BIOLASE Inc (BIOL) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the BIOLASE Technology, Inc. 2012 First Quarter Results Conference Call. (Operator Instructions) This conference is being recorded today, Wednesday, May 9, 2012. I would now like to turn the conference over to Matt Clawson. Please go ahead, sir.

Thank you, Joe. Good afternoon, everyone, and we apologize for the short delay. Thanks for joining us today for BIOLASE's 2012 First Quarter 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 first quarter ended March 31, 2012.

Before we get started, I've been asked to make the following statements. The words and phrases can be, may effect, may depend, believe, estimate, project, and similar words and phrases, are intended to identify forward-looking statements. Forward-looking statements are subject to various known and unknown risks and uncertainties, and BIOLASE cautions you that any forward-looking information provided is not a guarantee of future performance.

Actual results could differ materially from these anticipated in the forward-looking statements due to a number of factors, some of which are beyond BIOLASE's control and may be discussed in BIOLASE's filings with the Securities and Exchange Commission. All such forward-looking statements are current only as of the date on which the statements are made. BIOLASE does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which the statement was made or reflect current unanticipated events.

Also, as a quick reminder, a replay of the call will be available on the BIOLASE website at www.biolase.com. The Company's first quarter 2012 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 Chief Executive Officer, and Fred Furry, Chief Operating Officer and Chief Financial Officer. Federico and Fred will review the prepared remarks, including an update on the business, operational performance, and outlook. There will be a question-and-answer session at the end of the call, followed by a few closing remarks. During our question-and-answer session, we will limit each call to one question and a follow-up question. Callers are welcome to re-enter the queue to ask additional questions as time permits. We plan to limit the session to no more than 90 minutes. With that, I'd like to turn the call over to Federico.

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

First, let me briefly recap the 2012 first quarter. Net revenues in the quarter were $12.3 million, a growth rate of 17% over the $10.6 million in last year's first quarter. It bears noting that during the 2011 first quarter we booked $3 million in iLase product sales to Henry Schein, our former exclusive global distributor, to satisfy irrevocable one-time purchase orders, effectively, the repayment of a liability in product for which we have been prepaid several quarters earlier.

If you exclude those payment sales, those equipment sales, our revenues in Q1 actually reflect an increase of approximately $4.7 million, or approximately 62% of adjusted revenues of $7.6 million for debt the prior year period. We believe that these measures illustrate more accurately the increase in overall productivity of our direct sales in select distributor models. And Fred will expand on this further when we discuss the financial details.

Now, I would like to walk through some of the operational strategic highlights from the period, over which we expect to have a positive impact on the Company's performance in 2012 and beyond. In general, the first quarter was a time of tremendous activity internally and externally. We made several important operational strategic moves that were all designed to improve our ability to become the dental industry top provider of technology solution and more generally to move towards becoming a true multi-product, multi-platform corporation.

As we discussed last quarter, BIOLASE considered a purchase of the remaining inventory of Waterlase and the Turbo laser systems held by Henry Schein, our former exclusive global distributor. Pursuant to the agreement, we purchased Shein's inventory of Waterlase and the Turbo laser systems and Shein liens on our assets. The liens related to the irrevocable prepaid purchase orders from August 2010 that were satisfied with the payment of product through July 2011.

We paid the entire purchase price by offsetting accounts receivable currently due from Schein from sales made in the normal course of business. None of the funds used to offset the purchase price related to the original sales of the MD Turbo laser system that were purchased.

We recognize that the accounts receivable due from Schein that we used to purchase these laser systems would have otherwise been converted to cash for our operation. However, the significant portion of that cash would have been used to purchase inventory for our second quarter and beyond. This transaction actually gave us the opportunity to purchase inventory at a price lower than our standard cost.

Of the units we purchased, approximately one-third were dental units used by Schein as sales aids, and two-thirds were still new in box. We plan to use the new in-box units primarily as a source of parts for our newly released Waterlase MDX line of all-tissue lasers and for our install base of approximately 6,500 Waterlase MD Turbo laser systems.

As for the used lasers, we plan to remanufacture these and sell 75 pre-owned units and place a number of them in dental schools to promote the Company's Waterlase technology. This transaction has provided us with a tremendous source of low priced inventory, but we also believe that the elimination of this inventory from the marketplace will benefit the selling efforts of our growing sales force.

Speaking of our sales organization, we promoted Bill Brown, a 30-year veteran of the medical laser industry, from vice president-international to vice president-sales and marketing during the quarter. Bill has made a tremendous number of contributions to our core growth and brand reputation over the past 10 years, and we are confident that his leadership in his new role will be invaluable in driving our business in the future. As of today, Bill oversees two managers and 32 external sales representatives in North America. And [inside] manager and [inside] sales group of six, and a [last] network of distributors international.

Our external sales force continues to grow as we add new personnel and make new adjustments as productivity dictates. We are still targeting a team of 40 to 45 outside sales reps in North America by the end of 2012.

In the interest of generating greater profitability among our sales force, we have made significant changes in our training and education program in the past few months. Our first group of new hires is currently participating in our week-long introductory training course, and we anticipate the greatest success rate for new hires and increased productivity as these programs are rolled out across the group.

Further, we are continuing with the development of our inside sales group. We will utilize inside sales representatives to sell our diode laser systems including the iLase and our newly introduced EPIC 10 in our array of lower priced digital equipment.

We will also have a team of lead generators to help create additional opportunities for our external sales representatives for our various Waterlase products in our Cone Beam 3D digital imaging equipment.

We are very excited about the potential of our inside sales group as it ramps up during the second quarter. Our inside sales reps and lead generator are participating in the same new training and education programs that we have developed for our external sales representatives.

On the strategic front, we were also very active in the first quarter. We became the distributor for Cefla Dental Group, NewTom Cone Beam 3D imaging products in the US and Canada, thereby complementing the large part of the BIOLASE imaging products. Cefla is a leading Italian dental equipment manufacturer, and the NewTom products are considered to be among the highest quality 3D dental imaging products in the world.

We are still in the early stages of our experts with digital imaging, and we have a lot to learn, but we believe that these products will complement our internal developed laser technology.

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

In February we introduced the Waterlase MDX line of all-tissue laser. The MDX laser system blends features from the MD Turbo and other revolutionary iPlus in a modernized platform for practitioners that do not require advanced speed and functionality of the industry-leading iPlus, such as endodontists and periodontists.

The MDX 450 and 300 provide the Company with quality laser system product for the midpoint price range and new customers added [fairly well] well to these options. The new Waterlase MDX system is a logical evolution of the Waterlase MD Turbo. As a result, the new in-box MD Turbo purchased from Schein will be used as part of the MDX at great savings. In fact, the parts and material for our MDX will have been more expensive to purchase from our vendors.

In May we introduced the EPIC 10, the next generation of our total diode solution. This next generation of diode soft tissue laser will have the shortest pulse available in the market today. Short pulses are known to cause less thermal damage in tissue and produce cleaner cuts.

In addition, the EPIC 10 will have a built-in battery for a full day of operation and will be used as a design platform to build more powerful versions with different combinations of laser wavelengths. The EPIC 10 was recently demonstrated at the California Dental Association annual trade show and several other current industry events. The EPIC 10 is not yet available for sale in the US and is pending 510(k) clearance from the FDA.

Finally, on the marketing front, we are all looking forward to our upcoming World Clinical Laser Institute Super Symposium. The Super Symposium is the largest laser dentistry conference worldwide and is scheduled to kick off on June 7 in San Diego, California.

The Super Symposium is a great opportunity for dentists to be educated and work side-by-side with the finest laser dentists in the US. They will learn interesting new clinical laser techniques, valuable practice management tools, and a series of opportunities for using the laser in conjunction with imaging to generate more business and wealth from the last equipment investment.

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

Thank you, Federico, and good afternoon, everyone. On a GAAP basis, revenue for the first quarter of 2012 totaled approximately $12.3 million, up 17% from $10.6 million in the same quarter for 2011. As Federico mentioned, however, excluding $3 million in iLase sales to Henry Schein to satisfy one-time prepaid purchase orders during last year's first quarter, revenue in this year's first quarter actually reflects an increase of $4.7 million, or 62% over adjusted revenue of $7.6 million for the same period in the prior year.

In order to provide greater visibility into our increased revenues during the quarter of 2012, we are adjusting for equipment sales to Schein to satisfy irrevocable purchase orders from August 2010. While we recognize that this is not a GAAP measure, we believe it is a more accurate method to measure the true productivity of our current mix of direct sales and distributors. A table illustrating the effect of this irrevocable purchase order from Schein is included in our press release.

Gross profit as a percentage of GAAP net revenue for the 2012 first quarter was 47.1% compared to 45.8% for the prior year comparable period, and 42.2% in the fourth quarter of 2011.

Our operations team has worked hard to improve our manufacturing and production processes over the last six months, and we are beginning to see the impact of our efforts and our results. BIOLASE also experienced the benefit from the de-recognition of approximately 142,000 of warranty reserves associated with the purchase of inventory from Schein. Our efficiencies have increased, manufacturing costs have been reduced, our supply chain is much more reliable, and we continue to move towards lean manufacturing.

Further, as an added benefit, our product reliability has continued to improve along with our improved production capabilities. We have made good strides, but we also recognize that we must continue to focus on these efforts to further improve our manufacturing and production processes.

Operating expenses in this year's first quarter were $7.4 million compared to $5.2 million in the prior year period. Operating expenses were up year-over-year as we strengthened our spending on sales and marketing, and also increased our efforts in engineering and development. We recognize these efforts impacted our bottom line during the quarter, but we believe that these investments will ultimately provide both short- and long-term benefits to our revenues and stockholders.

On a GAAP basis, the net loss for the first quarter of 2012 totaled $1.7 million, or a loss of $0.05 per share compared to a net loss of $750,000, or a loss of $0.03 per share in the 2011 first quarter. After removing non-cash depreciation and amortization expenses of $125,000, stock based, other equity instruments and other noncash compensation expense of $670,000, and interest expense of $5,000, this year's first quarter resulted in a non-GAAP net loss of $872,000, or a loss of $0.03 per share compared with non-GAAP net income of $153,000, or $0.01 per share for the first quarter of 2011.

Turning to the balance sheet, as of March 31, 2012, we had cash and cash equivalents of approximately $2.8 million, accounts receivable of $9 million, inventory of $10.3 million, and shareholders' equity of $11.9 million.

Moving on to financial guidance. We expect our unadjusted product revenues for the second quarter of 2012 to range from $13 million to $14 million, an increase of approximately $900,000 to $1.9 million, or 7% to 16%, compared to $12.1 million for the second quarter of 2011.

On an adjusted basis, after excluding the revenues associated with the irrevocable one-time purchase orders from Schein in 2011, this represents an increase of $3 million to $4 million, or 30% to 40%.

Note, however, that our second quarter results may be impacted by certain accounting consequences related to the termination agreement with Schein to purchase Schein's inventory of Waterlase MD Turbos, which was completed early in the second quarter. We have recognized certain effects of this transaction on the balance sheet and are currently in the process of researching the proper accounting treatment for the remaining aspect of this very complex transaction.

Our full year revenue guidance for 2012 remains $57 million to $60 million. Excluding equipment sales to Henry Schein to satisfy irrevocable one-time purchase orders effectively for the repayment of a liability in product of approximately $5.9 million during 2011, the midpoint of our guidance of $58.5 million represents an increase of 36% year-over-year.

Thank you, Fred. Before we hand the call over to the operator for questions, I have several concluding remarks. Our top priority is and has always been growing shareholder value in a variety of ways. The goal always involves making both long- and short-term decisions in balancing the benefits to the organization and its stock owners. I want to again note that our goal for 2012 remains to execute and (inaudible) investor expectations where we deliver on our promises. We exceeded our guidance in the first quarter, and it is our intention to continue to grow, execute and make rational investments as we progress in 2012.

We have also made the decision to continue to invest in innovating new products in our core dental market, but also to continue to commit resources towards developing several of our laser-based technologies for new markets such as ophthalmology, orthopedics, and pain management.

Candidly, the results of these investments will continue to negatively impact our bottom line in the near term. We recognize this, but we strongly believe that these investments will bring greater return in the longer run so that our investors will ultimately benefit to a much larger extent because of this philosophy.

Finally, to further reward our shareholders for the loyalty during this period of investment, our board of directors has adopted a 2% annual stock dividend policy for 2012 and declared a 0.5% stock dividend to stockholders of record on March 15, 2012.

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

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Greg Garner with Singular Research. Please go ahead.

First of all, with one question, I guess the main thing I'd like to understand is revenues for Waterlase, as I see here, were, even though it's down sequentially with the typical for the first quarter, it looks like they were up about 80% year-over-year. And can you tell me if there is anything different you're seeing in the marketplace that is driving this, or is this the new marketing team or new marketing effort?

Greg, this is Fred. There are a couple of things at play here. One is, yes, we have invested heavily in our sales and marketing group focused on these products. We have the introduction of the Waterlase iPlus in late Q1 of last year, so obviously that will be a little bit different. But we also have the introduction of the MDX, our midpoint lasers in Q1 of 2012. So, those are a couple of the factors.

We have made a lot of effort in the training of our sales force, that is clearly another factor. But, also, we have -- Q1 of 2011 had approximately $3 million of diodes still to Schein under those irrevocable purchase orders. So, that in essence inflated the diode sales in Q1 in 2011. Without that in Q1 2012, you can see that the focus is really on the revolutionary Waterlase technology.

So, what I'm hearing is it's really more the product expansion. You're not seeing anything different in the industry or the reception, or is it because of the production expansion that there is more reception in the industry?

No, I don't want to give you that impression. We are seeing -- there are several factors at play here. It's not just one answer. But we're seeing a lot of new customers. We're also seeing existing customers upgrading their technology. And we're also seeing overall increases in the enthusiasm of our product as it gains traction in the industry. I mean, iPlus is just about a year old right now and it's really making a good impact in the industry.

One thing I would like to bring to the attention to all the listeners is that last year, in 2011, BIOLASE sold 700 hard tissue or all-tissue lasers, mainly iPluses. And Schein has sold out of their inventory, roughly 300, in these. So, that is something that has to be taken in consideration to understand the difficulties for BIOLASE management to manage the Company expectations last year because of the aggressive marketing from Schein in getting rid of their inventory.

As you know, we picked up the remaining inventory, around 150 of these MDs at a very convenient price to us, so we are very happy about that. But we are also very happy about the fact that we are not going to be suffering anymore from interferences in selling our hard tissue/all-tissue lasers. So that is a fundamental change from 2011 to 2012.

Also, what you want to appreciate is the fact that overall, all-tissue, hard tissue laser family overall increased by 1,000 units last year. That's a big number. And also we will have this 300 and these generate consumables and services and warranty revenues in 2012.

So, overall, our performance in 2011 has been a year of restructuring in position a good one, and it is very important to notice the fact that by taking away the $3 million in diode sales that was based on a right of first refusal that Schein had on a specific product, the iLase, we grew sales in excess of 40%. Exactly what, 46%, Fred?

36%.

36%. So, 36% is a nice growth, and it shows clearly that we are moving in the right direction.

Yes, it certainly appears that way. Would I be able to do one more question or was that my follow-up question when I asked for clarity?

Please, go ahead.

Just regarding the marketing expense and the new marketing VP, I just wanted to get a sense for just how we should look at the new level of marketing expense relative to sales.

We will have Bill Brown that is here with us answer.

Marketing expenses will go up slightly, but primarily we're shifting the way we're spending the money in marketing to a much more targeted and much more modern methods of marketing things, including social networking and Internet-based things. The BIOLASE store, and a number of expansion to basically globalize our business not just send our e-mails and snail mail to our customer base.

By the way, I would like to add that last year we launched the BIOLASE store, and the BIOLASE store is a tremendous success story. We are very proud to see a quite dramatic increase in sales on a monthly basis, basically. So, we are very proud of that move and we believe that the BIOLASE store and the inside sales team effort will contribute substantially to our success.

Okay, thank you.

Thank you, sir. Our next question comes from the line of Lenny Brecken with Brecken Capital. Please go ahead.

Hi, guys. Great job on turning around the business the last couple of quarters. Bill, I'm glad you are on the call. I mean, you have a pretty unique perspective on the way things were run in the past and the way they're going to be run going forward. Can you provide some perspective on how things have changed in the product adoption and in the sales and marketing today versus five years ago and today? And do you think that -- I think management is sort of [implying] that the core growth rate of the laser business is somewhere north of 30%. When you answer the question, can you give us some perspective whether that's what you believe -- you know, what you think you can sustainably grow your business given the changes here? Thank you.

Thanks, Lenny. I think if you really want to have a benchmark, you need to look at what happened with digital x-ray systems around 10 or 15 years ago, where they were under 10% adoption rate for a number of years and then jumped to 15. And then within 3 to 5 years we're at 50%. I believe that we're just starting into the inflection point of getting into that kind of adoption, and that adoption of lasers at the dental level by the dentist is triggered by the large number of diode lasers that have been sold over the last five years.

So, as these doctors are getting the diode lasers and starting to do some basic procedures, they're getting more comfortable and their patients are actually asking them can you actually deliver no-shot, no-drill dentistry, and the fact is that they can't without an all-tissue laser. And so there's a lot of opportunity now for us to go back within this group and actually allow them to deliver no-shot, no-drill dentistry to their patients, and I'm very optimistic.

Okay. I mean, can you just summarize why you think it's different that this Company can grow at a sustainable 30% when you get past all the Schein comps? Because I think that goes to the valuation of the Company. A lot of people don't believe you can grow at that rate, obviously, given how the Company is valued. So, I just want to understand what management thinks is different, what they see as different versus, say, five years ago when you had spurts of growth but they petered out. Why is it different today?

Many things are different, Lenny. Number one, it is a way more mature market now. Lasers, they are desirable, they are understood, they are a real alternative to conventional dentistry. It is funny, but it is not funny to know that conventional dentistry as it is now, today, with a burr, is 9,000 years old. It was invented by the Egyptians. And I frankly don't see the world that is expanding at high speed of innovation continue with the technology that is essentially 9,000 years old.

So, lasers are the [authority] for many reasons. Number one is because we can offer painless dentistry, or almost painless dentistry. Number two, because we are far less invasive than dental burrs. Number three, because we can do more with a laser than with the burr. Number four, it is very important, we are safe. Burrs, dental burrs that go from mouth to mouth to mouth of patients and there is no way to sterilize them. There are independent studies that demonstrate that.

So, the fact is that there is a clear high risk for patients to get cross-contaminated. So, when a patient goes to a dentist and a dentist wears gloves and a mask, he is to protect himself, because he knows that everything he touches and puts in the mouth of a patient is contaminated. So, while the patient thinks that he is doing that to protect him, the patient, no, he's protecting himself. The doctor is protecting himself.

Lasers kill any kind of bacteria and any kind of virus, and it is very important to educate the public to understand the difference between a traditional dental burr and dentistry performed with a traditional dental burr and instead the modern, high-tech dentistry that is performed with laser.

Number five, there is a tremendous amount of clinicals today supporting laser dentistry, something that we didn't have in the past. Number six, we have thousands of users, something that we didn't have in the past. We sold 10,000 hard tissue lasers worldwide, 1,000 were sold just last year.

So, there are so many things that are different compared to a few years ago. And let me also give the last one, that the competitive grounds have cleaned out dramatically. Nobody could have been competing with the Waterlase technology, so we have several companies that were in the field of hard tissue laser dentistry that went out of business or out of this business because they couldn't compete with us. And so we are today in a market that is essentially, definitely dominated by BIOLASE, and that is also another important advantage.

Thank you. (Operator Instructions) We have a follow-up question from the line of Lenny Brecken with Brecken Capital. Please go ahead.

Yes, two additional questions. Fred, can you give an estimate if your dental business without the spending of newer products outside of your core market, whether you're profitable at this point? And can you describe any of those products that you expect to be commercialized this year? I mean, in the product line. I mean, what other new products are coming out (inaudible).

Obviously, these are kind of tricky questions. I don't really want to break down too much into our R&D what's for our current product platform and what's for our new platform. But you can see what our R&D was for the year, or for the quarter, what, $3 million? And that is a pretty sizable chunk, and you can compare that to our loss, just for the simplest way to evaluate what we're talking about here. I'm sorry, engineering and development was $1.2 million. And so if you take the $1.2 million and you take some component of our sales expansion, you can evaluate on your own whether you think we would break even or not. I really don't want to get into too much detail there.

As for future products, there are -- we have a whole host of things that our Waterlase technology is capable of. It cuts tissue in such a unique way, in such an atraumatic way that it has a tremendous number of benefits around the body. We have over, as you know, we have over 280 patents in this, and those are not just all in dentistry. We have, say, 30 of those are already in ophthalmology. We're already approved as a general knife for the eye.

We have approvals in orthopedics as well, and just in general surgery. So, we're in the stage right now where we may not have a business plan, per se, for, say, ophthalmology or orthopedics, but we're absolutely working to strengthen and understand our IP to make it very, very attractive for potential product, potential joint ventures for moving into those areas.

And then one other notable thing is with the release of our IP, we have a lot more flexibility with respect to joining some sort of joint venture or some sort of agreement.

Lenny, also, look at the fact that overall we burn cash in the quarter of around $0.5 million. It's not a big amount. Compared to what used to be a year and a half ago, two years ago, is a tremendous improvement. And, yes, we are investing in the future. We are a technology company and that is part of our mission. Also, what Waterlase technology is, in essence, is a brand-new surgical system for the human body, not just for dentistry.

So, with the absolutely not serving the shareholder interest, not expanding this incredible technology to performed surgery on the human body in the most biological way by expanding in other fields is, by the way, extremely promising.

Does that mean there won't be any commercialization this year of either non-dental or additional dental product?

Lenny, when we will have it, we will announce it.

Okay. All right. That's all I wanted. I wanted what you commented. Final question is, do you have -- some people are concerned about your cash position. I know your cash burn isn't very high, but still I think some investors are concerned about the $2.5 million in cash you have. Is there something -- can you disclose on what you're doing to work on that?

First of all, Lenny, I understand these are concerns, but the fact is that we have a [certain] amount of cash (inaudible). In our inventory we just got -- we just purchased the inventory from Schein, and that is essentially cash, because will be transformed into cash. And, anyway, we needed to spend cash to buy parts. So, in reality, it is far less worrisome, the cash situation, than what it does appear.

Okay. But is there any other plan to address it in terms of financing or --

I can tell you we are not going to sell securities. That is not in our intention at all. We believe that the stock price is extremely the best, doesn't reflect the realities and the future opportunities of the Company at all. That is our belief, so given the fact that the stock is what it is, definitely we are not planning any sales of securities.

Okay. Thank you, sir.

Thank you.

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

Good afternoon. I was wondering if you could discuss the current conditions of the overseas markets and in particular Europe, given everything that is going on in Europe right now with the economic crisis. And then, also, some discussion about your plans in Japan.

Chris, nice to hear from you. Yes, Europe, it is definitely an interesting question given the fact that there is a lot of turmoil there, but on a macroeconomic point of view, I strongly believe that they will follow the example of what the United States has been doing, so they will essentially print cash and relaunch the economy. The signal of the last direction has been that the austerity is not really what the Europeans want. So, there is going to be, also, higher taxes, but against that there are going to be incentives towards investments in capital equipment.

We are doing very well in France. We are doing okay in other countries. So, we are also, by the way, expanding outside Europe and North Africa, where we have seen some very interesting opportunities there. So, it is -- Europe is a market that we believe will expand. Germany, it is definitely a stable and strong market in which we see an important future for BIOLASE.

Regarding Japan, Japan we -- maybe, Bill, why don't you answer that question.

Yes, our sales in Japan are holding steady with the last few years, and we are, through our distributors are very interested in introducing our digital imaging products there. The registration requirements for Japan for imaging is much less than what it is for laser. So, we are actually very optimistic and we'll be making some additional distribution and registrations in Japan this year.

Clearly, we are pursuing registration of the laser. But, again, we know that Japan is not an easy market from the regulatory point of view. So, what would we expect, probably end of 2013, possibly?

(Inaudible).

Yes. And clearly Japan is a great opportunity. It is a very, very receptive marketplace to laser dentistry.

Okay. And my second question is for Fred. Just so we can -- so this doesn't come as a surprise, even though it's a complicated transaction, just from an accounting point of view, what is the range of possibilities in terms of what impact a Schein transaction would have on reported numbers?

That's a great question, Chris, but unfortunately we're not capable of answering that question right now. Well, I suppose I'm capable, but I'm just -- I'm not permitted to answer that question quite yet.

Okay.

I mean, I could say a range between zero and some number, but that's not a very appropriate response for you.

Okay. Without getting into the magnitude, what I'm trying to figure out is, is it going to be viewed as contra-revenues and therefore depress some of the reported revenues, and then on a non-GAAP basis you'd have to increase it back up? Is that sort of in the range of something that would happen, or is it going to be below the line or where will it hit the GAAP numbers?

That's the crux of what we're evaluating and researching right now. We're having some discussion with our service providers, and we'll be coming to a resolution fairly soon, but I just can't comment on that quite yet. You're right on point to where the issue is, though.

Okay. And then, finally, just absent anything with the Schein, what can -- given all the changes you've made on the factory floor and moving toward lean manufacturing and supply chain management and so forth, at least in the near term on roughly the volumes that you're putting up right now, where can gross profit margins go to? Will they equilibrate at -- will they max out at 50 or 55? Could it get to 60? Where can these gross profit margins go?

Our goal for 2012 is really to push towards 50%. There are a lot of different factors involved. It's not just the manufacturing floor, which there are a couple of other things. For example, service and warranty costs are also in our gross profit margin. But as our manufacturing capabilities improved and we will see the benefits to other things, such as service, as we go through this process. So, we are targeting 50% towards the end of the year.

Okay, thank you.

Thank you, sir. Our next question is a follow-up from the line of Greg Garner with Singular Research. Please go ahead. One moment, please. Please go ahead, Mr. Garner. Your line is now open.

Okay, thank you. A follow-up on the Henry Schein issue. I thought you mentioned in the quarter, or in the report that it was closed in April, but were there some inventory transfers in the first quarter?

Well, the agreement was signed in principle with pretty much all the details laid out in late February, and it went through escrow and then closed in very early April in the second quarter. What that creates is, and it's sounding mumbo-jumbo, it creates a subsequent event which impacts how you account for certain things. Certain things on the balance sheet were able to be de-recognized because it was subsequent to the quarter end but prior to issuance of the financial statement.

There are a couple of things that weren't able to be de-recognized because they were contractual obligations and they don't necessarily go away until a contract is officially signed. And then there, of course, as Mr. Sassouni pointed out, an issue with how you account for the repurchase and where it goes on the income statement, if at all. And that's what we're working on there. But the vast majority, specifically to your question, the vast majority of products have been shipped and returned in the second quarter.

So, at the end of the first quarter, you will see the AR Schein that was used to repay this or to pay for this is on our balance sheet as AR, and there is no inventory reflected in our balance sheet at 3/31 for this transaction.

So, there is about $3 million extra of AR in --

No. No, Greg, we haven't identified a number. We have some limitations on what we're permitted to say at this point in time, but at some point in the future we'll be able to disclose more about the transaction and how it's accounted for, but I can't elaborate.

Anyway, it is way below $3 million. But the fact is that -- take as a measure, if you want, what we are saying, that it would be more expensive for us to buy parts to build MDXs than what is the price of repurchase. So, that should put you at ease with the transaction.

And the other thing that I would like to bring to all the shareholders' attention of this transaction is that this last transaction is not just about repurchasing the remaining little number of MDs that were in the hands of our past global distributor. It is the conclusion of an ordeal that has lasted for six years, that was conceived by Robert Grant, our past CEO, and was a very ill decision toward the life of the Company, and we suffered for six years because of that ill decision.

So, the strategic move from the past CEO, I've been against that transaction from day one. I lost my chairmanship position because of it. Now, what we need to do here is to really take the 40,000 view approach and look at things from a great scale and not manual scale of the transaction. The fact that we are now completely behind the Schein deal between BIOLASE and Schein, it is very important for the present and the future of BIOLASE.

With that, I want to say Schein is a great company, so no criticism towards Schein. That was the wrong partner for BIOLASE. And the fact that now we have cleaned the plate entirely of this relationship is where the investors should focus, in my opinion.

We are now free, entirely free to do whatever we deem strategically good for us to do. And we are already demonstrating, we demonstrated last year with an increase of almost 100%, and we have demonstrated this quarter, Q1 over Q1 of last year, that our direct model works. And we work even further as we move ahead in time.

A lot of resources have gone in time and money in closing this -- in terminating entirely this transaction with Schein. A very substantial amount of legal money has gone into dealing with Schein in the past 18 months. And a tremendous amount of my time and Fred's time, and several other people in this company.

So, if we take the approach of looking at things on a grand scale, what we have achieved in Q1 by closing completely this relationship, this is of great benefit to BIOLASE for the present and the future growth of the Company.

Thank you for that explanation. I want to just move on to the imaging business. If you could tell me if there is any revenues recorded in the first quarter and with the signing of the new product, is there -- do you have a better sense on when that might start moving into a revenue-generating phase?

Yes. We have recorded a minor amount of revenues in Q1. We will start as of Q2, to see some interesting revenues, and we will increase -- we will see basically revenues in imaging increase quarter after quarter. So, we are very optimistic, but it is a fact that we are not prepared as much as we wanted to be, and so there has been a delay. But now we feel to be in a very good position. Also, we had delays in regulatory approvals that have been, frankly, somewhat out of our control, and so we are in a good position now. We are very optimistic about the growth, the potential growth of the imaging business.

Sure. All the regulatory hurdles. Are they gone now? So, it was just really a matter of marketing, getting the word out?

Well, they've gone in the United States, they've gone in Canada. We have other countries in which we are doing -- you know, we're doing work from the points of view of regulatory approval. But the fact is that we have two major markets in which we are (inaudible) and we are doing obviously -- we see us growing nicely in that field.

And you'll be able to have the imaging equipment at the symposium coming up?

Absolutely.

We actually have a dedicated track for imaging, and we have several of the top imaging speakers and presenters from around the United States. And to my knowledge it's the first multi-day dedicated imaging track in an educational format like this.

We also had pretty much all of the units at the recent CDA last week.

Also, DaVinci and the (inaudible) line. We have to understand that in essence we have the most complete imaging line of any other company in North America. So, that is also to consider as a competitive advantage.

Okay. And just finally, as the EPIC 10, you mentioned there was a 510(k) already applied. Is there any time frame for when you would get some feedback on that one?

It's a simple 510(k) based on our ezlase product line, and it could be anywhere from 30 to 90 days.

Okay.

From the date we filed.

Right.

And so that would be, I guess I'm trying to understand. Would that in this quarter, to next quarter?

We hope it's going to be this quarter. And, again, the EPIC is the new line of diodes. We're going to have several models, and it is a great evolution of the ezlase that have been a very, very successful product. But the EPIC is definitely -- is the next generation. The ezlase was conceived six years ago, so this is the next generation of our diode line and we feel that it is going to be grabbing a lot of the marketplace -- of the market share.

Okay. All right. Thank you.

Thank you, sir. Our next question comes from the line of Lenny Brecken, an follow-up, with Brecken Capital. Please go ahead.

Yes, two questions. Fred, at one point I think I recall you saying you were going to be cash flow-neutral in the third quarter, and I just -- usually the third quarter is sequentially down from the second. So, could you just clarify why you're going to be neutral in that quarter and not in the second quarter? Is there anything going on in the expense line?

And of the percent of the 510(k) -- of the 510(k)s that you plan on filing this year, what percent have already been filed, overall?\

Well, Lenny, we feel that we might be break-even on a cash basis in Q2. We don't want to give a prediction here, but we feel that we could be close to it, or around to it. But regarding Q3, you have to consider that we are ramping up (inaudible) imaging, so -- and we are going to have basically in full swing, also, the new (inaudible). So, all together, we don't see really as deep in sales in Q3. And what was the last question that you had, I'm sorry?

Let's say that you planned 510(k) filings was X. I was just wondering what progress, what percent have been filed so far against the X for the year.

Well, we're making progress. Again, we are actively pursuing it, but obviously we give priorities to it. So, the one that we feel is the most significant, they have precedence. And we're not going to get into the details for competitive reasons on which one we're doing.

Okay. But can you disclose at least, have you made progress against the -- I forget the exact amount that you had planned on filing this year, but I remember it was a substantial amount. I'm just asking what sort of progress you're making against those 510(k)s to be filed? And the reason why I'm asking is a lot of us are still waiting to see for the second half what kind of new products are coming out, and I'm anxious to find out. That's why I'm asking that kind of question.

It is a very legitimate question, but we are not going to give details. When we will have 510(k)s approved, we will announce them. But definitely we are focused on it, Lenny, so we believe that part of the strategy of increasing sales is increasing the product offering. So, obviously, we are going to be active in 510(k)s.

Okay.

Thank you, Lenny.

Thank you, sir. At this time there are no further questions in the queue. You may continue with any closing remarks.

Yes. Well, thank you to all of you. I understand there has been a difficult time to be invested in BIOLASE. We saw the stock going from $0.60 to almost 7, and then from there to around $2.50, so a wild ride. But, again, what I want to assure the shareholders of is that we are building value every day for you, for the owners of the Company, and the direction of the Company is a solid one. And the people that we have in this Company, they are excellent people, and we have a strategy and we are very disciplined in following the strategy that we have. And we are strongly convinced that we will see the results. So, thank you for your commitment to the Company, our shareholders, and we will be talking again next quarter. Thank you.

Ladies and gentlemen, this concludes the BIOLASE Technology, Inc. 2012 First Quarter Results Conference Call. Thank you for your participation. You may now disconnect.