biol-10q_20200930.htm

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

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

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

As of November 10, 2020, the registrant had 93,014,195 shares of common stock, $0.001 par value per share, outstanding.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Net revenue	$	6,539		$	8,646		$	14,260		$	27,617
Cost of revenue		4,265			5,677			9,692			17,746
Gross profit		2,274			2,969			4,568			9,871
Operating expenses:
Sales and marketing		2,678			3,515			7,475			10,665
General and administrative		2,300			3,210			7,446			8,114
Engineering and development		963			1,126			2,644			3,665
Total operating expenses		5,941			7,851			17,565			22,444
Loss from operations		(3,667	)		(4,882	)		(12,997	)		(12,573	)
Loss (gain) on foreign currency transactions		(53	)		19			68			68
Interest expense		568			551			1,782			1,559
Other (income) expense, net		(4,209	)		—			(4,209	)		—
Non-operating (income) loss, net		(3,694	)		570			(2,359	)		1,627
Income (loss) before income tax provision		27			(5,452	)		(10,638	)		(14,200	)
Income tax provision		15			26			49			68
Net income (loss)		12			(5,478	)		(10,687	)		(14,268	)
Other comprehensive income item:
Foreign currency translation adjustment		111			(128	)		167			(170	)
Comprehensive income (loss)	$	123		$	(5,606	)	$	(10,520	)	$	(14,438	)

Net income (loss)	$	12		$	(5,478	)	$	(10,687	)	$	(14,268	)
Deemed dividend on convertible preferred stock		(17,378	)		—			(17,378	)		—
Net loss attributable to common stockholders:	$	(17,366	)	$	(5,478	)	$	(28,065	)	$	(14,268	)
Net loss per share:
Basic	$	(0.21	)	$	(0.25	)	$	(0.56	)	$	(0.66	)
Diluted	$	(0.21	)	$	(0.25	)	$	(0.56	)	$	(0.66	)
Shares used in the calculation of net loss per share:
Basic		81,341			21,898			50,366			21,545
Diluted		81,341			21,898			50,366			21,545

	Mezzanine Equity						Stockholders' Equity
	Series E
	Convertible Preferred										Paid-in			Series F Convertible						Accumulated Other						Total
	Stock						Common Stock				Capital			Preferred Stock						Comprehensive			Accumulated			Stockholders'
	Shares			Amount			Shares		Amount		Amount			Shares			Amount			Loss			Deficit			Equity
Balance at June 30, 2020		—			—			50,322		50		247,149			—			—			(645	)		(245,246	)		1,309
Exercise of stock options, net		—			—			—		—		—			—			—			—			—			—
Issuance of Series F Convertible Preferred Stock in Rights Offering, net of $0.3 million in offering costs		—			—			—		—		—			18			2,411			—			—			2,411
Beneficial conversion on Series F Convertible Preferred Stock												2,700						(2,700	)
Deemed dividend on Series F Convertible Preferred Stock		—			—			—		—		(17,378	)		—			17,378			—			—			—
Conversion of Series F Convertible Preferred Stock								42,370		43		16,905			(17	)		(16,948	)		—			—			—
Reclassification of July 2020 Warrants		—			—			—		—		9,450			—			—			—			—			9,450
Stock-based compensation		—			—			—		—		513			—			—			—			—			513
Issuance of stock from RSUs, net		—			—			191		—		—			—			—			—			—			—
Exercise of June 2020 Warrants		—			—			116		—		46			—			—			—			—			46
Net income		—			—			—		—		—			—			—			—			12			12
Foreign currency translation adjustment		—			—			—		—		—			—			—			111			—			111
Balance at September 30, 2020		—			—			92,999		93		259,385			1			141			(534	)		(245,234	)		13,851

Balances, December 31, 2019		70			3,965			31,459		31		235,594			—			—			(701	)		(234,547	)		377
Conversion of Series E Convertible Preferred Stock		(70	)		(3,965	)		6,957		7		3,958			—			—			—			—			3,965
Sale of common stock		—			—			10,800		11		3,861			—			—			—			—			3,872
June 2020 Warrants		—			—			—		—		3,031			—			—			—			—			3,031
Reclassification of July 2020 Warrants		—			—			—		—		9,450			—			—			—			—			9,450
Stock offering costs		—			—			—		—		(856	)		—			—			—			—			(856	)
Warrant issued in connection with debt instruments		—			—			—		—		67			—			—			—			—			67
Issuance of Series F Convertible Preferred Stock in Rights Offering, net of $0.3 million in offering costs		—			—			—		—		—			18			2,411			—			—			2,411
Beneficial conversion on Series F Convertible Preferred Stock												2,700						(2,700	)
Deemed dividend on Series F Convertible Preferred Stock		—			—			—		—		(17,378	)		—			17,378			—			—			—
Conversion of Series F Convertible Preferred Stock		—			—			42,370		43		16,905			(17	)		(16,948	)		—			—			—
Stock-based compensation		—			—			—		—		1,846			—			—			—			—			1,846
Issuance of stock from RSUs, net		—			—			1,297		1		161			—			—			—			—			161
Exercise of common stock warrants		—			—			116		—		46			—			—			—			—			46
Net loss		—			—			—		—		—			—			—			—			(10,687	)		(10,687	)
Foreign currency translation adjustment		—			—			—		—		—			—			—			167			—			167
Balances at September 30, 2020		—			—			92,999		93		259,385			1			141			(534	)		(245,234	)		13,851

Balances at June 30, 2019		—			—			21,866		22		229,972			—			—			(712	)		(225,482	)		3,800
Stock-based compensation		—			—			—		—		659			—			—			—			—			659
Issuance of stock from RSUs, net		—			—			88		—		81			—			—			—			—			81
Net loss		—			—			—		—		—			—			—			—			(5,478	)		(5,478	)
Foreign currency translation adjustment		—			—			—		—		—			—			—			(128	)		—			(128	)
Balance at September 30, 2019		—			—			21,954		22		230,712			—			—			(840	)		(230,960	)		(1,066	)

Balance at December 31, 2018		—			—			21,067		21		228,430			—			—			(670	)		(216,692	)		11,089
Exercise of stock options, net		—			—			2		—		3			—			—			—			—			3
Stock-based compensation		—			—			—		—		1,835			—			—			—			—			1,835
Issuance of stock from RSUs, net		—			—			885		1		235			—			—			—			—			236
Warrant issued in connection with debt instruments		—			—			—		—		209			—			—			—			—			209
Net loss		—			—			—		—		—			—			—			—			(14,268	)		(14,268	)
Foreign currency translation adjustment		—			—			—		—		—			—			—			(170	)		—			(170	)
Balance as of September 30, 2019		—			—			21,954		22		230,712			—			—			(840	)		(230,960	)		(1,066	)

	Nine Months Ended
	September 30,
	2020			2019
Cash Flows from Operating Activities:
Net loss	$	(10,687	)	$	(14,268	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation and amortization		527			754
Provision for bad debts		1,263			1,243
Provision for sales returns		87			—
Amortization of discounts on lines of credit		123			103
Amortization of debt issuance costs		240			130
Change in fair value of warrants		(5,850	)		—
Issuance costs for common stock warrants		1,640			—
Earned interest income		—			2
Stock-based compensation		2,367			1,974
Deferred income taxes		—			(6	)
Changes in operating assets and liabilities:
Accounts receivable		4,017			1,393
Inventory		(1,597	)		711
Prepaid expenses and other current assets		430			1,011
Accounts payable and accrued liabilities		(3,445	)		(1,157	)
Deferred revenue		(562	)		36
Net cash and cash equivalents used in operating activities		(11,447	)		(8,074	)
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment		(78	)		(138	)
Net cash and cash equivalents used in investing activities		(78	)		(138	)
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock		6,912			—
Proceeds from the issuance of Series F Convertible Preferred Stock		2,700			—
Proceeds from the issuance of July 2020 Warrants		15,300			—
Payments of equity offering costs		(1,281	)		(50	)
Payment of July 2020 Warrant issuance costs		(1,640	)
Borrowings on other long-term loans		3,140			—
Borrowings under term loan		—			2,500
Principal payment on term loan		(700	)		—
Borrowings on credit facility		3,000			—
Repayment of credit facility		(3,000	)		—
Proceeds from the exercise of common stock warrants		46			—
Payment of debt issuance costs		(75	)		(38	)
Proceeds from exercise of stock options		—			4
Net cash and cash equivalents provided by financing activities		24,402			2,416
Effect of exchange rate changes		181			(157	)
Increase (decrease) in cash, cash equivalents and restricted cash		13,058			(5,953	)
Cash, cash equivalents and restricted cash, beginning of period		6,101			8,356
Cash, cash equivalents and restricted cash, end of period	$	19,159		$	2,403
Supplemental cash flow disclosure:
Cash paid for interest	$	1,438		$	1,315
Cash paid for income taxes	$	21		$	19
Cash paid for operating leases	$	417		$	606
Non-accrual for accrual for equity offering costs	$	—		$	191
Non-cash accrual for capital expenditures	$	—		$	4
Non-cash settlement of performance award liability	$	151		$	236
Non-cash right-of-use assets obtained in exchange for lease obligation	$	2,037		$	824
Deemed dividend on preferred stock	$	17,378		$	—
Warrants issued in connection with debt instruments	$	67		$	209

BIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company”) is a medical device company that develops, manufactures, markets, and sells laser systems in dentistry and medicine. The Company’s products advance the practice of dentistry and medicine for patients and health care professionals. The Company’s proprietary dental laser systems allow dentists, periodontists, endodontists, oral surgeons, and other dental specialists to perform a broad range of minimally invasive dental procedures, including cosmetic, restorative, and complex surgical applications. The Company’s laser systems are designed to provide clinically superior results for many types of dental procedures compared to those achieved with drills, scalpels, and other conventional instruments. The Company has clearance from the Food and Drug Administration (“FDA”) to market and sell its laser systems in the United States and also has the necessary registration to market and sell its laser systems in Canada, the European Union, and many other countries outside the United States.

The unaudited consolidated financial statements include the accounts of BIOLASE and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December 31, 2019 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments and the elimination of all material intercompany transactions and balances, necessary to fairly present the information set forth therein. These unaudited, interim, consolidated financial statements do not include all the footnotes, presentations, and disclosures normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements.

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

The Company incurred losses from operations and used cash in operating activities for the three and nine months ended September 30, 2020. The Company’s recurring losses, level of cash used in operations, and need for additional capital in the future, including uncertainties surrounding the impact of COVID-19, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The COVID-19 pandemic has severely impacted global economic activity, and many countries and many states in the United States have reacted to the pandemic by instituting quarantines, mandating business and school closures and restricting travel. These mandated business closures have included dental office closures in Europe and the United States for all but emergency procedures. The Company’s salespeople were unable to call on dental customers during these closures. In addition, most dental shows and workshops scheduled in the first and second quarters of 2020 were canceled. Although most dental offices in the United States opened in the third quarter, there is no assurance that they will remain open or the Company’s sales will return to normal levels during at any time during 2020 or at any time thereafter. The full impact of the COVID-19 outbreak continues to evolve and it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce and has taken actions to mitigate the impact including among other things, temporary reductions in pay, furloughs of certain positions and deferrals in payment for cash preservation. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.

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

As of the date of issuance of these unaudited financial statements, the Company has not yet determined any future impact that the CARES Act will have on our financial condition, results of operations, or liquidity.

On July 22, 2020, the Company completed a registered rights offering (“the Rights Offering”). Pursuant to the Rights Offering, the Company sold an aggregate of 18,000 units consisting of an aggregate of 18,000 shares of Series F Convertible Preferred Stock and 45,000,000 warrants, with each warrant exercisable for one share of Common Stock, resulting in net proceeds to the Company of approximately $16.1 million, after deducting expenses relating to the Rights Offering, including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants. See Note 4 for additional information.

As of September 30, 2020, the Company had working capital of approximately $14.6 million. The Company’s principal sources of liquidity as of September 30, 2020 consisted of approximately $19.2 million in cash, cash equivalents and restricted cash and $3.4 million of accounts receivable, net, and approximately $1.0 million of availability under the PMB Loan (as defined below).

In order for the Company to continue operations beyond the next 12 months and be able to discharge its liabilities and commitments in the normal course of business, the Company must increase sales of its products, control or potentially reduce expenses and establish profitable operations in order to generate cash from operations or obtain additional funds when needed.

Although the Company received gross proceeds of approximately $24.0 million from the equity offerings in the second and third quarters of 2020, the Company may still have to raise additional capital in the future. Additional capital requirements may depend on many factors, including, among other things, the rate at which the Company’s business grows, the COVID-19 pandemic and the actions taken to contain it, demands for working capital, manufacturing capacity, and any acquisitions that the Company may pursue. From time to time, the Company could be required, or may otherwise attempt, to raise capital through either equity or debt offerings. The Company cannot provide assurance that it will be able to successfully enter into any such equity or debt financings in the future or that the required capital would be available on acceptable terms, if at all, or that any such financing activity would not be dilutive to its’ stockholders.

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates in these consolidated financial statements include allowances on accounts receivable, inventory, and deferred taxes, as well as estimates for accrued warranty expenses, goodwill and the ability of goodwill to be realized, revenue deferrals, effects of stock-based compensation and warrants, contingent liabilities, and the provision or benefit for income taxes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.

Information with respect to the Company’s critical accounting policies, which management believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management as discussed in the Company’s 2019 audited financial statements included in the Company’s 2019 Form 10-K. Management believes that there have been no significant changes during the nine months ended September 30, 2020 in the Company’s critical accounting policies from those disclosed in the Company’s 2019 audited financial statements included in the Company’s 2019 Form 10-K.

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

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

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

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

Substantially all of the Company’s revenue is denominated in U.S. dollars, including sales to international distributors. Only a small portion of its revenue and expenses is denominated in foreign currencies, principally the Euro and Indian Rupee. The Company’s foreign currency expenditures primarily consist of the cost of maintaining offices, consulting services, and employee-related costs. During the three and nine month periods ended September 30, 2020 and 2019, the Company did not enter into any hedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of the Company’s products outside the U.S.

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

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

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU was issued because the London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons. ASU 2020-04 provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022). The Company is currently evaluating alternative benchmark rates to replace LIBOR and is in the process of evaluating the impact that adopting this new accounting standard will have on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope and to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for the Company beginning January 1, 2023, with early adoption permitted beginning January 1, 2019. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

On August 5, 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The amendments to this standard affect entities that issue convertible instruments and/or contracts indexed to and potentially settled in an entity’s own equity. The new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. The amendments in the ASU are effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

Revenue for sales of products and services is derived from contracts with customers. The products and services promised in customer contracts include delivery of laser systems, imaging systems, and consumables as well as certain ancillary services such as training and extended warranties. Contracts with each customer generally state the terms of the sale, including the description, quantity and price of each product or service. Payment terms are stated in the contract and vary according to the arrangement. Because the customer typically agrees to a stated rate and price in the contract that does not vary over the life of the contract, the Company’s contracts do not contain variable consideration. The Company establishes a provision for estimated warranty expense.

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

Revenue from products and services transferred to customers at a single point in time accounted for 86% and 78% of net revenue for the three and nine months ended September 30, 2020 and 77% and 81% for the three and nine months ended September 30, 2019, respectively. The majority of the Company’s revenue recognized at a point in time is for the sale of laser systems and consumables. Revenue from these contracts is recognized when the customer is able to direct the use of and obtain substantially all of the benefits from the product which generally coincides with title transfer during the shipping process.

Revenue from services transferred to customers over time accounted for 14% and 22% of net revenue for the three and nine months ended September 30, 2020 and 23% and 19% for the three and nine months ended September 30, 2019, respectively. The majority of the Company’s revenue that is recognized over time relates to product training and extended warranties. Deferred revenue attributable to undelivered elements, which primarily consists of product training, totaled approximately $0.5 million and $0.6 million as of September 30, 2020 and December 31, 2019, respectively.

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

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

The Company also has contracts that include both the product sales and product training as performance obligations. In those cases, the Company records revenue for product sales at the point in time when the product has been shipped. The customer obtains control of the product when it is shipped, as all shipments are made FOB shipping point, and after the customer selects its shipping method and pays all shipping costs and insurance. The Company has concluded that control is transferred to the customer upon shipment.

Accounts receivable are stated at estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and the Company’s historical experience with accounts receivable write-offs. During the nine months ended September 30, 2020, the Company recorded an additional allowance for doubtful accounts of approximately $1.3 million due to the uncertainties stemming from the impact of COVID-19.

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

The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables at September 30, 2020 and December 31, 2019.

The amount of revenue recognized during the nine-month period ended September 30, 2020 and September 30, 2019 that was included in the opening contract liability balance related to undelivered elements was $0.3 million. and $0.1 million, respectively.

The Company disaggregates revenue from contracts with customers into geographical regions and by the timing of when goods and services are transferred. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors.

The Company’s revenues related to the following geographic areas were as follows for the periods indicated (in thousands):

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

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

The Company acts as the principal in all its imaging equipment distribution sales. The Company takes possession and control of the equipment before they are sold and transferred to the customer. The Company provides the equipment and any related services directly to the customer. The Company has inventory risk before the equipment is transferred to a customer. The Company purchases and obtains the goods before obtaining a contract with a customer. The Company also has discretion in establishing the price sold to the customer for the equipment.

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

At the 2020 Annual Meeting, the Company’s stockholders approved a proposal to amend the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of BIOLASE common stock from 40,000,000 shares to 180,000,000 shares. On May 28, 2020, the Company filed the amendment with the Secretary of State of the State of Delaware to effect such increase.

On July 23, 2020, the Company consummated the sale of an aggregate of 18,000 shares of Series F Convertible Preferred Stock and 45,000,000 warrants (the “July 2020 Warrants”) through the Rights Offering. Each share of Series F Preferred Stock is convertible at the Company’s option at any time on or after July 22, 2021 or at the option of the holder at any time, into the number of shares of our common stock determined by dividing the $1,000 stated value per share of the Series F Preferred Stock by a conversion price of $0.40 per share.

The gross proceeds from the sale of Series F Convertible Preferred Stock and common stock warrants were $18.0 million, before broker fees and related expenses of approximately $1.9 million. Each share of Series F Convertible Preferred Stock is convertible into 2,500 shares of common stock and each July 2020 Warrant entitles the holder thereof to purchase one share of common stock at a conversion price of $0.40 per share.

The initial fair value of the July 2020 Warrants was estimated to be $0.34 per share using the Black-Scholes pricing model with an expected term of 5 years, market price of $0.44 per share, which is the last closing price of our common stock prior to the transaction date, volatility of 109.8%, a risk free rate of 0.27% and an expected dividend yield of 0. The July 2020 warrants were initially recognized as liability and on September 28, 2020, the Warrant Agreement was amended and was reevaluated for equity accounting and reclassified in permanent equity. On the effective date of the amendment, the July 2020 Warrants were remeasured and the change in fair value was recognized as a gain of approximately $5.8 million and is recorded in the consolidated statement of operations in Other (income) expense, net for the three and nine-months ended September 30, 2020. The fair value upon the amendment was estimated to be $0.21 per share using the Black-Scholes pricing model with an expected term of 5 years, a market price of $0.28 per share, which was the last closing price of our common stock prior to the amendment date, volatility of 109.5%, a risk free rate of 0.26% and an expected dividend yield of 0.

The Series F Convertible Preferred Stock contained a beneficial conversion feature which resulted in a deemed dividend to preferred stockholders of approximately $2.7 million. Additionally, the July 2020 Warrants were recognized as a discount to the Series F Convertible Preferred Stock and upon conversion of the Series F Convertible Preferred Stock to common stock, this discount was accreted and also recognized as a deemed dividend to preferred stockholders in the amount of $14.7 million for the three and nine month period ended September 30, 2020.

Issuance costs of $1.6 million relating to the July 2020 Warrants were recognized as an expense and is recorded in Other (income) expense, net in the consolidated statement of operations for the three and nine month period ended September 30 2020. Approximately 17,000 of the Series F Convertible Preferred Stock had been converted to common stock as of September 30, 2020.

The board of directors of BIOLASE (the “Board”), without further stockholder authorization, may from time to time authorize the issuance of up to 1,000,000 shares of the Company’s preferred stock. Of the 1,000,000 shares of preferred stock, 69,565 shares have been designated as Series E Participating Convertible Preferred Stock, par value $0.001 per share (“Series E Preferred Stock”), and 18,000 shares have been designated as Series F Convertible Preferred Stock, par value $0.001 per share (“Series F Preferred Stock”).

In 2019, the Company sold 69,565 shares of Series E Preferred Stock in a private offering. All 69,565 shares of Series E Preferred Stock were automatically converted into 6,956,500 shares of Common Stock upon receipt of the requisite approval at the 2020 Annual Meeting. Upon the conversion, the net proceeds of approximately $4.0 million were reclassified from mezzanine equity to permanent equity. As of September 30, 2020 and December 31, 2019, 0 and 69,565 shares of Series E Preferred Stock were issued and outstanding, respectively.

The shares of Series E Preferred Stock were offered in reliance upon exemptions from registration under the Securities Act of 1933, as amended, afforded by Regulation D and corresponding provisions of state securities laws. The Company subsequently filed a registration statement with the SEC to register the resale of the shares of Common Stock underlying the Series E Preferred Stock.

The 2002 Stock Incentive Plan (as amended effective as of May 26, 2004, November 15, 2005, May 16, 2007, May 5, 2011, June 6, 2013, October 30, 2014, April 27, 2015, and May 6, 2016, the “2002 Plan”) was replaced by the 2018 Plan (as defined below) with respect to future equity awards. Persons eligible to receive awards under the 2002 Plan included officers, employees, and directors of the Company, as well as consultants. As of September 30, 2020, a total of approximately 3.1 million shares of the Company’s common stock have been authorized for issuance

under the 2002 Plan, of which approximately 1.0 million shares of the Company’s common stock have been issued pursuant to options that were exercised and restricted stock units (“RSUs”) that were settled in common stock and 1.1 million shares of common stock have been reserved for outstanding options and unvested RSUs, and no shares are available for future grants.

At the 2018 annual meeting of stockholders, the Company’s stockholders approved the 2018 Long-Term Incentive Plan (as amended, the “2018 Plan”) which was amended by Amendment No. 1 to the 2018 Plan, approved by the Company’s stockholders at a special meeting on September 21, 2018 and Amendment No. 2 to the 2018 Plan, as approved by the Company’s stockholders on May 15, 2019 and Amendment No. 3 to the 2018 Plan, as approved by the Company’s stockholders on May 13, 2020. The purposes of the 2018 Plan are (i) to align the interests of the Company’s stockholders and recipients of awards under the 2018 Plan by increasing the proprietary interest of such recipients in the Company’s growth and success; (ii) to advance the interests of the Company by attracting and retaining non-employee directors, officers, other employees, consultants, independent contractors and agents; and (iii) to motivate such persons to act in the long-term best interests of the Company and its stockholders.

Subject to the terms and conditions of the 2018 Plan, the number of shares authorized for grants under the 2018 Plan is 12.2 million. As of September 30, 2020 a total 5.3 million shares of the Company’s common stock have been reserved for issuance upon the exercise of outstanding options and or settlement of unvested RSUs, and 3.8 million shares of the Company’s common stock remain available for future grants.

The Company recognized stock-based compensation expense of $0.8 million and $0.8 million, for the three month period ended September 30, 2020 and 2019 and $2.4 million and $1.9 million for the nine month period ended September 30, 2020 and September 30, 2019 respectively. As of September 30, 2020, the Company had approximately $1.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested share-based compensation arrangements. The Company expects that expense to be recognized over a weighted-average period of 1.2 years.

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

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

A summary of option activity for the nine months ended September 30, 2020 is as follows (in thousands, except per share data):

A summary of unvested stock option activity for the nine months ended September 30, 2020 is as follows (in thousands, except per share data):

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

During the nine months ended September, 30, 2020, the Company granted approximately 2.9 million RSUs and the Company canceled approximately 1.0 million RSUs with performance based vesting due to non-achievement of the performance targets.

A summary of unvested RSU activity for the nine months ended September 30, 2020 is as follows (in thousands, except per share amounts):

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

On July 23, 2020 the Company consummated the Rights Offering issuing 18,000 shares of Series F Convertible Preferred Stock par value $0.001 and 45,000,000 July 2020 warrants with an exercise price of $0.40 per share. Based on the terms and conditions of the warrants, the Company initially determined that liability classification was appropriate and recognized the fair value of the warrants as a liability. On September 28, 2020 the Warrant Agreement was amended to support classification as equity as described above. Upon the amendment to the Warrant Agreement, the Company remeasured the fair value of the July 2020 as described above and reclassified the value to equity. The Company allocated the net proceeds to the July 2020 Warrants based on their fair value at the commitment date. The initial fair value of the July 2020 Warrants was estimated to be at $0.34 per share using the Black-Scholes pricing model with an expected term of 5 years, market price of $0.44 per share, which is the last closing price of our common stock prior to the transaction date, volatility of 109.8%, a risk free rate of 0.27% and an expected dividend yield of 0. The fair value upon the amendment was estimated to be $0.21 per share using the Black-Scholes pricing model with an expected term of 5 years, a market price of $0.28 per share, which was the last closing price of our common stock prior to the amendment date, volatility of 109.5%, a risk free rate of 0.26% and an expected dividend yield of 0. Based on the fair value of the July 2020 warrants, the Company allocated approximately $2.7 million to the Series F Preferred Stock and $15.3 million to the July 2020 Warrants before issuance costs.

On June 10, 2020, the Company consummated a registered direct offering of 10,800,000 shares of its common stock to certain accredited institutional investors and a concurrent private placement of warrants to purchase up to an aggregate of 10,800,000 shares of common stock with an exercise price of $0.515 per share (“the June 2020 Warrants”). The June 2020 Warrants are exercisable commencing on the date of their issuance and will expire on June 10, 2025. The combined purchase price for one Share and one June 2020 Warrant in the offering was $0.64. The Company received aggregate gross proceeds of approximately $6.9 million in the offering, before deducting fees to the placement agents and other offering expenses of approximately $0.7 million.

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

A summary of warrant activity for the nine months ended September 30, 2020 is as follows (in thousands, except exercise price amounts):

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

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

Outstanding stock options, RSUs and warrants and Series F Convertible Preferred Stock to purchase approximately 67.2 million shares were not included in the calculation of diluted loss per share for the three and nine months ended September 30, 2020, as their effect would have been anti-dilutive. For the same 2019 periods, anti-dilutive outstanding stock options and warrants to purchase 5.6 million shares were not included in the computation of diluted loss per share.

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

Inventory has been reduced by estimates for excess and obsolete amounts totaling $1.0 million and $1.3 million as of September 30, 2020 and December 31, 2019, respectively.

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

Depreciation and amortization expense related to property, plant, and equipment totaled $0.1 million and $0.5 million for the three and nine months ended September 30, 2020 and $0.2 million and $0.8 million for the three and nine months ended September 30, 2019, respectively.

The Company conducted its annual impairment test of goodwill as of June 30, 2020 and determined that there was no impairment. The Company also tests its intangible assets and goodwill between the annual impairment tests if events occur or circumstances change that would more likely than not reduce the fair value of the Company or its assets below their carrying amounts. For intangible assets subject to amortization, the Company performs its impairment test when indicators, such as reductions in demand or significant economic slowdowns, are present. No events have occurred since June 30, 2020 through the date of these unaudited consolidated financial statements that would trigger further impairment testing of the Company’s intangible assets and goodwill.

As of September 30, 2020 and December 31, 2019, the Company had goodwill (indefinite life) of $2.9 million. As of September 30, 2020 and December 31, 2019, all intangible assets have been fully amortized and no amortization expense was recognized during the three and nine months ended September 30, 2020 and 2019.

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

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

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

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

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

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

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

In April, 2020, the Company drew $3.0 million under the PMB Loan and repaid the balance in full during the second quarter. Interest incurred on the loan was not material. In May 2020 it was determined that the Company was not in compliance with the minimum unrestricted cash requirement under the PMB Loan’s existing covenants as of March 31, 2020. On July 30, 2020, the Company obtained a waiver for the covenant violation and entered into the First Amendment to the Loan and Security Agreement (the “First Amendment”). Under the First Amendment to the PMB Loan, the Company obtained a forbearance waiving non-compliance through August 1, 2020 subject to certain conditions. In addition, the First Amendment to the PMB Loan the loan covenants were modified to include (a) on or before July 31, 2020, the Borrower has received net cash proceeds in the amount of at least $8.0 million from the issuance of equity securities and those funds are deposited into accounts maintained by PMB and (b) the Company maintains unrestricted cash at PMB in an aggregate amount of $1.5 million. On July 23, the Company completed its Rights Offering whereby it received net proceeds of approximately $16.0 million.

As of September 30, 2020 and December 31, 2019, the Company had no borrowings outstanding and unused availability under the PMB Loan of approximately $1.5 million and $2.7 million, respectively

On November 9, 2018, the Company entered into a five-year secured Credit Agreement (the “Credit Agreement”) with SWK Funding LLC (“SWK”), pursuant to which the Company has borrowed $12.5 million (“SWK Loan”). The Company’s obligations under the Credit Agreement are secured by substantially all of the Company’s assets. Under the terms of the Credit Agreement, repayment of the SWK loan is interest-only for the first two years, paid quarterly with the option to extend the interest-only period. Principal repayments will begin in the first quarter of 2021 and will be approximately $0.7 million quarterly until the SWK loan matures in the fourth quarter of 2023. The loan bears interest at the London Interbank Bank Offered Rate (“LIBOR”) plus 10% or another index that approximates LIBOR as close as possible if and when LIBOR no longer exists. Approximately $0.9 million of the proceeds from the SWK Loan were used to pay off all amounts owed to Western Alliance Bank under the business financing agreement entered into in 2018.

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

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

As of March 31, 2019, the Company was not in compliance with certain covenants in the Credit Agreement and in May 2019, SWK granted the Company a waiver of such covenants. On May 7, 2019, the Company and SWK agreed to amend the Credit Agreement (the “First Amendment) to increase the total commitment from $12.5 million to $15.0 million, and to revise the financial covenants to (a) adjust minimum revenue and EBITDA levels, (b) require the Company to have a shelf registration statement declared effective by the Securities and Exchange Commission before September 30, 2019, with a proposed maximum aggregate offering price of at least $10.0 million if the Company did not reach set minimum revenue levels for the three-month period ended September 30, 2019, and (c) require minimum liquidity of $1.5 million at all times. The First Amendment provided that if aggregate minimum revenue and EBITDA levels were not achieved by September 30, 2019, the minimum liquidity requirement would be increased to $3.0 million, until the Company has obtained additional equity or debt funding of no less than $5.0 million. In 2019, the Company obtained additional equity financing greater than $5.0 million. The Company borrowed the additional $2.5 million during the year ended December 31, 2019.

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

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

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

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

On May 15, 2020, the Company entered into the Fifth Amendment to its Credit Agreement with SWK (the “Fifth Amendment”). The Fifth Amendment amended the Credit Agreement by providing for minimum consolidated unencumbered liquid assets of $1.5 million prior to June 30, 2020 and $3.0 million on or after June 30, 2020; providing for a minimum aggregate revenue target of $41.0 million for the twelve month period ending June 30, 2020, a related waiver of such minimum revenue target in the event that the Company raises equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly revenue targets; and providing for a minimum EBITDA target of ($7.0 million) for the twelve month period ended June 30, 2020, a related waiver of such minimum EBIDTA target in the event that the Company raises equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly EBITDA targets. The Fifth Amendment contains representations, warranties, covenants, releases, and conditions customary for a credit agreement amendment of this type. On June 8, 2020, SWK agreed to extend the deadline by which the Company is required to raise not less than $10.0 million in equity capital or subordinated debt to July 31, 2020 and agreed that the $6.9 million in proceeds from the offering completed on June 10, 2020 shall be counted toward the $10.0 million requirement On July 22, 2020, the Company consummated the public offering of 18,000 units, each consisting of one share of Series F Convertible Preferred Stock, par value $0.001 per share (“Series F Convertible Preferred Stock”) and 2,500 warrants, each to purchase one share of Common Stock at an exercise price of $0.40 per share, for which it raised gross proceeds of $18.0 million before the payment of dealer-manager fees and associated offering expenses. Based on the extension of the compliance deadline to July 31, 2020, the Company was in compliance with or received a waiver for debt covenants as of June 30, 2020, and there were no covenants in place at September 30, 2020 as described further below.

On August 12, 2020, the Company entered into the Sixth Amendment to the Credit Agreement. Under the Sixth Amendment, the interest only period on the loan was extended through May 2022, the loan maturity date was extended to May 9, 2024, the financial covenants were amended and restated to exclude the remainder of 2020, and a $0.7 million repayment of the principal amount was required upon execution of the agreement.

For each of the above amendments, the Company paid an incremental amendment fee of $25,000 per amendment. These fees are being amortized over the remaining life of the loan as of the date of each amendment.

Due to the continued uncertainty surrounding the impact of COVID-19 on its business and the impact this may have on its ability to meet financial covenants in the future, the Term Loan is classified as a current liability in the unaudited consolidated balance sheets.

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

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

The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.

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

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

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

The Company recognized approximately $0.6 million and $0.6 million and $1.8 million and $1.6 million in interest expense for the three and nine months ended September 30, 2020 and 2019, respectively. The weighted-average interest rate as of September 30, 2020 was 12.25%.

On March 6, 2018, the Company issued to Western Alliance warrants (the “Original Western Alliance Warrants”) to purchase up to the number of shares of common stock equal to $120,000 divided by the applicable exercise price at the time such warrants are exercised. The Original Western Alliance Warrants are fully vested and exercisable. The Original Western Alliance Warrants may be exercised with a cash payment from Western Alliance, or, in lieu of a cash payment, Western Alliance may convert the warrants into a number of shares, in whole or in part. The initial exercise price of the warrants was $2.35 per share. On September 27, 2018, the Company entered into the Second Modification Agreement to amend the Original Business Financing Agreement. In connection with the Second Modification Agreement, the Original Western Alliance Warrants were terminated, and the Company issued new warrants (the “Western Alliance Warrants”) to purchase up to the number of shares of common stock equal to $120,000 divided by the exercise price of $2.13, which was the closing price of the Company’s common stock on September 27, 2018. The Western Alliance Warrants are immediately exercisable and expire on September 27, 2028. These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issue shares at a price per share less than the exercise price. The sale of common stock in the second quarter of 2020 triggered an adjustment to the exercise price to approximately $0.60 per share. The impact of the adjustment to the exercise price was not material.

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

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

In connection with the SWK Loan, the Company paid a finder’s fee to Deal Partners Group of $0.4 million cash and issued warrants to purchase up to 279,851 shares of common stock (the “DPG Warrants”). The DPG Warrants were issued on November 14, 2018, were exercisable immediately, and expire on November 9, 2026. The exercise price of the DPG Warrants is $1.34 which was the average closing price of the Company’s common stock for the ten trading days immediately preceding November 9, 2018. These warrants contain down-round features that require the Company to adjust the exercise price proportionately should the Company issue shares at a price per share less than the exercise price. The fair value of the DPG Warrants of $0.3 million was estimated using the Black Scholes option pricing model with the following assumptions: expected term of 8 years; volatility of 81.79%; annual dividend per share of $0.00; and risk-free interest rate of 3.13%. In November 2019, the exercise price of the DPG Warrants issued on November 9, 2018 was adjusted from $1.34 per share to $0.8767 per share and the exercise price of the DPG Warrants issued on May, 2019 was adjusted from $2.17 per share to $1.4197 per share. The impact of the reprice was de minimis to the unaudited consolidated financial statements. The June 2020 sale of common stock triggered the down round features of these warrants and in August 2020, the Company adjusted the exercise price of these warrants to $0.62 and $0.38 per share the impact of this reprice was not material.

The value of both the SWK Warrants and the DPG Warrants was recognized as a discount on the SWK Loan and are being amortized on a straight-line basis which approximates the effective-interest method, over the loan term of five years. Additionally, based on the adoption of ASU 2017-11 in the fourth quarter of 2018, these warrants are classified as equity in the consolidated balance sheet as of September 30, 2020.

The future minimum principal and interest payments as of September 30, 2020 are as follows (in thousands):

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

In 2020, the Company entered into two real property leases in Foothill Ranch, California and Corona, California. The Foothill Ranch lease is a 11,936 square foot lease and will be used as the Company’s headquarters upon commencement on July 1, 2020. The Corona lease is for an 11,032 square foot facility for the Company’s manufacturing operations. The Corona lease commenced in June 2020 and as a result the Company recorded an right of use asset and offsetting liability in the amount of $0.6 million. The Foothill Ranch lease commenced in July 2020 and the Company recorded a right of use asset and offsetting lease liability of $1.3 million. Because the rate in each of the new leases is not readily determinable, the Company used the IBR of 12.25% to measure the present value of the lease liabilities. The IBR was based on the Company’s SWK Term Loan as amended, which the Company believes is indicative of prevailing market rates.

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

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

Maturities of lease liabilities as of September 30, 2020 for leases that have commenced were as follows (in thousands):

As of September 30, 2020, right-of-use assets were $2.1 million and lease liabilities were $2.1 million.

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

On April 24, 2012, CAO Group, Inc. (“CAO”) filed a lawsuit against BIOLASE in the District of Utah alleging that BIOLASE’s ezlase dental laser infringes on U.S. Patent No. 7,485,116 (the “116 Patent”). On September 9, 2012, CAO amended its complaint, adding claims for (1) business disparagement/injurious falsehood under common law and (2) unfair competition under 15 U.S.C. Section 1125(a). The additional claims stem from a press release that BIOLASE issued on April 30, 2012, which CAO claims contained false statements that are disparaging to CAO and its diode product. The amended complaint sought injunctive relief, treble damages, attorneys’ fees, punitive damages, and interest. Until January 24, 2018, this lawsuit was stayed in connection with United States Patent and Trademark Office proceedings relating to the 116 Patent, which proceedings ultimately culminated in a January 27, 2017 decision by the United States Court of Appeals for the Federal Circuit, affirming the findings of the Patent Trial and Appeal Board, which were generally favorable to the Company. On January 25, 2018, CAO moved for leave to file a second amended complaint to add certain claims, which filing the Company is not opposing.

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

On January 25, 2019 (the “Effective Date”), BIOLASE entered into a settlement agreement (the “Settlement Agreement”) with CAO. Pursuant to the Settlement Agreement, CAO agreed to dismiss with prejudice the lawsuits filed by CAO against the Company in April 2012 and January 2018. In addition, CAO granted to the Company and its affiliates a non-exclusive, non-transferable (except as provided in the Settlement Agreement), royalty-free, fully-paid, worldwide license to the licensed patents for use in the licensed products and agreed not to sue the Company, its affiliates or any of its manufacturers, distributors, suppliers or customers for use of the licensed patents in the licensed products, and the parties agreed to a mutual release of claims. The Company agreed (i) to pay to CAO, within five days of the Effective Date, $500,000 in cash, (ii) to issue to CAO, within 30 days of the Effective Date, 500,000 restricted shares of common stock of the Company (the “Stock Consideration”), and (iii) to pay to CAO, within 30 days of December 31, 2021, an amount in cash equal to the difference (if positive) between $1,000,000 and the value of the Stock Consideration on December 31, 2021. The Stock Consideration vests and becomes transferrable on December 31, 2021, subject to the terms of a restricted stock agreement to be entered into between the parties. The Company considered this a Type I subsequent event and recognized a $1.5 million contingent loss on patent litigation settlement in its statement of operations for the year ended December 31, 2018. In January 2019, the Company paid CAO $500,000 in cash. On January 31, 2019, the case was dismissed with prejudice. During the three-month period ended March 31, 2019, the Company recorded an additional loss on patent litigation of $0.2 million which represented the change in fair value of the restricted stock to be issued to CAO at March 31, 2019. Subsequent to March 31,2019, the Company reversed the additional loss commensurate with the fluctuations in the Company’s share price. In August 2020, the Company signed a Letter Agreement to terminate the Manufacturing Agreement and purchase from CAO raw materials and other inventory held by CAO as part of the original Settlement Agreement. As of September 30, 2020 and December 31, 2019, the accrued liability relating to this agreement was $1.0 million and is included in Other liabilities.

The Company currently operates in a single business segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. For the three and nine months ended September 30, 2020, sales to customers in the United States accounted for approximately 73% and 71% of net revenue and international sales accounted for approximately 27% and 29% of net revenue, respectively. For the three and nine months ended September 30, 2019, sales to customer in the United States accounted for approximately 57% and 61% of net revenue and international sales accounted for 43% and 39%, respectively. No individual country, other than the United States, represented more than 10% of total net revenue during the three and nine months ended September 30, 2020 or 2019.

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

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

Revenue from the Company’s products for the three and nine months ended September 30, 2020 and 2019 are as follows (dollars in thousands):

No individual customer represented more than 10% of the Company’s revenue for the three and nine months ended September 30, 2020 or 2019.

The Company maintains its cash and cash equivalents in money market investment accounts with established commercial banks. Such cash deposits periodically exceed the Federal Deposit Insurance Corporation insured limit.

No individual customer represented more than 10% of the Company’s accounts receivable at September 30, 2020 and December 31, 2019.

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

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

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has elected to classify interest and penalties as a component of its income tax provision. With respect to the liability for unrecognized tax benefits, including related estimates of penalties and interest, the Company did not record a liability for unrecognized tax benefits for the three and nine months ended September 30, 2020 and 2019. The Company does not expect any changes to its unrecognized tax benefit for the next 12 months that would materially impact its consolidated financial statements.

During the three and nine months ended September 30, 2020, the Company recorded an income tax provision of $15,000 and a provision of $49,000 resulting in an effective tax rate of 0.3% and 0.3%, respectively. During the three and nine months ended September 30, 2019, the Company recorded an income tax provision of $26,000 and $68,000 resulting in an effective income tax rate of 0.2% and 0.3%, respectively. The income tax provisions for the three and nine months ended September 30, 2020 and 2019 were calculated using the discrete year-to-date method. The effective tax rate differs from the statutory tax rate of 21% primarily due to the existence of valuation allowances against net deferred tax assets and current liabilities resulting from the estimated state income tax liabilities and foreign tax liability.

The following information should be read in conjunction with the unaudited consolidated financial statements and related notes of BIOLASE, Inc. (“BIOLASE”) and its consolidated subsidiaries (together with BIOLASE, the “Company,” “we,” “our,” or “us”) included elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and our audited consolidated financial statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020 (the “2019 Form 10-K”). In addition to historical information, this discussion and analysis contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include statements, predictions, or expectations regarding market opportunities, sales and marketing expenses, general and administrative expenses, dental office patient volume, investments in engineering and development, compliance with Nasdaq listing requirements, interest rate fluctuations, future products and services and enhancements of existing products and services, potential collaborations, our use of proceeds from the PPP Loan (as defined below), seasonality and the reasons therefor, operating and other expenses, anticipated cash needs, our strategy and any other statement that is not historical fact. Forward-looking statements are identified by the use of words such as “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “continue,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “outlook,” “potential,” “plan,” “seek,” and similar expressions and variations or the negatives of these terms or other comparable terminology.

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

Further information about factors that could materially affect the Company, including our results of operations and financial condition, is contained under “Risk Factors” in Item 1A in the 2019 Form 10-K and in Item 1A to this Form 10-Q. Except as required by law, we undertake no obligation to revise or update any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise.

We are a leading provider of advanced laser systems for the dental industry. We develop, manufacture, market, and sell laser systems that provide significant benefits for dental practitioners and their patients. Our proprietary systems allow dentists, periodontists, endodontists, oral surgeons, and other dental specialists to perform a broad range of minimally invasive dental procedures, including cosmetic, restorative, and complex surgical applications. Our laser systems are designed to provide clinically superior results for many types of dental procedures compared to those achieved with drills, scalpels, and other conventional instruments. Potential patient benefits include less pain, fewer shots, faster healing, decreased fear and anxiety, and fewer appointments. Potential practitioner benefits include improved patient care and the ability to perform a higher volume and wider variety of procedures and generate more patient referrals.

We offer two categories of laser system products: Waterlase (all-tissue) systems and diode (soft-tissue) systems. Our flagship brand, the Waterlase, uses a patented combination of water and laser energy and is FDA cleared for over 80 clinical indications to perform most procedures currently performed using drills, scalpels, and other traditional dental instruments for cutting soft and hard tissue. For example, Waterlase safely debrides implants without damaging or significantly affecting surface temperature and is the only effective, safe solution to preserving sick implants. In addition, Waterlase disinfects root canals more efficiently than some traditional chemical methods. We also offer our diode laser systems to perform soft tissue, pain therapy, and cosmetic procedures, including teeth whitening. As of September 30, 2020 we had approximately 259 issued and 41 pending United States and international patents, the majority of which are related to Waterlase technology. From 1998 through September 30, 2020, we sold over 41,500 laser systems in over 80 countries around the world. Contained in this total are approximately 13,400 Waterlase systems, including over 8,900 Waterlase MD, MDX, Express and iPlus systems.

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

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

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

Due to the limitations associated with traditional and alternative dental instruments, we believe there is a large market opportunity for all-tissue dental laser systems that provide superior clinical outcomes, reduce the need to use anesthesia, help reduce trauma, pain, and discomfort associated with dental procedures, and increase patient acceptance for treatment protocols.

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

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

The COVID-19 pandemic has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak of the novel coronavirus by instituting quarantines, mandating business and school closures and restricting travel. These mandated business closures have included dental office closures worldwide for all but emergency procedures, for the most part. The ability of our salespeople to call on dental customers during these closures was greatly limited. In addition, most dental shows and workshops scheduled in 2020 were canceled. As a result of reduced sales due to the COVID-19 pandemic and actions taken to contain it, cash generated from our operations during the three quarters of 2020 were negatively impacted. The full impact of the COVID-19 outbreak continues to evolve and the full magnitude that the pandemic may have on our financial condition, liquidity, and future results of operations remains uncertain. Although most dental offices in the United States opened in the third quarter, there is no assurance that they will remain open or the Company’s sales will return to normal levels at any time during 2020 or at any time thereafter.

On March 31, 2020, BIOLASE received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying BIOLASE that, based on the BIOLASE’s stockholders’ equity of $377,000 as of December 31, 2019, as reported in the 2019 Form 10-K, BIOLASE was no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2.5 million. BIOLASE has responded to Nasdaq with a specific plan to achieve and sustain compliance with the foregoing listing requirement. If the Company’s plan to regain compliance is accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the letter for the Company to evidence compliance. On June 4, 2020, Nasdaq granted the Company’s request for an extension of time to regain compliance to August 31, 2020. In July 2020, the Company consummated a registered Rights Offering (the “Rights Offering”) for gross proceeds of $18.0 million, and on August 14, 2020, the Company received notification from Nasdaq that it had regained compliance with this requirement.

On December 3, 2019, BIOLASE received a deficiency letter Nasdaq notifying BIOLASE that it violated the continued listing requirements of Nasdaq listing rule 5550(a)(2). In accordance with Nasdaq rules, BIOLASE was provided an initial period of 180 calendar days, or until June 1, 2020, to regain compliance. In response to the COVID-19 pandemic and related extraordinary market conditions, Nasdaq provided temporary relief from the continued listing requirements and the cure period for regaining compliance is tolled through June 30, 2020. As a result of the Company’s deadline to regain compliance was extended to August 15, 2020 (the “Compliance Date”).

Because the Company did not regain compliance with the Bid Price Rule by the Compliance Date, we provided written notice to Nasdaq of our intention to cure the deficiency during an additional 180 calendar day compliance period by effecting a reverse stock split, if necessary, provided that we meet the continued listing requirement for the market value of publicly held shares and all other material listing standards, with the exception of the bid price requirement.

On August 12, 2020, we entered into the Sixth Amendment to the Credit Agreement (the “Sixth Amendment”) with SWK Funding, LLC.. Under the Sixth Amendment, the interest-only period on the loan was extended to May 2022, the loan maturity date was extended to May 9, 2024, the financial covenants are amended and restated to begin in 2021, and a $0.7 million repayment of the principal amount was required upon execution of the Sixth Amendment.

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

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

On July 23, 2020, the Company consummated the sale of an aggregate of 18,000 shares of Series F Convertible Preferred Stock, par value $0.001 per share (“Series F Preferred Stock”) and 45,000,000 warrants (the “July 2020 Warrants”) through the Rights Offering. Each share of Series F Preferred Stock is convertible at the Company’s option at any time on or after July 22, 2021 or at the option of the holder at any time, into the number of shares of our Common Stock determined by dividing the $1,000 stated value per share of the Series F Preferred Stock by a conversion price of $0.40 per share. The gross proceeds from the sale of Series F Convertible Preferred Stock were $18.0 million, before broker fees and related expenses of approximately $1.9 million. Each share of Series F Convertible is convertible into 2,500 shares of common stock and each July 2020 Warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $0.40 per share.

In accordance with applicable accounting standards, the $18.0 million gross proceeds from the Rights Offering described above were allocated to the Series F Convertible Preferred Stock and the July 2020 Warrants in the amount of $2.7 million and $15.3 million, respectively. The allocation was based on the fair value of the July 2020 warrants as of the commitment date, with the residual allocated to the Series F Convertible Preferred Stock. The fair value of the July 2020 Warrants determined using a Black Scholes model. Assumptions used in the Black-Scholes model include an expected term of five years, a risk-free rate of 0.3% and a dividend yield of 0%. The July 2020 warrants were initially recognized as liability and on September 28, 2020, the Warrant Agreement was amended and was reevaluated for equity accounting and reclassified in permanent equity. On the effective date of the amendment, the July 2020 Warrants were remeasured and the change in fair value was recognized as a gain of approximately $5.8 million and is recorded in the consolidated statement of operations in Other (income) expense, net for the three and nine-months ended September 30, 2020. The fair value upon the amendment was estimated to be $0.21 per share using the Black-Scholes pricing model with an expected term of 5 years, a market price of $0.28 per share, which was the last closing price of our common stock prior to the amendment date, volatility of 109.5%, a risk free rate of 0.26% and an expected dividend yield of 0. Issuance costs of $1.6 million relating to the July 2020 Warrants was recognized as an expense and is recorded in Other (income) expense, net in the consolidated statement of operations for the three and nine month period ended September 30 2020. The gross proceeds allocated to the Series F Convertible Preferred Stock was recognized in equity for the period ended September 30, 2020. This transaction resulted in a deemed dividend from accretion of the Preferred Stock discount, resulting in a beneficial conversion feature, allocation of proceeds and issuance costs of approximately $17.4 million, which has been reflected as a deemed distribution to preferred stockholders for the period ended September 30, 2020. Approximately 17,000 of the Series F Convertible Preferred Stock had been converted to common stock as of September 30, 2020.

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses reported during the period. Information with respect to our critical accounting policies that we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the 2019 Form 10-K. There have been no significant changes during the nine months ended September 30, 2020 in our critical accounting policies from those disclosed in Item 7 of the 2019 Form 10-K.

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

	Three Months Ended						Three Months Ended						Nine Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2020						2019						2020						2019
Products and services	$	6,539		100.0		%	$	8,646		100.0		%	$	14,260		100.0		%	$	27,617		100.0		%
Cost of revenue		4,265		65.2		%		5,677		65.7		%		9,692		68.0		%		17,746		64.3		%
Gross profit		2,274		34.8		%		2,969		34.3		%		4,568		32.0		%		9,871		35.7		%
Operating expenses:
Sales and marketing		2,678		41.0		%		3,515		40.7		%		7,475		52.4		%		10,665		38.6		%
General and administrative		2,300		35.2		%		3,210		37.1		%		7,446		52.2		%		8,114		29.4		%
Engineering and development		963		14.7		%		1,126		13.0		%		2,644		18.5		%		3,665		13.3		%
Total operating expenses		5,941		90.9		%		7,851		90.8		%		17,565		123.2		%		22,444		81.3		%
Loss from operations		(3,667	)	(56.1	)	%		(4,882	)	(56.5	)	%		(12,997	)	(91.1	)	%		(12,573	)	(45.5	)	%
Non-operating (income) loss, net		(3,694	)	(56.5	)	%		570		6.6		%		(2,359	)	(16.5	)	%		1,627		5.9		%
Income (loss) before income taxes		27		0.4		%		(5,452	)	(63.1	)	%		(10,638	)	(74.6	)	%		(14,200	)	(51.4	)	%
Income tax provision		15		0.2		%		26		0.3		%		49		0.3		%		68		0.2		%

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

Management believes that the presentation of this non-GAAP financial information provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provides a more complete understanding of our financial performance, competitive position, and prospects for the future. However, the non-GAAP financial measures presented in this Form 10-Q have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by us may be different from similarly named non-GAAP financial measures used by other companies.

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

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

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

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

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

Total net revenue decreased by $2.1 million or 24% during the three months ended September 30, 2020 as compared to the same period in 2019 primarily due to decreases in sales as a result of the global COVID-19 pandemic. In the U.S., net revenue decreased by $0.2 million, or 4% for the three months ended September 30, 2020 compared to the same period in 2019. Outside the U.S., net revenue declined by $1.9 million, or 52% during the three months ended September 30, 2020 as compared to the same period in 2019. We believe dental offices in the United States have generally been quicker to return to prior patient volume, compared to the rest of the world, resulting in better comparative revenue results in the United States.

Cost of Revenue and Gross Profit: The following table summarizes our unaudited cost of revenue and gross profit for the three months ended September 30, 2020 and 2019, as well as the amount of change and percentage of change (dollars in thousands):

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, product costs and revenue levels. Gross profit for the three months ended September 30, 2020, was $2.3 million, or 34.8% of net revenue, a decrease of approximately $0.7 million, or 23% as compared with gross profit of $3.0 million or 34.3% of net revenue for the same period in 2019. The 23% decrease in gross profit reflects the impact of the decrease in revenues from the COVID-19 pandemic and our fixed manufacturing costs, partially offset by increased average selling prices for products sold in the United States and higher percentage of U.S. revenue during third quarter of 2020 compared to the same period in 2019.

Operating Expenses: The following table summarizes our unaudited operating expenses for the three months ended September 30, 2020 and 2019, as well as the amount of change and percentage of change (dollars in thousands):

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

Sales and Marketing Expense. Sales and marketing expenses during the three months ended September 30, 2020 decreased by $0.8 million or 24% as compared to the same period in 2019. This decrease is primarily due to decreases of $0.2 million in sales commissions, $0.3 million in travel and travel related expenses, and $0.3 million in trade show expenses which are primarily due to the impact of the COVID-19 pandemic on our business operations. If the recent reopening of dental offices persists, we expect our fourth quarter sales and marketing expense to increase for the remainder of the year ended December 31, 2020.

General and Administrative Expense. General and administrative expenses during the three months ended September 30, 2020 decreased by $0.9 million or 28% compared to the same period in 2019, primarily due to a decrease in the provision for doubtful accounts of $0.9 million, a $0.1 million decrease in licensing fees offset by an increase in compensation expense of $0.1 million.

Engineering and Development Expense. Engineering and development expenses during the three months ended September 30, 2020 decreased by $0.2 million or 15% compared to the same period in 2019, primarily due to a $0.1 million decrease in payroll and consulting-related expenses driven by a reduction in engineering projects for 2020 as compared to 2019. We expect to continue our investment in engineering and development activity in the remainder of 2020. However, our primary focus will be on our sales and marketing efforts.

Gain (Loss) on Foreign Currency Transactions. We realized a $53,000 gain on foreign currency transactions during the three months ended September 30, 2020 compared to a $19,000 loss on foreign currency transactions during the three-months ended September 30, 2019, primarily due to exchange rate fluctuations between the U.S. dollar and Euro, as well as other foreign currencies.

Interest Expense, Net. Interest expense was $0.6 million during the three months ended September 30, 2020 and was consistent with the same period in 2019. We expect interest expense to fluctuate depending on the movement in the London Interbank Bank Offered Rate (“LIBOR”) through the remainder of 2020 and the outstanding balance of our PMB Loan (if any).

Other (Income) Expense, Net. Other (Income) Expense for the three months ended September 30, 2020, is comprised of a $5.8 million gain on the change in fair value of the July 2020 Warrants offset by the costs to issue the July 2020 warrants of approximately $1.6 million.

Income Tax Provision. We use a discrete year-to-date method in calculating quarterly provision for income taxes. Our provision for income taxes was a expense of $15,000 for the three months ended September 30, 2020 as compared to a provision of $26,000 for the same period in the prior year. For additional information regarding income taxes, see Part I, Item I, Note 14 – Income Taxes.

Net Income (Loss). Our net income (loss) totaled approximately $12,000 for the three months ended September 30, 2020 compared to a net loss of $5.5 million for the three-months ended September 30, 2019, before the deemed dividend on convertible preferred stock of $17.4 million.

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

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

Total net revenue decreased by $13.4 million or 48% during the nine months ended September 30, 2020 as compared to the same period in 2019. In the U.S., net revenue decreased by $6.9 million, or 41% and outside the U.S., net revenue declined by $6.5 million, or 61% during the nine months ended September 30, 2020 as compared to the same period in 2019, primarily due to the impact of the global COVID-19 pandemic.

Cost of Revenue and Gross Profit: The following table summarizes our unaudited cost of revenue and gross profit for the for the nine months ended September 30, 2020 and 2019, as well as the amount of change and percentage of change (dollars in thousands):

Gross profit as a percentage of revenue typically fluctuates with product and regional mix, selling prices, product costs and revenue levels. Gross profit for the nine months ended September 30, 2020, was $4.6 million, or 32% of net revenue, a decrease of approximately $5.3 million, or 54% as compared with gross profit of $9.9 million or 36% of net revenue for the same period in 2019. The 54% decrease in gross profit reflects the impact of the decrease in revenues from the COVID-19 pandemic and our fixed manufacturing costs.

Operating Expenses: The following table summarizes our unaudited operating expenses for the for the nine months ended September 30, 2020 and 2019, as well as the amount of change and percentage of change (dollars in thousands):

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

Sales and Marketing Expense. Sales and marketing expenses during the nine months ended September 30, 2020 decreased by $3.2 million or 30% as compared to the same period in 2019, primarily due to the impact of the COVID-19 pandemic on sales operations resulting in decreased payroll and benefits of $0.6 million, sales commissions of $0.8 million, marketing and convention event related costs of $1.0 million and travel and entertainment expenses of $0.8 million. We expect sales and marketing expenses to increase as a percentage of revenue during the fourth quarter of 2020.

General and Administrative Expense. General and administrative expenses during the nine months ended September 30, 2020 decreased by $0.7 million or 8% compared to the same period in 2019, primarily due to a decrease in payroll and consulting costs of $0.8 million and a $0.3 million decrease in bank fees partially offset by an increase in compensation expense of $0.2 million, licensing fees of $0.2 million and investor relations fees of $0.1 million. We expect general and administrative expenses to increase as a percentage of revenue in the fourth quarter of 2020.

Engineering and Development Expense. Engineering and development expenses during the nine months ended September 30, 2020 decreased by $1.0 million or 28% compared to the same period in 2019, primarily due to a $0.8 million decrease in payroll and consulting-related expenses and a decrease in travel and entertainment and other expenses of $0.2 million. We expect engineering and development expenses to decrease as a percentage of revenue through the remainder of 2020.

(Loss) Gain on Foreign Currency Transactions. We realized a $68,000 loss on foreign currency transactions during the nine months ended September 30, 2020 compared to a $68,000 loss on foreign currency transactions during the nine months ended September 30, 2019, primarily due to exchange rate fluctuations between the U.S. dollar and Euro, as well as other foreign currencies.

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

Other (Income) Expense, Net. Other (Income) Expense for the nine months ended September 30, 2020, is comprised of a $5.8 million gain on the change in fair value of the July 2020 Warrants offset by the costs to issue the July 2020 warrants of approximately $1.6 million.

Income Tax Provision. We use a discrete year-to-date method in calculating quarterly provision for income taxes. Our provision for income taxes was $49,000 for the nine months ended September 30, 2020 and $68,000 September 30, 2019. For additional information regarding income taxes, see Part I, Item I, Note 14 – Income Taxes.

Net Income (Loss). Our net loss totaled approximately $10.7 million for the nine months ended September 30, 2020 compared to a net loss of $14.3 million for the nine months ended September 30, 2019, before the deemed dividend on convertible preferred stock of $17.4 million.

At September 30, 2020, we had approximately $19.2 million in cash, cash equivalents and restricted cash. Management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. The increase in our cash, cash equivalents and restricted cash of $13.0 million at September 30, 2020 as compared to December 31, 2019 was primarily due to the net proceeds from the registered direct private placement and the Rights Offering consummated during the nine months ended September 30nine months ended September 30, 2020.

The following table summarizes our change in cash, cash equivalents and restricted cash (in thousands):

Net cash used in operating activities consists of our net loss, adjusted for our non-cash charges, plus or minus working capital changes. Cash used in operating activities for the nine months ended September 30, 2020 totaled $11.4 million and was primarily comprised of our net loss of $10.7 million, partially offset by non-cash adjustments for depreciation and amortization expenses of $0.5 million and stock-based compensation expenses of $2.4 million and our provision for bad debt of $1.3 million, gain on the change in fair value of the July 2020 Warrants of $5.8 million, and issuance costs for the July 2020 Warrants of $1.6 million . The net decrease in our operating assets and liabilities was primarily due to a $4.0 million decrease in accounts receivable primarily due to the impact of the COVID-19 pandemic on our revenues offset by an increase of $1.6 million in inventory and a decrease in accounts payable and accrued liabilities of $3.4 million.

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

Net cash provided by financing activities for the nine months ended September 30, 2020 was approximately $24.4 million primarily due to the funds borrowed on the PPP Loan and the sale of common stock from our registered direct private placement and sale of preferred stock as further described below.

The effect of exchange rate changes on cash for the nine months ended September 30, 2020 was $181,000 and ($157,000), respectively primarily due to fluctuations between the U.S. Dollar and the Euro.

As of September 30, 2020, we had working capital of approximately $14.6 million. Our principal sources of liquidity as of September 30, 2020consisted of approximately $19.2 million in cash, cash equivalents and restricted cash and $3.4 million of net accounts receivable and any availability under our credit facility with Pacific Mercantile Bank.

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

Furthermore, in order for us to continue operations beyond the next 12 months and be able to discharge our liabilities and commitments in the normal course of business, we must sell our products directly to end users and through distributors, establish profitable operations through increased sales, decrease expenses, generate cash from operations, or obtain additional funds when needed. We intend to improve our financial condition and ultimately improve our financial results by increasing revenues through expansion of our product offerings, continuing to expand and develop our field sales force and distributor relationships both domestically and internationally, forming strategic arrangements within the dental and medical industries, educating dental and medical patients as to the benefits of our advanced medical technologies, and reducing expenses.

On November 9, 2018, we entered into a five-year secured Credit Agreement (“Credit Agreement”) with SWK Funding LLC (“SWK”), pursuant to which we borrowed $12.5 million (“SWK Loan”). Our obligations under the Credit Agreement are secured by substantially all of our assets. Under the terms of the Credit Agreement, repayment of the loan is interest-only for the first two years, paid quarterly with the option to extend the interest-only period. Principal repayments will begin in the second quarter of 2021 and will be approximately $0.7 million quarterly until the loan matures in the fourth quarter of 2023. The loan bears interest at London Interbank Bank Offered Rate (“LIBOR”) plus 10% or another index that approximates LIBOR as close as possible if and when LIBOR no longer exists. Approximately $0.9 million of the proceeds from the SWK Loan were used to pay off all amounts owed to Western Alliance Bank. In connection with the Credit Agreement, we issued warrants to SWK (the “SWK Warrants”) on November 9, 2018 to purchase up to 372,023 shares of BIOLASE common stock and on May 7, 2019, to purchase up to 115,175 shares of BIOLASE common stock. The SWK Warrants were immediately exercisable and expire 7 years after the applicable issuance date. The exercise price of the SWK Warrants issued on November 9, 2018 is $1.34, and the exercise price of the SWK Warrants issued on May 7, 2019 is $2.17, both of which were based on the average closing price of BIOLASE common stock for the ten trading days immediately preceding the applicable issuance date.

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

As of March 31, 2019, we were not in compliance with certain covenants in the Credit Agreement, as described in Note 9 to the consolidated financial statements included in Item 1 of this Form 10-Q, and in May 2019, SWK granted us a waiver of such covenants. On May 7, 2019, we and SWK agreed to amend the Credit Agreement (the “First Amendment) to increase the total commitment from $12.5 million to $15.0 million, and to revise the financial covenants to (i) adjust minimum revenue and EBITDA levels, (ii) require the us to have a shelf registration statement declared effective by the Securities and Exchange Commission before September 30, 2019, with a proposed maximum aggregate offering price of at least $10.0 million if we did not reach set minimum revenue levels for the three-month period ended September 30, 2019, and (iii) require minimum liquidity of $1.5 million at all times. The First Amendment provides that if aggregate minimum revenue and EBITDA levels are not achieved by September 30, 2019, the minimum liquidity requirement will be increased to $3.0 million, until we have obtained additional equity or debt funding of no less than $5.0 million. In connection with the First Amendment, we paid to SWK loan origination and other fees of approximately $0.1 million payable in cash and approximately $0.2 million in additional warrants to purchase BIOLASE common stock. In 2019, we borrowed the additional $2.5 million.

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

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

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

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

On June 8, 2020, SWK agreed to extend the deadline by which we were required to raise not less than $10.0 million in equity capital or subordinated debt to July 31, 2020 and agreed that the $6.9 million in proceeds from the offering completed on June 10, 2020 shall be counted toward the $10.0 million requirement. On July 22, 2020, we consummated the public offering of 18,000 units, each consisting of one share of Series F Convertible Preferred Stock, par value $0.001 per share and 2,500 July 2020 Warrants, each entitling the holder thereof to purchase one share of Common Stock at an exercise price of $0.40 per share, for which it raised gross proceeds of $18.0 million before the payment of dealer-manager fees and associated offering expenses of approximately $2.2 million. In connection with the Fifth Amendment, on May 15, 2020 we entered into the Third Consolidated, Amended and Restated Warrant pursuant to which we issued additional warrants to SWK to purchase 63,779 shares of common stock with a warrant price per share of $0.39198, and adjusted the warrant price per share with respect to 487,198 existing warrant shares previously issued to SWK to $0.39198. Based on the extension of the compliance deadline to July 31, 2020, we were in compliance with or received a waiver for debt covenants as of June 30, 2020.

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

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

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

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

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

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

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

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

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

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

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

As of September 30, 2020, we had no balances outstanding and had approximately $0.8 million of availability under the PMB Loan.

On April 14, 2020, we were granted a PPP Loan from Pacific Mercantile Bank in the aggregate amount of $2,980,000, pursuant to the Paycheck Protection Program under the CARES Act.

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

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

On May 22, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the United States Small Business Administration (the “SBA”) under its Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic on the our business. The principal amount of the EIDL Loan is $150,000.00, with proceeds to be used for working capital purposes. Interest on the EIDL Loan accrues at the rate of 3.75% per annum and installment payments, including principal and interest, are due monthly beginning twelve months from the date of the EIDL Loan. The balance of principal and interest is payable 30 years from the date of the promissory note.

On June 10, 2020, we consummated a registered direct offering of 10,800,000 shares of its common stock to certain accredited institutional investors and a concurrent private placement of warrants to purchase 10,800,000 shares of common stock with an exercise price of $0.515 per share (the “June 2020 Warrants”). The June 2020 Warrants are exercisable commencing on the date of their issuance and will expire on June 10, 2025.

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

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

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

BIOLASE^®, ZipTip^®, ezlase^®, eztips^®, ComfortPulse^®, Waterlase^®, Waterlase Dentistry^®, Waterlase Express^®, iLase^®, iPlus^®, Epic^®, Epic Pro^®, WCLI^®, World Clinical Laser Institute^®, Waterlase MD^®, Waterlase Dentistry^®, and EZLase^® are registered trademarks of BIOLASE, and Pedolase™ is a trademark of BIOLASE. All other product and company names are registered trademarks or trademarks of their respective owners.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were not effective as described below, such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any change in our internal control over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the material weaknesses and remediation discussed below.

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

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

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

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

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

On March 31, 2020, BIOLASE received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying BIOLASE that, based on the BIOLASE’s stockholders’ equity of $377,000 as of December 31, 2019, as reported in its Annual Report on Form 10-K for the year ended December 31, 2019, BIOLASE was no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2.5 million. We responded to Nasdaq with a specific plan to achieve and sustain compliance with the foregoing listing requirement. On June 4, 2020, Nasdaq granted our request for an extension of time to regain compliance to August 31, 2020. In July 2020, BIOLASE consummated a registered rights offering for gross proceeds of $18.0 million, and on August 14, 2020, the Company received notification from Nasdaq that it had regained compliance with Nasdaq listing rule 5550(b)(1). There is no assurance that the Company will remain in compliance.

On December 3, 2019, we received a deficiency letter from the Listing Qualifications Department of Nasdaq stating that, for the preceding 30 consecutive business days, the bid price for Common Stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq rules, we had until June 1, 2020 to regain compliance with the Bid Price Rule. In response to the COVID-19 pandemic and related extraordinary market conditions, Nasdaq provided temporary relief from the continued listing requirements and the cure period for regaining compliance was tolled through June 30, 2020. As a result, the Company’s deadline to regain compliance was August 15, 2020 (the “Compliance Date”).

Because we did not regain compliance with the Bid Price Rule by the Compliance Date, we provided written notice to Nasdaq of our intention to cure the deficiency during an additional 180 calendar day compliance period, by effecting a reverse stock split, if necessary, provided that we meet the continued listing requirement for the market value of publicly held shares and all other initial listing standards, with the exception of the bid price requirement.

If we do not regain compliance with the Bid Price Rule during the additional compliance period, the Staff will provide written notification to us that our common stock may be delisted. At that time, we may appeal the Staff’s delisting determination to a Nasdaq Listing Qualifications Panel.

We intend to monitor the closing bid price of our common stock and may, if appropriate, consider available options to regain compliance with the Bid Price Rule. However, we may not regain compliance with the Bid Price Rule or any of the other Nasdaq continued listing requirements in the future.

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

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

On April 14, 2020, BIOLASE obtained a loan (the “PPP Loan”) from Pacific Mercantile Bank in the aggregate amount of $2,980,000, pursuant to the Paycheck Protection Program under the CARES Act. On April 23, 2020, the Secretary of the United States Department of the Treasury stated that the Small Business Administration will perform a full review of any PPP loan over $2.0 million before forgiving the loan. In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, the maintenance of our entire workforce, notwithstanding certain obvious “work-from-home” limitations associated with the nature of our business. We also took into account our need for additional funding to continue operations, and our ability to access alternative forms of capital in the then-current market environment. Following this analysis, we believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the objectives of the PPP of the CARES Act. If it is later determined that we were ineligible to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties and adverse publicity, which could have a material adverse effect on our business, results of operations, and financial condition.

We believe that we used the proceeds of the PPP Loan in a manner that will entitle us to full forgiveness.

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

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

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

We had an accumulated deficit of approximately $245 million at September 30, 2020. We recorded net losses of approximately $10.7 million, $17.9 million, $21.5 million, and $16.9 million for the nine months ended September 30, 2020 and the years ended December 31, 2019, 2018, and 2017, respectively. In order to achieve profitability, we must increase net revenue through new sales and control our costs. Failure to increase our net revenue and decrease our costs could cause our stock price to decline and could have a material adverse effect on our business, financial condition, and results of operations.

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

Under the Credit Agreement dated November 9, 2018 (as amended from time to time, the “Credit Agreement”), between BIOLASE and SWK Funding, LLC (“SWK”), we are required to maintain a specified amount of consolidated unencumbered liquid assets as of the end of each fiscal quarter, generate minimum levels of revenue as of the end of each period specified in the Credit Agreement and maintain specified levels of consolidated EBITDA as of the end of each period specified in the Credit Agreement. Our ability to comply with these covenants may be affected by factors beyond our control. Pursuant to the terms and conditions of the Second Amendment to the Credit Agreement, dated as of September 30, 2019, between BIOLASE and SWK, SWK agreed to waive the BIOLASE’s non-compliance with the consolidated unencumbered liquid assets requirement for the quarter ended September 30, 2019, subject to the satisfaction of certain conditions prior to October 31, 2019. In connection with such amendment, SWK agreed that we could enter into a revolving loan facility in an amount up to $5.0 million that would be secured by our inventory and accounts receivable, subject to the terms and conditions set forth in that amendment. On October 28, 2019, the Company entered into a loan and security agreement with Pacific Mercantile Bank (the “PMB Loan”), which provides a revolving line of credit. The PMB Loan requires the Company to maintain certain levels of liquidity and to raise at least $5.0 million through the sale of equity securities before December 31, 2019. In the fourth quarter of 2019, the Company consummated the sale of approximately 9.0 million shares of Common Stock for gross proceeds of $5.2 million and the sale of approximately 69,650 shares of its Series E Participating Convertible Preferred Stock, par value $0.001 per share (“Series E Preferred Stock”), for gross proceeds of approximately $4.0 million. On May 13, 2020, our stockholders approved the issuance of such number of shares of Common Stock as are issuable upon the full conversion of our Series E Preferred Stock. Our ability to comply with the covenants in our debt agreements may be affected by factors beyond our control, including, without limitation, the impact of the COVID-19 pandemic and efforts taken to contain it. Pursuant to five separate amendments to the Credit Agreement, SWK has agreed to waive BIOLASE’s non-compliance with certain financial covenants in the Credit Agreement as of March 31, 2019, September 30, 2019, December 31, 2019 and March 31, 2020. We were not in compliance with the financial covenants in the Credit Agreement as of March 31, 2020.

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

There is no assurance that we will be able to obtain similar waivers of non-compliance in the future. If we fail to comply with the covenants contained in the PMB Loan or the Credit Agreement or if the Required Lenders (as defined in the Credit Agreement) contend that we have failed to comply with these covenants or any other restrictions, it could result in an event of default under the PMB Loan or the Credit Agreement, as the case may be, which would permit or, in certain events, require PMB or SWK to declare all amounts outstanding thereunder to be immediately due and payable. There can be no assurances that we will be able to repay all such amounts or able to find alternative financing in an event of a default. Even if alternative financing is available in an event of a default under the PMB Loan or the Credit Agreement, it may be on unfavorable terms, and the interest rate charged on any new borrowings could be substantially higher than the interest rate under the PMB Loan or the Credit Agreement, thus adversely affecting cash flows, results of operations, and ultimately, our ability to meet operating cash flow requirements.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited):	3
	Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	3
	Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2020 and September 30, 2019	4
	Consolidated Statements of Redeemable Preferred Stock and Stockholders’ Equity for the three and nine months ended September 30, 2020 and September 30, 2019	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
PART II	OTHER INFORMATION	49
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 5	Other Information	52
Item 6.	Exhibits	53
Signatures		57

	September 30,			December 31,
	2020			2019
	(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	18,847		$	5,789
Restricted cash		312			312
Accounts receivable, less allowance of $3,837 and $2,531 in 2020 and 2019, respectively		3,393			8,760
Inventory		12,592			10,995
Prepaid expenses and other current assets		903			1,163
Total current assets		36,047			27,019
Property, plant, and equipment, net		742			1,193
Goodwill		2,926			2,926
Right of use asset		2,061			276
Other assets		220			433
Total assets	$	41,996		$	31,847
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,592		$	5,332
Accrued liabilities		4,279			4,744
Deferred revenue, current portion		1,616			2,237
Term loan (net of discount)		12,946			13,466
Total current liabilities		21,433			25,779
Deferred revenue		412			358
Warranty accrual		204			245
Non current term loans		3,140			—
Non current operating lease liability		1,859			4
Other liabilities		1,097			1,119
Total liabilities		28,145			27,505
Commitments and contingencies — Note 11
Redeemable preferred stock:
Series E Preferred stock, par value $0.001 per share; 1,000 shares authorized, 0 and 70 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	$	—		$	3,965
Total redeemable preferred stock		—			3,965
Stockholders' equity:
Series F Preferred stock, par value $0.001 per share; 1,000 shares authorized, 1 and 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	$	141		$	—
Common stock, par value $0.001 per share; 180,000 and 40,000 shares authorized, 93,044 and 31,439 shares issued and 92,999 and 31,439 outstanding as of September 30, 2020 and December 31, 2019, respectively		93			31
Additional paid-in-capital		259,385			235,594
Accumulated other comprehensive loss		(534	)		(701	)
Accumulated deficit		(245,234	)		(234,547	)
Total stockholders' equity		13,851			377
Total liabilities, redeemable preferred stock and stockholders' equity	$	41,996		$	31,847

	September 30,		December 31,
	2020		2019
Undelivered elements (training, installation, product and support services)	$	487	$	559
Extended warranty contracts		1,541		2,063
Total deferred revenue		2,028		2,622
Less long-term portion of deferred revenue		412		385
Total deferred revenue — long -term		412		385
Deferred revenue — current	$	1,616	$	2,237

				Weighted		Weighted Average Remaining
				Average		Contractual		Aggregate
	Shares			Exercise Price		Term (Years)		Intrinsic Value(1)
Options outstanding at December 31, 2019		1,287		$	5.77			$	—
Granted at fair market value		1,241		$	0.38
Exercised		—		$	—
Forfeited, cancelled, or expired		(124	)	$	5.35
Options outstanding at September 30, 2020		2,404		$	3.01		7.38	$	—
Options exercisable at September 30, 2020		1,060		$	6.19		4.68	$	—
Vested options expired during the period ended September 30, 2020		17		$	13.2

				Weighted
				Average Grant
	Shares			Date Fair Value
Unvested options at December 31, 2019		254		$	1.44
Granted		1,242		$	0.29
Vested		(137	)	$	1.46
Forfeited or cancelled		(15	)	$	2.56
Unvested options at September 30, 2020		1,344		$	0.37

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

	Principal		Interest⁽¹⁾
2020 (three months)		—		461
2021		—		1,807
2022		5,094		1,746
2023		2,800		1,390
2024		9,409		1,866
2025 and thereafter		137		122
Total future payments	$	17,440	$	7,392

(1) estimated using LIBOR rates as at September 30, 2020

	Three Months Ended,
	September 30, 2020
Cash paid for operating lease liabilities	$	87
Right-of-use assets obtained in exchange for new operating lease obligations		1,440
Weighted-average remaining lease term	4.9 years
Weighted-average discount rate		12.3	%

	Nine Months Ended,
	September 30, 2020
Cash paid for operating lease liabilities	$	417
Right-of-use assets obtained in exchange for new operating lease obligations		2,037
Weighted-average remaining lease term	5.2 years
Weighted-average discount rate		12.3	%

Due in 12 month period ended September 30,
2021	$	478
2022		567
2023		584
2024		587
2025		529
Thereafter		128
	$	2,873
Less imputed interest		800
Total lease liabilities	$	2,073

Current operating lease liabilities		214
Non-current lease liabilities		1,859
Total lease liabilities	$	2,073

	Year Ended
	December 31,
2020 (three months)	$	68
2021		547
2022		573
2023		588
2024		587
2025		510
Total future minimum lease obligations	$	2,873

		BIOLASE, INC.
		(Registrant)


November 13, 2020	By:	/s/ Todd A. Norbe
Date		Todd A. Norbe
		President and Chief Executive Officer
			(Principal Executive Officer)


November 13, 2020	By:	/s/ JOHN R. BEAVER
Date		John R. Beaver
		Executive Vice President, Chief Financial Officer, and Chief Operating Officer
			(Principal Financial Officer and
			Principal Accounting Officer)