BIOLASE Inc (BIOL) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIOLASE Technology Inc. 2011 first-quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation, instructions will be given for the question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded today, May 9, 2011. I would now like to turn the call over to Matt Clawson with Allen & Caron. Please go ahead.

Thank you, Greg, and good morning, everyone. Thanks for joining us today for the BIOLASE Technology 2011 first-quarter conference call. You should have all received a copy by e-mail this morning of the release announcing the company's results for the first quarter ended March 31, 2011.

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

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

Also, as a quick reminder, the replay of the call will be available on the BIOLASE website at www.BIOLASE.com.

The company's 2011 first-quarter and year-end results can also be found on the company's yearly report on Form 10-K, which the company will file with the Securities and Exchange Commission.

With me on the call today from BIOLASE are Federico Pignatelli, Chairman and CEO and Frederick Furry, Chief Financial Officer. Federico and Fred will review the prepared remarks, including an update on the business, operational performance and outlook. Then there will be a question-and-answer session at the end of the call, followed by a few closing remarks. With that I would like to turn the call over to Federico Pignatelli. Good morning, Federico.

Good morning, Matt, and thank you. I want to welcome all of you to our first-quarter results conference call, and thank you for participating.

Today we will review the progress and accomplishments achieved by BIOLASE so far in 2011, including an update on the ongoing successful launch of our new flagship laser system, the Waterlase iPlus; the adoption of our proven sales and marketing model in certain international markets; the progress made by our new BIOLASE imaging division; the favorable equity financing achieved by the company; and progress in the areas of technological development, monetizing our vast intellectual property portfolio. Fred will then summarize the financial results for the quarter, after which we will answer questions.

The pace of change and progress in the first quarter remained very rapid at BIOLASE, as our new management team continues efforts with the turnaround of the company while also addressing the challenges of expanding the business in supporting our growth while continuing to generate non-GAAP income. As you saw from our financial results, the positive turnaround of the company is continuing and we are taking orders and shipping products at rates we have not seen in many quarters. This kind of growth demands that we make certain investments, acquire a growing number of parts and materials and carefully manage operations so that we can satisfy demand while keeping our spending under control. In the first quarter, the team did just that.

Before we address some of the operational highlights, I would like to quickly summarize our financial results for the first quarter.

In the quarter, we experienced year over-year growth in net revenues of more than 140% and sequential growth from the 2010 fourth quarter of more than 9%. These results were achieved without selling internationally to Schein as we were renegotiating their distributor status and ultimately regained the ability to sell direct or to other distributors in those territories.

While we came in shy of GAAP net income, we maintained non-GAAP profitability in the first quarter. This achievement was substantial considering the high-growth environment where the level of purchasing inventory, build, assembly, testing, and new customer service levels all continue to increase. I'm very proud of our operational team for having performed so well in this challenging period.

After rejoining the company as the CEO in August 2010, I was immediately very focused on eliminating nonessential costs so that our cost basis would be consistent with a very low level of revenues we were producing at the time. And as I mentioned in the past, we reduce our sales break-even level considerably. We have started and will continue, however, to make targeted investment in key people, capital equipment, systems, and new product developments that will allow BIOLASE to further additional growth. And it is my goal to make sure that this growth is efficient. In addition, we are investing in the kickoff of our BIOLASE DaVinci Imaging division, which we anticipate in the near future.

Commercially, in North America, we increased our sales force to 26 to continue our shift to a direct sales and multi-distributor model. The successful launch of the iPlus is progressing very well, and dentists that are now using it are enthusiastic about increased cutting speed and ease of use. The iPlus is not only the fastest laser cutting tool on the market. For the first time it's fast or faster than a high-speed drill, but operating the system is also very easy and intuitive for dentists. I believe it will become the most successful all-tissue laser product in the history of BIOLASE and laser industry in general, and a driver of much deeper laser adoption into the domestic and international dental and medical communities.

Our diode and iLase devices also continued to sell very well, both in the US and abroad. Last quarter, we announced our decision to work with a major European OEM manufacturer to design and distribute state-of-the-art extra-oral and intra-oral imaging devices that complement the minimally invasive dental treatment solution offered by the BIOLASE laser division. The strategic idea behind this move is to leverage our installed base. To date, we have sold approximately 17,300 lasers and our products are a part of over a 11,000 practices around the world.

Our growing direct sales force can leverage these relationships and has tremendous experience selling capital equipment. We are currently busy making preparation for the market launch in the second half of the year. That work includes the final design of the products, development of all marketing materials and training our direct sales force and distributors.

We still anticipate the BIOLASE DaVinci Imaging division to be slightly accretive to overall equipment sales in the second half of 2011 and could contribute $20 million to $25 million in additional equipment sales in fiscal year 2012.

Our international sales effort continued to show benefit in the first quarter as we migrated from a sole distributor model and adopted the combination of a direct mode and multi-distributor platform in Germany, the third-largest dental laser market in the world.

In addition, a number of additional countries, including France, Spain, Italy, England, the Netherlands, Austria, Belgium, Australia, and New Zealand reverted from an exclusive territory of Henry Schein to non-exclusive distributor territory.

In addition to those key items, some of the other important actions and accomplishments made during the first part of the year include the receipt of CE Mark approval for the Waterlase iPlus paving the way for sales in Europe; the hiring of a serious senior sales and marketing executive; and the opening of a sales and support office, BIOLASE Asia Pacific, to expand penetration in the fast-growing Asian dental and medical market; the adoption of a stock dividend policy with a declared stock dividend of 1% on a quarterly basis, the first one payable March 31, 2011 to shareholders of record on March 15, 2011; the receipt of approximately $7.1 million in cash net of commissions and expenses which was raised through the sale of approximately 2.2 million shares of our common stock and approximately $600,000 through the exercise of options. A portion of these proceeds are used to pay off $2.8 million of the remaining principal interest and fees for a high-cost $3 million debt facility in Q1 2011, making BIOLASE free of bank debt.

Lastly, the word of three new patents were used of our YSGG patent laser technology for eye surgery, including the treatment for presbyopia, a condition suffered by 2.5 billion people worldwide. Our patented YSGG technology has already received an FDA approval as a general eye-cutting device, and we are seeking partners to commercialize the product.

I will now hand the call over to Fred Furry to go through the highlights of our financial results for the quarter and review our upcoming guidance for the second quarter and year.

Thank you, Federico and good morning.

Total revenue for the first quarter of 2011 was $10.6 million, up 140% from $4.4 million in the same quarter 2010 and up 9% sequentially from $9.7 million in the fourth quarter of 2010. These increases were primarily driven by the direct sales and multi-distributor business model we began implementing during the fourth quarter of 2010. The majority of sales in this year's first quarter were from the sale of the revolutionary all-tissue Waterlase iPlus and the handheld iLase.

The percentage of net revenue in this year's first quarter to the US and international markets was approximately 81% and 19%, respectively, as compared to approximately 51% and 49% of net revenue, respectively, in the first quarter of 2010.

Also, for comparative purposes, during the fourth quarter of 2010, the ratio was 74% and 26%, respectively. International revenue in this year's first quarter was negatively impacted as we were not selling internationally to Schein as we renegotiated our distributor relationships, as Federico mentioned previously.

For this year's first quarter, gross profit as a percentage of net revenue was 46% compared to 6% for the same period in the prior year. The year-over-year quarterly increase of 40% was primarily due to higher sales volumes, better utilization of fixed assets and reduced expenses.

The significant increase from the first quarter a year ago was partially offset by increased costs from the initial production run and significant one-time price concessions to certain luminaries from the initial sale of the Waterlase iPlus. This is evident from the decrease from our gross profit percentage of 50% of net revenue in the fourth quarter of 2010.

Operating expenses for the first quarter of 2011 were $5.2 million compared to $5.6 million in the prior year's comparable period. The year-over-year reduction in expenses was primarily to ongoing cost-cutting measures that were partially offset by initial costs associated with the launch of the Waterlase iPlus and increased professional services expenses.

These additional one-time costs contributed to the increase in our operating expenses from $4.5 million in the fourth quarter of 2010. Our net loss for the first quarter of 2011 was $750,000 or a loss of $0.03 per share compared to a net loss of $5.3 million or a loss of $0.22 per share in the first quarter of 2010.

After removing interest and other debt-related costs of $298,000 resulting from the payoff of our term loan and non-cash expenses related to depreciation and amortization of $228,000, and stock-based compensation expenses of $316,000, this year's first quarter resulted in a non-GAAP net income of $92,000 or $0.00 per share.

Our first quarter of 2010 resulted in a non-GAAP net loss of $4.8 million or a loss of $0.20 per share.

Turning to the balance sheet, as of March 31, 2011, we had cash and cash equivalents of $1.6 million, Accounts Receivable of $6 million, total assets of $20.3 million, and stockholders' equity of $4.3 million.

As mentioned by Federico, during the quarter, we used a portion of the approximately $7.1 million raised through the sale of our common stock in the exercise of options to pay off the remaining interest, fees and principal of our $3 million term debt facility, leaving the remaining funds as working capital and to invest in our growth initiatives.

In the first quarter, to account for better than expected sales of our current product lines, as well as the launch of the BIOLASE DaVinci Imaging division expected during the second half of the year, we raised our annual revenue outlook for 2011 to $60 million to $65 million, which represents growth of approximately 130% to 150% over 2010.

Net revenue for the second quarter ended June 30, 2011 is expected to be between $14 million and $15 million, up from $4.7 million of revenues, excluding royalty income of $1.2 million in the second quarter of 2010, a targeted increase of 200% to 220%. As a result, we expect our cash and Accounts Receivable to exceed $8 million at the end of the second quarter.

That concludes our formal prepared remarks. Federico and I would like now like to open up the call to questions.

(Operator Instructions). Dalton Chandler, Needham & Company.

Good morning. I was wondering if you could just give us any additional detail on your plans to roll out international sales, if you have some goal for example by year end at a number of companies -- countries you would be direct in?

Good morning, Dalton. We are going to be direct in Germany. That is a fact, and then we are in the process of analyzing all other countries. And there is an interest from Schein in certain countries to still have an exclusivity for those countries. So we are now dealing directly with the specific countries on a one-to-one basis with specific minimums that clearly we would like to be higher than previously for them to maintain exclusivity. So, we will be -- every market will be very much based on a performance guideline.

Okay. And, as you are growing the sales force and preparing to commercialize the imaging products, is the sales and marketing spend in the first quarter sufficient to support that? Or should we look for that number to grow through the year?

Well, some spending will occur for the launch of the imaging, but clearly, we expect a substantial amount of revenues from that division, so [cost] will be offset and we have a very healthy margin there.

Okay. Do you expect the imaging gross margins to be comparable to your current gross margins?

We expect overall the gross margin of the imaging division to be around 50%.

Okay. And then, on the presbyopia indication, I think you still need regulatory clearance for that. Is that correct? And if so, what's the regulatory pathway?

We're looking for an IDE that would be the possibility of starting human trials, so we have -- we are in the process of looking to obtain an IDE. It's a process that can take a few quarters, and that is our immediate goal.

Okay, but you expect this to be a PMA rather than a 510(k)?

Exactly.

Okay. All right, thanks very much.

Jeff Osher, Harvest Capital.

Congratulations on the continued positive momentum. Two just housekeeping questions -- maybe just a little color on the linearity within the quarter and I'm sure that ties into the big jump sequentially of Accounts Receivable.

Well the Accounts Receivable has jumped simply because we launched the iPlus at the end of January and we had a late pickup in production in late quarter. We actually went to a double shift to produce enough to satisfy demand. Orders have been substantially stronger than what we expected. And, so, we delivered at the very end of the quarter the iPlus and that is why you see that jump in Accounts Receivable, but again, we have received a very large portion of that receivable already, so it was just a --

Timing issue?

Timing issue.

Okay. And how much of that iPlus, Federico was -- and it sounds like there was a very impressive sell in just based on the jump of 50% gross margins -- that would imply about $6 million of revenue sequentially, that change if I use a 50% gross margin with the $3 million sequential change. What -- was that mainly for sell in? Or was that to meet existing orders that -- and maybe along those lines, where are you in that process of fulfilling the early indication of backlog?

Well we are satisfying demand as it comes. Again, one thing to keep in mind is that we have sold a substantial number of the iPlus's to luminaries, at lower prices than we would sell to normal customers. Luminaries are very important because they are the ones that provide cleaning cost to us and also spread the word about the validity of a new technology or new product. And that has affected our gross margin in a substantial way. I would say that, overall, the launch of the iPlus has cost in Q1 more or less $1 million when we take all factors in.

Okay, great. And then the final housekeeping question, just along the lines of the deposits from Schein, do you expect that $2.95 million to be worked through in Q2?

Exactly. We just received from Schein a PO that includes more or less 50 or 55 iPlus's, the newest laser, the new flagship laser, and other equipment that they intend to buy. The order is actually slightly over $3 million, so we expect to fill the order in the current quarter.

Okay, and that will be booked against their deposit?

Yes. So there's --

There will be no cash coming in for that order.

No, there will be no cash coming in for that, but that will exhaust entirely the prepaid of $9 million. So with this last $3 million, we will have entirely repaid Schein.

Fantastic. Keep up the good work, guys.

Lenny Brecken, Brecken Capital.

When you go with the new laser, can you just walk me through sort of the value proposition as the dentist sees it in terms of the payback when you go into say a new account and try and sell it?

Well, the fundamental --

I mean a monetary payback. That's what I meant.

Yes; but let me give you a little more than just answering to your question directly.

Clinically, the Waterlase technology have been always superior for many reasons through the high-speed dental drill. The issue though was that was a little slower than the high-speed dental drill. And so dentists, while they were recognizing all the clinical advantages and also the possibility of performing in most of the cases no-pain dentistry, so not -- that would allow them not to administer anesthesia to patient, they were -- their drawback was the fact that it would take them longer to actually perform what they would perform normally with a dental drill.

Now, with the iPlus as we just launched at the end of January of 2011, we broke the last barrier, the barrier of speed, and we are now as fast if not faster in our cutting than the dental drill. So, at this point, we are left with only the advantages, all the clinical advantages, and all the advantages of performing painless surgery, and multi-surgeries in the mouth because you are not forced to give anesthesia to the patient so you can perform more surgeries at one time. So basically the return on investment increases dramatically at this point. And there is no more drawbacks in a dentist, in adopting the Waterlase technology.

Okay, but, all right, so given that, what -- I mean so if you buy the machine for X, what is the payback you pitch to the dentist to actually make back his money, and how does that economics work?

I understand what you said, but can you be a little more specific? I just want to make sure that the price -- is the value proposition is there for the dentist to continue to adopt it monetarily.

Yes. I will try to give you a range. We have performed studies and dentists that buy a laser by paying a lease -- monthly lease payment, they make 4 times to 8 times what they pay with the lease payment. It depends how often they use it and how versed they are in using it, but the payback is absolutely huge.

Now is that because of more patients come in? Is it because of speed? What is -- how do you work that in?

Well, first of all, he can see more patients because he doesn't have to administer anesthesia as often as normally with a drill. Then he can perform way more surgeries in the mouth. For instance, if a patient has a problem on the left side or the right side of the mouth, he can treat both (multiple speakers) multiple surgeries at the same time because he cannot anesthetize both sides of the mouth, obviously.

He can also perform more surgeries that he would not normally perform and that he had to refer to outside practices, so there is basically more dollars for the dentist. And also there is a happy patient who then refers more patients to that dental office.

Okay, that does explain it. I appreciate that insight.

Absolutely. Thank you.

Suraj Kalia, Rodman & Renshaw.

Good morning, gentlemen. Congrats on the quarter.

Federico, forgive me, I joined a little late. I just have one question. To the extent that you can share, your -- any color on your laser toothbrush? And specifically on the clinical side, am I right in thinking that in the professional setting or in the dentist's lab, you have to use some sort of a hydrogen peroxide-based gel and then the laser activates some ingredients in it to achieve whitening. Would the laser toothbrush -- or could the laser toothbrush also be used for whitening? Is that in the plans? And how would that be achieved?

Yes, the laser toothbrush would also be used for whitening. Again, the laser toothbrush is definitely in BIOLASE plans. It is a high focus that we have. We just very recently had a very encouraging renewed relaunch of the relationship with Procter & Gamble. We're very excited to be again working with them. They see the validity of the product as far as we can tell. And so we are, again, in tune and working together to bring to market ASAP the laser toothbrush.

We will do it independently or with Procter & Gamble. Has to be seen, but we will definitely want to do it together with them. It's a great company and with a great -- it's a company that can get us the best distribution in the world; there is no doubt.

Regarding the whitening, light always whitens teeth. So you can use a certain level of peroxide that is not damaging to the enamel for a quicker result. But again, we recommend to use the lowest amount of peroxide because peroxide can damage the enamel. So, the laser toothbrush anyway will enhance whitening in a very natural mode.

And Federico, just to wrap it up, any color on the timelines? I know it might be a little -- still a little early to inquire about this. Our due diligence suggests that especially for gingivitis and some of the other bacterial issues, there could be a clear-cut role for the toothbrush. I was wondering if you could shed some color on timing in Q4, Q1 '12? How do you see this?

Well you just mentioned gingivitis. Yes, that's a very important part of the laser tooth brush, the reduction of bacterias. Laser light kills bacteria and so healthier gums means overall a healthier person.

It is premature for us to talk about a timeline. It is definitely an upside to our revenues that we have guided for. So, we hope to be able to have it in a couple of quarters for Q4. But again, we just relaunched our relationship with Procter & Gamble, and we need to see what is happening there.

Again, this is a new management and Procter & Gamble has been working on this specific project with the past management for quite some time. Nothing has happened, and at this point, with the new management, things are starting to move in the right direction, I feel, and so we will see.

One way or another, we will bring that product to market. It is -- we are very resolute over that. We would love to do it with Procter & Gamble; there is no doubt.

Great. Thanks for taking my questions, guys.

Ron Vincent, Morgan Stanley.

Hi, Federico. Excellent presentation. I just have one for question. Are there any ramifications of using radiation on the lasers in any of the products that we currently have?

No; we don't see any health issue at all because it is low-power, so I guess you are referring to the laser toothbrush.

Correct.

And, no, there is absolutely no issue at all.

Thank you very much.

Austin Hopper, AWH Capital.

Thanks for taking my questions. First, housekeeping, just -- can you just give us a basic and fully diluted share count as of today?

I believe that we are 27,750,000. Is that correct?

Yes, 27-- (inaudible).

Yes, that is after the 1% -- that reflects the 1% dividend.

Okay. You talked about your OEM partner today for your Biolase Imaging, which I guess now is called DaVinci Imaging. I thought I caught that in the press release. But does that partner currently sell a suite of products in the United States that is similar to what you are going to launch with them?

I'm sorry, let me correct the count of the shares. Apparently it's 26.714 million at the end of the quarter.

Okay. Great. You got my second question; you talked about your OEM partner and I'm just curious if that OEM partner, that European Italian OEM partner, do they have a suite of products in the US that is similar to what you are launching that is already on the market?

I cannot really comment on that question.

Okay. That's just -- I guess the nature -- it is a confidential relationship, I guess?

, Yes, it is.

Okay. So like -- if I was at a tradeshow, or I guess my question is, is the OEM partner -- are they bound to the same level of confidentiality that you are?

Yes.

Okay. So like for example, they wouldn't mention at a tradeshow that they have a partnership with you?

Exactly.

Okay. Is that partner a company called Cefla? It's spelled C-e-f-l-a; they've got a brand in the US called MyRay.

Like I said, I will not comment to such questions.

Okay, great. Thank you.

Wyatt Carr, Crowell, Weedon.

Thank you for taking my call. I just had a couple of housekeeping questions. First of all, the share count -- I can't -- does that recognize the 2.1 million shares that were sold at the ATM deal in the first quarter?

Yes. But, there were a little more -- there were 300,000-and-some shares sold in the second quarter. So, that is not reflected.

Okay. So, and that -- and the 310,000 shares at [$5.60] were not reflected in the cash balance either?

Exactly.

Okay. And then, the price of iPlus, can you tell me -- at the Yankee conference, you sold that at a special price to luminaries; at the Chicago conference, the price was increased. Is that correct?

Yes, but luminaries were sold at far lower prices. I would say that more or less in the $40, $45 range. Luminaries are very important to us. And, like I say, it is a certain number that we want immediately to adopt our new products.

These are the people that are the dentist. They look up to and these are dentists that perform a lot of clinical, so we obviously keep them in high consideration. And so when we launched the iPlus, we give them a very special deal and that is reflected in the $1 million cost over all of the launch of the iPlus in Q1.

Okay. And, in reading the K for last year, I didn't see a sales -- you used to give a salesmen and sales servicing account. Can you give me approximately what the ending count of salesmen were at the year end?

In Q4, we are at 17.

At 17. And, you are currently at --?

26 at the end of Q1.

Right. And your intent is to still increase that number. Is that correct?

Yes. The net increase will be every quarter in the vicinity of the 8 to 10. Our goal is to be at 45 by the end of Q3. Again, we hire more people during a quarter, but we also dropped some because there is the -- in the field of sales reps, there is an 80/20 rule where 80 survive and do well and 20 eventually, they are dropped.

Okay. And, the last question I have is on Schein. You mentioned in the call that the balance of the $3 million order and it was actually a little over $3 million was in iPlus. And, in the original, and I have another part to the question as well, but in the original order, it was for iLase, and then the second tranche of the order could be either iLase or other products. Have they switched the order to primarily iPlus now in the $3 million balance?

Yes, they like the iPlus. Everybody likes the iPlus, so they -- the order has been order of magnitude -- I can't recall exactly, but over 50 iPlus's and around 130 ezlase, and, that fills entirely the prepaid. So what is important to notice is that every quarter we pay them more or less $3 million. So $9 million of prepaid with this quarter will be completed.

Okay, great. And then the last question I have is actually a statement. In Stanley Bergman's comments on his quarterly call, he made a statement that said -- and you have to also take into account that we are no longer exclusive for BIOLASE, and that over time, we will probably diversify our offering labels. But, you also commented that they are in the process of negotiating with you for some exclusive exclusivity in Europe. Are they changing their position here?

No; they (inaudible) to say that they are not exclusive in all territories. And that doesn't preclude us in countries that are performing well to have Henry Schein being exclusive. Obviously, it will be tied to certain minimums and to performance. And if they fell on the performance we will revert to nonexclusive. We clearly are interested in performance. We are interested in selling lasers, in selling products. Lasers any [measuring].

So until when a certain country performs we are happy to deal with Schein. I was a little surprised that he mentioned that -- he's a big company, $7.5 billion to mention us, in a way is surprising, but I guess it is also something that we should be proud of for him to single us out.

But again, what is important to understand is that they did not have any sales internationally of BIOLASE because we essentially turned them down, and because we didn't agree on certain numbers. And at that point, we -- the territories -- international territories are reverted to us. And so they are nonexclusive and that's what he said.

That doesn't mean that, like I said, in the future, we can on certain territories, revert to exclusivity we are discussing with them.

The other thing that we have to say is that Schein, being a large organization, is a little slower than us in adapting to this change in sales and marketing. In the past, when we were exclusive with them, we were actively helping them in selling and now instead, we are selling our own products, so clearly, they have to adjust and start selling themselves.

They recently also lowered their prices to a more market value of their lasers in inventory, so we like that; we encourage that. Every time they sell, that's additional revenues for us in service contract warranties and consumables, so we encourage -- obviously we want Schein to continue selling. And the more they do it independently, the better it is.

Great. Thank you very much. Thank you for answering my questions.

Mitchell Sacks, Grand Slam.

Thank you for taking my questions. A couple questions. First one has to do with the royalties. I noticed for the quarter, licensees and royal revenues were low. Is that a seasonality issue? Is it a timing issue? Can you just walk me through that a little bit?

Royalties, again, last year there was a big number -- $1.2 million royalties from Procter & Gamble, and this year there is none from Procter & Gamble. They're simply from some laser company that sell erbium [yags]. We -- BIOLASE owns the underlying patents of all erbium yags, and so we do receive royalties from companies that sell worldwide erbium yag that is a different laser than our laser. We had a erbium YSGG.

So, it is -- we are a more sophisticated laser, but we still have the underlying patents; we own the underlying patents of erbium yags.

There are several manufacturer around the world that are not paying royalties to us at the moment, and we are in the process of talking to them about paying us back royalties, and future royalties.

Okay. So for this year then, in terms of the $60 million to $65 million in revenue, if I'm projecting, I shouldn't really put much into that line. That would be correct, right?

Yes, that's correct.

Okay. I want to talk about the luminaries because I didn't really fully understand how that works and flows. If you look at sales of the new laser that came out this year, what percentage of sales do you think go to luminaries? And let's say I was a luminary; how do I look at that in terms of -- I'm trying to understand how the economics work; if a person is repping or doing clinics on the product, is it disclosed when they teach that they are getting (inaudible) -- how does it all work?

Well, luminaries are sort of masters in laser dentistry. They're dentists that have been for a very long time, using lasers and they are very adept to the Waterlase technology. They're big supporters. They perform a lot of clinicals. They help us with suggestions, and so they are active with BIOLASE in making our literature and our products and our advertising better, and so we obviously like to work with this group of luminaries. Then again, Q1 was heavy in sales to this group.

What roughly, if you could, what percentage of the sales of the new laser do you think was that group?

I would say that 40% of the sales that were to that group.

Okay.

That affected in a big way the gross margin (multiple speakers)

So for this Q, we would expect a much lower percentage of that and therefore much higher margin?

Yes.

And in terms of sales of lasers, what percentage of sales that you do, do you get a trade-in of one of your previously sold lasers? Is it a high percentage, a low percentage?

Well, we love to get an MD back because we refurbish it and then we sell it in -- as a used laser in that segment of the market that is the high 20's.

So we can offer basically an entry-level to a dentist that can't afford to buy at higher prices. So, often, when a buyer of an iPlus has an MD, maybe he wants to exchange -- give to us the MD and just pay the difference. But, that doesn't happen all the time. They also like to keep the M.D. in many cases. And --

What percent of sales do you think you get a trade-in back?

Well -- we again, we are encouraged to get them back because, like I said, we like to be in that segment of the market. I would say that probably in Q1, we have 60%, 70% of retiring an older laser.

Okay. And then just from an accounting perspective, when I'm looking and trying to do projections, how do I think about how that flows through an accounting statement? Do you -- so in a sale, do you record the full sale and then you take a net with the re-purchaser? How do you account for that? How do I flow it through if I'm looking to project it out?

I'm going to ask Fred to answer that question.

The full selling price is recognized as revenue, and the trade-in value assigned to the older laser is put into inventory. And then as we refurbish the older laser we add cost in inventory and then when that's sold we relieve those costs and recognize revenue on that sale.

Okay.

Again, the iPlus -- we sell it for $57,900. And we would retire an MD in the vicinity of around $8,000 to $10,000; it depends on the condition, how old it is, so it is a limited portion of the price. And we refurbish it with $1500, $2000 in expenditure and then we can sell it in the high $20,000's.

Okay thank you very much.

[Nahu Kadahli], (inaudible) Capital.

I was wondering if you can break down revenue across Waterlase diodes and consumables and warranty mix?

Well, I'm going to have Fred answer this question.

Okay, more or less, for the quarter, so I don't know how much detail we're going to get into here, but I would say it's safe to say that for the quarter, probably somewhere around one-third related to the iPlus; a little less than that to the iLase; and then a little less than that to consumables. And then we have also sales of MD Waterlase and ezlases as well. I'm being vague on purpose.

Okay. And, what's your long-term target for growth and operating margins for the business?

Well, is the 18%, 20%. That's our goal.

That's the operating margin, 18%, 20%, right?

Yes.

Okay. And what sort of incremental contribution margins do you expect for every one of $5 million from here?

I'm sorry, for every?

Yes, for every $5 million or -- whatever number you want to put in above the current $10 million, $11 million run rate; what sort of additional incremental contribution margin do you expect?

Well, to be on the safe side, we can say 50%.

That's the gross margins, right?

The gross margin, yes.

And you said you are planning to make some additional investments as you progress and grow the business. Do you have estimated capital investments? And what sort of incremental G&A or sales and marketing do you need to make for the rest of the year?

We are not in a position to disclose that at the moment. We are looking very carefully at ophthalmology right now. And so, we are not in a position to give out a number.

Okay. On the ophthalmology, that's still in development stage or where are you in terms of releasing a product?

Well, we are not in any shape or form close to release a product. We have to do human trials, so we have to have -- we have to open an IDE to do that, and that is an undertaking. And, a year after that, we can start selling internationally after 40 plus 40 cases. And then you need 220 human cases to potentially receive an FDA approval. So, there is definitely quite some time, and a substantial amount of work there to be performed. But again, it is a tremendous opportunity because it's a multibillion-dollar market.

And, we have 29 patents, of which a great deal has been approved and added appending. So it is literally a great opportunity within BIOLASE to develop the ophthalmic market. But, it's going to take some work and some time.

And how much do you currently invest or are you investing in that product development?

Again, we are in the process of making a precise plan, but like I say at the moment, our goal is to pursue the IDE that would be the permission from the FDA to perform human trials.

Okay.

The product essentially is already developed. It would be -- the product itself is developed. It's simply a different handpiece, so it is -- our goal now is to obtain an IDE.

Is this a brand-new product in the market? Or are there some current versions of the product from others right now?

No, for presbyopia, there is no company that has any product and any viable technology. So we feel that we would be really the technology of choice. And presbyopia, it is a condition that 2.5 billion people out of 7 billion people in the world they are affected by, including myself, so I can't wait to get rid of my reading glasses.

Okay. Thank you.

Carlton Savoye, Princeton Capital.

Just two quick questions. Federico, one of the things that we've observed with the company over the years was that there was no after-market really designed into the product. I'm just wondering if with the iPlus, is there more of a chance for consumables sales later on? Is there more of a chance for service sales, that type of thing than with past products like the Waterlase MD?

Yes, you are correct. We are doing a lot of work in that department. We want to increase the consumable sales. They are increasing very nicely actually. It is frankly increasing -- it is one of the revenue items that is increasing the best.

So, we are putting a lot of effort behind increasing them even further. We are working on it. Again, there is the tendency of dentists to use and reuse the tips, and we want to make sure that that doesn't happen also because it lowers the power of the laser. Once the tip is used too many times, the actual power that is coming out from the fiber is diminished.

So, we are trying to find ways for the iPlus to, after a certain number of amount of uses, to eventually even shut off if the tip is not changed.

We are also working on having servicing of the laser done remotely. 70% of the times, a laser would have a software glitch, and until now we would send a service engineer to fix it. And instead, now, we are working on a way to do it remotely as you can do it with a computer. The iPlus basically has in screen a computer, so that would save a lot of money in servicing lasers.

Right. And the last question is what happens to the MD? Are you guys still going to sell that or is that going to be dropped as a model?

It is a great product. And again, the iPlus is the high end, the very high end, and the MD is -- cost more or less $19,000 less. And so, it is a great entry point. We also offer used MD's at around $12,000 less than a brand-new one. So, we have now three different entry levels for heart tissue or old tissue lasers and I think it is the right policy to have.

Okay, and just to make sure, so therefore the MD is sort of listing if you will for about $40,000? Is that right?

$38,700.

$38,700. And, just for kicks, what was Schein trying to sell the Waterlase MD for say a year ago?

$54,900.

All right. It's come down. All right. That's all I needed to know. Thank you very much.

Jeff Osher, Harvest Capital.

Just to follow up, really quickly, you said $54,500 last year versus $80,000; I thought it was $80,000.

Well, this (multiple speakers) is $80,000 in 2006, then they drove down the price to $74,900. And then it was $65,900. And then it dropped down to $54,900. The last price they had for the MD as a consequence of the introduction of the iPlus is now officially $39,900.

Got it. Okay, that's helpful. Two really quick ones, and I appreciate you taking my follow-up. First is, when should we expect a new shelf to be filed? I believe you have -- for the most part drawn down your existing shelf. And then the diode shortage problem -- were there any catch-up shipments in Q1 or any catch-up shipments in Q2 now that your dual or multi-sourcing that product, that component?

Well, first of all, regarding the shelf, we -- there is no expectation to do any shelf registration at the moment. We are adequately capitalized.

And regarding the diodes, yes, we've been working across the entire spectrum of the supply chain to be well provided with all components. Yet some specialty components for the iPlus that we had to work very hard in getting, but we are making real progresses there that, in essence, in Q1, we had some problems. We sold them, and now we want to have a smoother ride going forward, so Q2 will be the last quarter in which we experienced some shortages of critical components.

And as far as the capitalization, you think you are okay even if you have a an incremental international distribution partner where you may be need to sell in. Should we expect some kind of a pre-funding deposit similar to Henry Schein? Or do you think the $3 million you have collected with receivables and the roughly $8 million you have if we include the 2.2 million share sale, you think that's sufficient for the working capital ramp that your guidance implies?

We have enough working capital. We expect to close the quarter between cash and accounts receivable in the range of $9 million. So, we -- we are fine.

And again, international distributors don't really cost to BIOLASE. Germany will be clearly somewhat of an investment, but Germany, we are very well positioned. We already have a facility there that is a service facility and also used to be a production facility. We really have a group of employees there. We are in the process of interviewing for salespeople. But, we have already an installed base of 300 Waterlase in Germany that we sold in the past when we were direct. So, we feel that Germany is going to be a quick turnaround on the positive, and we feel that Germany will contribute several millions of dollars in sales going forward. It's the third largest world laser dental market. 60,000 dentists and very high income.

Great. So in $9 million, so the $7.2 million in cash from the deal, you ended with $1.6 million; that's $8.8 million; you've collected $3 million, so that's $11.8. So you expect to burn $2.8 million to end with $9 million?

We actually believe that we could even generate some cash this quarter from break even to actually generating cash. So --

So you'll end well north of $9 million then of cash, if you generate cash.

I always like to give conservative numbers, but the fact is that we are well-capitalized. We don't have a need at the moment to sell shares.

Great. Thank you, guys, for taking my follow-ups.

Mitchell Sacks, Grand Slam.

I wanted to follow up on the consumables question from before just to make sure I understand it. Did you disclose or I may have missed the number, what the consumables sales were for Q1 of this year?

I'm sorry, it didn't come out (multiple speakers)

Sorry, there was a question before about consumable service and warranty, that revenue line item that you disclose every quarter. Did you disclose it for this quarter? And what was the number?

We just talked vaguely about it on the call, but right now, we are somewhere between $700,000 and $1 million per month.

Okay. So -- and that number has been flat to down for the last two years if I'm going back and looking at the numbers. Why isn't that number growing with the adoption of the lasers? Why has that number stayed flat? Do you have less consumable sales with the new products? What's not driving that up?

Well again, while we were with only one distributor, overall sales have gone down. So, and they've gone down dramatically. We have in 2006, almost $70 million in sales. We ended up at $26 million last year. So, there's been clearly less lasers sold, and so, we didn't have that increasing consumable sales that we would expect going forward.

I guess my question is though, if you have -- if the base of people using lasers is expanding, is there something else that's driving down that consumable thing? Or is it that new lasers work better, therefore, they use less consumables? Why is that not a growing number as the adoption of lasers increases?

Again, we go back to past management shortfalls, I would say. We are doing everything that we can now to increase consumable sales for a product. We are designing products with consumable attached to it, and again, a broad example for instance of the fact that dentists -- they tend to use and overuse the same tips. And with the iPlus we're trying to find ways to -- and we are finding ways to correct that. So a dentist will -- as he uses it, will have to be changing the tip, so that will increase consumable sales. There is also a lot of consumable sales attached to the diode line, so you will see consumable sales increase from now on.

Okay. Thank you very much.

There are no more questions. I'd like to turn the ball back over to Mr. Pignatelli for any closing comments.

Well, a lot has been achieved in the past two quarters. This company, BIOLASE has suffered through years of difficult times, of rapidly declining revenues, mounting losses. I would characterize it frankly mismanagement, and at this point, we have turned around the company very rapidly. As I became the CEO on August 27, from that point on, the company has resurrecting to a new company, and I'm very proud of the work that the entire team, every single employee of BIOLASE has produced, and enthusiasm of the employees now is of the highest level that I have ever experienced in the company. And, clearly the results, they are talking for themselves.

We have been profitable on an operating basis non-GAAP for two quarters in a row. And, if we look at the past, we were producing losses in the millions on a quarterly basis. Q1 of last year as an example, the loss was $5.5 million.

So for us to -- in such a short time, turn things around, I think is remarkable. And we are very optimistic going forward, so we see a very bright future for BIOLASE.

I thank you for being on the call and I thank you for being interested in BIOLASE. And for sure, we are no longer optimistic, but very dedicated to the company. We will do everything that we can to make you proud of your investment. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude the conference call for today. We do thank you for your participation. You may now disconnect your lines at this time.