BIOLASE' CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Biolase, Inc. (BIOL)

BIOLASE Inc. (NASDAQ:BIOL)

Q3 2012 Results Earnings Call

November 5, 2012 04:30 PM ET

Executives

Matt Clawson - IR, Allen & Caron

Federico Pignatelli - Chairman and CEO

Fred Furry - Chief Operating Officer and CFO

Bill Brown - VP, Sales and Marketing

Analysts

Bill Shudder - GBP Capital

Chris Sassouni - Eagle Asset Management

Robert Hoffman - Princeton Opportunity Partners

Wyatt Car - Monarch Bank

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the BIOLASE 2012 Third Quarter 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)

Today’s conference is being recorded today, November 5, 2012. I’d now like to turn the conference over to Lisa Wilson, Investor Relations for BIOLASE. Please go ahead.

Lisa Wilson

Thank you operator. Good afternoon everyone and thank you for joining the BIOLASE third quarter 2012 financial conference call. Today’s call will include remarks from the Federico Pignatelli, Chairman & Chief Executive Officer; and Fred Furry, Chief Operating Officer and Chief Financial Officer followed by a question and answer period. When listening to this call, please refer to the press release issued earlier today announcing the companies result for the third quarter and nine months and in September 30, 2012. If you do not have a copy of this release, it is available on the BIOLASE website at BIOLASE.com.

Before we get started, please be aware that a number of forward-looking statement will be made during this presentation. Forward-looking statements are any fact they are not historical fact and can be identified words and phrases including can be, may affect, may depend, believe, estimate, project and similar words and phrases. These forward-looking statements are based on BIOLASE’s current expectations and are subject to a variety of known and unknown risks and uncertainties that could cause the Company’s actual result to differ materially from those the statements contain in this presentation.

These risk factors are discussed in the Company’s filings to the SEC. Filed is cautions you that any forward-looking information provided is not a guarantee of future performance. Any forward-looking statements represent the Company’s views only as if today and should not be relied upon as representing a views as of any subsequent date. For the benefit of those who may be listening to the replay this call was held and recorded on November 5, 2012. A replay of the call will be available on the BIOLASE website shortly after its completion. The Company’s 2012 third quarter in nine months result can also be found on the Company’s quarter report on Form 10Q, which the Company will file with the securities and exchange commission. With that I’d like to turn the call over to the Federico Pignatelli. Federico please go ahead.

Federico Pignatelli

Thank you, Lisa and good afternoon everyone for the third quarter of 2012 was marked as strong growth progress in execution. We are within our stated range of revenue guidance including and nearly 50% increasing revenues from our core WaterLase product quarter-over-quarter reported.

Notably, we met our guidance without any meaningful revenues from the EPIC 10 for which we received a CE mark just two days before the quarter closed and notice that we have received FDA clearance only during Q4. We also achieved improved margins and reduced our general and administrative expenses enabling us to report non-GAAP net income for the quarter.

I will discuss our business in key growth drivers in greater detailed but first I would like Fred Furry, Our CFO and COO to review this financials of the third quarter 2012. After that Fred and I will be glad to answer your question.

Fred Furry

Thank you, Federico and good afternoon, for the quarter ended September 30, 2012. We reported net revenue of $13.8 million versus $13.1 million for the third quarter of 2011. The 5.5% increase in net revenue was primarily driven by higher sales of our core all-tissue WaterLase systems. Note however that 2011 third quarter revenue includes $900,000 to sales to Schein to satisfy one time prepaid purchase orders. Excluding this amount, net revenue for the 2012 third quarter represents a 13.4% increase over non-GAAP adjusted net revenue of $12.2 million for the prior year quarter.

Looking specifically at our core WaterLase product line. Unit sales increased by 29.9% in the third quarter of 2012 as compared to the prior year quarter. Primarily due to increase sales of iPlus systems as well as pre-owned MD Turbo systems.

Revenues from the sale of WaterLase systems during the 2012 third quarter totaled $9.3 million this is an increase of $1.1 million or 12.7% as compared to $8.2 million in the third quarter ended September 30, 2011. The 2011 third quarter revenue from the sale of WaterLase systems includes approximately $200,000 in sales to Schein to satisfy one-time prepaid purchase orders. Excluding this amount revenue from the sale of WaterLase systems for the third quarter of 2012 increased by $1.2 million or 15.2% over non-GAAP adjusted net revenue for the prior year quarter.

WaterLase sytems sales comprised approximately 67.2% of net revenues for the third quarter of 2012, compared to 62.9% for the prior year quarter. The majority of these WaterLase revenues in both quarters were from the sales of the company’s flagship WaterLase iPlus all-tissue laser systems.

Diode laser system sales comprised approximately 6.5% of net revenues for the third quarter of 2012 compared to 16.6% for the prior year quarter. Diode sales were impacted in the third quarter of 2012 pending regulatory clearance of the new EPIC 10 diode laser system. BIOLASE received the CE Mark for the EPIC 10 in the final days of September 2012, and received notice of its regulatory clearance from the FDA on October 1, 2012. As a result, the Company expects that diode laser system sales will increase significantly beginning with the fourth quarter of 2012.

Imaging revenues totaled approximately $675,000, or 4.9% of net revenue, during the third quarter of 2012 as compared to $100,000, or 0.7% of net revenue, for the prior year period, an increase of 575%.

Gross profit as a percentage of net revenue was 45.6% as compared to 40.7% for the prior year period. This year-over-year increase for the third quarter was primarily due to higher sales of WaterLase systems, increased license fees and royalty revenue, and decreased costs of revenues as service and warranty expenses continue to decline as manufacturing processes and quality continue to improve.

Operating expenses in this year third quarter was $6.7 million, or 48.4% of net sales, as compared to $6.3 million, or 47.9% of net sales, in the third quarter of 2011. The increased sales in marketing expense and engineering in development cost as we continue to invest in our new product development were offset in part by lower general and administrative expenses in the 2012 quarter. These increased cost reflect the Company’s continued investment in growing its core business.

As a result, the net loss for the third quarter of 2012 was $548,000, or a loss $0.02 per share, compared to a net loss of $953,000, or loss $0.03 per share, for the third quarter of 2011.

After removing interest expense of $98,000, non-cash depreciation and amortization expenses of $126,000, and non-cash stock-based, other equity instruments and other non-cash compensation expense of $420,000. The quarter resulted in non-GAAP net income of $96,000, or $0.00 per share, compared with a non-GAAP net loss of $397,000, or a loss $0.01 per share, for the third quarter of 2011.

Turning to the nine months result on a GAAP basis, net revenue was $38.3 million for the nine months ended September 30, 2012 compared to $35.7 million with the prior year. Please note however that that 2012 nine months GAAP net revenue reflects a $1.1 million reduction related to the repurchase WaterLase MD Turbo laser systems from Schein, which we completed in the second quarter of 2012.

Other 2011 nine months revenue includes $5.9 million in sales to Schein to satisfy one-time prepaid purchase orders. Excluding these amounts, the non-GAAP adjusted net revenue for the nine months ended September 30, 2012, of $39.4 million represents a 32.2% increase over non-GAAP adjusted net revenue of $29.8 million for the prior year period.

The number of WaterLase systems sold for the nine months ended September 30, 2012, increased by 35.1% as compared to the prior year period, primarily due to increased sales of the WaterLase iPlus systems and pre-owned MD Turbo laser system. Gross revenues from the sale of WaterLase systems, excluding the $1.1 million inventory repurchase from Schein during the second quarter, increased $5.2 million, or 25.9%, to $25.4 million for the nine months ended September 30, 2012, as compared to $20.2 million in the prior year period.

The 2011 nine month revenue from the sale of WaterLase systems includes $2.3 million in sales to Schein to satisfy one-time prepaid purchase orders. Excluding this amount, non-GAAP adjusted net revenue from the sale of WaterLase systems for the nine months ended September 30, 2012, increased by $7.5 million, or 42.0%, over non-GAAP adjusted net revenue for the prior year period. WaterLase system sales comprised approximately 63.5% of gross revenues for the nine months ended September 30, 2012, compared to 56.6% for the prior year period. The majority of these WaterLase revenues were from sales of the Company’s flagship WaterLase iPlus all-tissue laser system.

Gross profit as a percentage of net revenue was 46.0% as compared to 44.2% for the prior year nine months period. The year-over-year increase was primarily due to increased sales of WaterLase systems, coupled with lower costs of revenues reflecting lower service and warranty expenses due to ongoing improvements in manufacturing processes and quality, offset by reduced diode systems sales and reduced license fees and royalty revenue.

Operating expenses totaled $21.3 million for the nine months ended September 30, 2012, or 55.7% of net sales, as compared to $17.8 million, or 50% of net sales, in the prior year period. The increase was primarily due to increased sales commissions advertising a convention cost within sales and marketing increases in bank fees and our allowance for doubtful accounts within general, administrative expenses increased supplies expenditures for new product development within engineering and development. And increased payroll and consulting cost across all departments, but primarily within sales and marketing and engineering and development as we continue to invest in our core business.

The net loss for the nine months ended September 30, 2012, was $4.1 million, or a loss of $0.13 per share, compared with a net loss of $2.5 million, or a loss of $0.08 per share, in the prior year period.

After removing interest expense of $140,000, non-cash depreciation and amortization expenses of $375,000, and non-cash stock-based, other equity instruments and other non-cash compensation expense of $1.5 million, the non-GAAP net loss for the nine months ended September 30, 2012, was $2.1 million, or a loss of $0.07 per share compared to a non-GAAP net loss of $175,000, or a loss of $0.01 per share for the nine months ended September 30, 2011.

Turning to the balance sheet as of September 30, 2012, we had approximately $6.2 million in working capital. Cash and cash equivalents and restricted cash totaled approximately $1.3 million compared to $1.7 million at June 30, 2012, and $3.3 million at December 31, 2011.

Accounts receivable totaled $10.3 million compared to $9.6 million at June 30, 2012, and $8.9 million at December 31, 2011. Stockholders’ equity was $10.3 million at September 30, 2012. In addition, the Company had two revolving lines of credit totaling $8 million, with $5.1 million of available borrowings, in excess of the $2.2 million outstanding, at September 30, 2012.

Moving on to financial guidance, we expects net revenue for the fourth quarter of 2012 of approximately $16.5 million to $17.5 million, which reflects growth of 26% to 34% as compared to the same period last year. The Company also expects to generate non-GAAP net income and be cash flow positive in the fourth quarter of 2012.

Due to the timing in obtaining regulatory clearance for our new EPIC 10 soft tissue diode laser, BIOLASE expects non-GAAP adjusted gross revenue of $55 million to $58 million for 2012, which excludes the $1.1 million reduction in net revenue – resulting from the inventory repurchased from Schein during the 2012 second quarter. Therefore, our GAAP revenue guidance, which includes the $1.1 million reduction in net revenue from the inventory re-purchase from Schein during the 2012 second quarter, is effectively $53.9 million to $56.9 million for fiscal 2012.

With that, I’ll turn the call back to

Federico Pignatelli

Thank you, Fred. The third quarter of 2012 was a very active one for BIOLASE, and I’m very proud of the accomplishments made across the organization. Our efforts enabled BIOLASE to achieve a significant sales milestone in August, when we sold our 20,000 laser worldwide more than any other company in this industry.

We look forward to obtaining even greater milestones with our current family WaterLase all-tissue lasers, which include our revolutionary iPlus and our newly released EPIC diode soft-tissue laser. To ensure we have the right team in place, to drive sales growth, we expanded our direct outside sales force and established our inside sales organization during this 2012, third quarter.

Our inside sales representatives and lead generators work in partnership with our direct outside sales team to sell our lines of lasers in imaging products, win new customers, leverage the company’s existing installed customer base and drive new dentists to our sales seminars. We are very pleased with the progress our inside sales team has made thus far, as we added more talent to the group, already in the fourth quarter.

Needless to say our entire sales team which is currently comprised of 37 outside direct sales reps and 10 inside sales reps and lead generators is very excited with the release of our new EPIC diode laser as well as the 3Shape TRIOS, and I will discuss those products shortly.

We are investing heavily in the training and education of our sales team, because of well-trained effective sales team is critical to driving increased adoption of our products. Since opening our new corporate technology and training center in July, we have held several best practices seminars to train our expanded sales force on our [Core laser] a newly introduced imaging product. We are already seeing the results.

We are also using the new facility to hold training courses for our customers, in fact, many doctors and hygienists attended a certified training course for new owners at our facility [just] this first quarter. Our selling efforts should also benefit from our recent partnership with the world-renowned laser dentistry expert Professor Dr. Norbert Gutknecht, of the Aachen Center for Laser Dentistry in Germany, which is the world largest laser clinic, and which is designed to promote laser dentistry worldwide through clinical laser education, training and research.

Professor Dr. Gutknecht will direct courses in overseas research that is critical for the broader acceptance of high-tech laser dentistry. The key goal of the partnership is devising a global training plan, under which trainers teaching our systems will do so in a consistent uniform manner, we substantially strengthened our product offerings during the third quarter through an agreement with 3Shape to distribute their TRIOS, their overall imaging systems in the US and Canada.

The TRIOS provides faster impression-taking, greatly improved accuracy with much better clinical results as compared to other currently available products. Of all impression-taking will soon be digital and that TRIOS is the most advanced 3D systems in the world, with significant competitive advantage. Our ability to distribute 3Shape TRIOS, allows BIOLASE not only better serve doctors -- to better serve doctors and oral surgeons doing complex dentistry but to also open a new market for BIOLASE to partner with them for [large].

But adding the TRIOS digital solution to our lines of advanced laser products and digital imaging products, we can offer them to professionals in one-stop-shop for a totally integrated group of devices in dental engineering services. This total technology solution will enable us to drive new revenue growth in all aspects of the dental market.

We launched the TRIOS at the ADA Meeting in San Francisco a few weeks ago and the initial reception has been very positive. We expect to see an impact from TRIOS revenues starting late in the fourth quarter of 2011 as we will receive product from the manufacturer and look forward to the contribution that it will have in 2013.

We believe high-value technology based products are the future of the industry, with addition of the TRIOS intra-oral scanner, BIOLASE now offers a fully – a full totally integrated suite of innovative products and designs. Our total technology solution begins with our NewTom or BIOLASE DaVinci 3D Cone Beam technology which provide dentists the superior diagnostic capability, enables the early identification of problems and facilitate the development of proper treatment programs for the patients.

Diagnosis is then followed by laser treatment using either our revolutionary old-tissue WaterLase or our recently released soft tissue EPIC 10 diode laser, depending from the indication. The state-of-the-art laser product offering through treatment and much better clinical benefit than traditional methods.

The TRIOS intra-oral scanner is then used to take a digital impression, if for example a crown is required. The digital impression can then be sent to a dental lab or used with a [chair-sized] million machine. We will continue to look for strategic distribution opportunities to further leverage our experienced direct sales force in service engineered, that said we believe increasing adoption of our core WaterLase product along with revenues from our newly released and highly anticipated EPIC 10 will be the company’s primary growth drivers for the foreseeable future.

In addition, to our direct sales efforts we have began implementing several consumer based initiatives that we believe will enhance this demand in 2013 by driving patients to laser dentists and creating more pull from the marketplace.

We’re very pleased to have received FDA clearance and the CE mark for our EPIC 10 diode soft-tissue laser. The EPIC 10 is an exceptional diode laser platform and offers cleaner cutting and improved patient comfort, comes pre-programmed with 15 commonly performed soft-tissue procedure, including pain therapy.

Innovations include, evolution of ComfortPulse. Our proprietary technology does allows dentists to precisely control the level of laser energy, that penetrate the target tissue, ComfortPulse gives patients more comfortable by avoiding the pain inducing heat buildup at the surgical site, which is typical of diode laser and can cause excessive tissue damage. ComfortPulse can shorten laser pulses to as little as 10 millionth of a second, with longer periods and [off-time] which results in less pain and greater patient comfort.

There has been tremendous interest in the EPIC 10 already, and we have generated a healthy backlog, both domestically and internationally. Since receiving CE mark approval and regulatory clearance from the FDA. As a result, we expect the EPIC 10 will be a strong contributor to revenue in the fourth quarter 2012 and beyond.

To quickly catch on engineering and development, we’ve strengthened our intellectual property estate in the third quarter with the new patent covering the use of laser endodontics. This new patent moves us closer to our goal developing a protected process using infrared or near infrared laser which is our WaterLase system in diode soft tissue lasers for root-canal sterilization, which should attract more general practitioners in endodontics, that have not yet adopted laser endodontics set up.

Why a focus primarily on sales execution to drive revenue growth we remain committed to innovation that further our core laser technologies and protect our market leading position in laser dentistry. In addition to our recent FDA clearance for the epic, we currently have two additional 510(NYSE:K)s submission filed and under review with the FDA, in three key submissions related to our four technologies, currently planned to be filed in Q4 2012.

Several of these submissions include multiple indications and or specialty. For example one submission currently under review with the FDA includes 82 indications for over 15 different specialties, we elect to include multiple specialties in indication on one submission from time to time in attempt to facilitate the FDA clearance process that has become more burdensome.

We are extremely satisfied with what we have accomplished over the past 24 months, since the whole new management team and board of directors help including [place], notwithstanding the many issues we have faced both internally and with the current global economy, we have successfully launched several new products including our revolutionary WaterLase iPlus. The mid-size WaterLase MDX line of laser and our newly released EPIC 10 diode soft tissue laser.

We have leveraged our direct sales force to establish also an Imaging Division which now offers the TRIOS intra-oral scanner as well as several top of the line CBCT cone beam. We continue to grow our core business despite ongoing global economic weakness, and generated non-GAAP net income for the 2012 third quarter. We look forward to continuing growth going forward including, as Fred mentioned, generating non-GAAP net income and achieving positive cash flow in the fourth quarter of this year.

With that we will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of [Bill Shudder] with GBP Capital. Please go ahead.

Bill Shudder - GBP Capital

Hi, thanks for taking my questions. Just a couple, first I want to talk a little about Benco down, I know you guys had announced, I think a couple of years ago, a sizable order from them and they’d be carrying your demo-laser product line and then maybe subsequently you had mentioned Benco serving as a distributor for BIOLASE products, can you comment on the status of the relationship that you have with Benco today and does Benco hold BIOLASE products in its inventory, actively selling these products, are they trying to sell them back to BIOLASE?

Federico Pignatelli

It’s a very good relationship the one that we have with Benco, very positive, they are not trying to sell anything back to BIOLASE, they’ve been selling, they’ve been very actively selling. They are concentrating in a big manner in soft tissue lasers, because they are clearly well-equipped to do that, while we are the one that is well-equipped to sell the big lasers the ones that are more of a challenge to sell because of the training that the doctor has to receive and the education that he has to receive and so on. He’s a [hard] of sales. Benco is very excited about our approval – FDA approval of the EPIC. And they are very involved in selling the EPIC.

Bill Shudder - GBP Capital

And just like I’m clear then, currently do they hold BIOLASE products in their inventory?

Federico Pignatelli

Very little.

Bill Shudder - GBP Capital

Very little?

Federico Pignatelli

Yes.

Bill Shudder - GBP Capital

Okay. Next question I had was on the lower servicing warranties, could you discuss maybe the improvement that you saw there on the expenses?

Fred Furry

Bill, now that we’re entering our third year with the iPlus in production we’ve seen efficiencies within the manufacturing process, the supply chain process and as well as the service of those units. The WaterLase iPlus, even though it was the same basic WaterLase technology, it was a whole new platform as compared to our previous WaterLase product. So it took a little bit of time to get that dialed in those three areas and that’s what we’re starting to see now.

Bill Shudder - GBP Capital

Through just making some adjustments based on experience?

Fred Furry

Oh, yeah, of course as you introduce any new product you’re going to have your alpha build, you learn things from that and then you move on to you beta build and then along the way you have different tooling that you need to get. You have some vendors that worked very well for you, others that don’t work at all. We had an issue, almost - a little over three years ago about some vendors not being able to supply products at the end of the quarter and those aren’t our vendors any more, so overtime we dialed in these processes and we’re really starting to see the effects of that now.

Bill Shudder - GBP Capital

One last question for you Fred, on the Comerica bank facility can you walk us through the math on how you get to borrowing capacity or what’s the eligible accounts receivable formula is?

Fred Furry

Yeah, we have a fair half hour, but you know it’s a very standard bank loan. And the loan is actually available as an exhibit to our financial statements, you can go through there and see the different steps we have to take. But it’s effectively an asset-based line of credit, two lines of credit one is EXIM agreement one is domestic based. And those are based on percentages allowable, AR and inventory primarily, so the simplest way is that a function of our AR and inventory, based on certain parameters that are set in the agreement that are available through exhibits through our financial statements. I mean it’s not something that’s really out of the ordinary, it’s a very typical EXIM and domestic revolver.

Bill Shudder - GBP Capital

It’s a moving target based on those accounts?

Fred Furry

Well, of course, it’s asset-based so as you’re AR and inventory go up, your borrowing capacity goes up, and as they go down, the borrowing capacity goes down. So there are times in the quarter where our borrowing capacity will be less than other times. But that’s the whole reason we have a line of credit is, is certain times of the quarter we have lower cash reserve than other time. So it’s been a great facility to have, we’re very happy with the efforts and the partnership with Comerica. And it’s been a great asset to have for the company.

Bill Shudder - GBP Capital

Great, and Fred, lastly, what were the international revenues for the quarter?

Fred Furry

Those being [those].

Bill Shudder - GBP Capital

Oh, thank you.

Fred Furry

International for the quarter – let’s say that they were fairly in line with prior quarters, because this information will be available, the reason I’m hesitating is that’s not publicly available yet and it will be coming out with our 10Q in a couple of days. And I don’t want to get into too much detail but we – as you know from reading our financial statements we list that information every quarter, but it will be available in a few days, but its fairly consistent with prior quarters as a percentage of total revenue.

Bill Shudder - GBP Capital

Thank you.

Federico Pignatelli

Adding to what Fred had said, regarding our production efficiencies and our suppliers, you have to realize that when the new management stepped in 24 months ago, the company was in very bad shape I that time period. And with these incredible improvements on all, and going forward we will benefit greatly from this growth.

Operator

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

Chris Sassouni - Eagle Asset Management

Yeah, good afternoon. Federico, I just want you to go over again with us the advantages of the EPIC. I mean clearly, there are number of competitors out there that have soft-tissue dental lasers, and while that has it’s pros and cons, it’s clear that the market is adapting soft-tissue dental lasers, perhaps a bit faster than the heart tissue dental lasers but not-withstanding that, tell us again what the EPIC can do, both in terms of the model that’s coming and then the platform that it represents and what it can do in the future if you need to scale up power or other features in the platform that you have?

Federico Pignatelli

Chris, thank you. Well, first of all I would like to say that it is important that EPIC is a platform, so it’s upgradeable, to higher powers and added features. And that will create economies of scale for BIOLASE. So it is very important that is – consider as a platform.

Now, regarding the clinical advantages, I’m going to – I’m more of a businessman than a clinician and I have in front of me, Brill Brown that with more details than I can provide, will answer your question.

Bill Brown

Thanks, Chris. It’s really very simple, EPIC has the first ability for soft tissue for laser whitening and for temporary pain therapy. No doubt laser is ever been available to gave you the choice of those three indications with a custom delivery systems. It’s backwards – compatible with all of the delivery devices that we have sold with our thousands of ezlase and iLase. And the short pulse, the 10 microsecond pulse gives us the ability to have the most comfortable cutting of any diode laser that’s ever been developed.

Chris Sassouni - Eagle Asset Management

So it can do the ablation of the soft tissue, gingival, contouring and frenectomies and so forth and then at the same time you can apply it for laser tooth whitening and then finally there’s – you’re saying that there’s some sort of setting where if you shine a laser on the tooth itself it desensitizes the tooth?

Bill Brown

No, for pain therapy, where things like [TMJ] with there’s very few things that work for. So for TMJ for all massofacial pain and Trismus and things like - our book stage is like that it’s totally approved for oral massofacial pain it can also be used by [cal practitioners] et cetera for neck and shoulder and temporary relief of pain and other body parts.

Chris Sassouni - Eagle Asset Management

Okay, and then the price point at this point?

Federico Pignatelli

It is $5950.

Chris Sassouni - Eagle Asset Management

Great. All right. Secondly -

Federico Pignatelli

And by the way it’s way below what other competitors that have been in this arena, diode sales for well over $1000 per watt. And we are selling at essentially $600 per watt.

Chris Sassouni - Eagle Asset Management

Okay, next question, Federico, could you just talk a little bit about all of your efforts to expand distribution outside the US and what is the current number of distributors and countries in which you have distribution capabilities and as you look out over the next year, how many more countries and/or distributors could you add?

Federico Pignatelli

Well, I personally have made a substantial effort in spending time in Europe and we just signed up sales that is I will tell you the largest distributor of imaging systems in France with the turnover of around $650 million and they are now very strong believers that the next wave is going to be lasers in that history and so they decided to stop that the division dedicated to laser dentistry and so they signed up our product line and we will re-launch officially at the end of the month of November. And they already have placed a nice order with us or old tissue lasers and soft tissue lasers and we are now looking at the market. You know this is more of a complex market place as you well know than United States is more uniform. Every country has it differences.

We have distribution in Germany. We have current distribution in England as that we are reviewing. We have distribution in Japan. We are not satisfied about the distribution in Italy, so I’ll spending time in reviewing how to approach that in other selective countries in Europe but essentially every country in Europe you have to study carefully how the first distributor has overall internationally next period we will be around 60.

Chris Sassouni - Eagle Asset Management

60 countries?

Federico Pignatelli

International distributors.

Chris Sassouni - Eagle Asset Management

Oh 60 international distributors, wow okay. All right. Last question and this is for a Bill. I thank and that is with the upcoming New York dental association meeting so there is two things that I would expect good come out of a New York Dental Association and one is the that this -- there’s obviously a showcase for products. You have a large number of products still new products, so if you could just talk about some of the new products, that you’ll be featuring at New York dental and also whether I think a section 279 tax credit is in placed and what the amount is for this year and how that’s likely to stimulate demand at New York dental association meeting.

Bill Brown

Fine. You are correct – as we did had the American dental association meeting in October. We will be featuring the large of the EPIC and the 3Shape at the Greater New York, I’m just driving this Sunday, after thanksgiving, but it will also be the first time that we’ve had the NewTom Cone Beam system available to east coast for the New York customers, so we will be excited. So we will be featuring the NewTom Cone Beam the 3Shape as well as the official launch of the EPIC through the East Coast.

If it is 179 is a very strong driver in Q4 every year, but it has a special impact this year where if the laws not change that it will drop down from $125,000 to only $25,000 in the 23rd change, so it is the uncertainty or recording once they (inaudible) has doctors considering moving their purchasing decisions up to 2012.

Chris Sassouni - Eagle Asset Management

Okay, okay and those were all my question. Thank you very much.

Federico Pignatelli

Thank you, Chris.

Operator

(Operator Instructions) And our next question comes from the light of Robert Hoffman with Princeton Opportunity Partners. Please go ahead.

Robert Hoffman - Princeton Opportunity Partners

Yes, I don’t think you answered this I was trying to two things at the same time, any of you at least said you’ve begun intimating several consumer based initiatives on the one hand the demand and routine by driving patients twice to dentist creating more impulse from the market place. Can you flesh that out a bit?

Federico Pignatelli

Well, thank you for asking this question. I really care about this issue. If you bring an example into this surgical, probably at $18 going down around $6 and was very similar to BIOLASE in a way, they were losing money. They were growing in revenues. The medical community was very well aware of these new phenomenon of robotic surgery and what really draw the demand into this surgical of DaVinci product line was the patient’s demand.

At a certain point, the patient’s [through a] campaign they got aware of this new technology and they start to demanding it and it is not just like change that we have on our board BIOLASE one of the best most renowned surgeon of DaVinci System Dr. Norman Nemoy and I ask to Dr. Nemoy when is that you decided to spend $2.6 million to buy the per system, he owns now two. And he said, Federico, when I lost my fifth patient, notwithstanding I will tell the patient that was always my hand performing surgery, and there robot was only replicating my hand.

I would lose patients because they wanted the best possible treatment and they believe that robotic would provided. So when I lost my fifth patient, I called the DaVinci surgical and purchased my first system and now I have two.

So that is exactly what we need to make half we need to make happen, at BIOLASE, the WaterLase Technology and the BIOLASE brand is known by over 90% of the dental community of dentists. But only a very small percentage of the patient’s they know all the advantages or they know all the WaterLase technology.

So we want to make the patient and users aware of the great advantages of the WaterLase Technology, so they can demand this to the doctors and the doctor then will be in a way stimulated did not force to became a high paid dentist and again he is very interesting to see what has happen into the surgical going out 100 times in value from $6 to $600 in just few years, once that phenomenon happen, and today is a $21 billion, and they’re only selling to hospital. We are selling to dental offices in United States in that 140,000 we are selling worldwide and $1.2 million in growing. So the market is incredibly bigger and also our system the top system that we are selling the latest system is under 50, now in the millions. So you can understand the important of a consumer driven demand.

Robert Hoffman - Princeton Opportunity Partners

May be even here my question, I was – I agree with what all you said and as owned to the surgical back end in the day and suffered the volatility back then and you look back when you say well, there was nothing, but I think there is some big differences between deciding where you’re going to go for and whether or not you continue to go to your regular dentists which was people do. But my real question is what are those initiatives, not whether they’re smart I think they’re over smart that’s why I am focusing on the question what are those initiatives that you’re looking it?

Federico Pignatelli

They’re all social media base, as you know the Internet allows instant communication today and a lot of people have already interested in the best all care matters as the ones deciding why everyone deciding which dentist is going to be count as family dentist. Let’s not forget that the WaterLase technology is approved for use on case and the 80 million cases in this country.

The fact that in the vast majority of the cases there is no need of a needle but using a WaterLase and there is also no cross contamination that I can also more about that issue because when you go to a dentist a conventional dentist the burs that goes in to your mouth has been in the mouth so many other patient who before and there is no proof whatsoever that bur is narrow or the level that he should be and also that independent establish let say that doesn’t matter what do you do, you will never have a through sterile bur, 20% of the dental burs and 60% of the endo files the still contain bacterias and viruses even if sterilized as for protocol.

So not only we are talking about better dentistry, no pain dentistry, but we’re also talking about sales dentistry and by having the public understand that we want to drive the consumer in the demanding it. And by the way it is very interesting what you said about a perspective surgery on a prostate is the fear factor because it can be deadly that drive the patient to demand the best technology. But the same thing is in dentistry if you know that you can get cross contaminated or that you can receive an injection you have that fear factor playing into it, so we believe that also in oral care can be substantial pools from the consumer.

Operator

Thank you. Our next question comes from the line of [Wyatt Car] with Monarch Bank. Please go ahead.

Wyatt Car - Monarch Bank

Hi thank you, Federico and Fred. My question, first one is on WaterLase in the quarter and this is your still your core product I believe, if I am not mistaken it was 63% of revenues?.

Fred Furry

Yeah.

Wyatt Car - Monarch Bank

And your units were up but the profits were not up as much and some of that was because some of these MDs that you were selling and then iPlus is but could you kind of walk me through, you’ve got a lot of different WaterLase products now I mean you’ve got the 300, 400 iPlus MD Turbo, MD can you kind of breakout where the sales of WaterLase were in the quarter?

Federico Pignatelli

Well, let me answer to this question, we almost to go to much in to details of how much we sold this product that product what I can tell you it is very simple we brought back $1.1 million of a product that we have discounted that is the MD Turbo. So we obviously concentrated in selling that product that sales basically around the $20,000 and plus and so you see the number of WaterLase going up, but the price has been lower that’s the difference that you see there. But is a healthy difference simply because we’re getting rid off a product in other profit by the way then we purchase from own distributor, Henry Schein.

Wyatt Car - Monarch Bank

Right, okay.

Fred Furry

And I would like to add a little bit there, and your other part to your question so at the top level is taking upturns we have in our WaterLase line we have a wide range now the top level is revolutionary iPlus in the middle you have MDX 450 and then below that you have the MDX 300 which is very similar to the MD Turbo in output and what it can do. And then like Federico mentioned we have the certified pre-owned or used MD Turbos that we repurchase from Henry Schein that have been a big hit the marketplace, in addition to MD Turbos that we can take in trade much like car dealership would when returning customers by higher level iPlus.

So we’ve seen a lot of good reactions from the market where we offer the iPlus the highest level the fastest study speed, the most presets the more stability and then also we have the certified pre-own model for those people that can’t quite afford it or don’t necessarily needle that pre and all those presets but they love the entry point and we really like having all those new users joining us that at a low cost and we look at everybody that buys an MD used MD Turbos going to be looking for future biology product and as well as consumables and service contracts and warranties and everything else, we’re very happy with that.

Federico Pignatelli

This is very important to understand every time we spell the piece of equipment it is not just the sale of the equipment itself, it everything that is going to become a recurring revenue over time.

Wyatt Car - Monarch Bank

Okay, great and if the same transaction which was it has been kind of a cloud or confusion. You are out of that as of the fourth quarter all of the accounting issues and everything will be completed is that correct and can you kind of give me an idea of what things will look like post the Schein transaction?

Federico Pignatelli

Well, I’m very happy that you brought this question yes was way more than a cloud and we got reed of it with this quarter Q3. So for the first time we’re going to have comparison of Q4 versus Q4 with real numbers that will reflect the improvements of the new BIOLASE.

Unfortunately, even Q4 will be somewhat affected by some remaining inventory of eyelids and eyeglasses in the hands of Schein. Schein is not accompanied that it shows in selling capital equipment. We do, but we know how to sale capital equipment. They know how to sale consumable and they sale a lot of our consumable so they are making very good money, in selling our consumable. So this already care much about the remaining inventories that they had in this two products [high price]. So they have lowered prices competing with us to just get rid most likely by Q4 of older inventory. So that can have some effect and we will some effect in Q4. So the clouds still there until year end but before was a very bad cloud, now it is a light cloud.

Wyatt Car - Monarch Bank

Okay.

Federico Pignatelli

The interesting thing is that by their effort including this product sales revenue stream market you will have an sales revenue free. So at the end BIOLASE will benefit doesn’t matter what going into 2013.

Wyatt Car - Monarch Bank

And my last question comes along the lines of the consumer initiatives and one of those that in the past that has been brought up is the Procter & Gamble the toothbrush and I believe Fred got a question at the Singular Conference and maybe you can address that now since you’re here?

Federico Pignatelli

You want me to address this question after Fred already did?

Wyatt Car - Monarch Bank

No Fred couldn’t address it so.

Federico Pignatelli

Okay. Well we have a very active relationship with Procter & Gamble is a very active project but at the same time, we have better limit what we can say or not say. We believe that is a very promising technology and product and we believe that Procter & Gamble is a phenomenal partner and we believe that we don’t believe.

We are positive on the fact that at certain point this technology will find its place in the market and will be a very important place to market because it is truly the first hi-tech toothbrush ever existed. Any other toothbrush was simply an enjoying actually into toothbrush instead of doing it by hand there was an engine rotating the brush, so there is really no technology in that or minimal technology.

So we are very proud to own the patents of this wonderful technology would be the first consumer product BIOLASE consumer product. We obviously a very substantial recurring amount of revenues but again let’s not just stop to that if I may I would like to bring to the attention of the fact that we have fact in case for podiatry nail fungus that is $1.5 billion market and that is a huge upside potential that could occur in 2013, if we get approval as we expect for orthopedic or small bone with high class for 10 different procedures the market is over $5 billion and we have 510K there too, so another huge up side.

In ophthalmology, we have dry eyes that is almost the $2 billion market, Glaucoma that is almost the $3 billion of oculoplastic that is over $3 billion market opportunity and, in fact we walk down the road two to three years down the road is a $5 billion market in plus. So this so much more to WaterLase technology and our diode technology then just dentistry and we have made a strategic moves to broaden our – the scope of use of WaterLase without getting destructive by our core business that is the dental business. And as you can see we’re being able to turn the profit while non-GAAP profit while we’ve been making all these investments with user set potential in the future.

In other thing that I would like to ask is that BIOLASE in our opinion has been really misplaced in the category of capital equipment, while we’re not ready to capital equipment per se company, yes we sell equipment but we have intellectual properties the huge amount of intellectual properties that what we have done a BIOLASE is that we invented that and perfected a new surgical device to look at human and animal tissue. With a minimal examine -- in the most biological way so we are the best surgical system today biologically compared to any other surgical system out there.

So I frankly believe that BIOLASE should be as a biomedical company not as a medical technology company. We don’t sell dental chairs, pacemakers, dental burs or just noble equipment. We have invented the technology that back to the other molecular level. And but we also manufacture the product, so really it is I get upset when I see BIOLASE is being compared to company that in reality fewer catheter equipment companies, in the space of dentistry, we are much more than that and I hope that you investors going to start to looking at BIOLASE a different way.

Wyatt Car - Monarch Bank

Great, well, thank you very much.

Operator

Thank you. I am showing no further questions in the queue at this time. I’d like to turn the conference back to management for any final closing remarks.

Fred Furry

Well, we are very happy overly to have been able to turn profitable on a non-GAAP basis ahead of our expectations of Q4. Clearly, we would have done much better if you would have seen the EPIC CE Mark approval and FD approval, a couple of months or three months ahead of time. Unfortunately, we are production capacity limited at this moment as with any new product you have that issue for a while and so the last time in approval that’s not necessarily means that we could adjust made at the revenues of the EPIC, loss revenues of the Epic in Q3 in Q4. So that’s why we lower the guidance by couple million dollars, but in 2013 the production of the EPIC will go essentially on a quarterly basis and we believe that is going to be that it will be as already has shown to be a very successful product in high demand.

With that I thank you for being at this Q3 conference and being patience for BIOLASE and believers in BIOLASE and more or less technology and all other technologies that BIOLASE in involved in and our efforts in expanding in to dramatic field as well. And we will be talking in three months or grew more for Q4. Thank you very much.

Operator

Ladies and gentlemen this does conclude our conference for toady. Thank you for your participation. You may now disconnect.

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