NOTE 13—NON-RECURRING EVENT

On April 12, 2012, the Company completed the 2012 Termination Agreement with HSIC whereby the Company purchased HSIC’s inventory of Waterlase MD Turbo laser systems for approximately $1.1 million and HSIC released its liens on the Company’s assets. Pursuant to the terms of the 2012 Termination Agreement, the Company paid the entire purchase price by offsetting accounts receivable currently due from HSIC from sales made in the normal course of business. None of the funds used to offset the purchase price were related to the original sales of the MD Turbo laser systems that were purchased.

As a result of the transaction, the Company recorded a decrease to accounts receivable of approximately $1.1 million with a corresponding decrease to revenue to pay for the purchase of the Waterlase MD Turbo laser systems. The Company also recorded an increase to inventory for the same amount with a corresponding decrease to cost of revenue to record the inventory acquired. As such, while the Company’s revenues and cost of revenues were both reduced by $1.1 million to record the effects of the transaction, there was no effect on the Company’s gross profit during the quarter ended June 30, 2012. In addition, the Company de-recognized approximately $155,000 of accounts receivable due from HSIC related to support services previously provided to HSIC and approximately $142,000 of accrued warranties previously provided to HSIC during the three months ended March 31, 2012. During the quarter ended June 30, 2012, the Company reversed accrued sales and marketing service liabilities of approximately $350,000 because the liability was extinguished with the completion of the performance obligations set forth in the 2012 Termination Agreement.