BIOLASE Inc (BIOL) 2011 Q2 法說會逐字稿

Welcome to the BIOLASE Technology 2011 second quarter and 6 month 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 reminder this call is being recorded today, August 10, 2011. I would now like to turn the call over to Jill Bertotti with Allen and Caron. Please go ahead.

Thank you, and good morning everyone. Thank you for joining us today for the BIOLASE Technology 2011 second quarter and 6 month results conference call. You should have all received a copy by e-mail this morning of the release announcing the Company's results for the second quarter and 6 months ended June 30, 2011. Before we get started I've been asked to make the following statement. The words and phrases; can be, may affect, may depend, believe, estimate, project, and similar words and phrases are intended to identify forward-looking statements. Forward-looking statements are subject to various known and unknown risks and uncertainties, and BIOLASE cautions you that any forward-looking information provided is not a guarantee of future performance.

Actual results could differ materially from those anticipated in these forward-looking statements due to number of factors, some of which are beyond BIOLASE's control, and may be discussed in BIOLASE's filings with the Securities and Exchange Commission. All such forward-looking statements are current only as of the date on which statements are made. BIOLASE does not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which the statement was made or reflect current unanticipated events. Also, as a quick reminder, the replay of the call will be available on the BIOLASE website at www.biolase.com. The Company's 2011 second quarter results can also be found on the Company's quarterly report on Form 10-Q, which the Company will file with the Securities and Exchange Commission.

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 now like to turn the call over to Federico. Good morning, Federico.

Good morning, Jill, and thank you. I want to welcome all of you to our second quarter and 6 month results conference call and thank you for participating. Today we will review the progress and various accomplishments achieved at BIOLASE so far in 2011. These will include an update on our growth, and the beginning of our evolution into a well diversified Company with products that offer dentists Total Technology Solutions. We will also elaborate on some of our operational highlights, the strengthening of our management team and North American direct sales force. The ongoing success of the launch of our new flagship laser system, the Waterlase iPlus, the progress we're making with our new BIOLASE imaging division, and the recent equity financing undertaken by the Company in the strengthening of our balance sheet. Fred will then summarize the financial results for the quarter, after which we will answer questions.

First, a necessary interruption. BIOLASE is a true turnaround story. What we have achieved in the past 9 months since I became the CEO, with the help of BIOLASE's new management and its fully reconstituted, competent, and dedicated Board of Directors has been very remarkable. I believe that it is necessary to clarify that I was the Chairman of the Board from 1994 to early 2006. From mid 2006 through August 2010, I was not acting in any operating capacity, other than the fourth quarter of 2007, when I was the interim CEO. During the fourth quarter of 2007, BIOLASE's sales increased from $12 million in the third quarter to record sales of $20.7 million. After this success I was again confined by the Board of Directors to act as the Chairman Emeritus and Honorary President, with no office at the Company. I was effectively relegated to a minority voice on the Board and was only 1 vote out of 7. I continued to express my disagreement with the way the Company was being run, but unfortunately, it had no influence.

Now, proceeding with the business of the Company. The process of our turnaround has been very successful to date. BIOLASE's rate of growth in its core product lines continues at a strong pace in the second quarter, as we show substantial progress with the sales of both our All-Tissue laser, Waterlase and Soft Tissue Diode Laser systems. The buildup of our new executive team, which is nearly complete, remains focused on our strategic initiatives to ensure that we continue to deliver an excellent range of quality products, we grow our core product lines, and develop new product offerings, and we make certain the Company operations run smoothly and efficiently, as we continue towards increasing sales and generating regular quarterly profits.

It is noticeable that this quarter was our third consecutive quarter with non-GAAP income. This is the first time since the second quarter of 2004 that we have generated three consecutive quarters of non-GAAP profit. The positive commercial and financial trends of BIOLASE are continuing, and we are taking orders and shipping products on a daily basis. We continue to make strategic investments, including the continued expansion of our sales force, the improvement of our supply chain and production capabilities, and the addition of top executives to lead our growth as we broaden our product performance. Unlike the past, we are transforming BIOLASE from a one-dimensional, single product Company into a well diversified medical technology Company, offering a variety of high-end products, the goal of which is to ultimately offer a Total Technology solution for all dental practices.

Today, we have already achieved to be the only Company currently offering the two most desired high-technology product in dentistry; a complete line of All-Tissue and Diode lasers, and digital imaging products. We will continue to leverage our strong brands in laser dentistry, and expect to pursue further opportunities in dental CAD/CAM and 3D laser Intra-Oral dental scanners. We also plan to expand into other areas of medicine, such as ophthalmology, orthopedic, dermatology, and pain management in quarters to come. We expect to achieve this goal with our current technologies as well as technologies that will be new to BIOLASE. In fact, by 2012 we plan to address new markets, with product launches that are multiples of our current market. We are very excited about our future, and this is at the core of what supports our assertion that we will continue to grow at significant rates in the coming years.

Before we address some of the operational highlights and future plans however, I would like to quickly summarize our financial results for the second quarter and first 6 months. For the quarter ended June 30, 2011, we experienced year-over-year growth in net revenue of more than 105%. Excluding royalties income from both periods, our net revenue increased 146% period over period. Our sequential growth from the first quarter of 2011 was more than 14%. While we came in shy of GAAP net income, we maintained non-GAAP profitability in the second quarter. Our third quarter was our third consecutive quarter of non-GAAP profit.

This is a substantial achievement considering our rapid growth, and resulting over time and other costs required to increase our production. The production demand from our rapid growth, coupled with the supply chain supply issue due to a late change order from our lab distributor Henry Schein, put a burden on our operation, and ultimately contributed to our inability to ship approximately $2 million of orders received in the second quarter by June 30, 2011. It includes approximately $200,000 in addition to manufacturing costs. The timing of our orders and delays in the receipt of this critical component forced us to delay shipments that would have allowed us to grow even more in the quarter, and reach our guidance. We have recently strengthened our operation team with the addition of Richard Whipp, our Director of Operations. We added Rick in order to improve our supply chain, production flow and production quality. Rick has more than 30 years of experience in supply chain manufacturing and operations, including 13 years in operations in the dental industry. He has hit the ground running, and we are very pleased with his leadership and operational knowledge. As our Director of Operations, Rick will be critically improving our supply chain management, increasing our production capacities and qualities, and reducing our production costs.

Commercially, in North America we have increased our sales force from 24 at the end of the first quarter to 30 at the end of our second quarter. This growing sales force generated new interest and strong revenue across all of our product platforms. The demand for the Waterlase iPlus continues to progress very well. And we plan to continue to grow our North American sales force to 40 during the third quarter. In the first quarter, as we expected, the majority of our iPlus sales, approximately 63%, were to pulmonary luminary dentists and existing Waterlase customers. In the second quarter we experienced a strong shift in sales to new customers, as our existing customer base accounted for only approximately 36% of our iPlus sales. We are very pleased with this trend and see the Waterlase iPlus as an important tool in breaking down the barriers to entry into the last markets of dentists that have yet to embrace the technology.

We believe that the shift to new users has been driven by two major improvements in the technology. First, we have broken the speed barrier and have demonstrated that the iPlus is as fast, if not faster, than a high-speed drill. Second, the software is intuitive and much more user-friendly. A couple of weeks ago, we also announced that we had regulatory approval to sell our state-of-the-art BIOLASE DaVinci Imaging dental imaging device. We have received our first orders and expect to ship those units in the third quarter. As a reminder, we are working with a major European OEM to design and distribute state-of-the-art extra-oral and intra-oral imaging devices that complement the minimally invasive dental treatment solutions currently offered by the BIOLASE laser division.

We have hired team sales executives with imaging backgrounds, and trained our sales team on this new product line. Our sales force is now introducing this imaging product to our current installed base of laser dentists, as well as marketing this along with our dental lasers to other dentists. We are tremendously excited as we take this essential step in our growth to offer dentists a Total Technology Solution. We will expect that the BIOLASE DaVinci imaging division will be slightly accretive to overall equipment sales in the second half of 2011, and we believe that it could contribute substantially to additional equipment sales in fiscal year 2012. As a result, we exited the second quarter with an adequate cash position and a much healthier balance sheet than at the same time a year ago. We expect to leverage our financial strength to pursue timely opportunities in expanding our high-technology product offerings to include dental CAD/CAM and 3D laser intra-oral scanners. We expect to introduce these technologically superior products in the first half of 2012 at competitive prices comparable to products on the market today. 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 third quarter and year.

Thank you, Federico, and good morning. Total revenue in the second quarter of 2010 was $12.1 million, up 105% from $5.9 million in the same quarter for 2010, and up 14% sequentially from $10.6 million in the first quarter 2011. These increases were primarily driven by our return to a direct sale and multi-distributor business model, which was initiated during the fourth quarter of 2010. Net revenue for the first 6 months of 2011 was $22.6 million, up 120% from $10.3 million in the prior year period. We are very pleased that we have nearly matched our revenues for all of 2010 in just the first half of 2011. Approximately 63% of our revenues for the second quarter and 53% of our revenues for the 6 months ended June 30, 2011, were from the sale of our All-Tissue Waterlase system. The majority of which have been our revolutionary Waterlase iPlus. Sales of our Diode Laser systems made up approximately 14% and 24% of total revenue during the second quarter and 6 months ended June 30, 2011, respectively.

Excluding royalties of $390,000 and $1.1 million in the second quarters of 2011 and 2010, respectively, net revenue increased $6.9 million, or 146% period over period. As Federico mentioned, approximately $2 million orders received in the second quarter were not shipped by the end of the quarter. As we have previously disclosed, this was primarily due to last minute delays in our supply chain of a few critical components. Several of our components have long lead times, and our production capabilities were impacted by the timing of the significant change order placed by Schein after the start of the second quarter. While this was within their contractual right, it was a contributing factor in why we were not able to ship a significant number of orders by June 30. All products ordered by Schein have been shipped during the third quarter.

The percentage of net revenue in this year's second quarter from the US and international markets totaled approximately 71% and 29%, respectively, as compared to approximately 60% and 40% of net revenue in the prior year's comparable period. In April, 2011, we announced that we had regained full rights to sell and/or distribute our products in all international markets, were previously exclusive markets to Schein. As result, we are now selling through multiple distributors, with the ability to sell direct in those markets on a go forward basis. As we have spent the first few quarters of the year reorganizing our international sales model, we have experienced a reduction in our international sales as a percentage of our total sales. We expect international sales to increase as a percentage of our total sales on a go forward basis.

Gross profit as a percentage of net revenue for this year's second quarter and the first 6 months was 46.5% and 46.2%, respectively, compared to 32.8% and 21.4% for the prior year comparative period. The year-over-year increases were primarily due to higher sales volumes as a result of expanding our product offering, better utilization of bit costs, and reduced expenses, which were offset by the decline in our P&G royalty revenue. Gross profit increased as a percentage of net revenue from 45.8% in the first quarter of 2011 to 46.5% in this year's second quarter, despite additional production costs and expedite fees, which negatively impacted our gross margin by approximately 1.5%.

Operating expenses in the second quarter and first 6 months of 2011 were $6.3 million and $11.6 million, respectively, compared to $6.1 million and $11.6 million in the year-earlier period. Our net loss for the second quarter of 2011 totaled $753,000, or a loss of $0.03 per share, compared to a net loss of $4.2 million, or a loss of $0.17 per share in the second quarter of 2010. After removing interest expense of $6,000, non-cash depreciation and amortization expenses of $183,000, and non-cash stock-based compensation expense of $570,000, this year's second quarter resulted in an adjusted non-GAAP net income of $6,000 or $0.00 per share.

Our second quarter of 2010 resulted in a non-GAAP net loss of $3.7 million, or a loss of $0.15 per share. Our net loss for the first 6 months of the year was $1.5 million, or a loss of $0.06 per share, compared to a net loss of $9.5 million, or a loss of $0.39 per share for the same period in the prior period. Non-GAAP net income was $98,000, or $0.00 per share for this year's 6 months, compared with a non-GAAP net loss of $8.5 million, or a loss of $0.35 per share in the prior period. Turning to the balance sheet. As of June 30, 2011, we had cash and cash equivalents of $10.1 million, and shareholder's equity of $14.9 million.

Our improved balance sheet puts us in a stronger position when it comes to dealing with suppliers and vendors, and allows us to fuel sales and marketing efforts that have been on the back burner, as well as attract top industry professionals. It also gives us the opportunity to make strategic acquisitions. Net revenue for the third quarter ended September 30, 2011, is expected to be between $14 million to $15 million, up from $6.2 million of net revenue, a targeted increase of 126% to 142%.

I will now complete my remarks. Internationally, we continue to expand our distributor network, and are excited about the opportunities in new and existing markets. We have increased our direct presence in Asia, and are evaluating how to proceed in Europe. These led to the opening of our Asian headquarters in Shanghai, China, and a direct sales and service office in Mumbai, India in June. These are two important emerging markets that are thriving with growth and maturing economies beginning to adopt laser dentistry and digital imaging.

We are already beginning to see results in an increased level of interaction with both private and government dental professionals. These should result in significant increases in sales in the second half of this year, and in 2012. As a percent of the total iPlus systems sold, international sales increased from 12% of total systems in the first quarter 2011 to 30% of total systems in the second quarter 2011. Also, our international property portfolio is stronger than ever and continues to grow. We were awarded 3 new patents during the second quarter that extended the Company's core laser technology well into 2026, while adding protection for many new features and alternatives, such as other wavelengths. We have also received two new patents directly related to treating presbyopia, a condition suffered by 2.5 billion people worldwide.

We are aggressively pursuing the ophthalmology market, and are moving towards obtaining the grant of an investigational device exemption IDE for a human trial. Extending our technology into ophthalmology, orthopedics, and other areas of medicine remains a strong focus for BIOLASE. We believe that the true value of our diversified and multi-layered intellectual property portfolio greatly exceeds the net book value of our intangible assets of approximately $277,000 as of the balance sheet of June 30, 2011. I'm also happy to say that we are again collaborating with Procter & Gamble on the development of certain products at this time, and we may have more information to report on this in the near future.

We continue to gain momentum operationally, but we also executed a $9 million private placement towards the end of the second quarter, which put us in a much stronger financial position. Year-to-date, we have sold approximately 4.1 million shares at an average price of $4.50, for gross proceeds totaling approximately $18.4 million. We achieved this with a dilution of approximately 16%. In addition, approximately $1 million has been received in connection with the exercise of approximately 500,000 stock options during the first 6 months of 2011. This concludes our formal prepared remarks, and I would like now to open up the call to questions.

Thank you very much. (Operator instructions). Our first question does come from the line of Ethan Roth with WJB Capital.

Hi, congrats on a strong quarter here. Just a couple quick questions. First to be clear and gross margin. You mentioned there was an incremental, I think $200,000 in production costs that otherwise would not have been there, and you would've been about 48% for the quarter. As you think about the next couple quarters, should we be expecting that go away and then pick up again a little bit closer to the 50% that you were targeting at the end of the year? Thanks.

Yes, we expect the gross margin to increase quarter after quarter into the low to mid 50s.

Okay. Thanks, and then just in terms of the environment for dental equipment. I know demand is actually in pretty strong throughout the last year for higher tech products, but things seems to be changing almost on a daily basis here, in terms of a thing going on in Europe and in the US. I just wonder if you have any feedback in the last couple weeks from your customers about cutting back on spending, maybe if they are a little bit nervous about patient volumes. I know you guidance for next quarter is pretty strong but any color there would be helpful.

We haven't really seen any change in patterns of purchases and interest from dentists. But clearly it's a very fluid world economic situation. But what is very encouraging is what we heard yesterday, that interest rates will be at the minimum level for the next 3 years. And as we know, interest rates are very important for any capital equipment purchase. Also clearly, a way to stimulate the economy is about stimulating investments in capital equipment. So we are quite positive regarding our environment.

Okay, thanks but I will just jump back in the queue.

Thank you.

Our next question does come from the line of Dalton Chandler with Needham & Company.

Hi Dalton.

Good morning, and congratulations on the ongoing turnaround. Just let me just ask about -- you commented a couple of times about expanding into new areas of medicine and additional technologies. Can you just talk about how you plan to about that or do you expect to do it yourselves directly? Are you going to do with partners? Just any additional detail you can provide.

This is a large discussion to have. It is not an easy answer to give you, Dalton. Clearly ophthalmology, we want to do it on our own. And then once we have an approval we could seek partners at that point. But orthopedics, for instance, is very specialized, we will be looking for a partner. Dermatology, we are talking to a potential partner, and regarding pain management, we intend to do it direct. So each market will be evaluated carefully.

Okay. And then if I've done the math correctly here, it looks like the Diode laser sales were up year-over-year, but down sequentially. Is that just some seasonal issues or is there something going on is changing demand there?

No, it's simply that we have a large pre-paid order from Schein for Diode lasers. Approximately $7.5 million of the $9 million from Schein has been for Diodes. And in the first 6 months we had $4.5 million from Schein in diodes. That clearly has increased the numbers in the first quarter. Now we are seeing going forward a more normalized rate of increase of revenues between All-Tissue lasers, the Waterlase iClass and MD, and Diodes, but we also are going to launch new Diode products. We see the diode market as a very interesting market and as a substantial contributor to revenue in future.

Okay, by new products, are you talking about new wavelengths to do different applications or different treatments?

Our intention is to launch the more sophisticated diode that is going to be multi- wavelength, and we expect to do it no later than Q1 2012.

Okay. And you talked about the fact that the restructuring your international distribution, but it looks like international revenue is up pretty nicely sequentially and year-over-year. So can you just talk about what your longer term expectations are for that?

First of all, the increases you see is because we have been tapped to more markets and more to come. Latin America, for instance, is essentially uncovered and we will put important effort in that area. But clearly international revenues compared to domestic revenues, they will growth at a faster pace in the future.

Okay. Thanks very much and congratulations again.

Our next question does come from the line of Chris Sassouni with Eagle Asset Management.

Hi Chris.

Good morning, and congratulations on a great quarter and ongoing momentum. In the many years that I have followed the evolution of this dental laser technology, there had always been, as you described it, a performance barrier, which was that these lasers could not have as fast as a high-speed hand piece, and now you've broken that performance paradigm, and I would imagine that you're early adopters are pretty enthusiastic because this is something that just could not be done. I think that most of the luminaries probably understand that the laser has always been better dentistry in terms of terms of interaction between the laser light at the tube structure. Now you also have speed. The thing that I'm interested in is what are you as a company going to do to change the awareness of the dental community that there that BIOLASE is the premier brand, but more importantly, that the performance characteristics of dental lasers as they once knew it has now jumped in order of magnitude, and they have to sort of rethink where they use dental lasers because you now have this productivity improvement. I would imagine that there's relatively low awareness of this, and so the question is how are you going to deploy the capital of the Company to build the awareness around the iPlus and its performance characteristics?

Chris, thank you for the question. Yes, it is a breakthrough, the fact that we managed with the iClass that we just launched in the middle of Q1, so it is a brand-new product. We really broke the last barrier of adoption of the laser dental technology, that was speed. Clearly, all the clinical advances were there but many dentists had found obstacle in the fact that it was 30% slower than the dental drill, so now that we are as fast and in certain types of surgeries even faster, has created an optimal situation for return on investment for the dental offices. Clearly that is going to be a major approach that BIOLASE will take to dentists know about this breakthrough in laser dental technology that BIOLASE has just achieved, and the return on investment, the advantages that they can also have clinically, and the market advantages that they can have, because clearly, by having patients that can be now treated with minimal pain or no pain at all, and no injection, that means happy patients, and patients that don't need to go back to the dentist for multiple surgeries. You can have a patient be treated for multiple issues in his mouth in one session, instead of multiples, simply because you don't need anesthesia in the great majority of cases. So we are talking about a revolution in dentistry, and clearly we are going, in all possible ways including social media, trade shows, and telemarketing, to bring awareness to the dentists. Clearly, to have luminaries using it, and we have roughly 60 of them, is very important because luminaries, they influence hundreds and hundreds of dentists, and then spread. So our effort clearly at this point is to explain the ROI, how it has now increased dramatically, and how it makes sense investment-wise, and all the clinical advantages.

Okay, now let me just follow-up on that with 3 different directions. Number 1 is can you just delineate what are the upcoming dental trade shows that which you'll be present? Number 2, I'd like you to just tell us a little bit about the laser offerings of AMD -- HOYA ConBio sort of is no longer, but if you could just comment on what it is that they had. And number 3, my observation has been that one of the most important good housekeeping seals of approval in dentistry for new technology has come from Dr. Gordon Christensen, and I was curious as to whether or not there will be a way to have him evaluate the iPlus, so that perhaps he can put his imprimatur on it, and again, drive its options. So, trade shows, competitive landscape of AMD and HOYA ConBio, and finally, Gordon Christiansen.

Regarding trade shows, we go to all the major trade shows. We have cut down to save money In the past BIOLASE was going everywhere, and there are trade shows that make sense to be at, and trade shows where we just lose money, and so we cut down to the ones that make sense. But we will be there and our presence will be strong. We will have a brand new booth with a lot of advertising on all the major issues that matter, return on investment and better results clinically, and so on.

Regarding laser offers of AMD. AMD has been a company that has in a way damaged the entire industry, because their strategy has been about pricing equipment at a lower level, instead of looking at the quality. These are lasers that are manufactured in China, and they have also recalled. We are not, frankly, very high on this type of approach, and we continue, instead, producing high-end diode lasers. But clearly has been -- they have an effect in lowering the overall cost of diode lasers. It in fact has lowered our gross margin in that product. But again, we believe that quality and technology is the answer to have, to win in the market.

Does AMD have a hard tissue laser?

They don't. They are planning to. Same story with the Erbium YAG. Not the YSGGs, only YAGs. To have an Erbium YAG they have to pay us royalties, as we own the underlying patents. We haven't granted them yet [soft rights] and again, we do not feel that they are going to be a threat, they would be using a mechanical arm to transmit the laser energy, so in essence it is a markup of the Fotona laser that has been highly unsuccessful in penetrating the market overall. In the United States and in Europe, Fotona has really not been successful with even their latest product. So we feel that they are by far the leader in hard-tissue and all-tissue lasers. I understand, the diode field is definitely more competitive.

Regarding HOYA, HOYA is out of the market now and is for sale. So we are definitely looking at that, because there are some interesting assets that HOYA has. But again, HOYA is of the market now. Regarding Dr. Christiansen, that is one of the most important luminaries in the country; he has evaluated the ezLase for 6 months, and will evaluate the iPlus next. So we are working with him.

Excellent, okay, thank you and congratulations.

Thank you.

Our next question is come from the line of Lenny Brecken with Brecken Capital.

Hi, I have 3 or 4 questions, if I may. Can you just summarize better the product road map going into 2012 in that it sounds like you are going to have 2 to 4 products on the market, and I have to assume that they are going to be in the market in the first half of the year. Can you just give us a sense of how big those markets are, what the near term addressable markets are for those, and how much you think they are going to contribute to 2012, and I'm talking x the imaging products that's on the market today.

You're talking about laser markets?

I'm talking about overall. If you look at the Company now, you have the iPlus then you have the diodes, right? So you have 2 product families, per se. And the imaging is a third. So if you look out in 2012 like get the impression it is probably going to be 2 to 4 new product families, and can you just help us size those opportunities, and maybe what they could contribute to 2012, as a percent, whatever your revenues are?

I understand your question, but I will not give dollar amounts behind it. I can simply say that they're all very large markets that we are going to address, and yes, we are planning production of products in the first half of 2012. Yes, the Waterlase iPlus, it is the major driver in 2011 in our revenue growth and in 2012, you understand, we are going to have multi-layer of new opportunities of revenue growth. So we will be multidimensional, and ophthalmology clearly is a field in which we will start selling. We have FDA approvals already. So presbyopia is two years down the road, but we can start selling products for glaucoma, for dry eyes. We are also planning new introduction of laser products that we would not like to discuss for competitive reasons addressing new markets. We also are going to ensure the CAD/CAM and the IOS marketplace that is one of the most interesting fields, and clearly both of them they require laser expertise, and BIOLASE is the Company with the finest laser expertise in the market.

My point -- it sounds like it's more than 2 to 4 products actually, but nonetheless, if you double your market share, or your market penetration and iPlus going forward, I think that probably would amount to somewhere in $0.5 billion market. I'm sorry, incremental revenue opportunity. Are you telling us that each of the 2 to 4 markets could exceed that in aggregate, and many more times that in aggregate?

They're very large markets, Leonard --

Is that why you've used the necessity in your statements regarding the stock buyback in that this is not just an iPlus story anymore, this is a multiple product family story where any one of these product families can justify, obviously, the stock valuation, but in terms of the market opportunity and revenue opportunity, many more times than the existing markets you are addressing today?

You're absolutely correct. That is the evolution of the new BIOLASE to be a multi product company addressing several markets, so we will not only be selling dental lasers. We are leveraging our brand that is high be recognized. Over 80% of the dentists in the US and Canada recognize BIOLASE brand and recognize it as high-tech, so our scope is to become a Total Technology Solution for dental offices, so to be the high tech company for the dental offices. In medicine we are definitely looking at applications for our technology in different fields. So they are all very large markets, very large opportunities, there is absolutely no doubt.

Okay, can ask you a question on display and demand of iPlus? Are you able to fulfill, given your progress on the supply chain, to fulfill all orders for iPlus. And also in that context, I understand that in the certain markets that you are in, your penetration is much greater than the overall market deep penetration. For example, think your penetration, California --

Leonard, thank you for the question. I'm very proud to say that a lot of the negative arguments about the Waterlase technology is the 1%, 2% kind of market penetration. It is the kind of technology product that is only for aficionados of high-tech tools. But the fact is the 1% or 2% wall in market penetration, we have broken it in many regions in the United States and overseas. We have in market penetration of 13% in Hawaii, we have a market penetration of 70% in California, we have a market penetration of around 6% in Florida. We have a market penetration of over 10% in Korea, and so on and so on. And we have at the very minimum market penetration and many other areas. But where we perform well in selling and servicing, we went through the barrier very, very, strongly. So there is no, per se, barrier of adoption of our technology. It is all about execution.

Okay, just 2 more follow-up questions quickly. What's your overall confidence on achieving the stated target gross margins of 50% to 65% either next quarter or the quarter after? I know there has been some one off impacts to the margin but it still seems to be running below that. Can you just address that, and also what your visibility going into this quarter versus last quarter is? What gives you the confidence that you are going to be able to make the numbers in that context? Thanks.

We are confident. We gave guidance, so we obviously don't give guidance lightly. We are confident in the quarter. Regarding the gross margin, we see the gross margin growing and particularly in Q4, because it is also tied volume, obviously, and the highest volume quarter is Q4, and we are carefully preparing ourselves to satisfy demand in Q4. Q3 we still are constrained in supply. There is a substantial lead time in several components. I would like to remind that the iPlus is a very sophisticated piece of equipment, with almost 2,000 components, and there are some critical components with months of lead time and Rick has been working diligently in making sure that we can prepare ourselves for a strong Q4 and satisfy demand.

Okay. I will get back into queue. Thank you.

Thank you.

Our next question does come from the line of Robert Hoffman with Princeton Opportunity Partners.

Good morning. Thank you for taking the call. I just wanted to dig a little deeper into the specific iPlus sales. So I guess I'm under the impression, or have to be under the impression that you effectively sold out of the iPlus in the second quarter, correct?

Correct.

And in terms of why Schein made the change. Originally they had called $3 million worth of -- what's the handheld one?

iLase.

iLase ordered and then they changed in the middle of the quarter for the iPlus. Can you give any feedback as to why they did that? Do you know whether they actually had sales, and it seems to me that they wouldn't want to be stuffing their own channel with a very expensive piece of machinery, when they could have -- I would think the iLase would be a lot easier sale than the iPlus. So I guess my question is, do you know whether there was intrinsic demand for the iPlus to cause them to make that change?

First of all, originally the $9 million pre-paid was all for iLase. But they had an option for the last $3 million to change it to other products. And at the very last minute, the very last day, they exercised that option to change from the iLase so that caused a lot of problems to us because we were producing iLase for them and we had to shift to the iPlus option. The reason why they decided to move to ordering the iPlus and more ezLase -- that is a diode, is frankly only a speculation. I can say they like to be always on the edge of technology and they like to have the laser technology, laser products, so they decided to also have the iPlus. They are selling the iPlus, clearly.

What puzzled me in the time management area is why they wanted so many of the iPlus all together in Q2. But they had the right to do so. They had the right, basically, of first refusal in the sense that if we have them, we have to give it to them. And we did so and frankly, why they wanted all these iPluses in Q2? I don't know. But if they are selling them? Yes they are, and we know that because, obviously, every sale has to be registered. So yes. The demand is there. And again, it is nice my speculation they just like to have the best products on the market in their portfolio.

Obviously a year ago you could say that 100% of your sales were to Schein, correct? So going forward there is going to be sales through Schein, there's going to be sales through Benco, who I understand has turned their opinion around on BIOLASE. I don't know in the past whether it was sour grapes because they didn't have a relationship with you, or whether it was the speed issue. But my impression from Benco sources is that they are very excited about the iPlus. Can you give us any sort of sense of the breadth of distributor success I guess both in the US and internationally?

First of all, Benco is a great company and is expanding very rapidly, actually gaining market share in the United Sates and we regard Benco a great deal as an excellent distributor. We started dealing with Benco as we were not any more exclusive with Schein, obviously. Once the door opened we were able to then deal with Benco. Again, we regard Henry Schein as a great distributor and we love dealing with them, but clearly there is an adjustment on their side because before we were selling for them, and now they have to sell by themselves. And that's not an easy transition for them.

Regarding distributors internationally -- actually regarding all the distributors domestically and also Canada, we are talking to some of them and again, we like to have distributors in the area in which we are not strong with our direct sales force. It is a logical choice. So there are certain regional distributors that we are talking to and successfully. Regarding international we are doing very well. We are setting up new dealers. In some territories we are going to be direct and dealers. So that is really to be seen market by market because every market has its own characteristics. But there is a huge interest from dealers to represent our product.

Maybe I should clarify my understanding. So if dentist A buys and iPlus -- and will they, by definition, have met with one of your sales people or if it's a Benco salesperson then they will order through Benco or Schein, but if it's you guys involved, then the distributor gets treated how?

Essentially the distributor sells, and then we provide -- we have a service group, and we provide the service. The distributor, has a level 1 that is the installation, then we do level 2 kind of servicing. So when we sell to a distributor we sell, obviously, at a lower price, and the dealer understanding that they are the ones making the effort and selling. Then when there is a service call, that is revenues to us. But they are trained by us to do to do level 1 servicing and installation.

I guess I understand that. What I'm trying to ask is can you break out the sales in US what percentage of how much of the Q2 sales went through distributors and how many were sourced just buy your force?

We don't really disclose that, but again you have to realize that the data is a little distorted by the fact that we still were fulfilling the last order to Schein in Q2. So clearly we will have a better -- more realistic split of that as of Q3 and Q4.

Great. Okay can you just elaborate as much as you can I guess on where we stand with P&G. You made the announcement that you were recognizing some royalty revenues in the quarter, fairly minor. And from what I understand that's the end of the recognition. So what are the generalities of what you're talking about, a continuation of an investigative set up, or are we a lot closer to product introduction?

Again it is a little delicate for me to talk about that, but Proctor and Gamble, we know is the Company that sells more toothbrushes than anybody else in the world, they sell $7 billion of toothbrushes of which $1 billion is in high-tech toothbrushes. So that is the market that we are addressing with them. Clearly there is a substantial, high level of interest on their part for our laser toothbrush. It is completely novel technology. We are going through some demonstration of safety with them, and Procter and Gamble is a cutting-edge company. They believe in technology. They know how to address consumer markets. Obviously an alliance with them would be a perfect choice, but if they decide not to do it on their own -- I mean to do it now and the months to come, then we will proceed anyway with the laser toothbrush. We are strong believers in the home market, in the consumer market and we strongly believe that the laser toothbrush which we have patented to protect the technology is a phenomenal potential product with also a very interesting consumable flow.

Great. Just another question switching gears completely. Can you talk about the DaVinci Imaging, the value proposition versus the competition that's already out there? Can you tell us how the salespeople are selling it?

Again, that's a competing market. There are many digital imaging companies out there, but what we do is to leverage the fact that we have a good brand. We already have a relationship with thousands of dental offices. And it is a fact that when you work with a dental office to sell a product you can sell 2 or even 3, so the fact is that there is a tendency of a dental office to rely on 1 vendor for their technology buys or their consumable buys, for instance Schein is very well established in the consumable markets -- I believe that 70% of the dental offices in the United States one way or another they use Schein for consumables. So they like to deal with 1 vendor and if so we strive to be the 1 vendor to be providing the Total Technology Solution to the dental offices, so to be able to give them everything that is high tech from lasers to digital imaging to CTscan and (inaudbile.)

I understand the synergies, but if I'm a dentist and I've had another person calling on me now for a year and a half to sell me a digital imaging system, and I have yet to take the plunge, what is the value proposition for the DaVinci? Is it slightly cheaper? It is it more intuitive? Is it a better warranty? Just trying to think of things that might cause a dentist to make a choice.

First of all, we have clearly the chosen a line that is cutting-edge technology-wise with improved the software also. We have redesigned fashion of the product to make it more appealing. But definitely it is price competitive and technology competitive. Again, digital imaging is all about the quality of the image. It is a combination of hardware and software. We have improved the software. And we will continue improving the software.

Ladies and gentlemen, we would like to remind everyone to please ask 1 question and 1 follow-up. Our next question does come from the line of Jeff Osher with Harvest Capital.

Hi, congrats on another good quarter. I was worried I wasn't going to get into queue after the callers before me. But let me keep it to a question and a follow-up. And maybe before I even getting to mine, Federico can you just -- you were confirming the $60 million to $65 million for the year that one of the previous callers asked in theirs?

I'm sorry, what is the question? I couldn't understand.

You guided multiple times and internally were looking for $60 million to $65 million consistent with your guidance. I want to make sure you are confirming that guidance?

Yes, I'm confirming the guidance, probably. I'm worried about seeing what is happening in the world. But so far we don't see any signs. But clearly every day we turn on the news and we see the markets collapsing and countries having difficulties and riots in major cities. It is a really worrisome environment, but notwithstanding that, we believe that it is the number. And we like definitely the news that we had yesterday about low interest rates, because interest rates are very important when you sell capital equipment because we lease equipment. Only 10% of the systems that we sell is generally purchased outright and 90% is to a lease. So that affects, really, the purchase.

We still stand by the guidance. Again, the major driver this year in 2011 is going to be the laser business, the iPlus in particular, and in 2012 we are going to have multiple layers of revenues, more products than some. But surely I think that any company is worrying right now about what is happening, and we can only hope things will get under control.

Very fair. Then my follow-up, with regard to warranty accruals, walk me through the policy as it relates to iPlus and iLase, and I'm just asking in relation -- it looks like your warranty accrual, despite sales being up 100%, which was a real feather in you guys' cap. Frederico, with regard to turnaround and ramping sales were you have, is there a reason warranty accruals are down year-over-year? Is that just a reflecting confidence in the new products?

Our warranty accrual is based on the information we receive back. It's usually more generally a specific identification applied to a product line. So our warranty accrual process is based on historical information, forecast, and then mathematical functions within there. So based on what we are seeing so far, we are comfortable that the warranty accrual addresses our future warrantees.

Great. And final question, that's really helpful. Final question, as it relates to the cash and balance sheet, just tell me reconcile my model. Frederico, we were looking for $9 million of cash at the end of Q2 based on the Q1 conference call last time. You raised $7.2 million earlier in Q2, another $9 million from the equity raise we looked at in Q2. You collected $3 million in accounts receivable, based on the commentary from the last call, so that should be about $21 million of cash in the balance sheet. Maybe just walk us through some of the usage -- uses of cash that were a surprise in the quarter, and then I assume given the buyback announcement, you're indicating real confidence as it relates to cash accretion and future quarters.

First of all, we don't have $21 million in cash. I don't know where the math comes from.

Let me clarify that. It comes from your comments on the last call. You had $1.6 million of cash, you've raised $7.2 million, then you raised another $9 million at the end of the quarter, so that's $16.2 million. And you said on the last call that you'd already collected $3 million from the big accounts receivable balance at the end of Q1. So when I add up those 3 figures and add it to the $1.6 million you ended Q1 with, it equals $20.8 million, but we ended with $10.1 million. Just trying to get a sense of that.

Jeff, it's a bit dangerous at this point, with -- the 10-Q is going to come out in a day or two, and it will obviously have a cash flow statement. It will illustrate all the ins and outs of where the funds went and what they've done. I think it is a bit dangerous sometimes to look at these gross amounts. You're looking at one side of the transaction -- and I understand your question, you're asking for the other side of transaction, but we have prepaid purchase orders, for example, for Schein that we had to fulfill. We had to ramp up inventory to do that, and we are also ramping up inventory for Q3 and Q4, and as you know from our previous disclosures, that we had a good chunk of sales that were held up at the end of the quarter for just a couple of components, so all that inventory, all those parts were in with that at the time, so that was a cash out we had to build that inventory. And with the supply chain delays all our shipments went out for the end of the quarter, towards the end of the month of the quarter, which means that you might expect to see another high AR balance as we continue our turnaround. So while, yes, we have some good cash coming in from those raises you mentioned, we also have some other business constraints that have impacted it the other direction. You'll see a very detailed explanation in the cash flow statement in a day or two.

Also I'd like to say that the situation that I inherited when I became the CEO the Company was not a good financial situation. The Company was in a horrendous state of finance. So obviously do we had to pay down debt. We had to pay down $3 million of bank loan. We paid down the $9 million to Schein, so that more or less at a 50% gross margin is $4.5 million. So we paid down a lot, and we now have a very clean balance sheet, and a very understated balance sheet I would say for the assets that we have. For instance IDE is one. And clearly we will invest the money in a strategic manner. We will be smart investing it.

Regarding the stock buyback, we're going to be opportunistic. When and if the market gets irrational like it's been recently and brings evaluation of the Company through rational evaluations, obviously we are interested in getting shares back. But we definitely have use for our capital in increasing products and addressing new markets.

Our next question does come from the line of Austin Hopper with AWH Capital.

Hi, can you hear me?

Yes.

First I just want to echo Jeff comments, I was worried I wasn't going to be able to ask a question after listening to Lenny and Robert ask questions for 10 or 15 minutes, but I wanted to ask you about your 3D cone beam imaging system. What is the name of the product? What is the highest point and when do expect it to ship?

The product line is the BIOLASE DaVinci Imaging. And it is the Skyview. And what was the question, when?

Yes.

We are calling it Deep 3D Want to know when we will start delivering, is that the question?

Yes, that was the question I asked.

We will start this quarter.

A question about the system. Is that a supine, or otherwise known as a lay-down system, so someone lays down in it like a dental chair or a bed?

Yes, you have -- when you are standing up and holding onto the machine with your hands and you have your chin resting there, there is always movement. So the picture is much more clear when you are supine. So you can --

Okay.

You can use it either way. It is a higher quality picture.

So the major players in the market, clearly not your OEM, but Kodak and Danner and others, have they kind of moved away from the lay-down, from the supine system in a way, towards the upright system?

Again, we decided to carry that product because we believe there is a market for the product. We're happy the doctors don't have it, so I'm not saying that it is going to the top-selling product, but it is a very interesting product, and there is a demand for it.

Right. And does it use up more space in a dental office than an upright system?

Yes, it does. Obviously we are not going to sell many of those in New York, in Manhattan. But there are dental offices with enough space in many, many other cities with bigger dental offices. And it is the kind of machine you sell to a dental office with several dentists -- dental cleaning basically. So there is definitely a market for it.

Okay, thanks final question. You raised $9 million recently or roughly that amount at a type at $5.55 a share. Mid-to-close at the end of June. 2 weeks later you pre-announced the second quarter at a fairly meaningful revenue shortfall, which is what you had projected previously. But 15% or 20%, obviously your stock went down $1 to $2 based on that. Just curious if there's any concern at the buyers of the type would seek remedies through the mercurial adverse change clause in the documents that they signed through your deal?

We feel that we are totally protected by these (inaudible) that we gave them, but I'm not going to speculate on what they are going to do or not do. The fact is that we have all the proofs of our debate. We relied on suppliers. Suppliers unfortunately encountered problems. They didn't live up to their commitments to us and we suffered from it. But again, really it technical miss because it is not as if the orders have disappeared. They've simply been transferred from one quarter to the next.

Our next question does come from the line of George Santana with Ascendiant Capital Markets.

Hi, thanks for taking my question. A couple of questions. I noticed the operating expenditures were up significantly for the quarter. Can you comment on whether this is a new base, or were there special items in the quarter that were the cause for the ramp?

For various expenses I will answer, we are increasing headcount, we also had legal expenses to clear up past problems inherited from the past management. So legal has been increasing. Remember we are very committed in protecting our IP portfolio. Something that has not been done in the past. So we have been doing extensive work, legal work in that field. So those are the major drivers basically in operating expenses.

The wasn't any kind of some kind of lumpiness from the operating expenses and things like that impacted the quarter and should disappear. We should use this as a new base?

No, anything with the offering was met with the proceeds there, so that wasn't anything on the income statement.

Okay. All right, fair enough. Another question, somebody alluded to this earlier how the (inaudible) is a real improvement over the previous generation of hard-tissue lasers. Can you comment even in the range what percent of sales were upgrade sales from the customers, or trade ins?

We said in the press release or my statement, I believe, that we went from 63% to user of MDs in Q1 to 36% in Q2. So there is a substantial increase in new users of the iClass. So we like that trend. And again, the Q1 was heavy in old users, because we sold a lot to luminaries, and we sold some also in Q2.

Our next question does come from the line of Greg Garner with Singular Research.

Thank you for taking my call. I didn't know if I was going to get in the queue here, or if I was in the queue at all. Just a follow-up on that last question is wanted to ask about. It appears he really expanding the market share for the iPlus with almost two thirds to new customers. To help us understand how this can expand beyond just a few percentage points of market share to the dentist market, can you explain what the value added is here to these new dentists? It certainly appears that you are moving into an area where you don't even have a multiple of dentist office now. In particular, in comparison to a mechanical drill that may only cost $1,000 or $2,000, or maybe the life of that mechanical drill needs to be replaced more frequently. Can you just walk us through what the value added to sales focus is there, and how that can potentially expanding market for beyond where it is right now?

Again, the drills work with friction. Friction creates heat and micro fractures, and also it is very important, we will make a big issue out of this, there is a clear risk of cross-contamination because the bur is used from patient to patient. And even if autoclaves are 100%, there is 1 chance out of 6, and this is an independent stat, to be contaminated with a virus or bacteria from another patient. So it is a major problem of which the public is not aware. And cross contamination is definitely an angle that we are going to play to make the public understand that they want to go to a laser dentist just because of that reason, besides the fact that they can have no pain dentistry, and besides the fact they can go to the dentist for one session instead of multiple sessions if they have several problems in their mouth. So there are advantages on both sides.

Number 1, I want to be clear, laser energy kills any bacteria and any virus. So it is completely safe. The clinical advantages, they are tremendous. It is a biological cap. We use the water that is in the tissue and water that is on the surface of the tissue to cap biologically the tissue, so there is no heat, there's no vibration, there is no abrasion. It is a total novel approach to [tiling] tissue.

We have also the advantage for the dentist to be able to perform multiple procedures in one session. And given the fact that he is paid per procedure, not per session, these revenues -- they have a direct increment if you can perform more procedures in one session. Every time the patient comes back, he has already paid for that procedure. When he comes back the dentist has to do it for free. So the fact is that we provide much superior results and the ROI now has increased dramatically, because until now -- and we sold 11,000 of the old tissue lasers in the past few years. And we sold them notwithstanding the problem of much slower speed compared to the dental drill speed. Now that we have the iClass that has a speed that's equal to the dental drill, in certain cases even faster, it depends on the tissue, the ROI has increased romantically. Also, let me point out the fact that with the Waterlase technology, you can perform, a dentist can perform more surgeries then he can perform with a dental drill. For instance, come he cannot perform with a dental drill frenectomy, as an example. Instead he can with a laser. If a patient has labial herpes a dentist with a laser can stop the outbreak and make it go away. You cannot do that with a dental drill. And so on, so on, so on. So there are many applications that the dentist has to treat a patient that the convention, the old style dental drill, he doesn't have.

Our next question does come from the line of Brian Freckmann with LS Capital.

I'll make it a quick question. Can you just help me understand how much Schein revenue is coming within the current quarter. I'm trying to sort of figure out -- your customer deposit number decline which indicated that you sold to Schein. So given -- I'm trying to figure out, $2 million decline this year.

$2 million was the amount of revenues of sales to Schein. But again, we need to understand that Schein will not go away. Schein has an install base of thousands of our lasers of all types. So clearly Schein places orders regularly with us, and there is a demand from their customers of our product. I'm not saying that they are thrilled having lost their exclusivity. Obviously they are not. But there is no reason for them not to satisfy the requests of their customers. Also we are the leader, in essence, we are the only all-tissue laser in the market. So if a dentist that deals with Schein wants a all-tissue laser, Schein is going to order it from us.

Sorry, Fred, the question was how much revenue exactly was from Schein in the last quarter?

I explained it to you, $2 million.

$2 million was in the last quarter, and $2 million be the number in the next quarter?

No. In the current quarter it is going to be around $1 million. That basically ends the $9 million in pre-paid.

And we have time for one final question that does come from the line of Wyatt Carr with Crowell.

Hi Federico and Fred. I really appreciate you taking time to answer my question. I will be as quick as I can. DaVinci, the OEM that you have has a 510K on file. And you are selling under their 510K. We you able to make changes, and you've made the statement that you were able to improve the software and make some changes. Are you able to make those changes for these systems that you are currently delivering? Or will the OEM or you have to file a new 510K?

We are doing all the paperwork that is necessary to essentially import our under brand. At the moment it is under their approval, and then within, I would say probably 2 or 3 months, we should be able to have it under our own paperwork. So basically we will import directly that way. But we are -- basically it is more a formality than anything else. We are and we can import under their approval.

Okay. And would you be making the 510K application, or with the OEM be making the 510K application?

Again, I'm not an expert in regulatory, but if we want to make major changes to the equipment, then we have to clearly file the 510K. If the changes are minor, we can function basically under their 510K and get it transferred to us. That pertains mainly to the hardware. The software is really not an issue. And we really are concentrating in improving the software.

Ladies and gentlemen, we have run out of time for questions today. I would like to turn the call back over to management for any closing comments.

We are very thankful to all of you for having been at our Q2 conference call. And again, thank you for your patience. Thank you for your interest. We have seen unfortunately some wild movements in the price of the stock, and I'm sure that many the holders are not happy about it. I'm not happy, either, as a major shareholder of the Company -- single shareholder of the Company. Eagle is now the largest. Clearly we are working diligently to do everything that we need to do to build this solid business with a clear future, and we are very optimistic that we are building the foundation of a very strong Company that will be very successful in 2012 and ahead.

But again, we are puzzled clearly from these price movements in the stock, and that is why we decided to go also for a stock buyback if the price gets unreasonable, like recently has been happening, we will be there to take advantage of that. It is unfortunate that the Company seems not to be understood all shareholders as a solid Company. And that the turnaround that is occurring at BIOLASE has not been understood. We are trying to do our best to give the message out in clear terms of what we are doing and how we are doing it. And hopefully we are satisfying your demands. We are always happy, Fred and I, to have talks with investors with questions, and if we are able to answer within the limits of the law, we will.

With that, I thank you and I will expect to hear from you on the Q3 call. Thank you very much.

Thank you.

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.