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Biolase, Inc. (NASDAQ:BIOL)

Q2 2012 Earnings Call

August 8, 2012 04:30 p.m. ET

Executives

Matt Clawson – IR, Allen & Caron

Federico Pignatelli – Chairman & CEO

Fred Furry – COO & CFO

Analysts

Dalton Chandler – Needham & Co

Greg Garner – Singular Research

Chris Sassouni – Eagle Asset Management

Lenny Brecken – Brecken Capital

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the BIOLASE 2012 Second Quarter and Six Months Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for question. (Operator Instructions) This conference is being recorded today, Wednesday August 8, 2012.

And I’d now like to turn the conference over to our host Mr. Matt Clawson of Allen & Caron. Please go ahead.

Matt Clawson

Thank you, Kelly. Good afternoon everyone and thank you all for joining us today for BIOLASE’s 2012 second quarter and six months results conference call. You should have all received a copy by e-mail this morning of the release announcing the company’s results for the second quarter and six months ended June 30, 2012.

Before we get started, I’ve been asked to make the following statements. The words and phrases can be, may affect, may depend, believe, estimate, project and similar words and phrases are intended to identify forward-looking statements. Forward-looking statements are subject to various known and unknown risks and uncertainties and BIOLASE cautions you that any forward-looking information provided is not a guarantee of future performance. Actual results could differ materially from these anticipated in the forward-looking statements due to a number of factors, some of which are beyond BIOLASE’s control and may be discussed in BIOLASE’s filings with the Securities and Exchange Commission. All such forward-looking statements are current only as of the date on which statements are made.

BIOLASE does not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which the statement was made or reflect current unanticipated events.

Also, as a quick reminder, a replay of the call will be available on the BIOLASE website at www.biolase.com. The company’s 2012 second quarter and six months results can also be found on the company’s quarterly report on Form 10-Q, which the company will file with the Securities and Exchange Commission tomorrow.

With me on the call today from BIOLASE are Federico Pignatelli, Chairman and Chief Executive Officer; and Fred Furry, Chief Operating Officer and Chief Financial Officer. Federico and Fred will review the prepared remarks, including an update on the business, operational performance and outlook. There will be a question-and-answer session at the end of the call followed by a few closing remarks. During our question-and-answer session, we will limit each call to one question and a follow-up question as time permits.

Federico Pignatelli

Good afternoon, and thank you, Matt. I want to welcome all of you to our second quarter six months results conference call. Thank you for participating. Today, we will review the progress and various accomplishments achieved by BIOLASE during the second quarter of 2012, as well as our comments on our progress in key initiatives that will impact the coming periods.

First, let me briefly recap the 2012 second quarter. Net revenues in the second quarter were $12.2 million, compared to $12.1 million in the prior quarter period. However, the 2012 second quarter was negatively impacted by the accounting consequences for this year’s repurchase of Waterlase MD Turbo laser systems from Henry Schein, our former exclusive global distributor in connection with the 2012 termination agreement. These will be discussed later by our CFO, Fred Furry. But both revenues and net cost of revenues were reduced by $1.1 million as a result of the transaction. There was no impact to gross profit where accounting for the transaction certainly impacted our net revenues and cloud the progress we made this quarter.

Our gross revenue from operations were actually $13.3 million before the impact of this transaction, which was within our range of guidance for the quarter of $13 million to $14 million. Our overall revenues were also affected by the lack of FDA clearance for our newly launched EPIC 10 and the result is still remarkable because of the growth of our Waterlase product line.

Our gross revenues from operations of $13.3 million for the 2012 second quarter excluding the effects of the Schein transaction represents an increase of $3.3 million or 33% compared to non-GAAP revenues of $10 million for the 2011 second quarter after excluding the effects of the prepaid purchase order from Schein in that quarter.

To give you more insight into the growth of our core business, let’s look at our core product line, the Waterlase system. Excluding the inventory repurchase sales, direct sales of Waterlase systems during the 2012 second quarter totaled $8.2 million. This is an increase of 48% compared to $5.6 million in the second quarter ended June 30, 2011 when excluding sales of $2.1 million to Schein to satisfy one-time prepaid purchase order during the 2011 second quarter.

Excluding the inventory of repurchase for the second quarter of 2012, sales of Waterlase system totaled $16.2 million for the first six months of 2012, an increase of $6.3 million or 63% over the same period of 2011, excluding a $2.1 million in sales of Waterlase iPlus system to Schein to satisfy one-time prepaid purchase orders in the first six months of 2011. We believe that these more accurately illustrate the growth of our core business. Again Fred will expand on this further when we discuss the financial details.

Now, I would like to walk through some of the operational and strategic highlights from the period, which we expect to have a positive impact on the company’s performance in 2012 and beyond. The second quarter was again a time of extensive activity internally and externally. We made several important operational moves that were all strategically designed to do two things. First, to become the dental industry’s top provider of high-end technology solutions with our patented laser technology as the central core of the business, and, second, to continue our efforts in becoming a true multi-product, multiplatform company.

As we discussed and reported on last quarter’s call, we completed our purchase of the remaining inventory Waterlase MD Turbo laser system from Schein in April 2012. The benefits of that purchase are many, including the elimination of the inventory overhang of low-priced equipments that impacted the four quarter 2011. The acquisition of high quality parts and technology inventory that we’re using to assemble current model devices such as the Waterlase MDX leading to lower cost and higher margins. And most importantly, the deal eliminated all leans on our intellectual assets with Schein organization as a result of the $9 million prepaid purchase orders from August 2010, which were fully satisfied by August 2011.

Freeing up those intellectual property assets then paved the way for BIOLASE to secure two favorable revolving credit facilities providing for an aggregate borrowing of up to $8 million with Comerica Bank to assist with our quarterly working capital needs and to fund our continuing growth initiatives without diluting shareholders.

Completing the 2012 termination agreement with Schein was a great milestone for BIOLASE and we are very pleased to have it behind us entirely. Due to the complexity and unique nature of the transaction, however, we have mentioned that the accounting for that transaction was still being evaluated as per our last call.

Fred will provide more detail, but we ultimately determined that the purchase price should be reversed to both revenues and cost of revenue. This is evidenced in today’s results included in our press release as the line item titled non-recurring events, just below the products and service revenues and cost of revenue. There is no effect to the gross margin, although it will impact our management discussion and analysis in the 2012 second quarter. Thank you.

Moving on to sales and marketing. Our external sales force continues to grow. We are adding new personnel and making new adjustments as productivity dictates. Although, we are still working towards team of 40 outside sales reps in North America by the end of 2012, we have also developed a new strong training program for our current sales teams.

Training will remain a strong focus going forward as we work diligently to continuously improve the performance of our salespeople. We have already seen improvements in the effectiveness of our team as a result of improvements we have made. Also in connection with our new sales training program, we have recently completed the build-out of the world class technology, customer and sales training facility of our headquarter in Irvine, California. The state-of-the-art center has a hands-on lab featuring our entire line of Waterlase products, our EPIC 10, iLase diode lasers, digital imaging including NewTom Cone Beam 3D Imaging and BIOLASE DaVinci Imaging products and lastly 3Shape new intra-oral scanning technologies for impression-taking solutions.

In addition to using this facility to continue to train and clinically educate our inside and outside sales teams, the technology and training center will also be used to provide introductory and specialized training session for dental professionals seeking proficiency and certification training, utilizing best-in-class BIOLASE products. We’ve seen many benefits arising from this operation. First, we can create an environment in which users, trainers and potential users are all interacting, creating peer to peer marketing opportunities.

In addition, potential and current users of our patented laser technology get the chance to visit the manufacturing floor and understand the quality and care that goes into BIOLASE lasers and other equipments. So far, these have been a surprising hit with those who have participated. Participants are also encouraged to interact with management and the development team to make sure we understand the up to the moment needs of the high-tech dentists.

Also in late July, we established a long-term collaboration with laser dentistry expert Professor, Dr. Norbert Gutknecht and the Aachen Center for Laser Dentistry, or AALZ, in German. Professor Dr. Gutknecht is known around the world for his expertise in laser dentistry and will be instrumental in helping us promote laser dentistry worldwide through clinical laser education, training and research. We believe that with approximately 13,000 members, the combination of BIOLASE’s World Clinical Laser Institute or WCLI, that was founded by BIOLASE and owned by BIOLASE and then the AALZ will form the largest group of users, experts and opinion leaders in laser dentistry in the world.

We also officially launched our inside sales group during the quarter. These dedicated sales force will leverage, both our installed base customers, as well as future educational opportunities and programs, drive adoption of our diode laser systems, including our revolutionary iLase and our newly introduced EPIC 10, which has been very well received and provide lead generation for our higher end capital equipments.

We currently have six dedicated inside sales employees, and expect to continue to ramp that number up to double-digits by the end of the year. Management believes that this group will provide tremendous support to our outside sales representative who are generating its own sales and profit as a P&L cost center and therefore contribute greatly to BIOLASE’s overall growth.

When it comes to our Waterlase products including the revolutionary iPlus in all-tissue laser dentistry in general, we feel strongly that we are nearing the tipping point where the marketplace will begin to demand the benefits of high-tech dentistry from practitioners. Evidence of these can be seen in the peer-to-peer training and selling that is accelerating, as well as the creative way the dentists are taking market share in the communities by promoting their use of lasers. It is difficult to determine what sort of timeframe these will have, but we know that with a combination of quality, innovative products and the effective global marketing initiatives of BIOLASE are moving in closer.

This past May, we introduced the next generation of our Total Diode Solution, the EPIC 10. This soft-tissue diode laser will have the shortest pulse available in the market today. Short pulses are known to cause less thermal damage in tissue and produce cleaner cuts. In addition, the EPIC 10 will have a built-in battery for a full day of operation and will be used as a design platform to build more powerful versions with different combinations of laser wavelengths.

The EPIC 10 was demonstrated at the California Dental Association annual tradeshow in May and several other industry events, including WCLI Super Symposium in June and has been very, very well received. The EPIC 10 is not yet available for sales in the U.S and has the pending 510(k) clearance from the FDA. We expect to have the capability to sell the EPIC 10 internationally before we have clearance in the U.S. sometimes in the near future. This is simply a function of the steps involved in the regulatory approval process.

Finally, the WCLI Super Symposium was reinvigorated and held in June in San Diego, California. The Super Symposium was a huge success with attendance by both users and prospective laser dentists, exceeding our expectation. The symposium gave attendees the opportunity to learn and work side by side with the finest laser dentists in the world.

The curriculum included new clinical laser techniques, valuable practice management tools and a series of opportunities for using the laser in conjunction with imaging to generate more business and wealth from the laser equipment investment.

Speaking of imaging, as most of you know, we are still in the early stages of selling digital imaging equipment. While we still have much progress to make, we did begin to produce more meaningful revenues from that segment in the second quarter. We posted just over $900,000 in imaging revenues, primarily driven by replacements of a number of BIOLASE DaVinci Imaging and NewTom Cone Beam systems. This represents an increase of over 500% from the 2012 first quarter.

In addition, we just entered a five-year agreement with Copenhagen-based 3Shape Corporation, making BIOLASE a distributor of 3Shape’s intra-oral scanning technologies for digital impression-taking solutions in the U.S. and Canada. This adds one more component to our total technology solution and gives us the ability to incorporate 3Shape’s technology into our Waterlase products. I will have more to say about that as this relationship matures, as we believe this is a very important new partnership for us.

BIOLASE has the largest specialized sales force and distribution network in dentistry and we remain determined to leverage that commercial channel by adding additional products, services and selling opportunities of the same call point.

By way of update, we continue to seek the most efficient routes to market for our laser technology as it relates to ophthalmology and other surgical specialties where we have already developed important intellectual property and gained regulatory clearances. We are currently in early discussion with the leading Italian company to develop a relationship to jointly deliver our first product to that marketplace.

We are excited about our opportunities in ophthalmology and we will update you all in greater detail when something definitely is in place.

Another topic of interest is our ongoing development discussion with Procter & Gamble relating to a consumer oriented laser-based toothbrush for optimum use based on our laser technology. In the past few months, these efforts have continued to gain momentum and the technical team of both companies have been actively involved. We are now in the process of developing protocols for some clinical studies as directed by Procter & Gamble. As you might imagine, such a product initiative will take time that the fundamental impact on a company our size to be dramatic. So, we continue to invest in this track and look forward to continue to progress there.

I will now hand over the call to Fred Furry to go through the highlights of our financial results for the quarter and year-to-date.

Fred Furry

Thank you, Federico, and good afternoon, everyone. On a GAAP basis, net revenue for this year’s second quarter totaled $12.2 million, which was an increase of $96,000 or 1% as compared to GAAP net revenue of $12.1 million for the prior year period. GAAP net revenue for the six months of 2012 was $24.5 million, compared to $22.6 million in the prior year period.

As Federico mentioned, however, the 2012 second quarter net revenues were impacted by the $1.1 million reduction from the accounting consequences related to the 2012 termination agreement with Schein and the repurchase of their inventory of Waterlase MD Turbo laser systems, which was completed on April 12, 2012.

Further, the 2011 second quarter revenues included $2.1 million of product sales to Schein to satisfy one-time prepaid purchase orders, these sales were outside of our direct sales efforts. While we recognize that this is a non-GAAP measure, we have excluded both of these amounts for discussion purposes in order to accurately illustrate our true sales growth period-over-period.

A table illustrating the effects of these items has been included in our press release. Therefore, excluding the $1.1 million reduction in revenue for the inventory repurchase from Schein during the 2012 second quarter and $2.1 million in products sales to Schein to satisfy the one-time prepaid purchase orders during the 2011 second quarter, non-GAAP net revenue in this year’s second quarter was $13.3 million compared to non-GAAP net revenue of $10 million for the 2011 second quarter, an increase of $3.3 million or 33%.

Non-GAAP net revenue for the first six months of 2012, excluding the $1.1 million reduction for the inventory repurchase in this year’s second quarter was $25.6 million. This compares to non-GAAP net revenue of $17.7 million during the first six months of 2011, which excludes $5 million in equipment sales to Schein to satisfy its irrevocable purchase orders, and represents year-over-year increase of $7.9 million, or 45%.

The increase in net revenue, excluding the non-recurring event was primarily attributable to continued demand for our all-tissue Waterlase systems, increased sales of imaging systems, and increases in consumables and service and warranty and training.

Looking specifically at our Waterlase product line, gross sales of Waterlase systems during 2012 second quarter totaled $8.2 million. This is an increase of 48% compared to $5.6 million in the second quarter ended June 30, 2011 when excluding the $2.1 million of Waterlase iPlus systems sold to Schein to satisfy one-time prepaid purchase orders during the 2011 second quarter.

For the first six months of 2012, sales of Waterlase systems totaled $16.2 million, an increase of $6.3 million, or 63%, over the same period in 2011, again excluding $2.1 million in sales of Waterlase iPlus systems to Schein to satisfy one-time prepaid purchase orders during the first six months of 2011.

Gross profit as a percentage of net revenue for this year’s second quarter and the first six months was 45.2% and 46.2% respectively compared to 46.5% and 46.2% for the prior year comparable period. This year-over-year decrease in the second quarter was primarily due to increased sales of products and services with higher costs and lower margins, such as the imaging equipment and decreased sales of products and services with lower costs, such as license fees and royalty revenue.

Operating expenses in this year’s second quarter and the first six months were $7 million and $14.5 million respectively compared to $6.3 million and $11.6 million in the prior year period. Operating expenses were up year-over-year as we invested heavily in sales and marketing, including bringing back the highly successful WCLI Super Symposium and strengthened spending in engineering and development in order to invest in programs including both dental and other segments. We’ve recognized these efforts impacted our bottom line, but we believe that these investments will ultimately provide both short and long-term benefits to our revenues and stockholders.

On a GAAP basis, the net loss for the second quarter of 2012 totaled $1.9 million or a loss of $0.06 per share, compared to a net loss of $753,000 or a loss of $0.03 per share in the 2011 second quarter. After removing non-cash depreciation and amortization expenses of $122,000, stock-based other equity instruments and other non-cash compensation expense of $400,000 and interest expense of $38,000, this year’s second quarter resulted in a non-GAAP net loss of $1.3 million or a loss of $0.04 per share, compared with non-GAAP net revenue of $69,000 or zero cents per share for the second quarter of 2011.

The net loss for the first six months of 2012 was $3.5 million or a loss of $0.11 per share compared to a net loss of $1.5 million, or a loss of $0.05 per share for the year earlier period. Excluding non-cash depreciation and amortization expenses of $247,000, stock-based other equity instruments and other non-cash compensation expense of $1.1 million and interest expense of $42,000, the non-GAAP net loss for the first six months of 2012 was $2.2 million, or a loss of $0.07 per share. This compares to non-GAAP net income of $222,000, or $0.01 per share, for the first six months of 2011.

Our net losses in 2012 have been primarily driven by increased cost of revenues; significant investments in sales and marketing, which included increased convention costs, expansion into specialty market segments, increased media and advertising expenses, and additional WCLI events; substantial increases in legal fees relating to freeing the company from its prior relationship with Schein in just the past 18 months, and continued engineering and development costs related to our efforts in developing our core technologies, as well as efforts developing our patented laser toothbrush and clinical investments in the promising field of ophthalmology.

Turing to the balance sheet, as of June 30, 2012, we had cash, cash equivalents and restricted cash of approximately $1.7 million, accounts receivable of $9.6 million, inventory of $10.7 million and stockholders’ equity of $10.7 million.

Moving on to financial guidance, we expect our unadjusted product revenues for the third quarter of 2012 to range from $13.5 million to $15 million. On a non-GAAP adjusted basis, 2012 third quarter revenue is expected to increase approximately $1.3 million to $2.8 million, or 11% to 23% compared to the same period last year, after excluding the product revenues, totaling approximately $900,000 associated with the irrevocable one-time purchase orders form Schein for the 2011 third quarter.

Our full year revenue guidance for 2012 remains $57 million to $60 million, excluding the $1.1 million reduction in revenue for the inventory repurchase from Schein during the 2012 second quarter. Excluding equipment sales to Henry Schein to satisfy irrevocable one-time purchase orders of approximately $5.9 million during 2011, the midpoint of our guidance of $58.5 million represents an increase of 36% year-over-year. In addition, our goal remains to be cash flow positive in the fourth quarter of 2012.

Federico Pignatelli

Thank you, Fred. Before we end, we hand the call over to the operator for questions, I have several concluding remarks. Our top priority is and has always been growing shareholder value in a variety of ways. The goal always involves making both long and short-term decisions that balance the benefits to the organization and its stock owners. I want to again note that our goal always remains to execute our strategies and meet or surpass investors’ expectations where we deliver on our promises. We have also made the decision to continue to invest in innovating new products in our core dental market.

At the same time, we will continue to develop several of our laser-based technologies for new markets such as ophthalmology, orthopedics and pain management. Candidly, the results of these investments will continue to impact our bottom line to a certain extent in the near term. We recognize this, but we strongly believe that this philosophy and these investments will bring strong returns in the long run so that our investors will ultimately benefit greatly from such expansion of our core technologies.

Finally, because we believe that the current share price represents a great opportunity. We have recently executed a series of stock purchases and our corporate share buyback program since the end of the quarter. Along with our stock dividend, we view this activity as a way to return value to our loyal shareholders, and we will continue to be active in the markets as our dialogues in the program policies allow.

This concludes our formal prepared remarks. As a remainder during the question-and-answer section of the call, we will limit each call to one question and then a follow-up question. Callers are obviously welcome to reenter the queue to ask additional questions as time permits. We plan to allocate up to 90 minutes to the Q&A to give you full access to management.

I would like now to open the call to questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Dalton Chandler with Needham & Company. Please go ahead.

Dalton Chandler – Needham & Company

Hi, good afternoon. I was wondering if you could give us a little more detail on the -your deal with 3Shape as specifically the list price of the product or products you’re going to be selling and what kind of margin you expect out of those?

Federico Pignatelli

Hi, Dalton. Unfortunately, we cannot enter into these details, but margins, they will be healthy for us and it is a strategic move with several ramifications for BIOLASE. We feel that it’s a very important product to carry for us.

Dalton Chandler – Needham & Company

Okay. Well, when you say the margins will be good for you, so would that be comparable to your own margins and your own products?

Federico Pignatelli

The only thing I can say is that pricing will be competitive and the margins will be along the rest of the line of imaging products.

Dalton Chandler – Needham & Company

Okay. Okay, thanks.

Federico Pignatelli

Thank you.

Operator

Thank you. And our next question comes from the line of Greg Garner with Singular Research. Please go ahead.

Greg Garner – Singular Research

Hi, thanks. I guess my first question I’d like to ask about the Symposium in June. Can you tell us about what sales lead there may be, the volume of them or interest in image versus the iLase, and also how the productivity of the sales force is working with that?

Federico Pignatelli

Well, on the WCLI, we found that it was not performed for quite some time and the Schein exclusive distribution agreement and was an incredible effort on our staff to do it with other reasonable costs and with a great success of attendance and also end results in purchases. I guess, you meant to the iPlus not the iLase that we – yes, we sold several units of iPlus. We had imaging in display and we did generate very strongly to then conclude into sales and had a direct impact on imaging sales. There is no doubt.

Again, education and understanding of laser technology is paramount in penetrating the market. And we view the WCLI, now this cooperation with AALZ from Germany as a very strong vehicle to penetrate the market. Dentists in general follow opinion leaders. They follow experts in fields. And the WCLI in the AALZ is exactly composed of this group of people.

So, it is very important to start again in educating dentists including with – in comfort with users and have them understand the clinical advantages that they are tremendous of the Waterlase Technology. And so we will continue the WCLIs on a regular basis. Actually we are planning to have several WCLIs in – on the West Coast, the Midwest and then on the East Coast, because we found them extremely effective. I hope that that answers your question.

Greg Garner – Singular Research

Yeah. I appreciate you talking about the iPlus, that is what I meant, but I guess I’m not following the last part that we go to WCLI, are these smaller symposiums that help following that part of it because…?

Federico Pignatelli

The WCLI that we had in San Diego was very large one, but we intent to have a large one on a yearly basis, and we are planning to have maybe a large one in the East Coast and maybe two or three smaller ones in different regions throughout the United States.

Greg Garner – Singular Research

Okay. And so these leaders in the industry in Germany they are – even the U.S. dentistry profession follows their leader (inaudible) is that the correct way of interpreting that?

Federico Pignatelli

Well, on an international basis, Professor Gutknecht is sort of oracle and so he is – definitely what he says that is the right technology dentist buy. He is also known in United States, but here in the United States and in Canada we do have opinion leaders that are very valuable to us and to the Waterlase technology. So, again, it is very important that opinion leaders, the guide, the dentist in general also to their publications of (inaudible) of use of the Waterlase technology.

One thing that I would like to point out is that we know is that tradeshows they are less effective than they were – as they were in the past. The Internet world has changed also the attendance at tradeshows, so we are determined to limit our presence to the most significant tradeshows, I’d say probably to only four or five and instead expand these activities of the WCLI and other marketing actives like – the more the dentist is in connection with another dentist that uses Waterlase the more he is convenienced in the validity of the technology and in the return on investments.

Greg Garner – Singular Research

Okay. Thank you. I’ll jump back into the queue.

Federico Pignatelli

Thank you.

Operator

Thank you. And our next question comes from the line of Chris Sassouni with Eagle Asset Management. Please go ahead.

Chris Sassouni – Eagle Asset Management

Yes, good afternoon. I wanted to circle back to a question that was alluded to earlier, not so specific to the 3Shape, but just in general, as you move into imaging, since you’re not the manufacturer of the imaging equipment and if you – you don’t have the associated R&D either. When you look at the margin that you will be able to generate from those imaging products on an operating basis, are they neutral, additive, slightly dilutive to your overall margins or it remains to be seen based on mix?

Federico Pignatelli

Hello, Chris. Yes, I mean, clearly the margins that we have in imaging products is not comparable to the margins that we have in lasers. But they are a tool, a very important tool to enter dental practices by being a sole provider of essentially of technological solutions. Many dentists, many dental practices they don’t like to buy a piece of equipment from one company, another one from another company, another one from another company, because they like to have one provider, one company to call, one service guy to close and basically fix it all and service (inaudible) there. So, it makes sense to have deadline also because high-quality imaging and microsurgery with lasers, they go very well together, but again we are not thinking of becoming a very strong distributor in imaging. It will be definitely an important sizable part of our revenues, but the line of share would be by far lasers. If that answers your question?

Chris Sassouni – Eagle Asset Management

It does. So, in a sense what you are doing is you are changing a bit the image of BIOLASE and the value – you’re changing the value proposition to the dentists and that before they might think of BIOLASE strictly from the standpoint of you sell lasers, dental lasers. And now you’re saying, we on a direct basis can offer you a full spectrum of technological solutions for your practice. Is that the way to think about it?

Federico Pignatelli

Yeah, that’s the way to think about it. And also, Chris, is very often the dentist may be interested in buying an imaging equipments and then at the end he comes out in buying also lasers. So, it is a very good opportunity for us to approach dentists that are interested in imaging that as we know it is widespread adoption now and introduce them to lasers.

Chris Sassouni – Eagle Asset Management

Okay. And then my last question is, do you think that the EPIC will be approved here in the U.S.? I know you can’t forecast with the FDA, but probably you are still having dialog with them, do you think that the EPIC will be ready for the October American Dental Association or the New York Dental Association in December?

Federico Pignatelli

Well, I would say that, by December, yes, we are more optimistic than that, but, again, we are very pleased from the reception of the EPIC, very pleased. We believe that there’s going to be a strong success for BIOLASE that the FDA has become more stringent in fact and case approvals. And so basically the timeframe is a little longer than in the past, but we are trying to be optimistic that in the near future we should receive it. We don’t know if it’s going to be in Q3 clearly, but we will – we are (inaudible) that we will have it by December.

Chris Sassouni – Eagle Asset Management

Okay. Thank you.

Federico Pignatelli

Thank you, Chris.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Stan Bergman Bluebay Asset Management. Please go ahead.

Stan Bergman – Bluebay Asset Management

Good afternoon, Federico.

Federico Pignatelli

Good afternoon.

Stan Bergman – Bluebay Asset Management

A couple of questions. With regard to the bank line of credit and the increase in marketing and R&D, are we getting ahead of ourselves, because the revenue is not pacing itself quick enough for the spend, would you feel that by the fourth quarter that will take care of itself in the first quarter 2013?

Federico Pignatelli

Well, we’d expect revenues to increase and we would expect to – our board to be cash flow positive in Q4. Clearly, the elections, they’re now playing to our favor at the moment, because there is a lot of latency in the marketplace. And so that is why we’re pretty cautious. Otherwise we would be more aggressive. We also don’t know if we can receive or not clearance for that EPIC in Q3.

So, as you can see the guidance is quite wide, $13.5 million to $15 million because of that reason – because of both reasons. But, yes, we think that we will enjoy an acceleration in revenues. And again let me remind all of you that the laser conference told that we have performed by the miracle in a short amount of time. That is besides the reorganizing the entire company and reorganizing the entire production in R&D. We have introduced a state of new products, in essence we have all new problems and more to come out. Clearly an acceleration of revenues is expected.

Stan Bergman – Bluebay Asset Management

And the last question, in terms of the Schein agreements, so that was the cost agreement – are they presently buying from you? And if they are not buying from you, do you have the ability or are you close with another distributor as the non-exclusive that could give you a much more – a much greater potential of revenue increase that Schein did than (inaudible) with you guys?

Federico Pignatelli

Well, we have a nice relationship. We really like Benco. We have been taking to them and I will call (inaudible). We have to remind everybody that we sold them in the past for $52,000. Regarding the Schein, if Schein wants to buy equipment from us, they will be treated as any other distributor. Obviously, we are completely free of the old agreement with last six years. We have no obligations one way or the other (inaudible) so we are freed from any obligations towards then and they are freed of any obligations towards us.

With regard to Schein as a very strong and large organization, we have some of the regions of Schein working efficiently in selling lasers. We have some international markets where Schein is strong, a strong presence and efficient. And so we – our only choice we can deal with them on selected international markets and in United States and Canada we can sell them at the same price that we sell to other distributors.

Stan Bergman – Bluebay Asset Management

Thank you very much.

Federico Pignatelli

You are welcome.

Operator

Thank you. Our next question is a follow-up question from the line of Dalton Chandler with Needham & Company. Please go ahead.

Dalton Chandler – Needham & Company

Hi, again, I just want to clarify on your guidance for the third quarter, the non-GAAP adjustment you are making here is that to the year ago quarter and you’re taking out Schein revenue or is there something else going on there?

Federico Pignatelli

So, it is the last year in Q3 we paid last portion of the $9 million with the advanced test. And is equivalent to, to be precise $908,000. So if you deducted $908,000 from the revenues of last year then you have a number that is the number that you essentially should take in consideration as the number that is the true number because it is the direct sales. So $13.1 million, less $900,000 is $12.2 million.

Dalton Chandler – Needham & Company

Okay.

Federico Pignatelli

That is the number that we should take in consideration to measure BIOLASE.

Dalton Chandler – Needham & Company

Okay, but that this is the last quarter that you’ll have past period adjustment for Schein, is that correct?

Federico Pignatelli

Is absolutely correct, we’re very happy about that. I am thrilled about that because finally there is going to be no more confusion on what BIOLASE is, how much we’re growing and we don’t have to talk about Schein have a gain in vis-à-vis in comparisons et cetera. They’re going to be just the clients, if they want to be and they will be, like I said, it is a large company and within this company we have some groups of dentist that love our technology and some of the regional people that are very well active in selling.

So, we will be treating them fairly as any other distributor, but like I said, we have some preferences in talking to non-exclusive particularly in areas in which we are not strong on a direct basis, we have been talking to Banco, and we like the way that Banco works, we think is a great company. And expanding very rapidly, so we are pleased and we will be pleased to increase our gelling’s with them.

Dalton Chandler – Needham & Company

Okay, thank you.

Federico Pignatelli

Thank you.

Operator

Thank you. And our next question comes from the line of Greg Garner with Singular Research. Please go ahead, sir.

Greg Garner – Singular Research

Patents related to the endodontic probe, it appears that this is a consumable product that would be, lead to repeat sales, I just want to verify that. Also I am curious as to whether or not this was, it is just something that was developed as an application because BIOLASE recognize, you could do this or was this sort of a request from the endodontic – endodontists?

Federico Pignatelli

Well, first of all there are two things that I would like to say, one is the periodontal disease is an incredible area of expansion for the Waterlase technology, the other incredible opportunity is endodontic. And in the conventional way a dentist would use a metallic pile that is flexible. And you would extract the root by using – by moving up and down this flexible metallic file that by the way many (inaudible) infected with bacterias and viruses to a proportion of 70% meaning there is a high, high risk of cross contamination and this is even if they’ve been properly sterilized, same thing goes with the bur, by the way and that is another big issue. So safety is something that we have not even started touching on it, but there is a big issue when you go to the dentist, the dentist is supposed to throwaway the bur that he uses in the mouth of a patient.

And so, an endo file, and then go and buy new ones per every patient and per patient he uses more than one bur, because he uses different kind of size of burs in some. So basically his monthly bill can become few thousands of dollars, just in burs and endo files and that is where using a Waterlase, not only there is a total safety, because the laser component kills any bacteria and any virus, but also becomes very economical, but that is all about (inaudible), safety when going to the dentist, cross contamination is a huge issue.

And regarding endo in essence one out of four on average root canals gets reinfected in the conventional way. While using this new technology, which we got a very important patent just few days ago that we have a total 33 patents surrounding that technology, we have the possibility of sterilizing the root canal very, very close to 100%, 99.7%.

So, it is in essence, an incredible savings because if you calculate that one out of four goes infected, and that means that the patient has to go back to the dentist and dentist has to reopen an infected canal, and the patient has to take antibiotics before going to the dentist, because he is reinfected. And the dentist has to be even more careful this time around to clean-up well the canal.

You’re talking about hundreds of dollars that in essence the dentist has to pay on his own. Some dentist that charge the patent because they don’t guarantee the patient. And also there is insurance basically that kicks in. So the saving just in United States by using a sterile instrument for endo alone is around $3 billion to $4 billion. So it is a huge, huge advantage and is a consumable. So the (inaudible) is something that is single use and you just throwaway after you have treated the patient.

Greg Garner – Singular Research

Okay, thanks. I appreciate the color on that. And I guess, if I could ask, Fred a question. Regarding the comps that you’re using for prior year, it appears if it’s really doing a good job of identifying, how well the direct marketing team is doing and really appreciate that, but to make sure I am looking at this correctly, (inaudible) also a fact that, there was $2.1 million, I believe it was in last year’s second quarter of iPlus sold to Henry Schein, it still means that there was that amount moved to the market, I guess we don’t really know if that went to the end customer during that quarter is that -

Fred Furry

Yeah, Greg, that was all over the world too. So, we might have sold half a dozen units to Italy, or half a dozen units to France or 10 units in the U.S. So, if you look at the numbers and the ASPs, you’re talking maybe 20 units or 50 units or so. So it’s – and that’s spread all around the world in a variety of different geographic market. So yeah, there has been some place, but there could be some of those units in inventory. We’re not – I don’t have the numbers in front of me, so I can’t really comment on how much they might have in inventory, but if whatever they do have is not material to us at all.

Federico Pignatelli

They have inventory – is a little inventory – we’re talking about two units internationally, simply because they decided to not to return it, because they want to sell in, but we cleaned up the entire inventory in North America and again when I became the CEO of the company a year and a half ago, they had 440 MDs and we purchased 150 some MDs, so they sold close to 300 to end users and that is very important to understand because their effort even though has been aggressive pricing has increased the population of 300 users of (inaudible) lasers. And these users they are our clients now, and they will obviously generate revenues with warranties, with service and with consumables. By the way, I would like to add that the radial firing tip can be used with any of the Waterlase lasers and also with the iLase and with the new EPIC. So we can sterilize a root canal using any of our lasers.

Greg Garner – Singular Research

Okay. And I guess that would be good for other procedures too. Or is it well -

Federico Pignatelli

The radial firing tip is essentially for the root canal and for pockets in the gap.

Greg Garner – Singular Research

Okay. Back to what Henry Schein units might – they might have, first of all they aren’t allowed to sell in the U.S. though, right, the iPlus?

Fred Furry

No, they are, but what we’re trying to say is that, that $2.1 million in the third quarter last year went to all of their markets. Some went to the U.S. and even it’s half in half went to international, of that, that’s a year ago, so a vast majority of those have been sold through.

Greg Garner – Singular Research

Okay.

Fred Furry

None of those iPlus is sold in Q3 of last year. We’re part of that buyback, I want to make that crystal clear that -

Greg Garner – Singular Research

Okay.

Fred Furry

We repurchased were from 2006-2007 in the original MD sales to them.

Greg Garner – Singular Research

So your sense on any inventory they may have is, for the iPlus is quite low.

Fred Furry

Yes, we are not concerned about that. We don’t feel that there is any inventory overhang. We are managing the number of units that we sell, all of our distributors including Henry Schein to make sure we don’t have any issues with that.

Greg Garner – Singular Research

Okay, great. Thanks.

Federico Pignatelli

Anyway, a little correction, the one that we purchased back the MDs, they are basically 2009 and 2010. So they are not that old, but clearly the MD has become an older unit compared to the iPlus that we introduced and also Schein had a direct sales force that they essentially decided to move away from it to have a dedicated sales force to sell all these lasers.

So they got very aggressive in pricing and they created obviously a lot of confusion in the marketplace for us and for the dentist because of it, but now that is completely gone and if they want an iPlus, they will buy it from us at the regular dealer price and they will want to make their own normal profit. And so, basically will be source of ala carte order, if a dentist that is a Schein dentist wants one, they will be happy to sell it and make their margin.

But the issue of the so-called phantom inventory that many peoples have been talking about is gone. And as well as they have sold well in excess of a thousand ezlase that they had in inventory, they sold them all. So we are talking about Schein having moved close to 1,500, 1,600 lasers in the market between hard-tissue and soft-tissue in a little more than a year 16, 17 months.

So that is clearly beneficial to us, because like I said is, as we go on, revenues in the warrantees, in service, in consumable and all these customers are customers that now they are aware of laser dentistry in BIOLASE.

Greg Garner – Singular Research

Great, thank you. I appreciate that.

Federico Pignatelli

Thank you.

Operator

Thank you. And our next question comes from the line of Lenny Brecken with Brecken Capital. Please go ahead.

Lenny Brecken – Brecken Capital

Two questions. Fred, can you give us a 10,000 foot overview of the sources and uses of cash that’s without the cash flow statement? And I am mainly looking for a sequential kind of comparison basically issuance of cash from last quarter, what – what corresponded to the spent, some sense of (inaudible) second question is Federico you said -

Federico Pignatelli

Lenny, Lenny, I’m sorry to interrupt you, but you are on a speaker phone and really it is very difficult to understand what you’re saying.

Lenny Brecken – Brecken Capital

Okay, I’ll repeat the question. Fred, can you give us a 10,000 foot overview of sources and uses of cash relating to the change in cash sequentially?

Fred Furry

Yeah, sure at the highest level, we would have, there is an impact and obviously the changes in operating assets and liabilities. You’ll have more clarity tomorrow when the 10-Q comes out, but there is also, we did have about a $0.5 million in additions of property and equipment, with some of our build outs, and some of our expansion, we had some issue costs related to the line of credit, where we spend cash. And again in the operating assets and liabilities you’ll see certain expenditures related to our core development of technology and then expenditures with respect to moving into some of these other medical platform areas.

Federico Pignatelli

Well, you also have to consider that we have to do surveys, send people to survey this – and these that we brought back, we had to pay to transport them from many, many different locations back to Irvine where they’re stored. And we had legal expenses because we closed the deal and was quite a deal to close. And so -

Lenny Brecken – Brecken Capital

Quantify what’s core use of cash versus non-recurring that’s what I’m trying to get at?

Federico Pignatelli

Well, it’s difficult to answer core to non-core. We can get back to you, we can go there and -

Lenny Brecken – Brecken Capital

Okay.

Federico Pignatelli

You will see, I don’t know, there is going to be more clarity in the 10-Q, but we are not going to get into these details. If you’re worried about amount we are spending in non-core, meaning lasers, I can tell you that we are very careful in how we are spending money in ophthalmology and in the development of the laser toothbrush.

We are not throwing money around, I can assure you of that. But we are doing it because (inaudible) as they come to fruition, if they come to fruition as we (inaudible) return can be meaningful. And so, would not make sense not to invest some money in that direction.

Lenny Brecken – Brecken Capital

Okay and just one last follow-up, Federico you said you are nearing the tipping point, but when I look at the guidance and the 2Q results including and excluding imaging, I don’t see a real big change in iPlus sales. So I want you to be specific on exactly what gives you the comfort to make that statement, what do you see forthcoming in this third quarter and the fourth quarter that you are feeling more comfortable that the demand is actually accelerating for your core product? Thank you.

Federico Pignatelli

Well it’s the $1 billion question and what we see is that there is a lot of interest, dentist having embraced finally the concept of laser dentistry to stay and expand. There is still some uncertainty in maybe making the final move and they need a little time here and there in taking the decision, some doctors – it takes them six months to be ready to do their signature on a concept. Some other dentist they are worried about financing. So we are looking at different alternatives there.

But I have here the Bill Brown who’s our VP of Sales and Marketing and very interesting to report is that yesterday came out this Technology Census of 2012, Dental Products Report, and with our great interest we see that we are actually if you turn the first page from Tech Census 2012 the first thing that you’ll see is lasers. And the title is, If no, do you plan to buy one? and 19% of the dentists says yes, in the next 60 days; 22% says, yes in the next year, 22% says no, not a good fit for my practice; 16% says no can’t afford one right now. 22% no, still need more information on the technology. So we are talking about 41% that says yes in the next 60 days and yes in the next year, so 1%.

Lenny Brecken – Brecken Capital

Why haven’t you seen that in the near-term business yet, do you think this is just a delay?

Federico Pignatelli

Well, let me first say to be precise, that this also includes diode lasers, so it is not only hard tissue. Of this, that’s the next, if yes, what time? 81%, they would buy a diode laser. 30%, they will buy a YSGG (inaudible), 30%. Now, why this is important and why it is important that as you turn the first page of the Tech Census 2012 you have lasers on number one. This was unthinkable 10 years ago, five years ago. So we are very pleased because we see a lot of dentists.

I mean my own dentist that I use, I have some major dental work and I went to Italy because he is a dentist that he is a luminary in Italy and maybe because I’m an Italian, I trust him, and my redesign came and he fixed my mouth. I had some major problems. He was – he is a kind of dentist that uses a microscope to perform dentistry. And he was entirely two years ago, when he fixed my mouth, entirely uninterested in lasers. He is now completely turned around. And that he is extremely interested in all the aspects of the use of the lasers. And we are talking about him to be a part of our advisory board by the year-end and be an active performant of laser technology in Europe and he is an opinion leader.

Lenny Brecken – Brecken Capital

So, Federico, by the way your math from what you just disclosed, I would love to see this in a press release so that I can get my hands on it to read it, but buy your math that means 12% of the market is going to buy a laser in the next 12 months, from what you said, hard tissue laser?

Federico Pignatelli

Well, this is not based on 140,000 dentists. They have taken obviously a group of dentists that are interested in technology, okay. So this is a magazine that is all about technology and they go on about CAD/CAM, how many they will buy, the CAD/CAM system and things about that too, but this is a magazines that is dedicated about technology. So dentists that are interested in technology, they are looking at lasers and that is they encourage it. If we would be a 12% market penetration foreclosed with the stock would be at a much different evaluation than around $2 with $50 million market cap.

So we are talking about the beginning of a phenomenon, and again I want to look at an interesting chart and you made me very curious because Chris Sassouni actually gave me the idea of looking at Intuitive Surgical, because he came, he actually took the time and we were very happy to see him in San Diego at the WCLI, and it’s not a secret that Chris Sassouni used to be a dentist, and he understands dentistry very well, and also his friend is a very large shareholder of BIOLASE.

And his comments that we are, and he is here on the phone, so he can conform it, that we are quite enthusiastic about the WCLI, but he also told me, you know, Federico, I feel that I am revisiting an old store here when I went at the first few meetings of Intuitive Surgical and the stock was a $6 to $10 stock and then look at where the stock is today. And I want to look at the chart, the company went public in 2000 at $16. In 2001 it was $6 and there is a flat kind of chart between $6 and $20 or $6 and $18, something like that until 2004, and then the stock went to $600. So we are talking about from $6 in 2001 to $600 and it’s $500 now. And what Intuitive Surgical, that is a great company, has done really is to bring automation robotic instance to conventional surgery while instead the Waterlase Technology is, is to change surgery, is to cast human and animal tissue in a different mold, completely different mold.

Lenny Brecken – Brecken Capital

Well, Federico most people just want to hear what – which is translating into near-term revenue count, not necessary, I mean…

Federico Pignatelli

Lenny, I completely understand you are a Wall Street guy, I’m an ex-Wall Street guy. We look at things quarter by quarter and the market now is extremely – this is probably the most short-sighted market – soft stock market I’ve seen since I got interested in investing in the stock market, and I used to be a stockbroker in my early age. And so I completely understand your point of view it is frustrating and that’s why BIOLASE is running the market in both sub-stock because we got frustrated in seeing a market that is so biotic to what is tomorrow and after tomorrow and they only look at what is today or tomorrow, the immediate tomorrow.

So, when you look at the 40,000, not the 10,000, the 40,000, when you take the view of the 40,000 feet and you look down at this little company what has done and how has perfected this technology to bring it to the level of the same speed then a high speed dental drill from the first that – from the first laser, the first Waterlase that was approved in 1998, we are talking about a miracle in technology advancement and the clinical advantages, they are so strong and the safety it is so paramount to me and will become to many because we can’t forget the 100,000 Americans that get sick every year and they die because they cannot be cured by going to doctors.

So I don’t go and I have the surgery and they get bacterias and viruses that are unrelated and they are incurable. And then there is an incredible amount of the people that get sick and they damage certain organ. We have 80,000 Europeans every year dying by going to doctors. 50% of the population in United States is to some degrees not susceptible anymore to antibiotics. So, it is a very, very serious problem and we are, BIOLASE, the Waterlast technology is a solution to say, not only better dentistry, but also to safety and that’s very important.

Operator

Thank you. And there are no further questions in the queue. I’d now like to turn the conference back over to management for closing remarks.

Fred Furry

Well thank you for your very interesting questions and thank you for participating. Thank you for being patient, long-term investors, we like the fact that you are notwithstanding the difficult times of the stock market, the uncertainty in the economy and the stock price too has not been stellar, the contrary year out there has believers and thank you so for the interest in this company that it is really revolutionizing surgery, conventional surgery and that is moving dentistry and medicine to the next stage of innovation. It is a big undertaking, but we are very optimistic that we will be successful. Thank you again and we will be hearing from you hopefully in Q3.

Operator

Thank you ladies and gentlemen. That concludes the BIOLASE 2012 second quarter and six-month results conference call. Thank you for your participation. You may now disconnect.

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