BIOLASE
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549 FORM 10-K (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018OR☐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) (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 registeredCommon 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 ☒Indicate 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 ☒Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in 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, smaller reporting company, or an emerging growth company. Seethe definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer☐ Accelerated filer☐Non-accelerated filer☒ Smaller reporting company☒ Emerging growth company☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒The aggregate market value of the Registrant’s common stock held by non-affiliates was $9,577,160 based on the last sale price of common stock on June 30, 2018.As of March 5, 2019, there were 21,126,162 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 2019 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, 2018, 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, 2018TABLE OF CONTENTS PART I Item 1. Business3 Executive Officers of the Registrant19Item 1A. Risk Factors20Item 1B. Unresolved Staff Comments37Item 2. Properties37Item 3. Legal Proceedings37Item 4. Mine Safety Disclosures38 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities39Item 6. Selected Financial Data39Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations40Item 8. Financial Statements51Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure51Item 9A. Controls and Procedures51Item 9B. Other Information52 PART III Item 10. Directors, Executive Officers and Corporate Governance53Item 11. Executive Compensation53Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters53Item 13. Certain Relationships and Related Transactions, and Director Independence53Item 14. Principal Accountant Fees and Services53 PART IV Item 15. Exhibits and Financial Statement Schedules54Item 16. Form 10-K Summary54 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 do not materialize as expected, could cause our results to differ materially from thoseexpressed or implied by such forward-looking statements. Examples of forward-looking statements include, but are not limited to any statements, predictions,or expectations regarding our plans to expand our product line and clinical applications, future demand for improved dental care, compliance with laws andregulatory requirements, expenses, the impact of cost-saving measures, excise tax expenses, anticipated cash needs, capital requirements and capitalexpenditures, needs for additional financing, anticipated use of proceeds from debt financing, use of working capital, plans for future products and servicesand for enhancements of existing products and services, plans to explore potential collaborations, potential acquisitions of products and technologies, effectsof engineering and development efforts, plans to expand our field sales force, the development of distributor relationships, anticipated growth strategies,ability to attract customers, the adequacy of our facilities, products and solutions from competitors, ability to maintain product quality standards, protectionof patents and other technology, the ability of third party payers to pay for costs of our products, critical accounting policies and the impact of recentaccounting pronouncements, recording tax benefits or other financial items in the future, plans, strategies, expectations, or objectives of management forfuture operations, our financial condition or prospects, and any other statement that is not historical fact. Forward-looking statements are often identified bythe use of words such as “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “continue,” “expect,” “believe,” “anticipate,” “estimate,”“predict,” “outlook,” “potential,” “plan,” “seek” and similar expressions and variations or the negatives of these terms or other comparable terminology.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; •failure in our efforts to train dental practitioners or to overcome the hesitation of dentists and patients to adopt laser technologies; •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; •problems in manufacturing our products; •warranty obligations if our products are defective; •adverse publicity regarding our technology or products; •adverse events to our patients during the use of our products, regardless of whether caused by our products;  •issues with our suppliers, including the 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; •litigation, including the failure of our insurance policies to cover certain expenses relating to litigation and our inability to reach a finalsettlement related to certain litigations; •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; •risks relating to the Credit Agreement (as further described below) with SWK Funding LLC and failure to comply with certain debt covenantstherein, including interest rate risk, limited operational flexibility and foreclosure of the Company’s assets; •failure to comply with the reporting obligations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 404 ofthe Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) or maintain adequate internal control over financial reporting; •climate change initiatives; •failure of our intellectual property rights to adequately protect our technologies and potential third-party claims that our products infringe theirintellectual property rights; •changes in government regulation or the inability to obtain or maintain necessary governmental approvals; •our failure to comply with existing or new laws and regulations, including fraud and abuse and health information privacy and securities laws; •changes in the regulatory requirements of the Food and Drug Administration (“FDA”) applicable to laser products, dental devices, or both; •recall or other regulatory action concerning our products after receiving FDA clearance or approval; and •risks relating to ownership of our common stock, including low liquidity, low trading volume, high volatility and dilution.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. PART IItem 1. BusinessOverviewBIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company,” “we,” “our” or “us”) is a medical device company thatdevelops, manufactures, markets, and sells laser systems in dentistry and medicine and also markets, sells, and distributes dental imaging equipment,including three-dimensional CAD/CAM intra-oral scanners and digital dentistry software. Our products advance the practice of dentistry and medicine forpatients and health care professionals. Our proprietary dental laser systems allow dentists, periodontists, endodontists, oral surgeons, and other dentalspecialists to perform a broad range of minimally invasive dental procedures, including cosmetic, restorative, and complex surgical applications. Our lasersystems are designed to provide clinically superior results for many types of dental procedures compared to those achieved with drills, scalpels, and otherconventional instruments. We have clearance from the FDA to market and sell our laser systems in the United States and also have the necessary registrationto market and sell our laser systems in Canada, the European Union, and many other countries outside the United States. Additionally, our in-licensedimaging 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, the Waterlase, usesa 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 255 issued and 73 pending U.S. and international patents, the majority of which are related to Waterlasetechnology. From 1998 through December 31, 2018, we sold over 38,900 laser systems in over 80 countries around the world. Contained in this total areapproximately 13,000 Waterlase systems, including approximately 8,900 Waterlase MD, MDX, Express and iPlus systems. We were originally formed asSociete Endo Technic, SA (“SET”) in 1984 in Marseilles, France, to develop and market various endodontic and laser products. In 1987, SET merged intoPamplona Capital Corp., a public holding company incorporated in Delaware. In 1994, we changed our name to BIOLASE Technology, Inc. and in 2012, wechanged 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 $46.2 million, $46.9 million, and $51.8 million, in 2018, 2017,and 2016, respectively, and we had net losses of $21.5 million, $16.9 million, and $15.4 million for the same periods, respectively. We had total assets of$38.5 million and $43.0 million as of December 31, 2018 and 2017, respectively.Recent DevelopmentsNew Leadership AdditionsConsistent with our goal to focus our energies on worldwide competitiveness, strengthening our leadership, and increasing the amount of attention wepay to our professional customers and their patients, we have made strategic personnel additions to our senior management team.Effective October 8, 2018, the Company’s board of directors (the “Board”) elected Elaine C. Wagner to the Board. Dr. Wagner is a retired United StatesNavy Rear Admiral with 33 years of service. Dr. Wagner most recently the Director of Readiness and Health at the Navy Bureau of Medicine and Surgery.Additionally, Dr. Wagner is a renowned leader in the practice of pediatric dentistry.Effective August 7, 2018, the Board appointed Todd A. Norbe as our President and Chief Executive Officer and John R. Beaver, who was serving asour Interim Chief Executive Officer, was promoted to Executive Vice President and Chief Financial Officer.Effective June 15, 2018, the Board elected Mr. Norbe and Jess Roper to the Board. Mr. Norbe has more than 25 years of experience as a seniorexecutive with companies within the dental industry. Mr. Roper has more than 25 years of experience as a senior executive with companies in the medicalindustry and has held financial management positions with publicly traded and venture-funded companies.Effective April 10, 2018, and with the resignation of Harold C. Flynn, Jr. as our President and Chief Executive Officer and as a director, the Boardappointed John Beaver as our Interim Chief Executive Officer to focus on business performance improvement and continuing operational efficiencies. 3Effective April 4, 2018, the Board elected Garrett Sato to the Board. Mr. Sato has more than 30 years of experience as a successful consultant andsenior executive with companies in the dental industry and has served as a senior advisor and executive partner with private equity and investment bankingfirms.Also consistent with our goal to focus our energies on worldwide competitiveness, strengthening our leadership, and increasing the amount ofattention we pay to our professional customers and their patients, we have made strategic personnel additions to our senior management team.Southern California Model MarketIn 2018, we bolstered efforts in southern California to significantly enhance the region’s oral health and dental care by increasing awareness andeducation in laser dentistry. We added local specialists to our staff to offer dentists more support in maximizing the use of their lasers. In addition, we beganto offer more educational courses, informational events and community activities to help ensure that dentists and their patients are provided with the latestinformation in laser dentistry. In April 2018, we formed a Southern California Dental Advisory Board, which is comprised of local dentistry veterans whosecollective expertise serves as excellent resources to help propel the local market forward. Based on the success of this initiative, in October 2018, we began asimilar initiative in the Dallas/Fort Worth, Texas area.Reverse Stock SplitEffective May 10, 2018, we effectuated a one-for-five reverse stock split. In connection with the reverse stock split, the number of authorized shares ofour common stock was reduced from 200,000,000 shares to 40,000,000 shares. All share and per share data referenced throughout this Form 10-K have beenretroactively restated to reflect the one-for-five reverse stock split. See Note 1 to the consolidated financial statements.Debt FinancingOn November 9, 2018, we entered into a five-year secured Credit Agreement with SWK Funding LLC (“SWK”), pursuant to which we have borrowed$12.5 million (the “SWK Loan”). Our obligations are secured by substantially all of our assets. The SWK Loan matures on November 9, 2023, and the interestrate on the SWK Loan is London Interbank Offered Rate (“LIBOR”) plus 10% (or another index that approximates LIBOR if LIBOR is discontinued).Approximately $0.9 million of the proceeds from the SWK Loan were used to pay off all amounts owed to Western Alliance Bank under the BusinessFinancing Agreement (as amended and defined and described further in Item 7, “Management Discussion and Analysis of Financial Condition and Results ofOperations”), and we plan to use the remaining proceeds to provide additional working capital to fund our growth initiatives, such as broadening ourcustomer base and increasing the utilization of our products to drive recurring higher margin consumables revenue. See Note 6 to the consolidated financialstatements for additional information.Intellectual Property LitigationOn January 25, 2019 (the “Effective Date”), the Company entered into a settlement agreement (“Settlement Agreement”) with CAO Group, Inc.(“CAO”). Under the terms of the Settlement Agreement, CAO agreed to dismiss with prejudice the previously-disclosed lawsuits filed by CAO against theCompany in April 2012 and January 2018 alleging, among other things, that the Company’s ezlase dental laser and diode laser infringe on certain of thepatents owned by CAO. In addition, CAO granted to the Company and its affiliates a non-exclusive, non-transferable (except as provided in the SettlementAgreement,), royalty free, fully-paid, worldwide license to the licensed patents for use in the licensed products and agreed not to sue the Company (the“Stock Consideration”), its affiliates or any of its manufacturers, distributors, suppliers or customers for use of the licensed patents in the licensed products,and the parties agreed to a mutual release of claims. The Company agreed (i) to pay to CAO, within five days of the Effective Date, $500,000 in cash, (ii) toissue to CAO, within 30 days of the Effective Date, 500,000 restricted shares of common stock of the Company, and (iii) to pay to CAO, within 30 days ofDecember 31, 2021, an amount in cash equal to the difference (if positive) between $1,000,000 and the value of the Stock Consideration on December 31,2021. The Stock Consideration vests and becomes transferrable on December 31, 2021, subject to the terms of a restricted stock agreement to be entered intobetween the parties. The Company has recorded a contingent loss relating to the settlement of $1.5 million in its consolidated financial statements as ofDecember 31, 2018. See Notes 7 and 11 to the consolidated financial statements for additional information. 4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.The American Dental Association’s (“ADA”) last available Survey of Dental Services Rendered (the “ADA Study”), published in 2007, estimated thatmore than 200 million hard tissue procedures are performed annually in the United States. Hard tissue procedures include cavity preparation, root canals, andother procedures involving bone or teeth. Moreover, iData Research, an international market research group that specializes in medical device marketdynamics, estimated that approximately 400 million hard tissue procedures are performed annually outside the United States.The ADA also estimates that 46.5 million periodontal, implant, or soft tissue surgical procedures are performed annually in the United States.Periodontal procedures are performed on the supporting structures to remove periodontal and gum disease, which leads to tooth loss. Implant proceduresinclude dental implant placement and restoration, and the treatment of peri-mucositis and peri-implantitis to mitigate implant failure, which is estimated toaffect as many as 48% of all implants placed since 2000.Furthermore, according to the ADA Study, over 90% of hard tissue procedures and 60% of periodontal, implants, and soft tissue, procedures in theUnited States are performed by general dentists. The remainder are performed by dental specialists, such as periodontists, pediatric dentists, implantologists,oral surgeons, prosthodontists, and endodontists. According to “Prevalence of Periodontitis in Adults in the United States” by Ede, Dye, Wei et al., recentevidence indicates that 47% of dental patients aged 30 or older have moderate to severe periodontitis that would benefit from intervention and Waterlasetherapy. The ADA Health Policy Institute reported that in 2014, several key indicators of demand for dental services showed positive growth, including percapita dental expenditures, overall dental visits, and dentist earnings. The ADA Health Policy Institute also reported promising trends in patient access tohealth insurance coverage and increased consumerism of oral healthcare. Overall, the demand for dental services has continued to evolve positively due topopulation growth, aging demographics, and increased awareness of the benefits of preventive dentistry in reducing the incidence of oral and systemicdisease. Periodontitis and peri-implantitis are two rapidly growing disease states requiring therapy in a dental practice.According to “The Oral Health Atlas, 2nd edition,” untreated tooth decay was the most prevalent of 291 oral disease conditions studied by the FDIWorld Dental Federation in 2015, with periodontal disease and associated complications being the 6th most prevalent oral disease state.We believe there is a growing awareness among consumers globally of the value and importance of oral health and its connections to overall systemichealth and wellness. Studies indicate a link between periodontitis and other health conditions such as heart disease, diabetes, and stroke. As of 2017,according to the ADA, there were 198,517 active private practitioners in the U.S. According to the World Health Organization, there were 1.8 million dentistsworldwide in 2012. As many developing nations continue to experience fiscal growth, we believe those nations will also experience higher demand forimproved dental care. Corresponding growth resulting from dental practices competing for patients could create further demand for clinical solutions thatenable dentists to perform minimally invasive dental procedures with less trauma, less anesthesia, improved patient acceptance, and clinically superiorresults. We believe our product offerings align with this trend.Traditional Dental InstrumentsDentists and other specialists utilize a variety of instruments depending on the tissue involved and the type of procedure. Most procedures require theuse of multiple instruments to achieve desired results. Many of the instruments available today are based on decades-old practices. Examples are as follows: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 microfractures, 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.5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.Alternative Dental InstrumentsAlternative technologies have been developed over the years to address the problems associated with traditional methods used in dentistry. However,most alternatives have addressed either hard or soft tissue applications but not both, or have other limitations.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.Our ProductsOur laser systems and three-dimensional CAD/CAM intraoral scanning and imaging solutions can provide dental professionals with enhancedcapabilities for minimally invasive treatment. Our product offering consists of the following:Waterlase all-tissue laser systems. Our all-tissue Waterlase dental laser systems currently consist of the new Waterlase Express, our flagshipWaterlase iPlus, and the Waterlase MD, and MDX. Each of these systems features proprietary laser crystal technology that produces energy with specificabsorption and tissue interaction characteristics specifically designed for dental procedures. It is minimally invasive and can precisely cut hard tissue, such asbone and teeth, and soft tissue, such as gums and skin, without the heat, vibration, bleeding, or pressure associated with traditional dental treatments. Bycombining the laser light and water, our Waterlase systems can eliminate the need for anesthesia in most cases and result in faster healing times compared totraditional methods of treatment, both of which could lead to improved patient-reported outcomes. 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. TheWaterlase systems are FDA-cleared in the United States, CE mark-approved in Europe, and approved for sale in more than 80 other countries for dental uses.In the United States, we also have regulatory clearance for dermatological, aesthetic, and other general surgery uses.Diode soft-tissue laser systems. Our Diode soft tissue laser systems currently consist of the Epic Pro, Epic X, Epic 10 and iLase diode lasers thatperform soft tissue, hygiene, cosmetic procedures, teeth whitening, and provide temporary pain relief. Epic X, Epic 10, and iLase systems feature ourproprietary 940nm wavelength and Epic Pro features our proprietary 940nm plus 980nm wavelength with patented pulse technology called ComfortPulse,which is designed for added patient comfort. iLase was the first “personal” laser with no wires, footswitch, or cumbersome cables to manage. Epic 10 is aportable, powerful diode laser that facilitates clinical versatility with surgical, pain therapy, and whitening capabilities and provides an exceptional laserwith an attractive value proposition. In December 2014, we introduced the Epic X diode laser, an enhanced soft tissue laser system featuring upgrades andimprovements from our Epic 10. Epic Pro, released in 2016, is a soft-tissue diode laser with Super Thermal Pulse and Automatic Power Control features forenhanced patient comfort and clinical outcomes. The iLase, Epic X, Epic10, and Epic Pro are FDA-cleared in the United States, CE mark-approved in Europe,and approved for sale in more than 80 other countries for dental uses. In the United States, we also have regulatory clearance for dermatological, aesthetic,and other general surgery uses.6Imaging systems. Our imaging product line includes a full line of 3Shape TRIOS intraoral scanners, digital impression systems and software fortaking highly accurate three-dimensional scans, which can be used to design crowns, study models, surgical guides for implant placement, and eventorthodontic and athletic appliances. We distribute the 3Shape products under the manufacturer’s FDA 510(k) clearances. 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 systems, we sell teeth whitening gel kits.Our Laser SolutionsDue 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, reduce the need to use anesthesia, help reduce trauma, pain, and discomfort associated with dentalprocedures, and increase patient acceptance for treatment protocols.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.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. Our lasersystems allow dentists to perform these procedures easily and efficiently, increasing their range of skills, professional and patient satisfactionlevels, patient retention rates, new patient attraction rates, and revenues. •Additional procedures through increased information and efficiency. Our laser systems can shorten and reduce the number of patient visits,providing dental professionals with the ability to service more patients. For hard tissue procedures, our Waterlase systems can reduce the need foranesthesia, which enables the dental practitioner to perform multiple procedures in one visit. The Waterlase and Diode systems cut soft tissuemore precisely and with minimal bleeding when compared to traditional tools such as scalpels and electrosurge systems. We have FDA clearancefor treatment indications for use that comprise our REPAIR Perio and REPAIR Implant, our proprietary periodontal protocols for subgingivalcalculus removal and debridement of root surfaces and implant surfaces using the Waterlase system and patented Radial and Side Firing PerioTips. This is a minimally invasive treatment for moderate to advanced gum and peri-implant diseases, which are among the leading causes ofdental health conditions for adults over age 35 and conditions that impact more than half of Americans over the age of 55. In addition, our Epicsystem can be used to quickly perform in-office teeth whitening with our proprietary whitening gel and to provide temporary pain relief. Ourdigital imaging systems allow dentists to diagnose and discover cases that they might not be able to detect with film images or other two-dimensional images, thereby giving them the ability to offer more treatment options for patients. •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 helps improvepatient retention rates, attract new patients, and increase revenue per patient, demand for elective procedures, acceptance of treatment plans, andword-of-mouth referrals. •Improved clinical outcomes. Our laser systems can be used for dozens of clinical indications with reduced trauma, swelling, and generaldiscomfort of the patient, resulting in improved clinical outcomes and less follow-up treatment. In parallel, our digital imaging systems providegreater clarity and information, making it possible for the doctor to determine the optimal diagnosis and treatment plan. Our productscollectively improve clinical outcomes, making it possible for practitioners to devote time to new cases, rather than managing or treatingcomplications.7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 and efficiency. Procedures utilizing our Waterlase systems do not require anesthesia in many cases, which allows dentalpractitioners to perform multiple procedures in one appointment, which saves patients time. Digital images are available almost immediately, sopatients do not have to spend extra time in the dental chair waiting for film to be developed. •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 procedures utilizing our Waterlase system, patients may bemore likely to consider cosmetic and other elective procedures resulting in better smiles and oral health. Our Waterlase system receivedexpanded clearance from the FDA for dermatological, aesthetic, and general surgery uses, as well as dental procedures. Since digital images aredisplayed on computer monitors, doctors can make treatment planning a more personal experience for patients. We believe that these factors willlead to greater patient case acceptance.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 and education in laser dentistry. We added local specialists to our staff in southern California and northern Texas to offerdentists more support in maximizing the use of their lasers. In addition, we plan to offer more educational courses, informational events andcommunity activities to help ensure that dentists and their patients are provided with the latest information in laser dentistry. We have developeda local advisory board of dentistry veterans whose collective expertise should serve as an excellent resource that will help propel these localmarkets forward. •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. •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. •Strengthening sales and distribution capabilities. In the U.S. and Canada, we have primarily distributed our products directly to dentalpractitioners via our field sales force. During 2016, we augmented our field sales force efforts with outbound, phone-based sales supportinitiatives. These initiatives are driven from our corporate headquarters and are comprised of sales representatives and lead generators working inpartnership with the field sales team to maximize effectiveness in engaging and servicing customers. In addition to our field sales force in NorthAmerica, we also use various independent distributors to sell and support our products throughout Europe, the Middle East, Latin America, andAsia-Pacific regions. We plan to continue to build out the infrastructure to support our customers and to drive revenue and profit growth, bothdomestically and internationally. This includes expanding our sales presence with respect to the rapidly growing group practices, grouppurchasing organizations, and government channels.8 •Improving product quality. We plan to achieve the industry’s highest rate of defect-free delivery of products, maintain high quality standards,and address and timely resolve customer complaints. In the U.S., we provide maintenance and support services to customers through our supporthotline and dedicated staff of in-house and field service personnel. Outside the U.S., we maintain a network of factory-certified servicetechnicians to provide maintenance and support services to customers. •Strengthening and defending technology leadership. We plan to continue protecting our intellectual property rights by expanding our existingpatent portfolio in the United States and internationally. We strategically enforce our intellectual property rights worldwide. •Expanding our product portfolio to dental practitioners. We plan to continue to evaluate how to optimize the manner in which we market andsell additional products to supplement our core Waterlase and Epic franchises. •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 fordental applications 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 plan to continue to explore potential collaborations to bring our proprietary lasertechnologies with expanded FDA-cleared indications for other medical applications in the future. In addition, we may acquire complementaryproducts and technologies. We also aim to increase our consumables revenue by selling more single-use accessories used by dental practitionerswhen performing procedures using our dental laser systems.WarrantiesOur Waterlase laser systems sold domestically are covered by a warranty against defects in material and workmanship for a period of up to one yearfrom the date of sale to the end-user by us or a distributor. Our Diode systems sold domestically are covered by a warranty against defects in material andworkmanship for a period of up to two years from the date of sale to the end-user by us or a distributor. Waterlase systems and Diode systems soldinternationally are covered by a warranty against defects in material and workmanship for a period of up to 28 months from date of sale to the internationaldistributor. Our laser systems warranty covers parts and service for sales in our North American territories and parts only for international distributor sales. InNorth America and select international locations, we sell extended warranty contracts to our laser systems end users that cover the period after the expirationof our standard warranty coverage for our laser systems. Extended warranty coverage provided under our service contracts varies by the type of system andthe level of service desired by the customer. Products or accessories remanufactured, refurbished, or sold by unauthorized parties, voids all warranties in placefor such products and exempts us from liability issues relating to the use of such products. We distribute extended warranties on certain imaging products,including our digital radiography products. However, all imaging products that we distribute are initially covered by manufacturer’s warranties.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(power suppliers, 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, an unexpected interruption from a single-source supplier could cause manufacturingdelays, re-engineering, significant costs, and sales disruptions, any of which could have a material adverse effect on our operations. We are continuallyseeking to identify and qualify alternate source suppliers for our key components, including but not limited to those noted above. There can 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 enter into an agreementwith any such alternate source supplier on terms acceptable to us.9As discussed below, we are subject to periodic inspections by the FDA as a manufacturer of medical devices. Such inspections can covermanufacturing, design, production, reporting, recordkeeping, and other processes and can lead to FDA observations requiring corrective action, which candisrupt normal processes.Marketing and SalesMarketingWe market our laser systems worldwide. Our marketing efforts are focused on driving brand awareness and demand for our laser solutions with dentalpractitioners. We also continue to test methods to increase awareness of our brands’ benefits by marketing directly to patients.Dental Practitioners. We market our laser systems to dental practitioners through regional, national, and international educational events, seminars,industry tradeshows, trade publications, digital/social media, field sales forces, and agents and distributors. We also use brochures, direct communications,public relations, and other promotional tools and materials.Our primary marketing message to dental practitioners focuses on the ability of our lasers to resolve dental challenges and deliver improved cash flowand return on investment (“ROI”), which can be realized with improved patient-reported outcomes. Our WCLI is a leader in educating and training dentalpractitioners in laser dentistry. We believe that, as the community of dental practitioners that use our products expands, the WCLI will continue to deliverfresh and exciting laser educational opportunities utilizing the latest in learning methodologies and platforms. The WCLI conducts and sponsors educationalprograms domestically and internationally for dental practitioners, researchers, and academicians, including one, two, and three-day seminars and trainingsessions involving in-depth presentations on the use of lasers in dentistry. In addition, we have developed relationships with research institutions, dentalschools, and dental laboratories that use our products for clinical research and in-clinical training. We believe these relationships will continue to increaseawareness of and demand for our products.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, and on Facebook, Twitter,LinkedIn, YouTube, and Instagram. 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 field 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.The following table summarizes our net revenues by category for the years ended December 31, 2018, 2017, and 2016 (dollars in thousands): Years Ended December 31, 2018 2017 2016 Laser systems $29,733 64.4 % $29,121 62.0 % $35,150 67.9 %Imaging systems 1,694 3.7 % 3,685 7.9 % 3,066 5.9 %Consumables and other 8,287 18.0 % 7,332 15.6 % 6,906 13.3 %Services 6,429 13.9 % 6,660 14.2 % 6,539 12.6 %Total products and services 46,143 100.0 % 46,798 99.7 % 51,661 99.7 %License fees and royalty 12 — % 128 0.3 % 149 0.3 %Net revenue $46,155 100.0 % $46,926 100.0 % $51,810 100.0 %10Net revenue by geographic location based on the location of customers was as follows (in thousands): Years Ended December 31, 2018 2017 2016 United States $28,661 $29,296 $33,385 International $17,494 17,630 18,425 $46,155 $46,926 $51,810International revenue accounts for a significant portion of our total revenue and accounted for approximately 38%, 38%, and 36% of our net revenuein 2018, 2017, and 2016, respectively. No individual country outside the United States represented more than 10% of our net revenue during the years endedDecember 31, 2018, 2017, and 2016.For financial information about our long-lived assets, see Notes 3, 4, and 9 to the consolidated financial statements.United States Sales. In the United States, we primarily sell our products directly to dental practitioners utilizing a field sales force consisting of lasersales representatives and regional managers. We also have an in-house sales force, which is located at our corporate headquarters and is comprised of salesrepresentatives and lead generators who work in partnership with the field 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. We have sold our products directly to end users in Germany since 2011 and directly to endusers in India and neighboring countries since 2012.Customer Concentration. We sell our products through our field sales force, agents, and distributors. For the years ended December 31, 2018, 2017,and 2016, sales to our largest distributor worldwide accounted for approximately 4%, 4%, and 4%, respectively, of our net revenue. We had one customer thatrepresented approximately 12% of our total outstanding accounts receivable as of December 31, 2018, and zero that represented more than 10% of our totaloutstanding accounts receivable as of December 31, 2017.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 several third-party financial institutions with which wehave established good relationships. In the United States, third-party customers enter into a financing agreement with one of the financial institutions thatpurchases the product from us or one of our distributors. We are not party to these financing agreements. Thus, if the customer agrees to pay the financialinstitution in installments, we do not bear the credit risk. The financial institutions do not have recourse to us for a customer’s failure to make payments, nordo we have any obligation 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 higher 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 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 30.11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 15 individuals with medical device and or laser development experience, including one Ph.D. During the years ended December 31, 2018,2017, and 2016, our engineering and product development expenses totaled approximately $5.2 million, $6.2 million, and $7.8 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 new and improved protocols or procedures that are less painful andhave clinically superior results. Some examples of the improvements we are pursuing for our laser systems include faster cutting speed, improved ease of use,less need for anesthesia, interconnectivity, and an expanded portfolio of consumable products for use with our laser systems. Our engineering and productdevelopment activities encompass both fundamental and applied fields. We seek to improve methods to perform clinical procedures through the use of newlaser wavelengths, laser operation 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.To further our development efforts, we have entered into a development and distribution agreement with IPG Medical. The development anddistribution agreement between the Company and IPG Medical covers several projects in various stages of development, with the expectation that theseprojects will culminate in commercialized joint dental laser products, accessories, or integral system components. The parties will collaborate in the designand development of these new products and applications, with each party contributing its technological expertise, know-how, and development resources.We will be responsible for U.S. and international registrations of all dental products resulting from the agreement, and we will have exclusive worldwidecommercial distribution rights for certain products over a multi-year initial term after completion of development.Intellectual Property and Proprietary RightsWe believe that to maintain a competitive advantage in the marketplace, we must develop and maintain protection of the proprietary aspects of ourtechnology. 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, 2018, we had approximately 255 issued patents and 73 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: 2 in 2019 and 2 in 2020, with the majority having expiration dates rangingfrom 2025 to 2036. With approximately 73 patent applications pending, we expect the number of new grants to exceed the number of patents expiring. Wedo 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 ofoperations.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 and our Waterlasesystems have been FDA-cleared for a wide range of uses beyond dentistry, including dermatological, aesthetics, and other general surgery uses. 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.12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. 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, it is possible that new or existing competitors may develop competing products, procedures, or clinical solutions that couldprove to be more effective, safer, or less costly than procedures using our laser systems. The introduction of new products, procedures, or clinical solutions bycompetitors may result in price reductions, reduced margins, or loss of market share, or may render our products obsolete.Government RegulationsFDA and Related Regulatory RequirementsOur products are subject to extensive regulation particularly as to safety, efficacy, and adherence to FDA Quality System Regulation and relatedmanufacturing standards. Medical device products are subject to rigorous FDA and other governmental agency regulations in the United States and similarregulations of foreign agencies abroad. The FDA regulates the design, development, research, preclinical and clinical testing, introduction, manufacture,advertising, labeling, packaging, marketing, distribution, import and export, and record keeping for such products, in order to ensure that medical productsdistributed in the United States are safe and effective for their intended use. In addition, the FDA is authorized to establish special controls to providereasonable assurance of the safety and effectiveness of most devices. Non-compliance with applicable requirements can result in import detentions, fines,civil and administrative penalties, injunctions, suspensions or losses of regulatory approvals, recall or seizure of products, operating restrictions, refusal of thegovernment to approve product export applications or allow us to enter into supply contracts, and criminal prosecution.Unless an exemption applies, the FDA requires that a manufacturer introducing a new medical device or a new indication for use of an existingmedical device obtain either a Section 510(k) premarket notification clearance or a premarket approval (“PMA”) before introducing it into the U.S. market.The type of marketing authorization is generally linked to the classification of the device. The FDA classifies medical devices into one of three classes (ClassI, II, or III) based on the degree of risk the FDA determines to be associated with a device and the level of regulatory control deemed necessary to ensure thedevice’s safety and effectiveness.Our products currently marketed in the United States are marketed pursuant to 510(k) pre-marketing clearances and are either Class I, Class II, or ClassIII devices. The process of obtaining a Section 510(k) clearance generally requires the submission of performance data and often clinical data, which in somecases can be extensive, to demonstrate that the device is “substantially equivalent” to a device that was on the market before 1976 or to a device that hasbeen found by the FDA to be “substantially equivalent” to such a pre-1976 device (referred to as “predicate device”). As a result, FDA clearance requirementsmay extend the development process for a considerable length of time. In addition, in some cases, the FDA may require additional review by an advisorypanel, which can further lengthen the process. The PMA process, which is reserved for new devices that are not substantially equivalent to any predicatedevice and for high-risk devices or those that are used to support or sustain human life, may take several years and requires the submission of extensiveperformance and clinical information.Medical devices can be marketed only for the indications for which they are cleared or approved. After a device has received 510(k) clearance for aspecific intended use, any change or modification that significantly affects its safety or effectiveness, such as a significant change in the design, materials,method of manufacture, or intended use, may require a new 510(k) clearance or PMA approval and payment of an FDA user fee. The determination as towhether or not a modification could significantly affect the device’s safety or effectiveness is initially left to the manufacturer using available FDA guidance;however, the FDA may review this determination to evaluate the regulatory status of the modified product at any time and may require the manufacturer tocease marketing and recall the modified device until 510(k) clearance or PMA approval is obtained. The manufacturer may also be subject to significantregulatory fines or penalties.Any devices we manufacture and distribute pursuant to clearance or approval by the FDA are subject to extensive and continuing regulation by theFDA and certain state agencies. These include product listing and establishment registration requirements, which help facilitate FDA inspections and otherregulatory actions. As a medical device manufacturer, all of our manufacturing facilities are subject to inspection on a routine basis by the FDA. We arerequired to adhere to applicable regulations setting forth detailed current good manufacturing practice (“cGMP”) requirements, as set forth in the FDA’sQuality System Regulation (“QSR”), which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control,documentation and other quality assurance procedures during all phases of the design and manufacturing process. Noncompliance with these standards canresult in, among other things, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, refusal of thegovernment to grant 510(k) clearance or PMA approval of devices, withdrawal of marketing approvals, and criminal prosecutions. We believe that ourdesign, manufacturing, and quality control procedures are in compliance with the FDA’s regulatory requirements.13We must also comply with post-market surveillance regulations, including medical device reporting requirements which require that we review andreport to the FDA any incident in which our products may have caused or contributed to a death or serious injury. We must also report any incident in whichany of our products has malfunctioned if that malfunction would likely cause or contribute to a death or serious injury if it were to recur.Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission (“FTC”) andby state regulatory and enforcement authorities. Medical devices approved or cleared by the FDA may not be promoted for unapproved or uncleared uses,otherwise known as “off-label” promotion. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses,and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties andcriminal prosecution.Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under health carereimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiatelitigation relating to advertising claims. If the FDA determines that our promotional materials or training constitutes promotion of an uncleared orunapproved use, the FDA could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including theissuance of an untitled letter, a notice of violation, a warning letter, an injunction, a seizure, a civil fine, or criminal penalties. In that event, our reputationcould be damaged and adoption of the products could be impaired.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.Foreign RegulationSales of medical devices outside the United States are subject to regulatory requirements that vary widely from country to country. In the EU, placingour medical devices on the market must comply with the requirements of Council Directive 93/42/EEC concerning medical devices (“MDD”). Applicablerequirements include compliance with the essential requirements of the MDD (the “Essential Requirements”) and the CE marking process. Our devices areclassified as Class I, Class IIa, Class IIb or Class III devices.Medical devices marketed in the EU must meet all proper regulatory requirements and have a CE marking affixed to them. For devices falling withinClass I (low risk), the manufacturer is responsible for ensuring that the product complies with the Essential Requirements and must draw up a writtenstatement to this effect (a “Declaration of Conformity”). Class I devices without a measuring function and supplied in non-sterile condition do not require theinvolvement of an organization designated by an EU-competent authority to assess the conformity of certain products before being placed on the EU market(a “Notified Body”). Manufacturers of sterile products and devices with a measuring function must apply to a Notified Body for certification of the aspects ofmanufacture relating to sterility or metrology.For devices falling within Class IIa (low – medium risk), in order to affix the CE marking and place the product on the EU market, the manufacturermust follow one of several authorization procedures involving the engagement of a Notified Body. For Class I devices, the manufacturer is responsible fordeclaring conformity with the provisions of the MDD and ensuring that the products comply with the Essential Requirements. This declaration must besupported by a conformity assessment by a Notified Body. Once the manufacturer has received certification from the Notified Body and issued a Declarationof Conformity, it may affix the CE marking to the relevant products and place them on the EU market.For devices falling within Class IIb (medium – high risk) and Class III (high risk), in order to affix the CE marking and place the product on the EUmarket, the manufacturer must follow one of several authorization procedures. For Class IIa devices, this requires the engagement of a Notified Body. Theprocedure for placing Class III devices on the market is similar to that applicable for Class IIb devices. However, the manufacturer must also submit a designdossier to the Notified Body for approval under Annex II of the MDD, and some of the authorization procedures permitted for Class IIb devices are notpermitted.Once medical devices correctly have a CE marking and comply with other applicable regulatory requirements, they may be placed on the market inany member state of the European Economic Area (“EEA”). However, a CE marking does not indicate that the manufacturer’s quality system or that aproduct’s safety profile has been approved or assessed by competent authority.In addition, other EU regulatory requirements may apply to our medical devices, including other types of CE markings having different requirements,where applicable. For example, Directive 2014/35/EU relating to the making available on the market of electrical equipment designed for use within certainvoltage limits, Directive 2014/30/EU on electromagnetic compatibility and Directive 2011/65/EU on the restriction of the use of certain hazardoussubstances in electrical and electronic equipment may apply to our electrical products. Moreover, we must ensure compliance with applicable EU chemicallegislation such as Directive 2011/65/EU on the restriction of the use of certain hazardous substances in electrical and electronic equipment and Regulation1907/2006 on the Registration, Evaluation, Authorization and Restriction of Chemicals. Additional EU requirements may also include safety, health, andenvironmental protection.14The European Association for the Co-ordination of Consumer Representation in Standardization has cautioned that, amongst other things, CEmarking cannot be considered a “safety mark” for consumers.In addition, CE marking is a self-certification program. Retailers sometimes refer to products as “CE approved,” but the CE marking does not actuallysignify approval. As mentioned above, certain categories of products (such as Class IIa, Class IIb and Class III medical devices) require involvement of aNotified Body to ensure conformity with relevant technical standards, but CE marking by the manufacturer in itself does not certify that this has been done.Our facilities manufacturing medical devices for the EEA market are EN ISO 13485 (Medical devices - Quality management systems - Requirementsfor regulatory purposes) Certified. Moreover, our Waterlase and Diode laser systems have a CE marking. In addition, we have attained the proper licensing forWaterlase and Diode laser systems for sale in Canada, meeting the Canadian Medical Device Regulation requirements as part of the ISO certification process.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. Furthermore, we are 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.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. In the U.S., there arefederal and state anti-kickback statutes that generally prohibit the payment or receipt of kickbacks, bribes, or other remuneration in exchange for the referralof patients or other health-related business. For example, the federal Anti-Kickback Statute 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 Statute 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 federal Anti-Kickback Statute. Exceptions and safe harbors exist for a number of arrangementsrelevant to our business, including, among other things, certain payments to bona fide employees, certain discount and rebate arrangements, and certainpayment arrangements with health care providers, assuming all elements of the relevant exception/safe harbor have been satisfied. Although an arrangementthat fits squarely into one or more of these exceptions or safe harbors generally will not be subject to prosecution, OIG has also cautioned in various contextsthat even 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 federal Anti-Kickback Statute. However, arrangements that do not fit squarely within an exception or safe harbor do not necessarily violate thefederal Anti-Kickback Statute. Rather, OIG and/or other government enforcement authorities will examine the facts and circumstances relevant to the specificarrangement to determine whether it involves the sorts of abuses that the statute was designed to combat. Violations of this federal law constitute a felonyoffense punishable by imprisonment, criminal fines of up to $25,000, civil fines of up to $74,792 per violation (as adjusted for annual inflation) and threetimes the amount of the unlawful remuneration, and exclusion from Medicare, Medicaid, and other FHCPs. Exclusion of a manufacturer like us wouldpreclude any FHCP from paying for the manufacturer’s products. In addition, pursuant to the changes made by the Affordable Care Act, a claim resulting froma violation of the federal Anti-Kickback Statute may serve as the basis for a false claim under the federal Civil False Claims Act. Many states also have theirown 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, andrelationships with dental and medical providers by limiting the kinds of arrangements we may have with hospitals, alternate care market providers,physicians, dentists, and others in a position to purchase or recommend our products.15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 of up to$21,916 (as adjusted for annual 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.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 (the “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 $24,253 per claim (as adjusted for annual inflation), up to $161,692 for circumvention schemes, and up to$11,052 per day for failing to report information concerning the entity’s ownership, investment, and compensation arrangements upon HHS’ request. StarkLaw violations also may lead to False Claims Act liability and possible exclusion from FHCPs.The FCPA’s anti-bribery provisions generally prohibit companies and their intermediaries from offering to pay, promising to pay, or authorizing thepayment of money or anything of value to non-U.S. officials for the purpose of influencing any act or decision of the foreign official in his/her capacity or tosecure any other improper advantage to obtain or retain business. Violation of the anti-bribery provisions of the FCPA by a corporation or business entity canresult in criminal fines of up to $2 million and civil penalties of up to $16,000 for each violation. Individuals, including officers, directors, stockholders, andagents of companies, can be subject to a criminal fine of up to $250,000 and/or imprisonment, in addition to civil penalties of up to $16,000, per violation.The FCPA’s accounting provisions require that all issuers 1) make and keep books, records, and accounts that, in reasonable detail, accurately andfairly reflect an issuer’s transactions and dispositions of an issuer’s assets; and 2) devise and maintain a system of internal accounting controls sufficient toensure management’s control, authority, and responsibility over the firm’s assets. Violations of the accounting provisions by a corporation or other businessentity can result in criminal fines of up to $25 million per violation and civil penalties of up to $725,000. Individuals can be subject to a criminal fine of upto $5 million per violation and/or imprisonment and civil penalties of up to $150,000.16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 comply with these laws. Evolving interpretationsof current laws or the adoption of new federal or state laws or regulations could adversely affect some of the arrangements we have with customers, 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 and criminal 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 covered entity.Although we are not a covered entity, most health care (including dental) facilities that purchase our products are covered entities under HIPAA. Due toactivities 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.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.In 2013, the Office for Civil Rights (“OCR”) of HHS released an omnibus final rule (the “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 $110 to more than $55,000 per violation, with a maximum penalty of $1,650,300 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.17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 Medicare, Medicaid, and private payersto 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 dependent in parton the coverage and reimbursement policies of these payers. We believe that most of the procedures being performed with our current products generally arereimbursable, 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 (or at such other intervals, asindicated by medical necessity) are generally covered by Medicaid. Although not required to cover dental services for adults, most state Medicaid programsstill provide a degree of coverage for at least emergency dental services. Medicare covers dental services only in certain limited circumstances. For instance, Medicare will pay for certain dental services when provided in theinpatient hospital setting if the dental procedure itself made hospitalization necessary. Medicare will also pay for certain dental services that are an integralpart of a covered procedure (e.g., jaw reconstruction following accidental injury), extractions done in preparation for certain radiation treatments, and oralexaminations preceding kidney transplantation or heart valve replacement, under certain circumstances.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 2% cut. The Bipartisan Budget Act of 2015 extended the 2% sequestration cut for Medicare through fiscal year 2025 and realigned thefiscal year 2025 Medicare sequestration amounts so that there will be a 4% sequester for the first six months and a 0% sequester for the second six months,instead of a 2% 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 50 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.18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, 2018, the Company employed approximately 190 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 our Board, which follows the annual meeting of stockholders, and atother Board meetings, as appropriate. At March 6, 2019, the executive officers of the Company were as follows:Name Age PositionTodd A. Norbe 51 President and Chief Executive OfficerJohn R. Beaver 57 Executive Vice President and Chief Financial OfficerRyan T. Meardon 39 Vice President of U.S. SalesRichard R. Whipp 65 Vice President of OperationsTodd A. Norbe was named President and Chief Executive Officer in August 2018. Prior to joining the Company as a Director in June 2018, Mr. Norbewas the President, North America of KaVo Kerr, a subsidiary of the Danaher Corporation, where he held executive leadership positions from 2006 to 2018,including President of Kerr North America, and Vice President and General Manager, Metrex Medical – Sybron Dental Specialties. Mr. Norbe holds aBachelor of Science degree in Marketing from Bloomsburg University and a Master of Business Administration in Management from Fairleigh DickinsonUniversity.John R. Beaver was named Senior Vice President and Chief Financial Officer in October 2017 and was promoted to Executive Vice President andChief Financial Officer in August 2018. Prior to joining the Company, Mr. Beaver served as the Chief Financial Officer of Silicor Materials, Inc., a globalleader in the production of solar silicon, from 2009 to 2013 and 2015 to 2017. Mr. Beaver also served on the Board of Directors of Silicor Materials, Inc. from2013 to 2015. From 2013 to 2015, Mr. Beaver was Chief Financial Officer for Modumetal, Inc., a nano-laminated alloy coatings company focused on oil andgas applications. Prior to 2009, Mr. Beaver was Senior Vice President – Finance and Chief Financial Officer at Sterling Chemicals, a mid-sized publiccommodity chemical manufacturer. Mr. Beaver holds a Bachelor of Business Administration in Accounting from the University of Texas at Austin and is aCertified Public Accountant.Ryan T. Meardon joined the Company in August 2011 as an Account Manager and advanced to the role of Sales Director in August 2013. In January2018, Mr. Meardon was named Vice President of U.S. Sales. Prior to joining the Company, Mr. Meardon served as a Regional Product Specialist and KeyAccount Manager for Brasseler USA, a dental and surgical instrumentation company, from 2005 to 2011. Mr. Meardon holds Bachelor of Arts and Masters ofScience degrees in Kinesiology from The University of Colorado.Richard R. Whipp joined the Company in July 2011 as Director of Operations and was promoted to Vice President of Operations in October 2011.Prior to joining the Company, Mr. Whipp served as Senior Director of Operations at Discus Dental, which became a division of Philips Electronics, from 1998to 2011. From 1992 to 1998, Mr. Whipp was Director of Operations at Leica Geosystems, Inc. Mr. Whipp previously held operations management positions atGulton Industries, Inc., Conrac Industries, Inc., and Hydril. Mr. Whipp holds a Bachelor of Science degree in Industrial Engineering from the Newark Collegeof Engineering.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 Exchange Act, are available free of charge on our website at http://www.biolase.com, as soon as reasonablypracticable after the Company electronically files such reports with, or furnishes those reports to, the SEC. We are providing our internet site solely for theinformation of investors. We do not intend the address to be an active link or to otherwise incorporate the contents of the website into this report.19Additional InformationBIOLASE®, ZipTip®, ezlase®, eztips®, ComfortPulse®, Waterlase®, Waterlase Dentistry®, Waterlase Express®, iLase®, iPlus®, Epic®, Epic Pro®,WCLI®, World Clinical Laser Institute®, Waterlase MD®, Waterlase Dentistry®, and EZLase® are registered trademarks of BIOLASE, and Pedolase™ is atrademark of BIOLASE. All other product and company names are registered trademarks or trademarks of their respective owners.Item 1A. Risk FactorsInvesting in our securities involves a high degree of risk. You should carefully consider the following risk factors together with all of the otherinformation included in this Form 10-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties notpresently known to us or that we presently consider to be immaterial could also adversely affect us. If any of the following risks come to fruition, ourbusiness, financial condition, results of operations, cash flows, and future growth prospects could be materially and adversely affected. In thesecircumstances, the market price of our stock could decline, and you could lose all or part of your investment.Risks Related to Our Business and OperationsAlthough our financial statements have been prepared on a going concern basis, our management and independent auditors in their reportaccompanying our consolidated financial statements for the year ended December 31, 2018, believe that our recurring losses from operations and otherfactors have raised substantial doubt about our ability to continue as a going concern as of December 31, 2018.Our audited financial statements for the fiscal year ended December 31, 2018 were prepared on a going concern basis in accordance with U.S. GAAP.The going concern basis assumes that we will continue in operation for the next 12 months and will be able to realize our assets and discharge our liabilitiesand commitments in the normal course of business. Thus, our financial statements do not include any adjustments that might be necessary if we are unable tocontinue as a going concern. Our recurring losses, negative cash flow, potential need for additional capital and the uncertainties surrounding our ability toraise such funding, raise substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next 12 monthsand be able to discharge our liabilities and commitments in the normal course of business, we must sell our products directly to end-users and throughdistributors, establish profitable operations through increased sales, decrease expenses, generate cash from operations or raise additional funds when needed.We intend to improve our financial condition and ultimately improve our financial results by increasing revenues through expansion of our productofferings, continuing to expand and develop our field sales force and distributor relationships both domestically and internationally, forming strategicarrangements within the dental and medical industries, educating dental and medical patients as to the benefits of our advanced medical technologies, andreducing expenses. If we are unable to increase sales, reduce expenses or raise sufficient additional capital we may be unable to continue to fund ouroperations, develop our products, realize value from our assets, or discharge our liabilities in the normal course of business. If we become unable to continueas a going concern, we could have to liquidate our assets, and potentially realize significantly less than the values at which they are carried on our financialstatements, and stockholders could lose all or part of their investment in our common stock.We have experienced net losses for each of the past three years and we could experience additional losses and have difficulty achieving profitability inthe future.We had an accumulated deficit of approximately $216.7 million at December 31, 2018. We recorded net losses of approximately $21.5 million, $16.9million, and $15.4 million for the years ended December 31, 2018, 2017, and 2016, respectively. In order to achieve profitability, we must increase netrevenue through new sales and control our costs. Failure to increase our net revenue and decrease our costs could cause our stock price to decline and couldhave a material adverse effect on our business, financial condition, and results of operations.20We 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. We believe thesedisruptions are likely to have an ongoing adverse effect on the world economy. A continuing economic downturn and financial market disruptions couldhave a material adverse effect on our business, financial condition, and results of operations, including by: •reducing demand for our products and services, increasing order cancellations and resulting in longer sales cycles and slower adoption of newtechnologies; •increasing the difficulty of collecting accounts receivable and the risk of excess and obsolete inventories; •increasing price competition in our served markets; and •resulting in supply interruptions, which could disrupt our ability to produce our products.We could need to raise additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we could 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 could 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 could have rights, preferences or privileges senior to those of our common stock. In addition, if weraise additional funds through debt financing, we could be subject to debt covenants that place limitations on our operations. We could not be able to raiseadditional capital on reasonable terms, or at all, or we could use capital more rapidly than anticipated. If we cannot raise the required capital when needed, wemay not be able to satisfy the demands of existing and prospective customers, we could lose revenue and market share and we may have to curtail our capitalexpenditures. 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.If we are unable to obtain sufficient capital in the future, we could 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, or reducedmanufacturing efficiencies and could have a material adverse effect on our business, financial condition, and results of operations.21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. For the fiscal years ended December 31, 2018, 2017, and 2016, revenue from distributors accounted for approximately 34%, 32%, and30% of our total net revenue, respectively. Our distributors have significant discretion in determining the efforts and resources they apply to the sale of ourproducts, and we face significant challenges and risks in expanding, training, and managing our third-party distributors, particularly given theirgeographically dispersed operations. Our distributors may not commit the necessary resources to market and sell our products to the level of our expectations,and, regardless of the resources they commit, they may not be successful. From time to time, we may face competition or pricing pressure from one or more ofour non-exclusive distributors in certain geographic areas where those distributors are selling inventory to the same customer base as us. Additionally, mostof our distributor agreements can be terminated with limited notice, and we may not be able to replace any terminating distributor in a timely manner or onterms agreeable to us, if at all. If we are not able to maintain our distribution network, if our distribution network is not successful in marketing and sellingour products, or if we experience a significant reduction in, cancellation, or change in the size and timing of orders from our distributors, our revenues coulddecline significantly and lead to an inability to meet operating cash flow requirements, which would have a material adverse effect on our business, financialcondition, and results of operations.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, and our inability to do socould have a material adverse effect on our business, financial condition, and results of operations. Historically, we have experienced long sales cyclesbecause dentists have been, and could continue to be, slow to adopt new technologies on a widespread basis. As a result, we generally are required to invest asignificant amount of time and resources to educate dentists about the benefits of our products in comparison to competing products and technologies beforecompleting a sale, if any.Factors that could 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 could have on the dentist’s practice and become comfortable performing procedures with ourproducts. Absent an immediate competitive motivation, a dentist may not feel compelled to invest the time required to learn about the potential benefits ofusing a laser system. Dentists may not accept or adopt our products until they see additional clinical evidence supporting the safety and efficiency of ourproducts or recommendations supporting our laser systems by influential dental practitioners. In addition, economic pressure, caused, for example, by aneconomic slowdown, changes in health care reimbursement or by competitive factors in a specific market, could make dentists reluctant to purchasesubstantial capital equipment or invest in new technologies. Patient acceptance will depend on the recommendations of dentists and specialists, as well asother factors, including the relative effectiveness, safety, reliability, and comfort of our systems as compared to other instruments and methods for performingdental procedures.Any failure in our efforts to train dental practitioners could result in the misuse of our products, reduce the market acceptance of our products and havea material adverse effect on our business, financial condition, and results of operations.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 provide assurance that we will be successful in these efforts. If dental practitioners are not properly trained, they couldmisuse or ineffectively use our products, or could be less likely to appreciate our laser systems. This could also result in unsatisfactory patient outcomes,patient injury, negative publicity, FDA regulatory action, or lawsuits against us, any of which could negatively affect our reputation and sales of our lasersystems.22If future data proves to be inconsistent with our clinical results or if competitors’ products present more favorable results our revenues could declineand our business, financial condition, and results of operations could be materially and adversely affected.If new studies or comparative studies generate results that are not as favorable as our clinical results, our revenues could decline. Additionally, if futurestudies indicate that our competitors’ products are more effective or safer than ours, our revenues could decline. Furthermore, dental practitioners couldchoose not 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.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 could 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 could decline, which wouldimpact our ability to meet our operating cash flow requirements and our business, financial condition, and results of operations could be adversely affected.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.We may not be able to distinguish our products and commercialize any new products, new or improved technologies, or additional applications for our lasersystems.If our customers cannot obtain third-party reimbursement for their use of our products, they could be less inclined to purchase our products and ourbusiness, financial condition, and results of operations could be adversely affected.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 could 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 could 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 could be limited.Section 382 of the Internal Revenue Code of 1986 (“IRC”) 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 material 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. Given our continued generation of losses since the completion of 2006 study, we have not updated the study.However, we plan to update the study if we expect to utilize net operating loss carryforwards in any future year. If we experience an ownership change asdefined in IRC Section 382, utilization of the net operating loss carryforwards, research and development credit carryforwards, and other tax attributes, wouldbe subject to an annual limitation under Section 382 of the IRC. In addition, our ability to utilize net operating loss carryforwards, research and developmentcredit carryforwards, and other tax attributes may be limited by other changes outside our control, such as changes to applicable tax law. Any limitation mayresult in the expiration of a portion of the net operating loss or research and development credit carryforwards before utilization. If we lose our ability to usenet operating loss carryforwards, any income we generate will be subject to tax earlier than it would be if we were able to use net operating loss carryforwards,resulting in lower profits which could have a material adverse effect on our business, financial condition, and results of operations.23We could 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 could 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 could expend significantresources in obtaining, maintaining, and addressing our compliance with these requirements. Our success will depend in part upon our ability to manufactureour products in compliance with the FDA’s QSR and other regulatory requirements. We have experienced quality issues with components of our productssupplied by third parties, and we could continue to do so. Our future success depends on our ability to manufacture our products on a timely basis withacceptable manufacturing costs, while at the same time maintaining good quality control and complying with applicable regulatory requirements, and aninability to do so could have a material adverse effect on our product sales, cash collections from customers, and our ability to meet operating cash flowrequirements, which could have a material adverse effect on our business, financial condition, and results of operations.We could be subject to significant warranty obligations if our products are defective, which could have a material adverse effect on our business,financial condition, and results of operations.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 could continue to experience such non-compliance in thefuture, which could lead to higher costs and reduced margins.Our products could contain defects that cannot be repaired easily and inexpensively, and we have experienced in the past and could 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, which could have a material adverse effect on growth in new customers and sales of our product, leading to a decline in revenues, cash collections,and ultimately our ability to meet operating cash flow requirements.Our products are used in minimally invasive surgical procedures, usually, though not always, without anesthesia. All surgical procedures carry somerisk. Patients could experience adverse events or outcomes following a surgical procedure due to a multitude of different factors alone or in combination,including deficits in the skill, experience, and preparedness of the surgeon, the existence of underlying conditions or overall poor health of the patient, anddefects, age, and misuse of medical products used in the procedure. Should an adverse patient event occur during the use of our products, there could beadverse publicity, increased scrutiny from regulatory agencies, and a loss of good will, even if it is ultimately shown to be caused by factors other than ourproduct.24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 provide assurance thatwe will be 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 claimbrought against us could result in harm to our reputation, decreased demand for our products, costs related to litigation, product recalls, loss of revenue, anincrease in our product liability insurance rates, or the inability to secure coverage in the future, and could have a material adverse effect on our business byreducing cash collections from customers and limiting our ability to meet our operating cash flow requirements.Our suppliers may not supply us with a sufficient amount or adequate quality of materials, which could have a material adverse effect on our business,financial condition, and results of operations.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 could affect theirability to deliver components for us in a timely manner. Moreover, our suppliers could 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.If any of our suppliers cease 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 could need to reengineer our components,which could 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. We arecontinually in the process of identifying and qualifying alternate source suppliers for our key components. There can be no assurance, however, that we willsuccessfully identify and qualify an alternate source supplier for any of our key components or that we could enter into an agreement with any such alternatesource supplier on terms acceptable to us, or at all.Rapidly changing standards and competing technologies could harm demand for our products, result in significant additional costs, and have amaterial adverse effect on our business, financial condition, and results of operations.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 could emerge that 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 could incur higher manufacturing costs if manufacturing processes or standards change, and we could need to replace, modify, design, or build and installequipment, all of which would require additional capital expenditures.25We could be unable to effectively manage and implement our growth strategies, which could have a material adverse effect on our business, financialcondition, and results of operations.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, could require longer implementation times or greaterstart-up expenditures than anticipated, and could otherwise fail to achieve the desired results in a timely fashion, if at all. These efforts could also require thatwe successfully 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 could be unable to increase our sales and earnings by expanding our product offerings in a cost-effective manner, and we could fail to accurately predict future customer needs and preferences or to produce viable technologies. In addition, we couldinvest heavily in research and development of products that do not lead to significant revenue. Even if we successfully innovate and develop new productsand product enhancements, we could incur substantial costs in doing so. In addition, promising new products could fail to reach the market or realize onlylimited commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes, or uncertainty over third-partyreimbursement.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, 2018, 2017, and 2016, international sales accounted for approximately 38%, 38%, and 36% 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, which could have a material adverse effect on our revenues and operating cashflow, 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; •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 could do so in the future.26We could 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, or employee error, malfeasance or other disruptions that cause an IS security breach could lead to amaterial disruption of our IS and/or the loss of business information. Such an attack could result in, among other things: •the theft, destruction, loss, misappropriation or release of confidential data and intellectual property; •operational or business delays; •liability for a breach of personal financial and health information belonging to our customers and their patients or to our employees; and •damage to our reputation.Any of these results could have a material adverse effect on our business due to the time and expense to respond to such an attack, recover data, andremediate IS weaknesses, which would disrupt our daily business operations. Further, in the event of an attack, we would be exposed to a risk of loss orlitigation and possible liability, including under laws that protect the privacy of personal information.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 could be affected by vacation patterns, whichcan cause revenue to be flat or lower than in the second quarter of the year. Our historical seasonal fluctuations could also be impacted by sales promotionsused by large dental distributors that encourage end-of-quarter and end-of-year buying in our industry. Other factors that might cause quarterly fluctuationsin our revenue 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;27 •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 carryforwards 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, wecould 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 defend and could materially and adversely affect our business, financial condition, andresults of operations.We 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 could divert our management’s attention, and we could incur significant expenses indefending these lawsuits. In addition, we could be required to pay damage awards or settlements or become subject to unfavorable equitable remedies.Moreover, any insurance or indemnification rights that we could 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 and havea material adverse effect on our business, financial condition, and results of operations.Substantially all of our administrative operations and our manufacturing operations are located at our facility in Irvine, California, which is nearknown earthquake fault zones. Although we have taken precautions to safeguard our facilities including disaster recovery planning and off-site backup ofcomputer data, 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 couldsignificantly disrupt our operations. Our business interruption insurance coverage may not cover all or any of our losses from natural disasters or otherdisruptions.28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, and technical, researchand other personnel who are in high demand and are often subject to competing employment opportunities. Our success will depend on our ability to retainour current personnel and to attract and retain qualified like personnel in the future. Competition for senior management, engineers, marketing and salespersonnel, and other specialized technicians is intense and we may not be able to retain our personnel. If we lose the services of any executive officers or keyemployees, our ability to achieve our business objectives could be harmed or delayed, which could have a material adverse effect on our daily operations,operating cash flows, results of operations, and ultimately share price. In general, our officers could terminate their employment at any time without notice forany reason.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 could 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 could 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 stockholders. We could 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 results of operations.Failure to meet covenants in the Credit Agreement, dated as of November 9, 2018 (the “Credit Agreement”), between BIOLASE, Inc. and SWKFunding LLC, as agent (“SWK”), could result in acceleration of our payment obligations thereunder, and we may not be able to find alternative financing.Under the Credit Agreement, we are required to maintain a specified amount of consolidated unencumbered liquid assets as of the end of fiscal quarter,generate minimum levels of revenue as of the end of each period specified in the Credit Agreement and maintain specified levels of consolidated EBITDA asof the end of each period specified in the Credit Agreement. Our ability to comply with these covenants may be affected by factors beyond our control. If wefail to comply with the covenants contained in the Credit Agreement, or if the Required Lenders (as defined in the Credit Agreement) contend that we havefailed to comply with these covenants or any other restrictions, it could result in an event of default under the Credit Agreement, which would permit or, incertain events, require SWK to declare all amounts outstanding thereunder to be immediately due and payable. There can be no assurances that we will beable to repay all such amounts or able to find alternative financing in an event of a default. Even if alternative financing is available in an event of a defaultunder the Credit Agreement, it may be on unfavorable terms, and the interest rate charged on any new borrowings could be substantially higher than theinterest rate under the Credit Agreement, thus adversely affecting cash flows, results of operations, and ultimately, our ability to meet operating cash flowrequirements.29Our variable rate indebtedness under the Credit Agreement subjects us to interest rate risk, which could result in higher expense in the event ofincreases in interest rates and adversely affect our business, financial condition, and results of operations.Borrowings under the Credit Agreement bear interest at a rate that varies depending on the London Interbank Offered Rate (“LIBOR”) or areplacement index that approximates LIBOR should LIBOR no longer be available. As a result, we are exposed to interest rate risk. If LIBOR rises, the interestrate on outstanding borrowings under the Credit Agreement will increase. Therefore, an increase in LIBOR will increase our interest payment obligationsunder the Credit Agreement and have a negative effect on our cash flow and possibly our ability to meet operating cash flow requirements.The restrictive covenants in the Credit Agreement and the Company’s obligation to make debt payments under the Credit Agreement may limit ouroperating and financial flexibility and may adversely affect the Company’s business, financial condition, and results of operations. The Credit Agreement imposes operating and financial restrictions and covenants, which may limit or prohibit our ability to, among other things: •incur additional indebtedness; •make investments, including acquisitions; •create liens; •make dividends, distributions or other restricted payments; •effect affiliate transactions; •enter into mergers, divisions, consolidations or sales of substantially all of our or our subsidiaries’ assets; •change business activities and issue equity interests; or •sell material assets (without using the proceeds thereof to repay the obligations under the Credit Agreement).In addition, we are required to comply with certain financial covenants under the Credit Agreement as described above.Such restrictive covenants in the Credit Agreement and the Company’s repayment obligations under the Credit Agreement could have adverseconsequences to the Company, including: •limiting our flexibility in operating our business and planning for, or reacting to, changes in our business and our industry; •requiring the dedication of a substantial portion of any cash flow from operations to the payment of principal of, and interests on, theindebtedness, thereby reducing the availability of such cash flow to fund our operations, working capital, capital expenditures, future businessopportunities and other general corporate purposes; •restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; •limiting our ability to obtain additional financing; •limiting our ability to adjust to changing market conditions; and •placing us at a competitive disadvantage relative to our competitors who are less highly leveraged.30If we fail to comply with the terms of the Credit Agreement and there is an event of default, the creditor(s) may foreclose upon the assets securing ourobligations thereunder.To secure the performance of our obligations under the Credit Agreement, we granted SWK security interests in substantially all of the assets ofBIOLASE. and certain of our foreign and domestic subsidiaries. Our failure to comply with the terms of the Credit Agreement could result in an event ofdefault thereunder. In that event, SWK will have the option to (and, in certain circumstances, will have the obligation to) foreclose on the assets of BIOLASE.and certain of our subsidiaries pledged as collateral under the Credit Agreement or the other documents executed in connection with the Credit Agreement.The foreclosure on the Company’s assets could severely and negatively impact our business, financial condition, and results of operations.If certain individuals (or permitted replacements thereof) no longer serve as our Chairman, Chief Executive Officer or Chief Financial Officer, we maybe obligated to pay all outstanding obligations and certain fees under the Credit Agreement. The Credit Agreement provides that, unless such actions are consented to in advance in writing by SWK, if two or more of the three of Jonathan Lord,Todd Norbe and John Beaver (or, in each case, his approved successor) at any one time no longer serves in their current positions with the Company and wedo not find individuals to replace such individuals within 150 days (or in certain circumstances 210 days), with individuals of appropriate qualification andexperience approved in writing by SWK (which approval may not be unreasonably withheld or delayed), there is a “Key Person Event” and all outstandingobligations and certain fees under the Credit Agreement become immediately due and payable. Whether Mr. Lord, Mr. Norbe and Mr. Beaver remain ourChairman, Chief Executive Officer and Chief Financial Officer, respectively, is not entirely under our control. Although we intend to find an appropriatereplacement satisfactory to SWK if any of Mr. Lord, Mr. Norbe or Mr. Beaver leaves his current position, there is no assurance that we will be able find such areplacement within the time period permitted under the Credit Agreement, if at all. If there is a Key Person Event, there can be no assurance that we will beable to repay all outstanding obligations and fees payable or able to find alternative financing. Even if alternative financing is available, it may be onunfavorable terms, and the interest rate charged on any new borrowings could be substantially higher than the interest rate under the Credit Agreement, thusadversely affecting our business, financial condition, and results of operations.If we fail to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act, or if we fail to maintain adequateinternal control over financial reporting, our business, financial condition, and results of operations, and investors’ confidence in us, could be materiallyand 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 (“NASDAQ”), expose us to lawsuits, andrestrict our ability to access financing on favorable terms, or at all.In addition, pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to evaluate and provide a management report of our systems ofinternal control over financial reporting. During the course of the evaluation of our internal control over financial reporting, we could identify areas requiringimprovement and could be required to design enhanced processes and controls to address issues identified through this review. This could result insignificant delays and costs to us and require us to divert substantial resources, including management time, from other activities. In addition, if we fail tomaintain the adequacy of our internal control over financial reporting, we may not be able to ensure that we can conclude on an ongoing basis that we haveeffective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us toproduce reliable financial reports and are important to help prevent fraud. Any failure to maintain compliance with the requirements of Section 404 on atimely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could, negatively impact the tradingprice of our stock, and adversely affect investors’ confidence in the Company and our ability to access capital markets for financing.Climate change initiatives could materially and adversely affect our business, financial condition, and results of operations.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 could benegatively impacted which could result in increased manufacturing costs.31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 could 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 cannotensure 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 could 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 (the “USPTO”), and there could be future proposed changes that, if enacted, have a significant impact on our ability to protect ourtechnology and enforce our intellectual property rights. If we fail to protect our intellectual property rights adequately, our competitive position could beadversely affected, and there could be a material adverse effect on sales, cash collections, and our ability to meet operating cash flow requirements.If third parties claim that we infringe their intellectual property rights, we could incur liabilities and costs and have to redesign or discontinue sellingcertain products, which could have a material adverse effect on our business, financial condition, and results of operations.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 could 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,could 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 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 have a material adverse effect on ourbusiness, financial condition, and results of operations.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 could 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.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 and conduct humanclinical testing and would very likely be subject to a significantly longer review period.32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. For example, in 2010, President Obama signed the Affordable Care Act into law, which included various reforms impacting Medicarecoverage and reimbursement, including revision to prospective payment systems, any of which could adversely impact any Medicare reimbursementsreceived by our end-user customers. New legislation may be enacted as President Trump and Congress consider further reform. In addition, as a result of thefocus on health care reform, there is risk that Congress could implement changes in laws and regulations governing health care service providers, includingmeasures to control costs, and reductions in reimbursement levels. We cannot be sure that government or private third-party payers will cover and reimbursethe procedures using our products, in whole or in part, in the future, or that payment rates will be adequate. If providers cannot obtain adequate coverage andreimbursement for our products, or the procedures in which they are used, our business, results of operations, and financial condition could suffer.We could 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 and which includes the RCHSA, under which the FDA has established reporting, recordkeeping, andperformance requirements for laser products; •state food and drug laws; •the federal Anti-Kickback Statute, which prohibits persons from knowingly and willfully soliciting, offering, receiving, or providingremuneration, directly or indirectly, to induce the referral for the furnishing of, or the purchase, order, or recommendation of, a good or service,for which payment could be made under FHCPs such as Medicare, Medicaid, and TRICARE; •state law equivalents to the federal Anti-Kickback Statute, 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;33 •the federal Stark Law, which, in the absence of a statutory or regulatory exception, prohibits: (i) the referral of Medicare or Medicaid patients by aphysician to an entity for the provision of designated health care services, if the physician or a member of the physician’s immediate family has adirect 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; •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 could be subject to the applicable penalty associated with the violation, which could 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 could 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, damage our reputation, and cause a material adverse effect on sales, cashcollections, and our ability to meet operating cash flow requirements.We could be exposed to liabilities under the FCPA, and any determination that we violated the FCPA could have a material adverse effect on ourbusiness, financial condition, and results 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 could 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 results of operations.34Product sales or introductions could be delayed or canceled as a result of the FDA regulatory requirements applicable to laser products, dentaldevices, or both, which could cause our sales or profitability to decline and have a material adverse effect on our business, financial condition, and resultsof operations.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 provide assurance 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 PMA. The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product issubstantially equivalent to other 510(k)-cleared products. The PMA process is more costly, lengthy and uncertain than the 510(k) process, and must besupported by extensive data, including data from preclinical studies, and human clinical trials. Because we cannot provide assurance that any new products,or any product enhancements, that we develop will be subject to the shorter 510(k) clearance process, significant delays in the introduction of any newproducts or product enhancement could occur. We cannot provide assurance that the FDA will not require a new product or product enhancement to gothrough the lengthy and expensive PMA process. Delays in obtaining regulatory clearances and approvals could: •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.Although we have obtained 510(k) clearance from the FDA to market our dental laser systems, we cannot provide assurance that we will not berequired to obtain new clearances or approvals for modifications or improvements to our products.Our products are subject to recalls and other regulatory actions 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. However, any recall could have a material adverse effect on our business, financial condition, and results of operations. Risks Related to Our StockThe liquidity and trading volume of our common stock could 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 could 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, 2014, 2016 and 2017 involved a significant issuance of stock to alimited number of investors, significantly increasing the concentration of our share ownership in a few holders.Two of our stockholders hold approximately 60% of our outstanding common stock, in the aggregate, as of December 31, 2018. As a result, thesestockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election andremoval of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect of delaying orpreventing a change in control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, couldhave a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices fortheir shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of otherstockholders. The concentration of ownership also contributes to the low trading volume and volatility of our common stock. 35Our stock price has been, and could 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 could negatively affect the market price of our stock. The market price and volumeof our common stock could fluctuate, and in the past has fluctuated, more dramatically than the stock market in general. You may not be able to resell yourshares at 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 orprospects or other factors. Some factors, in addition to the other risk factors identified above, that could have a significant effect on our stock market priceinclude but are not 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; •changes in financial markets or general economic conditions; •sales of stock by us or members of our management team, our Board, our significant stockholders, 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, warrants issued in past sales of our equity, future sales of ourequity, or the grant of future equity-based awards. During 2017, we sold approximately 6.9 million shares of common stock in a rights offering and privateplacement with gross proceeds totaling approximately $22.5 million. During 2016, we sold approximately 0.9 million shares of common stock in privateplacements with gross proceeds totaling approximately $10.0 million. We did not complete any private placements during 2015. During 2014, we soldapproximately 4.5 million shares of common stock in private placements with gross proceeds totaling approximately $52.0 million.At our annual meeting of stockholders on May 9, 2018 (the “ 2018 Annual Meeting”), our stockholders approved an amendment to our RestatedCertificate of Incorporation, as amended, to effect a reverse stock split our common stock, at a ratio ranging from one-for-five (1:5) to one-for-fifteen (1:15),with the final ratio to be determined by the Board. Immediately after the Annual Meeting, the Board approved a one-for-five (1:5) reverse stock split of theoutstanding shares of our common stock. On May 10, 2018, we filed an amendment to our Restated Certificate of Incorporation, as amended, with theSecretary of State of the State of Delaware to effect the reverse stock split and reduce the authorized shares of our common stock from 200,000,000 shares to40,000,000 shares.36As of December 31, 2018, an aggregate of 4,995,365 shares of common stock were reserved for issuance under our equity incentive plans, 1,623,018 ofwhich were subject to options outstanding as of that date at a weighted-average exercise price of $6.54 per share. Of the 4,995,365 stock options andrestricted stock units outstanding at December 31, 2018, 1,100,529 stock options were vested and exercisable. In addition, as of December 31, 2018,1,933,000 shares of our common stock were subject to warrants at a weighted-average exercise price of $6.62 per share. To the extent that outstandingwarrants or options are exercised, our existing stockholders could experience dilution. We rely heavily on equity awards to motivate current employees andto attract new employees. The grant of future equity awards by us to our employees and other service providers could further dilute our stockholders’ interestsin the Company.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.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesAs of December 31, 2018, we owned or leased a total of approximately 60,000 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 30, 2020. We also lease officespace in India and Germany. For additional information, see Note 7 to the consolidated financial statements.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.Intellectual Property LitigationOn April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against BIOLASE in the District of Utah alleging that BIOLASE’s ezlase dental laserinfringes on U.S. Patent No. 7,485,116 (the “116 Patent”). On September 9, 2012, CAO amended its complaint, adding claims for (1) businessdisparagement/injurious falsehood under common law and (2) unfair competition under 15 U.S.C. Section 1125(a). The additional claims stem from a pressrelease that BIOLASE issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO and its diode product. Theamended complaint sought injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. Until January 24, 2018, this lawsuit was stayedin connection with the USPTO proceedings relating to the 116 Patent, which proceedings ultimately culminated in a January 27, 2017 decision by the UnitedStates Court of Appeals for the Federal Circuit, affirming the findings of the Patent Trial and Appeal Board, which were generally favorable to the Company.On January 25, 2018, CAO moved for leave to file a second amended complaint to add certain claims, which filing the Company is not opposing. The Utahmatter has since been transferred to the Central District of California and the two matters have been consolidated with the matter described below.37On January 23, 2018, CAO filed a lawsuit against BIOLASE in the Central District of California alleging that BIOLASE’s diode lasers infringe on U.S.Patent Nos. 8,337,097, 8,834,497, 8,961,040 and 8,967,883. The complaint seeks injunctive relief, treble damages, attorneys’ fees, punitive damages, andinterest. On January 25, 2019, BIOLASE and CAO entered into a confidential settlement agreement, which provided that the lawsuits and claims therein weredismissed with prejudice with each party to bear its own costs and attorneys’ fees. See Notes 7 and 11 to the consolidated financial statements for additionalinformation.Item 4. Mine Safety DisclosuresNot applicable. 38PART IIItem 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.”As of March 5, 2019, the closing price of our common stock on the NASDAQ Capital Market was $2.51 per share, and the number of stockholders ofrecord was 149. 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 dividends in the foreseeable future. Additionally, we are prohibited from declaring and paying dividends under our Credit Agreement with SWK. As a result, we do notanticipate paying any stock dividends in 2019. Our dividend policy may be changed at any time, and from time to time, by our Board. We did not pay ordeclare any dividends in 2016, 2017, or 2018. Equity Compensation Plan InformationAt our 2018 Annual Meeting of stockholders on May 9, 2018, the Company’s stockholders approved the BIOLASE, Inc. 2018 Long-Term IncentivePlan (the “2018 Plan”). The purposes of the 2018 Plan are (i) to align the interests of the Company’s stockholders and recipients of awards under the 2018Plan by increasing the proprietary interest of such recipients in the Company’s growth and success; (ii) to advance the interests of the Company by attractingand retaining non-employee directors, officers, other employees, consultants, independent contractors and agents; and (iii) to motivate such persons to act inthe long-term best interests of the Company and its stockholders. The 2018 Plan replaced the BIOLASE, Inc. 2002 Stock Incentive Plan, (as amended, the“2002 Plan”), with respect to future awards.The 2002 Plan and the 2018 Plan are designed to attract and retain the services of individuals essential to the Company’s long-term growth andsuccess. The following table summarizes information as of December 31, 2018 with respect to the shares of our common stock that may be issued uponexercise of options, warrants or rights under the 2002 Plan and the 2018 Plan. Plan Category Number ofSecurities to beIssued UponExercise of OutstandingOptions and release ofRestricted Stock Units Weighted AverageExercise Price ofOutstanding Options Number of SecuritiesRemaining Availablefor Future IssuanceUnder EquityCompensationPlans (excludingsecurities reflectedin column)* Equity Compensation Plan Approved by Stockholders 3,600,065 $6.54 1,395,300 Equity Compensation Plan Not Approved by Stockholders — — — Total 3,600,065 $6.54 1,395,300 Item 6. Selected Financial DataAs a smaller reporting company, the Company is not required to provide the information called for under this Item. 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 three-dimensional CAD/CAM intra-oral scanners and digital dentistry software. Our products advance thepractice 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 complexsurgical applications. Our laser systems are designed to provide clinically superior results for many types of dental procedures compared to those achievedwith drills, scalpels, and other conventional instruments. We have clearance from the FDA to market and sell our laser systems in the United States and alsohave the necessary registration to market and sell our laser systems in Canada, the European Union, and many other countries outside the United States.Additionally, our in-licensed imaging equipment and related products improve diagnoses, applications, and procedures in dentistry and medicine.We offer two categories of laser system products: Waterlase (all-tissue) systems and Diode (soft-tissue) systems. Our flagship brand, the Waterlase, usesa 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 255 issued and 73 pending U.S. and international patents, the majority of which are related to Waterlasetechnology. From 1998 through December 31, 2018, we sold over 38,900 laser systems in over 80 countries around the world. Contained in this total areapproximately 13,000 Waterlase systems, including over 8,900 Waterlase MD, MDX, Express and iPlus systems.Consistent with our goal to focus our energies on strengthening our leadership, and worldwide competitiveness and increasing the amount of attentionwe pay to our professional customers and their patients, we have made strategic personnel additions to our senior management team.Effective October 8, 2018, the Board elected Elaine Wagner to the Board. Dr. Wagner is a retired United States Navy Rear Admiral with 33 years ofservice. Dr. Wagner most recently served as the Director of Readiness and Health at the Navy Bureau of Medicine and Surgery. Additionally, Dr. Wagner is arenowned leader in the practice of pediatric dentistry.Effective August 7, 2018, the Board appointed Todd Norbe as our President and Chief Executive Officer. Mr. Norbe has more than 25 years ofexperience as a senior executive with companies within the dental industry. John Beaver, who was serving as our Interim Chief Executive Officer, waspromoted to Executive Vice President and Chief Financial Officer.Effective June 15, 2018, the Board elected Mr. Norbe and Jess Roper to the Board. Mr. Roper has more than 25 years of experience as a seniorexecutive with companies in the medical industry and has held financial management positions with publicly traded and venture-funded companies.Effective April 10, 2018 with the resignation of Harold Flynn, Jr. as our President and Chief Executive Officer and as a director, the Board appointedJohn Beaver as our Interim Chief Executive Officer to focus on business performance improvement and continuing operational efficiencies.Effective April 4, 2018, the Board elected Garrett Sato to the Board. Mr. Sato has more than 30 years of experience as a consultant and seniorexecutive with companies in the dental industry and has served as a senior advisor and executive partner with private equity and investment banking firms.Effective May 10, 2018, we effectuated a one-for-five reverse stock split. In connection with the reverse stock split, the number of authorized sharesof our common stock was reduced from 200,000,000 shares to 40,000,000 shares. All share and per share data referenced throughout this Form 10-K havebeen retroactively restated to reflect the one-for-five reverse stock split.40On March 6, 2018, BIOLASE and two of its wholly-owned subsidiaries (such subsidiaries, together with BIOLASE, the “Borrower”) entered into aBusiness Financing Agreement (the “Business Financing Agreement”) with Western Alliance Bank (“Western Alliance”), which provided for borrowings ofup to $6.0 million. On August 13, 2018, the Borrower and Western Alliance entered into a Business Financing Modification Agreement, pursuant to whichWestern Alliance waived the Borrower’s covenant defaults and provided an advance of $1.5 million, which advance was due by September 27, 2018. Inconnection with the execution of the Business Financing Agreement, we issued to Western Alliance warrants. See Notes 6 and 8 to the consolidated financialstatements for additional information. On September 27, 2018, the Borrower and Western Alliance entered into a second Business Financing Modification Agreement which reduced thecredit limit under the Business Financing Agreement to $2.5 million and extended the due date of the $1.5 million advance to March 6, 2019. On October 22, 2018, the Borrower and Western Alliance entered into a third Business Financing Modification Agreement, pursuant to which WesternAlliance waived BIOLASE’s non-compliance with certain financial operating covenants as set forth in the Business Financing Agreement, and the Borroweragreed to certain amended covenants contained in the Business Financing Agreement, including $300,000 minimum unrestricted cash balance covenant anda waiver of reporting items required to be delivered by BIOLASE to Western Alliance under the Business Financing Agreement.On November 9, 2018, BIOLASE entered into a five-year secured Credit Agreement with SWK Funding LLC (“SWK”), pursuant to which BIOLASEhas borrowed $12.5 million (the “SWK Loan”). BIOLASE’s obligations are secured by substantially all of our assets. The SWK Loan matures on November 9,2023, and the interest rate on the SWK Loan is LIBOR plus 10%. Approximately, $0.9 million of the proceeds from the SWK Loan were used to repay allamounts owed to Western Alliance under the Business Financing Agreement, and we plan to use the remaining proceeds to provide additional workingcapital to fund our growth initiatives, such as broadening our customer base and increasing the utilization of its products to drive recurring higher marginconsumables revenue.On November 9, the Business Financing Agreement, as amended on October 22, 2018, was replaced by the Credit Agreement. All outstandingborrowings, accrued interest and fees were paid off with a portion of the proceeds under the Credit Agreement, and the Business Financing Agreement wasterminated.In summary, 2018 was a year of continued transformation for us, positioning ourselves to further execute on our strategic goals of returning BIOLASEto a successful growing company and continuing as the clear worldwide industry leader in the dental laser segment. Although we have made improvementsthroughout the year, it will take time for the financial statements to reflect the changes and as such, for the three years ended December 31, 2018 we havereported recurring losses from operations and have not generated cash from operations. Our level of cash used in operations, the potential need for additionalcapital, and the uncertainties surrounding our ability to raise additional capital, raise substantial doubt about our ability to continue as a going concern. As aresult, the opinion we have received from our independent registered public accounting firm, on our consolidated financial statements, contains anexplanatory paragraph stating that there is a substantial doubt regarding our ability to continue as a going concern.The accompanying consolidated financial statements have been prepared on a going concern basis, which assumes that we will continue in operationfor the next 12 months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. The consolidatedfinancial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.Critical Accounting PoliciesThe preparation of consolidated financial statements and related disclosures in conformity with generally accepted accounting principles in theUnited States (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and theaccompanying notes. The following is a summary of those accounting policies that we believe are necessary to understand and evaluate our reportedfinancial results.Revenue RecognitionRevenue for sales of products and services is derived from contracts with customers. The products and services promised in contracts include deliveryof laser systems, imaging systems, and consumables as well as certain ancillary services such as product training and support for extended warranties.Contracts with each customer generally state the terms of the sale, including the description, quantity and price of each product or service. Payment terms arestated in the contract and vary according to the arrangement. Because the customer typically agrees to a stated rate and price in the contract that does notvary over the life of the contract, our contracts do not contain variable consideration. We establish a provision for estimated warranty expenses. For furtherinformation on warranty, see Warranty Cost discussion below.41At contract inception, we assess the products and services promised in our contracts with customers. We then identify performance obligations totransfer distinct products or services to the customers. In order to identify performance obligations, we consider all of the products or services promised in thecontract regardless of whether they are explicitly stated or are implied by customary business practices.Revenue from products and services transferred to customers at a single point in time accounted for 86%, 85% and 86% of net revenue for the yearsended December 31, 2018, 2017, and 2016, respectively. The majority of the revenue recognized at a point in time is for the sale laser systems, imagingsystems, and consumables. Revenue from these contracts is recognized when the customer is able to direct the use of and obtain substantially all of thebenefits from the product which generally coincides with title transfer during the shipping process.Revenue from services transferred to customers over time accounted for 14%, 15%, and 14% of net revenue for the years ended December 31, 2018,2017, and 2016, respectively. The majority of our revenue that is recognized over time relates to training and extended warranties.The transaction price for a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, each performanceobligation is satisfied. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation usingthe best estimate of the standalone selling price of each distinct good or service in a contract. The primary method used to estimate standalone selling price isthe observable price when the good or service is sold separately in similar circumstances and to similar customers.Revenue is recorded for extended warranty over time as the customer benefits from the warranty coverage. This revenue will be recognized equallythroughout the contract period as the customer receives benefits from our promise to provide such services. Revenue is recorded for training as the customerattends a training program or upon the expiration of the obligation. We also have contracts that include both the product sales and product training as performance obligations. In those cases, we record revenue forproduct sales at the point in time when the product has been shipped. The customer obtains control of the product when it is shipped, as all shipments aremade FOB shipping point, and after the customer selects its shipping method and pays all shipping costs and insurance. We have concluded that control istransferred to the customer upon shipment.We perform our obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the customer.We invoice our customers as soon as control of an asset is transferred and a receivable due to us is established. We recognize a contract liability when acustomer prepays for goods and/or services and we have not transferred control of the goods and/or services.Accounts receivable are stated at estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts andour historical experience with accounts receivable write-offs.Accounting for Stock-Based Payments. Stock-based compensation expense is estimated at the grant date of the award, is based on the fair value of theaward and is recognized ratably over the requisite service period of the award. For restricted stock units we estimate the fair value of the award based on thenumber of awards and the fair value of our common stock on the grant date and apply an estimated forfeiture rate. For stock options, we estimate the fair valueof the option award using the Black-Scholes option pricing model. This option-pricing model requires us to make several assumptions regarding the keyvariables used to calculate the fair value of its stock options. The risk-free interest rate used is based on the U.S. Treasury yield curve in effect for the expectedlives of the options at their grant dates. Since July 1, 2005, we have used a dividend yield of zero, as we do not intend to pay cash dividends on our commonstock in the foreseeable future. The most critical assumptions used in calculating the fair value of stock options is the expected life of the option and theexpected volatility of our common stock. The expected life is calculated in accordance with the simplified method, whereby for service-based awards, theexpected life is calculated as a midpoint between the vesting date and expiration date. We use the simplified method, as there is not a sufficient history ofshare option exercises. For performance-based awards, the expected life equals the life of the award. We believe the historic volatility of our common stock isa reliable indicator of future volatility, and accordingly, a stock volatility factor based on the historical volatility of our common stock over a lookbackperiod of the expected life is used in approximating the estimated volatility of new stock options. Compensation expense is recognized using the straight-line method for all service-based employee awards and graded amortization for all performance-based awards. Compensation expense is recognized only forthose options expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations. Forfeitures are estimatedat the time of the grant and revised in subsequent periods as actual forfeitures differ from those estimates. During the year ended December 31, 2018, weapplied a forfeiture rate of 7.28% and 45.31% to awards granted to executives and employees, respectively,42Valuation of Inventory. Inventory is valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. Weperiodically evaluate the carrying value of inventory and maintain an allowance for excess and obsolete inventory to adjust the carrying value as necessaryto the lower of cost or net realizable value. We evaluate quantities on hand, physical condition, and technical functionality, as these characteristics may beimpacted by anticipated customer demand for current products and new product introductions. Unfavorable changes in estimates of excess and obsoleteinventory would result in an increase in cost 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 subject to amortization but areevaluated for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. We conducted our annualimpairment analysis of our goodwill as of June 30, 2018 and concluded there had been no impairment in goodwill. We closely monitor our stock price andmarket capitalization and perform such analysis when events or circumstances indicate that there may have been a change to the carrying value of thoseassets.Warranty Cost. We provide warranties against defects in materials and workmanship of our laser systems for specified periods of time. For the yearsended December 31, 2018, 2017, and 2016 laser systems sold were covered by our warranty for a period of up to two years from the date of sale by us or thedistributor to the end-user. In 2017, for Waterlase systems sold domestically and purchased in 2017 or later, we decreased the warranty period from two yearsto one year. Laser systems sold internationally were covered by our warranty for a period of up to 28 months from the date of sale to the internationaldistributor. Estimated warranty expenses are recorded as an accrued liability with a corresponding provision to cost of revenue. This estimate is recognizedconcurrent with the recognition of revenue on the sale to the distributor or end-user. Warranty expenses expected to be incurred after one year from the timeof sale to the distributor are classified as a long-term warranty accrual. Our overall accrual is based on our historical experience and our expectation of futureconditions, taking into consideration the location and type of customer and the type of laser, which directly correlate to the materials and components underwarranty, the duration of the warranty period, and the logistical costs to service the warranty. Additional factors that may impact our warranty accrual includechanges in the quality of materials, leadership and training of the production and services departments, knowledge of the lasers and workmanship, training ofcustomers, and adherence to the warranty policies. Additionally, an increase in warranty claims or in the costs associated with servicing those claims wouldlikely result in an increase in the accrual and a decrease in gross profit. We offer extended warranties on certain imaging products. However, all imagingproducts are initially covered by the manufacturer’s warranties.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 significant but is not both probable and estimable, we disclose thematter in the notes to our consolidated financial statements.Income Taxes. Based upon our operating losses during 2018, 2017, and 2016 and the available evidence, management has determined that it is morelikely than not that the deferred tax assets as of December 31, 2018 will not be realized in the near term. Consequently, we have established a valuationallowance against our net deferred tax asset totaling approximately $46.9 million and $40.8 million as of December 31, 2018 and 2017, 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.43Fair Value of Financial InstrumentsOur financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, capital lease obligations and accruedliabilities, approximate fair value because of the liquid or short-term nature of these items.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 is based on assumptions that market participants would use, including a consideration of non-performance risk. Under theaccounting guidance for value hierarchy, there are three levels of measurement inputs. Level 1 inputs are quoted prices in active markets for identical assetsor liabilities. Level 2 inputs are observable, either directly or indirectly. Level 3 inputs are unobservable due to little or no corroborating market data.Results of OperationsThe following table sets forth certain data from our operating results for each of the years ended December 31, 2018, 2017, and 2016, expressed inthousands and as percentages of revenue: Years Ended December 31, 2018 2017 2016 Products and services revenue $46,143 100.0 % $46,798 99.7 % $51,661 99.7 %License fees and royalty revenue 12 — % 128 0.3 % 149 0.3 %Net revenue 46,155 100.0 % 46,926 100.0 % 51,810 100.0 %Cost of revenue 29,260 63.4 % 31,800 67.8 % 31,502 60.8 %Gross profit 16,895 36.6 % 15,126 32.2 % 20,308 39.2 %Operating expenses: Sales and marketing 18,121 39.3 % 16,718 35.6 % 17,018 32.8 %General and administrative 11,771 25.5 % 9,712 20.7 % 10,453 20.2 %Engineering and development 5,203 11.3 % 6,229 13.3 % 7,799 15.1 %Disposal of internally developed software 1,185 2.6 % 505 1.1 % — — %Loss on patent litigation settlement 1,500 3.2 % — — % — — %Total operating expenses 37,780 81.9 % 33,164 70.7 % 35,270 68.1 %Loss from operations (20,885) (45.2)% (18,038) (38.5)% (14,962) (28.9)%Non-operating (loss) gain, net (568) (1.2)% 605 1.3 % (258) (0.5)%Loss before income tax provision (21,453) (46.5)% (17,433) (37.2)% (15,220) (29.4)%Income tax provision (benefit) 63 0.1 % (582) (1.2)% 151 0.3 %Net loss $(21,516) (46.6)% $(16,851) (36.0)% $(15,371) (29.7)% The following table summarizes our net revenues by category for the years ended December 31, 2018, 2017, and 2016 (dollars in thousands): Years Ended December 31, 2018 2017 2016 Laser systems $29,733 64.4 % $29,121 62.0 % $35,150 67.9 %Imaging systems 1,694 3.7 % 3,685 7.9 % 3,066 5.9 %Consumables and other 8,287 18.0 % 7,332 15.6 % 6,906 13.3 %Services 6,429 13.9 % 6,660 14.2 % 6,539 12.6 %Total products and services 46,143 100.0 % 46,798 99.7 % 51,661 99.7 %License fees and royalty 12 — % 128 0.3 % 149 0.3 %Net revenue $46,155 100.0 % $46,926 100.0 % $51,810 100.0 % Non-GAAP DisclosureIn addition to the financial information prepared in conformity with GAAP, we provide certain historical non-GAAP financial information.Management believes that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results and that, in somerespects, these non-GAAP financial measures are more indicative of our ongoing core operating performance than their GAAP equivalents.44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 us 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-basedcompensation, and other non-cash compensation, as well as the disposal of internally developed software and loss on patent litigation settlement) in itsevaluation of our core results of operations and trends between fiscal periods and believes that these measures are important components of its internalperformance measurement process. Management believes that this non-GAAP financial information reflects an additional way of viewing aspects of ourbusiness that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business.Non-GAAP net loss for the periods presented is as follows (in thousands): Years Ended December 31, 2018 2017 2016 GAAP net loss attributable to common stockholders $(21,516) $(20,829) $(17,555)Deemed dividend on convertible preferred stock — 3,978 2,184 GAAP net loss $(21,516) $(16,851) $(15,371)Adjustments: Interest expense (income), net 510 (42) (74)Income tax provision (benefit) 63 (582) 151 Depreciation and amortization 945 1,203 1,048 Disposal of internally developed software 1,185 505 — Loss on patent litigation settlement 1,500 — — Stock-based and other non-cash compensation 2,768 2,207 3,065 Non-GAAP net loss $(14,545) $(13,560) $(11,181) Comparison of Results of OperationsYear Ended December 31, 2018 Compared with Year Ended December 31, 2017Net Revenue. Net revenue for the year ended December 31, 2018 (“Fiscal 2018”) was $46.2 million, a decrease of $0.8 million, or 2%, as comparedwith net revenue of $46.9 million for the year ended December 31, 2017 (“Fiscal 2017”). Domestic revenues were $28.7 million, or 62% of net revenue, forFiscal 2018 compared to $29.3 million, or 62% of net revenue, for Fiscal 2017. International revenues for Fiscal 2018 were $17.5 million, or 38% of netrevenue, compared to $17.6 million, or 38% of net revenue for Fiscal 2017.The decrease in year-over-year net revenue resulted from decreases in worldwide imaging systems, services, and royalty revenue and was partiallyoffset by increases of 2% and 13% in worldwide laser system and consumables and other revenue, respectively.Laser system net revenues increased by approximately $0.6 million, or 2%, in Fiscal 2018 compared to Fiscal 2017. The laser systems revenueincrease was driven by a 7% increase in domestic revenue which was partially offset by 3% decline in international revenue. The increase in domestic laserrevenues is primarily due to our increased sales efforts in our model markets as well as the rest of the U.S.Imaging system net revenue decreased by approximately $2.0 million, or 54%, in Fiscal 2018 compared to Fiscal 2017. This decrease was primarilydriven by a one-time study club purchase in 2017 and our renewed focus on laser sales in 2018.Consumables and other net revenue, which includes products such as disposable tips and shipping revenue, increased approximately $1.0 million, or13%, in Fiscal 2018, as compared to Fiscal 2017. The increase in consumables and other net revenue was primarily driven by an increase of approximately12% in domestic sales, which is attributed to our growing laser customer base.45License fees and royalty revenue decreased by approximately $0.1 million or 91%, in Fiscal 2018 compared to Fiscal 2017 primarily due to windingdown of the previously disclosed Fotona Proizvodnja Optoelektronskih Naprav D.D. and Fotona LLC intellectual property litigation (the “FotonaLitigation”).Cost of Revenue. Cost of revenue decreased by $2.5 million, or approximately 8%, to $29.3 million, or 63% of net revenue in Fiscal 2018, comparedto cost of revenue of $31.8 million, or 68% of net revenue, in Fiscal 2017. The decrease in cost of revenue in Fiscal 2018 as compared to Fiscal 2017 isprimarily due to product mix. In Fiscal 2018, we sold fewer imaging systems which have lower profit margin leading to an overall decline in cost of revenueas a percentage of revenue from Fiscal 2017.Gross Profit. Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, product costs and revenuelevels. Gross profit for Fiscal 2018 was $16.9 million, or 37% of net revenue, an increase of approximately $1.8 million, or 12%, as compared with grossprofit of $15.1 million, or 32% of net revenue, for Fiscal 2017. The increase in gross profit reflects new customer growth and a favorable change in productmix with an increase in laser sales, which have higher average selling prices and higher profit margins than our other product offerings.Operating Expenses. Operating expenses for Fiscal 2018 were $37.8 million, or 82% of net revenue, an increase of approximately $4.6 million, or14%, as compared with $33.2 million, or 71% of net revenue, for Fiscal 2017. See the following expense categories for further explanations.Sales and Marketing Expense. Sales and marketing expense for Fiscal 2018 increased by $1.4 million, or 8%, to $18.1 million, or 39% of netrevenue, as compared with $16.7 million, or 36% of net revenue, during Fiscal 2017. The increase in Fiscal 2018 was primarily a result of increases in payrolland consulting-related expense of $0.7 million, advertising and marketing expense of $0.4 million, share-based compensation of $0.3 million andcommissions of $0.1 million; the increases were partially offset by a decrease in convention related costs of $0.3 million. As we continue efforts to transformand drive revenue growth, we expect sales and marketing expense to decrease as a percentage of revenue in 2019 primarily due to our continued focus ontargeted and cost-effective advertising campaigns and marketing events.General and Administrative Expense. General and administrative expense for Fiscal 2018 increased by $2.0 million, or 21%, to $11.8 million, or25% of net revenue, as compared with $9.7 million, or 21% of net revenue, for Fiscal 2017. The increase in general and administrative expense was primarilydue to increases in patent and legal expense of $0.9 million, payroll and consulting-related expense of $0.5 million, provision for doubtful accounts of $0.4million, and other general expenses of $0.2 million, while share-based compensation was consistent with Fiscal 2017. We expect general and administrativeexpenses to decrease as a percentage of revenue in 2019 primarily due to decreased legal expenses.Engineering and Development Expense. Engineering and development expense for Fiscal 2018 decreased by $1.0 million, or 16%, to $5.2 million,or 11% of net revenue, as compared with $6.2 million, or 13% of net revenue, in Fiscal 2017. The decrease was primarily related to decreased payroll andconsulting-related expense of $0.4 million and decreased supplies expense of $0.4 million. The decrease in payroll and consulting-related expense resultedprimarily from decreased salaries and wages of $0.3 million. The decrease in supplies expense resulted primarily from decreased operating supplies of $0.3million. We expect to continue our investment in engineering and development activity. However, our primary focus will be on our sales and marketingefforts. Therefore, we expect engineering and development expenses to a decrease as a percentage of revenue in 2019.Disposal of internally developed software. In Fiscal 2018, we recognized a $1.2 million loss on disposal of internally developed softwarecosts. During 2018, it was determined that capitalized website development costs were impaired due to the fact that further development of the tools wouldnot be pursued. In Fiscal 2017, we recognized a $0.5 million loss on disposal of internally developed software resulting from our decision to stopimplementation of a new ERP system.Loss on patent litigation settlement. In Fiscal 2018, we recognized a contingent loss of $1.5 million relating to the patent litigation claim with CAO.Under the Settlement Agreement, CAO agreed to dismiss with prejudice the previously-disclosed lawsuits filed by CAO against BIOLASE and grantBIOLASE a non-exclusive, non-transferable (except as provided in the Settlement Agreement), royalty free, fully paid, worldwide license to the licensedpatents for use in the licensed products that were the subject of the litigation. BIOLASE agreed to pay $500,000 in cash and 500,000 restricted shares of ourcommon stock, which will vest on December 31, 2021. If upon December 31, 2021, the fair value of the shares issued to CAO is less than $1 million,BIOLASE will pay the difference between the value of the stock on December 31, 2021 and $1 million in cash. We expect legal expenses to decrease in 2019as a result of this settlement.46Non-Operating Income (Loss)Gain (Loss) on Foreign Currency Transactions. We recognized a $0.1 million loss on foreign currency transactions for Fiscal 2018 compared to a$0.5 million gain for Fiscal 2017, due to exchange rate fluctuations primarily between the U.S. dollar and the Euro.Interest Income (Expense), Net. Net interest expense increased by $0.6 million to $0.5 million in Fiscal 2018 compared to $0.1 million of net interestincome in Fiscal 2017. The increase in interest expense was the result of $0.3 million in interest relating to the SWK Loan and interest expense of $0.2million relating to the Business Financing Agreement with Western Alliance. We repaid the borrowings under the Business Financing Agreement in thefourth quarter of Fiscal 2018 with the proceeds from the SWK Loan. We expect interest expense to increase in 2019 as a result of having the SWK Loanoutstanding for the full year.Provision (benefit) for Income Taxes. Our provision for income taxes was $0.1 million for Fiscal 2018, an increase of $0.7 million as compared withour benefit for income taxes of $0.6 million in Fiscal 2017. The increase in our provision for 2018 is primarily due to the one-time impact of the Tax Cuts andJobs Act of 2017 had upon adoption in Fiscal 2017.Net Loss. For the reasons stated above, our net loss was $21.5 million for Fiscal 2018 compared to a net loss of $16.9 million for Fiscal 2017. Theincrease in net loss of approximately $4.7 million, or 28%, was primarily due to increased loss from operations of $2.8 million, including non-cash expensesconsisting of the $1.5 million loss relating to the CAO patent infringement settlement and the $0.7 million increase in loss on disposal of internallydeveloped software. Net loss for Fiscal 2018 also included increased legal expenses of $0.9 million and an increase in interest expense of $0.6 million, whichwere offset by decreases in engineering payroll and consulting expenses and supplies costs of $1.0 million.Year Ended December 31, 2017 Compared with Year Ended December 31, 2016Net Revenue. Net revenue for the year ended December 31, 2017 was $46.9 million, a decrease of $4.9 million, or 9%, as compared with net revenueof $51.8 million for the year ended December 31, 2016 (“Fiscal 2016”). Domestic revenues were $29.3 million, or 62% of net revenue, for Fiscal 2017compared to $33.4 million, or 64% of net revenue, for Fiscal 2016. International revenues for Fiscal 2017 were $17.6 million, or 38% of net revenue,compared to $18.4 million, or 36% of net revenue for Fiscal 2016.The decrease in year-over-year net revenue resulted from decreases in worldwide laser system revenue, international imaging systems revenue,international consumables and other revenue, international services revenue and domestic license fees and royalty revenue, partially offset by increases indomestic imaging systems revenue, domestic consumables and other revenue and domestic services revenue.Laser system net revenues decreased by approximately $6.0 million, or 17%, in Fiscal 2017 compared to Fiscal 2016. The laser systems revenuedecrease was driven by a 28% decline in domestic revenue and a 3% decline in international revenue. Imaging system net revenue increased by approximately $0.6 million, or 20%, in Fiscal 2017 compared to Fiscal 2016. This increase was due toincreased overall market interest in intra-oral scanning devices, and our favorable positioning as a distributor.Consumables and other net revenue, which includes products such as disposable tips and shipping revenue, increased approximately $0.4 million, or6%, in Fiscal 2017, as compared to Fiscal 2016. The increase in consumables and other net revenue was primarily a result of auxiliary sales to our growinglaser customer base.License fees and royalty revenue decreased by 14%, to approximately $0.1 million in Fiscal 2017 compared to Fiscal 2016. License fees and royaltyrevenues are associated with intellectual property related to our laser technologies. The decrease was primarily due to the Fotona Litigation from Fiscal2015. Cost of Revenue. Cost of revenue in Fiscal 2017 increased by $0.3 million, or 1%, to $31.8 million, or 68% of net revenue, compared with cost ofrevenue of $31.5 million, or 61% of net revenue, in Fiscal 2016. Gross Profit. Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, product costs and revenuelevels. Gross profit for Fiscal 2017 was $15.1 million, or 32% of net revenue, a decrease of approximately $5.2 million, or 26%, as compared with gross profitof $20.3 million, or 39% of net revenue, for Fiscal 2016. The decrease in gross profit was mainly attributable to promotional introductory pricing ofWaterlase Express, unabsorbed fixed costs due to lower revenue, and an increase in imaging revenue, which has lower product distribution margins than lasersystems revenue.47Operating Expenses. Operating expenses for Fiscal 2017 were $33.2 million, or 71% of net revenue, a decrease of approximately $2.1 million, or 6%,as compared with $35.3 million, or 68% of net revenue, for Fiscal 2016. The year-over-year decrease in expense is primarily due to a $0.7 million decrease incommissions expenses and $0.8 million decrease in stock-based compensation expenses. See the following expense categories for further explanations.Sales and Marketing Expense. Sales and marketing expenses for Fiscal 2017 decreased by $0.3 million, or 2%, to $16.7 million, or 36% of netrevenue, as compared with $17.0 million, or 33% of net revenue, during Fiscal 2016. The decrease was primarily a result of decreased commissions of $0.7million, partially offset by increased payroll and consulting-related expenses of $0.1 million, increased convention-related expenses of $0.1 million andincreased travel and travel-related expenses of $0.2 million. The decrease in commissions was driven by decreased sales in Fiscal 2017 compared to Fiscal2016. The increase in payroll and consulting-related expenses resulted primarily from increased incentive compensation of $0.3 million, partially offset by adecrease of $0.2 million in stock-based compensation due to fewer grants. In the first quarter of 2017, we participated in the International Dental Show inCologne, Germany, which led to higher convention-related expenses and travel expenditures.General and Administrative Expense. General and administrative expenses for Fiscal 2017 decreased by $0.7 million, or 7%, to $9.7 million, or 21%of net revenue, as compared with $10.5 million, or 20% of net revenue, for Fiscal 2016. The overall decrease to general and administrative expenses wasprimarily due to decreased payroll and consulting-related expenses of $0.8 million, and decreased patent and legal expenses of $0.3 million, partially offsetby increased provision for doubtful accounts of $0.2 million and increased bank fees of $0.1 million. The decreased payroll and consulting-related expensesresulted primarily from decreased recruiting fees of $0.3 million and decreased stock-based compensation expense of $0.6 million due to the reassessment ofcertain performance-based equity awards, partially offset by an increase in salaries and wages of $0.1 million. The decrease in patent and legal expensesresulted from a decrease in legal and litigation fees in the normal course of business of $0.3 million.Engineering and Development Expense. Engineering and development expenses for Fiscal 2017 decreased by $1.6 million, or 20%, to $6.3 million,or 13% of net revenue, as compared with $7.8 million, or 15% of net revenue, in Fiscal 2016. The decrease was primarily related to decreased payroll,consulting and temporary labor expenses of $0.9 million and decreased supplies expenses of $0.8 million. The decrease in payroll, consulting and temporarylabor expenses resulted primarily from decreased consulting fees of $0.9 million. The decrease in supplies expenses resulted primarily from decreasedoperating supplies of $0.6 million.Disposal of Internally Developed Software Expense. Disposal of internally developed software expense for Fiscal 2017 was $0.5 million. In 2013,we began our program to deploy a new global enterprise resource planning (“ERP”) system developed by SAP. After careful evaluation, we have concludedthat this new ERP system does not fit into our current business model. Accordingly, we have stopped our global ERP deployment and disposed of all relatedassets.Non-Operating Income (Loss)Gain (Loss) on Foreign Currency Transactions. We recognized a $0.6 million gain on foreign currency transactions for Fiscal 2017 compared to a$0.3 million loss for Fiscal 2016, due to exchange rate fluctuations primarily between the U.S. dollar and the Euro.Interest Income (Expense), Net. Interest income during Fiscal 2017 represented interest recognized from the discounted present value of thesettlement in connection with the Fotona Litigation. Interest expense in Fiscal 2017 consisted of interest incurred on our capital lease obligations inconnection with the lease of information technology equipment. Interest income, net comprised of approximately 0.1% of net revenue, for Fiscal 2017, whichis consistent with interest income of 0.1% of net revenue for Fiscal 2016. (Benefit) Provision for Income Taxes. Our benefit for income taxes was $0.6 million for Fiscal 2017, a change of $0.7 million, as compared with ourprovision of income taxes of $0.2 million in Fiscal 2016. The change is due to the Tax Cuts and Jobs Act of 2017, which decreased the corporate tax ratefrom 34% to 21%.Net Loss. For the reasons stated above, our net loss was $16.9 million for Fiscal 2017 compared to a net loss of $15.4 million for Fiscal 2016. Theincrease in net loss of approximately $1.5 million, or 10%, was primarily due to increased loss from operations of $3.1 million, including a non-cash expenserelated to the disposal of internally developed software of $0.5 million due to the decision to cancel future deployments of a new ERP system, partially offsetby increased gain of foreign currency transactions of $0.9 million and a change in income tax benefit, net of $0.7 million.48Liquidity and Capital ResourcesAt December 31, 2018, we had approximately $8.4 million in cash and cash equivalents, including restricted cash equivalents. Management definescash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. The decrease in our cash and cash equivalentsby $3.5 million from December 31, 2017 was primarily due to cash used in operating and investing activities of $14.2 million and $0.5 million, respectively,and the effect of exchange rates on cash of $0.1 million, partially offset by cash provided by financing activities of $11.2 million. The $14.2 million of netcash used in operating activities in 2018 was primarily driven by our net loss of $21.5 million during the year. At December 31, 2018, we had approximately $17.3 million in working capital. Our principal sources of liquidity at December 31, 2018, consisted ofapproximately $8.4 million in cash, cash equivalents and restricted cash and $11.1 million of net accounts receivable.We have reported recurring losses from operations and have not generated cash from operations for the three years ended December 31, 2018. Ourlevel of cash used in operations, the potential need for additional capital, and the uncertainties surrounding our ability to raise additional capital, raisesubstantial doubt about our ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis,which assumes that we will continue in operation for the next 12 months and will be able to realize our assets and discharge our liabilities and commitmentsin the normal course of business. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a goingconcern.In order for us to continue operations beyond the next 12 months and be able to discharge our liabilities and commitments in the normal course ofbusiness, we must sell our products directly to end users and through distributors, establish profitable operations through increased sales, decrease expenses,generate cash from operations, or obtain additional funds when needed. We intend to improve our financial condition and ultimately improve our financialresults by increasing revenues through expansion of our product offerings, continuing to expand and develop our field 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.On November 9, 2018, we entered into a five-year secured Credit Agreement with SWK, pursuant to which BIOLASE has borrowed $12.5 million. Theobligations are secured by substantially all of our assets. The SWK Loan matures on November 9, 2023, and the interest rate on the SWK Loan is LIBOR plus10%. Approximately $0.9 million of the proceeds from the SWK Loan were used to pay off all amounts owed to Western Alliance under the BusinessFinancing Agreement, and we plan to use the remaining proceeds to provide additional working capital to fund our growth initiatives, such as broadeningour customer base and increasing the utilization of our products to drive recurring higher margin consumables revenue. We are in compliance with the debtcovenants as of December 31, 2018. For further information regarding our debt financing, see Note 8 of the consolidated financial statements.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 will be available on acceptable terms, if at all, or that any such financing activity will 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.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. All other balances are reviewed on a pooled basis by age of receivable. Account balances are charged off against the allowance when it is probablethe receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.49Consolidated Cash FlowsThe following table summarizes our statements of cash flows for Fiscal 2018, Fiscal 2017, and Fiscal 2016 (in thousands): Years Ended December 31, 2018 2017 2016 Net cash (used in) provided by: Operating activities $(14,147) $(18,412) $(10,596)Investing activities (522) (747) (1,414)Financing activities 11,235 21,618 9,350 Effect of exchange rates on cash (106) 262 (64)Net change in cash and cash equivalents $(3,540) $2,721 $(2,724) Fiscal 2018 Compared to Fiscal 2017Cash used in operating activities for Fiscal 2018 decreased by $4.3 million compared to Fiscal 2017 and was primarily due an increase in net loss of$4.7 million, offset by an increase in adjustments to reconcile net loss to cash and cash equivalents of $3.5 million which included a $1.5 million loss relatedto the CAO patent litigation settlement, an increase in loss on disposal of internally developed software of $0.7 million, a $0.6 million increase in share-based compensation, and an increase of $0.7 million in deferred income taxes and a $0.5 million decrease in provision for inventory reserves. Additionally,net changes in operating assets and liabilities resulted in an increase of $5.4 million to operating cash flows in Fiscal 2018 driven primarily by $6.8 millionchange in accounts payable and accrued liabilities from Fiscal 2017 due to the timing of payments made in 2017 as compared to Fiscal 2018. Cash used inoperating activities for Fiscal 2017 totaled $18.4 million and was primarily comprised of net loss of $16.9 million, adjustments to reconcile net loss to netcash and cash equivalents of $3.8 million and cash outflow from net changes in assets and liabilities of $5.4 million. The $5.4 million net decrease in ouroperating assets and liabilities was primarily due to a decrease in accounts payable and accrued liabilities of $5.0 million related to the timing of ourpayments.Cash used in investing activities for Fiscal 2018 totaled $0.5 million compared to $0.7 million for Fiscal 2017. The $0.2 million decrease in net cashused in investing activities was due to our continued efforts to effectively manage resources and is in line with expectations. We expect capital expendituresfor 2019 to be consistent with Fiscal 2018.Cash provided by financing activities decreased by $10.4 million compared to Fiscal 2017 and was primarily due to the difference in the net proceedsfrom the SWK Loan in Fiscal 2018 as compared to the proceeds received from the proceeds from our rights offering in Fiscal 2017. See Notes 6 and 8 to theconsolidated financial statements for more information.The $0.1 million effect of exchange rate on cash for Fiscal 2018 was due to a recognized loss on foreign currency transactions, primarily the Eurocurrency conversion rates during Fiscal 2018.Fiscal 2017 Compared to Fiscal 2016The $7.8 million increase in net cash used in operating activities for Fiscal 2017 compared to Fiscal 2016 was primarily due to an increase in our netloss of $1.5 million, decreased stock-based compensation of $0.9 million and decreased accounts payable and accrued liabilities of $5.0 million. Theincreased net loss was primarily driven by an increase in loss from operations of $3.1 million, partially offset by a non-operating gain (loss), net of $0.9million a change in income tax benefit, net of $0.7 million. Cash used in operating activities for Fiscal 2017 totaled $18.4 million and was primarilycomprised of net loss of $16.9 million, adjustments to reconcile net loss to net cash and cash equivalents of $3.8 million and cash outflow from net changesin assets and liabilities of $5.4 million. The $5.4 million net decrease in our operating assets and liabilities was primarily due to a decrease in accountspayable and accrued liabilities of $5.0 million related to the timing of our payments.Cash used in investing activities for Fiscal 2017 totaled $0.7 million compared to $1.4 million for Fiscal 2016. The $0.7 million decrease in net cashused in investing activities was due to a $0.7 million decrease in capital expenditures during Fiscal 2017 compared to Fiscal 2016. The period-over-perioddecrease was primarily due to capital expenditures for the implementation of a new enterprise resource planning system, which has been put on hold in 2017.The $21.6 million increase in net cash provided by financing activities for Fiscal 2017 compared to Fiscal 2016 was primarily due to net proceedsfrom our rights offering in December 2017 and our equity offering in April 2017 totaling $21.6 million. See Note 8 to the consolidated financial statementsfor more information.50The $0.3 million effect of exchange rate on cash for Fiscal 2017 was due to a recognized gain on foreign currency transactions, primarily the Eurocurrency conversion rates during 2017.Contractual ObligationsWe lease our primary facility under a non-cancellable operating lease that expires in April 2020. On November 9, 2018, we entered into the Credit Agreement with SWK, which provides us with the SWK Loan, a variable-rate term loan in theamount of $12.5 million. The SWK Loan bears interest at LIBOR plus 10% and is interest-only for the first two years of the five-year loan term, with thepossibility of extending the interest-only period beyond two years. Principal repayments will begin in December 2020, and will be approximately $0.7million per quarter until the loan matures in November 2023.The following table presents our expected cash requirements for contractual obligations outstanding as of December 31, 2018, for the years ended asindicated below (in thousands): Less Than 1 to 3 3 to 5 More Than 1 Year Years Years 5 years Total Operating lease obligations $802 $346 $— $— $1,148 Purchase obligations 8,679 425 — — 9,104 SWK Loan interest (1) 1,598 2,934 1,491 — 6,023 SWK Loan principal — 3,500 9,000 — 12,500 Total $11,079 $7,205 $10,491 $— $28,775 (1) estimated using LIBOR rates as at December 31, 2018 Purchase obligations relate to purchase orders with suppliers that we expect to complete primarily during the year ended December 31, 2018. Inconformity with current GAAP, purchase obligations and operating lease obligations are not reported in the consolidated balance sheet as of December 31,2018.Recent Accounting PronouncementsSee Note 2 to the consolidated financial statements included in this in Part IV, Item 15 of this Annual Report on Form 10-K, which is incorporatedherein by reference.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(A)(4)(ii).Item 8. Financial StatementsAll financial statements required by this Item 8, including the report of the independent registered public accounting firm, are listed in Part IV, Item 15of this Form 10-K, are set forth beginning on Page F-1 of this Form 10-K, and are hereby incorporated herein by reference.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresDisclosure Controls and ProceduresOur management has evaluated, with the participation of our President and Chief Executive Officer and Chief Financial Officer, the effectiveness ofthe Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period coveredby this report. Based on that evaluation, our President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosurecontrols and procedures were effective as of December 31, 2018.51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. Under the supervision and with the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the frameworkestablished by the Committee of Sponsoring Organizations of the Treadway Commission entitled “Internal Control — Integrated Framework (2013)” (the“COSO Framework”). Based on our evaluation under the COSO Framework, our management concluded that our internal control over financial reporting waseffective as of December 31, 2018. Our internal control over financial reporting was not subject to attestation by our independent registered publicaccounting firm, as we are not an accelerated filer.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31,2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.52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 for the Annual Meeting of Stockholders to be filed with the SEC isincorporated by reference herein.The Biolase, Inc. Code of Business Conduct and Ethics applies to all of our employees, officers, and directors, including our President and ChiefExecutive Officer. The Code of Business Conduct can be found on our website at the following address: media.corporate-ir.net/media_files/nsd/blti/corpgov/CodeofConductandEthics.pdf.Item 11. Executive CompensationThe information set forth under the captions “Executive Compensation” and “Director Compensation” in the Proxy Statement for the Annual Meetingof Stockholders to be filed with the SEC is incorporated by reference herein.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for theAnnual Meeting of Stockholders to be filed with the SEC and the information set forth under the caption “Equity Compensation Plan Information” in Item 5of this Form 10-K are 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 forthe Annual Meeting of Stockholders to be filed with the SEC is incorporated 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 for the Annual Meeting of Stockholdersto be filed with the SEC is incorporated by reference herein. 53PART IVItem 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, 2018 and 2017F-3Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018, 2017, and 2016F-4Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017, and 2016F-5Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016F-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, 2018, 2017, and 2016S-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 exhibits filed as a part of this Annual Report on Form 10-K are listed in the accompanying Exhibit Index on page 58.Item 16. Form 10-K SummaryNone 54 BIOLASE, INC.Index to Exhibits 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 of6% Redeemable Cumulative Convertible PreferredStock of the Registrant; (ii) Certificate ofDesignations, Preferences and Rights of Series A 6%Redeemable Cumulative Convertible Preferred Stockof the Registrant; (iii) Certificate of Correction Filedto Correct a Certain Error in the Certificate ofDesignation of the Registrant; and (iv) Certificate ofDesignations of Series B Junior ParticipatingCumulative 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 3.1.4 Third Amendment to Restated Certificate ofIncorporation S-3 07/21/2017 3.4 07/21/2017 3.1.5 Fourth Amendment to Restated Certificate ofIncorporation 8-K 05/11/2018 3.1 05/11/2018 3.1.6 Certificate of Elimination of Series B JuniorParticipating Cumulative Preferred Stock 8-K 11/10/2015 3.1 11/12/2015 3.1.7 Certificate of Designations, Preferences and Rights ofSeries C Participating Convertible Preferred Stock 8-K 08/08/2016 3.1 08/08/2016 3.1.8 Certificate of Elimination of Series C ParticipatingConvertible Preferred Stock 8-K 04/18/2017 3.1 04/20/2017 3.1.9 Certificate of Designations, Preferences and Rights ofSeries D Participating Convertible Preferred Stock 8-K 04/18/2017 3.2 04/20/2017 3.2 Seventh Amended and Restated Bylaws of theRegistrant, adopted on October 8, 2018 8-K 08/08/2018 3.1 08/09/2018 4.1 Form of Warrant issued on November 7, 2014 8-K 11/03/2014 99.1 11/07/2014 4.2 Form of Warrant issued on August 8, 2016 8-K 08/01/2016 99.1 08/02/2016 4.3 Form of Warrant issued on April 18, 2017 DEF14A D 05/19/2017 4.4 Warrant to Purchase Stock issued on March 6, 2018to Western Alliance Bank 10-K 12/31/2017 4.4 03/14/2018 4.5 Warrant to Purchase Stock issued on September 27,2018 to Western Alliance Bank 10-Q 09/30/2018 4.1 11/14/2018 4.6 Warrant to Purchase Stock issued on November 9 toSWK Funding, LLC 10-Q 09/30/2018 4.2 11/14/2018 55 Incorporated by ReferenceExhibit Description FiledHerewith Form PeriodEnding/Dateof Report Exhibit FilingDate 4.7 Standstill Agreement, dated November 10, 2015, byand among the Registrant, Jack W. Schuler, RenateSchuler and the Schuler Family Foundation 8-K 11/10/2015 99.1 11/12/2015 4.8 Standstill Agreement, dated November 10, 2015, byand among the Registrant and Larry N. Feinberg,Oracle Partners, L.P., Oracle Institutional Partners,L.P., Oracle Ten Fund Master, L.P., Oracle Associates,LLC, and Oracle Investment Management, Inc. 8-K 11/10/2015 99.2 11/12/2015 4.9 Amendment to Standstill Agreement, dated August 1,2016, by and among the Registrant, Jack W. Schuler,Renate Schuler and the Schuler Family Foundation 8-K 08/01/2016 99.2 08/02/2016 4.10 Amendment to Standstill Agreement, dated August 1,2016, by and among the Registrant, Larry N.Feinberg, Oracle Partners, L.P., Oracle InstitutionalPartners, L.P., Oracle Ten Fund Master, L.P., OracleAssociates, LLC and Oracle Investment Management,Inc. 8-K 08/01/2016 99.3 08/02/2016 4.11 Amendment to Standstill Agreement, datedNovember 9, 2017, by and among the Registrant,Jack W. Schuler, Renate Schuler and the SchulerFamily Foundation 8-K 11/09/2017 99.1 11/09/2017 4.12 Amendment to Standstill Agreement, datedNovember 9, 2017, by and among the Registrant,Larry N. Feinberg, Oracle Partners, L.P., OracleInstitutional Partners, L.P., Oracle Ten Fund Master,L.P., Oracle Associates, LLC and Oracle InvestmentManagement, Inc. 8-K 11/09/2017 99.2 11/09/2017 10.1* 2002 Stock Incentive Plan, as amended DEF 14A A 04/07/2016 10.2* Form of Stock Option Agreement under the 2002Stock Incentive Plan 10-K 12/31/2004 10.26 07/19/2005 10.3* Form of Option Award Notice for CaliforniaEmployees under the 2002 Stock Incentive Plan 10-Q 09/30/2015 10.2 11/06/2015 10.4* Form of Option Award Notice for Non-CaliforniaEmployees under the 2002 Stock Incentive Plan 10-Q 09/30/2015 10.3 11/06/2015 10.5* Form of Option Award Notice for Non-EmployeeDirectors under the 2002 Stock Incentive Plan 10-Q 09/30/2015 10.4 11/06/2015 10.6* Form of Restricted Stock Unit Award Notice for Non-Employee Directors under the 2002 Stock IncentivePlan 10-Q 09/30/2015 10.5 11/06/2015 10.7* Form of Indemnification Agreement between theRegistrant and its officers and directors 10-Q 09/30/2005 10.1 11/09/2005 56 Incorporated by ReferenceExhibit Description FiledHerewith Form PeriodEnding/Dateof Report Exhibit FilingDate 10.8 Lease, dated January 10, 2006, by and between theRegistrant and The Irvine Company LLC 8-K 01/10/2006 10.1 01/17/2006 10.9 Third Amendment to Lease, dated March 16, 2015,by and between the Registrant and The IrvineCompany LLC 10-Q 03/31/2015 10.3 05/01/2015 10.10 Securities Purchase Agreement, dated August 1,2016, among the Registrant and the investors listedon Schedule I thereto 8-K 08/01/2016 99.1 08/02/2016 10.11 Securities Purchase Agreement, dated April 11, 2017,among the Registrant and the investors listed onSchedule I thereto 8-K 04/11/2017 99.1 04/14/2017 10.12* Employment Agreement, dated May 14, 2015, by andbetween the Registrant and Harold C. Flynn, Jr. 10-Q 06/30/2015 10.2 08/07/2015 10.13* Inducement Restricted Stock Unit Award Agreement,dated July 14, 2015, by and between the Registrantand Harold C. Flynn, Jr. 8-K 07/12/2015 10.2 07/15/2015 10.14* Acknowledgment Letter, dated November 22, 2016,by and between the Registrant and Harold C. Flynn,Jr. 10-K 12/31/2016 10.18 03/10/2017 10.15 Commitment Letter, dated September 26, 2017,between each of Oracle Partners, LP, OracleInstitutional Partners, LP and Oracle Ten FundMaster, LP and the Registrant S-1 09/29/2017 10.23 09/29/2017 10.16 Commitment Letter, dated September 26, 2017,between each of Renate Schuler, Jack W. SchulerLiving Trust and Schuler Family Foundation and theRegistrant S-1 09/29/2017 10.24 09/29/2017 10.17* Form of Stock Option Agreement for inducementgrants made to John R. Beaver on September 30,2017 8-K 09/30/2017 10.1 10/03/2017 10.18 Business Financing Agreement, dated as of March 6,2018, by and among the Registrant, Western AllianceBank, BL Acquisition Corp. and BL Acquisition IIInc. 10-K 12/31/2017 10.26 03/14/2018 10.19 Export-Import Bank of the United States WorkingCapital Guarantee Program Borrower Agreement,dated as of March 6, 2018, by and between theRegistrant in favor of the Export Import Bank of theUnited States and Western Alliance Bank 10-K 12/31/2017 10.29 03/14/2018 10.20 Export-Import Bank of the United States WorkingCapital Guarantee Program Borrower Agreement,dated as of March 6, 2018, by and between BLAcquisition Corp. in favor of the Export Import Bankof the United States and Western Alliance Bank 10-K 12/31/2017 10.29 03/14/201857 Incorporated by ReferenceExhibit Description FiledHerewith Form PeriodEnding/Dateof Report Exhibit FilingDate 10.21 Export-Import Bank of the United States WorkingCapital Guarantee Program Borrower Agreement,dated as of March 6, 2018, by and between BLAcquisition II Inc. in favor of the Export Import Bankof the United States and Western Alliance Bank 10-K 12/31/2017 10.29 03/14/2018 10.22 Waiver and Business Financing ModificationAgreement (First Amendment to Business FinancingAgreement), dated as of August 13, 2018, by andamong the Registrant, Western Alliance Bank, BLAcquisition Corp., and BL Acquisition II, Inc. 10-Q 09/30/2018 10.3 11/14/2018 10.23 Business Financing Modification Agreement(Second Amendment to Business FinancingAgreement), dated as of September 27, 2018, by andbetween Registrant, Western Alliance Bank, BLAcquisition Corp, and BL Acquisition II Inc. 10-Q 09/30/2018 10.4 11/14/2018 10.24 Business Financing Modification Agreement (ThirdAmendment to Business Financing Agreement),dated as of October 22, 2018, by and among theRegistrant, Western Alliance Bank, BL AcquisitionCorp., and BL Acquisition II, Inc. 10-Q 09/30/2018 10.5 11/14/2018 10.25 Credit Agreement dated as of November 9, 2018, byand between the Registrant and SWK Funding LLC 10-Q 09/30/2018 10.6 11/14/2018 10.26 Separation Agreement, dated April 30, 2018 by andbetween the Registrant and Harold C. Flynn, Jr. 8-K/A 04/10/2018 10.1 05/03/2018 10.27 Employment Agreement, dated August 7, 2018, byand between the Registrant and Todd Norbe 8-K 08/07/2018 10.1 08/08/2018 10.28 Confidential Settlement Agreement, dated January25, 2019, by and between the Registrant and CAOGroup, Inc. X 21.1 Subsidiaries of the Registrant X 23.1 Consent of Independent Registered PublicAccounting Firm, BDO USA, LLP X 31.1 Certification of Chief Executive Officer pursuant toRule 13a-14 and Rule 15d-14(a) of the SecuritiesExchange Act of 1934, as amended X 31.2 Certification of Chief Financial Officer pursuant toRule 13a-14 and Rule 15d-14(a) of the SecuritiesExchange Act of 1934, as amended X 58 Incorporated by ReferenceExhibit Description FiledHerewith Form PeriodEnding/Dateof Report Exhibit FilingDate 32.1 Certification of Chief Executive Officer pursuant to18 U.S.C. 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002 ** 32.2 Certification of Chief Financial Officer pursuant to18 U.S.C. 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002 ** 101 The following financial information from theCompany’s Annual Report on Form 10-K, for the yearended December 31, 2018, formatted in eXtensibleBusiness Reporting 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 to Consolidated 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.*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 8, 2019 By: /s/ TODD A. NORBE Todd A. Norbe President and Chief Executive Officer Pursuant 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/ TODD A. NORBE President andChief Executive Officer (Principal Executive Officer) and Director March 8, 2019Todd A. Norbe /s/ JOHN R. BEAVER Executive Vice President andChief Financial Officer (Principal Financial Officer and Principal AccountingOfficer) March 8, 2019John R. Beaver /s/ JESS ROPER Director March 8, 2019Jess Roper /s/ DR. JONATHAN T. LORD Director March 8, 2019Dr. Jonathan T. Lord March 8, 2019/s/ DR. RICHARD B. LANMAN Director March 8, 2019Dr. Richard B. Lanman /s/ GARRETT SATO Director Garrett Sato /s/ DR. ELAINE WAGNER Director March 8, 2019Dr. Elaine Wager 60 BIOLASE, INC.Index to Consolidated Financial Statements and Schedule PageReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2018 and 2017F-3Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018, 2017, and 2016F-4Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017, and 2016F-5Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016F-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, 2018, 2017 and 2016S-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 FirmShareholders and Board of DirectorsBIOLASE, Inc.Irvine, CaliforniaOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of BIOLASE, Inc. and subsidiaries (collectively, the “Company”) as of December 31,2018 and 2017, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2018, and the related notes and schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of theCompany and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the periodended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.Going Concern UncertaintyThe accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussedin Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has negative cash flows from operations foreach of the three years in the period ended December 31, 2018. These factors, among others, raise substantial doubt about its ability to continue as a goingconcern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theCompany’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securitieslaws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain anunderstanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error orfraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis forour opinion./s/ BDO USA, LLPWe have served as the Company's auditor since 2005.Costa Mesa, CaliforniaMarch 8, 2019 F-2 BIOLASE, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except per share data) December 31, 2018 2017 ASSETS Current assets: Cash and cash equivalents $8,044 $11,645 Restricted cash 312 251 Accounts receivable, less allowance of $850 and $802 in 2018 and 2017, respectively 11,112 10,124 Inventory 12,248 12,298 Prepaid expenses and other current assets 1,591 1,732 Total current assets 33,307 36,050 Property, plant, and equipment, net 1,975 3,674 Goodwill 2,926 2,926 Other assets 308 334 Total assets $38,516 $42,984 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $5,953 $5,109 Accrued liabilities 7,538 5,636 Deferred revenue 2,476 2,625 Total current liabilities 15,967 13,370 Deferred income taxes, net 77 104 Warranty accrual 447 70 Other liabilities 100 180 Term loan 10,836 — Total liabilities 27,427 13,724 Commitments and contingencies —Note 6 Stockholders' equity: Preferred stock, par value $0.001 per share; 1,000 shares authorized, 0 shares issued and outstanding as of December 31, 2018 and 2017, respectively — — Common stock, par value $0.001 per share; 40,000 and 40,000 shares authorized, 21,072 and 20,468 shares issued and outstanding as of December 31, 2018 and 2017, respectively 21 20 Additional paid-in capital 228,430 224,992 Accumulated other comprehensive loss (670) (576)Accumulated deficit (216,692) (195,176)Total stockholders' equity 11,089 29,260 Total liabilities and stockholders' equity $38,516 $42,984 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, 2018 2017 2016 Products and services revenue $46,143 $46,798 $51,661 License fees and royalty revenue 12 128 149 Net revenue 46,155 46,926 51,810 Cost of revenue 29,260 31,800 31,502 Gross profit 16,895 15,126 20,308 Operating expenses: Sales and marketing 18,121 16,718 17,018 General and administrative 11,771 9,712 10,453 Engineering and development 5,203 6,229 7,799 Disposal of internally developed software 1,185 505 — Loss on patent litigation settlement 1,500 — — Total operating expenses 37,780 33,164 35,270 Loss from operations (20,885) (18,038) (14,962)(Loss) gain on foreign currency transactions (58) 563 (332)Interest (expense) income, net (510) 42 74 Non-operating (loss) gain, net (568) 605 (258)Loss before income tax provision (21,453) (17,433) (15,220)Income tax provision (benefit) 63 (582) 151 Net loss (21,516) (16,851) (15,371)Other comprehensive income (loss) items: Foreign currency translation adjustments (94) 300 (75)Comprehensive loss $(21,610) $(16,551) $(15,446) Net loss $(21,516) $(16,851) $(15,371)Deemed dividend on convertible preferred stock — (3,978) (2,184)Net loss attributable to common stockholders $(21,516) $(20,829) $(17,555) Net loss per share attributable to common stockholders: Basic $(1.05) $(1.41) $(1.45)Diluted $(1.05) $(1.41) $(1.45)Shares used in the calculation of net loss per share: Basic 20,588 14,752 12,133 Diluted 20,588 14,752 12,133 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 Convertible Preferred Stock Comprehensive Accumulated Stockholders' Shares Amount Shares Amount Loss Deficit Equity Balances, January 1, 2016 11,646 $188,680 — $— $(801) $(162,954) $24,925 Exercise of stock options, net — 1 — — — — 1 Stock-based compensation — 3,065 — — — — 3,065 Issuance of stock from RSUs, net 98 — — — — — — Issuance of Series C participating convertible preferred stock and warrants, net of issuance cost of $480 — 1,092 88 8,428 — — 1,092 Beneficial conversion feature of Series C participating convertible preferred stock — 1,092 — (1,092) — — 1,092 Deemed dividend related to beneficial conversion feature of Series C participating convertible preferred stock — (2,184) — 2,184 — — (2,184)Issuance of common stock upon conversion of Series C participating convertible preferred stock 1,769 9,520 (88) (9,520) — — 9,520 Net loss — — — — — (15,371) (15,371)Foreign currency translation adjustment — — — — (75) — (75)Balances, December 31, 2016 13,513 201,266 — — (876) (178,325) 22,065 Exercise of stock options, net — 3 — — — — 3 Stock-based compensation — 2,145 — — — — 2,145 Issuance of stock from RSUs, net 81 — — — — — — Issuance of Series D participating convertible preferred stock and warrants, net of issuance cost of $251 — 2,026 81 8,214 — — 2,026 Beneficial conversion feature of Series D participating convertible preferred stock — 1,952 — (1,952) — — 1,952 Deemed dividend related to beneficial conversion feature of Series D participating convertible preferred stock — (3,978) — 3,978 — — (3,978)Issuance of common stock upon conversion of Series D participating convertible preferred stock 1,613 10,240 (81) (10,240) — — 10,240 Issuance of stock from rights offering, net 5,261 11,358 — — — — 11,358 Net loss — — — — — (16,851) (16,851)Foreign currency translation adjustment — — — — 300 — 300 Balances, December 31, 2017 20,468 225,012 — — (576) (195,176) 29,260 Exercise of stock options, net 1 3 — — — — 3 Fees for rights offering — (38) — — — — (38)Stock-based compensation — 2,627 — — — — 2,627 Issuance of stock from RSUs, net 603 — — — — — — Warrant issued in connection with debt instruments — 847 — — — — 847 Net loss — — — — — (21,516) (21,516)Foreign currency translation adjustment — — — — (94) — (94)Balances, December 31, 2018 21,072 $228,451 — $— $(670) $(216,692) $11,089 See accompanying notes to consolidated financial statements. F-5 BIOLASE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years Ended December 31, 2018 2017 2016 Cash Flows From Operating Activities: Net loss $(21,516) $(16,851) $(15,371)Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Depreciation and amortization 945 1,203 1,048 Loss (gain) on disposal of assets, net 1,228 505 (2)Provision (recovery) for bad debts, net 469 40 (118)Provision for inventory excess and obsolescence 166 623 272 Amortization of discount on debt 202 — — Amortization of debt issuance costs 126 — — Loss on patent litigation settlement 1,500 — — Stock-based compensation 2,768 2,207 3,065 Deferred income taxes (27) (694) 60 Earned interest income, net 1 (42) (70)Changes in operating assets and liabilities: Accounts receivable (1,458) (337) (644)Inventory (127) 419 (1,989)Prepaid expenses and other current assets (25) (11) 79 Accounts payable, accrued and other liabilities 1,762 (5,077) 3,338 Deferred revenue (161) (397) (264)Net cash and cash equivalents used in operating activities (14,147) (18,412) (10,596)Cash Flows From Investing Activities: Purchases of property, plant, and equipment (558) (747) (1,414)Proceeds from disposal of property, plant, and equipment 36 — — Net cash and cash equivalents used in investing activities (522) (747) (1,414)Cash Flows From Financing Activities: Principal payments under capital lease obligation (46) (146) (171)Borrowings under lines of credit 3,696 — — Payments under lines of credit (3,696) — — Proceeds from term loan 12,500 — — Payments of debt issuance costs (1,058) — — Proceeds from equity offerings, net of expenses — 21,761 9,520 Payments of equity offering costs (164) — — Proceeds from exercise of stock options 3 3 1 Net cash and cash equivalents provided by financing activities 11,235 21,618 9,350 Effect of exchange rate changes (106) 262 (64)(Decrease) increase in cash and cash equivalents (3,540) 2,721 (2,724)Cash, cash equivalents and restricted cash, beginning of year 11,896 9,175 11,899 Cash, cash equivalents and restricted cash, end of year $8,356 $11,896 $9,175 Supplemental cash flow disclosure - Cash Paid: Interest paid $23 $1 $4 Interest received $— $74 $74 Income taxes paid $44 $164 $76 Supplemental cash flow disclosure - Non-cash investing and financing activities Accrued capital expenditures and tenant improvement allowance $31 $102 $251 Increase in accrued and other liabilities due to loss on patent litigation $1,500 $— $— Warrants issued in connection with debt instruments $847 $— $— See accompanying notes to consolidated financial statements. F-6 BIOLASE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1 — BASIS OF PRESENTATIONThe CompanyBIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company”) incorporated in Delaware in 1987, is a medical devicecompany that develops, manufactures, markets, and sells laser systems in dentistry and medicine and also markets, sells, and distributes dental imagingequipment, including three-dimensional CAD/CAM intra-oral scanners and digital dentistry software. Use of EstimatesThe preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States ofAmerica (“GAAP”) requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and theaccompanying 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, effects of stock-basedcompensation and warrants, contingent liabilities, and the provision or benefit for income taxes. Due to the inherent uncertainty involved in makingestimates, actual results reported in future periods may differ materially from those estimates.ReclassificationsThe Company has reclassified certain immaterial amounts in prior years to conform to current year’s presentation.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 non-performance 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. Level 3 inputs are unobservable due to little or no corroborating market data.The Company’s financial instruments, consisting of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities,and SWK Loan, approximate fair value because of the liquid or short-term nature of these items.Reverse Stock SplitAt the Company’s annual meeting of stockholders on May 9, 2018 (the “2018 Annual Meeting”), the Company’s stockholders approved anamendment to its Restated Certificate of Incorporation to effect a reverse stock split of its common stock, at a ratio ranging from one-for-five to one-for-fifteen, with the final ratio to be determined by the Company’s board of directors (the “Board”). Immediately after the 2018 Annual Meeting, the Boardapproved a one-for-five (1:5) reverse stock split of the outstanding shares of the BIOLASE common stock. On May 10, 2018, the Company filed anamendment (the “Fourth Amendment”) to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the reversestock split and to reduce the authorized shares of common stock from 200,000,000 shares to 40,000,000 shares. Except as the context otherwise requires, allcurrent and prior year share numbers (including common stock warrants) and share price amounts (including exercise prices and closing market prices)contained in these audited financial statements and notes thereto reflect the one-for-five reverse stock split. Additionally, in 2018 the Company recorded areclassification of $0.1 million between common stock and additional paid-in capital, equal to the reduction in par value.F-7 Concentration of Credit Risk, Interest Rate Risk and Foreign Currency Exchange RateFinancial instruments which potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents,restricted cash, and trade accounts receivable. The Company maintains its cash and cash equivalents and restricted cash with established commercial banks.At times, balances may exceed federally insured limits. To minimize the risk associated with trade accounts receivable, management performs ongoing creditevaluations of customers’ financial condition and maintains relationships with the Company’s customers that allow management to monitor current changesin business operations so the Company can respond as needed. The Company does not, generally, require customers to provide collateral before it sells themits products. However, the Company has required certain distributors to make prepayments for significant purchases of products.Substantially all of the Company’s revenue is denominated in U.S. dollars, including sales to international distributors. Only a small portion of 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, consulting services, and employee-related costs. During the years ended December 31, 2018, 2017, and 2016, theCompany did not enter into any hedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of the Company’sproducts outside the U.S.Liquidity and Management’s PlansThe Company has reported losses from operations of $20.9 million, $18.0 million, and $15.0 million for the years ended December 31, 2018, 2017,and 2016, respectively, and has not generated cash from operations for the years ended December 31, 2018, 2017, and 2016. During the years endedDecember 31, 2017 and 2016, the principal sources of liquidity for the Company were its net proceeds from the December 5, 2017, April 18, 2017 and August8, 2016 sales by the Company of $11.4 million, $10.2 million, and $9.5 million, respectively, of unregistered shares of the Company’s equity securities.During the year ended December 31, 2018, the Company also received liquidity from the Credit Agreement (as defined and described in Note 6) with SWKFunding, LLC which provided borrowings of $12.5 million, and the Business Financing Agreement (as defined and described in Note 6) with WesternAlliance Bank, which provided borrowings up to $6.0 million. The Company’s recurring losses, level of cash used in operations, potential need for additionalcapital, and the uncertainties surrounding our ability to raise additional capital, raises substantial doubt about its ability to continue as a going concern. Thefinancial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.At December 31, 2018, the Company had approximately $17.3 million in working capital. The Company’s principal sources of liquidity atDecember 31, 2018 consisted of approximately $8.4 million in cash, cash equivalents, and restricted cash, and $11.1 million of net accounts receivable.In order for the Company to continue operations beyond the next 12 months and be able to discharge its liabilities and commitments in the normalcourse of business, the Company must increase sales of its products, control or potentially reduce expenses and establish profitable operations in order togenerate cash from operations or obtain additional funds when needed.Additional capital requirements may depend on many factors, including, among other things, the rate at which the Company’s business grows,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 Restricted CashRestricted cash represents $0.2 million relating to a revolving 90-day certificate of deposit maintained by the Company as collateral in connectionwith corporate credit cards and $0.1 million relating to its commercial credit card servicing agreement with Western Alliance Bank. At December 31, 2018and 2017, the restricted cash balance was $0.3 million and $0.3 million, respectively.The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheets to the sametotal reported in the consolidated statements of cash flows (in thousands): For the years ended December 31, 2018 2017 Cash and cash equivalents $8,044 $11,645 Restricted cash 312 251 Total cash, cash equivalents, and restricted cash in the consolidated statement of cash flows $8,356 $11,896 InventoryThe Company values inventory at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. The carrying valueof inventory is evaluated periodically for excess quantities and obsolescence. Management evaluates quantities on hand, physical condition, and technicalfunctionality as these characteristics may be impacted by anticipated customer demand for current products and new product introductions. The allowance isadjusted based on such evaluation, with a corresponding provision included in cost of revenue. Abnormal amounts of idle facility expenses, freight, handlingcosts and wasted material are recognized as current period charges, and the Company’s allocation of fixed production overhead is based on the normalcapacity of its production 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, 2018, 2017, and 2016 totaled approximately $0.9 million, $1.2 million and $1.0 million,respectively. The Company recognized losses on impairment of internally developed software of $1.2 million and $0.5 million during the years endedDecember 31, 2018 and December 31, 2017, respectively.Goodwill and Other Intangible AssetsGoodwill is not subject to amortization but is evaluated for impairment annually or whenever events or changes in circumstances indicate that theasset might be impaired. The Company operates in one reporting segment and operating unit; therefore, goodwill is tested for impairment at the consolidatedlevel against the fair value of the Company. The fair value of a reporting unit refers to the amount at which the unit as a whole could be bought or sold in acurrent transaction between willing parties. Quoted market prices in active markets are the best evidence of fair value and are used as the basis formeasurement, if available. Management assesses potential impairment on an annual basis on June 30th and compares the Company’s market capitalization toits carrying amount, including goodwill. A significant decrease in the Company’s stock price could indicate a material impairment of goodwill which, afterfurther analysis, could result in a material charge to operations. Inherent in the Company’s fair value determinations are certain judgments and estimates,including projections of future cash flows, the discount rate reflecting the inherent risk in future cash flows, the interpretation of current economic indicatorsand market valuations, and strategic plans with regard to operations. A change in these underlying assumptions could cause a change in the results of thetests, which could cause the fair value of the reporting unit to be less than its respective carrying amount.F-9 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.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 (loss) income is comprisedof foreign currency translation adjustments.Foreign Currency Translation and TransactionsTransactions of the Company’s German, Spanish, Australian, and Indian subsidiaries are denominated in their local currencies which have beendetermined to be their functional currencies. The results of operations and cash flows are translated at average exchange rates during the period, and assetsand liabilities are translated at end-of-period exchange rates. Translation gains or losses are shown as a component of accumulated other comprehensive (loss)income in stockholders’ equity. Income and losses resulting from foreign currency transactions which are denominated in a currency other than the entity’sfunctional currency, are included in the consolidated statements of operations.Revenue RecognitionContracts with CustomersRevenue for sales of products and services is derived from contracts with customers. The products and services promised in customer contracts includedelivery of laser systems, imaging systems, and consumables as well as certain ancillary services such as training and extended warranties. Contracts witheach customer generally state the terms of the sale, including the description, quantity and price of each product or service. Payment terms are stated in thecontract and vary according to the arrangement. Because the customer typically agrees to a stated rate and price in the contract that does not vary over the lifeof the contract, the Company’s contracts do not contain variable consideration. The Company establishes a provision for estimated warranty expense.Performance ObligationsAt contract inception, the Company assesses the products and services promised in its contracts with customers. The Company then identifiesperformance obligations to transfer distinct products or services to the customers. In order to identify performance obligations, the Company considers all ofthe products or services promised in contracts regardless of whether they are explicitly stated or are implied by customary business practices.Revenue from products and services transferred to customers at a single point in time accounted for 86%, 85%, and 86% of net revenue for the yearsended December 31, 2018, 2017, and 2016, respectively. The majority of the Company’s revenue recognized at a point in time is for the sale laser systems,imaging systems, and consumables. Revenue from these contracts is recognized when the customer is able to direct the use of and obtain substantially all ofthe benefits from the product which generally coincides with title transfer during the shipping process.F-10 Revenue from services transferred to customers over time accounted for 14%, 15%, and 14% of net revenue for the years ended December 31, 2018,2017, and 2016, respectively. The majority of our revenue that is recognized over time relates to product training and extended warranties. Deferred revenueattributable to undelivered elements, which primarily consists of product training, totaled approximately $0.7 million and $1.0 million as of December 31,2018 and 2017, respectively.Transaction Price AllocationThe transaction price for a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, each performanceobligation is satisfied. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performanceobligation using the best estimate of the standalone selling price of each distinct good or service in a contract. The primary method used to estimatestandalone selling price is the observable price when the good or service is sold separately in similar circumstances and to similar customers.Significant JudgmentsRevenue is recorded for extended warranties over time as the customer benefits from the warranty coverage. This revenue will be recognized equallythroughout the contract period as the customer receives benefits from the Company's promise to provide such services. Revenue is recorded for producttraining as the customer attends a training program or upon the expiration of the obligation, which is generally after nine months. The Company also has contracts that include both the product sales and product training as performance obligations. In those cases, the Companyrecords revenue for product sales at the point in time when the product has been shipped. The customer obtains control of the product when it is shipped, asall shipments are made FOB shipping point, and after the customer selects its shipping method and pays all shipping costs and insurance. The Company hasconcluded that control is transferred to the customer upon shipment.Accounts ReceivableAccounts receivable are stated at estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts andthe Company’s historical experience with accounts receivable write-offs.Contract LiabilitiesThe Company performs its obligations under a contract with a customer by transferring products and/or services in exchange for consideration fromthe customer. The Company typically invoices its customers as soon as control of an asset is transferred and a receivable for the Company is established. TheCompany, however, recognizes a contract liability when a customer prepays for goods and/or services and the Company has not transferred control of thegoods and/or services. The opening and closing balances of the Company’s contract liabilities are as follows (in thousands): December 31, 2018 2017 Undelivered elements (training, installation, product and support services) $730 $980 Extended warranty contracts 1,735 1,634 Deferred royalties 11 22 Total deferred revenue 2,476 2,636 Less: long-term portion of deferred revenue — 11 Deferred revenue – current $2,476 $2,625The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables in the years endedDecember 31, 2018 and 2017.The amount of revenue recognized during the years ended December 31, 2018 that was included in the opening contract liability balance related toundelivered elements was $0.8 million, related to extended warranty contracts was $0.8 million and deferred royalties was $11,000.F-11 Disaggregation of RevenueThe Company disaggregates revenue from contracts with customers into geographical regions and by the timing of when goods and services aretransferred. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenueand cash flows are affected by regional economic factors.The Company’s revenues related to the following geographic areas were as follows (in thousands): Years Ended December 31, 2018 2017 2016 United States $28,661 $29,296 $33,385 International 17,494 17,630 18,425 $46,155 $46,926 $51,810 Information regarding revenues disaggregated by the timing of when goods and services are transferred is as follows (in thousands): For the Year Ended December 31, 2018 2017 2016 Revenue recognized over time 6,441 7,123 7,103 Revenue recognized at a point in time $39,714 $39,803 $44,707 Total $46,155 $46,926 $51,810The Company’s sales by end market is as follows (in thousands): For the Year Ended December 31, 2018 2017 2016 End-customer $30,478 $31,886 $36,060 Distributors 15,677 15,040 15,750 $46,155 $46,926 $51,810 Shipping and Handling Costs and RevenuesShipping and freight costs are treated as fulfillment costs. For shipments to end-customers, the customer bears the shipping and freight costs and hascontrol of the product upon shipment. For shipments to distributors, the distributor bears the shipping and freight costs, including insurance, tariffs and otherimport/export costs. Provision for Warranty ExpenseThe Company provides warranties against defects in materials and workmanship of its laser systems for specified periods of time. For the years endedDecember 31, 2018 and 2017, laser systems sold were covered by the warranty for a period of up to two years from the date of sale by the Company or thedistributor to the end-user. In 2017, for Waterlase systems sold domestically and purchased in 2017 or later, the Company decreased the warranty period fromtwo years to one year. Laser systems sold internationally were covered by the warranty for a period of up to 28 months from the date of sale to theinternational distributor. Estimated warranty expenses are recorded as an accrued liability with a corresponding provision to cost of revenue. This estimate isrecognized concurrent with the recognition of revenue on the sale to the distributor or end-user. Warranty expenses expected to be incurred after one yearfrom the time of sale to the distributor are classified as a long-term warranty accrual. The Company’s overall accrual is based on its historical experience andmanagement’s expectation of future conditions, taking into consideration the location and type of customer and the type of laser, which directly correlate tothe materials and components under warranty, the duration of the warranty period, and the logistical costs to service the warranty. Additional factors that mayimpact the Company’s warranty accrual include changes in the quality of materials, leadership and training 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 inthe costs associated with servicing those claims would likely result in an increase in the accrual and a decrease in gross profit. All imaging products areinitially covered by the manufacturer’s warranties. However, the Company offers extended warranties on certain imaging products.F-12 Changes in the initial product warranty accrual and the expenses incurred under the Company’s initial and extended warranties for the years endedDecember 31 are included within accrued liabilities on the Consolidated Balance Sheets and were as follows (in thousands): Years Ended December 31, 2018 2017 2016 Balance, January 1 $1,190 $1,706 $2,188 Provision for estimated warranty cost 901 492 348 Warranty expenditures (783) (1,008) (830)Balance, December 31 1,308 1,190 1,706 Less: long-term portion of warranty accrual 447 70 773 Current portion of warranty accrual $861 $1,120 $933 Advertising CostsAdvertising costs are expensed as incurred and totaled approximately $0.6 million, $0.3 million and $0.4 million for the years ended December 31,2018, 2017, and 2016, 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, 2018, 2017, and 2016, the Company recognized compensation cost related to stock options of $2.8 million,$2.2 million, and $3.1 million, respectively, based on the grant-date fair value. In 2018, $0.1 million of the total stock compensation cost related toperformance-based awards was recognized as a liability. The following table summarizes the income statement classification of compensation expenseassociated with share-based payments (in thousands): Years Ended December 31, 2018 2017 2016 Cost of revenue $420 $207 $226 Sales and marketing 535 235 477 General and administrative 1,440 1,469 2,051 Engineering and development 373 296 311 $2,768 $2,207 $3,065As of December 31, 2018 and 2017, the Company had $2.8 million and $3.4 million, respectively, of total unrecognized compensation cost, net ofestimated forfeitures, related to unvested share-based compensation arrangements granted under its existing plans. The $2.8 million in cost is expected to berecognized over a weighted-average period of 2.0 years as of December 31, 2018.Stock-based compensation expense is estimated at the grant date of the award, is based on the fair value of the award and is recognized ratably overthe requisite service period of the award. For restricted stock units (“RSUs”) the Company estimates the fair value of the award based on the number of awardsand the fair value of BIOLASE common stock on the grant date, and applies an estimated forfeiture rate. For stock options, the Company estimates the fairvalue of the option award using the Black-Scholes option pricing model. This option-pricing model requires the Company to make several assumptionsregarding the key variables used to calculate the fair value of its stock options. The risk-free interest rate used is based on the U.S. Treasury yield curve ineffect for the expected lives of the options at their grant dates. Since July 1, 2005, the Company has used a dividend yield of zero, as it does not intend to paycash dividends on its common stock in the foreseeable future. The most critical assumptions used in calculating the fair value of stock options is the expectedlife of the option and the expected volatility of the Company’s common stock. The expected life is calculated in accordance with the simplified method,whereby for service-based awards the expected life is calculated as a midpoint between the vesting date and expiration date. The Company uses thesimplified method, as there is not a sufficient history of share option exercises. For performance-based awards, the expected life equals the life of the award.Management believes that the historic volatility of the Company’s common stock is a reliable indicator of future volatility, and accordingly, a stockvolatility factor based on the historical volatility of the Company’s common stock over a lookback period of the expected life is used in approximating theF-13 estimated volatility of new stock options. Compensation expense is recognized using the straight-line method for all service-based employee awards andgraded amortization for all performance-based awards. Compensation expense is recognized only for those options expected to vest, with forfeituresestimated at the date of grant based on historical experience and future expectations. Forfeitures are estimated at the time of the grant and revised insubsequent periods as actual forfeitures differ from those estimates. The Company applied a forfeiture rate of 7.28% and 45.31% to awards granted toexecutives and employees, respectively, during the year ended December 31, 2018.The stock option fair values were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: For the years ended December 31, 2018 2017 2016 Expected term (years) 5.87 5.51 5.96 Volatility 81% 79% 86%Annual dividend per share $— $— $— Risk-free interest rate 2.54% 1.99% 1.39% 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.The income tax provisions for the years ended December 31, 2018, 2017, and 2016 were calculated using the discrete year-to-date method. See Note 5for additional disclosures related to the Company’s income taxes.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.Outstanding stock options, restricted stock units and warrants to purchase approximately 5,862,000, 3,384,000, , and 4,107,000 shares were notincluded in the calculation of diluted loss per share amounts for the years ended December 31, 2018, 2017, and 2016, respectively, as their effect would havebeen anti-dilutive.Recent Accounting PronouncementsChanges to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to theFASB’s Accounting Standards Codification (“ASC”).The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined not to be applicable or areexpected to have minimal impact on the Company’s consolidated financial position and results of operations.Adopted Accounting StandardsIn May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The core principle of ASU 2014-09 is torecognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to beentitled for those goods or services. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein.F-14 ASU 2014-09 supersedes existing guidance on revenue recognition with a five-step model for recognizing and measuring revenue from contracts withcustomers. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improvecomparability within industries, across industries, and across capital markets. The underlying principle is that an entity will recognize revenue to depict thetransfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance alsorequires a number of disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows. The guidance can be appliedretrospectively to each prior reporting period presented (full retrospective method) or retrospectively with a cumulative effect adjustment to retained earningsfor initial application of the guidance at the date of initial adoption (modified retrospective method). The Company adopted the new standard effectiveJanuary 1, 2018 using the modified retrospective method applied to those contracts that were not completed or substantially completed as of January 1, 2018.The timing and measurement of revenue recognition under the new standard is not materially different than under the old standard. The adoption of the newstandard did not have an impact on the Company’s consolidated financial statements.In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”). The updated standard addresses eight specificcash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for public business entities for annual reporting periodsbeginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted. The Company adoptedASU 2016-15 as of January 1, 2018. The adoption of ASU 2016-15 did not have an impact on the Company’s consolidated financial statements.In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). The updated standard requires that astatement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash orrestricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cashequivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective forpublic business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods.The Company adopted ASU 2016-18 as of January 1, 2018. The adoption of ASU 2016-18 did not have a material effect on the Company’s consolidatedfinancial statements.In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) (“ASU 2017-09”). The updated standard clarifieswhen an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award. ASU 2017-09 is effective forpublic business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods.Early adoption is permitted. The Company adopted ASU 2017-09 as of January 1, 2018. The adoption of ASU 2017-09 did not have a material effect on theCompany’s consolidated financial statements.In July 2017, FASB issued ASU 2017-11 (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of theIndefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable NoncontrollingInterests with a Scope Exception (“ASU 2017-11”). The new standard simplifies the accounting for certain financial instruments with down round features.Part I of ASU 2017-11 changes the classification analysis of certain equity-linked financial instruments, such as warrants and embedded conversion features,such that a down round feature is disregarded when assessing whether the instrument is indexed to an entity’s own stock under Subtopic 815-40, Contracts inEntity’s Own Equity. As a result, a down round feature, by itself, no longer requires an instrument to be remeasured at fair value through earnings each period,although all other aspects of the indexation guidance under Subtopic 815-40 continue to apply. Part II of ASU 2017-11 recharacterizes the indefinite deferralof certain provisions of Topic 480, Distinguishing Liabilities from Equity, (currently presented as pending content in the Codification) as a scope exception.In the fourth quarter of 2018, the Company early-adopted ASU 2017-11 using the modified-retrospective method, which resulted in the reclassification ofpreviously liability classified warrants of approximately $0.8 million to Additional Paid-In Capital and no cumulative effect adjustment to retained earnings.These warrants were issued in connection with the Company’s debt financing activities in 2018. For further information on these warrants see Notes 6 and 8. The amendments in Part II have no accounting impact and therefore do not have an associated effective date.Accounting Standards Not Yet AdoptedIn February 2016, the FASB established ASU Topic 842 – Leases, by issuing ASU Topic No. 2016-02, which requires lessees to recognize lease on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU Topic 2018-11 – TargetedImprovements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and a lease liability for all leaseswith a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expenserecognition in the statement of operations. The new standard is effective for the Company on January 1, 2019, with early adoption permitted. The Companyexpects to adopt the new standard on its effective date. A modified retrospective transition method is required, applying the new standard to all leasesexistingF-15 at the date of initial application. An entity may choose to use either (1) the effective date or (2) the beginning of the earliest comparative period presented inthe financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply toleases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements andprovide disclosures required by the new standard for the comparative periods. The Company expects to adopt the new standard on January 1, 2019 and usethe effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the newstandard will not be provided for dates and periods before January 1, 2019.The new standard provides a number of optional practical expedients in transition. The Company expects to elect the practical expedients whichpermits the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. The Company expects this standard to have a material effect on our financial statements. While the Company assesses all of the effects of adoption, itcurrently believes the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on its balance sheet for its real property. TheCompany does not expect a significant change in its leasing activities between now and its adoption.On adoption, we currently expect to recognize additional operating liabilities ranging from $0.8 million to $1.0 million with corresponding ROUassets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.Our conclusions are preliminary and subject to change as we finalize our analysis. Changes in our lease population or changes in incremental borrowing ratesmay alter these estimates. We will expand our consolidated financial statements disclosure upon adoption of the new standard.In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology thatreflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. TheCompany will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit lossesrelating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basisof the securities. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted beginning January 1, 2019. Weare currently evaluating the impact of this standard on the Company’s consolidated financial statements, including accounting policies, processes, andsystems. NOTE 3 — SUPPLEMENTARY BALANCE SHEET INFORMATIONAccounts Receivable, net: December 31, (in thousands): 2018 2017 Trade $10,990 $10,047 Royalties 71 71 Other 51 6 Total receivables, net $11,112 $10,124Accounts receivable is net of allowances for doubtful accounts of approximately $0.9 million and $0.8 million and sales returns of approximately $0.2and $0.2 million at December 31, 2018 and 2017, respectively.Inventory: December 31, (in thousands): 2018 2017 Raw materials $3,590 $3,953 Work-in-process 1,435 1,162 Finished goods 7,223 7,183 Inventory $12,248 $12,298 Inventory includes write-downs for excess and obsolete inventory totaling approximately $1.1 million and $1.9 million at December 31, 2018 and2017, respectively.F-16 Property, Plant, and Equipment, net: December 31, (in thousands): 2018 2017 Building $213 $220 Leasehold improvements 2,004 2,005 Equipment and computers 7,277 6,883 Furniture and fixtures 634 634 Construction in progress 25 1,182 Total property, plant, and equipment before depreciation and land 10,153 10,924 Less: accumulated depreciation (8,344) (7,426)Total property, plant, and equipment, net before land 1,809 3,498 Land 166 176 Property, plant, and equipment, net $1,975 $3,674The cost basis of assets held under capital lease was $0.4 million, which was fully depreciated as of December 31, 2018.During 2018 and 2017, the Company recognized a non-cash, pre-tax charge related to the disposal of internally developed software of $1.2 millionand $0.5 million, respectively, primarily due to the decision to cancel future deployments of a global enterprise resource planning system and certain otherweb-based tools originally intended to customize such systems.Accrued Liabilities: December 31, 2018 2017 Payroll and benefits $2,400 $2,115 Warranty accrual, current portion 861 1,120 Taxes 714 544 Accrued professional services 1,044 584 Accrued insurance premium 328 870 Customer deposits 21 27 Patent litigation settlement 1,500 — Other 670 376 Accrued liabilities $7,538 $5,636 NOTE 4 — INTANGIBLE ASSETS AND GOODWILLThe Company conducted its annual impairment test of goodwill as of June 30, 2018 and determined that there was no impairment. The Company alsotests its intangible assets and goodwill between the annual impairment test if events occur or circumstances change that would more likely than not reducethe fair value of the Company or its assets below their carrying amounts. For intangible assets subject to amortization, the Company performs its impairmenttest when indicators, such as reductions in demand or significant economic slowdowns, are present. No events have occurred that triggered further impairmenttesting of the Company’s intangible assets and goodwill during the years ended December 31, 2018 and 2017.As of December 31, 2018 and 2017, the Company had goodwill (indefinite life) of $2.9 million. As of December 31, 2018 and 2017, all intangibleassets have been fully amortized and there was no amortization expense for the respective years. The amortization expense for the year ended December 31,2016 was $51,000.F-17 The following table presents the details of the Company’s intangible assets, related accumulated amortization and goodwill (in thousands): As of December 31, 2018 and 2017 Gross AccumulatedAmortization Impairment Carrying Value Patents (4-10 years)$1,914 $(1,914) $— $— Trademarks (6 years) 69 (69) — — Other (4 to 6 years) 817 (817) — — Total$2,800 $(2,800) $— $— Goodwill (indefinite life)$2,926 $2,926NOTE 5 — 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. Based on the Company’s net losses in prior years, managementhas determined that a full valuation allowance against the Company’s net deferred tax assets is appropriate.The following table presents the current and deferred provision for income taxes for the years ended December 31 (in thousands): 2018 2017 2016 Current: Federal $— $— $— State 14 19 22 Foreign 90 93 69 104 112 91 Deferred: Federal (41) (694) 60 State — — — Foreign — — — (41) (694) 60 $63 $(582) $151 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: 2018 2017 2016 Statutory regular federal income tax rate (21.0)% (34.0)% (34.0)%Change in valuation allowance 28.6 % (90.6)% 40.4 %State tax benefit (net of federal benefit) (3.1)% (3.2)% (3.0)%Research credits (1.7)% (1.7)% (3.4)%Foreign amounts with no tax benefit — % — % 0.2 %Non-deductible expenses 0.3 % 1.0 % 0.6 %Effect of change in rate from federal Tax Reform 0.5 % 127.1 % 0.5 %Other (3.3)% (2.0)% (0.2)%Total 0.3 % (3.4)% 1.1 % F-18 The components of the deferred income tax assets and liabilities as of December 31 (in thousands): 2018 2017 Capitalized intangible assets for tax purposes $(42) $(21)Reserves not currently deductible 1,666 1,130 Deferred revenue 38 5 Stock options 4,153 3,600 State taxes 5 6 Income tax credits 3,820 2,640 Inventory 549 495 Property and equipment 126 165 Other comprehensive income 120 — Unrealized gain on foreign currency 85 84 Net operating losses 37,205 33,451 Total deferred tax assets 47,725 41,555 Valuation allowance (46,967) (40,866)Net deferred tax assets 758 689 Capitalized intangible assets (629) (608)Other (206) (185)Total deferred tax liabilities (835) (793)Net deferred tax liabilities $(77) $(104) Based upon the Company’s operating losses incurred for each of three years ended December 31, 2018, and the available evidence, the Company hasestablished a valuation allowance against its net deferred tax assets in the amount of $47.0 million as of December 31, 2018. 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.The reversal of valuation allowance is primarily due to reduction in corporate income tax rate resulting from the enactment of the Tax Cuts Jobs Actfurther discussed below.As of December 31, 2018, the Company had net operating loss (“NOL”) carryforwards for federal and state purposes of approximately $164.6 millionand $98.6 million, respectively, which expire in 2019 through 2038. 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. As of December 31, 2018,the Company had research and development tax credit carryforwards for federal and state purposes of approximately $2.1 million and $2.0 million,respectively, which will begin to expire in 2019 through 2038 for federal purposes and will carry forward indefinitely for state purposes. An updated analysismay be required at the time the Company begins utilizing any of its net operating losses to determine if there is an IRC Section 382 limitation.The following table summarizes the activity related to the Company’s unrecognized tax benefits during the year ended December 31, 2018 (inthousands): Balance at January 1, 2018 $568 Additions for tax positions related to the prior year — Lapse of statute of limitations — Balance at December 31, 2018 $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 31,2018 and 2017, 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.F-19 The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2014 through 2018 tax yearsgenerally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2012 through 2018 tax years remain subject toexamination by their respective tax authorities.On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “2017 Act”) into law. The 2017 Act will have pervasive financialreporting implications for all companies with U.S. operations. The Company has reviewed and incorporated the 2017 Act implications in the 2018consolidated financial statements for the year ended December 31, 2018. The primary change is the remeasurement of deferred taxes at the new corporate taxrate of 21%, which reduced the Company’s net deferred tax assets for the year ended December 31, 2017, before valuation allowance, by $21.7 million. Dueto full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance other than deferred tax liability recordedagainst indefinite-lived intangible assets. In connection with the 2017 Act, net operating losses generated subsequent to December 31, 2017 have anindefinite carryforward period with a limitation on utilization to 80% of taxable income in any given year. In addition, the 2017 Act limits the interestexpense deduction to 30% of adjusted taxable income and any excess interest expenses are carried forward indefinitely. Accordingly, up to 30% of deferredtax assets generated with respect to a balance of excess interest carryforward and up to 80% of deferred tax assets related to NOL generated with indefinitecarryforward periods are available to offset deferred tax liability related to indefinite lived intangibles (“naked credit”). As of December 31, 2018, theCompany had $0.5 million of deferred tax assets available to offset a naked credit balance of $0.6 million, resulting in net deferred tax liability of $0.1million.U.S. income taxes or withholding taxes were provided for all the distributed earnings for the Company’s foreign subsidiaries as of December 31,2018. At December 31, 2018, unremitted earnings of foreign subsidiaries were approximately $0.6 million and have been included in our computation of thetransition tax associated with the enactment of the 2017 Act. We do not provide for U.S. taxes on our unremitted earnings of foreign subsidiaries that havenot been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. The 2017 Act subjects a U.S, stockholder to current tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. TheFASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election toeither recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in theyear the tax is incurred. We have elected to recognize the tax on GILTI as a period expense in the period the tax is incurred. The current income related to theGILTI inclusion in 2018 is $0.1 million. NOTE 6 — DEBTThe following table presents the details of the principal outstanding and unamortized discount (in thousands): December 31, 2018 2017 Term loan $12,500 $— Discount and debt issuance costs on term loan (1,664) — Total long-term debt, net $10,836 $—Line of CreditOn March 6, 2018, the Company and two of its wholly-owned subsidiaries (such subsidiaries, together with BIOLASE, the “Borrower”) entered intothe Business Financing Agreement (the “Business Financing Agreement” with Western Alliance Bank (“Western Alliance”). Pursuant to the terms andconditions of the Business Financing Agreement, Western Alliance has agreed to provide the Borrower a secured revolving line of credit permitting theBorrower to borrow or receive letters of credit up to the lesser of $6.0 million (the “Domestic Revolver”) (subject to a $6.0 million credit limit relating todomestic eligible accounts receivable (the “domestic credit limit”) and a $3.0 million credit limit relating to export-related (the “EXIM Revolver”) eligibleaccounts receivable (the “EXIM credit limit”)) and the borrowing base, which is defined as the sum of the domestic borrowing base (up to 75% of theBorrower’s eligible domestic accounts receivable less such reserves as Western Alliance may deem proper and necessary) and the export-related borrowingbase (up to 85% of the Borrower’s eligible export-related accounts receivable less such reserves as Western Alliance may deem proper and necessary). TheBusiness Financing Agreement was set to expire on March 6, 2020, and the Borrower’s obligations thereunder were secured by a security interest in all of theBorrower’s assets.F-20 The Business Financing Agreement required the Company to maintain compliance with certain financial and non-financial covenants, as definedtherein. Western Alliance had the right to declare the amounts outstanding under the Business Financing Agreement immediately due and payable upon adefault.Amounts outstanding under the Business Financing Agreement bore interest at a per annum floating rate equal to the greater of 4.5% or the “PrimeRate” published in the Money Rates section of the Western Edition of The Wall Street Journal (or such other rate of interest publicly announced from time totime by Western Alliance as its “Prime Rate”), plus 1.5% with respect to advances made under the line of credit, plus an additional 5.0% during any periodthat an event of default has occurred and is continuing. The commitment fee under the Business Financing Agreement was 0.25% of the domestic credit limitand 1.75% of the EXIM credit limit, payable on March 6, 2018 and each anniversary thereof. Pursuant to the Business Financing Agreement, the Company paid the first of two annual commitment fees totaling $67,500, being 0.25% of theaggregate $6.0 million commitment for the Domestic Revolver and 1.75% of the aggregate $3.0 million commitment for the EXIM Revolver. Thecommitment fees and the legal costs associated with acquiring the credit facilities were capitalized and were amortized on a straight-line basis as interestexpense over the term of the Business Financing Agreement.As additional consideration for the lines of credit, the Company also issued the Western Alliance Warrants. For additional information on the WesternAlliance Warrants, see Note 8 to the consolidated financial statements. The fair value of the Western Alliance Warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 10 years; volatility of 91.49%; annual dividend per share of $0.00; and risk-free interest rate of 2.88%; and resulted in an estimated fair value of $0.1 million, which was recorded as a liability and resulted in a discount to the creditfacilities at issuance. The discount was expensed to interest expense at the time the Business Financing Agreement was terminated, as discussed below.On August 13, 2018, the Borrower and Western Alliance entered into a Waiver and Business Financing Modification Agreement, pursuant to whichWestern Alliance waived certain of the Borrower’s covenants under the Business Financing Agreement and provided an advance of $1.5 million, whichadvance was due by September 27, 2018.On September 27, 2018, the Borrower and Western Alliance entered into a Business Financing Modification Agreement which reduced the credit limitunder the Business Financing Agreement to $2.5 million and extended the due date of the $1.5 million advance to March 6, 2019.On October 22, 2018, the Borrower and Western Alliance entered into a new Business Financing Modification Agreement, pursuant to which WesternAlliance waived BIOLASE’s non-compliance with certain financial operating covenants as set forth in the Business Financing Agreement, and the Borroweragreed to certain amended covenants contained in the Business Financing Agreement, including $300,000 minimum unrestricted cash balance covenant anda waiver of reporting items required to be delivered by BIOLASE to Western Alliance under the Business Financing Agreement.On November 9, 2018, all outstanding borrowings, accrued interest and fees under the Business Financing Agreement were repaid with a portion of theproceeds under the Credit Agreement, and the Business Financing Agreement was terminated. The Company recorded approximately $0.1 million of interestexpense including unamortized debt issuance costs that were written-off upon extinguishment of the debt. As of December 31, 2018, the warrants held byWestern Alliance remain outstanding and are classified in equity in the consolidated balance sheet upon the adoption of ASU 2017-11 in the fourth quarterof 2018 and as of December 31, 2018.Term LoanOn November 9, 2018, the Company entered into a five-year secured Credit Agreement (“Credit Agreement”) with SWK Funding LLC (“SWK”),pursuant to which the Company has borrowed $12.5 million (“SWK Loan”). The Company’s obligations under the Credit Agreement are secured bysubstantially all of the Company’s assets. Under the terms of the Credit Agreement, repayment of the loan is interest-only for the first two years, paid quarterlywith the option to extend the interest-only period. Principal repayments will begin in the first quarter of 2021 and will be approximately $0.7 millionquarterly until the loan matures in the fourth quarter of 2023. The loan bears interest at London Interbank Bank Offered Rate (“LIBOR”) plus 10% or anotherindex that approximates LIBOR as close as possible if and when LIBOR no longer exists. Approximately $0.9 million of the proceeds from the SWK Loanwere used to pay off all amounts owed to Western Alliance under the Business Financing Agreement. The Company plans to use the remaining proceeds toprovide additional working capital to fund its growth initiatives, such as broadening its customer base and increasing the utilization of its products to driverecurring higher margin consumables revenue.F-21 The Credit Agreement contains financial and non-financial covenants requiring the Company to, among other things, (i) maintain unencumberedliquid assets of no less than $1.5 million or (B) the sum of aggregate cash flow from operations less capital expenditures, ii) achieve certain revenue andEBITDA levels during the first two years of the loan, (iii) limit future borrowing, investments and dividends, and (iv) submit monthly and quarterly financialreporting. The Company was in compliance with these debt covenants as of December 31, 2018. In connection with the SWK Loan, the Company paid approximately $1.0 million in debt issuance costs, including a $0.2 million loan originationfee, a $0.4 million finder’s fee, and $0.4 million in legal and other fees. These costs were recognized as a discount on the SWK Loan and are being amortizedon a straight-line basis over the loan term which approximates the effective-interest method.The Company recognized approximately $0.2 million in interest expense relating to the SWK Loan for the year ended December 31, 2018. Theweighted-average interest rate for the year ended December 31, 2018 was approximately 12.8%.SWK WarrantsIn connection with the Credit Agreement, the Company issued warrants to SWK (the “SWK Warrants”) on November 9, 2018, to purchase up to372,023 shares of the Company’s common stock. The SWK Warrants are immediately exercisable and expire on November 9, 2026. The exercise price of theSWK Warrants is $1.34, which was the average closing price of the Company’s common stock for the ten trading days immediately preceding November 9,2018. These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issue shares ata price per share less than the exercise price. The fair value of the SWK Warrants was estimated using the Black-Scholes option-pricing model with thefollowing assumptions: expected term of 8 years; volatility of 81.79%; annual dividend per share of $0.00; and risk-free interest rate of 3.13%; and resultedin an estimated fair value of $0.4 million. See Note 8 for additional information.DPG WarrantsIn connection with the SWK Loan, the Company paid a finder’s fee to Deal Partners Group of $0.4 million cash and issued warrants to purchase up to279,851 shares of common stock (the “DPG Warrants”). The warrants were issued on November 14, 2018, were exercisable immediately, and expire onNovember 9, 2026. The exercise price of the DPG Warrants is $1.34 which was the average closing price of the Company’s common stock for the ten tradingdays immediately preceding November 9, 2018. These warrants contain down-round features that require the Company to adjust the exercise priceproportionately should the Company issue shares at a price per share less than the exercise price. The fair value of the DPG Warrants of $0.3 million wasestimated using the Black Scholes option pricing model with the following assumptions: expected term of 8 years; volatility of 81.79%; annual dividend pershare of $0.00; and risk-free interest rate of 3.13%. See Note 8 for additional information.The value of both warrants was recognized as a discount on the term loan and are being amortized on a straight-line basis over the loan term whichapproximates the effective-interest method over the loan term of five years. Additionally, based on the adoption of ASU 2017-11 in the fourth quarter of2018, these warrants are classified as equity in the consolidated balance sheet as of December 31, 2018.The future minimum principal payments as of December 31, 2018, are as follows (in thousands): Principal Interest (1) 2019 $— $1,598 2020 700 1,590 2021 2,800 1,344 2022 2,800 986 2023 6,200 505 Total future payments $12,500 $6,023 (1) Estimated using LIBOR rates as at December 31, 2018 F-22 NOTE 7 — COMMITMENTS AND CONTINGENCIESLeasesThe Company leases its 57,000 square foot corporate headquarters and manufacturing facility located at 4 Cromwell, Irvine, California. In March2015, the corporate headquarters and manufacturing facility lease was amended to extend the term through April 30, 2020, modify provisions for tenantimprovement allowance of up to $398,000, and adjust the basic rent terms. Future minimum rental commitments under operating lease agreements with non-cancelable terms greater than one year for the years ending December 31 are listed below. The Company also leases additional office space and certain officeequipment under various operating lease arrangements. Future minimum rental commitments under lease agreements, as of December 31, 2018, with non-cancelable terms greater than one year for each of theyears ending December 31 are as follows (in thousands): 2019 $802 2020 313 2021 33 2022 and thereafter — Total future minimum lease obligations $1,148 Rent expense totaled approximately $0.8 million, $1.0 million and $1.0 million in each of the years ended December 31, 2018, 2017, and 2016,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$3.0 million and $1.7 million at December 31, 2018 and 2017, respectively. The Company also has agreements with certain employees to pay bonuses basedon targeted performance criteria. As of December 31, 2018 and 2017, approximately $0.3 million and $0.1 million was accrued for performance bonuses,which is included in accrued liabilities in the consolidated balance sheets. See Note 8 for additional information relating to specific stock-basedcompensation awards.Purchase CommitmentsThe Company generally purchases components and subassemblies for its products from a limited group of third-party suppliers through purchaseorders. The Company had $8.7 million of purchase commitments as of December 31, 2018, for which the Company has not received the goods or services andwhich is expected to be purchased primarily within one year. These purchase commitments were made to secure better pricing and to ensure the Companywill have the necessary parts to meet anticipated near term demand. Although open purchase orders are considered enforceable and legally binding, theCompany 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.F-23 Intellectual Property LitigationOn April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against BIOLASE in the District of Utah alleging that BIOLASE’s ezlase dental laserinfringes on U.S. Patent No. 7,485,116 (the “116 Patent”). On September 9, 2012, CAO amended its complaint, adding claims for (1) businessdisparagement/injurious falsehood under common law and (2) unfair competition under 15 U.S.C. Section 1125(a). The additional claims stem from a pressrelease that BIOLASE issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO and its diode product. Theamended complaint sought injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. Until January 24, 2018, this lawsuit was stayedin connection with United States Patent and Trademark Office proceedings relating to the 116 Patent, which proceedings ultimately culminated in a January27, 2017 decision by the United States Court of Appeals for the Federal Circuit, affirming the findings of the Patent Trial and Appeal Board, which weregenerally favorable to the Company. On January 25, 2018, CAO moved for leave to file a second amended complaint to add certain claims, which filing theCompany is not opposing.On January 23, 2018, CAO filed a lawsuit against BIOLASE in the Central District of California alleging that BIOLASE’s diode lasers infringe on U.S.Patent Nos. 8,337,097, 8,834,497, 8,961,040 and 8,967,883. The complaint seeks injunctive relief, treble damages, attorneys’ fees, punitive damages, andinterest.On January 25, 2019, the Company and CAO entered into a confidential settlement agreement, The Company has recorded a contingent loss relatingto the settlement of $1.5 million in its consolidated financial statements as of December 31, 2018. See Note 11 for additional information.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, 2018 and2017, no shares of the Company’s preferred stock were issued or outstanding.Common StockAt December 31, 2018, 21,072,491 shares of the Company’s common stock were issued and outstanding. On May 10, 2018, the Company filed theFourth Amendment to its Restated Certificate of Incorporation to reduce the authorized shares of common stock from 200,000,000 shares to 40,000,000shares. See Note 1 for further information on the reverse stock split.Stock DividendsThere were no dividends paid or declared in 2018, 2017 or 2016. WarrantsThe Company issues warrants for the sale of its common stock as approved by its Board. In 2018, the Company issued 708,212 warrants to purchasecommon stock at a weighted-average exercise price of $1.40, including the SWK Warrants, the DPG Warrants and the Western Alliance Warrants, excludingthose warrants issued and canceled as a result of the Bridge Bank loan amendment. Warrants to purchase up to an aggregate of 785,174 unregistered shares ofcommon stock at an exercise price of $9.00 per share were issued in connection with the Company’s April 2017 private placement. The debt-related warrantsand the private placements are accounted for within stockholders’ equity in the consolidated balance sheets upon adoption of ASU 2017-11 in the fourthquarter and as of December 31, 2018.F-24 The following table summarizes warrant activity (in thousands, except per share data): Weighted-Average Exercise Price Shares Per Share Warrants outstanding, January 1, 2016 2,018 $20.90 Granted/Issued 407 $10.00 Exercised — $— Forfeited, cancelled, or expired (144) $32.50 Warrants outstanding, December 31, 2016 2,281 $20.90 Granted/Issued 785 $9.00 Exercised — $— Forfeited, cancelled, or expired (1,841) $20.00 Warrants outstanding, December 31, 2017 1,225 $9.65 Granted/Issued 760 $2.23 Exercised — $— Forfeited, cancelled, or expired (52) $2.35 Warrants outstanding, December 31, 2018 1,933 $6.62 Warrants exercisable, December 31, 2018 1,906 $6.43 Vested warrants expired during the 12 months ended December 31, 2018 — $— On March 6, 2018, in connection with the execution of the Original Business Financing Agreement, the Company issued to Western Alliance warrants(the “Original Western Alliance Warrants”) to purchase up to the number of shares of common stock equal to $120,000 divided by the applicable exerciseprice at the time such warrants are exercised. The Original Western Alliance Warrants are fully vested and exercisable. The Original Western AllianceWarrants may be exercised with a cash payment from Western Alliance, or, in lieu of a cash payment, Western Alliance may convert the warrants into anumber of shares, in whole or in part. The initial exercise price of the warrants was $2.35 per share, which was the Reverse Stock Split-adjusted closing marketprice of BIOLASE common stock on March 6, 2018. On September 27, 2018, the Company entered into the Second Modification Agreement to amend theOriginal Business Financing Agreement. In connection with the Second Modification Agreement, the Original Western Alliance Warrants were terminated,and the Company issued new warrants (the “Western Alliance Warrants”) to purchase up to the number of shares of common stock equal to $120,000 dividedby the exercise price of $2.13, which was the closing price of the Company’s common stock on September 27, 2018. The Western Alliance Warrants areimmediately exercisable and expire on September 27, 2028. These warrants contain down-round features that require the Company to adjust the exerciseprice proportionately should the Company issue shares at a price per share less than the exercise price. As a result of the early-adoption of ASU 2017-11, thevalue of these warrants has been recognized in equity in the consolidated balance sheets as of December 31, 2018. On November 9, 2018, in connection with the Credit Agreement, BIOLASE issued to SWK, LLC or its assignees (collectively with SWK, the “Holder”)warrants to purchase up to 372,023 shares of common stock. The exercise price of the SWK Warrants is $1.34 per share, which was the average closing priceof common stock for the ten trading days immediately preceding November 9, 2018. The SWK Warrants are immediately exercisable, expire on November 9,2026 and contain a “cashless exercise feature.” Subject to certain limitations, the Holder has certain piggyback registration rights with respect to the sharesthat are issued upon exercise of the SWK Warrants. These warrants contain down-round features that require the Company to adjust the exercise priceproportionately should the Company issue shares at a price per share less than the exercise price. As a result of the early-adoption of ASU 2017-11, the valueof these warrants has been recognized in equity in the consolidated balance sheets as of December 31, 2018. On November 14, 2018, in connection with the SWK Loan, the Company issued to DPG warrants to purchase up to 279,851 shares of common stock.The exercise price of the DPG Warrants is $1.34 per share, which was the average closing price of common stock for the ten trading days immediatelypreceding November 9, 2018. The DPG Warrants are immediately exercisable, expire on November 9, 2026 and contain a “cashless exercisefeature.” Subject to certain limitations, the Holder has certain piggyback registration rights with respect to the shares that are issued upon exercise of theDPG Warrants. These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issueshares at a price per share less than the exercise price. As a result of the early-adoption of ASU 2017-11, the value of these warrants has been recognized inequity in the consolidated balance sheet as of December 31, 2018.F-25 Stock Options 2002 Stock Incentive PlanThe 2002 Stock Incentive Plan (as amended effective as of May 26, 2004, November 15, 2005, May 16, 2007, May 5, 2011, June 6, 2013, October 30,2014, April 27, 2015, and May 6, 2016, the “2002 Plan”) was replaced by the 2018 Plan (as defined below) with respect to future equity awards. Personseligible to receive awards under the 2002 Plan included officers, employees, and directors of the Company, as well as consultants. As of December 31, 2018, atotal of 3,110,000 shares have been authorized for issuance under the 2002 Plan, of which 961,982 shares of common stock have been issued pursuant tooptions that were exercised, 1,724,264 shares of common stock have been reserved for options and restricted stock units that are outstanding, and 0 shares ofcommon stock remain available for future grants.2018 Stock Incentive PlanAt the 2018 Annual Meeting, the Company’s stockholders approved the 2018 Long-Term Incentive Plan (as amended, the “2018 Plan”) which wasamended by Amendment No. 1 to the 2018 Long Term Incentive Plan, approved by the Company’s stockholders at a special meeting on September 21, 2018.The purposes of the 2018 Plan are (i) to align the interests of the Company’s stockholders and recipients of awards under the 2018 Plan by increasing theproprietary interest of such recipients in the Company’s growth and success; (ii) to advance the interests of the Company by attracting and retaining non-employee directors, officers, other employees, consultants, independent contractors and agents; and (iii) to motivate such persons to act in the long-term bestinterests of the Company and its stockholders.As of December 31, 2018, a total of 3,271,101 shares of common stock have been authorized for issuance under the 2018 Plan, of which 1,875,801shares of common stock have been reserved for outstanding options and unvested RSUs, and 1,395,300 shares of common stock remain available for futuregrants.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 four years. Options expire after five years, ten years, or within a specified time from termination of employment, if earlier. The Company issues newshares of common stock upon the exercise of stock options. The following table summarizes option activity under the 2002 Plan and the 2018 Plan (inthousands, except per share data): Weighted- Weighted-Average AverageRemaining Aggregate Exercise Price Contractual Intrinsic Shares Per Share Term (Years) Value(1) Options outstanding, January 1, 2016 898 $15.15 Granted at fair market value 622 $7.10 Exercised — $— Forfeited, cancelled, or expired (198) $15.05 Options outstanding, December 31, 2016 1,322 $13.60 Granted at fair market value 446 $5.15 Exercised — $4.30 Forfeited, cancelled, or expired (421) $9.15 Options outstanding, December 31, 2017 1,347 $8.99 Granted at fair market value 611 $1.98 Exercised (1) $2.10 Forfeited, cancelled, or expired (334) $10.68 Options outstanding, December 31, 2018 1,623 $6.54 5.94 $— Options exercisable, December 31, 2018 1,101 $7.88 4.98 $— Vested options expired during the twelve months ended December 31, 2018 102 $18.06 (1)The intrinsic value calculation does not include negative values. This can occur when the fair market value on the reporting date is less than the exercise price of a grant.F-26 The following table summarizes additional information for those options that are outstanding and exercisable as of December 31, 2018 (in thousands,except per share data): 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 $1.17 - $2.13 416 $1.95 9.19 105 $2.10 $ 2.14 - $6.57 273 $4.06 7.20 204 $4.30 $6.58 - $7.50 391 $7.17 3.06 320 $7.16 $7.51 - $11.10 283 $9.15 6.32 213 $9.43 $11.11 - $20.35 260 $12.69 3.30 259 $12.69 Total 1,623 $6.54 5.94 1,101 $7.88 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, 2018 2017 2016 Proceeds from stock options exercised $2 $3 $1 Tax benefit related to stock options exercised(1) N/A N/A N/A Intrinsic value of stock options exercised(2) $— $1 $— Weighted-average fair value of options granted $1.38 $3.45 $5.15 Total fair value of shares vested during the year $1,191 $1,286 $1,728 (1)Excess tax benefits received related to stock option exercises are presented as operating cash inflows. For the periods presented, the Company did not receive a tax benefitrelated 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 price of the stock on the date ofgrant.2018 Stock Option ActivityEffective January 25, 2018, the Compensation Committee of the Board awarded 360,000 non-qualified stock options to purchase shares of commonstock to certain employees of the Company. These awards were valued at $2.11 per share and expire 10 years from the grant date. The options vest ratablyover the 36-month period, commencing on February 25, 2018.Additional options were granted during 2018, none of which were individually material.2017 Stock Option Activity •Effective February 6, 2017, the Compensation Committee of the Board issued 122,200 non-qualified stock options to purchase shares of theCompany’s common stock to certain employees of the Company. These awards were issued at $7.75 per share, the closing market price of theCompany’s common stock on the grant date, and expire 10 years from the grant date. Vesting periods for options are as follows: (i) for the117,200 options awarded to existing employees, one-half vest on the first anniversary of grant date and one-half vest on the second anniversaryof the grant date and (ii) for the 5,000 options awarded to new employees, 25% vest on February 6, 2018 and the remainder vest ratably over the36-month period, commencing on March 6, 2018. •On May 10, 2017, non-employee directors of the Company were granted a total of 105,105 non-qualified stock options to purchase shares ofcommon stock. These awards were issued at $6.05 per share, the closing market price of common stock on the grant date, and expire 10 yearsfrom the grant date. The total grant vests in equal installments over a consecutive 12-month period, commencing on June 10, 2017.F-27 •On September 1, 2017, Paul N. Clark resigned from the Board, effective September 11, 2017, and as Chairman of the Board, effective September1, 2017. Effective September 1, 2017, Dr. Jonathan T. Lord was appointed Chairman of the Board. On September 11, 2017, the CompensationCommittee of the Board approved a modification to expiration dates applicable to Mr. Clark’s vested options. As a result of the modification, theCompany recognized additional compensation expense of $44,000 for the year ended December 31, 2017. On September 11, 2017, Dr. Lord wasgranted 13,077 non-qualified stock options to purchase shares of common stock at $2.70 per share, the closing market price of the Company’scommon stock on the grant date, and expiring 10 years from the grant date. On September 12, 2017, Dr. Lord was granted 13,178 non-qualifiedstock options to purchase shares of common stock at $3.05 per share, the closing market price of common stock on the grant date, and expiring10 years from the grant date. Both grants vest in equal installments over an eight-month period, commencing on October 10, 2017. •On October 27, 2017, Frederic H. Moll, M.D. resigned from the Board, effective November 11, 2017. On November 11, 2017, the CompensationCommittee of the Board approved a modification to expiration dates applicable to Dr. Moll’s vested options. As a result of the modification, theCompany recognized additional compensation expense of $22,000 for the year ended December 31, 2017. Also, on October 27, 2017 the Boardelected Richard B. Lanman, M.D. to the Board. In connection with his election to the Board, on November 1, 2017, Dr. Lanman was granted27,066 non-qualified stock options to purchase shares of common stock at $3.75 per share, the closing market price of the Company’s commonstock on the grant date, and expiring 10 years from the grant date. •Effective November 7, 2017, the Compensation Committee of the Company’s Board issued 85,200 non-qualified stock options to purchaseshares of common stock to certain employees of the Company. These awards were issued at $3.00 per share, the closing market price of theCompany’s common stock on the grant date, and expire 10 years from the grant date. Vesting periods for options are as follows: one-half vest onthe first anniversary of the grant date and one-half vest ratably monthly commencing thirteen months after the grant date through the twenty-fourth month.2016 Stock Option Activity •On February 26, 2016, the Compensation Committee of the Board awarded to certain employees and consultants of the Company a total of59,000 non-qualified stock options to purchase shares of common stock. These awards were issued at $4.30 per share, the closing market price ofthe Company’s common stock on the grant date, and expire 10 years from the grant date. Vesting periods for options are as follows: (i) 37,000options, awarded to existing employees, vest ratably over a 48 month period, commencing one month from the grant date, and (ii) 22,000options, awarded to new 2016 employees, vest 25% on the one-year anniversary of the grant date and the remainder ratably over the 36-monthperiod, commencing 13 months after of the grant date. •On April 18, 2016, in connection with the hiring of the two new Vice Presidents, the Compensation Committee of the Board awarded 65,000non-qualified stock options to purchase shares of common stock. These awards were issued at $7.15 per share, the closing market price of theCompany’s common stock on the grant date, and expire 10 years from the grant date. Vesting periods for the options are as follows: (i) one-half ofthe total grant is subject to time vesting, with 25% vesting as of April 18, 2017 and the remaining 75% vesting ratably monthly over a 36-monthperiod commencing on April 18, 2017, and (ii) one-half of the total grant is subject to specific 2016 and 2017 performance criteria, with vestingupon completion of the applicable performance criteria. As of December 31, 2016, 48,750 non-qualified stock options to purchase shares of theCompany’s common stock remain outstanding. •On May 6, 2016, non-employee directors of the Company were granted a total of 119,551 non-qualified stock options to purchase shares ofcommon stock. These awards were issued at $7.05 per share, the closing market price of the Company’s common stock on the grant date, andexpire 10 years from the grant date. The total grant vests in equal installments over a consecutive 12-month period, commencing on June 6,2016. •On August 29, 2016, in connection with the hiring of a new Senior Director, the Compensation Committee of the Board awarded 12,000 non-qualified stock options to purchase shares of common stock. This award was issued at $8.25 per share, the closing market price of the Company’scommon stock on the grant date, and expires 10 years from the grant date. Vesting periods for the options are as follows: (i) one-half of the totalgrant is subject to ratable time vesting over a 48-month period commencing on September 29, 2016, and (ii) one-half of the total grant is subjectto specific 2017 performance criteria, with vesting upon completion of the applicable performance criteria. As of December 31, 2016, 12,000non-qualified stock options to purchase shares of the Company’s common stock remain outstanding.F-28 •On September 15, 2016, in connection with the hiring of a new Vice President, the Compensation Committee of the Board awarded 50,000 non-qualified stock options to purchase shares of common stock. This award was issued at $8.90 per share, the closing market price of the Company’scommon stock on the grant date, and expires 10 years from the grant date. Vesting periods for the options are as follows: (i) one-half of the totalgrant is subject to time vesting with 25% vesting as of September 15, 2017 and the remaining 75% vesting ratably monthly over a 36-monthperiod commencing on September 15, 2017, and (ii) one-half of the total grant is subject to specific 2017 and 2018 performance criteria, withvesting upon completion of the applicable performance criteria. As of December 31, 2016, 50,000 non-qualified stock options to purchase sharesof the Company’s common stock remain outstanding. •On October 3, 2016, in connection with the hiring of a new Vice President, the Compensation Committee of the Board awarded 25,000 non-qualified stock options to purchase shares of common stock. This award was issued at $8.60 per share, the closing market price of the Company’scommon stock on the grant date, and expires 10 years from the grant date. Vesting periods for the options are as follows: (i) one-half of the totalgrant is subject to time vesting with 25% vesting as of October 3, 2017 and the remaining 75% vesting ratably monthly over a 36-month periodcommencing on October 3, 2017, and (ii) one-half of the total grant is subject to specific 2017 through 2019 performance criteria, with vestingupon completion of the applicable performance criteria. As of December 31, 2016, 25,000 non-qualified stock options to purchase shares of theCompany’s common stock remain outstanding. •During the year ended December 31, 2016, the Compensation Committee of the Board granted non-qualified stock options to purchase 280,000shares of common stock to the Company’s President and Chief Executive Officer. The exercise price of such options ranged from $7.20-$7.25 pershare, vest over two to four years, and expire 10 years from the grant date.Restricted Stock Units2018 Restricted Stock Units Activity •Under the 2002 Plan, effective January 26, 2018, the Board issued 40,000 RSUs to the Company’s President and Chief Executive Officer. Thisaward was valued at $2.00 per share, the reverse stock split adjusted closing market price of the Company’s common stock on the grant date, andwill vest upon the achievement of specific annual Company performance criteria.Effective September 10, 2018 and September 21, 2018, respectively, the Compensation Committee of the Board granted the following: •650,000 shares to the Company’s President and Chief Executive Officer. These awards were valued at $2.17 per share, the closing price of theCompany’s common stock on the grant date. Vesting periods for the awards are as follows: (i) 54% of the total grant is subject to time vestingwith 33% vesting on August 7, 2019 and the remaining 67% vesting ratably semi-annually over the two-year period commencing on February 7,2020; and (ii) 46% of the awards is subject to specific 2019, 2020 and 2021 performance criteria, with vesting upon satisfaction of the applicableperformance criteria, subject to continued service through the applicable vesting dates. •30,388 shares to certain employees of the Company. These awards were valued at $2.06 per share, the closing price of the Company’s commonstock on the grant date. Vesting periods for the awards are as follows: (i) 50% of 24,271 shares vest on September 10, 2019 and the remaining50% vest on September 10, 2020; and (ii) 6,117 shares fully vest on March 15, 2019, subject to continued service through the applicable vestingdates.Effective May 14, 2018, the Compensation Committee of the Board granted the following: •1,193,850 shares to certain Board members, employees and consultants of the Company. These awards were valued at $1.45 per share, the closingprice of the Company’s common stock on the grant date, and vest 40% on December 31, 2018 and 60% on December 31, 2019, subject tocontinued service through the applicable vesting dates. •398,275 shares to certain Board members of the Company. These awards were valued at $1.45 per share, the closing price of BIOLASE commonstock on the grant date, and fully vest on the first anniversary of the grant date, subject to continued service through the applicable vesting date. •10,127 shares to certain employees of the Company. These awards were valued at $1.45 per share, the closing price of the Company’s commonstock on the grant date, and were fully vested on the grant date, subject to continued service through the applicable vesting date.F-29 Effective June 15, 2018, the Board granted 155,000 RSUs to two new Board members. These awards were valued at $1.25 per share, the closing priceof the Company’s common stock on the grant date, and vest fully on May 9, 2019. 2017 Restricted Stock Units ActivityEffective February 6, 2017, the Compensation Committee of the Board approved the grant of the following awards: •16,000 restricted stock units (“RSUs”) were awarded to an employee of the Company as part of the employee’s 2017 compensation. These awardswere valued at $7.75 per share, the closing market price of the Company’s common stock on the grant date, and vest as follows: (i) 6,000 of theRSUs vested on March 14, 2017, (ii) 4,000 of the RSUs vested on September 14, 2017, and (iii) 6,000 of the RSUs vest on May 10, 2018. •200,000 stock-settled RSUs were awarded to the Company’s President and Chief Executive Officer as part of his 2017 compensation. These RSUswere valued at $7.75 per share, the closing market price of the Company’s common stock on the grant date. These RSUs vest as follows: (i) one-quarter of the RSUs vest on February 6, 2019, (ii) one-eighth of the RSUs vest on February 6, 2020, (iii) one-eighth of the RSUs vest on February6, 2021, and (iv) one-half of the RSUs vest upon the achievement of specific interim and annual Company performance criteria. •On May 9, 2017 and in connection with the Company’s 2017 compensation plan, 100,000 RSUs were awarded to certain employees andconsultants of the Company. These awards were valued at $6.10 per share, the closing market price of the Company’s common stock on the grantdate. The RSUs vest as follows: (i) one-half of the total grant is subject to time vesting with 50% vesting on May 9, 2018 and the remaining 50%vesting on May 9, 2019, and (ii) one-half of the total grant is subject to specific 2017 and 2018 performance criteria, with vesting uponsatisfaction of the applicable performance criteria. •On May 10, 2017, non-employee directors of the Company were granted a total of 35,032 RSUs valued at $6.05 per share, the closing marketprice of the Company’s common stock on the grant date. These awards vest on May 10, 2018. On September 1, 2017, Paul N. Clark resigned fromthe Board, effective September 11, 2017, and as Chairman of the Board, effective September 1, 2017. On September 11, 2017, the CompensationCommittee of the Board approved a modification to the vesting criteria applicable to Mr. Clark’s unvested RSUs. As a result of the modification,the Company recognized additional compensation expense of $12,000 for the year ended December 31, 2017. On October 27, 2017, Frederic H.Moll, M.D. resigned from the Board, effective November 11, 2017. On November 11, 2017, the Compensation Committee of the Board approveda modification to the vesting criteria applicable to Dr. Moll’s unvested RSUs. As a result of the modification, the Company recognized additionalcompensation expense of $10,000 for the year ended December 31, 2017.2016 Restricted Stock Units ActivityUnder the 2002 Plan, effective February 26, 2016, the Compensation Committee of the Board granted the following awards: •77,700 restricted stock units (“RSUs”) were awarded to certain employees and consultants of the Company. These awards were valued at $4.30per share, the closing market price of common stock on the grant date, and fully vested on July 1, 2016. •28,000 RSUs were awarded to certain employees and consultants of the Company as part of their compensation plan. These awards were valuedat $4.30 per share, the closing market price of the Company’s common stock on the grant date, and vest 25% on each of the first, second, third,and fourth anniversaries of the grant date. •In connection with the President and Chief Executive Officer’s employment agreement, the maximum performance bonus was awarded,consisting of (i) $100,000 paid in cash during the nine months ended September 30, 2016, and (ii) the grant of 11,904 RSUs, valued at $4.30 pershare, the closing market price of the Company’s common stock on the grant date. Half of these RSUs vested on March 30, 2016 and half of theseRSUs vested on February 18, 2017. F-30 •On March 10, 2016, the Compensation Committee of the Board approved the grant of 14,000 RSUs to the Company’s Chief Financial Officer aspart of his 2015 compensation. These awards were valued at $6.15 per share, the closing market price of the Company’s common stock on thegrant date, and fully vested on July 1, 2016. •On May 6, 2016, as compensation for their service during the current year, non-employee directors of the Company were granted a total of49,750 RSUs valued at $7.05 per share, the closing market price of common stock on the grant date. These awards vest on May 6, 2017.The following table summarize RSU activity under the 2002 and 2018 Plans (in thousands): Shares Unvested restricted stock units, January 1, 2016 — Granted 181 Vested (97)Forfeited or cancelled — Unvested restricted stock units, December 31, 2016 84 Granted 470 Vested (81)Forfeited or cancelled (115)Unvested restricted stock units, December 31, 2017 358 Granted 2,836 Vested (604)Forfeited or cancelled (427)Unvested restricted stock units, December 31, 2018 2,163 Inducement Stock-Based Awards2018 Inducement ActivityThere were no new grants relating to inducements for the year ended December 31, 2018. Approximately 124,000 options were canceled and 328,500remain outstanding at December 31, 2018.2017 Inducement Activity •On March 13, 2017, and as amended on April 19, 2017, in connection with the hiring of a new Vice President of Sales, the CompensationCommittee of the Board awarded non-qualified stock options to purchase 80,000 shares of BIOLASE common stock. This award was issued at$5.85 per share, the closing market price of the Company’s common stock on the grant date, and expires 10 years from the grant date. Vestingperiods for the options are as follows: (i) two-fifths of the total grant is subject to time vesting with 25% vesting as of March 13, 2018 and theremaining 75% vesting ratably monthly over a 36-month period commencing on March 13, 2018, and (ii) three-fifths of the total grant is subjectto specific 2017 and 2018 performance criteria, with vesting upon satisfaction of the applicable performance criteria. This award was forfeitedupon the departure of the Vice President of Sales in November 2017. •On March 27, 2017, in connection with the hiring of a new Senior Vice President and Chief Financial Officer, the Compensation Committee ofthe Board awarded non-qualified stock options to purchase 120,000 shares of common stock. This award was issued at $6.40 per share, theclosing market price of the Company’s common stock on the grant date, and expires 10 years from the grant date. Vesting periods for the optionsare as follows: (i) two-thirds of the total grant is subject to time vesting with 25% vesting as of March 27, 2018 and the remaining 75% vestingratably monthly over a 36-month period commencing on March 27, 2018, and (ii) one-third of the total grant is subject to specific 2017 and2018 performance criteria, with vesting upon satisfaction of the applicable performance criteria. This award was forfeited upon the departure ofthe Senior Vice President and Chief Financial Officer in May 2017.F-31 •On October 2, 2017, in connection with the hiring of a new Senior Vice President and Chief Financial Officer, the Compensation Committee ofthe Board awarded non-qualified stock options to purchase 120,000 shares of common stock. This award was issued at $2.95 per share, theclosing market price of the Company’ common stock on the grant date, and expires 10 years from the grant date. Vesting periods for the optionsare as follows: (i) two-thirds of the total grant is subject to time vesting with 25% vesting as of October 2, 2018 and the remaining 75% vestingratably monthly over a 36-month period commencing on October 2, 2018, and (ii) one-third of the total grant is subject to specific 2018 and2019 performance criteria, with vesting upon satisfaction of the applicable performance criteria.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 62%, 62%, and 64% of net revenue and international salesaccounted for approximately 38%, 38%, and 36% of net revenue for the years ended December 31, 2018, 2017, and 2016, respectively. No individualinternational country represented more than 10% of net revenue during the years ended December 31, 2018, 2017, and 2016. Long-lived assets by geographic location was as follows (in thousands): Years Ended December 31, 2018 2017 2016 United States $1,673 $3,347 $4,175 International 302 327 303 $1,975 $3,674 $4,478 NOTE 10 — CONCENTRATIONSRevenue from the Company’s products for the years ended December 31, 2018, 2017 and 2016 are as follows: Years Ended December 31, 2018 2017 2016 Laser systems$29,733 64.4 % $29,121 62.0 % $35,150 67.9 %Imaging systems 1,694 3.7 % 3,685 7.9 % 3,066 5.9 %Consumables and other 8,287 18.0 % 7,332 15.6 % 6,906 13.3 %Services 6,429 13.9 % 6,660 14.2 % 6,539 12.6 %License fees and royalties 12 — % 128 0.3 % 149 0.3 %Total revenue$46,155 100.0 % $46,926 100.0 % $51,810 100.0 % The Company maintains its cash and cash equivalent accounts with established commercial banks. Such cash deposits periodically exceed the FederalDeposit Insurance Corporation insured limit.One individual customer represented approximately 12% of the Company’s accounts receivable at December 31, 2018. No individual customerrepresented more than 10% of the Company’s accounts receivable at December 31, 2017.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-32 NOTE 11 — SUBSEQUENT EVENTS (unaudited)Patent LitigationOn January 25, 2019 (the “Effective Date”), BIOLASE, Inc. (the “Company”) entered into a settlement agreement (the “Settlement Agreement”) withCAO Group, Inc. (“CAO”). Pursuant to the Settlement Agreement, CAO has agreed to dismiss with prejudice the previously-disclosed lawsuits filed by CAOagainst the Company in April 2012 and January 2018 alleging, among other things, that the Company’s ezlase dental laser and diode laser infringe on certainpatents owned by CAO. In addition, CAO granted to the Company and its affiliates a non-exclusive, non-transferable (except as provided in the SettlementAgreement), royalty-free, fully-paid, worldwide license to the licensed patents for use in the licensed products and agreed not to sue the Company, itsaffiliates or any of its manufacturers, distributors, suppliers or customers for use of the licensed patents in the licensed products, and the parties agreed to amutual release of claims. The Company has agreed (i) to pay to CAO, within five days of the Effective Date, $500,000 in cash, (ii) to issue to CAO, within 30days of the Effective Date, 500,000 restricted shares of common stock of the Company (the “Stock Consideration”), and (iii) to pay to CAO, within 30 days ofDecember 31, 2021, an amount in cash equal to the difference (if positive) between $1,000,000 and the value of the Stock Consideration on December 31,2021. The Stock Consideration vests and becomes transferrable on December 31, 2021, subject to the terms of a restricted stock agreement to be entered intobetween the parties. The Company considered this a Type I subsequent event and recognized a $1.5 million contingent loss on patent litigation settlement inits statement of operations for the year ended December 31, 2018.Equity AwardsRestricted Stock UnitsEffective February 22, 2019, the Compensation Committee of the Board issued to certain employees of the Company a total of approximately 0.9million non-qualified RSUs as part of the Company’s 2019 performance bonus program. Vesting of these awards will occur quarterly based on theachievement of specific Company performance criteria. These awards expire 10 years from the grant date and were valued at $2.26 per share, the closingmarket price of the Company’s common stock on the grant date. F-33 BIOLASE, INC.Schedule II — Consolidated Valuation and Qualifying Accounts and ReservesFor the Years Ended December 31, 2018, 2017, and 2016(in thousands) Balance at Charges Beginning (Reversals) to Cost Balance at of Year or Expenses Deductions End of Year Year Ended December 31, 2018: Allowance for doubtful accounts $802 $469 $(421) $850 Allowance for sales returns 210 — — 210 Allowance for tax valuation 40,866 6,101 — 46,967 Year Ended December 31, 2017: Allowance for doubtful accounts $1,209 $(401) $(6) $802 Allowance for sales returns 210 — — 210 Allowance for tax valuation 54,310 (13,444) — 40,866 Year Ended December 31, 2016: Allowance for doubtful accounts $1,765 $(438) $(118) $1,209 Allowance for sales returns 210 — — 210 Allowance for tax valuation 49,514 4,796 — 54,310 S-1 EXHIBIT 10.28CONFIDENTIAL SETTLEMENT AGREEMENTThis CONFIDENTIAL SETTLEMENT AGREEMENT (this “Agreement”) is entered into as of the Effective Date (as that term is defined below)between CAO Group, Inc., a Utah corporation having a place of business at 4628 West Skyhawk Drive, West Jordan, Utah 84084(“CAO”), and Biolase, Inc. f/k/a Biolase Technology, Inc., a Delaware corporation having a place of business at 4 Cromwell, Irvine,California 92618 (“Biolase”). CAO and Biolase are referred to in this Agreement collectively as the “Parties” and individually as a“Party”.A.On April 24, 2012, CAO filed a complaint against Biolase in the United States District Court for the District of Utah,captioned CAO Group, Inc. v. Biolase Technology, Inc., Case No. 2:12-cv00388 (“the Utah Action”). On March 7, 2018, the UtahAction was transferred to the United States District Court for the Central District of California, Southern Division and reassigned acase caption of CAO Group, Inc. v. Biolase Technology, Inc., Case No. 8:18-cv-00368 (“the California ‘368 Action”). The operativecomplaint in the California ‘368 Action (Dkt. No. 57) includes Count 1 for “Patent Infringement”, Count 2 for “BusinessDisparagement/Injurious Falsehood – Common Law” and Count 3 for “Unfair Competition - 15 U.S.C. §1125(a))”.B.On January 23, 2018, CAO filed a separate action against Biolase in the United States District Court for the Central Districtof California, captioned CAO Group, Inc. v. Biolase Technology, Inc., Case No. 8:18-cv-00133 (“the California ‘133 Action”). Theoperative complaint in the California ‘133 Action (Dkt. No. 57) includes Counts 1-4 for “Patent Infringement”.C.On March 21, 2018, the California ‘368 and ‘133 Actions were consolidated with all future filings to be filed only underCase No. 8:18-cv-00133 (“the Litigation”) and Case No. 8:18-cv-00368 was closed.E.Biolase has denied any and all liability in the Litigation.F.The Parties desire to settle the Litigation without the expenditure of further time and expense under the terms and conditionsset forth below.NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Partiesagree as follows:1.DEFINITIONS. As used in this Agreement:1.1“PREVIOUSLY DEFINED TERMS” The terms “Agreement”, “CAO”, “Biolase”, “Parties”, “Party”, “the UtahAction”, “the California ‘368 Action”, “the California ‘133 Action”, and “the Litigation” shall have the meanings set out above.1.2“Affiliate” with respect to any Party means any Person which currently or in the future controls, is controlled by,or is under common control with the Party. The terms “controls,” “is controlled by,” or “is under common control of or with” refer tothe possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whetherthrough ownership of voting securities (as to which ownership of at least fifty percent (50%) establishes control), or other interests, bycontract, or otherwise. For the avoidance of doubt, Dr. Densen Cao shall be considered an Affiliate of CAO for purposes of thisAgreement. 4836-3775-3988.v1  1.3“Biolase Entities” means Biolase and its Affiliates.1.4“Claims” means any and all claims, counterclaims, third-party claims, contribution claims, indemnity claims,demands, actions, causes of action, and all other claims of every kind and nature in law or equity, whether arising under state, federal,international or other law, which were asserted in or which arise from the same transactions or occurrences as those claims asserted inthe Litigation, whether such claims are absolute or contingent, direct or indirect, known or unknown.1.5“Effective Date” means the date on which this Agreement is fully executed by all the Parties; provided, however,that if all the Parties execute this Agreement, but less than all the Parties provide an execution date, then the Effective Date shall be thelatest date provided by any of those Parties who provided an execution date.1.6“Including” means “including without limitation”.1.7“LICENSED PATENTS” means (a) the Patents-in-Suit, (b) the patents and patent applications set forth on AppendixA, which is attached hereto and by this reference incorporated herein, and any other patents or patent applications of CAO or itsAffiliates that include one or more claims that read on products of Biolase or its Affiliates, as previously or currently configured andsold, or any components thereof, any patents, registrations or certificates of invention that may be issued pursuant thereto and alldivisionals, continuations, continuations-in-part, reissues, substitutes, renewals, reexaminations, and extensions or additions thereof,and any foreign counterparts of any of the foregoing; and (c) all current or future patent applications submitted to or patents issued bythe United States Patent and Trademark Office or submitted to or issued by a foreign government, including but not limited tocertificates and registrations, that share a common parent application with or that claim a priority from any of the patents or patentapplications listed on Appendix A or any of the other patents or patent applications covered by (a) above, and (c) any other patents,patent applications or other intellectual property rights of CAO or its Affiliates that products of Biolase or its Affiliates, as currentlyconfigured and sold, or any extensions, updates, variations or modifications of such products that are minor in scope and consistentwith current typical business practices, or which do not substantially change the features claimed in the Licensed Patents, which would,in the absence of the licenses granted herein, be subject to a claim of infringement, whether such infringement be direct or indirect, andwhether such infringement be literal or under the doctrine of equivalents.1.8“Licensed Products” means (i) the products accused of infringement in the Litigation, (ii) products of Biolase orits Affiliates as currently configured and sold, (iii) products or components of products of Biolase or its Affiliates as currentlyconfigured and sold, the manufacture, use, sale, offer for sale, or import of which, in the absence of this license agreement, would becovered by at least one claim of a Licensed Patent, (iv) products of Biolase or its Affiliates, as currently configured and sold that aremade using a process or machine, the use of which, in the absence of this license agreement, would be covered by a claim of aLicensed Patent, and (v) any extensions, updates, variations or modifications of products or components of Biolase or its Affiliatecovered under subdivisions (i)-(iv) that are minor in scope and consistent with current typical business practices or which do notsubstantially change the features claimed in the Licensed Patents. All products manufactured by or for CAO or its Affiliates forBiolase or its Affiliates shall not be required to be expressly licensed under this Agreement due to the applicable implied licensesand/or principles of patent exhaustion. No additional royalties will be due and payable under this Agreement for such productsmanufactured by or for CAO or its Affiliates for Biolase or its Affiliates.2 1.9“MANUFACTURING AGREEMENT” means the form of manufacturing agreement to be entered into by and betweenBiolase and CAO.1.10“Non-Patent Claims” means Count 2 for “Business Disparagement/Injurious Falsehood – Common Law” andCount 3 for “Unfair Competition - 15 U.S.C. §1125(a))” in the operative complaint in the California ‘368 Action (Dkt. No. 57).1.11“PATENT CLAIMS” means Count 1 for “Patent Infringement” in the operative complaint in the California ‘368Action (Dkt. No. 57) and Counts 1-4 for “Patent Infringement” in the operative complaint in the California ‘133 Action (Dkt. No. 1).1.12“Patents-in-Suit” means U.S. Patent Nos. 7,485,116, 8,337,097, 8,834,457, 8,961,040, and 8,967,883.1.13“Person” means any individual or any firm, association, organization, joint venture, trust, partnership,corporation, company or other collective organization or entity.1.14“Releasees” has the meaning provided for in Section 4.1 below.1.15“Settlement Payment” has the meaning provided for in Section 3.1 below.1.16“Third Parties” means any Person other than CAO and its Affiliates, and Biolase and its Affiliates.2.LICENSE AND COVENANT NOT TO SUE. 2.1LICENSE. CAO hereby grants to Biolase and its Affiliates, and Biolase hereby accepts, a nonexclusive,nontransferable except as provided for in this Agreement, royalty-free, fully-paid, worldwide license under the Licensed Patents, toimport, export, make, manufacture, have made, make for others, use, offer for sale, sell, or otherwise distribute Licensed Products,including the right to extend to others the right to make, manufacture, sell, offer for sale, distribute or export Licensed Products, for thepurpose of supplying Licensed Products to Biolase or its Affiliates, or for the purpose of distributing or selling Licensed Products forBiolase or its Affiliates, without the right to further sublicense. 2.2COVENANT NOT TO SUE. CAO hereby covenants, during the term of this Agreement, not to sue Biolase or itsAffiliates, or any of their direct or indirect manufacturers, distributors, suppliers, dealers, resellers, customers or end users, under theLicensed Patents, for making, having made, using, having used, selling, having sold, offering for sale, having offered for sale,distributing, leasing, renting, importing, or exporting, the Licensed Products, including for infringement of the Licensed Patents underthe laws of the United States or the laws of any other country or jurisdiction, including a claim of infringement under 35 U.S.C. §271(a), (b), (c), (f), or (g). This covenant not to sue shall expressly exclude and shall not in any way apply to commercial activities ofBiolase or its Affiliates which are unrelated to the commercialization or exploitation of the Licensed Products.3 2.3EXTENSION OF COVENANTS NOT TO SUE, AND RELEASES. The covenants not to sue granted in Section 2.2 above, andthe releases granted in Sections 4.1 and 4.2 below, all extend to Third Parties for claims relating to the Licensed Products to the extentsuch Third Parties: (a) are acting for or on behalf of the Biolase Entities; or (b) are direct or indirect customers, end-users, suppliers,manufacturers, resellers, contractors, agents, dealers and distributors of or for Biolase Entities; or (c) have rights under the doctrine ofexhaustion.3.SETTLEMENT PAYMENT AND MANUFACTURING AGREEMENT. 3.1Settlement Payment for Non-Patent Claims. (A) Biolase shall (i) within five (5) days of the Effective Date payto CAO Five Hundred Thousand U.S. Dollars and No Cents (USD$500,000.00) (the “Cash Payment”), and (ii) within thirty (30) daysof the Effective Date issue to CAO 500,000 restricted shares of common stock of Biolase, Inc., par value $0.001 per share (the“Restricted Stock”), and (B) within thirty (30) days of December 31, 2021, (iii) pay to CAO the difference, if any, between (x)$1,000,000.00 and (y) the dollar value of the Restricted Stock on December 31, 2021, calculated using the closing price per share asquoted on NASDAQ on such date; provided that the foregoing calculation is not a negative number, (A) and (B) above beingconsideration for the dismissal, release, covenant no to sue and other benefits under this Agreement relating to the Non-Patent Claims(“Settlement Payment”). The Restricted Stock shall vest and be transferable on December 31, 2021, subject to CAO’s continuedperformance under this Agreement and the terms and conditions set forth in a restricted stock agreement to be entered into by andbetween Biolase and CAO. CAO represents and warrants that its Federal tax ID number is 87-0644790. All taxes shall be thefinancial responsibility of the Party obligated to pay such taxes as determined by the applicable law and neither Party is or shall beliable at any time for any of the other Party’s taxes incurred in connection with or related to amounts paid under this Agreement. Thecash portions of the Settlement Payment will be made by wire transfer in U.S. dollars and in immediately available funds. The wiretransfer payment shall be sent to the following bank: CAO Group, Inc.Wells Fargo Bank, NAAccount Number 7759503928ABA Number: 121000248SWIFT Code: WFBIUS6S Settlement Payment shall be deemed earned when paid and shall be completely non-refundable and non-cancellable. 3.2MANUFACTURING AGREEMENT. As consideration for the dismissal, license, release, covenant no to sue and otherbenefits under this Agreement relating to the Patent Claims and the Licensed Patents, CAO and Biolase agree to negotiate in good faithto finalize and execute a definitive Manufacturing Agreement.4 4.RELEASES, DISMISSAL, AND REPRESENTATIONS.4.1RELEASES. Except with respect to the obligations created by or arising out of this Agreement, and subject topayment to CAO of the Cash Payment as set forth in Section 3.1 above, CAO does hereby for itself and its Affiliates and theirrespective legal successors, heirs and assigns, release and absolutely discharge the Biolase Entities, and their respective past, presentand future owners, shareholders, parents, subsidiaries, successors, assigns, divisions, units, officers, directors, employees, agents,attorneys, and representatives (collectively, “Releasees”), of and from any and all claims, demands, damages, debts, liabilities,accounts, reckonings, obligations, costs, expenses, liens, attorneys’ fees, actions and causes of action of every kind and naturewhatsoever, (i) arising out of or in connection with the Litigation (including the Patent Claims and the Non-Patent Claims) or theLicensed Patents, including all Claims, and/or (ii) based in whole or in part on acts of the Biolase Entities prior to the Effective Date ofthis Agreement that would have been licensed (or covenanted not to sue) under this Agreement if performed after the Effective Date ofthis Agreement. Biolase does hereby for itself and its Affiliates and their respective legal successors, heirs and assigns, release andabsolutely discharge the CAO Entities, and their respective past, present and future owners, shareholders, parents, subsidiaries,successors, assigns, divisions, units, officers, directors, employees, agents, attorneys, and representatives (collectively, “Releasees”), ofand from any and all claims, demands, damages, debts, liabilities, accounts, reckonings, obligations, costs, expenses, liens, attorneys’fees, actions and causes of action of every kind and nature whatsoever prior to the Effective Date of this Agreement, in connectionwith the licensing and enforcement of the Licensed Patents associated with the activities of Biolase, and any claims, counterclaims, ordefenses that Biolase may have to any claim for infringement by CAO on any of the Licensed Patents.4.2UNKNOWN CLAIMS. The Parties expressly acknowledge and agree that the release provided for in Section 4.1extends to and fully and finally releases and forever resolves the Litigation and all matters covered by the releases that are known orunknown, anticipated or unanticipated, suspected or unsuspected, that have arisen or that may hereafter arise as a result of thediscovery of new and/or additional facts. The Parties, having made independent investigation to their satisfaction, acknowledge andunderstand the significance and potential consequences of their release of unknown claims. The Parties intend that the claims releasedunder this Agreement be construed as broadly as possible and agree to waive and relinquish all rights and benefits each may haveunder Section 1542 of the Civil Code of the State of California, or any similar statute or law of any other jurisdiction. Section 1542reads as follows: “A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR OR RELEASINGPARTY DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THERELEASE AND THAT, IF KNOWN BY HIM OR HER, WOULD HAVE MATERIALLY AFFECTED HIS OR HERSETTLEMENT WITH THE DEBTOR OR THE RELEASED PARTY.”4.3DENIAL OF LIABILITY. The Parties acknowledge that they are entering into this Agreement to resolve disputedclaims, that nothing herein shall be construed to be an admission of liability, and that the Parties expressly deny any liability to the otherParty.4.4Dismissal. Within five (5) days of the receipt by CAO of the Cash Payment, the Parties shall jointly file astipulation of dismissal requesting that the United States District Court presiding over the Litigation dismiss with prejudice all claimsand counterclaims between the Parties in the Litigation, each Party to bear its own costs and attorneys’ fees. The Parties agree tosubmit to the court appropriate stipulations and proposed orders for extensions of time for all due dates in the Litigation so that neitherParty is required to incur unnecessary expenses in the Litigation between the Effective Date and the date the Litigation is dismissed.5 4.5Representations and Warranties.(a)CAO represents and warrants that (i) it owns all right, title and interest in and to the Licensed Patents, and (ii)CAO and its Affiliates do not own any patents or other intellectual property rights which are not licensed under this Agreement andwhich could be construed to cover any current products or services of Biolase or its Affiliates, and (iii) CAO is not aware of any priorart, public sale or use, or any other fact that would invalidate any of the Licensed Patents. If during the term of this Agreement, CAOor any of its Affiliates hereafter acquires additional patent(s) or intellectual property rights, including those from a foreign entity, thatmay cover any of the Licensed Products, then the term Licensed Patents will be supplemented to include such additional patent(s) orintellectual property rights without the payment by Biolase of any additional amounts. CAO represents and warrants it is the true andsole owner of the Licensed Patents with the sole right to sue for past, present and future infringement and the sole right to grant licensesunder the Licensed Patents; and that during the full term of this Agreement there are and shall be no liens, conveyances, mortgages,assignments, encumbrances or other agreements or obligations which prevent or impair the full and complete privileges granted byCAO, pursuant to the full terms and conditions of this Agreement.(b)All license rights, releases and covenants contained in this Agreement shall run with any of the Licensed Patentsto which those rights, releases or covenants pertain and shall be binding on any successors-in-interest or assigns of the LicensedPatents. CAO represents and warrants that CAO will not assign, transfer, and/or otherwise convey, whether individually orcollectively, any ownership rights or exclusive licenses in, to, or under any of the Licensed Patents unless such is done in a writteninstrument that: (i) includes an agreement by the assignee, transferee, or the like to be bound by and subject to the terms, conditions,and provisions of this Agreement, including, but not limited to, the releases, licenses and covenants not to sue granted by CAO in thisAgreement, and to obligate all future exclusive licensees and owners to also be so bound, and names the Biolase Entities as a third-party beneficiary to the extent of having the right to enforce such releases, licenses and covenants not to sue. Any assignment, transferor conveyance in violation of this Section 4.5(b) shall be null and void.5.TERM AND TERMINATION OF LICENSE. The term of this Agreement, including the licenses granted under this Agreement,begins on the Effective Date and continues until the expiration of the last surviving Licensed Patent plus six years. For the avoidanceof doubt, provided Biolase has made the Cash Payment and signed the Manufacturing Agreement under Section 3.2, (a) CAO shallhave no right to terminate this Agreement before the end of its term, and (b) the covenants not to sue in Sections 2.2-2.3 and releases inSections 4.1-4.2 shall survive any termination of this Agreement. 6.ASSIGNMENT OF RIGHTS AND OBLIGATIONS; BANKRUPTCY. 6.1Assignment of Rights and Obligations. This Agreement is personal to the Parties, and no Party may assign thisAgreement or any right or obligation under this Agreement without the prior written consent of the other Parties (other than inconnection with a transaction effected solely for the purposes of changing the corporate, organizational form or jurisdiction oforganization of an entity). Notwithstanding the above, this Agreement may be assigned, in whole or in part, by any Party without theother Parties’ consent as part of a sale or transfer of all or substantially all of its business related to the Licensed Products (regardless ofthe manner in which any such transaction is effected); provided however, that the rights assigned under this Agreement6 will not extend to any other activity (i.e., unrelated to the Licensed Products) conducted by the assignee or any of its Affiliates prior to,on or after the effective date of the assignment. Any assignment or transfer in violation of this Section 6.1 shall be null and void.Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the Parties and their respective Affiliates andtheir permitted successors and assigns.6.2Bankruptcy. Each Party acknowledges that all rights, covenants and licenses granted by CAO are, and shallotherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy Code (11 U.S.C. § 365(n)), licenses of rights to“intellectual property” as defined under Section 101(35A) of the Bankruptcy Code (11 U.S.C. § 101(35A)). Each Partyacknowledges this Agreement is an Executory Contract and that should any Party become a petitioner under the Bankruptcy Code,Section 365(n) applies to this Agreement and the rights afforded thereunder apply. Each Party further acknowledges that if such Party,as a debtor in possession or a trustee-in-bankruptcy in a case under the Bankruptcy Code, rejects this Agreement, the other Parties mayelect to retain their rights under this Agreement as provided in Section 365(n) of the Bankruptcy Code. Any change of controlresulting from any such bankruptcy proceeding shall be subject to Section 4.5(b) above. 7.GENERAL PROVISIONS.7.1Confidentiality. Except to the extent provided in Section 4.5(b), each Party will hold the terms of thisAgreement in confidence and shall not publicize or disclose it in any manner whatsoever. Notwithstanding the foregoing, the Partiesmay disclose this Agreement as required by applicable law, in confidence to a Court or responsive to a discovery request made inconnection with a Court proceeding (or otherwise as directed by law), and to the Parties’ respective Affiliates, attorneys, accountants,auditors, tax preparers, financial advisors and other agents who have a need to know the content of this Agreement. Further, Biolasemay disclose the scope of the licenses and covenants granted in Section 2 and the scope of the releases granted in Sections 4, to a ThirdParty to the extent that Biolase reasonably believes necessary to respond to an inquiry from such Third Party as to whether products oractivities are licensed and/or released and therefore not subject to a claim of infringement. Further, Biolase and CAO may disclose thisAgreement in connection with a proposed merger, acquisition, financing or similar transaction provided any such disclosure is madepursuant to a written confidentiality agreement.7.2APPLICABLE LAW. This Agreement is governed by, and all disputes arising under, relating to, or in connectionwith this Agreement shall be resolved in accordance with, the laws of California to the exclusion of its conflict of laws rules. TheParties shall endeavor to resolve amicably by negotiation all disputes arising out of, relating to, or in connection with this Agreement,including any question regarding its existence, validity, or termination, and including any allegations relating to any Licensed Patent(“Disputes”). Each Party agrees that it will not initiate any proceeding against the other Party, or assist any other person or entity ininitiating litigation against the other Party, involving any Dispute until (i) written notice of a claim has been sent by the complainingParty to the other Party; and (ii) at least sixty (60) calendar days have passed after such written notice has been sent. After receipt ofthat written notice, each Party will meet in person, through their respective chief executive officers and counsel, to discuss the claimsand attempt to resolve the dispute without the need for litigation. Any claim under this Agreement shall be time-barred unless theclaiming Party commences arbitration with respect to such claim within two (2) years after the basis for such claim became known orshould have become known to the claiming Party. Any applicable statutes of limitations and defenses based upon the passage of timeshall be tolled with respect to any Dispute for sixty (60) calendar days after a Party requests in writing negotiation to resolve theDispute, or such other longer period as the Parties may agree in writing.7 7.3The Parties agree: ▪Any Dispute that either remains unresolved sixty (60) calendar days after a Party requests in writingnegotiation, or within such other longer period as the Parties may agree in writing, shall be finallysettled under the Comprehensive Arbitration Rules of JAMS, Inc. then in effect (“JAMS ArbitrationRules”). This Agreement to arbitrate shall be specifically enforceable under the prevailing arbitrationlaw. For the avoidance of doubt, the Parties agree that any issue or disagreement over the scope orapplicability of this agreement to arbitrate shall be resolved and determined by the arbitrator(s). ▪The arbitration shall be heard and decided by one (1) arbitrator appointed in accordance with the JAMSArbitration Rules unless either Party makes claims that exceed Five Million United States Dollars($5,000,000.00 USD) in which event there shall be three (3) arbitrators appointed in accordance withthe JAMS Arbitration Rules (the arbitrators hereafter referred to as the “Arbitral Tribunal”). ▪The seat of the arbitration shall be held at JAMS, Inc. in Orange County, California, United States ofAmerica. Hearings shall be conducted at the seat of the arbitration, save as the Parties and/or theArbitral Tribunal may determine is appropriate for the convenience of the Parties and/or their witnesses.The arbitrators will determine the matters in dispute in accordance with California law and thearbitration will be conducted in the English language. ▪The existence and content of the arbitral proceedings and any rulings or award shall be kept confidentialexcept (i) to the extent that disclosure may be required of a Party to fulfill a legal duty, protect or pursuea legal right, or enforce or challenge an award in bona fide legal proceedings before a court or otherjudicial authority, or (ii) with the written consent of all Parties. Notwithstanding anything to thecontrary, either Party may disclose matters relating to the arbitration or the arbitral proceedings wherenecessary for the preparation or presentation of a claim or defense in such arbitration. ▪The Arbitral Tribunal shall include in their award an allocation of costs and expenses to be paid by thenon-prevailing party to the prevailing party, including attorneys’ fees and costs and expenses ofmanagement, in-house counsel, experts, and witnesses, as the Arbitral Tribunal shall deem reasonable.In making such allocation to the prevailing party, the Arbitral Tribunal shall consider the relativesuccess of the Parties on their claims, counterclaims, and defenses. ▪The Parties shall comply with the award of the Arbitral Tribunal, which shall be final and binding uponthe Parties. Judgment confirming and/or enforcing the award rendered by the Arbitral Tribunal may beentered in any court of competent jurisdiction. 8 7.4DULY EXISTING. Each of the Parties represents and warrants that it is duly existing, and each Party heretorepresents and warrants: (a) that it has the full power and authority to enter into this Agreement and to perform all of the covenants andagreements stated herein; (b) that this Agreement has been executed freely and voluntarily, without economic compulsion or otherduress, and with full knowledge of its legal significance and consequences; (c) that there are no other Persons whose consent to thisAgreement or whose joinder herein is necessary to make fully effective the provisions of this Agreement; and (d) that its signatorieshave been properly authorized to execute this Agreement and to enter into this Agreement on behalf of the Party and to bind the Partyto perform all of the covenants and agreements stated herein 7.5Comprehension. Each Party acknowledges to the other Party that it has been represented by independent legalcounsel of its own choice throughout all the negotiations which preceded the execution of this Agreement and that it has executed thisAgreement with the consent and on the advice of such independent legal counsel. Each Party further acknowledges that it and itscounsel have had adequate opportunity to make whatever investigation or inquiry they may deem necessary or desirable in connectionwith the subject matter of this Agreement prior to the execution hereof. Each Party has authorized and directed their respectiveattorneys to execute and deliver such other and further documents as may be required to carry out the terms and conditions of thisAgreement. 7.6Interpretation. The language of this Agreement has been approved by counsel for the Parties. The language ofthis Agreement shall be construed according to its fair meaning and none of the Parties (or the Parties’ respective attorneys) shall bedeemed to be the draftsman of this Agreement in any action which may hereafter arise between the Parties. 7.7Entire Agreement. This is an enforceable Agreement. This Agreement, including the attached Exhibits whichare incorporated by reference herein, constitute the entire agreement between the Parties and supersede all previous andcontemporaneous communications, representations, agreements or understandings, either oral or written, between the Parties withrespect to the subject matter hereof. This Agreement may be amended, supplemented or modified only by a written instrument dulyexecuted by or on behalf of each Party hereto which specifically refers to this Agreement.7.8Waiver. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior,concurrent or subsequent breach of the same or any provisions hereof, and no waiver shall be effective unless made in writing andsigned by an authorized representative of the waiving Party.7.9NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be sent by a reliableovernight courier service; or by facsimile to the other Party at the address below or to such other address for which such Party shallgive notice hereunder. Such notice shall be deemed to have been given one day after the date of sending if by overnight courierservice, or upon confirmed receipt if delivered by facsimile, except that notice of change of address shall be effective only upon receipt.9 For CAO:Densen Cao, President 4628 West Skyhawk Drive West Jordan,UT 84084 Tel:801-256-9282Fax:801-256-9287With a copy to:H. Dickson BurtonTRASKBRITT, PC230 South 500 East # 300Salt Lake City, Utah 84102Tel: (801) 532-1922; Fax: (801) 531-9168Email:HDBurton@traskbritt.comFor Biolase:Todd Norbe, President and CEO4 CromwellIrvine, CaliforniaTel:(949) 226-8100Fax:(949) 365-4913 With a copy to:Evan FinkelPillsbury Winthrop Shaw Pittman LLP725 South Figueroa Street, Suite 2800Los Angeles, California 90017-5406Tel: (213) 488-7307; Fax: (213) 226-4058Email: evan.finkel@pillsburylaw.com 7.10Severability. If any provision of this Agreement shall be determined to be invalid, illegal or unenforceableunder any controlling body of law, that provision shall be reformed, construed and enforced to the maximum extent permissible; andthe validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.7.11Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an originalhereof, but all of which together shall constitute one and the same instrument.7.12DUTY TO EFFECTUATE. The Parties agree to perform any lawful additional acts, including the execution ofadditional agreements, as are reasonably necessary to effectuate the purpose of this Agreement. [SIGNATURES APPEAR ON NEXT PAGE]10 IN WITNESS WHEREOF, the Parties do hereby execute this Settlement and Patent License Agreement by duly authorized officialsas of the Effective Date: Biolase, Inc. CAO Group, Inc. By: /s/ Todd Norbe By: /s/ Densen Cao Name: Todd Norbe Name: Densen Cao Title: President and CEO Title: President Date: January 25, 2019 Date: January 23, 2019 APPROVED: APPROVED: By: /s/ EVAN FINKEL By: /s/ H. Dickson Burton Name: Evan Finkel Name: H. Dickson Burton Pillsbury Winthrop Shaw Pittman LLP TRASKBRITT, PC Attorneys for Biolase, Inc. Attorneys for CAO Group, Inc. Date: January 24, 2019 Date: January 24, 2019 11 Appendix A No.Patent #1US 7,485,1162US 8,337,0973US 8,834,4574US 8,961,0405US 8,967,8836EP 21189717EP 21207608JP 56853529JP 563159410KR 10-1503544 No.Application #1US 60/891,0372US 11/231,5463US 11/961,8044US 13/863,2365US 15/173,1626US 95/002,2717PCT/US08/519408PCT/US08/546279KR 1020097019726 12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 23.1Consent of Independent Registered Public Accounting Firm BIOLASE, Inc.Irvine, CaliforniaWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-194889, 333-144095, 333-112173, 333-130677,333-177339, 333-204059, and 333-150105) and Form S-3 (Nos. 333-222564, 333-219406, 333-106260, 333-200623, 333-198291, 333-166145, 333-190158, 333-193426, 333-214281, 333-175664, 333-141417, 333-106290, 333-89692, and 333-58329) of BIOLASE, Inc. of our report dated March 8,2019, relating to the consolidated financial statements and consolidated financial statement schedule of BIOLASE, Inc., which appear in this Form 10-K. Ourreport contains an explanatory paragraph regarding the Company’s ability to continue as a going concern. /s/ BDO USA, LLPCosta Mesa, CaliforniaMarch 8, 2019  Exhibit 31.1CERTIFICATIONI, Todd A. Norbe, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 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 thisreport;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 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 the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.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 and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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; and b.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 8, 2019By:/s/ TODD A. NORBE Todd A. Norbe President and Chief Executive Officer(Principal Executive Officer)  Exhibit 31.2CERTIFICATIONI, John R. Beaver, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 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 thisreport;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 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 the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.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 and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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; and b.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 8, 2019By:/s/ JOHN R. BEAVER John R. Beaver Executive Vice President and Chief Financial Officer(Principal Financial Officer and Principal AccountingOfficer)  Exhibit 32.1CERTIFICATION OF THE CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. § 1350AS 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, 2018, (the “Report”), I,Todd A. Norbe, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that, to the best of my knowledge:(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 8, 2019 By:/s/ TODD A. NORBE Todd A. Norbe President and Chief Executive Officer(Principal Executive Officer)  Exhibit 32.2CERTIFICATION OF THE CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. § 1350AS 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, 2018, (the “Report”), I,John R. Beaver, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 8, 2019 By:/s/ JOHN R. BEAVER John R. Beaver Executive Vice President and Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer) 

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