions, which helpdental practitioners to deliver the best clinical outcomes for patients. Our imaging systems include the CEFLA NewTom VGi and VG3, 3-D Cone BeamComputed Tomography devices. We distribute these products under the manufacturer’s FDA 510(k) clearance.3Shape Trios CAD/CAM digital impression systems. The 3Shape system offers a spray-free scanning device for enhanced accuracy and patientcomfort, high speed technology with accurate digital impression-taking with up to 1,000 3-D pictures, a touchscreen interface with live 3-D visualization,online communication capability with labs, and practitioner efficiency and convenience. We distribute this product under the manufacturer’s FDA 510(k)clearance.In-office milling system. The Galaxy BioMill CAD/CAM system enables dental practitioners to complete scanning, designing, milling, and finishingof crowns, inlays, and veneers in the dental office in a single appointment.53-D Printers. We distribute Stratasys’ 3-D printers, which combine accurate and precise 3-D printing technology with a small footprint. They areeasy to use, and include specialized dental printing materials in convenient sealed cartridges. 3-D printers allow dentists to fabricate stone models,orthodontic appliances, delivery and positioning trays, models for clear aligners, retainers and surgical guides on their desktop.Related Accessories and Consumable ProductsWe also manufacture and sell consumable products and accessories for our laser systems. Our WaterLase and Diode systems use disposable laser tips ofdiffering sizes and shapes depending on the procedure being performed. We also market flexible fibers and hand pieces that dental practitioners replace atsome point after initially purchasing laser systems. For our EPIC and ezLase systems, we sell teeth whitening gel kits.Our SolutionDue to the limitations associated with traditional and alternative dental instruments, we believe there is a large market opportunity for all-tissue dentallaser systems that provide superior clinical outcomes, help reduce trauma, pain, and discomfort associated with dental procedures, and increase patientacceptance for treatment protocols. We also believe there is a large market opportunity for digital radiography systems that improve practice efficiency andaccuracy of diagnosis, leading to superior treatment planning, increased practice revenue, and healthier outcomes for patients.Our WaterLase systems precisely cut hard tissue, bone, and soft tissue with minimal or no damage to surrounding tissue and dental structures. OurDiode systems are designed to complement our WaterLase systems, and are used only in soft tissue procedures, pain therapy, hygiene, and cosmeticapplications, including teeth whitening. The Diode systems, together with our WaterLase systems, offer practitioners a broad product line with a range offeatures and price points.The in-licensed Cefla NewTom products are state-of-the-art digital imaging systems that provide both two- and three-dimensional X-ray images thatallow doctors to visualize and manipulate significantly more information than previously available with film, without the time delay of film development orcost associated with chemicals and the film itself. These imaging systems have been designed to produce high quality images while exposing patients tominimal amounts of radiation.The in-licensed 3Shape Trios (“Trios”) intra-oral CAD/CAM scanner offers diversity in our imaging product line with spray-free, high-speed, 3-D colorimpression capture as well as touch screen and online lab communication capabilities.The Galaxy BioMill System is an open-architecture CAD/CAM system for scanning, designing, milling and finishing crowns, inlays, and veneers inthe dental office in a single appointment. Also termed "chair-side" milling, the Galaxy BioMill System utilizes the fast and highly accurate Trios intra-oralscanner to capture color high resolution 3-D digital images of the teeth and crown-preparation site, which are then processed through a CAD/CAM softwareprogram to design the dental restoration. The design is then transferred to the Galaxy BioMill to mill the crown using the latest in aesthetically pleasing,biological compatible, and long-lasting tooth colored materials.The Stratasys 3-D printers combine accurate and precise 3-D printing technology with a small footprint. They are easy to use, and include specializeddental printing materials in convenient sealed cartridges. Using the Stratasys 3-D printers, dentists and dental laboratories can fabricate stone models,orthodontic appliances, delivery and positioning trays, models for clear aligners, retainers and surgical guides.We believe that by combining high-end digital imaging, laser systems, intra-oral scanning, CAD/CAM design, chair-side milling, and 3-D printing,dental offices can accurately and rapidly address a variety of unmet patient needs conveniently.6Benefits to Dental Professionals·Expanded range of procedures and revenue opportunities. Our laser systems allow general dentists to perform surgical and cosmeticprocedures that they are unable or unwilling to perform using conventional methods, and that would typically be referred to a specialist. Ourlaser systems allow dentists to perform these procedures easily and efficiently, increasing their range of skills, professional satisfaction, patientretention and attraction, and revenues.·Additional procedures through increased information and efficiency. Our digital imaging systems allow dentists to diagnose and discovercases that they might not be able to detect with film images or other two-dimensional images, thereby giving them the ability to offer moretreatment options for patients. Our laser systems can shorten and reduce the number of patient visits, providing dental professionals with theability to service more patients. For hard tissue procedures, our WaterLase systems can reduce the need for anesthesia, which enables the dentalpractitioner to perform multiple procedures in one visit. The WaterLase and Diode systems cut soft tissue more precisely and with minimalbleeding when compared to traditional tools such as scalpels and electrosurge systems. We have FDA clearance for treatment protocols includingREPair, our proprietary periodontal treatment or protocol and subgingival calculus removal using the WaterLase system and patented RadialFiring Perio Tips. This is a minimally invasive treatment for moderate to advanced gum disease, the leading cause for tooth loss for adults overage 35 and a condition impacting more than half of Americans over age 55. In addition, our EPIC system can be used to quickly perform in-officeteeth whitening with our proprietary whitening gel and to provide temporary pain relief. The Galaxy BioMill System and Stratasys 3-D printersallow for same-day crowns.·Increased loyalty and expanded patient base. We believe the improved patient comfort and convenience offered by our laser systems, thereduction in chair time and radiation exposure of our digital imaging systems, and the benefits of in-office, chair-side milling and 3-D printinghelps improve patient retention, attract new patients, and increase revenue per patient, demand for elective procedures, acceptance of treatmentplans, and word-of-mouth referrals.·Improved clinical outcomes. By providing more complete and accurate information, our digital imaging systems make it possible for the doctorto determine the optimal diagnosis and treatment plan. Our laser systems can then be used to reduce trauma, swelling, and general discomfort ofthe patient, resulting in improved clinical outcomes and less follow-up treatment. In addition, our laser systems may reduce the risk of cross-contamination that can occur with traditional dental tools. The Galaxy BioMill System and Stratasys 3-D printers further expand treatmentoptions available to patients and allow for same-day crowns. Thus, our products make it possible for practitioners to devote time to new cases,rather than treating complications.Benefits to Patients·Comfort. Our WaterLase systems allow dentists to perform minimally invasive dental procedures without anesthesia in many cases and patientsrecover more comfortably, faster, and with less pain than when treated with conventional instruments. The heat, vibration, microfractures, trauma,or pressure associated with traditional dental methods are largely avoided.·Convenience. Our WaterLase systems do not require anesthesia in many cases, which allows dental practitioners to perform multiple proceduresin one appointment, which saves patients time. Digital images are available almost immediately, so patients do not have to spend extra time inthe dental chair waiting for film to be developed. Further, the Galaxy BioMill System and Stratasys 3-D printers allow for same-day crowns.·Reduced trauma. WaterLase systems allow for a faster and more pleasant patient recovery with less swelling, bleeding, and general discomfortthan when treated with conventional instruments.·Broader range of available procedures. Due to the comfort and convenience of our WaterLase system, patients may be more likely to considercosmetic and other elective procedures resulting in better smiles and oral health. Since digital images are displayed on computer monitors,doctors can make treatment planning a more personal experience for patients. Further, the Galaxy BioMill System and Stratasys 3-D printers offerpatients the benefits of same day crowns. We believe that these factors will lead to greater patient case acceptance.7Business StrategyOur business strategy includes the following key elements:·Increasing awareness of and demand for our products among dental practitioners. We intend to increase demand for our products byeducating dental practitioners and patients about the clinical benefits of our product suite. We plan to continue participation in key industrytrade shows, the World Clinical Laser Institute® (“WCLI®”) (which we founded in 2002), dental schools, and other educational forums. Ourproducts are also used for clinical research, which often leads to published articles that can garner attention from dental practitioners.·Increasing awareness of and demand for our laser systems among patients. We also intend to increase demand for our products by educatingpatients about the clinical benefits of the WaterLase and Diode systems. We believe that patients will understand the clinical benefits and seekout dental practitioners that offer the WaterLase and Diode systems, which, in turn, will result in increased demand for our systems from dentalpractitioners. Consequently, we are testing methods of marketing directly to patients, utilizing a number of social and other media channels.·Creating value through innovation and leveraging existing technologies into adjacent medical applications. We plan to expand our productline and clinical applications by developing enhancements and transformational innovations, including new clinical solutions for dentalapplications and for other adjacent medical applications. In particular, we believe that our existing technologies can provide significantimprovements over existing standards of care in fields, including ophthalmology, otolaryngology, orthopedics, podiatry, pain management,aesthetics/dermatology, veterinary, and consumer products. We have already started to enter the otolaryngology, pain management, andveterinary markets to varying degrees. We plan to continue to explore potential collaborations to bring our proprietary laser technologies toother medical applications. In addition or alternatively, we may acquire complementary products and technologies. We also aim to increase ourconsumables revenue by selling more single-use accessories used by dental practitioners when performing procedures using our dental lasersystems.·Improving product quality. We plan to achieve the industry’s highest rate of defect-free delivery of products, adopt high quality standards, andaddress and timely resolve customer complaints. In connection with our initiative to measure, improve, and increase customer satisfaction andconfidence, in 2014, we extended the warranty for WaterLase systems from one to two years for systems purchased in 2014 or later. In the U.S.,we provide maintenance and support services to customers through our support hotline and dedicated staff of in-house and field servicepersonnel. Outside the U.S., we maintain a network of factory-certified service technicians to provide maintenance and support services tocustomers.·Strengthening sales and distribution capabilities. In the U.S. and Canada, we primarily distribute our products directly to dental practitionersvia an outside direct sales force. During 2012, we augmented our outside direct sales force by establishing an inside sales organization. Theinside sales organization is located at our corporate headquarters and is comprised of sales representatives and lead generators who work inpartnership with the outside sales team to maximize sales by leveraging the existing installed customer base. In 2013, we also added regionalimaging specialists to the inside sales organization to provide technical and clinical expertise in coordination with our laser salesrepresentatives. In addition to our outside direct sales force in North America, we also use various independent distributors to sell and supportour products throughout Europe, the Middle East, Latin America, and Asia-Pacific. We plan to continue to build out the infrastructure to supportour customers and to drive revenue and profit growth, both domestically and internationally. This includes expanding our sales presence withrespect to the rapidly growing group practices, group purchasing organizations, and government channels.·Strengthening and defending technology leadership. We plan to continue protecting our intellectual property rights by expanding ourexisting patent portfolio in the United States and internationally. We strategically enforce our intellectual property rights worldwide.·Strengthening customer training and clinical education. We provide introductory, advanced, and specialized training for dental practitionersto increase their proficiency and to certify them. Our goal is to provide our customers world class training that is accessible and can be executedwith a practical technique. ·Expanding our product portfolio to dental practitioners. By combining our digital imaging, intra-oral scanners, CAD/CAM design, chair-sidemilling, and 3-D printing, dental offices can accurately and timely address unmet patient needs with convenience. In 2014, we began shippingour Galaxy BioMill and 3-D printers. We plan to continue to evaluate how to optimize the manner in which we market and sell additionalproducts to our WaterLase and Diode systems customers.8WarrantiesOur WaterLase laser systems and Diode systems sold domestically are covered by a warranty against defects in material and workmanship for a periodof up to two years from the date of sale to the end-user by us or a distributor. In 2014, we extended the warranty for WaterLase systems sold domestically fromone to two years for systems purchased in 2014 or later. WaterLase systems and Diode systems sold internationally in 2014 are covered by a warranty againstdefects in material and workmanship for a period of up to twenty eight months from date of sale to the international distributor. Our laser systems warrantycovers parts and service for sales in our North American territories and parts only for international distributor sales. In North America and select internationallocations, we sell service contracts to our laser systems end users that cover the period after the expiration of our standard warranty coverage for our lasersystems. Extended warranty coverage provided under our service contracts varies by the type of system and the level of service desired by the customer.Products or accessories remanufactured, refurbished, or sold by authorized parties, voids all warranties in place for such products and exempts us fromliability issues relating to the use of such products. We offer extended warranties on certain imaging products that we distribute, including our digitalradiography products. However, all imaging products that we distribute are initially covered by manufacturer’s warranties.InsuranceWe maintain product liability insurance on a claims-made-and-reported basis with a limit of $10 million per occurrence and $10 million in theaggregate for all occurrences. The insurance is subject to various standard coverage exclusions, including damage to the product itself, losses from the recallof our product, and losses covered by other forms of insurance such as workers compensation. We cannot be certain that we will be able to successfullydefend any claims against us, nor can we be certain that our insurance will cover all liabilities resulting from such claims. In addition, we cannot assure youthat we will be able to obtain such insurance in the future on terms acceptable to us, or at all.ManufacturingOur strategy is to manufacture products in-house when it is efficient for us to do so. We currently manufacture, assemble, and test all of our lasersystems at our corporate headquarters facility in Irvine, California. The 57,000 square foot facility has approximately 20,000 square feet dedicated tomanufacturing and warehousing. The facility is ISO 13485 certified. ISO 13485 certification provides guidelines for our quality management systemassociated with the design, manufacture, installation, and servicing of our products. In addition, our U.S. facility is registered with the FDA and complies inall material respects with the FDA’s Quality System Regulation.We use an integrated approach to manufacturing, including the assembly of tips, laser hand pieces, fiber assemblies, laser heads, electro-mechanicalsubassembly, final assembly, and testing. We obtain components and subassemblies for our products from third-party suppliers, the majority of which arelocated in the United States. We generally purchase components and subassemblies from a limited group of suppliers through purchase orders. In general, werely on these purchase orders and do not have written supply contracts with many of our key suppliers. Three key components used in our WaterLase system(hand pieces, laser crystals, and fiber components) are each supplied by separate single-source suppliers. In recent years, we have not experienced materialdelays from the suppliers of these three key components. However, in the event that we experience an unexpected interruption from a single source supplier,manufacturing delays, re-engineering, significant costs, and sales disruptions could occur, any of which could have a material adverse effect on ouroperations. As of the date on which this Form 10-K was filed with the SEC, we were in the process of identifying and qualifying alternate source suppliers forour key components, including but not limited to those noted above. There can be no assurance, however, that we will successfully identify and qualify analternate source supplier for any of our key components or that we could enter into an agreement with any such alternate source supplier on terms acceptableto us.Marketing and SalesMarketingWe currently market our laser systems worldwide. Our marketing efforts are focused on increasing brand awareness and demand among dentalpractitioners. We also continue to test methods to increase awareness of our brands’ benefits by marketing directly to patients.9Dental Practitioners. We market our laser systems to dental practitioners through regional, national, and international trade publications,educational events, industry tradeshows, the internet, direct sales forces (in North America and Canada), agents and distributors, and seminars. We also usebrochures, direct mail, public relations, and other promotional tools and materials. In 2010, we introduced the Biolase Store for online purchase of lasersystems, consumables, accessories, and service contracts in North America. In 2002, we founded the World Clinical Laser Institute (the “WCLI”) to formalizeour efforts to educate and train dental practitioners in laser dentistry. The WCLI conducts and sponsors educational programs domestically andinternationally for dental practitioners, researchers, and academicians, including one, two, and three-day seminars and training sessions involving in-depthpresentations on the use of lasers in dentistry. In 2012, the organization was expanded to include digital imaging. In addition, we have developedrelationships with research institutions, dental schools, and laboratories that use our products for clinical research and in-clinical training. We believe theserelationships will increase awareness of and demand for our products. In 2012 we formalized a five-year agreement with Professor Norbert Gutknecht and theAachen Center for Laser Dentistry (“AALZ”), the acknowledged leader in dental laser education since its founding in 1992, to continue expanding theavailability of postgraduate advanced wavelength clinical laser education while also taking major steps toward standardizing laser dental education for all ofour owners worldwide.Patients. We plan to continue to test ways to effectively market the benefits of our laser systems directly to patients through marketing andadvertising programs, including the internet, search engine optimization, social media, print and broadcast media, and point-of-sale materials in dentalpractitioners’ offices. We believe that making patients aware of our laser systems and their benefits will motivate them to request from dental practitionerslaser procedures and their outcomes thereby increasing demand for our brands. We can be found online at www.biolase.com, on Facebook atwww.facebook.com/biolase, on Twitter at www.twitter.com/biolaseinc, on Pinterest at www.pinterest.com/biolase, on LinkedIn atwww.linkedin.com/company/biolase, on Google+ at www.google.com/+BIOLASEIrvine, on Instagram at www.instagram.com/biolaseinc, and on YouTube atwww.youtube.com/biolasevideos. Unless specifically stated otherwise, none of the information contained on any of these sites online is incorporated in thisForm 10-K by reference.SalesWe sell our products primarily to dentists in general practice through our direct sales force and our distributor network. We expect our laser systems tocontinue to gain acceptance among periodontists, endodontists, oral surgeons, pediatric dentists, and other dental specialists as they become aware of theclinical benefits and minimally invasive treatment options available by using our laser systems. We also sell our NewTom, 3Shape, Galaxy, and Stratasysproducts to dental specialists. Outside of the dental market, we expect that our initial sales of lasers will be in a regional test to ear, nose, and throat (“ENT”)physicians (otolaryngologists) and we are exploring other medical adjacencies for other opportunities to expand.The following table summarizes our net revenues by category for the years ended December 31, 2014, 2013, and 2012 (dollars in thousands): Years Ended December 31, 2014 2013 2012 Laser systems $29,490 61.9% $38,736 68.6% $42,348 73.8%Imaging systems 4,286 9.0% 4,632 8.2% 3,365 5.9%Consumables and other 6,524 13.7% 6,458 11.5% 5,954 10.4%Services revenue 7,211 15.1% 6,360 11.3% 5,524 9.6%Products and services revenue 47,511 99.7% 56,186 99.6% 57,191 99.7%License fees and royalties 145 0.3% 244 0.4% 165 0.3%Net revenue $47,656 100.0% $56,430 100.0% $57,356 100.0% Net revenue by geographic location based on the location of customers was as follows (in thousands): Years Ended December 31, 2014 2013 2012 United States $29,848 $35,653 $40,524 International 17,808 20,777 16,832 $47,656 $56,430 $57,356 International revenue accounts for a significant portion of our total revenue and accounted for approximately 37%, 37%, and 29% of our net revenuein 2014, 2013, and 2012, respectively. No individual country outside the United States represented more than 10% of our net revenue during the years endedDecember 31, 2014, 2013, and 2012.10For financial information about our long-lived assets, see Note 2 and Note 9 to the Notes to the Consolidated Financial Statements — Summary ofSignificant Accounting Policies and — Segment Information.North American Sales. In the United States and Canada, we primarily sell our products directly to dental practitioners utilizing a direct sales forceconsisting of laser sales representatives, imaging specialists, and regional managers. During 2012, we augmented our outside direct sales force byestablishing an inside sales organization. The inside sales force is located at our corporate headquarters and is comprised of sales representatives and leadgenerators who work in partnership with the outside sales team to maximize sales by leveraging the existing installed customer base.International Sales. Our distributors purchase laser systems and disposables from us at wholesale dealer prices and resell them to dentists in theirsales territories. All sales to distributors are final and we can terminate our arrangements with dealers, agents, and distributors for cause or non-performance.We have granted certain distributors the right to be our exclusive distributor in select territories. These distributors are generally required to satisfy certainminimum purchase requirements to maintain their exclusivity. In 2011, we began selling our products directly to end users in Germany. In 2012, we beganselling our products directly to end users in India and neighboring countries.Customer Concentration. We sell our products through our direct sales force, agents, and distributors. For the years ended December 31, 2014, 2013,and 2012, sales to our largest distributor worldwide accounted for approximately 6%, 5%, and 3%, respectively, of our net revenue.Customer Service. We provide high quality maintenance and support services in the United States through our support hotline and dedicated staff ofin-house and field service personnel. Outside the United States, we maintain a network of factory-certified service technicians to provide maintenance andsupport services to customers. Our international distributors are responsible for providing maintenance and support services for products sold by them. Weprovide parts to distributors at no additional charge for products covered under warranty.Financing Options. Most customers (other than distributors) finance their purchases through third-party financial institutions, including leasingcompanies and banks. In the United States and Canada, third-party customers enter into a financing agreement with a financial institution that purchases theproduct from us or one of our distributors. We are not party to these financing agreements, so if the customer agrees to pay the financial institution ininstallments we do not bear the credit risk. The financial institutions do not have recourse to us for a customer’s failure to make payments, nor do we have anyobligation to take back the product.Seasonality. Typically, we experience fluctuations in revenue from quarter to quarter due to seasonality. Revenue in the first quarter typically islower than average and revenue in the fourth quarter typically is stronger than average due to the buying patterns of dental practitioners. We believe that thistrend exists because a significant number of dentists purchase their capital equipment towards the end of the calendar year in order to maximize their practiceearnings while seeking to minimize their taxes. They often use certain tax incentives, such as accelerated depreciation methods for purchasing capitalequipment, 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 beflat or lower than in the second quarter of the year. Our historical seasonal fluctuations may also be impacted by sales promotions used by large dentaldistributors that encourage end-of-quarter and end-of-year buying in our industry. Because of these seasonal fluctuations, historically we have often used lesscash in operations for the six months ended December 31 as compared to the six months ended June 30.Engineering and Product DevelopmentEngineering and product development activities are essential to maintaining and enhancing our business. We believe our engineering and productdevelopment team has demonstrated its ability to develop innovative products that meet evolving market needs. Our engineering and product developmentgroup consists of 14 individuals with medical device and laser development experience, including two Ph.Ds. During the years ended December 31, 2014,2013, and 2012, our engineering and product development expenses totaled approximately $4.6 million, $4.0 million, and $4.7 million, respectively. Ourcurrent engineering and product development activities are focused on developing new product platforms, improving our existing products and technologyand extending our product range in order to provide dental practitioners and patients with less painful and clinically superior laser systems. Some examplesof the improvements we are pursuing for our laser systems include faster cutting speed, improved ease of use, less need for anesthesia injections,interconnectivity, and an expanded portfolio of consumable products for use with our laser systems. Our engineering and product development activitiesencompass both fundamental and applied fields. We seek to improve methods to perform clinical procedures through the use of new laser wavelengths, laseroperation modes and accessories.We also devote engineering and product development resources toward markets outside of dentistry in which we might exploit our technologyplatform and capabilities. We believe our laser technology and development capabilities could address unmet needs in several other medical applications,including ophthalmology, otolaryngology, orthopedics, podiatry, pain management, aesthetics/dermatology, veterinary, and consumer products. We havealready started to enter the otolaryngology, pain management, and veterinary markets to varying degrees.11Intellectual Property and Proprietary RightsWe believe that in order to maintain a competitive advantage in the marketplace, we must develop and maintain protection of the proprietary aspectsof our technology. We rely on a combination of patents, trademarks, trade secrets, copyrights and other intellectual property rights to protect our intellectualproperty. We have developed a patent portfolio internally, and to a lesser extent through acquisitions and licensing, that covers many aspects of our productofferings. As of December 31, 2014, we had approximately 250 issued patents and 100 pending patent applications in the United States, Europe and othercountries. While we hold a variety of patents that cover a broad range of technologies and methods, the majority of these patents provide market protectionfor our core technologies incorporated in our laser systems and related accessories. Existing patents related to our core technology, which are at variousstages of being incorporated into our products, are scheduled to expire as follows: 18 in 2015, 22 in 2016, four in 2017, and 20 in 2018, with the majorityhaving expiration dates ranging from 2025 to 2038. With approximately 100 patent applications pending, we expect the number of new grants to exceed thenumber of patents expiring. We do not expect the expiration of the expired or soon-to-expire patents to have a material adverse effect on our business,financial condition or results of operations.There are risks related to our intellectual property rights. For further details on these risks, see Item 1A — “Risk Factors.”CompetitionWe operate under relatively competitive market conditions. We believe that the principal competitive factors for companies that market technologiesin dental and other medical applications include acceptance by leading dental and medical practitioners, product performance, product pricing, intellectualproperty protection, customer education and support, timing of new product research, and development of successful national and international distributionchannels.Our competitors vary by product and location. There are companies that market some, but not all, of the same types of products as ours. Our lasersystems compete with other lasers, mostly with other wavelengths, patient outcomes and benefit profiles, as well as with drills, scalpels, scissors, air abrasionsystems, and a variety of other tools that are used to perform dental and medical procedures. We believe our products have key differentiating performancefeatures. For example, we market diode lasers which also have FDA clearance for use in both pain management therapy and teeth whitening. Our teethwhitening technology competes with other in-office whitening products and high intensity lights used by dentists, as well as teeth whitening strips, and otherover-the-counter products. Our pain management technology competes with a variety of traditional, advanced, and pharmaceutical pain managementproducts and services. The dental imaging equipment and in-office milling machines that we offer compete with traditional dental laboratories, imagingcenters and products and services.Traditional tools are generally less expensive than our laser systems for performing similar procedures. For example, a high speed drill or anelectrosurge device can be purchased for less than $2,500 each. In addition, though our systems are superior to traditional tools in many ways, they are notintended to replace all of the applications of traditional tools, such as removing metal fillings and certain polishing and grinding functions.Some of our competitors have significantly greater financial, marketing, and/or technical resources than we do. In addition, some competitors havedeveloped, and others may attempt to develop, products with applications similar to those performed by our products. Because of the large size of thepotential market for our products, we anticipate that new or existing competitors may develop competing products, procedures, or clinical solutions thatcould prove to be more effective, safer, or less costly than procedures using our laser systems. The introduction of new products, procedures, or clinicalsolutions by competitors may result in price reductions, reduced margins, or loss of market share, or may render our products obsolete.Government RegulationFDA’s Premarket Clearance and Approval RequirementsUnless an exemption applies, each medical device that we wish to market in the U.S. must first receive either 510(k) clearance, by filing a 510(k) pre-market notification, or PMA approval, by filing a Premarket Approval Application (“PMA”) from the FDA pursuant to the Federal Food, Drug, and CosmeticAct. The FDA’s 510(k) clearance process usually takes from four to twelve months, but it can take longer. The process of obtaining PMA approval is muchmore costly, lengthy, and uncertain. It generally takes from one to three years or even longer. We cannot be sure that 510(k) clearance or PMA approval willever be obtained for any product we propose to market.The FDA decides whether a device must undergo either the 510(k) clearance or PMA approval process based upon statutory criteria. These criteriainclude the level of risk that the agency perceives is associated with the device and a determination of whether the product is a type of device that is similarto devices that are already legally marketed. Devices deemed to pose relatively less risk are placed in either Class I or II, which generally requires themanufacturer to submit a pre-market notification requesting 510(k) clearance, unless an exemption applies.12Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls (“General Controls”)for medical devices, which include compliance with the applicable portions of the FDA’s Quality System Regulation (“QSR”) facility registration andproduct listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. SomeClass I devices also require premarket clearance by the FDA through the 510(k) premarket notification process.Class II devices are subject to the FDA’s General Controls, and any other special controls as deemed necessary by the FDA to ensure the safety andeffectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notificationprocedure. All of our current regulated devices are Class II devices and all have qualified for 510(k) clearance.Class III devices are those devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, ordeemed not substantially equivalent to a legally marketed predicate device. The safety and effectiveness of Class III devices cannot be assured solely by theGeneral Controls and the other requirements described above. These devices almost always require formal clinical studies to demonstrate safety andeffectiveness and must be approved through the premarket approval process described below. Premarket approval applications are subject to significantlyhigher user fees under the FDA Safety and Innovation Act (the “FDASIA”), which includes the Medical Device User Fee Amendments of 2012 (the “MDUFAIII”) as well as other medical device provisions, and generally take much longer for the FDA to review.To obtain 510(k) clearance, a company must submit a premarket notification demonstrating that the proposed device is “substantially equivalent” inintended use and in technological and performance characteristics to a legally marketed “predicate device” that is either in Class I or Class II or is a Class IIIdevice that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for submission of a PMA application. Pursuant to theFDASIA, which includes the MDUFA III as well as other medical device provisions, unless a specific exemption applies, 510(k) premarket notificationsubmissions are subject to user fees. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, orthat would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA approval. The FDA requires eachmanufacturer to make this determination in the first instance, but the FDA can review any decision. If the FDA disagrees with a manufacturer’s decision not toseek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also can require themanufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained. We have made and plan to continueto make additional product enhancements to our laser systems that we believe will not require new 510(k) clearances. We cannot assure you that the FDA willagree with any of our decisions not to seek additional 510(k) clearances or even PMA approval for these or future device modifications. If the FDA requires usto seek 510(k) clearance or PMA approval for any modification, we may be required to cease marketing and/or recall the modified device until we obtain anew 510(k) clearance or PMA approval.Class III devices are required to undergo the PMA approval process in which the manufacturer must establish the safety and effectiveness of the deviceto the FDA’s satisfaction. A PMA application must provide extensive preclinical and clinical trial data as well as information about the device and itscomponents regarding, among other things, device design, manufacturing and labeling. During the review period, an advisory panel of experts from outsidethe FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition,the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with the QSR. A new PMA or a PMA Supplement isrequired for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’sindications for use, manufacturing process, manufacturing facility, labeling and design. PMA Supplements often require submission of the same type ofinformation as an original PMA application, except that the supplement is limited to information needed to support any changes from the device covered bythe original PMA application, and may not require as extensive clinical data or the convening of an advisory panel. None of our products are currentlyapproved under a PMA.A clinical trial may be required in support of a 510(k) submission and generally is required for a PMA application. These trials generally require anInvestigational Device Exemption (“IDE”) application approved in advance by the FDA for a specified number of patients, unless the product is deemed anon-significant risk device eligible for certain exemptions from the IDE requirements. The IDE application must be supported by appropriate data, such asanimal and laboratory testing results. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boardsat the clinical trial sites. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device ormay otherwise not be sufficient to obtain FDA clearance to market the product in the U.S.In the future, we may be required to make additional 510(k) submissions to the FDA to address new claims, uses, or products. We cannot assure youthat the FDA will not deem one or more of our future products, or those of our original equipment manufacturer partners, to be a Class III device subject to themore burdensome PMA approval process. The FDA also may not approve or clear these products for the indications that are necessary or desirable forsuccessful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or PMA of new products, new intended uses or modifications toexisting products.13Pervasive and Continuing FDA RegulationAfter a device is placed on the market, numerous regulatory requirements continue to apply. Those regulatory requirements include:·device listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;·QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design control, testing, change control,documentation, and other quality assurance procedures during all aspects of the manufacturing process;·labeling control and advertising regulations which include FDA prohibitions against the promotion of products for uncleared, unapproved, oroff-label uses or indications;·clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use ofone of our cleared devices;·approval of product modifications that affect the safety or effectiveness of one of our future approved devices;·medical device reporting, regulations, which require that manufacturers comply with FDA requirements to report if their device may have causedor contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if themalfunction of the device or a similar device were to recur;·post-approval restrictions or conditions, including post-approval study commitments;·post-market surveillance requirements, which apply when necessary to protect the public health or to provide additional safety and effectivenessdata for the device;·the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that isin violation of governing laws or regulations or other conditions under which the product was approved;·regulations pertaining to voluntary recalls; and·notices of corrections or removals.We invest significant time and other resources to ensure ongoing compliance with FDA QSR and other post-market regulatory requirements.We have registered with the FDA as a medical device manufacturer and we have obtained a manufacturing license from the California Department ofHealth Services. As a manufacturer, we are subject to announced and unannounced facility inspections by the FDA and the California Department of HealthServices to determine our compliance with various regulations. Our subcontractors’ manufacturing facilities are also subject to inspection.If the FDA finds that we have failed to comply, the agency can institute a wide variety of enforcement actions, ranging from a public warning letter tomore severe sanctions such as:·fines and civil penalties;·unanticipated expenditures to address or defend such actions;·delays in clearing or approving, or refusal to clear or approve, our products;·withdrawal or suspension of approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies;·product recall or seizure;·interruption of production;·operating restrictions;·injunctions; and·criminal prosecution.The FDA also has the authority to request repair, replacement, or refund of the cost of any medical device manufactured or distributed by us. Ourfailure, or the failure of our subcontractors, to comply with applicable requirements could lead to an enforcement action that may have an adverse effect onour business, financial condition, and results of operations.14Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission(“FTC”) and by state regulatory and enforcement authorities. Promotional activities for FDA-regulated products of other companies have been the subject ofenforcement actions brought under health care reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similarstate laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or trainingconstitutes promotion of an uncleared or unapproved use, the FDA could request that we modify our training or promotional materials or subject us toregulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, an injunction, a seizure, a civil fine, orcriminal penalties. In that event, our reputation could be damaged and adoption of the products could be impaired.We are also subject to regulation under the Radiation Control for Safety and Health Act of 1968 (the “Safety Act”), which is administered by the FDA.The Safety Act regulates the energy emissions of light and sound and electronic waves from electronic products. Regulations implementing the Safety Actrequire a laser manufacturer to file new product and annual reports; to maintain quality control, product testing, and sales records; to distribute productoperation manuals; to incorporate certain design and operating features in lasers sold to end users; and to certify and label each laser sold to end users as oneof four classes of lasers based on the level of radiation emitted from the laser. In addition, various warning labels must be affixed to the product and certainprotective features must be installed, depending upon the class of product.Foreign RegulationMany foreign countries in which we market or may market our products have regulatory bodies and restrictions similar to those of the FDA.International sales are subject to foreign government regulation, the requirements of which vary substantially from country to country. The time required toobtain approval by a foreign country may be longer or shorter than that required for FDA clearance and the requirements may differ. We have received CEMarking for our WaterLase and Diode laser systems. Additionally, foreign countries in which the Company markets its products may subject the Company toregulations affecting, among other things, product standards and specifications, packaging requirements, labeling requirements, quality system requirements,import restrictions, tariffs, duties, tax requirements and interactions with health care providers and/or government officials (e.g. UK Anti-Bribery Act). Wecannot assure you that we will be able to obtain necessary foreign government approvals or successfully comply with foreign regulations. Our failure to do socould adversely affect our business, financial condition, and results of operations.Other U.S. RegulationWe and our subcontractors also must comply with numerous federal, state and local laws relating to matters such as safe working conditions,manufacturing practices, environmental protection, fire hazard control, and hazardous substance disposal. We are also subject to various reportingrequirements including those prescribed by the Affordable Care Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. We cannot be surethat we will not be required to incur significant costs to comply with these laws and regulations in the future or that these laws or regulations will notadversely affect our business, financial condition, and results of operations. Unanticipated changes in existing regulatory requirements or the adoption ofnew requirements could adversely affect our business, financial condition, and results of operations.EnvironmentalOur manufacturing processes involve the use, generation, and disposal of hazardous materials and wastes, including alcohol, adhesives, and cleaningmaterials. As such, we are subject to stringent federal, state, and local laws relating to the protection of the environment, including those governing the use,handling, and disposal of hazardous materials and wastes. Future environmental laws may require us to alter our manufacturing processes, thereby increasingour manufacturing costs. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicableenvironmental laws and worker health and safety laws. However, the risk of environmental liabilities cannot be completely eliminated.15Health Care Fraud and AbuseAs a medical device manufacturer, our operations and interactions with health care providers, including dentists, are subject to extensive laws andregulations imposed at the federal, state, and local level in the U.S., including, but not limited to, those discussed in this Form 10-K. For example, in the U.S.,there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes, or other remuneration in exchange for thereferral of patients or other health-related business. For example, the federal Anti-Kickback Law is a criminal statute that prohibits anyone from, among otherthings, knowingly and willfully offering, paying, soliciting, or receiving any bribe, kickback, or other remuneration intended to induce a referral for thefurnishing of, or the purchase, order, or recommendation of, any item or service reimbursable under the Federal health care programs (“FHCPs”), includingMedicare, Medicaid, and TRICARE. Recognizing that the federal Anti-Kickback Law is broad and potentially applicable to many commonplacearrangements, the U.S. Congress and the Office of Inspector General (“OIG”) within the Department of Health and Human Services (“HHS”) have createdstatutory “exceptions” and regulatory “safe harbors” to the Anti-Kickback Law. Exceptions and safe harbors exist for a number of arrangements relevant toour business, including, among other things, certain payments to bona fide employees, certain discount and rebate arrangements, and certain paymentarrangements with health care providers, assuming all elements of the relevant exception/safe harbor have been satisfied. Although an arrangement that fitssquarely into one or more of these exceptions or safe harbors generally will not be subject to prosecution, OIG has also cautioned in various contexts thateven where each component of an arrangement has been structured to satisfy a safe harbor, the components, as part of an overall arrangement, may stillviolate the Anti-Kickback Law. However, arrangements that do not fit squarely within an exception or safe harbor do not necessarily violate the Anti-Kickback Law. Rather, OIG and/or other government enforcement authorities will examine the facts and circumstances relevant to the specific arrangementto determine whether it involves the sorts of abuses that the statute was designed to combat. Violations of this federal law constitute a felony offensepunishable by imprisonment, criminal fines of up to $25,000, civil fines of up to $50,000 per violation and three times the amount of the unlawfulremuneration, and exclusion from Medicare, Medicaid, and other FHCPs. Exclusion of a manufacturer, like us, would preclude any FHCP from paying for themanufacturer’s products. In addition, pursuant to the changes made by the Affordable Care Act, a claim resulting from a violation of the Anti-Kickback Lawmay serve as the basis for a false claim under the federal Civil False Claims Act. Many states also have their own laws that parallel and implicate anti-kickback restrictions, but may apply regardless of whether any FHCP business is involved. Federal and state anti-kickback laws may affect our sales,marketing and promotional activities, educational programs, pricing and discount practices and policies, and relationships with dental and medical providersby limiting the kinds of arrangements we may have with hospitals, alternate care market providers, physicians, dentists, and others in a position to purchaseor recommend our products.Federal and state false claims laws prohibit anyone from presenting, or causing to be presented, claims for payment to third-party payers that are falseor fraudulent. For example, the federal Civil False Claims Act imposes liability on any person or entity that knowingly presents, or causes to be presented, afalse or fraudulent claim for payment to the government, including FHCPs. Some suits filed under the Civil False Claims Act can be brought by a“whistleblower” or a “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines orsettlement. Manufacturers, like us, can be held liable under false claims laws, even if they do not submit claims to the government, where they are found tohave caused submission of false claims by, among other things, providing incorrect coding or billing advice about their products to customers that fileclaims, or by engaging in kickback arrangements with customers that file claims. A violation of the Civil False Claims Act could result in fines ranging from$5,500 to $11,000 (as adjusted for inflation) for each false claim, plus up to three times the amount of damages sustained by the government. A Civil FalseClaims Act violation may also provide the basis for the imposition of administrative penalties and exclusion from participation in FHCPs. In addition to theCivil False Claims Act, the federal government also can use several criminal statutes to prosecute persons who are alleged to have submitted false orfraudulent claims for payment to the federal government, or improperly retained funds received which were not due. Moreover, a number of states also havefalse claims laws, and some of these laws may apply to claims for items or services reimbursed under Medicaid and/or commercial insurance.In addition to the general fraud statutes mentioned above, there are a variety of other fraud and abuse laws specific to health care. For example, theHealth Insurance Portability and Accountability Act of 1996 (“HIPAA”) created several new federal crimes, including health care fraud and false statementsrelated to health care matters. The health care fraud statute prohibits, among other things, knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payers. A violation of this statute is a felony and may result in fines, up to ten years imprisonment (assuming noserious bodily injury or death results), or exclusion from FHCPs. The false statements statute prohibits, among other things, knowingly and willfullyfalsifying, concealing or covering up a material fact, or making any materially false, fictitious, or fraudulent statement in connection with the delivery of orpayment for items or services under a health care benefit program. A violation of this statute is a felony and may result in fines and imprisonment and couldpotentially result in the government’s pursuit of exclusion from FHCPs. Additionally, a person who offers or transfers to a Medicare or Medicaid beneficiaryany remuneration that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier ofitems or services payable by Medicare or Medicaid may be liable for civil money penalties of up to $10,000 for each item or service and potential exclusionfrom FHCPs.16The Physician Payments Sunshine Act requires us to report annually to the Centers for Medicare and Medicaid Services (“CMS”) certain paymentsand other transfers of value we make to U.S.-licensed physicians, dentists, and teaching hospitals. These annual reports are publicly available, which couldimpact the number of health care providers who are willing to work with us on the research and development of our products. In addition, several states haveimplemented similar transparency and disclosure laws applicable to medical device manufacturers, some of which require reporting of transfers of value madeto a wider variety of health care professionals and institutions.The federal physician self-referral prohibition (“Stark Law”) is a strict liability statute, which, in the absence of a statutory or regulatory exception,prohibits: (i) the referral of Medicare and Medicaid patients by a physician to an entity for the provision of designated health care services if the physician ora member of the physician’s immediate family has a direct or indirect financial relationship, including an ownership interest in, or a compensationarrangement with, the entity and (ii) the submission of a bill to Medicare or Medicaid for services rendered pursuant to a prohibited referral. Penalties forviolations of the Stark Law include denial of payment for the service, required refund of payments received pursuant to the prohibited referral, and civilmonetary penalties for knowing violations of up to $15,000 per claim, up to $100,000 for circumvention schemes, and up to $10,000 per day for failing toreport information concerning the entity’s ownership, investment, and compensation arrangements upon HHS’ request. Stark Law violations also may lead toFalse Claims Act liability and possible exclusion from FHCPs.The Foreign Corrupt Practices Act (“FCPA”) generally prohibits companies and their intermediaries from offering to pay, promising to pay, orauthorizing the payment of money or anything of value to non-U.S. officials for the purpose of influencing any act or decision of the foreign official inhis/her capacity or to secure any other improper advantage to obtain or retain business. Violation of the anti-bribery provisions of the FCPA can result incriminal fines of up to $2 million and civil penalties of up to $16,000 for each violation. Individuals, including officers, directors, stockholders, and agents ofcompanies, can be subject to a criminal fine of up to $250,000 and imprisonment, in addition to civil penalties of up to $16,000, per violation.Due to the breadth of some of these laws, it is possible that some of our current or future practices might be challenged under one or more of these laws.In addition, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws. Evolvinginterpretations of current laws or the adoption of new federal or state laws or regulations could adversely affect some of the arrangements we have withcustomers, physicians, and dentists. If our past or present operations are found to be in violation of any of these laws, we could be subject to civil andcriminal penalties, which could hurt our business, financial condition, and results of operations.Privacy and Security of Health InformationNumerous federal, state, and international laws and regulations govern the collection, use, and disclosure of patient-identifiable health information,including HIPAA. HIPAA applies to covered entities, which include, among other entities, a “health care provider” that transmits health information inelectronic form in connection with certain transactions regulated under HIPAA. HIPAA also applies to “business associates,” meaning persons or entities thatcreate, receive, maintain, or transmit protected health information (“PHI”) to perform a function on behalf of, or provide a service to, a coveredentity. Although we are not a covered entity, most health care (including dental) facilities that purchase our products are covered entities under HIPAA. Dueto activities that we perform for or on behalf of covered entities, we may sometimes act as a business associate, or our customers may ask us to enter BusinessAssociate Agreements and assume business associate responsibilities. Various implementing regulations have been promulgated under HIPAA. The HIPAA Security Rule requires implementation of certain administrative,physical, and technical safeguards to ensure the confidentiality, integrity, and availability of electronic PHI. The HIPAA Privacy Rule governs the use anddisclosure of PHI and provides certain rights to individuals with respect to that information. For example, for most uses and disclosures of PHI, other than fortreatment, payment, health care operations, and certain public policy purposes, the HIPAA Privacy Rule generally requires obtaining valid writtenauthorization from the individual, including in the research context. With certain limited exceptions, the covered entity performing the research must obtainvalid authorization from the research subject (or an appropriate waiver) before providing that subject’s PHI to sponsors like us. Furthermore, in most cases, theHIPAA Privacy Rule requires that use or disclosure of PHI be limited to the minimum necessary to achieve the purpose of the use or disclosure.The HIPAA Privacy and Security Rules require covered entities to contractually bind us, where we are acting as a business associate, to protect theprivacy and security of individually identifiable health information that we may use, access, or disclose for purposes of services we may provide. Moreover,the Health Information Technology for Economic and Clinical Health Act (“HITECH”) enacted in February 2009, made certain provisions of the HIPAAPrivacy and Security Rules directly applicable to business associates.17HITECH also established new breach notification requirements, increased civil penalty amounts for HIPAA violations, and requires HHS to conductperiodic audits of covered entities and business associates to confirm compliance. In addition, HITECH authorizes state attorneys general to bring civilactions in response to HIPAA violations committed against residents of their respective states.On January 17, 2013, the Office for Civil Rights (“OCR”) of HHS released an omnibus final rule (“Final Rule”), implementing HITECH. Among otherprovisions, the Final Rule made certain changes to the breach notification regulations, including requiring business associates to notify covered entities if abreach occurs at or by the business associate. Following a breach of unsecured PHI, covered entities must provide notification of the breach to affectedindividuals, the HHS Secretary, and, for breaches affecting more than 500 residents of a state or jurisdiction, prominent media outlets serving thatstate/jurisdiction. Breaches of health information can also give rise to class actions by affected individuals and result in significant reputational damage tothe covered entity and/or business associates or other parties involved in the breach.The Final Rule also provides for heightened governmental investigations of potential non-compliance. However, the Final Rule did not addressaccounting of disclosures, although such regulations are forthcoming. The proposed rule addressing accounting of disclosures, if finalized, could impose asignificant burden on us, as it would require covered entities and their business associates to develop systems to monitor (1) which employees access anindividual's electronic PHI contained in a designated record set, (2) the time and date such access occurs, and (3) the action taken during the access session(e.g., modification, deletion, viewing).Failure to comply with HIPAA may result in civil and criminal penalties. Civil penalties for a single violation of the regulations occurring on or afterFebruary 18, 2009 range from $100 to more than $50,000 per violation, with a maximum penalty of $1.5 million per year for violations of an identicalprovision of the regulations. Criminal penalties of up to $250,000 and imprisonment may also be imposed for certain knowing violations of HIPAA. We maybe required to make costly system modifications, which may restrict our business operations, to comply with HIPAA, to the extent we act as a businessassociate. Our failure to comply may result in liability and adversely affect our business, financial condition, and results of operations.Numerous other federal and state laws protect the confidentiality of patient information, including state medical privacy laws and federal and stateconsumer protection laws. These state laws may be similar to or possibly more stringent than the federal provisions. These laws in many cases are notpreempted by the HIPAA rules and may be subject to varying interpretations by the courts and government agencies, creating complex compliance issues forus and our customers and potentially exposing us to additional expense, adverse publicity, and liability. Other countries also have, or are developing, lawsgoverning the collection, use, and transmission of personal or patient information, which could create liability for us or increase our cost of doing business.New health information standards, whether implemented pursuant to HIPAA, future Congressional action, or otherwise, could have a significant effecton the manner in which we handle health information, and the cost of complying with these standards could be significant. If we do not properly comply withexisting or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions.Third-Party ReimbursementDentists and other health care providers that purchase our products may rely on third-party payers, including the Medicare, Medicaid, and privatepayers to cover and reimburse all or part of the cost of the clinical procedures performed using our products. As a result, demand for our products is dependentin part on the coverage and reimbursement policies of these payers. We believe that most of the procedures being performed with our current productsgenerally are reimbursable, with the exception of cosmetic applications, such as teeth whitening.No uniform coverage or reimbursement policy for dental and medical treatment exists among third-party payers, and coverage and reimbursement candiffer significantly from payer to payer. Under Medicaid, for example, states are required to cover basic dental services for children, but retain discretion as towhether to provide coverage for dental services for adults. Under the Early Periodic Screening, Diagnostic, and Treatment benefit available to children, dentalservices determined to be “medically necessary” and provided at intervals that meet reasonable standards of dental practice are generally covered byMedicaid. Although not required to cover dental services for adults, a majority of state Medicaid programs still provide some degree of coverage for dentalservices. Medicare covers dental services only in certain limited circumstances. For instance, Medicare will pay for certain dental services when provided in theinpatient hospital setting. Medicare will also pay for certain dental services that are an integral part of a covered procedure (e.g., jaw reconstruction followingaccidental injury), extractions done in preparation for certain radiation treatments, and oral examinations preceding kidney transplantation or heart valvereplacement, under certain circumstances.18Future legislation, regulation or coverage and reimbursement policies of third-party payers may adversely affect the demand for our products. Forexample, the Affordable Care Act included various reforms impacting Medicare reimbursement and coverage, including revision to prospective paymentsystems, any of which may adversely impact any Medicare reimbursements received by our end-user customers. Moreover, the Budget Control Act of 2011,enacted on August 2, 2011, established a process to reduce federal budget deficits through an automatic “sequestration” process if deficit reductions targetsare not otherwise reached. Under the terms of the Budget Control Act, sequestration imposes cuts to a wide range of federal programs, including Medicare,which is subject to a two percent cut. The Bipartisan Budget Act of 2013 extended the two percent sequestration cut for Medicare through fiscal year 2023,and a bill signed by President Obama on February 15, 2014 further extended this cut for an additional year, through fiscal year 2024. The Protecting Accessto Medicare Act of 2014 realigned the fiscal year 2024 Medicare sequestration amounts so that there will be a four percent sequester for the first six monthsand a zero percent sequester for the second six months, instead of a two percent sequester for the full 12-month period.In addition, private payers and employer-sponsored health care plans became subject to various rules and potential penalties under the AffordableCare Act. For example, health plans in the individual and small group markets were required to begin providing a core package of health care services, knownas “essential health benefits.” Essential health benefits include ten general categories of care, including pediatric services, which requires coverage of dentaland vision care, among other medical services, for children. The Affordable Care Act also required employers with fifty or more employees to offer healthinsurance coverage to full-time workers or pay a penalty, which could potentially increase the availability of third-party reimbursement for some medicalprocedures using our products, although we continue to assess the impact of the Affordable Care Act on our business.We cannot be sure that government or private third-party payers will cover and reimburse the procedures using our products in whole or in part in thefuture or that payment rates will be adequate.Because third-party payments may be less than a provider’s actual costs in furnishing care, providers have incentives to lower their operating costs byutilizing products that will decrease labor or otherwise lower their costs. However, we cannot be certain that dental and medical service providers willpurchase our products, despite the clinical benefits and opportunity for cost savings that we believe can be derived from their use. If providers cannot obtainadequate coverage and reimbursement for our products, or the procedures in which they are used, our business, financial condition, and results of operationscould suffer.EmployeesAt December 31, 2014, the Company employed approximately 210 people. Our employees are not represented by any collective bargainingagreement and we believe our employee relations are good.Executive Officers of the RegistrantThe executive officers of the Company are elected each year at the meeting of the board of directors (our “Board”), which follows the annual meetingof stockholders, and at other Board meetings, as appropriate.At March 6, 2015, the executive officers of the Company were as follows: Name Age PositionJeffrey M. Nugent 68 President and Chief Executive OfficerBrendan O'Connell 38 Vice President of Finance and Corporate ControllerClark Barousse 49 Senior Vice President of Worldwide Sales and Account ManagementOrlando Rodrigues 53 Vice President and Chief Marketing OfficerDmitri Boutoussov 51 Vice President of Research and Development Jeffrey M. Nugent has served as our President and Chief Executive Officer (“CEO”) since September 2014, Acting CEO since June 2014 and a Biolasedirector since August 2014. In December 2010, Mr. Nugent founded Precision Dermatology, Inc., a multi-channel skin care company, and he served as itsPresident and Chief Executive Officer from December 2010 until it was acquired by Valeant Pharmaceuticals International, Inc. in February 2014. From 2008until he founded Precision Dermatology, Inc., Mr. Nugent was Chairman and Chief Executive Officer of Ascension Orthopedics, a maker of joint replacementimplants. Mr. Nugent began his career with Johnson & Johnson and progressed in increasing responsibilities in finance, operations, marketing, research anddevelopment as well as becoming corporate Vice President for Global Quality. He led the acquisition of Neutrogena and became worldwide President andCEO from 1995 to 1999. From 1999 to 2002, Mr. Nugent served as the President and Chief Executive Officer of Revlon, Inc. Mr. Nugent holds an M.B.A. inMarketing and Finance from Loyola University in Chicago and a B.S. degree in Mathematics from St. Joseph’s College.19Brendan O’Connell was appointed Vice President of Finance and Corporate Controller in January 2015. Mr. O’Connell began his career with Biolaseas our Assistant Controller in May 2007 and was promoted to serve as our Corporate Controller effective February 2009. Mr. O’Connell earned a Bachelor ofScience in Accounting and an M.B.A. from University of California, Riverside.Clark Barousse joined Biolase in August 2014 and as the Senior Vice President for Worldwide Sales and Account Management. Before joiningBiolase, Mr. Barousse served as President of Hybridge, a leading group of dental practices focus on implant procedures, from August 2012 to August 2014.Prior to Hybridge, Mr. Barousse was Senior Vice President of Global Sales & Marketing for Biohorizons Implant Systems, a dental implant and biologicscompany, from June 2008 until July 2012. Mr. Barousse earned his M.B.A. from Georgia State University and holds a Bachelor of Arts degree in Economicsand Spanish from Hampden-Sydney College in Hampden-Sydney, Virginia.Orlando Rodrigues joined Biolase in July 2014 as Vice President and Chief Marketing Officer. Prior to Biolase, Mr. Rodrigues was Principal andSenior Consultant at COR Communications, where he assisted various medical device and life sciences company’s in the areas of marketing and sales,fundraising and business development from February 2013 to June 2014. He was Vice President, Global Sales and Marketing for SynergEyes, a privately-held specialty contact lens company from October 2011 to January 2013. Mr. Rodrigues was Interim President for K1 Speed, an upscale consumerentertainment concept from June 2010 to May 2011. He was Vice President of Marketing for I-Flow Corporation, a NASDAQ-traded medical devicecompany focused on delivering a unique pain relief solution for post-surgical care, from January 2002 to May 2010. Mr. Rodrigues earned Bachelor of Artsdegrees in Managerial Studies and Biochemistry from Rice University.Dmitri Boutoussov, Ph.D. became our Vice President of Research and Development in July, 2013. Mr. Boutoussov has been with the Company since2000 and initially joined as the Director of Engineering. He held this position from June, 2000 through April, 2005 when he became the Vice President ofEngineering. He held that position until October 2010, when he was appointed Chief Technology Officer. He held the position of Chief Technology Officeruntil July 2013. Mr. Boutoussov holds a Doctorate Degree in Philosophy and a Master’s of Science Degree in Physics from Polytechnic University in St.Petersburg, Russia.Available InformationOur Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnishedpursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge on our website athttp://www.biolase.com, as soon as reasonably practicable after the Company electronically files such reports with, or furnishes those reports to, the SEC. Weare providing our internet site solely for the information of investors. We do not intend the address to be an active link or to otherwise incorporate thecontents of the website into this report.Additional InformationBIOLASE®, ZipTip®, ezlase®, eztips®, MD Flow®, Comfortpulse®, WaterLase®, iLase®, iPlus®, WCLI®, World Clinical Laser Institute®, WaterLaseMD®, WaterLase Dentistry®, Proprietary MD®, and EZLase It’s So Easy® are registered trademarks of BIOLASE, Inc., and Diolase™, HydroPhotonics™,LaserPal™, HydroBeam™, Occulase™, Diolase 10™, Body Contour™, Radial Firing Perio Tips™, Deep Pocket Therapy with New Attachment™, 2R™ ,Comfortprep™ , Rapidprep™ , Bondprep™ , Occulase iPlus™, Flavorflow™, Occulase MD™, Epic Laser™, Epic™, Dermalase™, Deltalaser™, Delta™,iStarlaser™, iStar™, Biolase DaVinci Imaging™, Oculase™, WaterLase MDX™, Total Technology Solution™, Geyserlaser™, Geyser™, eplus™, elase™,and Galaxy BioMill™ are trademarks of BIOLASE, Inc. All other product and company names are registered trademarks or trademarks of their respectiveowners.20 Item 1A. Risk FactorsThe following risk factors and other information included in this Form 10-K should be carefully considered. The risks and uncertainties describedbelow are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently consider to be immaterial may alsoadversely affect us. If any of the following risks come to fruition, our business, financial condition, results of operations, cash flows, and future growthprospects would likely be materially and adversely affected. In these circumstances, the market price of our stock could decline, and you could lose all orpart of your investment.Risks Related to Our Business and OperationsWe are vulnerable to continued global economic uncertainty and volatility in financial markets.Our business is highly sensitive to changes in general economic conditions as a seller of capital equipment to end users in dental professionalpractices. Financial markets inside the United States and internationally have experienced extreme disruption in recent times, including, among other things,extreme volatility in security prices, severely diminished liquidity and credit availability, and declining valuations of investments. These disruptions arelikely to have an ongoing adverse effect on the world economy. A continuing economic downturn and financial market disruptions may:·reduce demand for our products and services, increase order cancellations and result in longer sales cycles and slower adoption of newtechnologies;·increase the difficulty of collecting accounts receivable and the risk of excess and obsolete inventories;·increase price competition in our served markets; and·result in supply interruptions, which could disrupt our ability to produce our products.We have experienced net losses for each of the past three years and we may experience additional losses and have difficulty achieving profitability inthe future.We had an accumulated deficit of approximately $142.7 million at December 31, 2014. We recorded net losses of approximately $18.9 million, $11.5million, and $3.1 million for the years ended December 31, 2014, 2013, and 2012, respectively. In order to achieve profitability, we must control our costsand increase net revenue through new sales. Failure to increase our net revenue and decrease our costs could cause our stock price to decline.We may need to raise additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we may be unable toexecute our business plan.To remain competitive, we must continue to make significant investments in the development of our products, the expansion of our sales andmarketing activities, and the expansion of our operating and management infrastructure as we increase sales domestically and internationally. If cashgenerated from our operations is insufficient to fund such growth, we may be required to raise additional funds through the issuance of equity or debtsecurities in the public or private markets, or through a collaborative arrangement or sale of assets. Additional financing opportunities may not be availableto us, or if available, may not be on favorable terms. The availability of financing opportunities will depend, in part, on market conditions, and the outlookfor our business. Any future issuance of equity securities or securities convertible into equity securities could result in substantial dilution to ourstockholders, and the securities issued in such a financing may have rights, preferences or privileges senior to those of our common stock. In addition, if weraise additional funds through debt financing, we may be subject to debt covenants that could place limitations on our operations. We may not be able toraise additional capital on reasonable terms, or at all, or we may use capital more rapidly than anticipated. If we cannot raise the required capital whenneeded, we may not be able to satisfy the demands of existing and prospective customers, we may lose revenue and market share and we may have to curtailour capital expenditures. The following factors, among others, could affect our ability to obtain additional financing on favorable terms, or at all:·our results of operations;·general economic conditions and conditions in the dental or medical device industries;·the perception of our business in the capital markets;·our ratio of debt to equity;·our financial condition;·our business prospects; and·interest rates.21If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures. Any curtailment of our capital expenditurescould result in a reduction in net revenue, reduced quality of our products, increased manufacturing costs for our products, harm to our reputation, reducedmanufacturing efficiencies or other harm to our business.Our success depends, in part, on our relationships with, and the efforts of, third-party distributors.We rely on exclusive and non-exclusive third-party distributors for a portion of our sales in North America and a majority of our sales in countriesoutside of the U.S. and Canada. For the fiscal years ended December 31, 2014, 2013, and 2012, revenue from distributors accounted for approximately 30%,30%, and 23% of our total net revenue, respectively. Our distributors have significant discretion in determining the efforts and resources they apply to thesale of our products, and we face significant challenges and risks in expanding, training, and managing our third-party distributors, particularly given thattheir geographically dispersed operations. Our distributors may not commit the necessary resources to market and sell our products to the level of ourexpectations, and, regardless of the resources they commit, they may not be successful. From time to time, we may face competition or pricing pressure fromone or more of our non-exclusive distributors in certain geographic areas where those distributors are selling inventory to the same customer base as us.Additionally, most of our distributor agreements can be terminated with limited notice, and we may not be able to replace any terminating distributor in atimely manner or on terms agreeable to us, if at all. If we are not able to maintain our distribution network, if our distribution network is not successful inmarketing and selling our products, or if we experience a significant reduction in, cancellation, or change in the size and timing of orders from ourdistributors, our revenues could decline significantly.Dentists and patients have been hesitant in adopting laser technologies and our inability to overcome this hesitation could limit the market acceptanceof our products and our market share.Our dental laser systems represent relatively new technologies in the dental market. Only a small percentage of dentists use lasers to perform dentalprocedures. Our future success will depend on our ability to increase demand for our products by demonstrating to a broad spectrum of dentists and patientsthe potential performance advantages of our laser systems over traditional methods of treatment and over competitive laser systems. Historically, we haveexperienced long sales cycles because dentists have been, and may continue to be, slow to adopt new technologies on a widespread basis. As a result, wegenerally are required to invest a significant amount of time and resources to educate dentists about the benefits of our products in comparison to competingproducts and technologies before completing a sale, if any.Factors that may inhibit adoption of laser technologies by dentists include cost and concerns about the safety, efficacy and reliability of lasers. Inorder to invest in a WaterLase system, a dentist generally needs to invest time to understand the technology, consider how patients may respond to the newtechnology, assess the financial impact the investment may have on the dentist’s practice and become comfortable performing procedures with our products.Absent an immediate competitive motivation, a dentist may not feel compelled to invest the time required to learn about the potential benefits of using alaser system. Dentists may not accept or adopt our products until they see additional clinical evidence supporting the safety and efficiency of our products orrecommendations supporting our laser systems by influential dental practitioners. In addition, economic pressure, caused, for example, by an economicslowdown, changes in health care reimbursement or by competitive factors in a specific market, may make dentists reluctant to purchase substantial capitalequipment or invest in new technologies. Patient acceptance will depend on the recommendations of dentists and specialists, as well as other factors,including the relative effectiveness, safety, reliability and comfort of our systems as compared to other instruments and methods for performing dentalprocedures.Any failure in our efforts to train dental practitioners could result in the misuse of our products and reduce the market acceptance of our products.There is a learning process involved for dental practitioners to become proficient users of our laser systems. It is critical to the success of our salesefforts to adequately train a sufficient number of dental practitioners. Following completion of training, we rely on the trained dental practitioners toadvocate the benefits of our products in the broader marketplace. Convincing dental practitioners to dedicate the time and energy necessary for adequatetraining is challenging, and we cannot assure you that we will be successful in these efforts. If dental practitioners are not properly trained, they may misuseor ineffectively use our products, or may be less likely to appreciate our laser systems. This may also result in unsatisfactory patient outcomes, patient injury,negative publicity, or lawsuits against us, any of which could negatively affect our reputation and sales of our laser systems.If future data proves to be inconsistent with our clinical results or if competitors’ products present more favorable results our revenues may decline.If new studies or comparative studies generate results that are not as favorable as our clinical results, our revenues may decline. Additionally, if futurestudies indicate that our competitors’ products are more effective or safer than ours, our revenues may decline. Furthermore, dental practitioners may choosenot to purchase our laser systems until they receive additional published long-term clinical evidence and recommendations from prominent dentalpractitioners that indicate our laser systems are effective for dental applications.22We face competition from other companies, many of which have substantially greater resources than we do. If we do not successfully develop andcommercialize enhanced or new products that remain competitive with products or alternative technologies developed by others, we could lose revenueopportunities and customers and our ability to grow our business would be impaired.A number of competitors have substantially greater capital resources, larger customer bases, larger technical, sales and marketing forces and strongerreputations with target customers than ours. We compete with a number of domestic and foreign companies that market traditional dental products, such asdental drills, as well as companies that market laser technologies in the dental and medical markets. The marketplace is highly fragmented and verycompetitive. We expect that the rapid technological changes occurring in the health care industry may lead to the entry of new competitors, particularly ifdental and medical lasers gain increasing market acceptance. If we do not compete successfully, our revenue and market share may decline.Our long-term success depends upon our ability to (i) distinguish our products through improving our product performance and pricing, protecting ourintellectual property, improving our customer support, accurately timing the introduction of new products, and developing sustainable distribution channelsworldwide; and (ii) develop and successfully commercialize new products, new or improved technologies, and additional applications for our laser systems.If our customers cannot obtain third-party reimbursement for their use of our products, they may be less inclined to purchase our products.Our products are generally purchased by dental or medical professionals who have various billing practices and patient mixes. Such practices rangefrom primarily private pay to those who rely heavily on third-party payers, such as private insurance or government programs. In the United States, third-partypayers review and frequently challenge the prices charged for medical products and/or services. In many foreign countries, the prices for dental services arepredetermined through government regulation. Payers may deny coverage and reimbursement on various grounds, including if they determine that theprocedure was not medically necessary or that the device used in the procedure was investigational. Accordingly, both coverage and reimbursement can varysignificantly from payer to payer. For the portion of dentists who rely heavily on third-party reimbursement, the inability to obtain reimbursement for servicesusing our products could deter them from purchasing or using our products. We cannot predict the effect that future health care reforms or changes infinancing for health and dental plans may have on our business. Any such changes could have an adverse effect on the ability of a dental or medicalprofessional to generate a profit using our current or future products. In addition, such changes could act as disincentives for capital investments by dentaland medical professionals.Our ability to use net operating loss carryforwards may be limited.Section 382 of the Internal Revenue Code (“IRC”) of 1986 generally imposes an annual limitation on the amount of net operating loss carryforwardsthat may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. In 2006, we completed an analysis todetermine the applicability of the annual limitations imposed by IRC Section 382 caused by previous changes in our stock ownership and determined thatsuch limitations should not be significant. Based on our analysis, we believe that, as of December 31, 2014, approximately $93.2 million of net operatingloss carryforwards were available to us for federal income tax purposes. A detailed analysis will be required at the time we begin utilization of any netoperating losses to determine if there is an IRC Section 382 limitation. In addition, any ownership changes qualifying under IRC Section 382, includingchanges resulting from or affected by public offerings or stock repurchase plans, may adversely affect our ability to use our remaining net operating losscarryforwards. If we lose our ability to use net operating loss carryforwards, any income we generate will be subject to tax earlier than it would be if we wereable to use net operating loss carryforwards, resulting in lower profits.We may incur problems in manufacturing our products.In order to grow our business, we must expand our manufacturing capabilities to produce the systems and accessories necessary to meet any demandwe may experience. We may encounter difficulties in increasing the production of our products, including problems involving production capacity andyields, quality control and assurance, component supply, and shortages of qualified personnel. In addition, before we can begin commercial manufacture ofour products, we must ensure our manufacturing facilities, processes, and quality systems, and the manufacture of our laser systems, comply with FDAregulations governing facility compliance, quality control, and documentation policies and procedures. In addition, our manufacturing facilities are subjectto periodic inspections by the FDA, as well as various state agencies and foreign regulatory agencies. From time to time, we may expend significant resourcesin obtaining, maintaining, and addressing our compliance with these requirements. Our success will depend in part upon our ability to manufacture ourproducts in compliance with the FDA’s QSR and other regulatory requirements. We have experienced quality issues with components of our productssupplied by third parties. Our future success depends on our ability to manufacture our products on a timely basis with acceptable manufacturing costs, whileat the same time maintaining good quality control and complying with applicable regulatory requirements.23We may be subject to significant warranty obligations if our products are defective.In manufacturing our products, we depend upon third parties for the supply of various components. Many of these components require a significantdegree of technical expertise to design and produce. If we fail to adequately design, or if our suppliers fail to produce components to specification, or if thesuppliers, or we, use defective materials or workmanship in the manufacturing process, the reliability and performance of our products will be compromised.We have experienced such non-compliance with manufacturing specifications in the past and may continue to experience such non-compliance in the future,which could lead to higher costs and reduced gross margins.Our products may contain defects that cannot be repaired easily and inexpensively, and we have experienced in the past and may experience in thefuture some or all of the following:·loss of customer orders and delay in order fulfillment;·damage to our brand reputation;·increased cost of our warranty program due to product repair or replacement;·inability to attract new customers;·diversion of resources from our manufacturing and engineering and development departments into our service department; and·legal action.Adverse publicity regarding our technology or products could negatively impact us.Adverse publicity regarding any of our products or similar products marketed or sold by others could negatively affect us. If any studies raise orsubstantiate concerns regarding the efficacy or safety of our products or other concerns, our reputation could be harmed and demand for our products coulddiminish. Product liability claims against us could be costly and could harm our reputation.The sale of dental and medical devices involves the risk of product liability claims against us. Claims could exceed our product liability insurancecoverage limits. Our insurance policies are subject to various standard coverage exclusions, including damage to the product itself, losses from recall of ourproduct, and losses covered by other forms of insurance such as workers compensation. We cannot be certain that we will be able to successfully defend anyclaims against us, nor can we be certain that our insurance will cover all liabilities resulting from such claims. In addition, we cannot assure you that we willbe able to obtain such insurance in the future on terms acceptable to us, or at all. Regardless of merit or eventual outcome, any product liability claim broughtagainst us could result in harm to our reputation, decreased demand for our products, costs related to litigation, product recalls, loss of revenue, an increase inour product liability insurance rates, or the inability to secure coverage in the future, and may cause our business to suffer.Our suppliers may not supply us with a sufficient amount or adequate quality of materials.Our business depends on our ability to obtain timely deliveries of materials, components, and subassemblies of acceptable quality and in acceptablequantities from third-party suppliers. We generally purchase components and subassemblies from a limited group of suppliers through purchase orders, ratherthan written supply contracts. Consequently, many of our suppliers have no obligation to continue to supply us on a long-term basis. In addition, oursuppliers manufacture products for a range of customers, and fluctuations in demand for the products those suppliers manufacture for others may affect theirability to deliver components for us in a timely manner. Moreover, our suppliers may encounter financial hardships, be acquired, or experience otherbusiness events unrelated to our demand for components, which could inhibit or prevent their ability to fulfill our orders and satisfy our requirements.Certain components of our products, particularly specialized components used in our laser systems, are currently available only from a single source orlimited sources. For example, the crystal, fiber, and hand pieces used in our WaterLase systems are each supplied by a separate single supplier. Ourdependence on single-source suppliers involves several risks, including limited control over pricing, availability, quality, and delivery schedules.24If any of our suppliers ceases to provide us with sufficient quantities of our components in a timely manner or on terms acceptable to us, or ceases tomanufacture components of acceptable quality, we could incur manufacturing delays and sales disruptions while we locate and engage alternative qualifiedsuppliers, and we might be unable to engage acceptable alternative suppliers on favorable terms. In addition, we may need to reengineer our components,which may require product redesign and submission to the FDA of a 510(k) application, which could significantly delay production. Any interruption ordelay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timelymanner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive procedures. As of the date onwhich this Form 10-K was filed with the SEC, we were in the process of identifying and qualifying alternate source suppliers for our key components. Therecan be no assurance, however, that we will successfully identify and qualify an alternate source supplier for any of our key components or that we could enterinto an agreement with any such alternate source supplier on terms acceptable to us, or at all.Rapidly changing standards and competing technologies could harm demand for our products or result in significant additional costs.The markets in which our products compete are subject to rapid technological change, evolving industry standards, changes in the regulatoryenvironment, and frequent introductions of new devices and evolving dental and surgical techniques. Competing products may emerge that could render ourproducts uncompetitive or obsolete. The process of developing new medical devices is inherently complex and requires regulatory approvals or clearancesthat can be expensive, time-consuming, and uncertain. We cannot guarantee that we will successfully identify new product opportunities, identify new andinnovative applications of our technology, or be financially or otherwise capable of completing the research and development required to bring new productsto market in a timely manner. An inability to expand our product offerings or the application of our technology could limit our growth. In addition, we mayincur higher manufacturing costs if manufacturing processes or standards change, and we may need to replace, modify, design, or build and install equipment,all of which would require additional capital expenditures.We may be unable to effectively manage and implement our growth strategies.Our growth strategy includes expanding 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. Expansion of our existing product line and entry intonew medical applications divert the use of our resources and systems, require additional resources that might not be available (or available on acceptableterms), require additional country-specific regulatory approvals, result in new or increasing competition, may require longer implementation times or greaterstart-up expenditures than anticipated, and may otherwise fail to achieve the desired results in a timely fashion, if at all. These efforts may also require that wesuccessfully commercialize new technologies in a timely manner, price them competitively and cost-effectively, and manufacture and deliver sufficientvolumes of new products of appropriate quality on time. We may be unable to increase our sales and earnings by expanding our product offerings in a cost-effective manner, and we may fail to accurately predict future customer needs and preferences or to produce viable technologies. In addition, we may investheavily in research and development of products that do not lead to significant revenue. Even if we successfully innovate and develop new products andproduct enhancements, we may incur substantial costs in doing so. In addition, promising new products may fail to reach the market or realize only limitedcommercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes, or uncertainty over third-party reimbursement.We have significant international sales and are subject to risks associated with operating in international markets.International sales comprise a significant portion of our net revenue and we intend to continue to pursue and expand our international businessactivities. For the fiscal years ended December 31, 2014, 2013, and 2012, international sales accounted for approximately 37%, 37%, and 29% of our netrevenue, respectively. Political and economic conditions outside the United States could make it difficult for us to increase our international revenue or tooperate abroad. International operations are subject to many inherent risks, including among others:·adverse changes in tariffs and trade restrictions;·political, social, and economic instability and increased security concerns;·fluctuations in foreign currency exchange rates;·longer collection periods and difficulties in collecting receivables from foreign entities;·exposure to different legal standards;·transportation delays and difficulties of managing international distribution channels;·reduced protection for our intellectual property in some countries;25·difficulties in obtaining domestic and foreign export, import, and other governmental approvals, permits, and licenses, and compliance withforeign laws;·the imposition of governmental controls;·unexpected changes in regulatory or certification requirements;·difficulties in staffing and managing foreign operations; and·potentially adverse tax consequences and the complexities of foreign value-added tax systems.We believe that international sales will continue to represent a significant portion of our net revenue, and we intend to expand our internationaloperations further. In international markets where our sales are denominated in U.S. dollars, an increase in the relative value of the dollar against the currencyin such markets could indirectly increase the price of our products in those markets and result in a decrease in sales. We do not currently engage in anytransactions as a hedge against risks of loss due to foreign currency fluctuations. However, we may do so in the future.We may be subject to breaches of our information technology systems, which could damage our reputation and customer relationships. Such breachescould subject us to significant reputational, financial, legal, and operational consequences.We rely on information systems (“IS”) in our business to obtain, rapidly process, analyze and manage data to, among other things:·facilitate the purchase and distribution of thousands of inventory items through numerous distributors;·receive, process and ship orders on a timely basis;·accurately bill and collect from thousands of customers;·process payments to suppliers; and·provide technical support to our customers.A cyber-attack that bypasses our IS security causing an IS security breach may lead to a material disruption of our IS and/or the loss of businessinformation.·Such an attack may result in the theft, destruction, loss, misappropriation or release of confidential data and intellectual property;·operational or business delays; and·liability for a breach of personal financial and health information belonging to our customers and their patients. In the event of an attack, wewould be exposed to a risk of loss or litigation and possible liability.Our revenue and operating results fluctuate due to seasonality and other factors, so you should not rely on quarter-to-quarter comparisons of ouroperating results as an indication of our future performance.Our revenue typically fluctuates from quarter to quarter due to a number of factors, many of which are beyond our control. Revenue in the first quartertypically is lower than average, and revenue in the fourth quarter typically is stronger than average due to the buying patterns of dental practitioners. Webelieve that this trend exists because a significant number of dentists purchase their capital equipment towards the end of the calendar year in order tomaximize their practice earnings while seeking to minimize their taxes. They often use certain tax incentives, such as accelerated depreciation methods forpurchasing capital equipment, as part of their year-end tax planning. In addition, revenue in the third quarter may be affected by vacation patterns, which cancause 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 bylarge dental distributors that encourage end-of-quarter and end-of-year buying in our industry. Other factors that might cause quarterly fluctuations in ourrevenue and operating results include the following:·variation in demand for our products;·our ability to research, develop, market, and sell new products and product enhancements in a timely manner;·our ability to control costs;·our ability to control quality issues with our products;·regulatory actions that impact our manufacturing processes;·the size, timing, rescheduling, or cancellation of orders from distributors;26·the introduction of new products by competitors;·the length of and fluctuations in sales cycles;·the availability and reliability of components used to manufacture our products;·changes in our pricing policies or those of our suppliers and competitors, as well as increased price competition in general;·legal expenses, particularly related to litigation matters;·general economic conditions including the availability of credit for our existing and potential customer base to finance purchases;·the mix of our domestic and international sales and the risks and uncertainties associated with international business;·costs associated with any future acquisitions of technologies and businesses;·limitations on our ability to use net operating loss carry-forwards under the provisions of IRC Section 382 and similar state laws;·developments concerning the protection of our intellectual property rights;·catastrophic events such as hurricanes, floods, and earthquakes, which can affect our ability to advertise, sell, and distribute our products,including through national conferences held in regions in which these disasters strike; and·global economic, political, and social events, including international conflicts and acts of terrorism.The expenses we incur are based, in large part, on our expectations regarding future net revenue. Since many of our costs are fixed in the short term, wemay be unable to reduce expenses quickly enough to avoid losses if we experience a decrease in expected net revenue. Accordingly, you should not rely onquarter-to-quarter comparisons of our operating results as an indication of our future performance.Litigation against us could be costly and time-consuming to defendWe are from time to time involved in various claims, litigation matters and regulatory proceedings incidental to our business, including claims fordamages arising out of the use of our products or services and claims relating to intellectual property matters, employment matters, commercial disputes,competition, sales and trading practices, environmental matters, personal injury, and insurance coverage. Some of these lawsuits include claims for punitiveas well as compensatory damages. The defense of these lawsuits may divert our management’s attention, and we may incur significant expenses in defendingthese lawsuits. In addition, we may be required to pay damage awards or settlements or become subject to unfavorable equitable remedies. Moreover, anyinsurance or indemnification rights that we may have may be insufficient or unavailable to protect us against potential loss exposures.Our operations are consolidated primarily in one facility. A disruption at this facility could result in a prolonged interruption of our business.Substantially all of our administrative operations and our manufacturing operations are located at our facility in Irvine, California, which is nearknown earthquake fault zones. We have taken precautions to safeguard our facilities including disaster recovery planning and off-site backup of computerdata. However, a natural disaster such as an earthquake, fire, or flood, could seriously harm our facility and significantly disrupt our operations. Additionally,labor disputes, maintenance requirements, power outages, equipment failures, civil unrest, or terrorist attacks affecting our Irvine, California facility maysignificantly disrupt our operations. Our business interruption insurance coverage may not cover all or any of our losses from natural disasters or otherdisruptions.If we lose our key management personnel, or are unable to attract or retain qualified personnel, it could adversely affect our ability to execute ourgrowth strategy.Our success is dependent, in part, upon our ability to hire and retain management, engineers, marketing and sales personnel, technical, research andother personnel who are in high demand and are often subject to competing employment opportunities. Our success will depend on our ability to retain ourcurrent management, engineers, marketing and sales, technical, research and other personnel and to attract and retain qualified like personnel in the future.Competition for senior management, engineers, marketing and sales personnel, and other specialized technicians is intense and we may not be able to retainour personnel. If we lose the services of any executive officers or key employees, our ability to achieve our business objectives could be harmed. In general,our officers may terminate their employment at any time without notice for any reason.27Acquisitions involve risks and uncertainties, including difficulties integrating acquired businesses successfully into our existing operations and risks ofdiscovering previously undisclosed liabilities.Successful acquisitions depend upon our ability to identify, negotiate, complete, and integrate suitable acquisitions and to obtain any necessaryfinancing. We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhanceour capabilities, complement our current products, or expand the breadth of our markets or customer base. We have limited experience in acquiring otherbusinesses and technologies. Even if we complete acquisitions, we may experience:·difficulties in integrating any acquired companies, personnel, products, and other assets into our existing business;·delays in realizing the benefits of the acquired company, product, or other assets;·diversion of our management’s time and attention from other business concerns;·limited or no direct prior experience in new markets or countries we may enter;·higher costs of integration than we anticipated; and·difficulties in retaining key employees of the acquired business.In addition, an acquisition could cause us to incur debt or issue shares, resulting in dilution to existing shareholders. We may also discoverdeficiencies in internal controls, data adequacy and integrity, product quality, regulatory compliance, and product liabilities that we did not uncover prior toour acquisition of such businesses, which could result in us becoming subject to penalties or other liabilities. Any difficulties in the integration of acquiredbusinesses or unexpected penalties or liabilities in connection with such businesses could have a material adverse effect on our business, financial condition,and result of operations.If we fail to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes Oxley Act of 2002, or if we fail to maintainadequate internal control over financial reporting, our business, results of operations and financial condition and investors’ confidence in us could bematerially and adversely affected.As a public company, we are required to comply with the periodic reporting obligations of the Exchange Act, including preparing annual reports,quarterly reports, and current reports. Our failure to prepare and disclose this information in a timely manner and meet our reporting obligations in theirentirety could subject us to penalties under federal securities laws and regulations of The Nasdaq Stock Market LLC, expose us to lawsuits, and restrict ourability to access financing on favorable terms, or at all.Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 13(p) to the Exchange Act which requires us todisclose annually whether any conflict minerals, including tantalum, tin, gold, and tungsten, that are necessary to the functionality or production of a productmanufactured by us originated in the Democratic Republic of the Congo or an adjoining country. Components of our products containing these minerals aresourced through various vendors who may have complex supply chains that may change from time to time due to the influence of availability, pricing, orother factors in their purchasing decisions. On an annual basis, we are required to conduct a good faith and reasonable effort to determine the source of thesematerials. However, there can be no assurance that members of our supply chain will be willing or able to provide this information or further identify theirsources of supply or notify us timely of changes by May 31 subsequent to year-end.In addition, pursuant to Section 404 of the Sarbanes Oxley Act of 2002, as amended (the “Sarbanes Oxley Act”), we are required to evaluate andprovide a management report of our systems of internal control over financial reporting. During the course of the evaluation of our internal control overfinancial reporting, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identifiedthrough this review. This could result in significant delays and costs to us and require us to divert substantial resources, including management time, fromother activities. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to ensure that we canconclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes Oxley Act. Moreover, effectiveinternal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. Any failure to maintain compliance withthe requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turncould, negatively impact the trading price of our stock, and adversely affect investors’ confidence in our company and our ability to access capital marketsfor financing.28Climate change initiatives may materially and adversely affect our business.Our manufacturing processes require that we purchase significant quantities of energy from third parties, which results in the generation of greenhousegases, either directly on-site or indirectly at electric utilities. Both domestic and international legislation to address climate change by reducing greenhousegas emissions and establishing a price on carbon could create increases in energy costs and price volatility. Considerable international attention is nowfocused on development of an international policy framework to address climate change. Proposed and existing legislative efforts to control or limitgreenhouse gas emissions could affect our energy source and supply choices as well as increase the cost of energy and raw materials derived from sources thatgenerate greenhouse gas emissions. If our suppliers are unable to obtain energy at a reasonable cost in the future, the cost of our raw materials may benegatively impacted which could result in increased manufacturing costs.Risks Related to Our Intellectual PropertyIf the patents that we own or license, or our other intellectual property rights, do not adequately protect our technologies, we may lose market share toour competitors and be unable to operate our business profitably.Our future success depends, in part, on our ability to obtain and maintain patent protection for our products and technology, to preserve our tradesecrets and to operate without infringing the intellectual property of others. We rely on patents to establish and maintain proprietary rights in our technologyand products. We currently possess a number of issued patents and patent applications with respect to our products and technology. However, we cannotassure that any additional patents will be issued, that the scope of any patent protection will be effective in helping us address our competition, or that any ofour patents will be held valid if subsequently challenged. It is also possible that our competitors may independently develop similar or more desirableproducts, duplicate our products, or design products that circumvent our patents. The laws of foreign countries may not protect our products or intellectualproperty rights to the same extent as the laws of the United States. In addition, there have been recent changes in the patent laws and rules of the U.S. Patentand Trademark Office, and there may be future proposed changes that, if enacted, may have a significant impact on our ability to protect our technology andenforce our intellectual property rights. If we fail to protect our intellectual property rights adequately, our competitive position may be adversely affected.If third parties claim that we infringe their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinueselling certain products.We face substantial uncertainty regarding the impact that other parties’ intellectual property positions will have on dental and other medical laserapplications. The medical technology industry has in the past been characterized by a substantial amount of litigation and related administrative proceedingsregarding patents and intellectual property rights. From time to time, we have received, and we expect to continue to receive, notices of claims ofinfringement, misappropriation, or misuse of other parties’ proprietary rights. Some of these claims may lead to litigation. We may not prevail in any futureintellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Any claims, with or without merit,may be time-consuming and distracting to management, result in costly litigation, or cause product shipment delays. Adverse determinations in litigationcould subject us to significant liability and could result in the loss of proprietary rights. A successful lawsuit against us could also force us to cease selling orredesign products that incorporate the infringed intellectual property. Additionally, we could be required to seek a license from the holder of the intellectualproperty to use the infringed technology, and it is possible that we may not be able to obtain a license on acceptable terms, or at all.Risks Related to Our Regulatory EnvironmentChanges in government regulation or the inability to obtain or maintain necessary government approvals could harm our business.Our products are subject to extensive government regulation, both in the United States and in other countries. To clinically test, manufacture andmarket products for human use, we must comply with regulations and safety standards set by the FDA and comparable state and foreign agencies. Regulationsadopted by the FDA are wide-ranging and govern, among other things, product design, development, manufacture and control testing, labeling control,storage, advertising, and sales. Generally, products must meet regulatory standards as safe and effective for their intended use before being marketed forhuman applications. The clearance process is expensive, time-consuming, and uncertain. Failure to comply with applicable regulatory requirements of theFDA can result in an enforcement action which may include a variety of sanctions, including fines, injunctions, civil penalties, recall or seizure of ourproducts, operating restrictions, partial suspension, or total shutdown of production and criminal prosecution. The failure to receive or maintain requisiteapprovals for the use of our products or processes, or significant delays in obtaining such approvals, could prevent us from developing, manufacturing, andmarketing products and services necessary for us to remain competitive.29If we develop new products and applications or make any significant modifications to our existing products or labeling, we will need to obtainadditional regulatory clearances or approvals. Any modification that could significantly affect a product’s safety or effectiveness, or that would constitute achange in its intended use, will require a new FDA 510(k) clearance, or could require a PMA application. The FDA requires each manufacturer to make thisdetermination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with amanufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA isobtained. If 510(k) clearance is denied and a PMA application is required, we could be required to submit substantially more data, may be required toconduct human clinical testing and would very likely be subject to a significantly longer review period.Products sold in international markets are also subject to the regulatory requirements of each respective country or region. The regulations of theEuropean Union require that a device have a CE Mark, indicating conformance with European Union laws and regulations before it can be sold in theEuropean Union. The regulatory international review process varies from country to country. We rely on our distributors and sales representatives in theforeign countries in which we market our products to comply with the regulatory laws of such countries. Failure to comply with the laws of such countriescould prevent us from continuing to sell products in such countries. In addition, unanticipated changes in existing regulatory requirements or the adoption ofnew requirements could impose significant costs and burdens on us, which could increase our operating expenses.Changes in health care regulations in the U.S. and elsewhere could adversely affect the demand for our products as well as the way in which weconduct our business. Significantly, President Obama signed health care reform legislation into law that will require most individuals to have healthinsurance, establish new regulations for health plans, and create insurance pooling mechanisms and other expanded public health care measures. In general,an expansion of government’s role in the U.S. health care industry may lower reimbursements for our products or the procedures, for which our products areused, reduce demand for innovative products, and reduce volumes for dental and medical procedures. In addition, as a result of the focus on health carereform, there is risk that Congress may implement changes in laws and regulations governing health care service providers, including measures to controlcosts, and reductions in reimbursement levels.We may be subject to or otherwise affected by federal and state health care laws, including fraud and abuse and health information privacy andsecurity laws, and we could face substantial penalties if we are unable to fully comply with such regulations.We are directly or indirectly, through our customers, subject to extensive regulation by both the federal government and the states and foreigncountries in which we conduct our business. The laws that directly or indirectly affect our ability to operate our business include, but are not limited to, thefollowing:·the Federal Food, Drug, and Cosmetic Act, which regulates the design, testing, manufacture, labeling, marketing, distribution, and sale ofprescription drugs and medical devices;·state food and drug laws;·the federal Anti-Kickback Law, which prohibits persons from knowingly and willfully soliciting, offering, receiving, or providing remuneration,directly or indirectly, to induce the referral for the furnishing of, or the purchase, order, or recommendation of, a good or service, for whichpayment may be made under FHCPs such as Medicare, Medicaid, and TRICARE;·state law equivalents to the Anti-Kickback Law, which may not be limited to government reimbursed items;·state laws that prohibit fee-splitting arrangements;·the federal Civil False Claims Act, which imposes liability on any person or entity that knowingly presents, or causes to be presented, a false orfraudulent claim for payment to the government, including FHCPs;·state false claims laws that prohibit anyone from presenting, or causing to be presented, claims for payment to third-party payers that are false orfraudulent;·federal crimes for knowingly and willfully executing a scheme to defraud any health care benefit program or making false statements inconnection with the delivery of or payment for items or services under a health care benefit program;·federal law prohibiting offering remuneration to a Medicare or Medicaid beneficiary to influence the beneficiary’s selection of a particularprovider, practitioner, or supplier;·the federal Stark Law, which, in the absence of a statutory or regulatory exception, prohibits: (i) the referral of Medicare or Medicaid patients bya physician to an entity for the provision of designated health care services, if the physician or a member of the physician’s immediate family hasa direct or indirect financial relationship, including an ownership interest in, or a compensation arrangement with, the entity and (ii) submitting abill to Medicare or Medicaid for services rendered pursuant to a prohibited referral;30·state law equivalents to the Stark Law, which may not be limited to government reimbursed items·the Physician Payments Sunshine Act, which requires us to report annually to CMS certain payments and other transfers of value we make toU.S.-licensed physicians, dentists, and teaching hospitals;·the FCPA, which generally prohibits companies and their intermediaries from paying anything of value to foreign officials to influence anydecision of the foreign official in his/her official capacity or to secure any other improper advantage to obtain or retain business;·HIPAA and HITECH and their implementing regulations, which govern the use, disclosure, and safeguarding of PHI;·state privacy laws that protect the confidentiality of patient information;·Medicare and Medicaid laws and regulations that prescribe the requirements for coverage and payment, including the amount of such payment;state laws that prohibit the practice of medicine by non-physicians; and·the Federal Trade Commission Act and similar laws regulating advertising and consumer protection.If our past or present operations are found to be in violation of any of the laws described above or the other governmental laws or regulations to whichwe or our customers are subject, we may be subject to the applicable penalty associated with the violation, which may include civil and criminal penalties,damages, fines, exclusion from FHCPs, and the curtailment or restructuring of our operations. If we are required to obtain permits or licensure under these lawsthat we do not already possess, we may become subject to substantial additional regulation or incur significant expense. Any penalties, damages, fines, orcurtailment or restructuring of our operations could be significant. The risk of potential non-compliance is increased by the fact that many of these laws havenot been fully interpreted by applicable regulatory authorities or the courts, and their provisions are open to a variety of interpretations and additional legalor regulatory change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legalexpenses, divert our management’s attention from the operation of our business, and damage our reputation.We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Actcould have a material adverse effect on our business, financial condition, and result of operations.In light of our operations outside the United States, we are subject to the FCPA, which generally prohibits companies and their intermediaries fromoffering to pay, promising to pay, or authorizing the payment of money or anything of value to non-U.S. officials for the purpose of influencing any act ordecision of the foreign official in his/her capacity or to secure any other improper advantage to obtain or retain business. Violation of the anti-briberyprovisions of the FCPA can result in criminal fines of up to $2 million and civil penalties of up to $16,000 for each violation. Individuals, including officers,directors, stockholders, and agents of companies, can be subject to a criminal fine of up to $250,000 and imprisonment, in addition to civil penalties of up to$16,000, per violation. We may be held liable for actions taken by our distributors in violation of the FCPA, even though such partners are foreigncompanies that may not be subject to the FCPA. Any determination that we violated the FCPA could result in sanctions that could have a material adverseeffect on our business, financial condition, and result of operations.Product sales or introductions may be delayed or canceled as a result of the FDA regulatory process which could cause our sales or profitability todecline.The process of obtaining and maintaining regulatory approvals and clearances to market a medical device from the FDA and similar regulatoryauthorities abroad can be costly and time-consuming, and we cannot assure you that such approvals and clearances will be granted. Pursuant to FDAregulations, unless exempt, the FDA permits commercial distribution of a new medical device only after the device has received 510(k) clearance or is thesubject of an approved pre-market approval application. The FDA will clear marketing of a medical device through the 510(k) process if it is demonstratedthat the new product is substantially equivalent to other 510(k)-cleared products. The pre-market approval application process is more costly, lengthy anduncertain than the 510(k) process, and must be supported by extensive data, including data from preclinical studies, and human clinical trials. Because wecannot assure you that any new products, or any product enhancements, that we develop will be subject to the shorter 510(k) clearance process, significantdelays in the introduction of any new products or product enhancement may occur. We cannot assure you that the FDA will not require a new product orproduct enhancement to go through the lengthy and expensive pre-market approval application process. Delays in obtaining regulatory clearances andapprovals may:·delay or eliminate commercialization of products we develop;·require us to perform costly procedures;·diminish any competitive advantages that we may attain; and·reduce our ability to collect revenues or royalties.31Although we have obtained 510(k) clearance from the FDA to market our dental laser systems, we cannot assure you that the clearance of thesesystems will not be withdrawn or that we will not be required to obtain new clearances or approvals for modifications or improvements to our products.Our products are subject to recall even after receiving FDA clearance or approval.The FDA and similar governmental bodies in other countries have the authority to require the recall of our products in the event of materialdeficiencies or defects in design or manufacture. A government mandated or voluntary recall by us could occur as a result of component failures,manufacturing errors, or design defects, including defects in labeling. Any recall would divert management’s attention and financial resources and harm ourreputation with customers. Any recall involving our laser systems would be particularly harmful to us, because our laser systems comprise such an importantpart of our portfolio of products.We may be adversely affected by provisions of the Affordable Care Act.Under the Affordable Care Act, we are subject to a 2.3% excise tax payable semi-monthly on U.S. revenues of certain medical devices. A significantportion of our revenue is generated from medical devices sold in the U.S. and these taxes are imposed on us whether or not we earn a profit. The AffordableCare Act also contains reporting requirements of certain payments made by us to medical and dental practitioners and teaching hospitals (the “PhysicianPayment Sunshine Act”) which is published on a publicly available website annually. This requirement increases the administrative costs for bothmanufacturers and health care providers and may result in a decline in our collaborative efforts. A decline in these collaborations may adversely affectadvances in our laser technology or may reduce attendance at events at which our technology is demonstrated, which could reduce demand for our productsand lead to sales price pressures.Additionally, the Affordable Care Act may adversely impact third-party reimbursements received by our end-user customers, which may reducedemand for our products.Risks Related to Our StockThe liquidity and trading volume of our common stock may be low, and our ownership is concentrated.The liquidity and trading volume of our common stock has at times been low in the past and may again be low in the future. If the liquidity andtrading volume of our common stock is low, this could adversely impact the trading price of our shares, our ability to issue stock and our stockholders’ability to obtain liquidity in their shares. The issuance of common stock by us in 2013 and 2014 involved a significant issuance of stock to a limited numberof investors, significantly increasing the concentration of our share ownership in a few holders.Our stock price has been, and may continue to be volatile.There has been significant volatility in the market price and trading volume of equity securities, which is often unrelated to the financial performanceof the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our stock. The market price and volume ofour common stock may fluctuate, and in the past has fluctuated, more dramatically than the stock market in general. You may not be able to resell your sharesat or above the price you paid for them due to fluctuations in the market price of our stock caused by changes in our operating performance or prospects orother factors. Some factors, in addition to the other risk factors identified above, that may have a significant effect on our stock market price include but arenot limited to the following:·actual or anticipated fluctuations in our operating results or future prospects;·our announcements or our competitors’ announcements of new products;·the public’s reaction to our press releases, our other public announcements, and our filings with the SEC;·strategic actions by us or our competitors, such as acquisitions or restructurings;·new laws or regulations or new interpretations of existing laws or regulations applicable to our business;·changes in accounting standards, policies, guidance, interpretations, or principles;·changes in our growth rates or our competitors’ growth rates;·developments regarding our patents or proprietary rights or those of our competitors;·our inability to raise additional capital as needed;·concerns or allegations as to the safety or efficacy of our products;32·changes in financial markets or general economic conditions;·sales of stock by us or members of our management team, our Board, or certain institutional stockholders; and·changes in stock market analyst recommendations or earnings estimates regarding our stock, other comparable companies or our industrygenerally.You could experience substantial dilution of your investment as a result of subsequent exercises of our outstanding warrants and options, future salesof our equity, or the future grant of equity by us.You could experience substantial dilution of your investment as a result of subsequent exercises of outstanding warrants and outstanding optionsissued as compensation for services performed by employees, directors, consultants, and others, future sales of our equity, or the grant of future equity-basedawards. As of December 31, 2014, an aggregate of 9,250,000 shares of common stock were reserved for future issuance under our equity incentive plan,3,475,000 of which were subject to options outstanding as of that date at a weighted average exercise price of $3.03 per share. In addition, as of December 31,2014, 10,094,000 shares of our common stock were subject to warrants at a weighted average exercise price of $4.18 per share. Of the 3,475,000 stock optionsoutstanding at December 31, 2014, 2,627,000 stock options were vested and exercisable. To the extent that outstanding warrants or options are exercised, ourexisting stockholders may experience dilution. We rely heavily on equity awards to motivate current employees and to attract new employees. The grant offuture equity awards by us to our employees and other service providers may further dilute our stockholders interests in the Company. During 2014, we soldapproximately 22.4 million shares of common stock in private placements with gross proceeds totaling approximately $52.0 million. During 2013, we soldapproximately 2.7 million shares of common stock in a private placement with gross proceeds totaling approximately $5.0 million, and sold 340,000 sharesof common stock through an unregistered direct offering for gross proceed totaling approximately $612,000. Our Board declared a 0.5% stock dividend inthe first quarter of 2014 and each of the four quarters in 2013 and 2012 which resulted in the issuance of 187,224 shares, 667,342 shares and 634,162 sharesin 2014, 2013 and 2012, respectively.Anti-takeover provisions in our charter, bylaws, other agreements, and under Delaware law could discourage, delay, or prevent a change in control ofour company.Provisions in our restated certificate of incorporation and amended and restated bylaws may discourage, delay, or prevent a merger or acquisitioninvolving us that our stockholders may consider favorable. These provisions include but are not limited to the right of our Board to issue preferred stockwithout stockholder approval, no stockholder ability to fill director vacancies, elimination of the rights of our stockholders to act by written consent and callspecial stockholder meetings, super-majority vote requirements for certain amendments to our certificate of incorporation and stockholder proposals foramendments to our bylaws, prohibition against stockholders from removing directors other than “for cause” and rules regarding how stockholders maypresent proposals or nominate directors for election at stockholder meetings.We are also subject to the anti-takeover provisions of the Delaware General Corporation Law. Under these provisions, if anyone becomes an“interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage athird-party from making a takeover offer and could delay or prevent a change in control of us. An “interested stockholder” generally means (subject to certainexceptions as described in the Delaware General Corporation Law) someone owning 15% or more of our outstanding voting stock or an affiliate of ours thatowned 15% or more of our outstanding voting stock during the past three years.In addition, we have adopted a stockholder rights plan. Under the stockholder rights plan, if any party acquires 20% or more, of our outstandingcommon stock while the stockholder rights plan remains in place, subject to a number of exceptions set forth in the plan, the holders of these rights, otherthan the party acquiring the 20% position, will be able to purchase shares of our common stock, or other securities or assets, at a discounted price, causingsubstantial dilution to the party acquiring the 20% position. Following the acquisition of 20% or more of our stock by any person, without a redemption ofthe rights or a termination of the stockholder rights plan by our Board, if we are acquired by or merged with any other entity, holders of these rights, otherthan the party acquiring the 20% position, will also be able to purchase shares of common stock of the acquiring or surviving entity if the stockholder rightsplan continues to remain in place. Our stockholder rights plan could discourage a takeover attempt and make the consummation of an unsolicited tender offerfor shares of our common stock more difficult. As a result, without the approval of our Board, you may not have the opportunity to sell your shares to apotential acquirer of us at a premium over prevailing market prices. This could reduce the market price of our stock.33Because we do not intend to pay dividends, our stockholders will benefit from an investment in our common stock only if it appreciates in value.We intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeablefuture. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that ourcommon stock will appreciate in value or even maintain the price at which our stockholders purchased their shares.The ownership of our common stock is highly concentrated.Three of our stockholders beneficially own of approximately 42% of our outstanding common stock, in the aggregate, as of February 27, 2015, asdetermined based on a review of their reports on Schedule 13D/A and Schedule 13G. As a result, these stockholders will be able to affect the outcome of, orexert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. Inparticular, this concentration of ownership of our common stock could have the effect of delaying or preventing a change in control of us or otherwisediscouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of ourcommon stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, theinterests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. The concentration of ownershipalso contributes to the low trading volume and volatility of our common stock. Item 1B. Unresolved Staff CommentsNone. Item 2. PropertiesAs of December 31, 2014, we owned or leased a total of approximately 74,000 square feet of space worldwide. We lease our corporate headquartersand manufacturing facility which consists of approximately 57,000 square feet in Irvine, California. Our lease expires on April 20, 2015. We also own a12,000 square foot manufacturing and administrative facility in Floss, Germany. See Note 3 to the Notes to the Consolidated Financial Statements – Property,Plant, and Equipment, Net.We believe that our current facilities are sufficient for the current operations of our business and we believe that suitable additional space in variousapplicable local markets is available to accommodate any needs that may arise. Item 3. Legal ProceedingsFrom time to time, we are involved in legal proceedings and regulatory proceedings arising out of our operations. We establish reserves for specificliabilities in connection with legal actions that we deem to be probable and estimable. The ability to predict the ultimate outcome of such matters involvesjudgments, estimates, and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates.Class Action LawsuitsOn August 23, 2013, a purported class action lawsuit entitled Brady Adams v. Biolase, Inc., et al., Case No. 13-CV-1300 JST (FFMx) was filed in theUnited States District Court for the Central District of California against BIOLASE and its then Chief Executive Officer, Federico Pignatelli, and its thenChief Financial Officer, Frederick D. Furry. On August 26, 2013, a purported class action lawsuit entitled Ralph Divizio v. Biolase, Inc., et al., Case No. 13-CV-1317 DMG (MRWx) was filed in the same court against BIOLASE, Messrs. Pignatelli and Furry, and its then President and Chief Operating Officer,Alexander K. Arrow. Each of the lawsuits alleges violations of the federal securities laws and asserts causes of action against the defendants under Sections10(b) and 20(a) of the Exchange Act. In accordance with the Private Securities Litigation Reform Act of 1995, on December 10, 2013, the court entered anorder consolidating the lawsuits, appointing a lead plaintiff and approving the lead plaintiff’s selection of lead counsel. On February 24, 2014, the leadplaintiff filed a consolidated complaint against BIOLASE and Messrs. Pignatelli, Furry, and Arrow, alleging violations of the federal securities laws andasserting causes of action against the defendants under Sections 10(b) and 20(a) of the Exchange Act.On November 19, 2013, our Board received a letter from attorneys for purported shareholder David T. Long, demanding that our Board investigate,institute litigation, and take measures to redress and prevent alleged wrongdoing concerning the dissemination of certain allegedly false and misleadingpublic disclosures made by BIOLASE between January 2013 and August 2013.34We believe that the claims contained in the lawsuits are without merit and we intend to vigorously defend against the claims. During the year endedDecember 31, 2013, we paid $250,000 for legal costs incurred in connection with these matters. No legal costs were incurred by us in connection with thesematters during the year ended December 31, 2014.The parties have reached an agreement in principle to settle the consolidated securities class action lawsuit, which is subject to the negotiation of adefinitive settlement agreement and preliminary and final approval of the court. Although there can be no assurance that such agreement will be finalized, asof the date of the filing of this Form 10-K, management does not expect the Company to incur additional expenses related to this matter due to certaininsurance coverage in place.Intellectual Property LitigationOn April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against the Company in the District of Utah for patent infringement of U.S. Patent No.7,485,116 (the “116 Patent”) regarding the Company’s ezlase dental laser. On September 9, 2012, CAO filed its First Amended Complaint, which addedclaims for (1) business disparagement/injurious falsehood under common law and (2) unfair competition under 15 U.S.C. Section 1125(a). The additionalclaims stem from a press release that the Company issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO andits diode product. The First Amended Complaint seeks injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. On November 13,2012, the Court stayed the lawsuit for 120 days to allow the United States Patent and Trademark Office (the “USPTO”) to consider the Company’s request forreexamination of the patent-in-suit. The USPTO granted the request to reexamine the asserted claims of the patent-in-suit and, on February 28, 2013, theCourt stayed the lawsuit until the termination of the reexamination proceedings. On April 23, 2013, the USPTO issued an office action rejecting all of theasserted claims over the prior art, and CAO responded to the office action. On August 28, 2013, the USPTO issued an Action Closing Procedure, rejecting allof CAO’s patent claims. CAO responded to the USPTO’s ruling and on December 10, 2013, the USPTO issued a Right of Appeal Notice, finally rejectingsome claims of the 116 Patent while finding that other claims appeared to be patentable. The Company appealed the USPTO’s findings on January 9, 2014and on January 27, 2014, the USPTO declined to reconsider the finding of certain claims as patentable and instructed the parties to proceed to appeal to thePatent Trial and Appeal Board. On March 17, 2014, the Company filed its brief in support of its appeal of the USPTO’s decision not to reject certain claims ofthe 116 Patent. On March 24, 2014, CAO filed its brief in support of its appeal of the USPTO’s decision to reject certain claims of the 116 patent. On April 18,2014, the Company filed a respondent brief in opposition to the CAO’s appeal arguments. On May 30, 2014, both parties filed rebuttal briefs in support oftheir appeals. On June 30, 2014, the Company requested an oral hearing before our Board. On July 1, 2014, our Board noted that request and docketed thecase for consideration. A hearing on reconsideration was held in November 2014.The Company filed a patent infringement lawsuit against Fotona dd. (“Fotona”) in Düsseldorf District Court (the “Düsseldorf Court”) on April 12,2012 alleging infringement with respect to the Fotona Fidelis dental laser system. Fotona denies liability and seeks the reimbursement of statutory fees fromthe Company. Together with its response brief, Fotona also filed a nullity action against the patent in dispute, patent number EP 1 560 470. The nullityaction is pending at the German Federal Patent Court (the “Patent Court”), Docket No. 1 Ni 58/13 (EP). On September 2, 2013, the Company filed itscounterplea in the infringement proceedings and phrased its arguments defending the validity of the patent. These arguments were also the subject of thedefense brief to the Patent Court in the parallel nullity action proceedings. On September 9, 2013, the Company filed its response to the Patent Court. Fotonafiled a rejoinder on February 3, 2014, including its counterplea on nullity.On April 29, 2014, the Düsseldorf Court rendered a first instance decision whereby Fotona must cease and desist from selling its Fidelis andLightwalker dental laser systems, render accounts on past sales, recall respective products, and pay damages on infringement. Additionally, the Company wasawarded statutory fees, court costs, and attorney’s fees. Preliminary enforcement against Fotona is possible if the Company posts a bond totaling €500,000,which is designed to cover a portion of the potential damages, before a final instance decision is available. In Germany, damages can be calculated based onthe profits made by the infringer after the formal announcement of the granting of a patent, in this case beginning January 1, 2009, without considering directlabor or any other operational costs. This could amount to several million euros. However, Fotona has yet to provide the details of its profits in order to allowthe Company to calculate the damages. In the two additional first instance cases following the extension of the initial lawsuit against Fotona, the DüsseldorfCourt also required the Company to provide a statutory bond totaling €146,000. Such bonds are traditionally imposed on foreign plaintiffs to cover allstatutory, court, and attorney’s fees. Fotona submitted its responses to the action and filed respective invalidation actions against the rights of the Company,which are now pending at the Patent Court and the Federal Patent and Trademark Office.35Other MattersIn the normal course of business, we are subject to legal proceedings, lawsuits, and other claims. Although the ultimate aggregate amount of probablemonetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance,management believes that any monetary liability or financial impact to us from these matters, individually and in the aggregate, would not be material to ourfinancial condition, results of operations, or cash flows. However, there can be no assurance with respect to such results, and monetary liability or financialimpact to us from these other matters could differ materially from those projected. Item 4. Mine Safety DisclosuresNot applicable.PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock is traded on the NASDAQ Capital Market under the symbol “BIOL.”The following table sets forth the high and low closing prices for our common stock for the periods indicated: 2014 2013 High Low High Low First Quarter $3.36 $2.29 $4.46 $1.88 Second Quarter $2.39 $1.76 $5.90 $3.57 Third Quarter $2.72 $1.92 $4.02 $1.20 Fourth Quarter $2.97 $2.28 $3.06 $1.51 The above quotations reflect inter-dealer prices, without retail markup, markdown, or commission and may not necessarily represent actualtransactions.As of February 27, 2015, the closing price of our common stock on the NASDAQ Capital Market was $2.17 per share, and the number of stockholdersof record was 186. We believe that the number of beneficial owners is substantially greater than the number of record holders because a large portion of ourstock is held of record through brokerage firms in “street name.”Dividend PolicyWe intend to retain our available funds from earnings and other sources for future growth and, therefore, do not anticipate paying any cash dividendsin the foreseeable future. Our dividend policy may be changed at any time, and from time to time, by our Board.The following table sets forth certain information relating to our stock dividends declared during 2014, 2013, and 2012: Total Stock Dividend per Number of Shares Dividends Declaration Date Record Date Payment Date Share Outstanding Declared (in thousands, except per share data) Calendar year 2014 Mar. 5, 2014 Mar. 14, 2014 Mar. 28, 2014 0.50% 37,422,753 187,224 Calendar year 2013 Dec. 5, 2013 Dec. 16, 2013 Dec. 30, 2013 0.50% 35,191,663 179,847 Aug. 15, 2013 Aug. 30, 2013 Sept. 13, 2013 0.50% 31,999,465 164,026 May 21, 2013 Jun. 14, 2013 Jun. 28, 2013 0.50% 31,831,732 162,933 Feb. 28, 2013 Mar. 15, 2013 Mar. 29, 2013 0.50% 31,343,676 160,536 Calendar year 2012 Nov. 8, 2012 Dec. 14, 2012 Dec. 28, 2012 0.50% 31,283,974 159,490 Aug. 22, 2012 Sept. 14, 2012 Sept. 28, 2012 0.50% 31,124,484 158,561 May 10, 2012 Jun. 8, 2012 Jun. 25, 2012 0.50% 31,062,608 158,318 Mar. 2, 2012 Mar. 15, 2012 Mar. 30, 2012 0.50% 30,805,300 157,793 36In the first quarter of 2014, our Board announced a 2% annual stock dividend policy for 2014 and declared a one-half percent stock dividend (the“March Stock Dividend”) payable March 28, 2014 to stockholders of record on March 14, 2014. Although our Board expressed its desire to continue todeclare stock dividends in each quarter, the March Stock Dividend was deemed to be a special dividend and there is no assurance, with respect to the amountor frequency, that any stock dividend will be declared in the future.Equity Compensation Plan InformationThe information set forth under the caption “Equity Compensation Plan Information” in the definitive proxy statement (the “Proxy Statement”) to befiled in connection with our 2015 Annual Meeting of Stockholders, is incorporated by reference herein.Sale of Unregistered Common StockOn November 7, 2014, we completed private placement with several institutional and individual investors, and certain of our directors and officers,under which we agreed to sell an aggregate of 14,162,873 unregistered shares of our common stock at the price of $2.39 per share, the closing price of ourcommon stock on November 3, 2014, and warrants to purchase up to an aggregate of 9,205,862 unregistered shares of our common stock at an exercise priceof $4.00 per share. Gross proceeds from the sale were $35.0 million, and net proceeds, after offering expenses of approximately $235,000, were approximately$34.8 million. The warrants become exercisable on May 7, 2015, six months after the closing of the private placement, and have a term of three years from thedate of issuance. In connection with the transaction, we agreed to use commercially reasonable efforts to file within 30 days of the closing a registrationstatement with the SEC to register the resale of both the shares and the shares underlying the warrants issued at the closing. The proceeds will be used forworking capital and general corporate purposes. These shares were issued and sold in reliance upon exemptions from registration under the Securities Act of1933, as amended (the “Act”), afforded by Section 4(a)(2) of the Act and the rules promulgated thereunder and corresponding provisions of state securitieslaws. Each of the investors was either a "qualified institutional buyer" as defined in Rule 144A(a) under the Act or an "accredited investor" as defined in Rule501(a) under the Act.On July 22, 2014, we completed a private placement with several institutional and individual investors, and several of our directors and officers, inwhich we sold 6,250,000 unregistered shares of our common stock at a price of $1.92 per share (the closing price of our common stock on July 18, 2014).Gross proceeds from the sale totaled $12 million, and net proceeds, after offering expenses of approximately $462,000, were approximately $11.5 million.We used the proceeds to pay off our lines of credit with Comerica Bank and for working capital and general corporate purposes. These shares were issued andsold in reliance upon exemptions from registration under the Act, afforded by Section 4(a)(2) of the Act and the rules promulgated thereunder andcorresponding provisions of state securities laws. Each of the investors was either a "qualified institutional buyer" as defined in Rule 144A(a) under the Act oran "accredited investor" as defined in Rule 501(a) under the Act.On February 10, 2014, we entered into a subscription agreement with Oracle Partners L.P., Oracle Institutional Partners, L.P., and Oracle Ten FundMaster L.P., under which we offered an aggregate of 1,945,525 unregistered shares of common stock in a private placement at a price of $2.57 per share. Grossproceeds from the sale were $5.0 million, and net proceeds, after offering expenses of approximately $188,000, were approximately $4.8 million. We used theproceeds to repay our lines of credit and for working capital and general corporate purposes. These shares were issued and sold in reliance on Section 4(2) ofthe Act, and Rule 506 of Regulation D promulgated under the Act. These transactions qualified for exemption from registration because, among other things,the transactions did not involve a public offering, each investor was an accredited investor and/or qualified institutional buyer, each investor took ourcommon stock for investment and not resale, and we took appropriate measures to restrict the transfer of the Common Stock. No registration rights wereprovided, and none of these shares of our common stock sold may be re-offered or resold absent either registration under the Act or the availability of anexemption from the registration requirements.On December 19, 2013, we entered into a subscription agreement with Oracle Ten Fund Master, L.P. under which we sold an aggregate of 340,000unregistered shares of common stock in a private placement at a price of $1.80 per share. Gross proceeds from the sale totaled $612,000, and net proceeds,after offering expenses of approximately $30,000, totaled approximately $582,000. We used the proceeds for working capital and general corporate purposes.The common stock has not been registered under the Securities Act of 1933 (the "Act") and was offered pursuant to the exemptions from registrationpromulgated under the Act. No registration rights were provided and none of the common stock sold may be re-offered or resold absent either registrationunder the Act or the availability of an exemption from the registration requirements.37Stock Performance GraphThe following stock performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall suchinformation be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specificallyincorporate it by reference into such filing.The stock performance graph below compares the cumulative total stockholder return for Biolase, Inc. on $100 invested, assuming the reinvestment ofall dividends, on December 31, 2009, the last trading day before our 2010 fiscal year, through the end of fiscal 2014 with the cumulative total return on $100invested for the same period in the NASDAQ Composite Index and the NASDAQ Medical Equipment Index. The historical stock performance shown on thegraph below is not necessarily indicative of future price performance. Years Ended December 31, 2009 2010 2011 2012 2013 2014 Biolase, Inc. $100.00 $91.62 $140.02 $102.82 $160.46 $149.87 NASDAQ Composite Index 100.00 117.61 118.70 139.00 196.83 223.74 NASDAQ Medical Equipment 100.00 105.75 118.61 131.64 155.38 175.37 38Item 6. Selected Financial DataThe information set forth below is not necessarily indicative of future operations and should be read in conjunction with Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements and notes thereto included in Item 8,“Financial Statements and Supplementary Data,” of this Form 10-K, in order to understand further the factors that may affect the comparability of thefinancial data presented below. Years Ended December 31, 2014 2013 2012 2011 2010 (in thousands, except per share data) Consolidated Statements of Operations Data: Net revenue $47,656 $56,430 $57,356 $48,858 $26,225 Net cost of revenue(1) 29,484 34,900 30,878 27,540 17,400 Gross profit 18,172 21,530 26,478 21,318 8,825 Operating expenses: Sales and marketing(1) 16,375 18,682 16,250 13,075 9,938 General and administrative(1) 14,854 9,377 8,075 7,936 6,557 Engineering and development(1) 4,577 4,029 4,684 4,311 3,790 Excise tax 307 438 — — — Impairment of property, plant, and equipment(2) — — — — 35 Total operating expenses 36,113 32,526 29,009 25,322 20,320 Loss from operations (17,941) (10,996) (2,531) (4,004) (11,495)Non-operating loss (873) (650) (414) (393) (468)Loss before income taxes (18,814) (11,646) (2,945) (4,397) (11,963)Income tax provision (benefit) 112 (164) 111 89 58 Net loss as reported $(18,926) $(11,482) $(3,056) $(4,486) $(12,021)Net loss from operations per share: Basic $(0.42) $(0.34) $(0.08) $(0.13) $(0.42)Diluted $(0.42) $(0.34) $(0.08) $(0.13) $(0.42)Net loss per share: Basic $(0.45) $(0.35) $(0.10) $(0.15) $(0.44)Diluted $(0.45) $(0.35) $(0.10) $(0.15) $(0.44)Shares used in computing net loss from operations per share and net lossper share(3): Basic 42,232 32,768 32,162 30,762 27,105 Diluted 42,232 32,768 32,162 30,762 27,105 Consolidated Balance Sheet Data: Working capital (deficit) $38,647 $3,915 $7,542 $9,044 $(5,717)Total assets $59,403 $31,038 $31,973 $29,807 $18,147 Long-term liabilities $1,196 $618 $804 $956 $1,534 Stockholders' equity (deficit) $42,056 $8,481 $11,794 $12,569 $(3,047) (1)2014, 2013, 2012, 2011, and 2010 include $1.2 million, $1.6 million, $1.6 million, $1.5 million, and $727,000, respectively, in total compensationcost related to stock options classified in cost of revenue, sales and marketing, general and administrative, and engineering and developmentexpenses.(2)In 2010, we wrote down the value of our land and building in Germany by $35,000 to reflect the market value of the asset.(3)Shares used in computing net loss from operations per share and net loss per share have been adjusted to reflect the effects of stock dividends. 39Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in thisForm 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, andassumptions, which could cause actual results to differ materially from management’s expectations. Please see the “Cautionary Statement RegardingForward-Looking Statements” section immediately preceding Part I, Item 1 of this Form 10-K and the “Risk Factors” section in Part I, Item 1A of this Form10-K.OverviewWe are a medical device company that develops, manufactures, markets and sells laser systems in dentistry and medicine and also markets, sells, anddistributes dental imaging equipment, including cone beam digital x-rays and CAD/CAM intra-oral scanners, and in-office, chair-side milling machines and3-D printers. Our products advance the practice of dentistry and medicine for patients and health care professionals. Our proprietary dental laser systems allowdentists, periodontists, endodontists, oral surgeons, and other dental specialists to perform a broad range of minimally invasive dental procedures, includingcosmetic, restorative, and complex surgical applications. Our laser systems are designed to provide clinically superior results for many types of dentalprocedures compared to those achieved with drills, scalpels, and other conventional instruments. We have clearance from the FDA to market and sell our lasersystems in the United States and also have the necessary registration to market and sell our laser systems in Canada, the European Union, and many othercountries outside the U.S. Additionally, our in-licensed imaging equipment and related products improve diagnoses, applications, and procedures indentistry and medicine.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 to perform most procedures currently performed using drills, scalpels, and other traditional dentalinstruments for cutting soft and hard tissue. We also offer our Diode laser systems to perform soft tissue, pain therapy, and cosmetic procedures, includingteeth whitening. We have approximately 250 issued and 100 pending U.S. and international patents, the majority of which are related to WaterLasetechnology. From 1998 through December 31, 2014, we sold approximately 27,600 laser systems in over 80 countries around the world. Contained in thistotal are over 10,600 WaterLase systems, including more than 6,600 WaterLase MD and iPlus systems.The shareholder litigation brought by Oracle to resolve the dispute over our corporate governance and the composition of our Board, as well as theproxy contest and new litigation, brought by the former Chairman and CEO in July 2014, which litigation was subsequently dismissed, have significantlyand pervasively impacted all aspects of our organization. The litigation disrupted our daily operations, disrupted relationships with vendors and weakenedemployee morale. In addition, the legal expenses and professional fees associated with the litigation caused working capital strains. Externally in themarketplace, this litigation has impaired customer and investor perceptions of the Company, which resulted in a loss of overall confidence and has impactedus through the fourth quarter of 2014. Beginning in the second half of 2014, we appointed new key personnel to management to lead our sales and marketing department, including a newVice President of Worldwide Sales and Account Management as well as a new Senior Vice President and Chief Marketing Officer. Furthermore, in the fourthquarter of 2014, we enhanced our sales force domestically and internationally. We have also formed a new Dental Professional Advisory Board, made up offour founding members, who have made significant contributions to the specialties of periodontics, implantology, oral surgery, multi-stage restorativetherapy, and peri-implantitis therapy. Our goal is to refocus our energies on strengthening leadership, worldwide competitiveness and our professionalcustomers and their patients.We completed two private placements in the latter half of 2014 totaling in net proceeds after offering expenses, of approximately $46.3 million. Weused a portion of the proceeds to repay our lines of credit in July 2014. The remainder of the proceeds is being used for working capital and general corporatepurposes. Prior to these infusions of capital, the available borrowing capacity on our lines of credit with Comerica Bank and the net proceeds from theFebruary 2014 equity transaction have been principal sources of liquidity during the first half of 2014. On April 10, 2014, we entered into a forbearanceagreement that reduced our total aggregate available borrowings to $4.0 million. On May 5, 2014, June 3, 2014 and July 9, 2014, we amended theforbearance agreement to extend the forbearance periods and paid fees associated with such amendments. On July 28, 2014, we paid in full all amounts dueunder the revolving lines of credit, including principal, accrued interest, and fees which totaled, in the aggregate, approximately $2.9 million, and the CreditAgreements were terminated. Further discussion of the amendments is included in Note 5 to the Consolidated Financial Statements in Part IV, Item 15 of thisAnnual Report on Form 10-K, which is incorporated herein by reference.40Critical Accounting PoliciesThe preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in theUnited States requires us to make judgments, assumptions, and estimates that affect the amounts reported. The following is a summary of those accountingpolicies that we believe are necessary to understand and evaluate our reported financial results.Revenue Recognition. We sell our products in North America directly to customers through our direct sales force and through non-exclusivedistributors. We sell our products internationally through exclusive and non-exclusive distributors as well as directly to customers in certain countries. Salesare recorded upon shipment from our facility and payment of our invoices is generally due within 90 days or less. Internationally, we primarily sell productsthrough independent distributors. We record revenue based on four basic criteria that must be met before revenue can be recognized: (i) persuasive evidenceof an arrangement exists; (ii) delivery has occurred and title and the risks and rewards of ownership have been transferred to our customer, or services havebeen rendered; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue is recorded for all sales upon shipment assumingall other revenue recognition criteria are met.Sales of our laser systems include separate deliverables consisting of the product, disposables used with the laser systems, installation, and training.We apply the relative selling price method, which requires that arrangement consideration be allocated at the inception of the arrangement to all deliverablesusing the relative selling price method. This requires us to use estimated selling prices of each of the deliverables in the total arrangement. The sum of thoseprices is then compared to the arrangement, and any difference is applied to the separate deliverable ratably. This method also establishes a selling pricehierarchy for determining the selling price of a deliverable, which includes: (i) vendor-specific objective evidence (“VSOE”), if available, (ii) third-partyevidence if VSOE is not available, and (iii) estimated selling price if neither VSOE nor third-party evidence is available. VSOE is determined based on thevalue we sell the undelivered element to a customer as a stand-alone product. Revenue attributable to the undelivered elements is included in deferredrevenue when the product is shipped and is recognized when the related service is performed. Disposables not shipped at time of sale and installation servicesare typically shipped or installed within 30 days. Training is included in deferred revenue when the product is shipped and is recognized when the relatedservice is performed or upon the approximate expiration of time offered under the agreement. The adoption of the relative selling price method does notsignificantly change the value of revenue recognized.Key judgments related to our revenue recognition include the collectability of payment from the customer, the satisfaction of all elements of thearrangement having been delivered, and that no additional customer credits and discounts are needed. We evaluate a customer’s credit-worthiness prior to theshipment of the product. Based on our assessment of the available credit information, we may determine the credit risk is higher than normally acceptable,and we will either decline the purchase or defer the revenue until payment is reasonably assured. Future obligations required at the time of sale may alsocause us to defer the revenue until the obligation is satisfied.Although all sales are final, we accept returns of products in certain, limited circumstances and record a provision for sales returns based on historicalexperience concurrent with the recognition of revenue. The sales returns allowance is recorded as a reduction of accounts receivable and revenue.Extended warranty contracts, which are sold to our laser and certain imaging customers, are recorded as revenue on a straight-line basis over the periodof the contract, which is typically one year.For sales transactions involving used laser trade-ins, we record the purchased trade-ins as inventory at the fair value of the asset surrendered with theoffset to accounts receivable. In determining the estimated fair value of used laser trade-ins, we make an assessment of usable parts and key components andconsider the ultimate resale value of the certified pre-owned (or “CPO”) laser with applicable margins. We sell these CPO laser trade-ins as refurbished lasersfollowing our laser system revenue recognition policy. Trade-in rights are not established nor negotiated with customers during the initial sales transaction ofthe original lasers. Trade-in rights are promotional events used at our discretion to encourage existing laser customers to purchase new lasers by offeringperceived discounts in exchange for customers trading in original lasers. A customer is not required to trade-in a laser nor are we required to accept a trade-in,however, the promotional value offered in exchange for the trade-in laser is not offered without a laser trade-in. The transaction is treated as a monetarytransaction as each sale transaction involving a customer trade-in includes significant boot of greater than 25% of the fair value of the exchange. As amonetary transaction, the sale is recognized following our laser system revenue recognition policy. There have been no sales transactions in which the cashconsideration was less than 25% of the total transaction value.We recognize revenue for royalties under licensing agreements for our patented technology when the product using our technology is sold. Weestimate and recognize the amount earned based on historical performance and current knowledge about the business operations of our licensees.Historically, our estimates have been consistent with amounts historically reported by the licensees. Licensing revenue related to exclusive licensingarrangements is recognized concurrent with the related exclusivity period.41From time to time, we may offer sales incentives and promotions on our products. We recognize the cost of sales incentives at the date at which therelated revenue is recognized as a reduction in revenue, an increase in cost of revenue, or a selling expense, as applicable, or later, in the case of incentivesoffered after the initial sale has occurred.Accounting for Stock-Based Payments. We recognize compensation cost related to all stock-based payments based on the grant-date fair value usingthe Black-Scholes option valuation model, taking into consideration the probability of vesting and estimated forfeitures.Valuation of Accounts Receivable. We maintain an allowance for uncollectible accounts receivable to estimate the risk of extending credit tocustomers. We evaluate our allowance for doubtful accounts based upon our knowledge of customers and their compliance with credit terms. The evaluationprocess includes a review of customers’ accounts on a regular basis which incorporates input from sales, service, and finance personnel. The review processevaluates all account balances with amounts outstanding 90 days from the due date and other specific amounts for which information obtained indicates thatthe balance may be uncollectible. The allowance for doubtful accounts is adjusted based on such evaluation, with a corresponding provision included ingeneral and administrative expenses. Account balances are charged off against the allowance when we believe it is probable the receivable will not berecovered. We do not have any off-balance-sheet credit exposure related to our customers.Valuation of Inventory. Inventory is valued at the lower of cost, determined using the first-in, first-out method, or market. We periodically evaluatethe carrying value of inventory and maintain an allowance for excess and obsolete inventory to adjust the carrying value as necessary to the lower of cost ormarket. We evaluate quantities on hand, physical condition and technical functionality, as these characteristics may be impacted by anticipated customerdemand for current products and new product introductions. Unfavorable changes in estimates of excess and obsolete inventory would result in an increase incost of revenue and a decrease in gross profit.Valuation of Long-Lived Assets. Property, plant, and equipment, and certain intangibles with finite lives are amortized over their estimated usefullives. Useful lives are based on our estimate of the period that the assets will generate revenue or otherwise productively support our business goals. Wemonitor events and changes in circumstances that could indicate that the carrying balances of long-lived assets may exceed the undiscounted expected futurecash flows from those assets. If such a condition were to exist, we would determine if an impairment loss should be recognized by comparing the carryingamount of the assets to their fair value.Valuation of Goodwill and Other Intangible Assets. Goodwill and other intangible assets with indefinite lives are not amortized but are evaluatedfor impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. We conducted our annual impairmentanalysis of our goodwill as of June 30, 2014 and concluded there had been no impairment in goodwill. We closely monitor our stock price and marketcapitalization and perform such analysis when events or circumstances indicate that there may have been a change to the carrying value of those assets.Warranty Cost. We provide warranties against defects in materials and workmanship of our laser systems for specified periods of time. For the yearended December 31, 2014, WaterLase and Diode systems sold domestically are covered by our warranty for a period of two years. For the years endedDecember 31, 2013 and 2012, WaterLase systems sold domestically were covered by our warranty for a period of one year while our Diode systems warrantyperiod was for two years from date of sale by us or the distributor to the end-user. For the year ended December 31, 2014, WaterLase and Diode systems soldinternationally are covered by our warranty for a period of twenty-eight months from the date of sale to the international distributor. For the years endedDecember 31, 2013 and 2012, WaterLase systems sold internationally were covered by our warranty for a period of sixteen months while our Diode systemswarranty period was up to twenty-eight months from the date of sale to the international distributor. Estimated warranty expenses are recorded as an accruedliability with a corresponding provision to cost of revenue. This estimate is recognized concurrent with the recognition of revenue on the sale to thedistributor or end-user. Warranty expenses expected to be incurred after one year from the time of sale to the distributor are classified as a long-term warrantyaccrual. Our overall accrual is based on our historical experience and our expectation of future conditions, taking into consideration the location and type ofcustomer and the type of laser, which directly correlate to the materials and components under warranty, the duration of the warranty period, and thelogistical costs to service the warranty. Additional factors that may impact our warranty accrual include changes in the quality of materials, leadership andtraining of the production and services departments, knowledge of the lasers and workmanship, training of customers, and adherence to the warranty policies.Additionally, an increase in warranty claims or in the costs associated with servicing those claims would likely result in an increase in the accrual and adecrease in gross profit. We offer extended warranties on certain imaging products. However, all imaging products are initially covered by the manufacturer’swarranties.42Litigation and Other Contingencies. We regularly evaluate our exposure to threatened or pending litigation and other business contingencies.Because of the uncertainties related to the amount of loss from litigation and other business contingencies, the recording of losses relating to such exposuresrequires significant judgment about the potential range of outcomes. As additional information about current or future litigation or other contingenciesbecomes available, we assess whether such information warrants the recording of expense relating to contingencies. To be recorded as expense, a losscontingency must be both probable and reasonably estimable. If a loss contingency is material but is not both probable and estimable, we disclose the matterin the notes to the consolidated financial statements.Income Taxes. Based upon our operating losses during 2014, 2013, and 2012 and the available evidence, management has determined that it is morelikely than not that the deferred tax assets as of December 31, 2014 will not be realized in the near term. Consequently, we have established a valuationallowance against our net deferred tax asset totaling approximately $42.1 million and $35.6 million as of December 31, 2014 and 2013, respectively. In thisdetermination, we considered factors such as our earnings history, future projected earnings, and tax planning strategies. If sufficient evidence of our abilityto generate sufficient future taxable income tax benefits becomes apparent, we may reduce our valuation allowance, resulting in tax benefits in our statementof operations and in additional paid-in-capital. Management evaluates the potential realization of our deferred tax assets and assesses the need for reducingthe valuation allowance periodically.Fair Value of Financial InstrumentsOur financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate fairvalue because of the short maturity of these items. Financial instruments consisting of lines of credit approximate fair value, as the interest rates associatedwith the lines of credit approximate the market rates for debt securities with similar terms and risk characteristics.Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants in the principal market or, if none exists, the most advantageous market, for the specific asset or liability at the measurement date (referred to asthe “exit price”). The fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk. Level1 measurement of fair value is quoted prices in active markets for identical assets or liabilities.Results of OperationsThe following table sets forth certain data from our operating results for each of the years ended December 31, 2014, 2013, and 2012, expressed aspercentages of revenue: Years Ended December 31, 2014 2013 2012 Products and services 99.7 % 99.6 % 99.7 %License fees and royalty 0.3 0.4 0.3 Net revenue 100.0 100.0 100.0 Cost of revenue 61.9 61.8 53.8 Gross profit 38.1 38.2 46.2 Operating expenses: Sales and marketing 34.4 33.1 28.3 General and administrative 31.2 16.6 14.1 Engineering and development 9.6 7.2 8.2 Excise tax 0.6 0.8 — Total operating expenses 75.8 57.7 50.6 Loss from operations (37.7) (19.5) (4.4) Non-operating loss, net (1.8) (1.1) (0.7) Loss before income taxes (39.5) (20.6) (5.1) Income tax provision (benefit) 0.2 (0.3) 0.2 Net loss (39.7)% (20.3)% (5.3)% 43The following table summarizes our net revenues by category for the years ended December 31, 2014, 2013, and 2012 (dollars in thousands): Years Ended December 31, 2014 2013 2012 Laser systems $29,490 61.9 %$38,736 68.6 %$42,348 73.8 %Imaging systems 4,286 9.0 % 4,632 8.2 % 3,365 5.9 %Consumables and other 6,524 13.7 % 6,458 11.5 % 5,954 10.4 %Services 7,211 15.1 % 6,360 11.3 % 5,524 9.6 %Total products and services 47,511 99.7 % 56,186 99.6 % 57,191 99.7 %License fees and royalty 145 0.3 % 244 0.4 % 165 0.3 %Net revenue $47,656 100.0 %$56,430 100.0 %$57,356 100.0 % Non-GAAP DisclosureIn addition to the financial information prepared in conformity with generally accepted accounting principles in the United States (“GAAP”), weprovide certain historical non-GAAP financial information. Management believes that these non-GAAP financial measures assist investors in makingcomparisons of period-to-period operating results and that, in some respects, these non-GAAP financial measures are more indicative of the Company’s on-going core operating performance than their GAAP equivalents.Management believes that the presentation of this non-GAAP financial information provides investors with greater transparency and facilitatescomparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, andamortization 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-K have certain limitations in that they do not reflect all of the costs associated with theoperations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, andnot as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measurespresented by the Company may be different from similarly named non-GAAP financial measures used by other companies.Non-GAAP Net Loss. Management uses non-GAAP net loss (defined as net loss before interest, taxes, depreciation and amortization, stock-based,other equity instruments, and other non-cash compensation) in its evaluation of the Company’s core results of operations and trends between fiscal periodsand believes that these measures are important components of its internal performance measurement process. Management believes that this non-GAAPfinancial information reflects an additional way of viewing aspects of our business that, when viewed with our GAAP results, provides a more completeunderstanding of factors and trends affecting our business.Non-GAAP net loss for the periods presented is as follows (in thousands): Years Ended December 31, 2014 2013 2012 GAAP net loss, as reported $(18,926) $(11,482) $(3,056)Adjustments: Interest expense 458 600 239 Income tax (benefit) provision 112 (164) 111 Depreciation and amortization 696 601 513 Stock-based, other equity instruments, and other non-cashcompensation 1,356 1,965 1,873 Non-GAAP net loss $(16,304) $(8,480) $(320) 44Comparison of Results of OperationsYear Ended December 31, 2014 Compared with Year Ended December 31, 2013Net Revenue. Net revenue for the year ended December 31, 2014 (“Fiscal 2014”) was $47.7 million, a decrease of $8.7 million, or 15%, as comparedwith net revenue of $56.4 million for the year ended December 31, 2013 (“Fiscal 2013”). Domestic revenues were $29.8 million, or 63% of net revenue, forFiscal 2014 compared to $35.6 million, or 63% of net revenue, for Fiscal 2013. International revenues for Fiscal 2014 were $17.8 million, or 37% of netrevenue compared to $20.8 million, or 37% of net revenue for Fiscal 2013. The decrease in period-over-period net revenue resulted from decreases indomestic and international laser system revenue, imaging systems revenue, and license fees and royalties revenue, partially offset by increases inconsumables and other and services revenue. We believe that our results for Fiscal 2014 were pervasively and negatively impacted by the significantdistractions caused by our shareholder litigation and the related disruptions within both management and the marketplace, as well as a lack of salesmanagement. Since the second half of 2014, our goal has been to refocus on strengthening our leadership, worldwide competitiveness and our professionalcustomers and their patients. We have enhanced our management team with new key personnel and increased our sales force both domestically andinternationally.Laser system net revenues, as a result of the aforementioned reasons, decreased by approximately $9.2 million, or 24%, in Fiscal 2014 compared toFiscal 2013. As expected, we experienced an improvement in sales of our core laser systems during the fourth quarter of Fiscal 2014 as compared with thethird quarter of Fiscal 2014. Historically, revenue in the fourth quarter has typically been stronger than average due to the buying patterns of dentalprofessionals. We believe that a significant number of dentists purchase capital equipment during the fourth quarter in order to maximize their practiceearnings and minimize their taxes through the utilization of certain tax incentives, such as accelerated depreciation methods for purchased capital equipment,as part of their year-end tax planning.Imaging system net revenue, also as a result of the aforementioned reasons, decreased by approximately $346,000, or 7%, in Fiscal 2014 compared toFiscal 2013.Consumables and other net revenue, which includes consumable products such as disposable tips and shipping revenue, increased approximately$66,000, or 1%, for Fiscal 2014, as compared to Fiscal 2013. This increase in consumables and other net revenue was primarily a result of auxiliary sales toour growing laser customer base.Services net revenue, which consists of extended warranty service contracts, advanced training programs, and other services, increased byapproximately $851,000, or 13%, for Fiscal 2014, as compared to Fiscal 2013. The increased revenue was mainly attributed to the impact from recognizing$708,000 in deferred training service revenues resulting from a change in estimate in the period over which deferred training service revenue was beingrecognized during the third quarter of 2014.License fees and royalty revenue decreased by approximately $99,000, or 40%, to approximately $145,000 in Fiscal 2014 compared to $244,000 inFiscal 2013. These license fees and royalty revenue were attributable to intellectual property related to our laser technologies.Cost of Revenue. Cost of revenue in Fiscal 2014 decreased by $5.4 million, or 15%, to $29.5 million, or 62% of net revenue, compared with cost ofrevenue of $34.9 million, or 62% of net revenue, in Fiscal 2013. Our laser systems generally have significantly higher margins than our licensed imagingsystems and our domestic sales generally have higher margins than our international sales. In connection with our initiative to measure and improve customersatisfaction, the warranty for WaterLase systems purchased after January 1, 2014 was extended from one year to two years, which added $519,000 to the costof revenue during Fiscal 2014. In the third quarter of Fiscal 2013, we recorded a provision of $1.0 million for excess and obsolete inventory related tonegative market trends for certain products and the decreased velocity of certain elements of our inventory at that time. As a result, cost of revenue as apercentage of net revenue, remained consistent between Fiscal 2014 and Fiscal 2013 despite the decline in sales.Gross Profit. Gross profit for Fiscal 2014 was $18.2 million, or 38% of net revenue, a decrease of approximately $3.4 million, or 16%, as comparedwith gross profit of $21.5 million, or 38% of net revenue, for Fiscal 2013. Gross profit for Fiscal 2014, as a percentage of net revenue, was consistent withFiscal 2013.Operating Expenses. Operating expenses for Fiscal 2014 were $36.1 million, or 76% of net revenue, an increase of approximately $3.6 million, or11%, as compared with $32.5 million, or 58% of net revenue, for Fiscal 2013. We expect that operating expenses as a percentage of net revenue will decreasefor the year ending December 31, 2015 (“Fiscal 2015”). The year-over-year increase in expense is explained in the following expense categories:45Sales and Marketing Expense. Sales and marketing expenses for Fiscal 2014 decreased by $2.3 million, or 12%, to $16.4 million, or 34% of netrevenue, as compared with $18.7 million, or 33% of net revenue, for Fiscal 2013. The decrease was primarily a result of decreased convention relatedexpenses of $1.3 million, decreased commission expenses of $938,000, and decreased media and advertising expenses of $923,000, partially offset byincreased payroll and consulting related expenses of $699,000. The mid-year shareholder litigation brought distractions and disruptions within managementand the marketplace in connection with such litigation, as well as a lack of sales management. Due to the working capital required for legal expenditures andprofessional fees in connection with the shareholder litigation, management made the decision to reduce sales and marketing expenditures. Beginning in thesecond half of 2014, we appointed new key personnel to lead our sales and marketing department, including a new Senior Vice President of Worldwide Salesand Account Management as well as a new Vice President and Chief Marketing Officer. Furthermore, in the fourth quarter of 2014, we enhanced our salesforce domestically and internationally. As we continue to transform and sustain growth, we expect sales and marketing expenses to increase in Fiscal 2015.General and Administrative Expense. General and administrative expenses for Fiscal 2014 increased by $5.5 million, or 58%, to $14.9 million, or31% of net revenue, as compared with $9.4 million, or 17% of net revenue, for Fiscal 2013. The increase to general and administrative expenses was primarilydue to increased legal expenses and professional fees of $4.2 million, increased payroll and consulting related expenses of $520,000, and an increase to ourprovision for doubtful accounts of $1.0 million, partially offset by decreased patent and patent defense costs of $297,000. We incurred legal expenses andprofessional fees of approximately $4.3 million at the direction of our former Chairman and CEO in the shareholder litigation brought by Oracle to resolvethe dispute over our corporate governance and the composition of our Board, as well as the proxy contest and new litigation, brought by the former Chairmanand CEO in July 2014, which litigation was subsequently dismissed. We believe that the legal expenses and professional fees we incurred in 2014 areatypical and expect these expenses to decrease in Fiscal 2015.Engineering and Development Expense. Engineering and development expenses for Fiscal 2014 increased by $548,000, or 14%, to $4.6 million, or10% of net revenue, as compared with $4.0 million, or 7% of net revenue, for Fiscal 2013. The increase was primarily related to increased payroll, consultingand temporary labor expenses of $524,000 resulting from our efforts to accelerate innovation of our products and technologies beginning in the third quarterof Fiscal 2014. We expect to increase our investment in engineering and development as we continue our efforts in new product development in the future.Excise Tax Expense. Beginning in 2013, the Affordable Care Act imposed a 2.3% medical device excise tax on certain product sales to customerslocated in the U.S. Excise tax expenses for Fiscal 2014 was $307,000, or 1% of net revenue, as compared with $438,000, or 1% of net revenue, for Fiscal2013. The decrease of $131,000, or 30%, was directly associated with our decreased sales in the U.S.Non-Operating Income (Loss)(Loss) Gain on Foreign Currency Transactions. We recognized a $415,000 loss on foreign currency transactions for Fiscal 2014 compared to a$50,000 loss for Fiscal 2013 due to exchange rate fluctuations primarily between the U.S. dollar and the Euro. During Fiscal 2014, the Euro fellapproximately 12% in translation value against the U.S. dollar. Interest Expense, Net. Interest expense consists primarily of interest on our revolving credit facilities, amortization of debt issuance costs and debtdiscount, and the financing of our business insurance premiums. Interest expense totaled approximately $458,000 and $600,000 for Fiscal 2014 and 2013,respectively. The decrease of $142,000 in interest expense, in Fiscal 2014 when compared to Fiscal 2013 was primarily due to the repayment and terminationof our credit facilities with Comerica Bank on July 28, 2014.Provision (benefit) for Income Taxes. Our provision for income taxes was $112,000 for Fiscal 2014, compared to provision for income tax benefit of$164,000 in Fiscal 2013. The year over year change was driven by reversals of tax liabilities associated with expiring international unrecognized tax benefitsof $138,000 in Fiscal 2013. In addition, we recognized deferred tax assets related to certain indefinite lived assets (federal alternative minimum tax creditsand California R&D credits) that were used to offset deferred tax liabilities related to indefinite-lived intangible assets. This resulted in additional taxbenefits of $107,000 for Fiscal 2013.Net Loss. For the reasons stated above, our net loss was $18.9 million for Fiscal 2014 compared to a net loss of $11.5 million for Fiscal 2013. Theincrease in net loss of approximately $7.4 million, or 65%, was primarily due to decreased gross profit of $3.4 million, increased operating expenses of $3.6million and increased foreign currency translation loss of $365,000.46Year Ended December 31, 2013 Compared With Year Ended December 31, 2012Net Revenue. Net revenue for Fiscal 2013 was $56.4 million, a decrease of $926,000, or 2%, as compared with net revenue of $57.4 million for theyear ended December 31, 2012 (“Fiscal 2012”). Domestic revenues were $35.6 million, or 63% of net revenue, for Fiscal 2013 compared to $40.6 million, or71% of net revenue, for Fiscal 2012. International revenues for Fiscal 2013 were $20.8 million, or 37% of net revenue compared to $16.8 million, or 29% ofnet revenue for Fiscal 2012. The decrease in period-over-period net revenue resulted from decreases in domestic laser system revenue, partially offset byincreases in imaging systems, consumables and other, services, and license fees and royalty revenue. We believe that these results were primarily due to ourtransition from primarily selling WaterLase dental lasers to selling a wide range of hard- and soft-tissue dental and medical lasers and other high-techsolutions for dentists, including digital radiography and CAD/CAM intra-oral scanners. In order to more effectively deploy our resources and improve overallrevenue as well as our margins we changed our sales and marketing leadership during the fourth quarter of Fiscal 2013. Subsequent to our leadership changewe hired 15 additional sales personnel of which 12 were to primarily focus on selling our core laser products.Laser system net revenues, as a result of the aforementioned reasons, decreased by approximately $3.6 million, or 9%, in Fiscal 2013 compared toFiscal 2012. As expected, we experienced an improvement in sales of our core laser systems during the quarter ending December 31, 2013 as compared withthe quarter ending September 30, 2013. Historically, revenue in the fourth quarter has typically been stronger than average due to the buying patterns ofdental professionals. We believe that a significant number of dentists purchase capital equipment during the fourth quarter in order to maximize their practiceearnings and minimize their taxes through the utilization of certain tax incentives, such as accelerated depreciation methods for purchased capital equipment,as part of their year-end tax planning.Imaging system net revenue increased by approximately $1.3 million, or 38%, in Fiscal 2013 compared to Fiscal 2012. The increase was driven byincreased offerings at various value propositions, including the NewTom VG3.Consumables and other net revenue, which includes consumable products such as disposable tips and shipping revenue, increased approximately$504,000, or 8%, for Fiscal 2013, as compared to Fiscal 2012. This increase in consumables and other net revenue was primarily a result of auxiliary sales toour growing laser customer base.Services net revenue, which consists of extended warranty service contracts, advanced training programs, and other services, increased byapproximately $836,000, or 15%, for Fiscal 2013, as compared to Fiscal 2012. The increased revenue was due largely to increased follow-on sales related toour growing laser customer base and increased sales and marketing efforts in this part of our business.License fees and royalty revenue increased by approximately $79,000, or 48%, to approximately $244,000 in Fiscal 2013 compared to $165,000 inFiscal 2012. These license fees and royalty revenue were attributable to intellectual property related to our laser technologies. We also have a non-exclusivelicense agreement with Proctor and Gamble Company (“P&G”), granting P&G non-exclusive license rights to certain of our patents. Although the term of thearrangement continues until the underlying patents expire unless terminated earlier by either party, we have not generated revenue under the arrangementsince 2011 and we are exploring alternative product development opportunities.Cost of Revenue. Cost of revenue in Fiscal 2013 increased by $4.0 million, or 13%, to $34.9 million, or 62% of net revenue, compared with cost ofrevenue of $30.9 million, or 54% of net revenue, in Fiscal 2012. The increased cost as a percentage of revenue is a result of lower laser system sales andincreased imaging and international sales. Our laser systems generally have significantly higher margins than our licensed imaging systems and our domesticsales generally have higher margins than our international sales. We also recorded a provision of $1.0 million for excess and obsolete inventory during thethird quarter 2013, related to negative market trends for certain products and the decreased velocity of certain elements of our inventory at that time.Gross Profit. Gross profit for Fiscal 2013 was $21.5 million, or 38% of net revenue, a decrease of approximately $5.0 million, as compared with grossprofit of $26.5 million, or 46% of net revenue, for Fiscal 2012. The decrease was primarily due to higher sales of licensed imaging systems, which generallycarry lower margins than our laser products, increased international laser sales, which generally carry a lower margin than our domestic laser sales, and theincreased provision for excess and obsolete inventory.Operating Expenses. Operating expenses for Fiscal 2013 were $32.5 million, or 58% of net revenue, an increase of approximately $3.5 million ascompared with $29.0 million, or 51% of net revenue, for Fiscal 2012. The year-over-year increase in expense is explained in the following expensecategories:47Sales and Marketing Expense. Sales and marketing expenses for Fiscal 2013 increased by $2.4 million, or 15%, to $18.7 million, or 33% of netrevenue, as compared with $16.3 million, or 28% of net revenue, for Fiscal 2012. The increase was primarily a result of increased payroll and consultingrelated expenses of $1.4 million, increased convention costs of $579,000, and increased media and advertising expenses of $471,000, offset by decreasedcommission expenses of $482,000 related to lower sales. The increased costs were related to the launch and integration of our Cefla NewTom and BiolaseDaVinci 3-D Imaging product lines and our 3Shape Trios intra-oral scanners, the launch of our Epic V-Series and Epic 10S diode lasers in veterinary andotolaryngology, respectively, and the introduction of our Galaxy BioMill CAD/CAM chair-side milling system.General and Administrative Expense. General and administrative expenses for Fiscal 2013 increased by $1.3 million, or 16%, to $9.4 million, or17% of net revenue, as compared with $8.1 million, or 14% of net revenue, for Fiscal 2012. We experienced increased legal expenses of $615,000, of which$250,000 related to the defense of class action lawsuits (refer to Part I, Item 3 - Legal Proceedings), increased payroll and consulting related expenses of$536,000, and increased investor relations expenses of $220,000.Engineering and Development Expense. Engineering and development expenses for Fiscal 2013 decreased by $655,000, or 14%, to $4.0 million, or7% of net revenue, as compared with $4.7 million, or 8% of net revenue, for Fiscal 2012. The decrease was primarily related to decreased payroll andconsulting related expenses of $295,000 and decreased supplies expenses of $463,000.Excise Tax Expense. Beginning in 2013, the Affordable Care Act imposed a 2.3% medical device excise tax on certain product sales to customerslocated in the U.S. We incurred excise tax expenses of $438,000, or 1% of net revenue, for Fiscal 2013.Non-Operating Income (Loss)(Loss) Gain on Foreign Currency Transactions. We recognized a $50,000 loss on foreign currency transactions for Fiscal 2013 compared to a$175,000 loss for Fiscal 2012 due to exchange rate fluctuations between the U.S. dollar and other currencies.Interest Expense, Net. Interest expense consists primarily of interest on our revolving credit facilities, amortization of debt issuance costs and debtdiscount, and the financing of our business insurance premiums. Interest expense totaled approximately $600,000 and $239,000 for Fiscal 2013 and 2012,respectively.Provision (benefit) for Income Taxes. Our provision for income taxes was a benefit of $164,000 for Fiscal 2013, compared to provision of $111,000in Fiscal 2012. During Fiscal 2013, we reversed certain tax liabilities associated with unrecognized tax benefits related to international operations due toexpiring statutes and recognized tax benefits of $138,000. In addition, we recognized deferred tax assets related to certain indefinite lived assets (federalalternative minimum tax credits and California R&D credits) that were used to offset deferred tax liabilities related to indefinite-lived intangible assets. Thisresulted in additional tax benefits of $107,000. We also recorded an income tax expense of $81,000 for the current year tax provision in Fiscal 2013.Net Loss. For the reasons stated above, our net loss was $11.5 million for Fiscal 2013 compared to a net loss of $3.1 million for Fiscal 2012.48Selected Quarterly Financial DataThe following table presents our operating results for each quarter in our last two fiscal years. This data has been derived from unaudited financialstatements that, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of suchinformation when read in conjunction with our annual audited financial statements and notes thereto. These operating results are not necessarily indicative ofresults for any future operating period. (in thousands, except per share data) March 31, June 30, September 30, December 31, 2014 Net revenue $11,518 $10,186 $12,714 $13,238 Gross profit $3,941 $3,729 $5,393 $5,109 Loss from operations(1) $(4,635) $(6,192) $(3,295) $(3,819)Net loss(1) $(4,887) $(6,439) $(3,495) $(4,104)Net loss per share(3): Basic $(0.13) $(0.17) $(0.08) $(0.08)Diluted $(0.13) $(0.17) $(0.08) $(0.08)2013 Net revenue $14,597 $14,247 $12,345 $15,241 Gross profit $5,794 $5,561 $3,829 $6,346 Loss from operations(2) $(2,817) $(2,292) $(3,861) $(2,026)Net loss(2) $(2,631) $(2,568) $(4,049) $(2,234)Net loss per share(3): Basic $(0.08) $(0.08) $(0.12) $(0.06)Diluted $(0.08) $(0.08) $(0.12) $(0.06) (1)Loss from operations and net loss includes $310,000, $276,000, $301,000, and $346,000 in compensation cost related to stock options for thequarters ended March 31, June 30, September 30, and December 31, 2014, respectively.(2)Loss from operations and net loss includes $368,000, $380,000, $491,000, and $370,000 in compensation cost related to stock options for thequarters ended March 31, June 30, September 30, and December 31, 2013, respectively.(3)Net loss per share calculations for each of the quarters were based upon the weighted average number of shares outstanding for each period, adjustedto reflect the effects of stock dividends, and the sum of the quarters may not necessarily be equal to the full year net loss per common share amount.Liquidity and Capital ResourcesAt December 31, 2014, we had approximately $31.6 million in cash and cash equivalents. Management defines cash and cash equivalents as highlyliquid deposits with original maturities of 90 days or less when purchased. The increase in our cash and cash equivalents by $30.1 million from December 31,2013 was primarily due to cash provided by financing activities of $46.8 million, partially offset by net cash used in operating and investing activities of$16.2 million and $197,000, respectively, and the effect of exchange rates on cash of $234,000.At December 31, 2014, we had approximately $38.6 million in working capital. Our principal sources of liquidity at December 31, 2014, consisted ofapproximately $31.6 million in cash and cash equivalents and $9.0 million of net accounts receivable.On November 7, 2014, we completed a private placement with several institutional and individual investors, including certain of our directors andofficers, under which we agreed to sell an aggregate of 14,162,873 unregistered shares of our common stock at the price of $2.39 per share, the closing priceof our common stock on November 3, 2014, and warrants to purchase up to an aggregate of 9,205,862 unregistered shares of our common stock at an exerciseprice of $4.00 per share. Gross proceeds from the sale were $35.0 million, and net proceeds, after offering expenses of approximately $235,000, wereapproximately $34.8 million. The warrants become exercisable on May 7, 2015, six months after the closing of the private placement, and have a term ofthree years from the date of issuance. The proceeds are being used for working capital and general corporate purposes.On July 22, 2014, we entered into a private placement with several institutional and individual investors, and several of our directors and officers,wherein we sold 6,250,000 unregistered shares of common stock at a price of $1.92 per share. Gross proceeds from the sale were $12 million, and netproceeds, after offering expenses of approximately $462,000, were approximately $11.5 million. The Company used the proceeds to repay the Company’slines of credit and for working capital and general corporate purposes.On July 28, 2014, we repaid and terminated the credit facilities with Comerica Bank.49On February 10, 2014, we entered into a Subscription Agreement with Oracle Partners L.P. and its affiliates, wherein we sold 1,945,525 unregisteredshares of common stock in a private placement at a price of $2.57 per share. Gross proceeds from the sale totaled $5.0 million, and net proceeds, after offeringexpenses of approximately $188,000, totaled approximately $4.8 million. We used the proceeds for working capital and general corporate purposes.In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course ofbusiness, we must sell our products directly to end-users and through distributors, establish profitable operations through increased sales, decrease expenses,and generate cash from operations or obtain additional funds when needed. We intend to improve our financial condition and ultimately improve ourfinancial results by increasing revenues through expansion of our product offerings, continuing to expand and develop our direct sales force and distributorrelationships both domestically and internationally, forming strategic arrangements within the dental and medical industries, educating dental and medicalpatients as to the benefits of our advanced medical technologies, and reducing expenses.Additional capital requirements may depend on many factors, including, among other things, the rate at which our business grows, demands forworking capital, manufacturing capacity, and any acquisitions that we may pursue. From time to time, we could be required, or may otherwise attempt, toraise capital through either equity or debt offerings. We cannot provide assurance that we will enter into any such equity or debt financings in the future orthat the required capital would be available on acceptable terms, if at all, or that any such financing activity would not be dilutive to our stockholders.Concentration of Credit RiskFinancial instruments which potentially expose us to a concentration of credit risk consist principally of cash and cash equivalents, restricted cash,and trade accounts receivable. We maintain our cash and cash equivalents and restricted cash with established commercial banks. At times, balances mayexceed federally insured limits. To minimize the risk associated with trade accounts receivable, we perform ongoing credit evaluations of customers’financial condition and maintain relationships with our customers that allow us to monitor changes in business operations so we can respond as needed. Wedo not, generally, require customers to provide collateral before we sell them our products. However we have required certain distributors to makeprepayments for significant purchases of our products. For the years ended December 31, 2014, 2013, and 2012, sales to Henry Schein, Inc. worldwideaccounted for approximately 6%, 5%, and 3%, respectively, of our net sales.Receivables and Allowance for Doubtful AccountsTrade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of theamount of probable credit losses in the existing accounts receivable. We determine the allowance based on a quarterly specific account review of past duebalances over 90 days. All other balances are reviewed on a pooled basis by age of receivable. Account balances are charged off against the allowance whenit is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for discussion on the impact of interest rate risk and foreign currencyexchange rate risk.Consolidated Cash FlowsThe following table summarizes our statements of cash flows for Fiscal 2014, Fiscal 2013, and Fiscal 2012 (in thousands): Years Ended December 31, 2014 2013 2012 Net cash provided by (used in): Operating activities $(16,201) $(9,296) $(1,664)Investing activities (197) (685) (698)Financing activities 46,752 8,847 1,559 Effect of exchange rates on cash (234) 31 39 Net change in cash and cash equivalents $30,120 $(1,103) $(764) 50Fiscal 2014 Compared to Fiscal 2013The $6.9 million increase in net cash used in operating activities for Fiscal 2014 compared to Fiscal 2013 was primarily due to our increased net lossof $7.4 million. The increased net loss was primarily driven by increased legal expenses and professional fees of $4.3 million associated with the shareholderlitigation and decreased sales transactions stemming from distractions and disruptions within both management and the marketplace in connection with suchlitigation, as well as a lack of sales management. Net cash used in operating activities consists of our net loss, adjusted for our non-cash charges, plus orminus working capital changes. Cash used in operating activities for Fiscal 2014 totaled $16.2 million and was primarily comprised of non-cash adjusted netloss, excluding changes in operating assets and liabilities, of $14.6 million plus increases in inventory of $1.7 million.The $488,000 decrease in net cash used in investing activities for Fiscal 2014 compared with Fiscal 2013 was primarily due to decreased capitalexpenditures resulting from the diversion of working capital to legal expenditures and professional fees in connection with the shareholder litigation. With aclear vision and strategy for sustainable growth and success, we plan to implement a new enterprise resource planning software in Fiscal 2015. As a result, weexpect capital expenditures to total approximately $3.0 million in Fiscal 2015, and we expect depreciation and amortization to total approximately $1.3million for Fiscal 2015.The $37.9 million increase in net cash provided by financing activities for Fiscal 2014 compared to Fiscal 2013 was primarily due to net proceedsfrom equity offerings in February, July and November 2014 totaling $51.1 million, in the aggregate.The $265,000 decrease in effect of exchange rate on cash for Fiscal 2014 compared to Fiscal 2013 was primarily due to a recognized $415,000 loss onforeign currency transactions during Fiscal 2014.Fiscal 2013 Compared to Fiscal 2012The $7.6 million increase in net cash used in operating activities for Fiscal 2013 compared to Fiscal 2012 was primarily due to our increased net loss,which was primarily caused by our transition from primarily selling WaterLase dental lasers to selling a wide range of hard- and soft-tissue dental and medicallasers and other technological solutions for dentists, including digital radiography and CAD/CAM intra-oral scanners. Net cash used in operating activitiesconsists of our net loss, adjusted for our non-cash charges, plus or minus working capital changes. Cash used in operating activities for Fiscal 2013 totaled$9.3 million and was primarily comprised of non-cash adjusted net loss, excluding changes in operating assets and liabilities, of $7.1 million plus increasesin inventory of $1.4 million.Net cash used in investing activities remained relatively flat for Fiscal 2013 compared with Fiscal 2012 due to slightly higher capital assetexpenditures in Fiscal 2012 offset by proceeds from the sale of long-lived real estate assets in Germany.The $7.3 million increase in net cash provided by financing activities for Fiscal 2013 compared to Fiscal 2012 was primarily due to net proceeds fromequity offerings in late 2013 of $5.2 million plus increased net borrowing under lines of credit of $1.4 million.Contractual ObligationsWe lease our facility under a non-cancellable operating lease that expires in April 2015.The following table presents our expected cash requirements for contractual obligations outstanding as of December 31, 2014, for the years ending asindicated below (in thousands): Less Than 1 to 3 3 to 5 More Than 1 Year Years Years 5 years Total Operating lease obligations $ $597 $437 $— $— $1,034 Purchase obligations 13,827 273 — — 14,100 Other liabilities 25 — — — 25 Total $14,449 $710 $— $— $15,159 Purchase obligations relate to purchase orders with suppliers that we expect to complete primarily during the year ending December 31, 2015. Inconformity with GAAP, purchase obligations and operating lease obligations are not reported in the consolidated balance sheet as of December 31, 2014.51SeasonalityTypically, we experience fluctuations in revenue from quarter to quarter due to seasonality. Revenue in the first quarter typically is lower than averageand revenue in the fourth quarter typically is stronger than average due to the buying patterns of dental professionals. We believe that this trend existsbecause a significant number of dentists purchase their capital equipment towards the end of the calendar year in order to maximize their practice earningswhile seeking to minimize their taxes. This can be accomplished by utilizing certain tax incentives, such as accelerated depreciation methods for purchasingcapital equipment, as part of their year-end tax planning. In addition, revenue in the third quarter may be affected by vacation patterns which can causerevenue to be flat or lower than in the second quarter of the year. Our historical seasonal fluctuations may also be impacted by sales procedures employed bylarge dental distributors that encourage end-of-quarter and end-of-year buying in our industry. Because of these seasonal fluctuations, we have often used lesscash in operations for the six months ended December 31 as compared to the six months ended June 30.Recent Accounting PronouncementsSee Note 2 to the Notes to the Consolidated Financial Statements — Summary of Significant Accounting Policies — Recent AccountingPronouncements to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K, which is incorporated herein by reference.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet arrangements as defined in SEC Regulation S-K Item 303(A)(4)(ii). Item 7A. Quantitative and Qualitative Disclosures About Market RiskSubstantially all of our revenue is denominated in U.S. dollars, including sales to our international distributors. Only a small portion of our revenueand expenses is denominated in foreign currencies, principally the Euro and Indian Rupee. Our foreign currency expenditures primarily consist of the cost ofmaintaining our offices, including the facilities, consulting services and employee-related costs. To date, we have not entered into any foreign currencyhedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our products outside the United States.Inflation has not had a significant effect on our results of operations during the three years ending December 31, 2014 as we do not have significantoperations in countries that have experienced high rates of inflation. Item 8. Financial Statements and Supplementary DataAll financial statements and supplementary data required by this Item 8, including the report of the independent registered public accounting firm, arelisted in Part IV, Item 15 of this Form 10-K, are set forth beginning on Page F-1 of this Form 10-K, and are hereby incorporated into this Item 8 by thisreference. The Selected Quarterly Financial Data required by this Item 8 is set forth in Item 7 (Management’s Discussion and Analysis of Financial Conditionand Results of Operations) of this Form 10-K and is hereby incorporated into this Item 8 by this reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone. Item 9A. Controls and ProceduresDisclosure Controls and ProceduresOur management, with the participation of our President and CEO, evaluated the effectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2014. Based on this evaluation, our President and CEO concluded that ourdisclosure controls and procedures were effective as of December 31, 2014.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act.52Under the supervision of and with the participation of management, including our President and CEO, we conducted an assessment of theeffectiveness of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of theTreadway Commission entitled “Internal Control — Integrated Framework (2013)” (the “COSO Framework”). Based on our evaluation under the COSOFramework, management has concluded that our internal control over financial reporting was effective as of December 31, 2014.BDO USA, LLP, our independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K,issued an attestation report on our internal control over financial reporting as of December 31, 2014. Their report is included herein.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) thatoccurred during the fourth quarter of 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financialreporting.53Report of Independent Registered Public Accounting FirmBoard of Directors and StockholdersBIOLASE, Inc.Irvine, CaliforniaWe have audited BIOLASE, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2014, based on criteria establishedin Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.In our opinion, BIOLASE, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, basedon the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of BIOLASE, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, stockholders’equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated March 6, 2015 expressed an unqualifiedopinion thereon./s/ BDO USA, LLPCosta Mesa, CaliforniaMarch 6, 2015 54Item 9B. Other InformationNone.PART III Item 10. Directors, Executive Officers and Corporate GovernanceInformation regarding our executive officers is included in Part I of this Form 10-K under “Item 1. Business — Executive Officers of the Registrant.” Inaddition, the information set forth under the caption “Election of Directors” and “Security Ownership of Certain Beneficial Owners and Management— Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated by reference herein.We have adopted the Biolase, Inc. Code of Business Conduct and Ethics which applies to all of our employees, officers and directors, including ourPresident and Chief Executive Officer. The Code of Business Conduct can be found on our website at the following address:http://www.biolase.com/Pages/code-of-conduct.html Item 11. Executive CompensationThe information set forth under the captions “Executive Compensation” and “Election of Directors — Director Compensation” in the Proxy Statementis incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation —Equity Compensation Plan Information” in the Proxy Statement is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information set forth under the captions “Election of Directors” and “Certain Relationships and Related Transactions” in the Proxy Statement isincorporated by reference herein. Item 14. Principal Accountant Fees and ServicesThe information set forth under the caption “Principal Accountant Fees and Services” in the Proxy Statement is incorporated by reference herein. 55PART IV Item 15. Exhibits and Financial Statement Schedules(a) The following documents are filed as part of this Annual Report on Form 10-K beginning on the pages referenced below:(1)Financial Statements: PageReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2014 and 2013F-3Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2014, 2013, and 2012F-4Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013, and 2012F-5Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012F-6Notes to Consolidated Financial StatementsF-7(2)Financial Statement Schedule: Schedule II — Consolidated Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2014, 2013, and 2012S-1All other schedules have been omitted as they are not applicable, not required or the information is included in the consolidated financial statementsor the notes thereto.(3)Exhibits:The following exhibits are filed with this Annual Report on Form 10-K or are incorporated by reference herein in accordance with the designatedfootnote references. Incorporated by ReferenceExhibit Description FiledHerewith Form PeriodEnding/Dateof Report Exhibit FilingDate 3.1.1 Restated Certificate of Incorporation, including, (i)Certificate of Designations, Preferences and Rights of 6%Redeemable Cumulative Convertible Preferred Stock ofthe Registrant; (ii) Certificate of Designations, Preferencesand Rights of Series A 6% Redeemable CumulativeConvertible Preferred Stock of the Registrant; (iii)Certificate of Correction Filed to Correct a Certain Errorin the Certificate of Designation of the Registrant; and(iv) Certificate of Designations of Series B JuniorParticipating Cumulative Preferred Stock of the Registrant S-1,AmendmentNo. 1 12/23/2005 3.1 12/23/2005 3.1.2 Amendment to Restated Certificate of Incorporation 8-K 05/10/2012 3.1 05/16/2012 3.1.3 Second Amendment to Restated Certificate ofIncorporation 8-A/A 11/04/2014 3.1.3 11/04/2014 3.1.3 Sixth Amended and Restated Bylaws of the Registrant,adopted on June 26, 2014 8-K 06/26/2014 3.1 06/30/2014 4.1 Rights Agreement, dated as of December 31, 1998, by andbetween the Registrant and U.S. Stock TransferCorporation 8-A 12/31/1998 1 12/29/1998 56 Incorporated by ReferenceExhibit Description FiledHerewith Form PeriodEnding/Dateof Report Exhibit FilingDate4.2 Amendment to Rights Agreement, dated December 19,2008, by and between the Registrant and ComputershareTrust Company, N.A. 8-K 12/17/2008 4.1 12/22/2008 4.3 Amended and Restated Second Amendment to RightsAgreement, dated March 17, 2014, by and between theRegistrant and Computershare Trust Company, N.A. 10-K 12/31/2013 4.4 03/17/2014 4.4 Third Amendment to Rights Agreement, dated November3, 2014, by and between the Registrant andComputershare Trust Company, N.A. 8-A/A 11/04/2014 4.4 11/04/2014 4.5 Specimen of common stock certificate S-3 06/03/2002 4.1 06/03/2002 4.6 Warrant to purchase Common Stock, dated September 6,2013 10-Q 09/30/2013 4.2 11/12/2013 4.7 Warrant to purchase Common Stock, dated November 8,2013 10-Q 09/30/2013 4.3 11/12/2013 4.8 Warrant to purchase 80,000 shares of Common Stock ofthe Registrant, dated May 24, 2012 10-Q 06/30/2012 4.1 08/09/2012 4.9 Amendment No. 1 to Warrant to purchase 80,000 shares ofCommon Stock of the Registrant, dated August 6, 2012,by and between the Registrant and Comerica Bank 10-Q 06/30/2012 4.2 08/09/2012 4.10 Form of Warrant 8-K 11/03/2014 4.1 11/07/2014 10.1* 2002 Stock Incentive Plan Proxy 10/17/2005 E 10/17/2005 10.2* Form of Stock Option Agreement under the 2002 StockOption Plan 10-K 12/31/2004 10.26 07/19/2005 10.3* 2002 Stock Incentive Plan, as amended Proxy 05/16/2007 A 04/10/2007 10.4† License Agreement between SurgiLight, Inc. and theRegistrant dated February 3, 2005 8-K 03/14/2005 2.1 03/18/2005 10.5* Form of Indemnification Agreement between theRegistrant and its officers and directors 10-Q 09/30/2005 10.1 11/09/2005 10.6 Lease, dated January 10, 2006 between the Registrant andThe Irvine Company LLC 8-K 01/10/2006 10.1 01/17/2006 10.7† Letter Agreement, dated June 28, 2006, by and betweenThe Procter & Gamble Company and the Registrant 10-Q 06/30/2006 10.1 08/09/2006 10.8† License Agreement, dated January 24, 2007, by andbetween The Procter & Gamble Company and theRegistrant 10-Q 03/31/2007 10.1 05/10/2007 10.9 Letter Agreement, dated June 28, 2011, by and betweenthe Registrant and The Proctor & Gamble Company 10-Q 06/30/2011 10.2 08/11/2011 10.10 Subscription Agreement, dated September 23, 2013, byand between the Registrant and the investor signatorythereto 8-K 09/23/2013 10.1 11/27/2013 57 Incorporated by ReferenceExhibit Description FiledHerewith Form PeriodEnding/Dateof Report Exhibit FilingDate10.11 Subscription Agreement, dated December 19, 2013, byand between the Registrant and the investor signatorythereto 10-K 12/31/2013 10.42 03/17/2014 10.12 Subscription Agreement, dated February 10, 2014, by andbetween the Registrant and the investor signatoriesthereto 8-K 02/10/2014 10.1 02/13/2014 10.13 Securities Purchase Agreement, dated July 18, 2014, byand among the Registrant and each person listed onSchedule I thereto 8-K 07/18/2014 10.1 07/22/2014 10.14 Securities Purchase Agreement, dated November 3, 2014,by and among the Registrant and each person listed onSchedule I thereto 8-K 11/03/2014 99.1 11/03/2014 10.15 Loan and Security Agreement, dated May 24, 2012, byand between the Registrant and Comerica Bank 10-Q 06/30/2012 10.1 08/09/2012 10.16 Amendment No. 3 to Loan and Security Agreement, datedSeptember 6, 2013, by and between the Registrant andComerica Bank 10-Q 09/30/2013 10.1 11/12/2013 10.17 Amendment No. 4 to Loan and Security Agreement, datedNovember 8, 2013, by and between the Registrant andComerica Bank 10-Q 09/30/2013 10.4 11/12/2013 10.18 Forbearance Agreement, dated April 10, 2014, by andbetween Comerica Bank and the Registrant 8-K 04/10/2014 10.1 04/22/2014 10.19 Amendment No. 1 to Forbearance Agreement, dated May5, 2014, by and between Comerica Bank and theRegistrant 10-Q 03/31/2014 10.1 05/12/2014 10.20 Amendment No. 2 to Forbearance Agreement, dated June3, 2014, by and between Comerica Bank and theRegistrant 8-K 06/06/2014 10.1 06/12/2014 10.21 Borrower Agreement, dated May 24, 2012, by theRegistrant, in favor of the Export-Import Bank of theUnited States and Comerica Bank 10-Q 06/30/2012 10.2 08/09/2012 10.22 Master Revolving Note, dated May 24, 2012, in favor ofComerica Bank 10-Q 06/30/2012 10.3 08/09/2012 10.23 Amendment No. 1 to Master Revolving Note, dated May5, 2014, by and between Comerica Bank and theRegistrant 10-Q 03/31/2014 10.2 05/12/2014 10.24 Amendment No. 2 to Master Revolving Note, dated June3, 2014, by and between Comerica Bank and theRegistrant 8-K 06/06/2014 10.2 06/12/2014 10.25* Employment Agreement, dated February 22, 2015 andentered into on February 24, 2015, by and between theRegistrant and David Dreyer X 21.1 Subsidiaries of the Registrant X 23.1 Consent of Independent Registered Public AccountingFirm, BDO USA, LLP X 58 Incorporated by ReferenceExhibit Description FiledHerewith Form PeriodEnding/Dateof Report Exhibit FilingDate31.1 Certification of Chief Executive Officer and PrincipalFinancial Officer pursuant to Rule 13a-14 and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended X 32.1 Certification of Chief Executive Officer and PrincipalFinancial Officer pursuant to 18 U.S.C. 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of2002 ** 101 The following financial information from the Company’sAnnual Report on Form 10-K, for the year endedDecember 31, 2014, formatted in eXtensible BusinessReporting Language: (i) Consolidated Balance Sheets,(ii) Consolidated Statements of Operations andComprehensive Loss,(iii) Consolidated Statements of Stockholders’ Equity(Deficit)(iv) Consolidated Statements of Cash Flows, (v) Notes toConsolidated Financial Statements X †Confidential treatment was granted for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.In accordance with Rule 24b-2, these confidential portions were omitted from this exhibit and filed separately with the Securities and ExchangeCommission.††Confidential treatment was requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of1934. In accordance with Rule 24b-2, these confidential portions were omitted from this exhibit and filed separately with the Securities and ExchangeCommission.*Management contract or compensatory plan or arrangement.**Furnished herewith. 59SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized. BIOLASE, INC.,a Delaware Corporation (registrant) Dated: March 6, 2015 By: /s/ JEFFREY M. NUGENT Jeffrey M. Nugent President and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated: Signature Title Date /S/ JEFFREY M. NUGENT President andChief Executive Officer, (Principal Executive Officer, Principal FinancialOfficer and Principal Accounting Officer) andDirector March 6, 2015Jeffrey M. Nugent /s/ PAUL N. CLARK Director March 6, 2015Paul N. Clark /s/ DR. JONATHAN T. LORD Director March 6, 2015Dr. Jonathan T. Lord /s/ DR. FREDERIC H. MOLL Director March 6, 2015Dr. Frederic H. Moll /s/ JAMES R. TALEVICH Director March 6, 2015James R. Talevich 60 BIOLASE, INC.Index to Consolidated Financial Statements and Schedule PageReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2014, and 2013F-3Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2014, 2013, and 2012F-4Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013, and 2012F-5Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012F-6Notes to Consolidated Financial StatementsF-7SCHEDULE Schedule numbered in accordance with Rule 5.04 of Regulation S-X: II. Consolidated Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2014, 2013 and 2012S-1All Schedules, except Schedule II, have been omitted as the required information is shown in the consolidated financial statements, or notes thereto, orthe amounts involved are not significant or the schedules are not applicable. F-1 Report of Independent Registered Public Accounting FirmBoard of Directors and StockholdersBIOLASE, Inc.Irvine, CaliforniaWe have audited the accompanying consolidated balance sheets of BIOLASE, Inc. (the “Company”) as of December 31, 2014 and 2013 and therelated consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2014. In connection with our audits of the consolidated financial statements, we have also audited the consolidated financial statementschedule listed in the accompanying index as of and for the years ended December 31, 2014, 2013, and 2012. These consolidated financial statements andschedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements andschedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BIOLASE, Inc. atDecember 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, inconformity with accounting principles generally accepted in the United States of America.Also, in our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements takenas a whole, presents fairly, in all material respects, the information set forth therein.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United Sates), the Company’s internalcontrol over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2015 expressed an unqualified opinion thereon./s/ BDO USA, LLPCosta Mesa, CaliforniaMarch 6, 2015 F-2 BIOLASE, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except per share data) December 31, 2014 2013 ASSETS Current assets: Cash and cash equivalents $31,560 $1,440 Accounts receivable, less allowance of $1,711 and $573 in 2014 and 2013, respectively 9,004 11,127 Inventory, net 12,508 11,378 Prepaid expenses and other current assets 1,726 1,909 Total current assets 54,798 25,854 Property, plant, and equipment, net 1,295 1,826 Intangible assets, net 114 183 Goodwill 2,926 2,926 Other assets 270 249 Total assets $59,403 $31,038 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit $— $4,633 Accounts payable 8,357 8,560 Accrued liabilities 5,188 4,997 Customer deposits 112 285 Deferred revenue, current portion 2,494 3,464 Total current liabilities 16,151 21,939 Deferred income taxes 677 617 Deferred revenue, long-term — 1 Warranty accrual, long-term 519 — Total liabilities 17,347 22,557 Commitments and contingencies (Note 7) Stockholders' equity: Preferred stock, par value $0.001; 1,000 shares authorized, no shares issued and outstanding — — Common stock, par value $0.001; 100,000 and 50,000 shares authorized in 2014 and 2013, respectively, 58,115 and 37,336 shares issued in 2014 and 2013, respectively; 58,115 and 35,372 shares outstanding in 2014 and 2013, respectively 58 38 Additional paid-in capital 185,231 148,866 Accumulated other comprehensive loss (557) (274)Accumulated deficit (142,676) (123,750) 42,056 24,880 Treasury stock (Note 8) — (16,399)Total stockholders' equity 42,056 8,481 Total liabilities and stockholders' equity $59,403 $31,038 See accompanying notes to consolidated financial statements. F-3 BIOLASE, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except per share data) Years Ended December 31, 2014 2013 2012 Products and services revenue $47,511 $56,186 $57,191 License fees and royalty revenue 145 244 165 Net revenue 47,656 56,430 57,356 Cost of revenue 29,484 34,900 30,878 Gross profit 18,172 21,530 26,478 Operating expenses: Sales and marketing 16,375 18,682 16,250 General and administrative 14,854 9,377 8,075 Engineering and development 4,577 4,029 4,684 Excise tax 307 438 — Total operating expenses 36,113 32,526 29,009 Loss from operations (17,941) (10,996) (2,531)Loss on foreign currency transactions (415) (50) (175)Interest expense, net (458) (600) (239)Non-operating loss, net (873) (650) (414)Loss before income tax provision (benefit) (18,814) (11,646) (2,945)Income tax provision (benefit) 112 (164) 111 Net loss (18,926) (11,482) (3,056)Other comprehensive income (loss) items: Foreign currency translation adjustments (283) 46 40 Comprehensive loss $(19,209) $(11,436) $(3,016)Net loss per share: Basic $(0.45) $(0.35) $(0.10)Diluted $(0.45) $(0.35) $(0.10)Shares used in the calculation of net loss per share: Basic 42,232 32,768 32,162 Diluted 42,232 32,768 32,162 See accompanying notes to consolidated financial statements. F-4 BIOLASE, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands) Common Stock Accumulated and Additional Other Total Paid-in Capital Treasury Stock Comprehensive Accumulated Stockholders' Shares Amount Shares Amount Loss Deficit Equity Balances, January 1, 2012 32,502 $138,540 (1,964) $(16,399) $(360) $(109,212) $12,569 Exercise of stock options, net 214 455 — — — — 455 Stock-based compensation — 1,600 — — — — 1,600 Non-employee equity instruments — 23 — — — — 23 Other compensation — 250 — — — — 250 Stock repurchase (133) (235) — — — — (235)Warrant issued in connection with lines of credit — 142 — — — — 142 Exercise of warrants 31 6 — — — — 6 Stock dividends 634 — — — — — — Net loss — — — — — (3,056) (3,056)Foreign currency translation adjustment — — — — 40 — 40 Balances, December 31, 2012 33,248 140,781 (1,964) (16,399) (320) (112,268) 11,794 Exercise of stock options, net 343 709 — — — — 709 Stock-based compensation — 1,609 — — — — 1,609 Non-employee equity instruments — 106 — — — — 106 Other compensation — 250 — — — — 250 Issuance of stock, net 3,028 5,169 — — — — 5,169 Warrant issued in connection with lines of credit — 280 — — — — 280 Exercise of warrants 50 — — — — — — Stock dividends 667 — — — — — — Net loss — — — — — (11,482) (11,482)Foreign currency translation adjustment — — — — 46 — 46 Balances, December 31, 2013 37,336 148,904 (1,964) (16,399) (274) (123,750) 8,481 Exercise of stock options, net 153 310 — — — — 310 Stock-based compensation — 1,233 — — — — 1,233 Retirement of treasury stock (1,964) (16,399) 1,964 16,399 — — — Other compensation — 123 — — — — 123 Issuance of stock, net 22,359 51,118 — — — — 51,118 Exercise of warrants 39 — — — — — — Stock dividends 192 — — — — — — Net loss — — — — — (18,926) (18,926)Foreign currency translation adjustment — — — — (283) — (283)Balances, December 31, 2014 58,115 $185,289 — $— $(557) $(142,676) $42,056 See accompanying notes to consolidated financial statements. F-5 BIOLASE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years Ended December 31, 2014 2013 2012 Cash Flows From Operating Activities: Net loss $(18,926) $(11,482) $(3,056)Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Depreciation and amortization 696 601 513 Loss on disposal of assets, net 9 — 15 Provision for bad debts 1,295 291 241 Provision for inventory excess and obsolescence 585 1,132 330 Amortization of discount on lines of credit 200 179 43 Amortization of debt issuance costs 128 197 91 Stock-based compensation 1,233 1,609 1,600 Other equity instruments compensation — 106 23 Other non-cash compensation 123 250 250 Deferred income taxes 60 (30) 61 Incurred and unpaid interest expense — 27 19 Changes in operating assets and liabilities: Accounts receivable 826 264 (3,222)Inventory (1,715) (1,436) (160)Prepaid expenses and other current assets (21) 56 450 Customer deposits (174) (297) 417 Accounts payable and accrued liabilities 451 (999) (347)Deferred revenue (971) 236 1,068 Net cash and cash equivalents used in operating activities (16,201) (9,296) (1,664)Cash Flows From Investing Activities: Purchases of property, plant, and equipment (198) (675) (808)Proceeds from disposal of long-lived assets 1 — 124 Purchased other intangible assets — (10) (14)Net cash and cash equivalents used in investing activities (197) (685) (698)Cash Flows From Financing Activities: Borrowings under lines of credit 16,875 35,100 16,600 Payments under lines of credit (21,508) (32,104) (14,963)Payment of debt issuance costs (45) (57) (304)Proceeds from exercise of warrants — — 6 Proceeds from equity offering, net of expenses 51,118 5,201 — Stock repurchase — — (235)Proceeds from exercise of stock options 312 707 455 Net cash and cash equivalents provided by financing activities 46,752 8,847 1,559 Effect of exchange rate changes (234) 31 39 Increase (decrease) in cash and cash equivalents 30,120 (1,103) (764)Cash and cash equivalents, beginning of year 1,440 2,543 3,307 Cash and cash equivalents, end of year $31,560 $1,440 $2,543 Supplemental cash flow disclosure: Interest paid $148 $220 $88 Income taxes paid $52 $47 $62 Supplemental disclosure of non-cash transactions: Intangible assets acquired for accounts receivable reduction $— $— $200 See accompanying notes to consolidated financial statements. F-6 BIOLASE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE 1 — BASIS OF PRESENTATIONThe CompanyBIOLASE, Inc. (“BIOLASE” or the “Company”) incorporated in Delaware in 1987, is a medical device company that develops, manufactures, markets,and sells laser systems in dentistry and medicine and also markets, sells, and distributes dental imaging equipment, including cone beam digital x-rays andCAD/CAM intra-oral scanners, in-office, chair-side milling machines and three dimensional (“3-D”) printers.Basis of PresentationThe consolidated financial statements include the accounts of BIOLASE, Inc. and its wholly-owned subsidiaries. The Company has eliminated allmaterial intercompany transactions and balances in the accompanying consolidated financial statements. Certain amounts for prior years have beenreclassified to conform to the current year presentation.Use of EstimatesThe preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States ofAmerica (“U. S. GAAP”) requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements andthe accompanying notes. Significant estimates in these consolidated financial statements include allowances on accounts receivable, inventory and deferredtaxes, as well as estimates for accrued warranty expenses, goodwill and the ability of goodwill to be realized, revenue deferrals for multiple elementarrangements, effects of stock-based compensation and warrants, contingent liabilities and the provision or benefit for income taxes. Due to the inherentuncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.Fair Value of Financial InstrumentsFair 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 marketparticipants in the principal market (or, if none exists, the most advantageous market) for the specific asset or liability at the measurement date (referred to asthe “exit price”). The fair value is based on assumptions that market participants would use, including a consideration of nonperformance risk. Under theaccounting guidance for fair value hierarchy there are three levels of measurement inputs. Level 1 inputs are quoted prices in active markets for identicalassets or liabilities. Level 2 inputs are observable, either directly or indirectly, other than Level 1. Level 3 inputs are unobservable due to little or nocorroborating market data.The Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities,approximate fair value because of the short maturity of these items. Financial instruments consisting of lines of credit approximate fair value, as the interestrates associated with the lines of credit approximates the market rates for debt securities with similar terms and risk characteristics.Concentration of credit risk, interest rate risk and foreign currency exchange rate riskFinancial instruments which potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents andtrade accounts receivable. The Company maintains its cash and cash equivalents and restricted cash with established commercial banks. At times, balancesmay exceed federally insured limits. To minimize the risk associated with trade accounts receivable, management performs ongoing credit evaluations ofcustomers’ financial condition and maintains relationships with the Company’s customers that allow management to monitor current changes in businessoperations so the Company can respond as needed. The Company does not, generally, require customers to provide collateral before it sells them its products.However it has required certain distributors to make prepayments for significant purchases of products. For the years ended December 31, 2014, 2013, and2012, worldwide sales to the Company’s largest distributor, Henry Schein, Inc. (“HSIC”), accounted for approximately 6%, 5%, and 3%, respectively, of ournet sales.Substantially all of the Company’s revenue is denominated in U.S. dollars, including sales to international distributors. Only a small portion of itsrevenue and expenses is denominated in foreign currencies, principally the Euro and Indian Rupee. The Company’s foreign currency expenditures primarilyconsist of the cost of maintaining offices, including the facilities, consulting services and employee-related costs. Through the year ended December 31,2014, the Company has not entered into any hedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of theCompany’s products outside the United States.F-7 Outstanding balances on the Company’s lines of credit expose it to variable interest rate risks associated with fluctuations in the daily prime rate andLIBOR rate. Under the Company’s current policies, it does not use interest rate derivative instruments to manage exposure to interest rate changes. Increasesin the daily prime rate or LIBOR rate would increase the costs of borrowing and accordingly, the interest expense the Company must pay. However, as ofDecember 31, 2014, the Company did not have a line of credit facility.Liquidity and Management’s PlansThe Company has suffered recurring losses from operations and has not generated cash from operations for the three years ended December 31, 2014.During the year ended December 31, 2014, the principle sources of liquidity for the Company were its available borrowing capacity on the lines of creditwith Comerica Bank and the net proceeds from the February 10, 2014, July 22, 2014, and November 7, 2014 sale by the Company of $4.8 million, $11.5million, and $34.8 million respectively, of unregistered shares of Company common stock discussed below.At December 31, 2014, the Company had approximately $38.6 million in working capital. The Company’s principal sources of liquidity atDecember 31, 2014 consisted of approximately $31.6 million in cash and cash equivalents and $9.0 million of net accounts receivable.The available borrowing capacity on the Company’s lines of credit with Comerica Bank, discussed further in Note 5 — Lines of Credit and OtherBorrowings, and the net proceeds from equity transactions, discussed further in Note 8 – Stockholders’ Equity, have been the Company’s principal sources ofliquidity during the year ended December 31, 2014. On July 28, 2014, the Company repaid all amounts outstanding under its revolving credit facilities withComerica Bank, including principal, accrued interest, and fees which totaled approximately $2.9 million and the credit facilities were terminated.On November 7, 2014, the Company completed a private placement with several institutional and individual investors, and certain of its directors andofficers, under which the Company agreed to sell an aggregate of 14,162,873 unregistered shares of its common stock at the price of $2.39 per share, theclosing price of Company common stock on November 3, 2014, and warrants to purchase up to an aggregate of 9,205,862 unregistered shares of its commonstock at an exercise price of $4.00 per share. Gross proceeds from the sale were $35.0 million, and net proceeds, after offering expenses of approximately$235,000, were approximately $34.8 million. The warrants become exercisable on May 7, 2015, six months after the closing of the private placement, andhave a term of three years from the date of issuance. The Company is using the proceeds for working capital and general corporate purposes. In connectionwith the registration rights granted to these investors, the Company filed a registration statement on Form S-3 with the SEC, which was declared effective onDecember 12, 2014.The Company completed a private placement on July 22, 2014 with several institutional and individual investors, and several of the Company’sdirectors and officers, wherein the Company sold 6,250,000 unregistered shares of its common stock at a price of $1.92 per share (the closing price ofCompany common stock on July 18, 2014). Gross proceeds from the sale totaled $12 million, and net proceeds, after offering expenses of approximately$462,000, were approximately $11.5 million. In connection with the registration rights granted to these investors, the Company filed a registration statementon Form S-3 with the SEC, which was declared effective on September 18, 2014.On February 10, 2014, the Company entered into a subscription agreement with Oracle Partners L.P., Oracle Institutional Partners, L.P., and Oracle TenFund Master, L.P., under which the Company offered an aggregate of 1,945,525 unregistered shares of Company common stock in a private placement at aprice of $2.57 per share. Gross proceeds from the sale were $5.0 million, and net proceeds, after offering expenses of approximately $188,000, wereapproximately $4.8 million. The Company used the proceeds to repay the Company’s lines of credit and for working capital and general corporate purposes.Additional capital requirements may depend on many factors, including, among other things, the rate at which the Company’s business grows,demands for working capital, manufacturing capacity, and any acquisitions that the Company may pursue. From time to time, the Company could berequired, or may otherwise attempt, to raise capital through either equity or debt offerings. The Company cannot provide assurance that it will be able tosuccessfully 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 anysuch financing activity would not be dilutive to its stockholders. NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESCash and Cash EquivalentsThe Company considers all highly liquid investments with maturities of three months or less when purchased, as cash equivalents. Cash equivalentsare carried at cost, which approximates fair market value.F-8 Accounts ReceivableTrade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s bestestimate of the amount of probable credit losses in its existing accounts receivable. The Company evaluates its allowance for doubtful accounts based uponits knowledge of customers and their compliance with credit terms. The evaluation process includes a review of customers’ accounts on a regular basis whichincorporates input from sales, service, and finance personnel. The review process evaluates all account balances with amounts outstanding more than 90 daysfrom the due date and other specific amounts for which information obtained indicates that the balance may be uncollectible. The allowance for doubtfulaccounts is adjusted based on such evaluation, with a corresponding provision included in general and administrative expenses. Account balances arecharged off against the allowance when it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposurerelated to its customers.InventoryThe Company values inventory at the lower of cost, determined using the first-in, first-out method, or market. The carrying value of inventory isevaluated periodically for excess quantities and obsolescence. Management evaluates quantities on hand, physical condition, and technical functionality asthese characteristics may be impacted by anticipated customer demand for current products and new product introductions. The allowance is adjusted basedon such evaluation, with a corresponding provision included in cost of revenue. Abnormal amounts of idle facility expenses, freight, handling costs andwasted material are recognized as current period charges and the Company’s allocation of fixed production overhead is based on the normal capacity of ourproduction facilities.Property, Plant, and EquipmentProperty, plant, and equipment is stated at acquisition cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Uponsale or disposition of assets, any gain or loss is included in the consolidated statements of operations.The cost of property, plant, and equipment is depreciated using the straight-line method over the following estimated useful lives of the respectiveassets, except for leasehold improvements, which are depreciated over the lesser of the estimated useful lives of the respective assets or the related lease terms. Building30 yearsLeasehold improvements3 to 5 yearsEquipment and computers3 to 5 yearsFurniture and fixtures5 yearsDepreciation expense for the years ended December 31, 2014, 2013, and 2012 totaled approximately $627,000, $484,000, and $377,000,respectively.Goodwill and Other Intangible AssetsGoodwill and other intangible assets with indefinite lives are not subject to amortization but are evaluated for impairment annually or wheneverevents or changes in circumstances indicate that the asset might be impaired. The Company operates in one operating segment and has one operating unit;therefore goodwill is tested for impairment at the consolidated level against the fair value of the Company. The fair value of a reporting unit refers to theamount at which the unit as a whole could be bought or sold in a current transaction between willing parties. Quoted market prices in active markets are thebest evidence of fair value and are used as the basis for measurement, if available. Management assesses potential impairment on an annual basis on June 30thand compares the Company’s market capitalization to its carrying amount, including goodwill. A significant decrease in the Company’s stock price couldindicate a material impairment of goodwill which, after further analysis, could result in a material charge to operations. If goodwill is considered impaired, theimpairment loss to be recognized is measured by the amount by which the carrying amount of the goodwill exceeds the implied fair value of that goodwill.Inherent in the Company’s fair value determinations are certain judgments and estimates, including projections of future cash flows, the discount ratereflecting the inherent risk in future cash flows, the interpretation of current economic indicators and market valuations, and strategic plans with regard tooperations. A change in these underlying assumptions could cause a change in the results of the tests, which could cause the fair value of the reporting unit tobe less than its respective carrying amount.Costs incurred to acquire and successfully defend patents, and costs incurred to acquire trademarks and trade names are capitalized. Costs related tothe internal development of technologies that are ultimately patented are expensed as incurred. Intangible assets, except those determined to have anindefinite life, are amortized using the straight-line method or over management’s best estimate of the pattern of economic benefit over the estimated usefullife of the assets. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assetmay not be recoverable.F-9 Long-Lived AssetsThe carrying values of long-lived assets, including intangible assets subject to amortization, are reviewed when indicators of impairment, such asreductions in demand or significant economic slowdowns, are present. Reviews are performed to determine whether carrying value of an asset is impairedbased on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down tofair value, which is typically calculated using discounted expected future cash flows. Impairment is based on the excess of the carrying amount over the fairvalue of those assets.Other Comprehensive (Loss) IncomeOther comprehensive (loss) income encompasses the change in equity from transactions and other events and circumstances from non-owner sourcesand is included as a component of stockholders’ equity but is excluded from net (loss) income. Accumulated other comprehensive gain (loss) is comprised offoreign currency translation adjustments.Foreign Currency Translation and TransactionsTransactions of the Company’s German, Spanish, Australian, and Indian subsidiaries are denominated in their local currencies. The results ofoperations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end-of-period exchange rates.Translation gains or losses are shown as a component of accumulated other comprehensive gain (loss) in stockholders’ equity. Gains and losses resulting fromforeign currency transactions, which are denominated in a currency other than the entity’s functional currency, are included in the consolidated statements ofoperations.Revenue RecognitionThe Company’s products are sold in North America directly to customers through its direct sales force and through non-exclusive distributors. TheCompany sells its products internationally through exclusive and non-exclusive distributors as well as directly to customers in certain countries. Sales arerecorded upon shipment from the Company’s facility and payment of its invoices is generally due within 90 days or less. Internationally, the Companyprimarily sells products through independent distributors. Revenue is recorded based on four basic criteria that must be met before revenue can berecognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferredto the customer or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. Revenue is recorded for allsales upon shipment assuming all other revenue recognition criteria are met.Sales of the Company’s laser systems include separate deliverables consisting of the product, disposables used with the laser systems, installation, andtraining. The Company applies the relative selling price method, which requires that arrangement consideration be allocated at the inception of anarrangement to all deliverables using the relative selling price method. This requires the Company to use (estimated) selling prices of each of the deliverablesin the total arrangement. The sum of those prices is then compared to the arrangement, and any difference is applied to the separate deliverable ratably. Thismethod also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence(“VSOE”) if available, (2) third-party evidence if VSOE is not available, and (3) estimated selling price if neither VSOE nor third-party evidence is available.VSOE is determined based on the value the Company sells the undelivered element to a customer as a stand-alone product. Revenue attributable to theundelivered elements is included in deferred revenue when the product is shipped and is recognized when the related service is performed. Disposables notshipped at time of sale and installation services are typically shipped or installed within 30 days. Training is included in deferred revenue when the productis shipped and is recognized when the related service is performed or upon the appropriate expiration of time offered under the agreement. The adoption ofthe relative selling price method does not significantly change the value of revenue recognized. Deferred revenue attributable to undelivered elements, whichprimarily consists of training, totaled approximately $952,000 and $1.8 million as of December 31, 2014 and 2013, respectively.Key judgments of the Company’s revenue recognition include the collectability of payment from the customer, the satisfaction of all elements of thearrangement having been delivered, and that no additional customer credits and discounts are needed. The Company evaluates the customer’s creditworthiness prior to the shipment of the product. Based on the assessment of the credit information available, the Company may determine the credit risk ishigher than normally acceptable, and will either decline the purchase or defer the revenue until payment is reasonably assured. Future obligations required atthe time of sale may also cause the Company to defer the revenue until the obligation is satisfied.Although all sales are final, the Company accepts returns of products in certain, limited circumstances and records a provision for sales returns basedon historical experience concurrent with the recognition of revenue. The sales returns allowance is recorded as a reduction of accounts receivable andrevenue. As of December 31, 2014 and 2013, $110,000 and $110,000, respectively, was recorded as a reduction of accounts receivable for sales returns.F-10 Extended warranty contracts, which are sold to laser and certain imaging customers, are recorded as revenue on a straight-line basis over the period ofthe contracts, which is typically one year. Included in deferred revenue for each of the years ended December 31, 2014 and 2013, was approximately $1.5million and $1.6 million, respectively, for extended warranty contracts.For sales transactions involving used laser trade-ins, the Company records the purchased trade-ins as inventory at the fair value of the assetsurrendered with the offset to accounts receivable. In determining the estimated fair value of used laser trade-ins, Management makes an assessment of usableparts, key components, and consider the ultimate resale value of the certified pre-owned (or “CPO”) laser with applicable margins. The Company sells theseCPO laser trade-ins as refurbished lasers following its laser system revenue recognition policy. Trade-in rights are not established nor negotiated withcustomers during the initial sales transaction of the original lasers. Trade-in rights are promotional events used at Management’s discretion to encourageexisting laser customers to purchase new lasers by offering perceived discounts in exchange for customers trading in original lasers. A customer is notrequired to trade-in a laser nor is the Company required to accept a trade-in, however, the promotional value offered in exchange for the trade-in laser is notoffered without a laser trade-in. The transaction is treated as a monetary transaction as each sale transaction involving a customer trade-in includes significantboot of greater than 25% of the fair value of the exchange. As a monetary transaction, the sale is recognized following the Company’s laser system revenuerecognition policy. There have been no sales transactions in which the cash consideration was less than 25% of the total transaction value.From time to time, the Company may offer sales incentives and promotions on its products. The cost of sales incentives are recorded at the date atwhich the related revenue is recognized as a reduction in revenue, an increase in cost of goods sold or a selling expense, as applicable, or later, in the case ofincentives offered after the initial sale has occurred.Provision for Warranty ExpenseThe Company provides warranties against defects in materials and workmanship of its laser systems for specified periods of time. For the year endedDecember 31, 2014, WaterLase and Diode systems sold domestically are covered by the Company’s warranty for a period of two years. For the years endedDecember 31, 2013 and 2012, WaterLase systems sold domestically were covered by the Company’s warranty for a period of one year while the Company’sDiode systems warranty period was for two years from date of sale by the Company or the distributor to the end-user. For the year ended December 31, 2014,WaterLase and Diode systems sold internationally are covered by the Company’s warranty for a period of twenty eight months. For the years ended December31, 2013 and 2012, WaterLase systems sold internationally were covered by the Company’s warranty for a period of sixteen months while its Diode systemswarranty period was up to twenty eight months from date of sale to the international distributor. Estimated warranty expenses are recorded as an accruedliability with a corresponding provision to cost of revenue. This estimate is recognized concurrent with the recognition of revenue on the sale to thedistributor or end-user. Warranty expenses expected to be incurred after one year from the time of sale to the distributor are classified as a long-term warrantyaccrual. The Company’s overall accrual is based on its historical experience and Management’s expectation of future conditions, taking into considerationthe location and type of customer and the type of laser, which directly correlate to the materials and components under warranty, the duration of the warrantyperiod, and the logistical costs to service the warranty. Additional factors that may impact the Company’s warranty accrual include changes in the quality ofmaterials, leadership and training of the production and services departments, knowledge of the lasers and workmanship, training of customers, andadherence to the warranty policies. Additionally, an increase in warranty claims or in the costs associated with servicing those claims would likely result inan increase in the accrual and a decrease in gross profit. The Company offers extended warranties on certain imaging products. However, all imaging productsare initially covered by the manufacturer’s warranties.Changes in the initial product warranty accrual and the expenses incurred under our initial and extended warranties for the years ended December 31are included within accrued liabilities on the consolidated balance sheets and were as follows (in thousands): Years Ended December 31, 2014 2013 2012 Initial warranty accrual, beginning balance $1,096 $1,699 $2,218 Provision for estimated warranty cost 1,214 475 1,705 Warranty expenditures (861) (1,078) (2,224)Initial warranty accrual, ending balance 1,449 1,096 1,699 Less warranty accrual, long term 519 — — Total warranty accrual, current portion $930 $1,096 $1,699 Shipping and Handling Costs and RevenuesShipping and handling costs are expensed as incurred and are recorded as a component of cost of revenue. Charges to customers for shipping andhandling are included as a component of revenue.F-11 Advertising CostsAdvertising costs are expensed as incurred and totaled approximately $543,000, $1.5 million, and $907,000 for the years ended December 31, 2014,2013, and 2012, respectively.Engineering and DevelopmentEngineering and development expenses are generally expensed as incurred and consist of engineering personnel salaries and benefits, prototypesupplies, contract services and consulting fees related to product development.Stock-Based CompensationDuring the years ended December 31, 2014, 2013, and 2012, the Company recognized compensation cost related to stock options of $1.2 million,$1.6 million, and $1.6 million, respectively, based on the grant date fair value. The net impact to earnings for the years ended December 31, 2014, 2013, and2012, was $(0.03), $(0.05), and $(0.05) per diluted share, respectively. The following table summarizes the income statement classification of compensationexpense associated with share-based payments (in thousands): Years Ended December 31, 2014 2013 2012 Cost of revenue $134 $288 $245 Sales and marketing 401 585 514 General and administrative 616 594 668 Engineering and development 82 142 173 $1,233 $1,609 $1,600 As of December 31, 2014 and 2013, the Company had $1.4 million and $2.7 million, respectively, of total unrecognized compensation cost, net ofestimated forfeitures, related to unvested share-based compensation arrangements granted under its existing plans. The cost is expected to be recognized overa weighted average period of 0.9 years as of December 31, 2014.The Company uses the Black-Scholes option valuation model for estimating the fair value of traded options. This option pricing model requires theCompany to make several assumptions regarding the key variables used to calculate the fair value of its stock options. The risk-free interest rate used is basedon the U.S. Treasury yield curve in effect for the expected lives of the options at their dates of grant. Since July 1, 2005, the Company has used a dividendyield of zero as it does not intend to pay cash dividends on its common stock in the foreseeable future. The most critical assumptions used in calculating thefair value of stock options is the expected volatility of Company common stock and the expected life of the option. Management believes that the historicvolatility of Company common stock is a reliable indicator of future volatility, and accordingly, a stock volatility factor based on the historical volatility ofCompany common stock over a period of time is used in approximating the estimated volatility of new stock options. The expected term is estimated byanalyzing the Company’s historical share option exercise experience over a five-year period. Compensation expense is recognized using the straight-linemethod for all stock-based awards. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grantbased on historical experience and future expectations. Forfeitures are estimated at the time of the grant and revised in subsequent periods as actualforfeitures differ from those estimates.The stock option fair values were estimated using the Black-Scholes option-pricing model with the following assumptions: 2014 2013 2012 Expected term (years) 3.83 3.65 3.70 Volatility 94% 84% 97%Annual dividend per share $— $— $— Risk-free interest rate 1.66% 1.04% 0.77% Excise TaxCommencing January 1, 2013, certain of the Company’s product sales have been subject to the medical device excise tax. The Company has includedsuch taxes separately as a component of operating expense.F-12 Income TaxesDifferences between accounting for income taxes for financial statement purposes and accounting for tax return purposes are stated as deferred taxassets or deferred tax liabilities in the accompanying consolidated financial statements. The provision for income taxes represents the tax payable for theperiod and the change during the period in deferred tax assets and liabilities. The Company establishes a valuation allowance when it is more likely than notthat the deferred tax assets will not be realized.On January 1, 2007, the Company adopted the interpretations issued by the Financial Accounting Standards Board (“FASB”) which establish a singlemodel to address accounting for uncertain tax positions. The interpretations clarify the accounting for income taxes by prescribing a minimum recognitionthreshold a tax position is required to meet before being recognized in the financial statements and also provides guidance on de-recognition, measurement,classification, interest and penalties, accounting in interim periods, disclosure and transition.The income tax provisions for the years ended December 31, 2014 and 2013 were calculated using the discrete year-to-date method, whichmanagement determined to be more appropriate than the annual effective rate method which was used to calculate the income tax provision for the quarterended March 31, 2013. See Note 6 – Income Taxes for additional disclosures related to the Company’s income tax.Net Loss Per Share — Basic and DilutedBasic net income (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number ofcommon shares outstanding for the period. In computing diluted net income (loss) per share, the weighted average number of shares outstanding is adjustedto reflect the effect of potentially dilutive securities. Common shares outstanding, as included in the calculation of basic and diluted loss per share, includesretroactive adjustments to reflect increases resulting from stock dividends that have been paid through the date that these financial statements are issued.Outstanding stock options and warrants to purchase approximately 10,094,000, 6,039,000, and 4,713,000 shares were not included in the calculationof diluted loss per share amounts for the years ended December 31, 2014, 2013, and 2012, respectively, as their effect would have been anti-dilutive.Recent Accounting PronouncementsChanges to U.S. GAAP are established by the FASB in the form of accounting standards updates (“ASU’s”) to the FASB’s Accounting StandardsCodification (“ASC”).The Company considers the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to not be applicable or areexpected to have minimal impact on the Company’s consolidated financial position and results of operations.Newly Adopted Accounting StandardsIn March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon de-recognition of certainsubsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The revised guidance requires that the parent release any relatedcumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreignentity in which the subsidiary or group of assets had resided. The guidance is effective prospectively for reporting periods beginning after December 15,2013. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.Accounting Standards Not Yet AdoptedIn May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedesnearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods orservices are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenuerecognition process than are required under existing U.S. GAAP.F-13 The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transitionmethods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practicalexpedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includesadditional footnote disclosures). The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financialstatements and has not yet determined the method by which it will adopt the standard during the year ending December 31, 2017.In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. Thestandard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date thefinancial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements.Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 appliesto all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Company does notexpect that the adoption of this standard will have a material effect on its consolidated financial statements. NOTE 3 — SUPPLEMENTARY BALANCE SHEET INFORMATION December 31, ACCOUNTS RECEIVABLE (in thousands): 2014 2013 Components of accounts receivable, net of allowances, are as follows: Trade $8,887 $10,960 Royalties 88 82 Other 29 85 Total receivables, net $9,004 $11,127 Accounts receivable is net of allowances for doubtful accounts of approximately $1.7 million and $573,000 and sales returns of approximately$110,000 and $110,000 at December 31, 2014 and 2013, respectively. December 31, INVENTORY, NET (in thousands): 2014 2013 Components of inventory, net of allowances, are as follows: Raw materials $2,857 $3,094 Work-in-process 1,348 1,727 Finished goods 8,303 6,557 Inventory, net $12,508 $11,378 Inventory is net of a provision for excess and obsolete inventory totaling approximately $2.4 million and $2.8 million at December 31, 2014 and2013, respectively. December 31, PROPERTY, PLANT, AND EQUIPMENT, NET (in thousands): 2014 2013 Components of property, plant, and equipment, net of depreciation, are as follows: Building $226 $256 Leasehold improvements 1,197 1,207 Equipment and computers 4,948 6,078 Furniture and fixtures 413 1,049 Construction in progress 4 8 6,788 8,598 Accumulated depreciation and amortization (5,669) (6,971) 1,119 1,627 Land 176 199 Property, plant, and equipment, net $1,295 $1,826 F-14 Accrued liabilities are comprised of the following: December 31, ACCRUED LIABILITIES (in thousands): 2014 2013 Components of accrued liabilities are as follows: Payroll and benefits $1,905 $1,898 Warranty accrual, current portion 930 1,096 Taxes 139 338 Accrued professional services 1,581 911 Accrued insurance premium 450 428 Other 183 326 Accrued liabilities $5,188 $4,997 Deferred revenue is comprised of the following: December 31, DEFERRED REVENUE (in thousands): 2014 2013 Components of deferred revenue are as follows: Undelivered elements (training, installation, product and support services) $952 $1,823 Extended warranty contracts 1,542 1,642 Total Deferred Revenue 2,494 3,465 Less Long-Term amounts: Extended warranty contracts — 1 Total Deferred Revenue - Long Term — 1 Total Deferred Revenue - Current $2,494 $3,464 In connection with its initiative to measure and improve customer satisfaction, which was initiated during the Third Quarter 2014, the Companyperformed a review of its training service policies and procedures and determined that substantially all of the training service for new customers was usedwithin nine months of the related sale transaction. Accordingly, the Company changed the period over which deferred training service revenue was beingrecognized from an estimated period of 24 months to nine months.The Company accounted for this change as a change in accounting estimate which, pursuant to U.S. GAAP, was accounted for on a prospective basiseffective July 1, 2014. The change resulted in a reduction of deferred revenue and a corresponding recognition of revenue totaling approximately $708,000for quarter ended September 30, 2014. Revenue recognized for training is included in product and services revenue in the accompanying consolidatedstatements of operations. NOTE 4 — INTANGIBLE ASSETS AND GOODWILLThe Company conducted its annual two-step impairment test of goodwill as of June 30, 2014 and determined that there was no impairment. TheCompany also tests its intangible assets and goodwill between the annual impairment test if events occur or circumstances change that would more likelythan not reduce the fair value of the Company or its assets below their carrying amounts. For intangible assets subject to amortization, the Company performsits impairment test when indicators, such as reductions in demand or significant economic slowdowns, are present. No events have occurred that triggeredfurther impairment testing of the Company’s intangible assets and goodwill during the years ended December 31, 2014 and 2013.Amortization expense for the years ended December 31, 2014, 2013, and 2012, totaled $69,000, $117,000, and $136,000, respectively. Estimatedintangible asset amortization expense, based on existing intangible assets, for the years ending December 31, 2015 and 2016, is $62,000 and $52,000,respectively.F-15 The following table presents the details of the Company’s intangible assets, related accumulated amortization and goodwill (in thousands): As of December 31, 2014 As of December 31, 2013 Accumulated Accumulated Gross Amortization Impairment Net Gross Amortization Impairment Net Patents (4-10 years) $1,914 $(1,907) $— $7 $1,914 $(1,895) $— $19 Trademarks (6 years) 69 (69) — — 69 (69) — — Other (4 to 6 years) 817 (710) — 107 817 (653) — 164 Total $2,800 $(2,686) $— $114 $2,800 $(2,617) $— $183 Goodwill (Indefinite life) $2,926 $2,926 $2,926 $2,926 In December 2012, the Company capitalized approximately $224,000 related to intangible assets acquired from its former distributor in India. Theseassets primarily include a non-compete agreement and customer and luminary lists. Of the total capitalized balance, $200,000 was a noncash investmentwhereby the Company reduced the accounts receivable from its former distributor in exchange for these assets. The Company is amortizing these assets on astraight-line basis over the expected useful life of four years and has recognized amortization expense of approximately $57,000 and $55,000 related to theseintangible assets during the years ended December 31, 2014 and 2013, respectively. NOTE 5 — LINES OF CREDIT AND OTHER BORROWINGSLines of CreditThe Company entered into two revolving credit facility agreements with Comerica Bank (the “Credit Agreements”) on May 24, 2012. The revolvinglines of credit provided for borrowings against certain domestic accounts receivable and inventory (the “Domestic Revolver”) and certain export relatedaccounts receivable and inventory (the “Ex-Im Revolver”).On July 28, 2014, the Company repaid all amounts outstanding under the Credit Agreements, including principal, accrued interest, and fees whichtotaled, in the aggregate, approximately $2.9 million, and the Credit Agreements were terminated.The Credit Agreements required the Company to maintain compliance with certain monthly financial and non-financial covenants, as defined therein.Any noncompliance with these covenants could have resulted in default interest rates and penalties, and Comerica Bank could have declared the amountsoutstanding immediately due and payable. On March 4, 2014, the Company received a waiver of noncompliance with certain financial and nonfinancialcovenants as of January 31, 2014 and December 31, 2013. In connection with this waiver, the Company incurred a fee of $10,000 and Comerica Bankreduced the total aggregate available borrowings on the lines of credit to $5.0 million. The Company was not in compliance with a financial covenant as ofFebruary 28, 2014 and, as such, entered into a forbearance agreement (the “Forbearance Agreement”) with Comerica Bank on April 10, 2014. The Companypaid a fee of $10,000 in connection with the Forbearance Agreement and Comerica Bank reduced the total aggregate available borrowings to $4.0 million.The Company was not in compliance with a financial covenant at March 31, 2014 and did not repay the lines of credit in full on the original maturitydate of May 1, 2014. As a result, on May 5, 2014, the Company and Comerica Bank agreed to Amendment No. 1 to the Forbearance Agreement (“AmendmentNo. 1”) which extended the end of the forbearance period from May 1, 2014 to June 1, 2014. In connection with Amendment No. 1, the maturity date of therevolving lines of credit was extended to June 1, 2014 and the Company paid an administrative fee of $10,000. On June 3, 2014 the Company and ComericaBank agreed to Amendment No. 2 to the Forbearance Agreement (“Amendment No. 2”) which extended the maturity date of the revolving lines of credit toAugust 1, 2014. In connection with Amendment No. 2, Comerica Bank increased the interest rates on the lines of credit by 0.50% and the Company paid anadministrative fee of $15,000. The Company was not in compliance with certain financial covenants as of May 31, 2014 and, as a result, agreed toAmendment No. 3 to the Forbearance Agreement with Comerica Bank whereby the forbearance period was continued to August 1, 2014 and the Companypaid an administrative fee of $10,000. As of December 31, 2013, the Credit Agreements provided for borrowings against certain domestic accounts receivable and inventory, as set forth inthe $4.0 million revolving credit facility agreement (the “Domestic Revolver”), and borrowings against certain export related accounts receivable andinventory, as set forth in the $4.0 million revolving credit facility agreement (the “Ex-Im Revolver”), for a combined aggregate commitment of borrowings upto $8.0 million. As of December 31, 2013, the Company had outstanding borrowings totaling approximately $4.6 million, which included $1.8 million underthe Domestic Revolver and $2.8 million under the Ex-Im Revolver.F-16 The outstanding principal balances of the Credit Agreements, as amended June 3, 2014, bore interest at annual percentage rates equal to the dailyprime rate, plus 2.50% for the Domestic Revolver and 2.00% for the Ex-Im Revolver. The daily prime rate was subject to a floor of the daily adjusting LIBORrate plus 2.50% per annum, or if LIBOR was undeterminable, 2.50% per annum. The Company was also required to pay an unused commitment fee of 0.25%based on a portion of the undrawn lines of credit, payable quarterly in arrears. As of December 31, 2013, the outstanding principal balances of the CreditAgreements bore interest at annual percentage rates equal to the daily prime rate, plus 2.00% for the Domestic Revolver and 1.50% for the Ex-Im Revolver.The daily prime rate was subject to a floor of the daily adjusting LIBOR rate plus 2.50% per annum, or if LIBOR is undeterminable, 2.50% per annum. TheCompany was also required to pay an unused commitment fee of 0.25% based on a portion of the undrawn lines of credit, payable quarterly in arrears. Duringthe years ended December 31, 2014 and 2013, the Company incurred $457,000 and $599,000, respectively, of interest expense associated with the creditfacilities, including $128,000 and $197,000, respectively, of amortization of deferred debt issuance costs and $200,000 and $179,000, respectively, ofamortization of the discount on lines of credit. Interest expense payable was approximately $0 and $20,000 at December 31, 2014 and 2013, respectively,and was included in accrued liabilities in the accompanying consolidated financial statements.Lockbox arrangements under the revolving bank facilities provided that substantially all of the income generated was deposited directly into lockboxaccounts and then swept into cash management accounts for the benefit of Comerica Bank. Cash was disbursed from Comerica Bank to the Company onlyafter payment of the applicable debt service and principal. At December 31, 2014 and 2013, there were no restricted cash amounts. The Company’sobligations were generally secured by substantially all of the Company’s assets now owned or thereinafter acquired.Pursuant to the Credit Agreements, the Company incurred $55,000 and $67,000 of commitment fees and legal costs associated with the variouswaivers and amendments during the years ended December 31, 2014 and 2013, respectively. Commitment fees and legal costs associated with acquiring andmaintaining the credit facilities were capitalized and amortized on a straight-line basis as interest expense over the term of the Credit Agreements.On November 8, 2013, in connection with Amendment No. 4 to the Credit Agreements, the Company issued a warrant to Comerica Bank (the“November 2013 Comerica Warrant”) to purchase up to 100,000 shares of Company common stock at an exercise price per share of $2.00. The November2013 Comerica Warrant includes an accelerated vesting clause that may be triggered by certain events described therein, but otherwise vests in four equalquarterly tranches over a one year period commencing on December 31, 2013. The November 2013 Comerica Warrant may be exercised, in whole or in part,with a cash payment from Comerica Bank, or Comerica Bank may exercise the November 2013 Comerica Warrant on a cashless basis. The fair value of theNovember 2013 Comerica Warrant was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 5.00years; volatility of 102.65%; annual dividend per share of $0.00; and risk-free interest rate of 1.42%; and resulted in an estimated fair value of $137,000which was recorded as equity and resulted in a discount to the Credit Agreements that was amortized on a straight-line basis to interest expense. During thethird quarter of 2014, Comerica Bank exercised all 100,000 of the November 2013 Comerica Warrant on a cashless basis resulting in a net issuance of 19,354shares of Company common stock.On September 6, 2013, in connection with Amendment No. 3 to the Credit Agreements, the Company issued an additional warrant to Comerica Bank(the “September 2013 Comerica Warrant”) to purchase up to 100,000 shares of Company common stock at an exercise price per share of $2.00. TheSeptember 2013 Comerica Warrant vests in four equal quarterly tranches over a one year period commencing on December 31, 2013. The 2013 ComericaWarrant may be exercised, in whole or in part, with a cash payment from Comerica Bank, or Comerica Bank may exercise the September 2013 ComericaWarrant on a cashless basis. The fair value of the September 2013 Comerica Warrant was estimated using the Black-Scholes option-pricing model with thefollowing assumptions: expected term of 5.00 years; volatility of 105.32%; annual dividend per share of $0.00; and risk-free interest rate of 1.77%; andresulted in an estimated fair value of $143,000 which was recorded as equity and resulted in a discount to the Credit Agreements that was amortized on astraight-line basis to interest expense. During the third quarter of 2014, Comerica Bank exercised all 100,000 of the September 2013 Comerica Warrant on acashless basis resulting in a net issuance of 19,354 shares of Company common stock.During the year ended December 31, 2012, the Company issued a warrant to Comerica Bank (the “2012 Comerica Warrant”) to purchase up to 80,000shares of Company common stock at an exercise price of $2.83 per share, which was reduced to $2.00 per share in connection with Amendment No. 1 to theCredit Agreements, with an expiration date of May 24, 2017. During the first quarter of 2013, Comerica Bank exercised all 80,000 of the 2012 ComericaWarrants on a cashless basis resulting in a net issuance of 40,465 shares of Company common stock. The amended warrant issuance has an estimated fairvalue of $142,000 which was recorded as equity and resulted in a discount to the Credit Agreements that is being amortized on a straight-line basis to interestexpense.F-17 Other BorrowingsThe Company financed a portion of its annual insurance premiums which it paid in installments over nine months. As of December 31, 2014, $0 wasoutstanding under this arrangement. As of December 31, 2013, $197,000 at an annual interest rate of 2.9% was outstanding under this arrangement. TheCompany incurred interest expense associated with the financed insurance premiums of approximately $3,000 for the year ended December 31, 2014 and$5,000 during the years ended December 31, 2013 and 2012. NOTE 6 — INCOME TAXESThe Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the futuretax 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 berecovered 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 enactmentdate. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, theperiod in which they are expected to be recovered, and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is establishedwhen it is “more likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that a full valuation allowanceagainst the Company’s net deferred tax assets is appropriate.The following table presents the current and deferred provision (benefit) for income taxes for the years ended December 31 (in thousands): 2014 2013 2012 Current: Federal $— $(138) $— State 27 31 18 Foreign 25 (27) 32 52 (134) 50 Deferred: Federal 60 72 57 State — (118) 12 Foreign — 16 (8) 60 (30) 61 $112 $(164) $111 During the year ended December 31, 2013, the Company reversed certain tax liabilities associated with unrecognized tax benefits related tointernational operations due to expiring statutes and recognized tax benefits of $138,000 and recognized deferred tax assets related to certain indefinite livedassets (federal alternative minimum tax credits and California R&D credits) that were used to offset deferred tax liabilities related to indefinite-livedintangible assets of $107,000 resulting in an overall tax benefit of $245,000. Management does not expect to record additional significant tax benefits in theforeseeable future.The provision for income taxes differs from the amount that would result from applying the federal statutory rate as follows for the years endedDecember 31: 2014 2013 2012 Statutory regular federal income tax rate (34.0)% (34.0)% (34.0)%Change in valuation allowance 37.4 % 27.0 % (13.0)%Tax return to prior year provision adjustments — % (0.9)% 16.2 %Expiration of federal net operating losses — % — % 28.2 %Reduction of net operating loss attributes — % (3.1)% (3.7)%State tax benefit (net of federal benefit) (3.3)% (4.2)% 4.1 %Research credits (1.9)% (2.1)% — Foreign amounts with no tax benefit (0.1)% (0.2)% (0.6)%Non-deductible expenses 1.0 % 1.6 % 6.1 %Effect of change in rate 2.3 % 14.2 % — %Other (0.8)% 0.3 % 0.5 %Total 0.6 % (1.4)% 3.8 %F-18 The components of the deferred income tax assets and liabilities as of December 31 (in thousands): 2014 2013 Capitalized intangible assets for tax purposes $202 $283 Reserves not currently deductible 1,871 1,702 Deferred revenue 8 8 Stock options 2,911 2,565 State taxes 8 7 Income tax credits 2,200 1,583 Inventory 1,225 871 Property and equipment 280 376 Other comprehensive income 222 109 Unrealized gain on foreign currency 136 142 Net operating losses 33,140 28,058 Total deferred tax assets 42,203 35,704 Valuation allowance (42,069) (35,566)Net deferred tax assets 134 138 Capitalized intangible assets (752) (696)Other (59) (59)Total deferred tax liabilities (811) (755)Net deferred tax liabilities $(677) $(617) Based upon the Company’s operating losses incurred for the three years ended December 31, 2014, and the available evidence, the Company hasestablished a valuation allowance against its net deferred tax assets in the amount of $42.1 million as of December 31, 2014. Management considered factorssuch as the Company’s earnings history, future projected earnings and tax planning strategies. If sufficient evidence of the Company’s ability to generatesufficient future taxable income tax benefits becomes apparent, the valuation allowance may be reduced, thereby resulting in tax benefits in the statement ofoperations and additional paid-in-capital. Management evaluates the potential realization of the Company’s deferred tax assets and assesses the need forreducing the valuation allowance periodically.As of December 31, 2014, the Company had net operating loss (“NOL”) carryforwards for federal and state purposes of approximately $93.2 millionand $63.9 million, respectively, which expire in 2018 through 2034. The utilization of NOL and credit carryforwards may be limited under the provisions ofthe Internal Revenue Code (“IRC”) Section 382 and similar state provisions. IRC Section 382 generally imposes an annual limitation on the amount of NOLcarryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. During the year endedDecember 31, 2006, the Company completed an analysis to determine the potential applicability of any annual limitations imposed by IRC Section 382.Based on the analysis, management determined that there was no significant IRC Section 382 limitation. As of December 31, 2014, the Company hadresearch and development tax credit carryforwards for federal and state purposes of approximately $1.4 million and $1.1 million, respectively, which willbegin to expire in 2018 through 2034 for federal purposes and will carry forward indefinitely for state purposes. An updated analysis may be required at thetime the Company begins utilizing any of its net operating losses to determine if there is an IRC Section 382 limitation.In addition to the NOL carryforwards included in the deferred tax asset and liability schedule are excess tax deductions relating to stock options thathave not been realized. When the benefit of the NOLs containing these excess tax deductions are realized, the benefit will not affect earnings, but ratheradditional paid-in-capital. As of December 31, 2014 and 2013, the cumulative unrealized excess tax deductions amounted to approximately $6.9 million and$7.0 million, respectively. These amounts have been excluded from the Company’s NOL carryforwards. To the extent that such excess tax deductions arerealized in the future by virtue of reducing income taxes payable, the Company would expect additional paid-in-capital to increase by approximately $2.6million and $2.7 million for the years ended December 31, 2014 and 2013, respectively. The Company follows the appropriate ordering rules to determinewhen such NOLs have been realized.Recently enacted tax laws may also affect the tax provision on the Company’s financial statements. The state of California requires the use of a singlesales factor apportionment formula for tax years beginning on or after January 1, 2013. During the year ended December 31, 2013, the Company’s statedeferred tax assets were revalued to account for the change in the tax law; however, the Company records a full valuation allowance against the state deferredtax assets therefore the California apportionment mandate did not have a material impact on the Company’s consolidated financial statements.F-19 The following table summarizes the activity related to the Company’s unrecognized tax benefits during the year ended December 31, 2014 (inthousands): Balance at January 1, 2014 $568 Additions for tax positions related to the prior year — Lapse of statute of limitations — Balance at December 31, 2014 $568 The Company expects resolution of unrecognized tax benefits, if created, would occur while the full valuation allowance of deferred tax assets ismaintained. The Company does not expect to have any unrecognized tax benefits that, if recognized, would affect the effective tax rate. As of December 31,2014 and 2013, the Company does not have liability for potential penalties or interest. The Company does not expect its unrecognized tax benefits tochange significantly over the next 12 months.The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2010 through 2014 tax yearsgenerally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2008 through 2014 tax years remain subject toexamination by their respective tax authorities.U.S. income taxes or withholding taxes were provided for all the distributed earnings for the Company’s foreign subsidiaries as of December 31, 2014.There were no undistributed earnings from foreign subsidiaries as of December 31, 2014 or 2013. The Company intends to reinvest any earnings until suchtime a decision is made to liquidate the foreign operations. NOTE 7 — COMMITMENTS AND CONTINGENCIESLeasesIn January 2006, the Company entered into a five-year lease for its 57,000 square foot corporate headquarters and manufacturing facility located at 4Cromwell, Irvine, California, with initial monthly installments of $38,692 and annual adjustments over the lease term. On September 24, 2009, the lease wasamended to extend the term through April 20, 2015, adjust the basic rent, and modify provisions to the security deposit. On January 4, 2011, the lease wasfurther amended to defer a portion of the basic rent to future periods. The Company is recognizing rent expense on a straight line basis with the differencebetween rent expense and the cash paid recorded to deferred rent. These amounts are reflected in the commitments as of December 31, 2014, listed below. TheCompany also leases certain office equipment and automobiles under various operating lease arrangements.Future minimum rental commitments under operating lease agreements with non-cancelable terms greater than one year for each of the years endingDecember 31 are as follows (in thousands): 2015 $597 2016 306 2017 131 2018 — Thereafter — Total future minimum lease obligations $1,034 Rent expense totaled approximately $1.0 million, $1.1 million, and $789,000 for the years ended December 31, 2014, 2013, and 2012, respectively.Employee arrangements and other compensationCertain members of management are entitled to severance benefits payable upon termination following a change in control, which would approximate$503,000 and $717,000 at December 31, 2014 and 2013, respectively. The Company also has agreements with certain employees to pay bonuses based ontargeted performance criteria. As of December 31, 2014 and 2013, approximately $125,000 and $0 was accrued for performance bonuses, which is included inaccrued liabilities in the consolidated balance sheets.F-20 Purchase CommitmentsThe Company generally purchases components and subassemblies for its products from a limited group of third-party suppliers through purchaseorders. The Company had $14.1 million of purchase commitments as of December 31, 2014, for which the Company has not received the goods or servicesand which is expected to be purchased primarily within one year. These purchase commitments were made to secure better pricing and to ensure theCompany will have the necessary parts to meet anticipated near term demand. Although open purchase orders are considered enforceable and legallybinding, the Company may be able to cancel, reschedule, or adjust requirements prior to supplier fulfillment.LitigationThe Company discloses material loss contingencies deemed to be reasonably possible and accrues for loss contingencies when, in consultation withits legal advisors, management concludes that a loss is probable and reasonably estimable. The ability to predict the ultimate outcome of such mattersinvolves judgments, estimates, and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates.Class Action LawsuitsOn August 23, 2013, a purported class action lawsuit entitled Brady Adams v. Biolase, Inc., et al., Case No. 13-CV-1300 JST (FFMx) was filed in theUnited States District Court for the Central District of California against BIOLASE and its then Chief Executive Officer, Federico Pignatelli, and its ChiefFinancial Officer, Frederick D. Furry. On August 26, 2013, a purported class action lawsuit entitled Ralph Divizio v. Biolase, Inc., et al., Case No. 13-CV-1317 DMG (MRWx) was filed in the same court against BIOLASE, Messrs. Pignatelli and Furry, and its then President and Chief Operating Officer,Alexander K. Arrow. Each of the lawsuits alleges violations of the federal securities laws and asserts causes of action against the defendants under Sections10(b) and 20(a) of the Securities Exchange Act of 1934. In accordance with the Private Securities Litigation Reform Act of 1995, on December 10, 2013, thecourt entered an order consolidating the lawsuits, appointing a lead plaintiff and approving the lead plaintiff’s selection of lead counsel. On February 24,2014, the lead plaintiff filed a consolidated complaint against the Company and Messrs. Pignatelli, Furry, and Arrow, alleging violations of the federalsecurities laws and asserting causes of action against the defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.On November 19, 2013, the Company’s board of directors (the “Board”) received a letter from attorneys for purported shareholder David T. Long,demanding that the Board investigate, institute litigation, and take measures to redress and prevent alleged wrongdoing concerning the dissemination ofcertain allegedly false and misleading public disclosures made by the Company between January 2013 and August 2013.The Company believes that the claims contained in the lawsuits are without merit and intends to vigorously defend against the claims. During the yearended December 31, 2013, the Company paid $250,000 for legal costs incurred in connection with these matters. No legal costs were incurred by theCompany in connection with these matters during the year ended December 31, 2014.Subsequent to December 31, 2014, the parties have reached an agreement in principle to settle the consolidated securities class action lawsuit, whichis subject to the negotiation of a definitive settlement agreement and preliminary and final approval of the court. Although there can be no assurance thatsuch agreement will be finalized, as of the date of these financial statements, management does not expect the Company to incur additional expenses relatedto this matter due to certain insurance coverage in place.Shareholder LitigationOn March 3, 2014, the Company announced that its Board had appointed Paul N. Clark and Jeffrey M. Nugent to the Board and Dr. Alexander K.Arrow and Dr. Samuel B. Low had tendered their resignations. Subsequent to the Company’s announcement, Drs. Arrow and Low purported to rescind theirresignations. On March 6, 2014, Mr. Pignatelli instructed someone at the Company to file a Current Report on Form 8-K stating that the Board had appointedMessrs. Clark and Nugent and that, as a result of those appointments, there were eight directors on the Board.On March 11, 2014, Oracle Partners L.P. (“Oracle”) filed a lawsuit in the Delaware Court of Chancery (the “Court of Chancery”) seeking adetermination that, among other things, the Board consisted of only six members (not eight) and Drs. Arrow and Low had resigned from the Board and beenreplaced by Messrs. Clark and Nugent.F-21 Following discovery and an expedited trial, the Delaware Court of Chancery held that (1) the Board was comprised of five members, (2) Dr. Arrow’sresignation was effective and Mr. Clark was validly appointed, and (3) Dr. Low’s resignation was ineffective and Mr. Nugent had not been validly appointed.The Delaware Supreme Court affirmed the Chancery Court’s decision. Mr. Pignatelli resigned as Chairman of the Board and Chief Executive Officer of theCompany on June 12, 2014, the same date as the Delaware Supreme Court’s ruling.On July 3, 2014, Mr. Pignatelli purported to provide notice of his intention to nominate five candidates (including himself) for election to the Boardat our annual meeting. However, such notice failed to comply with the Company’s bylaws, because at the time that he provided such notice, while Mr.Pignatelli was a beneficial owner of our common stock, he did not have his holder of record provide such notice on his behalf.On July 21, 2014, Mr. Pignatelli filed a complaint in the Court of Chancery of the State of Delaware, naming the Company, Messrs. Clark, Nugent andTalevich and Dr. Moll as defendants. The complaint alleged, among other things, that (a) a slate of director nominees proposed by Mr. Pignatelli was valid,(b) certain members of the Company’s Board breached their fiduciary duties by rejecting Mr. Pignatelli’s slate, (c) the Company breached an agreementbetween Mr. Pignatelli and one current and several former Board members to nominate him for election, and (d) the Company’s recently enacted bylawamendments, including a fee-shifting bylaw provision, were invalid. Mr. Pignatelli sought expedited proceedings with respect to all of his claims other thanthe claims relating to the recently enacted bylaw amendments.On July 24, 2014, the Chancery Court denied Mr. Pignatelli’s motion for expedited proceedings on all but one of his claims (the rejection of Mr.Pignatelli’s slate).On July 29, 2014, Mr. Pignatelli filed a notice of voluntary dismissal of his July 21, 2014 complaint and withdrew his lawsuit.On August 6, 2014, Mr. Pignatelli resigned as director of the Company.Intellectual Property LitigationOn April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against the Company in the District of Utah for patent infringement of U.S. Patent No.7,485,116 (the “116 Patent”) regarding the Company’s ezlase dental laser. On September 9, 2012, CAO filed its First Amended Complaint, which addedclaims for (1) business disparagement/injurious falsehood under common law and (2) unfair competition under 15 U.S.C. Section 1125(a). The additionalclaims stem from a press release that the Company issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO andits diode product. The First Amended Complaint seeks injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. On November 13,2012, the Court stayed the lawsuit for 120 days to allow the United States Patent and Trademark Office (the “USPTO”) to consider the Company’s request forreexamination of the patent-in-suit. The USPTO granted the request to reexamine the asserted claims of the patent-in-suit and, on February 28, 2013, theCourt stayed the lawsuit until the termination of the reexamination proceedings. On April 23, 2013, the USPTO issued an office action rejecting all of theasserted claims over the prior art, and CAO responded to the office action. On August 28, 2013, the USPTO issued an Action Closing Procedure, rejecting allof CAO’s patent claims. CAO responded to the USPTO’s ruling and on December 10, 2013, the USPTO issued a Right of Appeal Notice, finally rejectingsome claims of the 116 Patent while finding that other claims appeared to be patentable. The Company appealed the USPTO’s findings on January 9, 2014and on January 27, 2014, the USPTO declined to reconsider the finding of certain claims as patentable and instructed the parties to proceed to appeal to thePatent Trial and Appeal Board. On March 17, 2014, the Company filed its brief in support of its appeal of the USPTO’s decision not to reject certain claims ofthe 116 Patent. On March 24, 2014, CAO filed its brief in support of its appeal of the USPTO’s decision to reject certain claims of the 116 patent. On April 18,2014, the Company filed a respondent brief in opposition to the CAO’s appeal arguments. On May 30, 2014, both parties filed rebuttal briefs in support oftheir appeals. On June 30, 2014, the Company requested an oral hearing before the Board. On July 1, 2014, the Board noted that request and docketed thecase for consideration. A hearing on reconsideration was held in November 2014.The Company filed a patent infringement lawsuit against Fotona dd. (“Fotona”) in Düsseldorf District Court (the “Düsseldorf Court”) on April 12,2012 alleging infringement with respect to the Fotona Fidelis dental laser system. Fotona denies liability and seeks the reimbursement of statutory fees fromthe Company. Together with its response brief, Fotona also filed a nullity action against the patent in dispute, patent number EP 1 560 470. The nullityaction is pending at the German Federal Patent Court (the “Patent Court”), Docket No. 1 Ni 58/13 (EP). On September 2, 2013, the Company filed itscounterplea in the infringement proceedings and phrased its arguments defending the validity of the patent. These arguments were also the subject of thedefense brief to the Patent Court in the parallel nullity action proceedings. On September 9, 2013, the Company filed its response to the Patent Court. Fotonafiled a rejoinder on February 3, 2014, including its counterplea on nullity.F-22 On April 29, 2014, the Düsseldorf Court rendered a first instance decision whereby Fotona must cease and desist from selling its Fidelis andLightwalker dental laser systems, render accounts on past sales, recall respective products, and pay damages on infringement. Additionally, the Company wasawarded statutory fees, court costs, and attorney fees. Preliminary enforcement against Fotona is possible if the Company posts a bond totaling €500,000,which is designed to cover a portion of the potential damages, before a final instance decision is available. In Germany, damages can be calculated based onthe profits made by the infringer after the formal announcement of the granting of a patent, in this case beginning January 1, 2009, without considering directlabor or any other operational costs. This could amount to several million euros. However, Fotona has yet to provide the details of its profits in order to allowthe Company to calculate the damages. In the two additional first instance cases following the extension of the initial lawsuit against Fotona, the DüsseldorfCourt also required the Company to provide a statutory bond totaling €146,000. Such bonds are traditionally imposed on foreign plaintiffs to cover allstatutory, court, and attorney’s fees. Fotona submitted its responses to the action and filed respective invalidation actions against the rights of the Company,which are now pending at the Patent Court and the Federal Patent and Trademark Office.Other MattersIn the normal course of business, the Company may be subject to other legal proceedings, lawsuits and other claims. Although the ultimate aggregateamount of probable monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable withassurance, the Company’s management believes that any monetary liability or financial impact to the Company from these other matters, individually and inthe aggregate, would not be material to the Company’s financial condition, results of operations or cash flows. However, there can be no assurance withrespect to such result, and monetary liability or financial impact to the Company from these other matters could differ materially from those projected. NOTE 8 — STOCKHOLDERS’ EQUITYPreferred StockThe Board, without further stockholder authorization, may issue from time to time up to 1,000,000 shares of the Company’s preferred stock. Of the1,000,000 shares of preferred stock, 500,000 shares are designated as Series B Junior Participating Cumulative Preferred Stock. As of December 31, 2014 and2013, none of the preferred stock was outstanding.The Company has adopted a stockholder rights plan under which one preferred stock purchase right was distributed on January 11, 1999 with respectto each share of common stock outstanding at the close of business on December 31, 1998 and with respect to each share of common stock issued by theCompany since then. The rights expire on December 31, 2018. While the rights are outstanding, they provide, among other things, that in the event anyperson becomes the beneficial owner of at least 20% of common stock outstanding (subject to certain exceptions), each right will be exercisable to purchaseshares of Company common stock having a market value equal to two times the then current exercise price of a right (initially $30.00). The rights alsoprovide that, if on or after the occurrence of such event, the Company merges with any other corporation or 50% or more of its assets or earning power aresold, each right will be exercisable to purchase common stock of the acquiring corporation having a market value equal to two times the then current exerciseprice of such stock. The Board may, at its option, authorize and direct the redemption of all, but not less than all, of the then-outstanding rights at aredemption price of $0.001 per right, subject to adjustment for any stock split, stock dividend or transaction occurring after December 31, 1998.Common StockAt December 31, 2014, the Company had 58,115,000 shares of Company common stock issued and outstanding. The Company currently has100,000,000 shares of Company common stock authorized for issuance. On July 18, 2014, the Company retired 1,963,500 shares of Company common stockheld in treasury at that date. The Company recorded the cost of the treasury stock retired as a $2,000 reduction to common stock and a $16,397,000 reductionin additional paid in capital.2014 common stock issuancesOn November 7, 2014, the Company completed a private placement (the “November 2014 Private Placement”) with several institutional andindividual investors, and certain of its directors and officers, under which the Company agreed to sell an aggregate of 14,162,873 unregistered shares ofCompany common stock at the price of $2.39 per share, the closing price of Company common stock on November 3, 2014, and warrants to purchase up toan aggregate of 9,205,862 unregistered shares of its common stock at an exercise price of $4.00 per share. Gross proceeds from the sale totaled $35.0 million,and net proceeds, after offering expenses of approximately $235,000, were approximately $34.8 million. The warrants become exercisable on May 7, 2015,six months after the closing of the private placement, and have a term of three years from the date of issuance. The Company is using the proceeds forworking capital and general corporate purposes. In connection with the registration rights granted to these investors, the Company filed a registrationstatement on Form S-3 with the SEC, which was declared effective on December 12, 2014.F-23 On July 22, 2014, the Company completed a private placement with several institutional and individual investors, and several of our directors andofficers, wherein the Company sold 6,250,000 unregistered shares of Company common stock at a price of $1.92 per share (the closing price of Companycommon stock on July 18, 2014). Gross proceeds from the sale totaled $12.0 million, and net proceeds, after offering expenses of approximately $462,000,were approximately $11.5 million. The Company used the proceeds to repay the Company’s lines of credit with Comerica Bank and for working capital andgeneral corporate purposes. In connection with the registration rights granted to these investors, the Company filed a registration statement on Form S-3 withthe SEC, which was declared effective on September 18, 2014.On February 10, 2014, the Company entered into a subscription agreement with Oracle Partners L.P., Oracle Institutional Partners, L.P., and Oracle TenFund Master, L.P., under which the Company offered an aggregate of 1,945,525 unregistered shares of Company common stock in a private placement at aprice of $2.57 per share. Gross proceeds from the sale totaled $5.0 million and net proceeds, after offering expenses of approximately $188,000, totaledapproximately $4.8 million. The Company used the proceeds for working capital and general corporate purposes.2013 common stock issuancesOn December 19, 2013, the Company entered into a subscription agreement with Oracle Ten Fund Master, LP under which the Company offered anaggregate of 340,000 unregistered shares of Company common stock in a private placement at a price of $1.80 per share. Gross proceeds from the sale totaled$612,000, and net proceeds, after offering expenses of approximately $30,000, totaled approximately $582,000. The Company used the proceeds for workingcapital and general corporate purposes.On July 26, 2013, the Company filed a registration statement on Form S-3, File No. 333-190158 (“2013 Registration Statement”) with the SEC toregister an indeterminate number of shares of Company common stock, preferred stock, and warrants with a total offering price not to exceed $5 million. The2013 Registration Statement was declared effective by the SEC on September 19, 2013. On September 23, 2013, the Company entered into an agreementwith Northland Securities, Inc. (“Northland”), pursuant to which Northland acted as placement agent in connection with the sale of 2,688,172 shares of itscommon stock at a price of $1.86 per share. Gross proceeds from the sale totaled $5 million, and net proceeds after offering expenses of $408,000, whichincluded Northland’s fee, totaled approximately $4.6 million.Stock dividendsThe Board declared one-half percent stock dividends during each of the four quarters of 2013. The stock dividend declared during the quarter endedDecember 31, 2013 was payable December 30, 2013 to shareholders of record on December 16, 2013. The stock dividend declared during the quarter endedSeptember 30, 2013 was payable September 13, 2013 to shareholders of record on August 30, 2013. The stock dividend declared during the quarter endedJune 30, 2013 was payable June 28, 2013 to shareholders of record on June 14, 2013. The stock dividend declared during the quarter ended March 31, 2013was payable March 29, 2013 to shareholders of record on March 15, 2013. All stock information presented, other than that related to stock options andwarrants, has been adjusted to reflect the effects of stock dividends.In February 2014, the Board announced a 2% annual stock dividend policy for 2014, payable in quarterly installments, and declared a one-halfpercent stock dividend payable March 28, 2014, to stockholders of record on March 14, 2014. No additional stock dividends were declared by the Board in2014.Stock dividends are discussed quarterly by the Board and management. The actual declaration of future stock dividends and the establishment of therecord and payment dates are subject to final determination by the Board after its review of the Company’s financial performance, the expected results offuture operations, availability of shares, and other factors that the Board may deem relevant. The Company’s dividend policy may be changed at any time bythe Board, and there is no assurance, with respect to the amount or frequency, that any stock dividend will be declared in the future.Stock repurchase programOn August 10, 2011, the Company announced that its Board authorized a stock repurchase program, pursuant to which the Company was authorizedto repurchase up to an aggregate of 2,000,000 shares of the Company’s outstanding common stock. The stock repurchase program became effective onAugust 12, 2011 and expired on August 12, 2013. Pursuant to the stock repurchase program, the Company repurchased 133,365 shares of the Company’scommon stock at a weighted average price of $1.73 during the year ended December 31, 2012.F-24 WarrantsThe Company issues warrants for the sale of its common stock as approved by its Board. Warrants to purchase up to an aggregate of 9,205,862unregistered shares of Company common stock at an exercise price of $4.00 per share were issued in connection with the November 2014 Private Placementand are accounted for within stockholders’ equity on the consolidated balance sheets in accordance with GAAP. In addition to the aforementioned warrantsissued in connection with common stock transactions, the Company has issued warrants in connection with strategic initiatives as follows:On July 12, 2013, the Company entered into a strategic agreement with Valam, Inc. (“Valam”) to develop, market, and sell office-based laser systemsto otolaryngologists (also known as “Ear, Nose, and Throat” or “ENT” doctors) (the “Valam Agreement”). The Valam Agreement provides the Company withan exclusive worldwide license to Valam’s ENT related patents and pending patents which complement the Company’s patent portfolio and support theCompany’s launch into the ENT laser market beginning in late 2013. In connection with the Valam Agreement, the Company issued Valam a warrant topurchase up to 165,000 shares of Company common stock, at a modified price per share of $4.00 (the “Valam Warrant”), which is a decrease from the originalagreed upon price per share of $6.00. The Valam Warrant is performance-based and vests as follows: 30,000 warrants upon the launch of the Company’s firstENT laser; 55,000 warrants upon the receipt of certain specified clearances required from the U.S. Food and Drug Administration (the “FDA”); 40,000warrants upon achieving $5 million in ENT laser revenues for a 12-month period; and 40,000 warrants upon achieving $10 million in ENT laser revenues fora 12-month period. Vested warrants may be exercised with a cash payment, or on a cashless basis. The Valam Warrant expires on July 14, 2020. As ofDecember 31, 2014 and 2013, in connection with the Valam warrant, 30,000 warrants have been earned and stock-based compensation costs ofapproximately $41,000 have been recognized.On April 26, 2013, the Company issued a warrant to Sun Dental Laboratories, LLC (“Sun Dental Labs”) to purchase up to 500,000 shares of Companycommon stock, at a price per share of $5.90 (the “Sun Dental Warrant”). The Sun Dental Warrant was performance-based and vested at a rate of 1,000 sharesper each 3Shape A/S (“3Shape”) Trios intraoral scanner (“Trios IOS”) that Sun Dental Labs assists in selling in conjunction with the agreement. The SunDental Warrant expired on April 24, 2014. The Company recorded stock-based compensation expense of $0 and less than $1,000 related to the Sun DentalWarrant during the years ended December 31, 2014 and 2013.On April 18, 2013, the Company issued to an investor relations firm a warrant (the “2013 IR Warrant”) to purchase up to 60,000 shares of Companycommon stock at a price per share of $5.10. The 2013 IR Warrant vests and becomes exercisable only if the closing price of Company common stock onNASDAQ reaches or exceeds $7.50 per share. In July 2014, the Company ceased its relationship with the investor relations firm and cancelled the 2013 IRWarrant. For the years ended December 31, 2014 and 2013, no stock-based compensation was recognized.On March 23, 2013, the Company issued to a consultant two tranches of warrants to purchase up to 100,000 shares of Company common stock, at aprice per share of $4.50 (the “CMR Warrant”). The first tranche of 50,000 warrants vests and becomes exercisable only if Company common stock closingprice on NASDAQ reaches or exceeds $6.00 per share. The first tranche of 50,000 warrants was cancelled during the year ended December 31, 2014 and thesecond tranche of 50,000 warrants was cancelled during the year ended December 31, 2013. As of December 31, 2014 and 2013, no stock-basedcompensation had been recognized for the CMR Warrant.On November 8, 2012, the Company issued to an investor relations consultant a warrant (the “2012 IR Warrant”) to purchase up to 50,000 shares ofCompany common stock, at a price per share of $2.50. The 2012 IR Warrant was subject to a vesting and exercisability condition which would have been metupon closing price of Company common stock on NASDAQ reaching or exceeding $7.00 per share by November 7, 2013. Furthermore, the 2012 IR Warrantcalled for immediate vesting of 25,000 shares upon early termination of the arrangement. The Company terminated the arrangement during the year endedDecember 31, 2013 and therefore recognized stock-based compensation of approximately $64,000 and issued 9,296 net shares of Company common stockpursuant to the 2012 IR Warrant during the same period.During September 2010, the Company issued to three service providers who provide investor services a warrant (the “2010 IR Warrant”) to purchasean aggregate of 50,000 shares of Company common stock at a price per share of $0.74. Pursuant to the 2010 IR Warrant, the service providers were alsoentitled to a second tranche of 2010 IR Warrant to purchase an aggregate of 50,000 shares of Company common stock at a price per share of $0.74. The 2010IR Warrant was fully exercised during the year ended December 31, 2012. In connection with the issuance of the 2010 IR Warrant, the Company recognizedexpenses of approximately $23,000 for the year ended December 31, 2012.The Company also issued warrants to its lenders. See Note 5 — Lines of Credit and Other Borrowings for further discussion.F-25 Stock OptionsThe Company currently has one stock-based compensation plan, the 2002 Stock Incentive Plan (as amended effective as of May 26, 2004, November15, 2005, May 16, 2007, May 5, 2011, June 6, 2013, and October 30, 2014) (the “2002 Plan”), which will expire on May 5, 2019. Persons eligible to receiveawards under the 2002 Plan include certain officers and employees of the Company, and directors of the Company, as well as consultants. As of December 31,2014, a total of 9,250,000 shares have been authorized for issuance under the 2002 Plan, of which 2,993,000 shares of Company common stock have beenissued pursuant to options that were exercised, 3,475,000 shares of Company common stock have been reserved for options that are outstanding, and2,782,000 shares of Company common stock remain available for future grant.Stock options may be granted as incentive or non-qualified options; however, no incentive stock options have been granted to date. The exerciseprice of options is at least equal to the market price of the stock as of the date of grant. Options may vest over various periods but typically vest on a quarterlybasis over three years. Options expire after five years, ten years or within a specified time from termination of employment, if earlier. The Company issues newshares of Company common stock upon the exercise of stock options. The following table summarizes option activity: Weighted WeightedAverage Average Remaining Exercise Price ContractualTerm AggregateIntrinsic Shares Per Share (Years) Value(1) Options outstanding, January 1, 2012 3,858,000 $3.75 Granted at fair market value 614,000 2.61 Granted at above fair market value 568,000 2.45 Exercised (214,000) 2.12 Forfeited, cancelled, or expired (966,000) 3.63 Options outstanding, December 31, 2012 3,860,000 3.48 Granted at fair market value 711,000 3.79 Granted at above fair market value 978,000 3.72 Exercised (343,000) 2.07 Forfeited, cancelled, or expired (765,000) 4.23 Options outstanding, December 31, 2013 4,441,000 3.51 Granted at fair market value 240,000 2.23 Granted at above fair market value 369,000 3.05 Exercised (153,000) 2.03 Forfeited, cancelled, or expired (1,422,000) 4.50 Options outstanding, December 31, 2014 3,475,000 3.03 2.97 $1,076,000 Options exercisable, December 31, 2014 2,627,000 3.00 2.46 975,000 Vested options expired during the twelve months ended December 31, 2014 185,000 10.04 — (1)The intrinsic value calculation does not include negative values. This can occur when the fair market value on the reporting date is less than theexercise price of a grant.F-26 The following table summarizes additional information for those options that are outstanding and exercisable as of December 31, 2014: Options Outstanding Exercisable Weighted Weighted Average Weighted Number Average Remaining Number Average Range of Exercise Prices of Shares Exercise Price Life (Years) of Shares Exercise Price $ 0.82 — $ 1.99 331,000 $1.41 3.76 321,000 $1.40 $ 2.00 — $ 2.99 1,978,000 2.32 2.77 1,488,000 2.26 $ 3.00 — $ 3.99 212,000 3.15 3.69 46,000 3.29 $ 4.00 — $ 4.99 416,000 4.21 3.56 356,000 4.16 $ 5.00 — $ 5.99 412,000 5.11 2.76 290,000 5.15 $ 6.00 — $ 6.99 53,000 6.47 1.36 53,000 6.47 $ 7.00 — $ 7.99 20,000 7.26 1.40 20,000 7.26 $ 8.00 — $ 8.75 53,000 8.45 1.97 53,000 8.45 Total 3,475,000 3.03 2.97 2,627,000 3.00 Cash proceeds, along with fair value disclosures related to grants, exercises, and vesting options, are as follows for the years ended December 31 (inthousands, except per share amounts): Years Ended December 31, 2014 2013 2012 Proceeds from stock options exercised $310 $707 $455 Tax benefit related to stock options exercised(1) N/A N/A N/A Intrinsic value of stock options exercised(2) $108 $860 $91 Weighted-average fair value of options granted $1.61 $1.82 $1.39 Total fair value of shares vested during the year $1,208 $1,544 $1,737 (1)Excess tax benefits received related to stock option exercises are presented as financing cash inflows. For the periods presented, the Company did notreceive a tax benefit related to the exercise of stock options due to its net operating losses.(2)The intrinsic value of stock options exercised is the amount by which the market price of the stock on the date of exercise exceeded the market priceof the stock on the date of grant.On January 2, 2015, the Compensation Committee of the Board granted non-qualified stock options to purchase 1,365,702 shares of Companycommon stock to certain officers of the Company in connection with a new compensation plan for 2015 and 86,000 shares of Company common stock tomembers of the Dental Professional Advisory Board (“DPAB”) as consultants for the Company. These options were granted at an exercise price of $2.64, theclosing market price of the Company’s stock on grant date. Options granted to certain officers of the Company expire ten years from grant date and vest asfollows: (i) as to 50% of the options, one-fourth on the one-year anniversary of the grant date and the remaining three-fourths, ratably over the next thirty-sixmonth period, commencing on the thirteenth month from grant date, and (ii) as to 50% of the options, upon achievement of specific annual Companyperformance criteria. Options granted to the DPAB fully vest and become exercisable upon the achievement of specified performance conditions, as definedin the consulting agreements, and expires five years from grant date.On June 6, 2013, the Board granted stock options to purchase 350,000 shares of Company common stock to Alexander K. Arrow in connection withhis appointment to President and Chief Operating Officer. These stock options were granted at an exercise price of $4.00 per share and vest and becomeexercisable in equal quarterly amounts over a four-year period beginning on June 6, 2014. During the year ended December 31, 2014, Mr. Arrow ceasedemployment with the Company and forfeited 306,250 unvested stock options. His stock options expire on February 28, 2016.On May 7, 2012, the Board granted to a consultant non-qualified stock options to purchase 65,000 shares of Company common stock, at a price pershare of $2.55, the closing market price of Company common stock on the grant date. The options fully vest and become exercisable upon the achievementof specified performance conditions, as defined in the consulting agreement with this consultant, and the option expires five years from the grant date. Theconsulting agreement was terminated and the options were cancelled during the year ended December 31, 2014. As of December 31, 2014 and 2013, nostock-based compensation has been recognized in connection with these options.F-27 Other Stock-Based AwardsOn July 13, 2014, the Compensation Committee of the Board of the Company approved the Chief Executive Officer’s stock-based compensationconsisting of non-qualified stock options to purchase 172,282 shares of Company common stock at an exercise price of $1.98 per share and 37,879 restrictedstock units ("RSUs") valued at $1.98 per share. One-sixth of the stock options and one-sixth of the RSUs vested immediately, with the remaining five-sixthsvesting ratably on a monthly basis over the twelve-month period ending on July 13, 2015. The fair value of the stock options of $1.31 per share wasestimated using the Black-Scholes option-pricing model with assumptions of 3.6 years for expected term, 98.37% volatility and 1.65% risk-free interest rate.On August 27, 2014, each non-employee director of the Company was granted 9,217 RSUs, totaling 36,868 RSUs valued at $2.17 per share, whichvest over a 12-month period. NOTE 9 — SEGMENT INFORMATIONThe Company currently operates in a single business segment. Management uses one measurement of profitability and does not segregate its businessfor internal reporting. Sales to customers located in the United States accounted for approximately 63%, 63%, and 71% of net revenue and international salesaccounted for approximately 37%, 37%, and 29% of net revenue for the years ended December 31, 2014, 2013, and 2012, respectively.Net revenue by geographic location based on the location of customers was as follows (in thousands): Years Ended December 31, 2014 2013 2012 United States $29,848 $35,653 $40,524 International 17,808 20,777 16,832 $47,656 $56,430 $57,356 No individual international country represented more than 10% of net revenue during the years ended December 31, 2014, 2013, and 2012.Long-lived assets located outside of the United States at our foreign subsidiaries, totaled approximately $374,000 and $430,000 as of December 31,2014 and 2013, respectively. NOTE 10 — CONCENTRATIONSRevenue from the Company’s products for the years ended December 31, 2014, 2013 and 2012 are as follows: Years Ended December 31, 2014 2013 2012 Laser systems 61.9 % 68.6 % 73.8 %Imaging systems 9.0 % 8.2 % 5.9 %Consumables and other 13.7 % 11.5 % 10.4 %Services 15.1 % 11.3 % 9.6 %License fees and royalties 0.3 % 0.4 % 0.3 %Total revenue 100.0 % 100.0 % 100.0 %Approximately 6%, 5%, and 3% of the Company’s revenue in 2014, 2013, and 2012, respectively, was generated through sales to HSIC worldwide.The Company maintains its cash and cash equivalent accounts with established commercial banks. Such cash deposits periodically exceed the FederalDeposit Insurance Corporation insured limit.No individual customer represented more than 10% of the Company’s accounts receivable at December 31, 2014 and 2013.The Company currently purchases certain key components of its products from single suppliers. Although there are a limited number of manufacturersof 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 andfinancial condition.F-28 NOTE 11 — SUBSEQUENT EVENTS (unaudited)Stock-Based CompensationOn January 2, 2015, the Compensation Committee of the Board granted non-qualified stock options to purchase 1,365,702 shares of Companycommon stock to certain officers of the Company in connection with a new compensation plan for 2015 and 86,000 shares of Company common stock tomembers of the Dental Professional Advisory Board (“DPAB”) as consultants for the Company. These options were granted at an exercise price of $2.64, theclosing market price of the Company’s stock on grant date. Options granted to certain officers of the Company vest based on service period and performanceof the Company, as defined in the applicable grant agreement, and expire ten years from grant date. Options granted to the DPAB fully vest and becomeexercisable upon the achievement of specified performance conditions, as defined in the consulting agreements, and expire five years from grant date. Furtherdiscussion of the stock-based compensation is disclosed in Note 8 – Stockholders’ Equity.Class Action LawsuitsThe parties have reached an agreement in principle to settle the consolidated securities class action lawsuit, which is subject to the negotiation of adefinitive settlement agreement and preliminary and final approval of the court. Although there can be no assurance that such agreement will be finalized, asof the date of these financial statements, management does not expect the Company to incur additional expenses related to this matter due to certaininsurance coverage in place. Further discussion of the class action lawsuits is disclosed in Note 7 – Commitments and Contingencies. F-29 BIOLASE, INC.Schedule II — Consolidated Valuation and Qualifying Accounts and ReservesFor the Years Ended December 31, 2014, 2013, and 2012(in thousands) Balance at Charges Beginning (Reversals) to Cost Balance at of Year or Expenses Deductions End of Year Year Ended December 31, 2014: Allowance for doubtful accounts $573 $1,261 $(123) $1,711 Allowance for sales returns 110 — — 110 Allowance for tax valuation 35,566 6,503 — 42,069 Year Ended December 31, 2013: Allowance for doubtful accounts $304 $291 $(22) $573 Allowance for sales returns 110 — — 110 Allowance for tax valuation 33,341 2,225 — 35,566 Year Ended December 31, 2012: Allowance for doubtful accounts $289 $241 $(226) $304 Allowance for sales returns 110 — — 110 Allowance for tax valuation 33,784 (443) — 33,341 S-1Exhibit 10.25 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (the “Agreement”) made as of the 22nd day of February, 2015 by and between Biolase, Inc. (the “Company”) and DavidDreyer (“Executive”). WHEREAS, the Company and Executive wish to enter into a formal employment contract which will govern the terms and conditions applicable toExecutive’s employment with the Company and will provide certain severance benefits for Executive in exchange for the Executive’s agreement to abide bythe terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties agree as follows:PART ONE — TERMS AND CONDITIONS OF EMPLOYMENT 1. Duties and Responsibilities. A. Executive shall serve as the Senior Vice President and Chief Financial Officer of the Company and shall report directly to the Company’s ChiefExecutive Officer. Executive shall perform the responsibilities of a Senior Vice President and Chief Financial Officer of a public company, including suchduties and functions as may be reasonably assigned to Executive from time to time by the Chief Executive Officer. Executive shall comply with all properand reasonable directives and instructions of the Chief Executive Officer, the Company’s Board of Directors (the “Board”), or any committee of the Board. B. Subject to the exceptions set forth in Paragraph 6, Executive agrees to devote all sufficiently necessary business time and attention to the Company,to use his best efforts to advance the business and welfare of the Company, to render his services under this Agreement fully, faithfully, diligently,competently and to the best of his ability. 2. Period of Employment. Executive’s employment with the Company shall be governed by the provisions of this Agreement commencing as of March 9,2015 (the “ Effective Date ”) and for the duration of Executive’s employment with the Company. Executive’s employment shall be “at will” and may beterminated by either the Company or Executive in accordance with the provisions of Section 7. The period during which Executive’s employment continuesin effect shall be referenced as the “ Employment Period.” 3. Base Salary. A. Executive shall be paid a base salary at the annual rate of not less than TWO HUNDRED AND SEVENTY-FIVE THOUSAND dollars ($275,000.00)per annum (hereinafter “Base Salary”) during the Employment Period. Executive’s Base Salary shall be paid at periodic intervals in accordance with theCompany’s payroll practices for salaried employees. B. The Company shall deduct and withhold from the compensation and benefits payable to Executive, including but not limited to Executive’s BaseSalary, any and all applicable Federal, State and local income and employment withholding taxes and any other amounts required to be deducted or withheldby the Company under applicable statutes, regulations, ordinances or orders governing or requiring the withholding or deduction of amounts otherwisepayable as compensation or wages to employees. The Company shall also deduct such amounts as may be authorized by Executive from time to time. 4. Performance Bonus; Stock Option Grant. A. For each full calendar year during the Employment Period, Executive may earn an annual Performance Bonus of up to 50% of Executive’s BaseSalary (the “Performance Bonus Target”) based on achievement of Performance Bonus criteria as established and determined in good faith by theCompensation Committee of the Board (the “Compensation Committee”). For any partial year at the beginning of the Employment Period, the PerformanceBonus Target shall be prorated based on the number of days in the calendar year during which  Executive is employed by the Company divided by three hundred sixty-five (365). The bonus shall be paid no later than March 15 of the year following theyear for which it is awarded. Executive must be employed by the Company as of December 31 of the year for which the bonus is awarded in order to earn thebonus. B. The Company shall grant to Executive, effective as of the Effective Date, a nonqualified stock option to purchase 871,710 shares of the Company’scommon stock at a per share exercise price equal to the fair market value (determined based on the closing selling price per share on the grant date, as suchprice is reported by the National Association of Securities Dealers on the Nasdaq Stock Market and published in The Wall Street Journal) of the Company’scommon stock on the grant date. Except as otherwise provided in Section 8.C., such stock option shall vest and become exercisable in accordance withperformance criteria as established by the Compensation Committee. Such stock option shall have a term of ten (10) years, and shall include such other termsand conditions as would apply to a stock option granted under the Company’s equity plan and shall be subject to the terms and conditions of this Agreement. 5. Fringe Benefits. A. Executive shall, throughout the Employment Period, be eligible to participate in any and all group term life insurance plans, group health plans,accidental death and dismemberment plans and short-term disability programs and other executive perquisites which are made available to the Company’sexecutives and for which Executive qualifies under the terms of such plans, policies or programs. B. Executive shall earn and accrue vacation time during the Employment Period at a rate of four (4) weeks of vacation per year. Executive shall not bepermitted to accrue more than six (6) weeks’ vacation. Once this maximum has been reached, all further accruals will cease. Vacation accruals willrecommence after Executive has taken vacation and his accrued hours have dropped below the accrual maximum. Executive will not earn vacation duringany unpaid leaves. If a recognized holiday falls during Executive’s vacation period, it will not be considered as a vacation day. C. During the Employment Period, Executive shall be authorized to incur necessary and reasonable travel, entertainment and other business expensesin connection with his duties hereunder. The Company shall reimburse Executive for such expenses upon presentation of an itemized account andappropriate supporting documentation. D. Executive and the Company shall enter into the Company’s standard Indemnification Agreement, which Indemnification Agreement shall beeffective as of the Effective Date. 6. Restrictive Covenants. A. Service to the Company. During the Employment Period, Executive shall devote all sufficiently necessary business time and attention to theperformance of Executive’s duties, except during periods of illness or vacation periods. Executive may continue to serve during the Employment Period as anon-employee member of the board of directors of the companies for which he so serves on the effective date of this Agreement and may join the board ofdirectors of other companies in the future with the Board’s prior written consent. Executive shall have the right to perform such services as are necessary inconnection with (i) Executive’s private investments and (ii) Executive’s charitable or community activities, or participation in trade or professionalorganizations, but only if such incidental services do not materially interfere with the performance of Executive’s services, or violate Section 6.B. B. No Competitive Activities. During the Employment Period, Executive shall not directly or indirectly own, manage, operate, join, control orparticipate in the ownership, management, operation or control of, provide services to, or be employed by or connected in any manner with, any enterprisewhich is engaged in the Business; provided, however, that such restriction shall not apply to any passive investment representing an interest of less than twopercent (2%) of an outstanding class of publicly-traded securities of any corporation or other enterprise which is not, at the time of such investment, engagedin the Business. For purposes of this Section 6, the “Business” shall refer to the design and manufacture of dental lasers, ophthalmologic lasers for Presbyopia,and such other businesses as the Company may expand into while Executive is employed by the Company, its parents, subsidiaries or affiliates.2  C. Confidential Information. As a condition of Executive’s receipt of the benefits provided for in this Agreement, Executive will execute theCompany’s Confidential Information and Assignment of Inventions Agreement, a true and correct copy of which is attached to this Agreement as Exhibit A.Executive’s obligations under this Paragraph 6.C. and Exhibit A shall continue in effect after the termination of his employment with the Company, whateverthe reason or reasons for such termination, and Executive acknowledges and agrees that the Company shall have the right to communicate with any future orprospective employer of Executive concerning Executive’s continuing obligations under this Paragraph 6.C. and Exhibit A. D. Non Solicitation of Employees. Executive agrees that during his Employment Period and for a period of twenty-four (24) months after termination ofhis employment with the Company, he shall not, directly or indirectly, through any other individual or entity, solicit any employee of the Company, to ceasehis or her employment with the Company, and Executive will not approach any such employee for any such purpose or knowingly authorize the taking ofany such action by any other individual or entity. E. Non Solicitation of Customers. Executive agrees that during his employment by the Company, and any of its parents, subsidiaries or affiliates and fora period of twenty-four (24) months after termination of his employment with the Company, Executive shall not, without the prior written approval of theCompany, directly or, with knowledge, indirectly, through or on behalf or any other individual or entity, solicit, entice or induce any business from any ofthe Company’s customers (including actively sought prospective customers) or suppliers/vendors, the identity of whom, or information concerning, rises tothe level of a “trade secret” within the meaning of the Uniform Trade Secrets Act (“UTSA”). F. Injunctive Relief. Executive acknowledges that monetary damages may not be sufficient to compensate the Company for any economic loss whichmay be incurred by reason of his breach of the foregoing restrictive covenants. Accordingly, in the event of any such breach, the Company shall, in additionto the termination of this Agreement and any remedies available to the Company under other provisions of this Agreement and/or at law, be entitled to obtainequitable relief in the form of an injunction precluding Executive from continuing such breach. 7. Termination of Employment. A. Executive’s employment may be terminated by either the Company or Executive at any time, for any reason, with or without Cause, upon writtennotice specifying the Effective Date of Termination, and without additional compensation, except as otherwise provided in Section 8. Except as provided inSections 7.B. and C., the Effective Date of Termination specified in the written notice may be immediate. B. For purposes of this Agreement, termination for “Cause” shall mean the involuntary termination of the Executive’s employment by the Company forany of the following reasons: (i) Executive’s conviction by, or entry of a plea of guilty in, a court of competent jurisdiction for any felony; (ii) A substantial and continual refusal by Executive to perform his duties and functions hereunder in accordance with the instructions of the Board asembodied in written resolutions of the Board and communicated in writing to Executive (provided that such instructions do not require Executive to takeany actions that Executive reasonably believes to be are unlawful after a reasonable inquiry); (iii) the willful and material breach of this Agreement by Executive which, if curable, Executive fails to cure within thirty (30) business days followingwritten notice from the Company; (iv) Executive’s conviction by, or entry of a plea of guilty a nolo contendere, in a court of competent jurisdiction, for any act of fraud, misappropriationor embezzlement in connection with his employment by the Company; (v) Executive is unable to perform the essential functions of his job for ninety or more consecutive days in any 12 month period; provided that suchinability to perform is not due to the Executive’s status as disabled under any short or long term disability provisions of the Company’s Employee BenefitPlans; or3  (vi) Executive’s death. An involuntary termination of Executive’s employment by the Company in any other circumstances or for any other reason will be a termination “WithoutCause.” C. For purposes of this Agreement, Executive’s resignation for “Good Reason” shall mean the resignation of employment by Executive following theoccurrence of: (i) a material diminution in Executive’s Base Salary; (ii) a material diminution in Executive’s authority, duties or responsibilities (other than a temporary suspension of authority, duties orresponsibilities due to Executive’s illness or disability, or an investigation of misconduct), or the assignment to Executive of any duties materiallyinconsistent with the Executive’s position, authority, duties or responsibilities without the consent of Executive; (iii) a change in the geographic location of Executive’s regular office location as of the Effective Date that is greater than a fifty (50) mile radiusfrom the Company’s headquarters; or (iv) the Company’s material breach of this Agreement.In order for Executive to resign for Good Reason, Executive must provide advance written notice of such resignation to the Company within sixty (60) daysfollowing the initial existence of the action or event giving rise to Good Reason. The notice must specifying an Effective Date of Termination that is not lessthan thirty (30) days, nor more than forty-five (45) days, after the date of the written notice, and Executive agrees that should the Company remedy the basisfor such resignation prior to the Effective Date of Termination specified in the written notice, then Executive may not resign for Good Reason. The Companymay relieve Executive of some or all of his duties, responsibilities and authority during any notice period, and such relief shall not serve as a basis forExecutive to claim “Good Reason” under Section 7.C.(ii), provided, that the Company reinstates such duties, responsibilities and authority not later the lastday of such notice period. D. The “Effective Date of Termination” shall be: (i) in the case of termination due to death, the date of Executive’s death, or (ii) in the case of any othertermination, the date of Executive’s separation from service, within the meaning of Section 409A(a)(2)(A)(i) of the Internal Revenue Code of 1986, asamended (the “Code”), and the Treasury regulations thereunder, from the Company and its subsidiaries or affiliates (the “Separation from Service”) specifiedin the written notice required by this Section. E. On the Effective Date of Termination of Executive’s employment for any reason during the Employment Period, Executive shall be paid all BaseSalary earned through the end of the Employment Period, any unpaid business expenses, and any unused vacation earned through the Effective Date ofTermination. Unless Executive is entitled to severance benefits under Section 8, he shall not be entitled to any compensation or benefits following theEffective Date of Termination, except as required by law or as provided under a retirement or welfare benefit plan of the Company. F. Executive shall resign from Executive’s position as the Chief Financial Officer of the Company, and shall resign from all other positions with theCompany or any of its subsidiaries, effective as of the Effective Date of Termination.PART TWO — SEVERANCE BENEFITS 8. Benefit Entitlement. A. Executive shall be entitled to receive the severance benefits specified in Section 8.B. or Section 8.C., as the case may be, in the event that: (i) theCompany terminates Executive’s employment Without Cause, or (ii) Executive resigns for Good Reason (providing the notice and allowing the Company tocure as provided in Section 7.C.). Such severance benefits shall be conditioned upon Executive properly executing on or after the Effective Date of4  Termination, and not revoking or attempting to revoke within the permitted timeframe, a general release of claims against the Company, its Board, itsaffiliates, and their employees and agents substantially in the form of Exhibit B or, in the event of a change in the law that would limit the effect of the releaseattached as Exhibit B, a general release that would have the same scope and effect as the release attached as Exhibit B (such release, the “Release ”) and theRelease becoming irrevocable within fifty-two (52) days following the Effective Date of Termination. Executive shall not be entitled to receive the severancebenefits specified in Section 8 in the event Executive fails to timely execute the Release or Executive timely revokes the Release. All severance payments made to Executive pursuant to Section 8 shall be subject to all applicable withholding requirements. In no event shallExecutive be entitled to severance benefits under both Sections 8.B and 8.C and under no circumstances shall any severance payments or benefits be payableif Executive’s employment is terminated for Cause or Executive resigns for other than Good Reason (as such terms are defined in Sections 7.B. and C.,respectively). B. Subject to Section 8.C., in the event Executive’s employment terminates, and the Release becomes irrevocable, under the conditions described inSection 8.A, Executive shall be entitled to severance benefits of: (i) Twelve (12) months of Executive’s annual Base Salary in effect under Section 3.A as of the Effective Date of Termination, plus the fullamount of the Executive’s Performance Bonus Target then in effect, payable in twenty-six (26) equal bi-weekly installments, during the twelve(12) months commencing on the first day of the calendar month next following sixty (60) days after the Effective Date of Termination, coincidingwith the Company’s regular payroll cycle;(ii) Executive’s nonqualified stock option granted to Executive shall become fully vested and exercisable on the first business daythat is at least sixty (60) days after the Effective Date of Termination; provided however in the event that the stock option grant has vesting termsthat are based (in part or in full) on Company’s achievement of financial performance targets or other milestones that are not achieved, then suchstock option shall not become fully vested; and (iii) Company paid COBRA premiums for Executive (and his eligible dependents) under the Company’s medical and dental benefitplans, as in effect from time to time, for the twelve (12) month period following the Effective Date of Termination. The benefits under such plansshall be provided through insurance maintained by the Company.C. In the event Executive’s employment terminates, and the Release becomes irrevocable, under the conditions described in Section 8.A, and theEffective Date of Termination is during the twelve (12) months following a Change of Control that occurs on or after February 1, 2016, Executive shall beentitled to the following severance benefits (which shall be in lieu of the severance benefit under Section 8.B.): (i) Twelve (12) months of Executive’s annual Base Salary in effect under Section 3.A as of the Effective Date of Termination, plus the fullamount of the Executive’s Performance Bonus Target then in effect, both payable in a lump sum in cash. The Company shall pay such lump sumpayment on the first business day that is at least sixty (60) days after the Effective Date of Termination; (ii) Executive’s nonqualified stock option granted to Executive shall become fully vested (and in the case of the stock option,exercisable) on the first business day that is at least sixty (60) days after the Effective Date of Termination; provided however in the event that thestock option grant has vesting terms that are based (in part or in full) on Company’s achievement of financial performance targets or othermilestones that are not achieved, then such stock option shall not become fully vested; and (iii) Company paid COBRA premiums for Executive (and his eligible dependents) under the Company’s medical and dental benefitplans, as in effect from time to time, for the twelve (12) month period following the Effective Date of Termination. The benefits under such plansshall be provided through insurance maintained by the Company. 5  For purposes of the this Agreement, a “Change of Control” shall mean the occurrence of any of the following events following the Effective Date: (i) anacquisition of any voting securities of the Company by any “person” (as the term “person” is used for purposes of Section 13(d) or Section 14(d) of theSecurities Exchange Act of 1934, as amended (the “ 1934 Act ”)) immediately after which such person has “beneficial ownership” (within the meaning ofRule 13d-3 promulgated under the 1934 Act) of 50% or more of the combined voting power of the Company’s then outstanding voting securities; or (ii) theconsummation of: (x) a merger, consolidation, share exchange or reorganization involving the Company, unless the stockholders of the Company,immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger,consolidation, share exchange or reorganization, at least 50% of the combined voting power of the outstanding voting securities of the corporation that is thesuccessor in such merger, consolidation, share exchange or reorganization in substantially the same proportion as their ownership of the voting securitiesimmediately before such merger, consolidation, share exchange or reorganization; (y) a complete liquidation or dissolution of the Company; or (z) the sale orother disposition of all or substantially all of the assets of the Company; or (iii) the majority of members of the Board are replaced during any twelve(12) month period by directors whose appointment or election is not endorsed by a majority of the Board prior to the date of such appointment or election. D. Parachute Payment. If any payment or benefit the Executive would receive pursuant to a Change of Control or otherwise (“ Payment ”) would(i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed bySection 4999 of the Code (the “ Excise Tax ”), then such Payment shall be reduced to the Reduced Amount. The “Reduced Amount” shall be either (x) thelargest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and includingthe total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the ExciseTax (all computed at the highest applicable marginal rate), results in the Executive’s receipt, on an after-tax basis, of the greater amount of the Paymentnotwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting “parachutepayments” is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order unless the Executive elects in writing adifferent order (provided, however, that such election shall be subject to Company approval if made on or after the effective date of the event that triggers thePayment): (1) reduction of cash payments, (2) cancellation of accelerated vesting of equity awards, and (3) reduction of employee benefits. In the event thatacceleration of vesting of equity award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grantof the Executive’s equity awards unless the Executive elects in writing a different order for cancellation. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change of Control shallperform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or groupeffecting the Change of Control, or is unwilling to perform this function, then the Company shall appoint a nationally recognized accounting firm to makethe determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting or law firm required to bemade hereunder. The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation,to the Executive and the Company within fifteen (15) calendar days after the date on which the Executive’s right to a Payment is triggered (if requested atthat time by the Executive or the Company) or such other time as requested by the Executive or the Company. If the accounting or law firm determines thatno Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish the Executive and theCompany with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to such Payment. Any good faithdeterminations of the accounting or law firm made hereunder shall be final, binding and conclusive upon the Executive and the Company. E. The severance benefits provided Executive under this Paragraph 8 are the only severance benefits to which Executive is entitled upon thetermination of his employment with the Company, and no other benefits shall be provided to Executive by the Company pursuant to any other severanceplan or program of the Company, except as required by applicable law. Executive acknowledges and agrees that but for his execution of this Agreement, hewould not be entitled to the severance benefits provided under this Paragraph 8. F. Notwithstanding the foregoing, if the Executive is a specified employee, as defined under6  Section 409A(a)(2)(B)(i) of the Code, on the date of Executive’s Separation from Service, to the extent that the payments or benefits under this Section 8 aresubject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which Executive is entitled underSection 8 is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, then such payment or portion thereof shall bepaid or distributed to Executive during the thirty (30) day period commencing on the earlier of (a) the expiration of the six-month period commencing on thedate of Executive’s Separation from Service or (b) the date of Executive’s death.PART THREE — MISCELLANEOUS PROVISIONS 9. Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and shall be binding upon, the Company, its successors andassigns. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators,successors, heirs, distributes, devisees and legatees. 10. Creditor Status. The benefits to which Executive may become entitled under Part Two of this Agreement shall be paid, when due, from the Company’sgeneral assets, and no trust fund, escrow arrangement or other segregated account shall be established as a funding vehicle for such payments. Executive isnot waiving any rights he may have to collect any monies due to Executive under this Agreement in the same manner as any other employee of the Companywould have. 11. Notices. A. Any and all notices, demands or other communications required or desired to be given by any party shall be in writing and shall be validly given ormade to another party if served either personally or if deposited in the United States mail, certified or registered, postage prepaid, return receipt requested. Ifsuch notice, demand or other communication shall be served personally, service shall be conclusively deemed made at the time of such personal service. Ifsuch notice, demand or other communication is given by overnight delivery, it shall be conclusively deemed given the day after it was sent addressed to theparty to whom such notice, demand or other communication is to be given. If such notice, demand or other communication is given by mail, it shall beconclusively deemed given two (2) days after it was deposited in the United States mail addressed to the party to whom such notice, demand or othercommunication is to be given. The address for notice for each of the parties shall be as follows:To the Company:Biolase, Inc.Attn: Chief Executive Officer4 CromwellIrvine, California 92618To Executive:To the address listed as Executive’s principal residence in the Company’s human resources records and to his principal place ofemployment with the Company. B. Both parties agree that if notice is by mail, then in good faith, the party giving notice will attempt to contact the other by their last known phonenumber and email address, to ensure notice was received. C. Any party may change its address for the purpose of receiving notices, demands and other communications by a written notice given in the describedmanner to the other party. 12. Governing Document. Except as otherwise provided or referenced herein, this Agreement constitutes the entire agreement and understanding of theCompany and Executive with respect to the terms and conditions of Executive’s employment with the Company and the payment of severance benefits andsupersedes all prior and contemporaneous written or verbal agreements and understandings between Executive and the Company relating to such subjectmatter. This Agreement may only be amended by written instrument signed by Executive and an officer7  of the Company specifically authorized by the Board for such purpose. Any and all prior agreements, understandings or representations relating to theExecutive’s employment with the Company are terminated and cancelled in their entirety and are of no further force or effect. 13. Governing Law. The provisions of this Agreement will be construed and interpreted under the laws of the State of California applicable to agreementsexecuted and to be wholly performed within the State of California. If any provision of this Agreement as applied to any party or to any circumstance shouldbe adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to themaximum extent permissible by law) the application of such provision under circumstances different from those adjudicated by the court, the application ofany other provision of this Agreement, or the enforceability or invalidity of this Agreement as a whole. Should any provision of this Agreement become or bedeemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemedamended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materiallyaltering the intention of the parties, then such provision will be stricken and the remainder of this Agreement shall continue in full force and effect. 14. Arbitration. Any controversy, claim or dispute between the parties directly or indirectly concerning this Agreement, or the breach or subject matterhereof, shall be finally settled by arbitration held in Orange County, California. The arbitration will be held under the auspices of either the AmericanArbitration Association (“AAA”) or Judicial Arbitration & Mediation Services, Inc. (“J • A • M • S”), with the designation of the sponsoring organization tobe made by the party who did not initiate the claim. The arbitration shall be in accordance with the AAA’s then-current employment arbitration procedures (ifAAA is designated) or the then-current J • A • M • S employment arbitration rules (if J • A • M • S is designated). The arbitrator shall be either a retired judge,or an attorney licensed to practice law in the state in which the arbitration is convened (the “Arbitrator”). The Arbitrator shall have jurisdiction to hear andrule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person, as the Arbitrator deems necessary. The Arbitratorshall have the authority to entertain a motion to dismiss, demurrer, and/or a motion for summary judgment by any party and shall apply the standardsgoverning such motions under the federal rules of civil procedure applicable in the location of the arbitration. The Arbitrator shall render a written award andopinion which reveals, however briefly, the essential findings and conclusions on which the award is based. The arbitration shall be final and binding uponthe parties, except as otherwise provided for by the law applicable to review of arbitration decisions/awards. Either party may bring an action in any court ofcompetent jurisdiction to compel arbitration under this Agreement and/or to enforce an arbitration award. The Company will pay the Arbitrator’s fees and anyother fees, costs or expenses unique to arbitration, including the filing fee, the fees and costs of the Arbitrator, and rental of a room to hold the arbitrationhearing. However, if Executive is the party initiating the claim, Executive shall be responsible for contributing an amount equal to the filing fee to initiate aclaim in the court of general jurisdiction in the state which Executive is (or was last) employed by the Company. The Arbitrator may award reasonable legalfees and/or costs to the prevailing party in any dispute subject to arbitration under this Agreement. Notwithstanding the foregoing either party may seektemporary or preliminary injunction relief in any court of competent jurisdiction if such relief is unavailable or cannot be timely obtained throughArbitration. 15. Remedies. All rights and remedies provided pursuant to this Agreement or by law shall be cumulative, and no such right or remedy shall be exclusiveof any other. A party may pursue any one or more rights or remedies provided by this Agreement or may seek damages or specific performance in the event ofanother party’s breach or may pursue any other remedy by law or equity, whether or not stated in this Agreement. 16. Counterparts. This Agreement may be executed in more than one counterpart, each of which shall be deemed an original, but all of which togethershall constitute but one and the same instrument. 8  IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year written above.BIOLASE, INC.By: /s/ Jeffrey M. NugentName: Jeffrey M. NugentTitle: President and Chief Executive OfficerDated: February 24, 2015 /s/ David DreyerDavid Dreyer Dated: February 22, 2015 9  EXHIBIT A TODAVID DREYER EMPLOYMENT AGREEMENTDATED AS OF FEBRUARY 22, 2015BIOLASE, INC.PROPRIETARY INFORMATION AGREEMENTAs an employee of Biolase, Inc., its subsidiary or its affiliate (together, the “Company”), and in consideration of the compensation now and hereafter paid tome, I agree to the following:1) Maintaining Confidential Information a) Company Information. I agree at all times during the term of my employment and thereafter, except for the benefit of the Company, to hold in thestrictest confidence, and not to use or to disclose to any person, firm or corporation without written authorization of the Board of Directors of the Company,any trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmentalor experimental work, computer programs, data bases, other original works of authorship, customer lists, business plans, financial information or other subjectmatter pertaining to any Business of the Company or any of its clients, consultants or licensees. b) Former Employer Information. I agree that I will not, during my employment with the Company, improperly use or disclose any proprietary informationor trade secrets of my former or concurrent employers or companies, if any, and that, to my knowledge, I will not bring onto the premises of the Company anyunpublished document or any property belonging to my former or concurrent employers or companies, if any, unless consented to in writing by saidemployers or companies. c) Third Party Information. I recognize that the Company has received and in the future will receive from third parties their confidential or proprietaryinformation subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Iagree that I owe the Company and such third parties, during the term of my employment and thereafter, a duty to hold all such confidential and proprietaryinformation in the strictest confidence and not to disclose it to any person, firm or corporation (except as necessary in carrying out my work for the Companyconsistent with the Company’s agreement with such third party) or to use it for the Company’s benefit of anyone other than for the Company or such thirdparty (consistent with Company’s agreement with such third party) without the express written authorization of the Board of Directors of Biolase, Inc.2) Retaining and Assigning Inventions and Original Works a) Inventions and Original Works Assigned to the Company. I agree that I will promptly make full written disclosure to the Company, will hold in trust forthe sole right and benefit of the Company, and will and hereby do assign to the Company all my right, title, and interest in and to any and all inventions,original works of authorship, developments, improvements or trade secrets which I may solely or jointly conceive or develop or reduce to practice, or cause tobe conceived or developed or reduced to practice, during the period of time I am in the employ of the Company related to the Business of the Company. Forpurposes of this Agreement, the “Business of the Company” is defined as the design and manufacture of dental lasers, ophthalmic lasers for Presbyopia, andsuch other expansions related to the Business of the Company or entirely new markets the Company may enter during the term of my employment. Irecognize, however, that Section 2870 of the California Labor Code (as set forth in Exhibit 1 attached hereto) exempts from assignment under this provisionany invention as to which I can prove the following: i) It was developed entirely on my own time; and ii) No equipment, supplies, facilities or trade secrets of the Company were used in its development; and10  iii) It did not relate, at the time of its conception or its reduction to practice, to the Business of the Company or to the Company’sactual or demonstrably anticipated research and development; and iv) It did not result from any work performed by me for the Company. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employments andwhich are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act (17 USCA, Section 101). b) Inventions Assigned to the United States. I agree to assign to the United States government all my right, title, and interest in and to any and allinventions, original works of authorship, developments, improvements or trade secrets whenever such full title is required to be in the United States by acontract between the Company and the United States or any of its agencies. c) Obtaining Letters Patent, Copyrights and Mask Work Rights. I agree that my obligation to assist the Company to obtain United States or foreign letterspatent, copyrights, or mask work rights covering inventions, works of authorship, and mask works, respectively, assigned hereunder to the Company shallcontinue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate for time actually spent by me at theCompany’s request on such assistance. If the Company is unable because of my mental or physical incapacity or for any other reason to secure my signatureto apply for or to pursue any application for any United States or foreign letters patent, copyright, or mask rights covering inventions or other rights assignedto the Company as above, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorneyin fact, to act for and in my behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecutionand issuance of letters patent, copyrights, and mask work rights with the same legal force and effect as if executed by me. I hereby waive and quitclaim to theCompany any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any patents, copyrights, or mask work rightsresulting from such application assigned hereunder to the Company. d) Exception to Assignments. I understand that the provisions of this Agreements requiring assignment to the Company do not apply to any inventionwhich qualifies fully under the provisions of Section 2870 of the California Labor Code, a copy of which is attached hereto as Exhibit 1. I understand that theCompany will keep in confidence and will not disclose to third parties without my consent any confidential information disclosed in writing to the Companyrelating to inventions that qualify fully under the provisions of Section 2870 of the California Labor Code.3) Returning Company Documents. I agree that to my best efforts, at the time of leaving the employ of the Company, I will deliver to the Company (and willnot keep in my possession or deliver to anyone else) any and all devices, records, data, notes, reports, proposals, lists, correspondence, specifications,drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to the Company,its successors or assigns, which constitutes a trade secret(s) and/or proprietary information of the Company. In the event of the termination of myemployment, I agree to sign and deliver the “Termination Certification” attached hereto as Exhibit 2.4) Representations. I agree to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. I represent that myperformance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by me in confidence orin trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any oral or written agreement in conflict herewith.5) General Provisions a) Governing Law. This Agreement will be governed by the laws of the State of California. b) Entire Agreement. This Agreement sets forth the entire agreement and understanding between the Company and me relating to the subject matter hereinand merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this agreement, will beeffective unless in writing signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not11  affect the validity or scope of this Agreement. c) Severability. If one or more of the provisions in this Agreement are deemed void by law, then the remaining provisions will continue in full force andeffect. d) Successors and Assigns. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for thebenefit of the Company, its successors, its assigns, and any third parties for which the company has developed proprietary technology. e) At-Will Employment. I acknowledge that this agreement is not intended and does not constitute a contract between me and the Company limiting therights of either of us to terminate my employment by the Company at any time for any reason with or without cause. f) Notification to New Employer. In the event that I leave the employ of the Company, I hereby grant consent to notification by the Company to my newemployer about my rights and obligations under this agreement.Dated as of February 22, 2015 Signature Name of Employee (typed or printed) Witness 12  EXHIBIT 1TO PROPRIETARY INFORMATION AGREEMENTCALIFORNIA LABOR CODE SECTION 2870EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS “(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention tohis or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment,supplies, facilities, or trade secret information except for those inventions that either: 1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual demonstrablyanticipated research or development of the employee. 2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being requiredto be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.”13  EXHIBIT 2TO PROPRIETARY INFORMATION AGREEMENTBIOLASE, INC.TERMINATION CERTIFICATIONThis is to certify that based on a reasonably diligent search by me, and to the best of my knowledge, I do not have in my possession, nor have I failed toreturn, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, otherdocuments or property, or reproductions of any aforementioned items which is a trade secret and/or proprietary information belonging to Biolase, Inc., itssubsidiaries, affiliates, successors or assigns (together, the “Company”).I further certify that, to the best of my knowledge, I have complied with all the terms of the Company’s Employee Proprietary Information Agreement signedby me.I further agree that, in compliance with the Employee Proprietary Information Agreement, I will preserve as confidential all trade secrets, confidentialknowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work,computer programs, data bases, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining toany Business of the Company or any of its clients, consultants or licensees which is proprietary and/or confidential information to the Company.Date: (Employee’s Signature) (Type/Print Employee’s Name) 14  EXHIBIT B TODAVID DREYER EMPLOYMENT AGREEMENTDATED AS OF FEBRUARY 22, 2015GENERAL RELEASE AND WAIVER OF CLAIMS In consideration of the payments and other benefits set forth in the Employment Agreement dated February 22, 2015 (the “Agreement”), to which this formshall be deemed to be attached, David Dreyer (“Executive”) hereby agrees to the following general release and waiver of claims (“General Release”). In exchange for the consideration provided to Executive by the Agreement that Executive is not otherwise entitled to receive, Executive hereby generallyand completely releases Biolase, Inc. (the “Company”) and its directors, officers, employees, shareholders, partners, agents, attorneys, predecessors,successors, parent and subsidiary entities, insurers, affiliates, and assigns from any and all claims, liabilities and obligations, both known and unknown, thatarise out of or are in any way related to events, acts, conduct, or omissions occurring prior to my signing this General Release. This general release includes,but is not limited to: (1) all claims arising out of or in any way related to Executive’s employment with the Company or the termination of that employment;(2) all claims related to Executive’s compensation or benefits from the Company, including salary, bonuses, commissions, vacation pay, expensereimbursements, severance pay, fringe benefits, stock, or any other ownership interests in the Company; (3) all claims for breach of contract, wrongfultermination, and breach of the implied covenant of good faith and fair dealing; (4) all tort claims, including claims for fraud, defamation, emotional distress,and discharge in violation of public policy; and (5) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation,attorneys’ fees, or other claims arising under Title VII of the 1964 Civil Rights Act, as amended, the Age Discrimination in Employment Act, the CaliforniaFair Employment and Housing Act, the Equal Pay Act of 1963, as amended, the provisions of the California Labor Code, the Americans with Disabilities Act,the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Sarbanes-Oxley Act of 2002, and any otherstate, federal, or local laws and regulations relating to employment and/or employment discrimination. The only exceptions are claims Executive may havefor unemployment compensation and worker’s compensation, Base Salary (through the date of termination), outstanding business expenses, unused vacationearned through the date of termination of Executive, claims to accrued and vested benefits under the Company’s employee benefit plans, and claims to theseverance benefits which are the consideration for this General Release. Executive expressly waives and relinquishes any and all rights and benefits Executive now has or may have in the future under the terms of Section 1542of the Civil Code of the State of California, which sections reads in full as follows:A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release,which if known by him or her must have materially affected his or her settlement with the debtor.Notwithstanding said Code Section, Executive knowingly and voluntarily waives the provisions of Section 1542 as well as any other statutory or commonlaw provisions of similar effect and acknowledges and agrees that this waiver is an essential part of this Agreement. Executive acknowledges that, among other rights, Executive is waiving and releasing any rights Executive may have under ADEA, that this GeneralRelease is knowing and voluntary, and that the consideration given for this General Release is in addition to anything of value to which Executive wasalready entitled as an executive of the Company. Executive further acknowledge that Executive has been advised, as required by the Older Workers BenefitProtection Act, that: (a) the General Release granted herein does not relate to claims under the ADEA which may arise after this General Release is executed;(b) Executive has the right to consult with an attorney prior to executing this General Release (although Executive may choose voluntarily not to do so); and(c) Executive has15  twenty-one (21) days from the date of termination of Executive’s employment with the Company in which to consider this General Release (althoughExecutive may choose voluntarily to execute this General Release earlier, in which case he voluntarily waives the remainder of the twenty-one (21) dayperiod); (d) Executive has seven (7) days following the execution of this General Release to revoke his consent to this General Release; and (e) this GeneralRelease shall not be effective until the seven (7) day revocation period has expired. Executive acknowledges his continuing obligations under the Proprietary Information and Inventions Agreement and the non-solicitation provisions setforth in Section 6 of the Agreement. Nothing contained in this General Release shall be deemed to modify, amend or supersede the obligations set forth inthat agreement. By signing this General Release, Executive hereby represents that he is not aware of any affirmative conduct or the failure to act on the part of theCompany, its officers, directors, and/or employees concerning the Company’s business practices, its reporting obligations, its customers and/or prospectivecustomers, its products, and/or any other any other aspect of the Company’s business, which Executive has any reason to believe rises to the level of unfair,improper and/or unlawful conduct pursuant to any state or federal law, rule, regulation or order, including, but not limited to, any rule, regulation or decisionpromulgated or enforced by the Securities and Exchange Commission, or which has been promulgated or enforced by any other state or federal office oradministrative body pursuant to the Sarbanes-Oxley Act of 2002. With the exception of the terms set forth in the Proprietary Information Agreement and the non-solicitation provisions set forth in Section 6 of theAgreement, this General Release constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and Executive withregard to the subject matter hereof. Executive is not relying on any promise or representation by the Company that is not expressly stated herein and theCompany is not relying on any promise or representation by Executive that is not expressly stated herein. This General Release may only be modified by awriting signed by both Executive and a duly authorized officer of the Company. The Company and Executive agree that for a period of ten (10) years after Executive’s employment with the Company ceases, they will not, in anycommunication with any person or entity, including any actual or potential customer, client, investor, vendor, or business partner of the Company, or anythird party media outlet, make any derogatory or disparaging or critical negative statements — orally, written or otherwise — against the other, or against theExecutive’s estate or affiliates, any of the Company’s directors, officers or employees. The parties acknowledge and agree that the obligation on the part ofthe Company not to make any derogatory statements as set forth in this paragraph shall only apply to the Company’s officers and directors. The parties agree that this General Release does not in any way compromise or lessen Executive’s rights to be indemnified by the Company pursuant tothat certain Indemnification Agreement dated February 22, 2015, pursuant to the Company’s by-laws or certificate of incorporation, or otherwise be coveredunder any applicable insurance policies that Executive would otherwise be entitled to receive and/or be covered by. The parties agree that in no way does this General Release preclude Executive from enforcing his ownership rights pertaining to any stock or stock optionswhich may have been purchased by Executive or granted to Executive by the Company pursuant to a written stock option grant and/or as memorialized in awritten Board Resolution (and as reported periodically in the Company’s proxy statements). BIOLASE, INC. By: Title: Dated: Dated: 16 Exhibit 21.1SubsidiariesBL Acquisition II, Inc. (Delaware)BL Acquisition Corp. (Delaware)Biolase International, LLC. (Delaware)Occulase, Inc. (Delaware)Biolase Australia, Pty. Ltd. (AUSTRALIA)Biolase Europe, GmbH (GERMANY)Biolase Spain, S.L. (SPAIN)Societe Endo Technic, Inc. (FRANCE)Biolase India Private Limited (INDIA) Exhibit 23.1 Consent of Independent Registered Public Accounting Firm BIOLASE, Inc.Irvine, California We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-194889, 333-144095, 333-112173, 333-130677,and 333-177339) and Form S-3 (Nos. 333-106260. 333-200623, 333-198291, 333-166145, 333-190158, and 333-193426) of BIOLASE, Inc. of our reportsdated March 6, 2015, relating to the consolidated financial statements and consolidated financial statement schedule, and the effectiveness of the BIOLASE,Inc.’s internal control over financial reporting, which appear in this Annual Report on Form 10-K. /s/ BDO USA, LLP Costa Mesa, CaliforniaMarch 6, 2015 Exhibit 31.1CERTIFICATIONI, Jeffrey M. Nugent, certify that:1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2014 of BIOLASE, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 6, 2015 By: /s/ JEFFREY M. NUGENT Jeffrey M. Nugent President and Chief Executive Officer (Principal Executive Officer and Principal FinancialOfficer) Exhibit 32.1CERTIFICATION OF THE CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. § 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of BIOLASE, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014 (the “Report”), I,Jeffrey M. Nugent, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ JEFFREY M. NUGENT Jeffrey M. Nugent President and Chief Executive Officer(Principal Executive Officer and Principal FinancialOfficer) March 6, 2015 

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