NOTE 1—BASIS OF PRESENTATION

The Company

BIOLASE, Inc., (the “Company”) incorporated in Delaware in 1987, is a biomedical company operating in one reportable business segment that develops, manufactures, and markets proprietary lasers in dentistry and medicine and also markets and distributes two-dimensional (“2-D”) and three-dimensional (“3-D”) digital imaging equipment and CAD/CAM intra-oral scanners; products that are focused on technologies that advance the practice of dentistry and medicine.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of BIOLASE, Inc. and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December 31, 2012 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. Certain amounts have been reclassified to conform to current period presentations.

The consolidated results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”) filed with the Securities and Exchange Commission on March 15, 2013.

Use of Estimates

The preparation of these consolidated financial statements in conformity with 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, indefinite-lived intangible assets, and the ability of goodwill to be realized, revenue deferrals for multiple element arrangements, 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.

Update to Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies which are described in the Company’s 2012 Form 10-K, except as noted below. See Note 2 – Recent Accounting Pronouncements for adoption of updated authoritative guidance.

Excise Tax

Commencing January 1, 2013, certain of the Company’s product sales are subject to the newly enacted medical device excise tax. The Company has included such taxes separately as a component of operating expense.

Income Tax

The income tax provision for the three and nine months ended September 30, 2013 was calculated using the discrete year-to-date method, which management determined to be more appropriate than the annual effective rate method which was used to calculate the income tax provision for the quarter ended March 31, 2013. See Note 12 – Income Taxes for additional disclosures related to the Company’s income tax.

Fair Value of Financial Instruments

The Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate fair value because of the short maturity of these items. Financial instruments consisting of lines of credit approximate fair value, as the interest rates associated with the lines of credit approximates the market rates for debt securities with similar terms and risk characteristics.

Liquidity and Management’s Plans

The Company suffered recurring losses from operations during the three years ended December 31, 2012. The Company also incurred a loss from operations, a net loss, and used cash in operating activities for the three and nine months ended September 30, 2013. The available borrowing capacity on our lines of credit with Comerica Bank and the net proceeds from the below mentioned equity offering have been principal sources of liquidity during the nine months ended September 30, 2013. These credit facilities were amended in November 2013, as discussed further below, and expire May 1, 2014. At September 30, 2013, the Company had approximately $5.0 million in working capital. The Company’s principal sources of liquidity at September 30, 2013 consisted of approximately $4.2 million in cash and cash equivalents, $10.8 million of net accounts receivable, and $2.5 million of available borrowings under two revolving credit facility agreements.

The Company’s ability to meet its obligations in the ordinary course of business is dependent upon the Company’s ability to sell its products directly to end-users and through distributors, establish profitable operations through increased sales, decrease expenses, and to generate cash from operations or obtain additional funds when needed. If the Company is unsuccessful in its efforts to improve its financial position, there may be substantial doubt about its ability to adequately fund the minimum requirements of its business.

The Company intends to improve its financial condition and ultimately improve its financial results by increasing revenues through expansion of its product offerings, continuing to develop its direct 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 its advanced medical technologies, and continuing cost reduction initiatives.

Management expects that the working capital and future borrowings available under the lines of credit should be sufficient to fund the minimum requirements of the Company; however, the Company cannot guarantee that it will be able to increase sales, reduce expenses, or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. Management will continue to monitor the liquidity of the Company and is prepared to implement cash saving measures or potentially issue debt or equity securities in the event that its plans to grow revenue do not materialize in the timeline anticipated by management.

Sale of common stock

On July 26, 2013, the Company filed a registration statement on Form S-3, File No. 333-190158 (“2013 Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register an indeterminate number of shares of common stock, preferred stock, and warrants with a total offering price not to exceed $30 million. The Company subsequently amended the 2013 Registration Statement and lowered the total not to exceed offering price to $5 million. The 2013 Registration Statement, as amended, was declared effective by the SEC on September 19, 2013. On September 23, 2013, the Company entered into an agreement with Northland Securities, Inc. (“Northland”), pursuant to which Northland acted as placement agent in connection with the sale of shares of the Company’s common stock in a registered direct offering (the “September 2013 Registered Direct Offering”) pursuant to the 2013 Registration Statement and paid Northland a fee of 5.0% of the aggregate gross proceeds in connection therewith. On September 23, 2013, the Company entered into a subscription agreement (“2013 Subscription Agreement”) with Camber Capital Management, LLC, pursuant to which the Company agreed to sell 2,688,172 shares of its common stock at a price per share of $1.86 for gross proceeds of $5 million. The net proceeds to the Company were $4.6 million, after deducting associated costs of $408,000, which included Northland’s fee. The shares of common stock sold in connection with the 2013 Subscription Agreement were issued pursuant to a prospectus supplement to the 2013 Registration Statement, which was filed with the SEC September 26, 2013.

Lines of credit

On September 6, 2013 and November 8, 2013, the Company amended its lines of credit with Comerica Bank. The amendments waive noncompliance with certain financial covenants, subject to additional requirements, and establish future covenants, restrictions, and penalties. The amendment on November 8, 2013 includes liquidity ratio and liquid asset covenants, and an equity raise requirement that established March 1, 2014 as the latest date by which the Company is required to raise at least $3.0 million. Any future noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the amounts outstanding immediately due and payable. Management is considering alternative financing solutions, including potentially issuing alternative debt securities, to mitigate any future liquidity constraints these covenants and restrictions may impose on the Company. Further discussion of the amendments is included in Note 8 – Lines of Credit and Other Borrowings.