BIOLASE's (BIOL) CEO Harold Flynn on Q2 2016 Results - Earnings Call Transcript

| About: Biolase, Inc. (BIOL)
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BIOLASE, Inc. (NASDAQ:BIOL) Q2 2016 Earnings Conference Call August 1, 2016 4:30 PM ET

Executives

Rene Caron - Investor Relations

Harold Flynn - President and Chief Executive Officer

David Dreyer - Chief Financial Officer

Analysts

Chris Sassouni - Eagle Asset Management

Chip Saye - AWH Capital

Wyatt Carr - Western International Securities

Paul Bornstein - Black Diamond

Martin Cohen - Private Investor

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the BIOLASE 2016 Second Quarter and First Six Months Result Conference Call. [Operator Instructions] For the benefit of those who maybe listening to the conference call replay, this call is held and recorded on August 1, 2016. I would now like to turn the conference over to Rene Caron of DresnerAllenCaron. Rene, please go ahead.

Rene Caron

Thank you very much, Matt and good afternoon, everyone and welcome to the BIOLASE conference call to discuss the results for our second quarter and first six months ended June 30, 2016. On the call today are BIOLASE’s President and CEO, Harold Flynn; and the company’s Chief Financial Officer, David Dreyer. Harold will begin the call with a brief introduction followed by an update on the progress being made with a number of the company’s key strategic initiatives. David will then review the company’s financial results and provide additional background and color on those financial results, after which he will open up the call for questions.

Please be aware that a number of forward-looking statements will be made during this presentation, including forward-looking statements regarding the company’s strategic initiatives and financial performance. Forward-looking statements are any statements that are not historical facts and that can be identified by words and phrases, including will, may, believe, estimate, project, plan and similar words and phrases. These forward-looking statements are based on BIOLASE’s current expectations and are subject to a variety of risks and uncertainties that could cause the company’s actual results to differ materially from the statements contained in this presentation. These risk factors are discussed in the company’s filings with the Securities and Exchange Commission. BIOLASE cautions you that any forward-looking information provided is not a guarantee of future performance. Any forward-looking statements represent the company’s view only as of today and should not be relied upon representing our views on any subsequent date. A replay of this conference call will be available on the BIOLASE website shortly after the completion of today’s call.

When listening to this call, please refer to the news release issued earlier today announcing the company’s results for its second quarter ended June 30, 2016. If you do not have a copy of the news release, it is available in the Investors section on the BIOLASE website at www.biolase.com. The company’s results for the second quarter and first six months ended June 30, 2016 can also be found in the company’s quarterly report on Form 10-Q, which the company filed with the Securities and Exchange Commission today, August 1, 2016.

With that, I am pleased to turn the call over to BIOLASE President and CEO, Harold Flynn. Harold?

Harold Flynn

Thank you, Rene, and thank you all for joining us on the call this afternoon. 1 year ago, I had the honor and privilege to host my first quarterly results conference call as President and CEO of BIOLASE and I was all of 4 weeks into the job. I said that day I was excited about the prospects for BIOLASE and about the engagement and drive of our team. I am pleased to say today that I am more enthusiastic than ever about the future of this company. While we still have a long way to go and a lot of work to do, I see meaningful progress every week. A year ago, I saw the potential in key elements for success here in effective and disruptive laser technology, an under-penetrated global marketplace, a strong intellectual property portfolio and great people, but it was clear the company needed to continue its overhaul of its commercial operation, including its sales and marketing strategy and its execution as well as its commercial processes and discipline. The transformation of BIOLASE begun by my predecessor, was in its earlier stages at the time.

Today, I believe the work of that transformation is well underway and we are beginning to see results in our efforts to create a strong and efficient and growing commercial enterprise. Our revenues, while still lumpy and nowhere near their ultimate potential are trending upward, David will get into the financial details in a moment, but we grew our business 16% year-over-year with accelerating growth of 22% in our largest and most profitable market in the United States.

I am especially encouraged by the commercial team’s performance in our core laser business hosting very good results in both our all tissue WaterLase franchise as well as our soft tissue EPIC product line. The U.S. team grew WaterLase revenue over 30% yielding the highest quarterly unit sales in the last 3 years for a non-fourth quarter period, while at the same time maintaining favorable pricing relative to 2015. EPIC sales in the United States increased significantly, growing 57% benefiting from a startup order from a dental service organization or as we refer to them a DSO that will provide a base for additional consumable sales for years to come as laser technology is integrated into routine protocols across their network.

While we are overhauling our commercial operation, we are managing spending very well. We saw a dramatic decrease in the cash burn rate for the quarter from $5.1 million in the first quarter to $1.8 million in the second quarter, which was also a substantial reduction from a year ago. So, we understand the drivers of our business and financial performance and we expect that direction to continue. This is a good point at which to comment on the great news that we released earlier today regarding our raising of $10 million led by our largest shareholders who have demonstrated continued confidence in our plans and the sales traction we have been gaining over the last few quarters.

Given our plans of new product introduction and commercial expansion, we were very happy that we could raise the risk adjusted amount we believe we need to achieve self sufficiency and positive cash flows. We achieved much better results than a year ago. And while the dental industry tends to be seasonal, I believe we are headed in the right direction. The real progress has been what we have done strategically and operationally within our organization in preparation for a great future.

Our commercial execution continues to improve as evidenced by the growth in our core WaterLase franchise. WaterLase revenue for the second quarter increased materially over last year’s second quarter, including a 32% increase in the U.S. and 19% internationally. We continue to build a much stronger sales team, particularly in terms of sales execution and demand generation, two areas we are developing into a core strength. We are hiring great talent and the new sales reps and veterans alike are responding to our updated and expanded sales training. With the new reps reaching a high productivity level much sooner than in the past, it’s a very encouraging sign for a company overall when new people can quickly achieve top quartile success in the selling model. The improvement of the team and its leadership is also evidenced by higher volumes at higher prices than in recent years, which mean the team understands more – understands and more importantly can sell the tremendous value of our solutions.

In terms of research and product development, we have repositioned our innovation pipeline both internally and externally. We have reevaluated and redirected our internal efforts and focused on developing new breakthrough systems as well as enhancing our current products with the goal of transformational penetration of the market and growing recurrent consumable and service revenue streams. Externally, we continue to evaluate partnerships where they can bring value and remain very excited about our collaboration with IPG Medical, the medical laser division of IPG Photonics, one of the world’s largest laser companies. We are working on several projects simultaneously with IPG, including next-generation products completely new to the dental industry. The first offering related to our collaboration continues to be expected this year. Our plan is to continue to invest significantly in product development and to start ramping up investment in product launch activities in the coming quarters.

We will also focus more on the development and growth of our international business, which is largely an indirect sales model in contrast to our direct selling model in the U.S. posing challenges and requiring different marketing and sales strategies from one country or region to the next. This is really a matter of assessing local market needs and understanding how we can enable our distribution partners to become more effective in their respective countries. We are working on developing the infrastructure, expertise, and the go-to-market plans country-by-country.

Before I turn the call over to David, I will share that I have spent some time over the course of the year riding along with some of our United States sales reps, visiting with our current as well as prospective customers. Our goal is to develop a deeper and visceral understanding of the types of customers we serve, what is most important to them with respect to their patients and their businesses and to be sure we have a compelling value proposition for laser dentistry that resonates with each of them. We are understanding our customers better, their usage of lasers and their attitudes toward them, and how we can meet their needs by providing benefits they desire most be the patient reported outcomes, higher productivity, or better returns on their investments and technology.

With that, I would like to turn the call over to David for more on our financial results. David?

David Dreyer

Well, thank you, Harold. Good afternoon, everyone. As I have done in the last several quarters, I will focus my review today on five key financial areas: revenue, gross margin, operating expenses, profitability, and liquidity.

Overall, our worldwide revenue increased 16% to $13.8 million from last year’s second quarter. U.S. sales increased 22% year-over-year and international sales grew 8%. The overall increase in net revenue was driven by a 32% year-over-year increase in our U.S. WaterLase sales and the 19% increase in international WaterLase revenue. These improvements were largely due to the continued realization associated with the changes to our sales cycle that we implemented in late 2015.

Net revenue for the quarter also included a 29% year-over-year improvement in imaging systems revenue on a relatively small base as we sold through selected imaging inventory given our primary focus on the core dental laser business. Partially offsetting the revenue increases was a 9% year-over-year decline in consumables and other revenue and a 3% decline in service revenue, which consist of extended warranty service contracts, advanced training programs and other services.

Gross margin increased more than 970 basis points to 41% compared to 31% in the second quarter of last year. This improvement reflects that a larger mix of domestic sales, which typically have higher product margins due to the higher pricing. Our gross margin typically fluctuates with product and regional mix, selling prices, product cost and different revenue levels.

Total operating expenses declined year-over-year by 16% or more than $1.7 million in the second quarter of last year. When you look at the mix of spending in our three largest expense categories as compared to last year’s second quarter, sales and marketing expenses declined by 5%, G&A expenses decreased by 32%, and engineering and development expenses decreased by 4% primarily due to a decrease in operating supplies partially offset by an increase in payroll and consulting and stock-based compensation.

Going forward, as we strive to return the sustained revenue growth, we expect sales and marketing and G&A expenses to continue to decrease as a percentage of revenue. However, we plan to increase our investment in engineering and development activity during 2016 as we continue efforts to develop new products and technologies, which we believe will further strengthen our worldwide market leadership position. Net loss declined more than $3.5 million or 50% to $3.5 million or a $0.06 loss per share compared to a net loss of $7 million or a $0.12 per share loss during the second quarter of last year. The decrease in net loss is attributed to overall business improvements, including the $1.9 million increase in net revenue, a reduction in cost of revenue and the large decrease in operating expenses.

Switching now to our year-to-date results, revenue increased 9% year-over-year to $24.7 million. Operating loss declined 41% year-over-year, excluding the favorable one-time effect of the legal settlement than last year’s first 6 months. Gross margin increased 700 basis points year-over-year to 38% and the net loss declined approximately 38% to $7.8 million or a loss of $0.13 per share compared to the prior period.

Looking at our non-GAAP net loss, if you exclude net interest income, income tax provision, non-cash expenses for depreciation and amortization and non-cash stock-based compensation, our non-GAAP net loss for the 2016’s second quarter was $2.3 million or a loss of $0.04 per share. This compares to a non-GAAP net loss than last year’s second quarter of $5.9 million or a loss of $0.10 per share. The non-GAAP net loss for the first six months of this year was $5.5 million or a loss of $0.10 per share. This compares to a non-GAAP net loss of $10.5 million or a loss of $0.18 per share.

I will now discuss liquidity. As of June 30, 2016, BIOLASE had approximately $13.6 million in working capital. Cash and restricted cash equivalents at the end of the second quarter were $5.1 million and net accounts receivable totaled $11 million. As we have said for the last several quarters, cash preservation continues to be a top priority for us and this year’s second quarter cash burn reflected the positive impact of our cash management efforts. As Harold mentioned earlier, cash used in this year’s second quarter declined 54% or less than half the amount used as compared to last year’s second quarter and it was lower by an even bigger amount at 65% as compared to the first quarter this year. In order to continue making progress in our commercial operations, revenue growth and funding our investments in new product development, we need to supplement our available cash.

As we have indicated for several quarters now, we have held discussions with various parties in search of financing while we were initially focused on searching for debt financing opportunities, our goal was always to find the best financing opportunity that would meet the liquidity needs of the company and help support our growth. As Harold mentioned, today we announced entering into a preferred stock purchase agreement with the group of investors that includes our largest shareholders and certain Board members and officers of the company in a private placement raising a total of $10 million. The private placement is expected to close and be fully funded next week on Monday, August 8 and involves selling unregistered shares of the company’s convertible preferred stock and related warrants to purchase shares of the company’s common stock. Each share of preferred stock will initially be convertible into 100 shares of BIOLASE common stock and reflects a conversion price equal to $1.13 per share, which was the closing price of BIOLASE common stock quoted on NASDAQ last Friday, July 29. In addition, investors will receive warrants to purchase up to an aggregate of 2,035,398 shares in BIOLASE common stock at an exercised price of $2 per share. The warrants become exercisable on February 8, 2017 or six months after the closing of the private placement and they have a term of 5 years from the date of issuance.

In closing, I would like to add that we are very optimistic about the future of BIOLASE. Our solid commercial progress, innovative product pipeline and more effective sales organization and the fresh capital all collectively bode well for our future. I am confident that we will further expand our leadership in the global dental market and continue to drive improvements in both our top and bottom line performances.

With that, I would like to turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Chris Sassouni from Eagle Asset Management. Please go ahead.

Chris Sassouni

Good afternoon and congratulations both on the financing and the progress that you are making. I wanted to just ask you a little bit about what you believe is causing the improvements in sales productivity? And then my second question is, the plans for the international markets, which seems – where revenue growth seems to be a little bit behind where the U.S. is?

Harold Flynn

Great. Thanks, Chris. With respect to sales productivity, there are a number of elements that have come into play. I think I have started the comment with one of them, which is great talent. I think the company has said on several occasions in the past that we continue to upgrade and update the talent on the sales team and we are finding people that have a very strong profile with respect to the dental market and equipment sales. That’s also in conjunction with bringing in new sales training that focuses on selling value rather than getting into price discussions and really understanding the customers’ needs in a process that has the lead become qualified and then educated, then validated and ultimately closed. So, several of the most effective reps in the past have used the similar process and our sales leaders in the United States are all well-experienced veterans who are giving them an infrastructure and follow-up as well as better tools to do the job. That’s also combined with the fact that we have a fairly full complement of salespeople at this higher talent level now. So, we are starting to see the effects of that and the discipline and rigor in a sales execution process. I think there is still significant room for us to improve, but I believe it demonstrates we are on the right path and we know the right levers to pull.

Well, with respect to international business, as I said it’s an indirect sales model and there are a lot of macroeconomic effects that occur such as what’s happened to oil in the Middle Eastern states, some of our strongest markets in the past as well as things like Brexit and other things that disrupt the European markets. That being said, we have to build an infrastructure that really considers these regions and/or countries independently and assembles go-to-market plans that are more tailored to the customs, the usage, and attitude toward lasers in dentistry and the like. So, it’s incumbent upon us to build out a good infrastructure that helps some of our distribution partners, some of which are solely BIOLASE focused and some of which are full line distribution partners on the larger scale to make sure we know how to work with each of them to maximize the return in country by country. So, that’s part of the investment in this next 12 months that I will be making in time and effort to make sure that we see the real opportunity and potential of the European markets, which as a whole as an example -- and Europe should be larger than the United States market and that’s not where we are performing today. So, I think there is a lot of runway there. There is a lot of runway in South America as well as in Asia-Pacific in countries like China. So, hopefully that addressed your question.

Chris Sassouni

Yes. So, since Germany has such a large market for lasers or at least that’s the way that I have understood it, can you just talk about your presence in Germany, whether you have feet on the street there, employees in Germany and just what the market is like right now in Germany for lasers?

Harold Flynn

I would summarize it as fairly underdeveloped and really dependent upon the distribution partner that we have or that one has. We have some direct presence there, but it is subscale at this point and part of the investment we need to make to take advantage of that market, which arguably outside of the United States and Japan is one of the world’s largest dental markets. So, it’s right with opportunity, but we are significantly underperforming that opportunity today. So, that’s what we are going to be going after. We do have a small, as I said, direct presence with some service and a couple of sales professionals, but that’s an area that I look toward investing in, in the coming year.

Chris Sassouni

Okay. And then my last question is just in the area of new products, I think we have been waiting for a while for kind of a new version of the iPlus perhaps different feature set or whatever. When are we likely to see a new version of the iPlus, and is that separate and apart from any product that would come from your partnership with IPG?

Harold Flynn

To answer the first part – or the last part first, if you will, the IPG products are completely independent of our current all tissue portfolio or WaterLase based products. So, those would be independent and launched independently. With respect to new products, we continue to look at the portfolio and I want to be very careful about any comment ahead of product readiness relative to new products going into the market for a number of reasons that would probably be obvious. But I believe in a portfolio that we will be able to appeal to a broader number of dentists, and let’s call it that pragmatist section in the next market segment if you consider crossing the chasm model where you go into early adopters and the technologists at first and you have to cross this chasm into the early majority or pragmatists. We have to appeal to them in terms of user interfaces, training, the ability to use the product everyday effectively. So, those are some of the things that I focus on with respect to expanding the portfolio, and I am not really prepared to talk about launch dates, but certainly we are looking at it in the near-to-mid-term future.

Chris Sassouni

Okay, thank you very much and congratulations.

Harold Flynn

Thanks. Thanks Chris for your support.

Operator

Our next question comes from Chip Saye from AWH Capital. Please go ahead.

Chip Saye

Thanks for taking my question. My first question is you usually don’t break it out at this level between WaterLase and EPIC you have done that in the past, but can you tell me what was the EPIC revenue in the quarter?

Harold Flynn

No, we prefer not to break things out specifically by product type really on a competitive basis. We will – we did say that we grew that segment pretty substantially in the U.S. a good portion of which is attributable to us getting to work with a dental service organization and integrate soft tissue laser protocols into their everyday hygiene. So, we are seeing some uptake of that soft tissue laser, but we wanted to be careful not to telegraph our kind of volumes and business segment by segment to our competitors.

Chip Saye

Okay. So I guess, you don’t split out for WaterLase or larger than EPIC say diode?

David Dreyer

I think we really normally have and we have concentrated on the business segment as to basically the combined both products basically into the laser segment. The reason why we are discussing the percentages is because they were driving the revenue growth in the respective geographic segments and that was really the information we wanted to share or just as Harold suggested for competitive reasons, we really don’t cover our specific product performances individually.

Harold Flynn

Because we have different competitors in both markets, we are participating kind of in both sides of that market in a pretty meaningful way.

Chip Saye

Okay. Could you give any indication of what it would be up outside of the sale to the DSO?

Harold Flynn

No. I don’t think so.

David Dreyer

Yes.

Chip Saye

Okay.

Harold Flynn

We would have seen growth, but at a smaller percentage.

Chip Saye

Right, okay. Was there any – maybe any repositioning of EPIC or diode in the quarter or is it really much the same, was it a different version of EPIC or is it the same version that was just mostly to the DSO?

Harold Flynn

No, it’s the same version. I would add that we are having a lot of success selling the WaterLase and the EPIC together. A laser is not a laser and they both have different benefits to the patients, the clinician and the hygienist. So, we are seeing a larger number of our EPICs go along with a WaterLase sale as part of an attractive package for laser dentistry integration into the practice. And we didn’t really have the new product or different position, I would say that one primarily, but the group of regional sales leaders worked with this dental service organization to trial a product and trial protocol enhancements to their hygiene programs that will be attractive both for the DSO and will be attractive for BIOLASE in the future, because these will be large consumable users. So, in that sense, we did look at a program that was structured a little bit differently than they might have been for a single practice or a small group of practices. So, I think that’s an opportunity for us to develop further as the growth of DSOs increase or these dental service organizations within the marketplace generally.

David Dreyer

Just one kind since the question was asking about products, if I refer you to our 10-Q, you will see the Note 10 about concentrations and it talks about the breakdown, which is basically laser systems, imaging, consumables and services, so that’s really the specificity that we cover on our public earnings calls.

Chip Saye

Okay. Next question is I want to ask you about the capital raise, congratulations on doing it. However, I ask on May 9 I said is there any chance that you are going to have a capital raise that involved stock and you should probably not, because the stock price was where it was. And then I just want to know if you could give us a little bit around that. Did you try to do a debt deal or can you talk about the process and then how you settled on this deal?

Harold Flynn

Well, I don’t think we can talk in too much detail about the specifics of the process, but we were in possession of several competing bids and opportunities that included debt equity or a mix of the two. And as we evaluated each of those against the needs of the company and the shareholders frankly, we determined that this was the most advantageous with the best terms for all involved. So, while it was clear that we did speak about on previous quarters that we were focusing on a debt deal at the time, when we looked at the deals that came in, this had the most advantageous terms for all parties involved and therefore why we selected this one.

Chip Saye

Got it. Okay, I appreciate it.

Harold Flynn

Thank you.

Operator

Our next question is from [indiscernible] from Rodman & Renshaw. Please go ahead.

Unidentified Analyst

Thank you for taking my questions. Do you expect the gross margin to improve further in the coming quarters?

Harold Flynn

I am sorry, just to confirm that was a question do we expect the gross margin to improve for growth?

Unidentified Analyst

Yes, yes.

Harold Flynn

I am sorry, which?

Unidentified Analyst

The gross margin.

Harold Flynn

Okay. We are having a little bit difficult time hearing you, sorry about that. I think as we have spoken about on some previous calls, our gross margin improved significantly with increased revenues that helps us absorb the fixed cost of our service infrastructure and some of our fixed costs and manufacturing. So, with expected growth over the coming periods and as I have spoken about before, we have some seasonality and periodicity in the dental markets, but that trendline improving should help us see improving gross margins on a percentage basis as well. Is that your question?

Unidentified Analyst

Okay. Also what is the number of units sold for the WaterLase and EPIC lasers in the second quarter?

Harold Flynn

Yes, I appreciate the question, but again, this is a pretty highly sensitive answer, especially for our competitors. So, we don’t share the actual unit sales. We don’t break out the individual laser sales, but we specifically don’t break out individually unit sales or the systems themselves. So sorry, I can’t answer that one.

Unidentified Analyst

Okay, thank you.

Harold Flynn

Thank you.

Operator

[Operator Instructions] And our next question comes from Wyatt Carr from Western International Securities. Please go ahead.

Wyatt Carr

Hi, David. Thank you so much for taking my questions and congratulations on the raise. I know you guys have worked hard on that. The question I have you probably will not like it, but I went back through the each quarter. You report total laser systems sold, WaterLase systems sold and iPlus and MDs sold. And I can’t figure out, number one, you have obviously increased WaterLase sales, but the units, I don’t see that they have really increased. I mean, there has been periods like if I look at the total WaterLase numbers from September to December, there is a 100 increase; from December to March, there is 200; from March to June, there is a 100. So, I can’t kind of reconcile the iPlus, MD and WaterLase numbers that are being reported as a total number? And then, the total – and as long with the total laser systems that are sold, can you give me a little clarity on that?

David Dreyer

I am sorry. We are – I am in a little bit of loss as to your sources. This is in management discussion points or...

Wyatt Carr

Yes, it’s in the management discussion points and it’s in the total, I believe, it’s on Page 22 of the queue.

David Dreyer

Yes, hang on a second. And what specifically you are trying to reconcile?

Wyatt Carr

Well, you have given total number of laser systems sold since 1998 through the end of the quarter you give the total laser systems sold. So like from March – from 1998 through March of 2016, you have sold 31,200 total laser systems.

David Dreyer

Right.

Wyatt Carr

And in June, you had sold 30 – additional 32,000, which is 800 unit positions?

David Dreyer

So you are doing them – sorry, just I don’t mean to cut you off, you are doing those by kind of subtraction in the management discussion on the quarter?

Wyatt Carr

Correct.

David Dreyer

So, one dynamic that may not be as apparent, but is a very real factor as we have a number of people that adopted the technology early, and we are now on our fourth generation of WaterLase products. So, people will actually buy additional units. So, those are the units ever sold if I am understanding your question correctly and as they have done the tally over time, that total units sold has built up. So I am not sure if you are trying to reconcile the quarter to quarter.

Wyatt Carr

I am trying to back into the WaterLase numbers and get a unit kind of number.

David Dreyer

Yes, we obviously try not to make it easy. Not that we don’t like the question, it’s that we don’t want to share the information. But it’s really to try to give perspective on the – or kind of order of magnitude of systems sold, but certainly not intended to reconcile with anything in particular to be able to transmit our unit sales.

Wyatt Carr

Can you give me then an idea of what the ASP trend has been?

David Dreyer

I would say upward. So since my arrival, a part of that growth year-over-year has been ASP improvement. Again just because of the sensitive nature of the marketplace and pricing in general, it’s easy for me to say that we have had increased units at increased pricing and that pricing has been meaningful, but not all of the increase.

Wyatt Carr

Okay, great. And lastly, on the cap raise, this is virtually an equity deal and it does add to the shares, will the share count probably reflect this by the end of the September quarter?

Harold Flynn

Yes, there are – on a fully diluted basis, it has to be diluted, basically at this stage at the $2, if it really comes down to what our market price is as to measuring the warrants, the preferred stock would be converted, yes.

Wyatt Carr

Okay. And lastly, is debt still on the table?

David Dreyer

Well, we are looking at certainly our needs for growth, but as I said in my comments, we really try to evaluate a risk-adjusted amount that the company would need and we were very happy that our investors that participated in this race supported us with the need that we were looking for there that we believe will get us to self sufficiency. Outside of considering other forms, if we were to look at technology acquisitions or other types of investments that would not be working capital, I would say, those are something there, but we are not really disclosing financial plans beyond this particular race, but that we are – we intend to make sure that we are well capitalized to achieve our objectives.

Wyatt Carr

Okay. Kind of with that, will this race remove the going concern?

Harold Flynn

I think that’s a question for our auditor.

David Dreyer

The auditors are going to have to evaluate that when they do the year end audit, so that comes down to an annual audit process. I think that we take this into consideration, not sure.

Wyatt Carr

Great. Thank you guys very much for taking my questions and appreciate the hard work.

David Dreyer

Thank you, Wyatt.

Harold Flynn

Thanks very much, Wyatt. Appreciate it.

Operator

Our next question comes from Paul Bornstein from Black Diamond. Please go ahead.

Paul Bornstein

Yes, thanks. It’s nice to see a lot of momentum here after years and years of no momentum. So I think it has to be the management team. My question is on the sales process, I am wondering if you can give us a little more color on the time you get new dentists on to the products and how much more sales are you getting out of existing dentists who are already using the products given that you have enhanced the sales process, I guess that’s your announcement last quarter. So, I am just trying to understand and now you are raising more money to really leverage up the sales process and maybe a little more on the product side, but I am more interested on the sales efforts that you are making and maybe give us some examples of the pickup that you are seeing from previous years?

Harold Flynn

Well, I think there is a few parts there to respond to, Paul. Thanks for the question. We see a blend typically of new customers and previous WaterLase users, as an example, as our previous generation, let’s say, the MD product, those people actually have the opportunity to upgrade and get twice as much laser energy to cut more efficiently or do different types of procedures than they might have been doing as easily or as quickly with the MD when they go to the iPlus. So, we have a stream of upgrades that occur in any given quarter. And then we have new customer acquisition and penetration as well. So, we don’t really comment on the percentages or proportions of those, but we are seeing, obviously, a pickup of both, but a pickup also of new customer acquisition. And I think that’s testament to the fact that we are doing better with our value proposition and focusing our message to the dental users and understanding better who they are. So, with this talent that we have acquired and with the training that we have done, we basically made them more effective and efficient and we have kind of addressed a number of the process questions that we have had in the past, but there is still room to improve. I think when we look at the productivity, I spoke about earlier, I am especially encouraged that we have new representatives less than 6 months in the company selling at the same rate or in some cases even higher than our veteran sales force, which means we are starting to understand the process better we are getting our lead generation improvement that we were looking for in our capacity and we are managing our sales cycle and events better. Again, I would not say we are near the potential we have for that, but at the same time, we are seeing that encouraging results by seeing higher sales unit number as well as pricing than we have seen in a few years.

Paul Bornstein

Yes. Well, I guess, I can. Yes, I wouldn’t expect your near or large penetration of the market yet and I am just wondering are you going to starting to go after the consumers in terms of getting them to get their dentists to start using the product or are you basically just focused on the dentists themselves?

David Dreyer

Yes, I think largely with the dentists, because the direct to patient or direct to patient’s mother or direct to patient’s wife is often an expensive endeavor, although there are much less expensive ways to do it today. So, we actually have some models in the international markets where we are doing some and piloting some direct to patient work through some of our distribution partners. We believe that ultimately that has a lot of legs to it and a lot of potential associated with it and we have to prepare the landscape, if you will and prepare the doctors. The worst thing to do is to try to get patient pulled before the doctors are ready, because they will undo it when they come into the clinics. So, we have to do them both kind of simultaneously and building up the perception and building up the awareness relative to the laser dentistry benefits for the clinicians, so that they have a receptive engagement with the patients when they came – come in as our priority first in the United States. But we do that locally we work with them and may also work with some third-parties. Our practice growth guarantee, as an example, was part of an after-sales support program to market laser dentistry directly to patients and therefore have them come into the clinic, but I think we need to have all of those channels working properly to get the types of penetrations we expect, and we got to do them in the right order to make sure that we prioritize our investments.

Paul Bornstein

Okay. And one last question on the $10 million race, which I am glad Oracle is putting lot money up since they created the change at the company, how much is going to go to sales versus anything else, because I am trying to figure out how much leverage you get out of this? And when you might see yourself being cash flow positive, because you have lowered the cost on a continual basis since you came on board?

Harold Flynn

Well, at this point, we don’t provide any guidance as to the timing. And we are giving the various elements of the company moving in the right direction to achieve that. I believe, that this race allows us even with some risk adjustment to reach self sufficiently – self-sufficiency and cash flow positive, but we are not giving any indication as to timing at this point. And I would say in subsequent quarters, we watch the top line accelerate and it should be pretty obvious when that trajectory should hit.

Paul Bornstein

Okay, thank you. We look forward to the progress.

Harold Flynn

Thanks, Paul.

Operator

Our next question is from Chris Sassouni from Eagle Asset Management. Please go ahead.

Chris Sassouni

Yes, just a couple of more questions. David, if – at today’s current prices, what then is the fully diluted share base for the company inclusive of this race?

David Dreyer

I couldn’t give you that exact quote right now. Yes, I need to follow-up with you on that, Chris.

Chris Sassouni

Okay, that’s fine. That’s fine. No problem. Okay. Second thing is I wanted to get some feedback from you, Harold, about the competitive landscape, haven’t heard a whole lot from folks at Fotona and don’t know how active they are in the marketplace. And then secondly, I didn’t know if the manufacturers of laser that is delaying our procedure is still as aggressive as they had been historically. And whether now that you are really presenting a new value proposition and seemingly getting some good traction whether that is beating back their marketing efforts on LANAP with much more expensive laser system.

Harold Flynn

Yes. I would say that we are focused on growing the market more than competitive share. Our sense and market checks are that we significantly outsell on a unit basis the, competition and by a few fold or many respects respect to that, we certainly see in different geographies that we have competitors and they will certainly pickup some sales. But by and large, it’s the focus on the penetration in the market expansion and utilization. With respect to they are certainly continuing to market and had some successful marketing campaigns recently. But our impression and certainly our sales have been such that, they haven’t impacted our trajectory or haven’t really taken up very much of the market capacity, if you will, to expand especially when there are much smaller scale both in the United States and internationally. So outside of that, I think it would be imprudent to comment on too much more in the call, but our impression is that it’s – the market in many respects is ours to win in that respect given our position of strength and our considerably larger penetration and size.

Chris Sassouni

Okay. My last question is one of the things that’s been discussed in the past has been the need for either new clinical studies or better clinical studies that demonstrate the efficacy of your products whether it be the EPIC or whether it would be the iPlus and was just curious whether you feel that there is a need for such studies and that it would help. And if so, is that part of the budget for – that if – from the money that you have raised?

Harold Flynn

Yes, I do believe that we need some good clinical studies and we have some ideas about the endpoints that are required to really help open up the penetration, if you will and validate for some of the customers that are more reticent about bringing the technology in. So it is very much a part of the budget going forward. And I would say there are several studies that we’re looking at, some we’ve actually already begun since I joined that we hope to report on in the coming quarters and/or announced.

Chris Sassouni

Okay, very good. Okay, thank you.

Harold Flynn

Thanks, Chris.

Operator

[Operator Instructions] And our next question comes from Martin Cohen, a Private Investor. Please go ahead.

Martin Cohen

Yes, Harold, there are two questions. For a long time, we have heard that the laser dental market is sort of what I would call the early adoptive phase, where everything is just getting going and I am wondering where do you think the market stands and in terms of the resistance and response from dentists to considering laser dentistry? And second question relates to your initiative in terms of setting up a dental training school, I mean, laser training schools you mentioned, I think in the last quarter that you are setting them up and has that happened and is – what kind of response are you getting from the marketplace to that laser training?

Harold Flynn

Okay. Hi, Marty. Thank you very much for the questions. I think the data would indicate based on penetration and if we use that crossing the chasm model, which is a convenient one to use, that typically somewhere between 10% and 15% of the market tends to be the early adopters the technologists the people that are not afraid to, are actually desirous of integrating technologies in their practices. So – and that’s where the penetration has been and in some respects, we have done very well to continue to market products and services to those customers and a portion of our sales every quarter isn’t upgrading them, because they are true believers and have seen the transformational nature of lasers in their practice. And they may need the new features and capabilities. So, our product pipeline is targeted at accessing that next cohort. And that next cohort is typically referred to as the early majority, but they are characteristic or is that they are pragmatic. They want to see everything in a practical way. They don’t want to have anything be a science experiment for them. So, we are really focusing on the capabilities, the user interfaces, the reliabilities and all of those fundamental attributes and requirements to access that market. If you do the math on that traditional bell curve that early majority is 35% of the market. So it triples your opportunity or actually quadruples that, right, if you put it together with the early stage adopters. So that’s where we are really focused on is without overusing that analogy crossing that chasm and getting to that early majority and that’s where we have seen penetrations start to pickup. And that would be very attractive in our financial returns, because if you think about in the United States, if we just hand wave and say, there are a 100,000 clinics in the United States, every point is a 1,000 unit, right, every point of penetration. So, I hope and we expect that after we develop these new products that are more appealing that we will be sales channel limited versus market limited and then it’s really a function of managing that ramp up.

The second part of the question with respect to laser training, we are getting great returns and great feedback on the BIOLASE Learning Center, which we put in place here, which is an investment we made. It started just before I got on board and we completed it in kind of the October November timeframe. And we have seen great feedback, great returns, the classes are getting larger and more frequent. So, we are doing more of our training here in our headquarters, which helps us leverage expense, helps us give a consistent message and helps the training experience be much more than it’s ever been in the past. We still have ways to go and certainly part of this investment is to continue investing in training and investing in that customer experience, because the sooner that they are confident enough to speed with respect to laser dentistry, the more annuity we will get in the form of tip sales and service revenues.

Martin Cohen

Great. Good answers and look forward to Q3.

Harold Flynn

Great, thank you, Marty.

Operator

We have time for one more question and it’s from Chip Saye from AWH Capital. Please go ahead.

Chip Saye

Hey, thanks for taking my follow-up. I just wanted to follow-up in regards to a question asked earlier and you can help me with this. As I understand the EPIC or diode, it’s mostly a soft tissue laser and the WaterLase iPlus is a combination of hard and soft tissue laser and you mentioned that maybe the new successor having is selling both together to a customer to a dentist. Can you talk about how that – how you are doing that, because in the past I have always thought that the EPIC diode was a gateway to getting it a combination laser in the future whereas now you are kind of putting those together. Are there two different users and just talk about that, because that can help explain some of the success you are having?

Harold Flynn

Sure. The soft tissue laser can be used for a number of procedures that the all-tissue laser can as well, so they have some things they do in common, most notably, let’s say, trimming gingival tissue, right, around restorations or doing what we call troughing around the crown or a bridge, which is removing the gum immediately next to the post so that you get a nice fit and a good impression so that your restoration can be done very well. They also do laser curettage, which if you think about kind of sticking it down in the pocket next to your tooth, it can kind of take out some of necrotic tissue or some of the issues. Soft tissue lasers also have the benefit, because of their wavelengths and the interaction with tissues and cells. They have biostimulative characteristics. They also have bacterial kill characteristics, so you can do low-level light therapy, but you can also do laser bacterial reduction. So, think about walking into the hygienist and the hygienist tells you I am going to be rooting around in your gum with a piece of metal and I am likely to stir some bacteria up. I would like to treat you with laser bacterial reduction, which will not be covered by your insurance, but it will cost you $25. Generally, the patients will say yes, of course, that makes total sense to me reduce the bacteria before you go into the pocket with a piece of metal. That’s an example of the hygienist using the soft tissue lasers in one particular application. The all-tissue lasers break up biofilms, they cut soft tissue, they cut hard tissue like bone and teeth and in these periodontal procedures, you are involving all three types in many respects of interactions.

So, one of the challenges in dentistry which has been very well handled in dermatology because it’s more obvious is that different wavelengths are good for different things when interacting with tissues and a dermatologist will use a different laser and wavelength for skin resurfacing versus hair removal versus tattoo removal so on and so forth. In dentistry, there is still opportunity for us to educate people better on which lasers do which things best and how you would use them in a practice, where in many cases you will have the hygienist using the soft tissue laser or the clinician. Generally, the all-tissue laser is surgical and the hygienist will not be allowed to use the all-tissue laser and it will be done – it will be used in more surgical settings, in general. So hopefully, that helped fill a few things in. Our website can give you additional information or I can speak more about it on an independent call if that kind of answers your question.

Chip Saye

It does. And I was just wondering the difference would be now maybe you are selling the more in combination, whereas before, they were sold as a step process or I am just trying to understand the….

Harold Flynn

Well, I would say – yes, I would say we are doing the sales team as we have spoken about has developed further to understand that they can put together these bundles and sell the value of both technologies simultaneously, rather than saying, well, I will sell in EPIC and then sometime in the future, I will sell an all-tissue WaterLase. There is benefit and need for both in laser dentistry, so let’s put a package together of great value to the clinician so that they can acquire both and use both. It’s not necessarily kind of a gateway, get them hooked on a diode, soft tissue and move to an all tissue although that will happen occasionally as well.

Chip Saye

Thank you.

Harold Flynn

Thank you. Appreciate your interest.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. And I would now like to turn the floor back over to Mr. Flynn for closing remarks.

Harold Flynn

Thank you very much, Matt. In conclusion, I believe we are operating in a much higher level today than they were a year ago and well on our way to becoming the solid commercial enterprise we can be. We have further developed and expanded the management team. We have advanced our innovation pipeline. We have improved sales execution and overhauled our marketing leadership and processes to be much more outwardly focused on the customer and delivering compelling value propositions. I believe all of us know more today about BIOLASE and our technology, more about the global laser dentistry market, more about our patients and more about the laser usage and attitudes of our customers. And thanks to our new comprehensive BIOLASE Learning Center, our customers know more about the safe and effective use of our products and understand better how they will help their practice. I believe this kind of market intelligence will pay great dividends in the years to come, with more targeted selling programs and more engagement in the marketplace. Again, I continue to be very bullish about our prospects for a prosperous future. Thank you all for joining us on the call this afternoon and for your continued support. We look forward to speaking with you again when we announce our results and discuss our progress for the third quarter of 2016. Have a great day, everyone.

Operator

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

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