BIOLASE Inc (BIOL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the BIOLASE 2012 Second Quarter and Six Months Results Conference Call. (Operator Instructions). This conference is being recorded today, Wednesday, August 8 of 2012.

And I'd now like to turn the conference over to our host, Mr. Matt Clawson of Allen & Caron. Please, go ahead.

Thank you, Kelly. Good afternoon, everyone, and thank you all for joining us today for BIOLASE's 2012 second quarter and six months results conference call.

You should have already [received] a copy by e-mail this morning of the release announcing the Company's results for the second quarter and six months ended June 30, 2012.

Before we get started, I have been asked to make the following statements.

The words and phrases can be, may affect, may depend, believe, estimate, project and similar words and phrases are intended to identify forward-looking statements. Forward-looking statements are subject to various known and unknown risks and uncertainties, and BIOLASE cautions you 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 & 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 publically 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 2012 second quarter and six months 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 tomorrow.

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, the 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'll limit each call to one question and a follow-up question, as time permits.

I want to welcome all of you to our second quarter/six months results conference call. Thank you for participating.

Today, we will review the progress of various accomplishments achieved at BIOLASE during the second quarter 2012, as well as comments on our progress in key initiatives that will impact the coming periods.

First, let me briefly recap the 2012 second quarter.

Net revenues in the second quarter were $12.2 million, compared to $12.1 million in the prior-quarter period. However, the 2012 second quarter was negatively impacted by the accounting consequences for this year's repurchase of Waterlase MD Turbo laser systems from Henry Schein, our formal, exclusive, global distributor, in connection with its 2012 termination agreement. This will be discussed later by our CFO, Fred Furry.

But both revenues and net cost of revenues were reduced by $1.1 million as a result of the transaction. There was no impact to gross profit. But accounting for the transaction certainly impacted our net revenues and clouds the progress we made this quarter.

Our gross revenue from operations were actually $13.3 million before the impact of this transaction, which was within our range of guidance for the quarter of $13 million to $14 million.

Our overall revenues were also affected by the lack of FDA clearance for our newly launched EPIC 10, and the result is still remarkable because of the growth of our Waterlase product line. Our gross revenues from operations of $13.3 million for the 2012 second quarter, excluding the effects of the Schein transaction, represents an increase of $3.3 million, or 33%, compared to non-GAAP revenues of $10 million for the 2011 second quarter, after excluding the effects of the prepaid purchase order from Schein in that quarter.

To give you more insight into the growth of our core business, let's look at our core product line, the Waterlase system. Excluding the inventory repurchase, direct sales of Waterlase systems during the 2012 second quarter totaled $8.2 million. This is an increase of 48% compared to $5.6 million in the second quarter ended June 30, 2011, when, excluding sales of $2.1 million to Schein to satisfy one-time, prepaid purchase order during the 2011 second quarter.

Excluding the inventory repurchase for the second quarter of 2012, sales of Waterlase systems totaled $16.2 million for the first six months of 2012, an increase of $6.3 million, or 63%, over the same period of 2011, excluding the $2.1 million in sales of Waterlase iPlus systems to Schein to satisfy one-time, prepaid purchase orders during the first six months 2011.

We believe that this more accurately illustrates the growth of our core business. Again, 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, which we expect to have a positive impact on the Company's performance in 2012 and beyond.

The second quarter was again a time of extensive activity, internally and externally. We have made several important operational moves that were all strategically designed to do two things; first, to become the dental industry's top provider of high-end technology solutions with our patented, laser technologies as the central core of the business and, second, to continue our efforts in becoming a true, multi-product, multi-platform company.

As we discussed and reported on last quarter's call, we completed our purchase of the remaining inventory Waterlase and the Turbo laser systems from Schein in April 2012. The benefits of that purchase are many, including the elimination of the inventory overhang of low-priced equipment that impacted the fourth quarter of 2011, the acquisition of high-quality parts and technology inventory that we are using to assemble current-model devices, such as the Waterlase MDX, leading to lower costs and higher margins. And, most importantly, the deal eliminated all liens on our intellectual assets by the Schein organization as a result of the $9-million prepaid purchase orders from August 2010, which were fully satisfied by August 2011.

Freeing up those intellectual property assets then paved the way for BIOLASE to secure two favorable, revolving credit facilities, providing for an aggregate borrowing of up to $8 million with Comerica Bank to assist with our quarterly working capital needs and to fund our continuing growth initiatives without diluting shareholders.

Completing the 2012 termination agreement with Schein was a great milestone for BIOLASE, and we are very pleased to have it behind us entirely. Due to the complexity and unique nature of the transaction, however, we have mentioned that the accounting for that transaction was still being evaluated as per our last call. Fred will provide more detail.

But we ultimately determined that the purchase price should be reversed to both revenues and cost of revenue. This is evidenced in today's results included in our press release as a line item titled Nonrecurring Events just to the products and service revenues and cost of revenue. There is no effect to the gross margin, although it will impact our management discussion and analysis in the 2012 second quarter 10-Q.

Moving on to sales and marketing, our external sales force continued to grow. We are adding new personnel and making new adjustments, as productivity dictates. Also, we are still working towards a team of 40 outside sales reps in North America by the end of 2012. We have also developed a new, strong, training program for our current sales team. Training will remain a strong focus going forward as we work diligently to continuously improve the performance of our salespeople. We have already seen improvements in the effectiveness of our team as a result of improvements we have made.

Also, in connection with our new sales training program, we have recently completed the build-out of a world-class technology, customer and sales training facility at our headquarter in Irvine, California. The state-of-the-art center has a hands-on lab feature -- future in our entire line of Waterlase products, our EPIC and iLase diode lasers, digital imaging, including neutron-cone beam 3D imaging and BIOLASE DaVinci imaging products and, lastly, 3Shape's new, intra-oral scanning technologies for impression-taking solutions.

In addition to using this facility to continue to train and clinically educate our inside and outside sales teams, the technology and training center will also be used to provide introductory and specialized training sessions for dental professionals taking proficiency and certification training, utilizing best-in-class BIOLASE products.

We've seen many benefits arising from these operations. First, we can create an environment in which users, trainers, and potential users are all interacting, creating peer-to-peer marketing opportunities. In addition, potential and current users of our patented laser technology get the chance to view the manufacturing floor and understand the quality and care that goes into BIOLASE lasers and other equipment. So far, this has been a surprising hit with those who have participated. Participants are also encouraged to interact with management and the development team to make sure we understand the up-to-the-moment needs of the high-tech dentists.

Also, in late July, we established a long-term collaboration with laser dentistry expert, Professor, Dr. Norbert Gutknecht in the Aachen Center for Laser Dentistry, or AALZ in German. Professor, Dr. Gutknecht is known around the world for his expertise in laser dentistry and will be instrumental in helping us promote laser dentistry worldwide through clinical laser education, training, and research. We believe that, with approximately 13,000 members, the combination of BIOLASE's world clinical laser institute, or WCLI, that was founded by BIOLASE and owned by BIOLASE and the AALZ will form the largest group of users, experts, and opinion leaders in laser dentistry in the world.

We also officially launched our inside sales group during the quarter. This dedicated sales force will leverage both our installed-base customers, as well as teach educational opportunities and programs, drive adoption of our diode laser systems, including our revolutionary iLase and our newly introduced EPIC 10, which has been very well received and provides lead generation for our higher-end capital equipment. We currently have six dedicated, inside sales employees and expect to continue to ramp that number up to double digits by the end of the year.

Management believes that this group will provide tremendous support to our outside sales representatives while generating its own sales and profit as a P&L cost center and therefore contribute greatly to BIOLASE's overall growth.

When it comes to our Waterlase products, including the revolutionary iPlus and all-tissue laser dentistry in general, we feel strongly that we are nearing the tipping point where the marketplace will begin to demand the benefits of high-tech dentistry from its practitioners. Evidence of this can be seen in the peer-to-peer training and selling that is accelerating, as well as the creative way the dentists are taking market share in their communities by promoting the use of laser. It is difficult to determine what sort of timeframe this will have, but we know that, with the combination of quality, innovative products, and the effective global marketing initiative of BIOLASE, are moving in closer.

This past May, we introduced the next generation of our total diode solution, the EPIC 10. This soft tissue diode 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 demonstrated at the California Dental Association annual tradeshow in May and several other industry events, including the WCLI super symposium in June, and has been very, very well received.

The EPIC 10 is not yet available for sales in the US and is pending 510(k) clearance from the FDA and has a pending 510(k) clearance from the FDA. We expect to have the capability to sell the EPIC 10 internationally before we have clearance in the US sometime in the near future. This is simply a function on the steps involved in the regulatory approval process.

Finally, the WCLI super symposium was reinvigorated and held in June in San Diego, California. The super symposium was a huge success, with attendance by both users and prospective laser dentists exceeding our expectation. The symposium gave attendees the opportunity to learn and work side by side with the finest laser dentists in the world. The curriculum included new clinical laser techniques, valuable practice management tools, and a series of opportunities to using the laser in conjunction with imaging to generate more business and wealth from the last equipment investment.

Speaking of imaging, as most of you know, we are still in the early stages of selling digital imaging equipment. While we still have much progress to make, we did begin to produce more meaningful revenues from that segment in the second quarter. We posted just over $900,000 in imaging revenues, primarily driven by the placement of a number of BIOLASE DaVinci imaging and NewTom cone beam systems. This represents an increase of over 500% from the 2012 first quarter.

In addition, we just entered a five-year agreement with Copenhagen-based 3Shape Corporation, making BIOLASE the distributor of 3Shape's intra-oral scanning technologies for difficult impression-taking solutions in the US and Canada. This adds one more component to our total technology solution and gives us the ability to incorporate 3Shape's technology into our Waterlase products. I will have more to say about that as this relationship matures, but we believe this is a very important new partnership for us.

BIOLASE has the largest specialized sales force and distribution network in dentistry, and we remain determined to leverage that commercial channel by adding additional products, services, and selling opportunities of the same (inaudible).

By way of update, we continue to seek the most efficient route to market for our laser technology as it relates to ophthalmology and other surgical specialties where we have already developed important intellectual property and gained regulatory clearances. We are currently in early discussions with a leading ophthalmic company to develop a relationship to jointly deliver our first product to that marketplace. We are excited about our opportunities in ophthalmology, and we'll update you all in greater detail when something definitive is in place.

Another topic of interest is our ongoing development discussion with Procter & Gamble relating to a consumer-oriented, laser-based toothbrush for at-home use based on our laser technology. In the past two months, these efforts have continued to gain momentum, and the technical teams at both companies have been actively involved. We are now in the process of developing protocols for some clinical studies, as directed by Procter & Gamble. As you might imagine, such a product initiative will take time, but the fundamental impact on a company our size could be dramatic. So we continue to invest in this track and look forward to continued progress there.

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

Thank you, Federico, and good afternoon, everyone.

On a GAAP basis, net revenue for this year's second quarter totaled $12.2 million, which was an increase of $96,000, or 1%, as compared to GAAP net revenue of $12.1 million for the prior-year period. GAAP net revenue for the six months of 2012 was $24.5 million, compared to $22.6 million in the prior-year period.

As Federico mentioned, however, the 2012 second quarter net revenues were impacted by the $1.1 million reduction from the accounting consequences related to the 2012 termination agreement with Schein and the repurchase of their inventory of Waterlase and Turbo laser systems, which was completed on April 12, 2012. Further, the 2011 second quarter revenues included $2.1 million of product sales to Schein to satisfy one-time, prepaid purchase orders. These sales were outside of our direct sales effort. While we recognize that this is a non-GAAP measure, we have excluded both of these amounts for discussion purposes in order to accurately illustrate our true sales growth period over period. A table illustrating the effects of these items has been included in our press release.

Therefore, excluding the $1.1 million reduction in revenue for the inventory repurchase from Schein during the 2012 second quarter and $2.1 million in product sales to Schein to satisfy the one-time, prepaid purchase orders during the 2011 second quarter, non-GAAP net revenue in this year's second quarter was $13.3 million, compared to non-GAAP net revenue of $10 million for the 2011 second quarter, an increase of $3.3 million, or 33%.

Non-GAAP net revenue for the first six months of 2012, excluding the $1.1 million reduction for the inventory repurchase in this year's second quarter, was $25.6 million. This compares to non-GAAP net revenue of $17.7 million during the first six months of 2011, which excludes $5 million in equipment sales to Schein to satisfy its irrevocable purchase orders and represents year-over-year increase of $7.9 million, or 45%. The increase in net revenue, excluding the nonrecurring event, was primarily attributable to continued demand for our all-tissue Waterlase system, increased sales of imaging systems, and increases in consumables and service and warranty and training.

Looking specifically at our Waterlase product line, gross sales of Waterlase systems during 2012 second quarter totaled $8.2 million. This is an increase of 48% compared to $5.6 million in the second quarter ended June 30, 2011, when excluding the $2.1 million of Waterlase iPlus systems sold to Schein to satisfy one-time, prepaid purchase orders during the 2011 second quarter.

For the first six months of 2012, sales of Waterlase systems totaled $16.2 million, an increase of $6.3 million, or 63%, over the same period in 2011, again, excluding $2.1 million in sales of Waterlase iPlus systems to Schein to satisfy one-time, prepaid purchase orders during the first six months of 2011.

Gross profit as a percentage of net revenue for this year's second quarter and the first six months was 45.2% and 46.2%, respectively, compared to 46.5% and 46.2% for the prior-year, comparable period. This year-over-year decrease for the second quarter was primarily due to increased sales of products and services with higher cost and lower margin, such as the imaging equipment, and decreased sales of products and services with lower cost, such as license fees and royalty revenue.

Operating expenses in this year's second quarter and the first six months were $7 million and $14.5 million, respectively, compared to $6.3 million and $11.6 million in the prior-year period. Operating expenses were up year over year as we invested heavily in sales and marketing, including bringing back the highly successful WCLI super symposium and strengthened spending in engineering and development in order to invest in programs, including both dental and other segments. We recognize these efforts impacted our bottom line, 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 second quarter of 2012 totaled $1.9 million, or a loss of $0.06 per share, compared to a net loss of $753,000, or a loss of $0.03 per share, in the 2011 second quarter. After removing noncash depreciation and amortization expenses of $122,000, stock-based, other equity instrument, and other noncash compensation expense of $400,000, and interest expense of $38,000, this year's second quarter resulted in a non-GAAP net loss of $1.3 million, or a loss of $0.04 per share, compared with non-GAAP net revenue of $69,000, or $0.00 per share, for the second quarter of 2011.

The net loss for the first six months of 2012 was $3.5 million, or a loss of $0.11 per share, compared to a net loss of $1.5 million, or a loss of $0.05 per share, for the year-earlier period. Excluding noncash depreciation and amortization expenses of $247,000, stock-based, other equity instruments, and other noncash compensation expense of $1.1 million, and interest expense of $42,000, the non-GAAP net loss for the first six months of 2012 was $2.2 million, or a loss of $0.07 per share. This compares to non-gap net income of $222,000, or $0.01 per share, for the first six months of 2011.

Our net losses in 2012 have been primarily driven by increased cost of revenue; significant investments in sales and marketing, which included increased convention costs, expansion into specialty market segments, increased media and advertising expenses, and additional WCLI events; substantial increases in legal fees relating to freeing the Company from its prior relationship with Schein in just the past 18 months; and continued engineering and development costs related to our efforts in developing our core technologies, as well as efforts developing our patented laser toothbrush and clinical investments in the promising field of ophthalmology.

Turning to the balance sheet, as of June 30, 2012, we had cash, cash equivalents, and restricted cash of approximately $1.7 million, accounts receivable of $9.6 million, inventory of $10.7 million, and stockholders' equity of $10.7 million.

Moving on to financial guidance, we expect our unadjusted product revenues for the third quarter of 2012 to range from $13.5 million to $15 million. On a non-GAAP, adjusted basis, 2012 third quarter revenue is expected to increase approximately $1.3 million to $2.8 million, or 11% to 23%, compared to the same period last year, after excluding the product revenues totaling approximately $900,000 associated with the irrevocable, one-time purchase orders from Schein for the 2011 third quarter.

Our full year revenue guidance for 2012 remains $57 million to $60 million, excluding the $1.1 million reduction in revenue for the inventory repurchase from Schein during the 2012 second quarter. Excluding equipment sales to Henry Schein to satisfy irrevocable, one-time purchase orders of approximately $5.9 million during 2011, the midpoint of our guidance of $58.5 million represents an increase of 36% year over year.

In addition, our goal remains to be cash flow positive in the fourth quarter of 2012.

Before we end -- 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 that balance the benefits to the organization and its stock owners. I want to again note that our goal always remains to execute our strategy and meet or surpass investors' expectations where we deliver on our promises. We have also made the decision to continue to invest in innovating new products in our core dental market. At the same time, we will continue to develop 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 impact our bottom line to a certain extent in the near term. We recognize this, but we strongly believe that this philosophy and these investments will bring strong returns in the long run so that our investors will ultimately benefit greatly from such expansion of our core technologies.

Finally, because we believe that the current share price represents a great opportunity, we have recently executed a series of stock repurchases under our corporate share buyback program since the end of the quarter. Along with our stock dividend, we view this activity as a way to return value to our loyal shareholders, and we will continue to be active in the market as our bylaws and the program policies allow.

This concludes our formal, prepared remarks. As a reminder, 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 re-enter 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.

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

I was wondering if you could give us a little more detail on your deal with 3Shape; specifically, the list price of the product or products you're going to be selling and what kind of margin you expect out of those.

Unfortunately, we cannot enter into these details. But margins -- they will be healthy for us. And it is a strategic move with several ramifications for BIOLASE. We feel that it is a very important product to carry for us.

Okay. Well, when you say that margins will be good for you, would they be comparable to your own -- the margins on your own products?

The only thing I can say is that pricing will be competitive and that the margins -- they will be along the rest of the line of imaging products.

Okay. Thanks.

Greg Garner, Singular Research.

I guess my first question I'd like to ask about is the symposium in June. Can you tell us about what sales leads there may be, the volume of them, or interest in image versus the iLase and also how the productivity of the sales force is working with that?

Well, the WCLI that we founded was not performed for quite some time under the Schein exclusive distribution agreement and was an incredible effort on our part to do it with -- at a reasonable cost and with the great success of attendance and also end results in purchases.

I guess you meant the iPlus, not the iLase. But, yes, we sold several units of iPlus. We had imaging in display, and we did generate very strong leads that then concluded into sales and had a direct impact on imaging sales. There is no doubt.

Again, education and understanding of laser technology -- it is paramount in penetrating the market. And we view the WCLI and, now, this cooperation with AALZ from Germany as a very strong vehicle to penetrate the market. Dentists, in general, follow opinion leaders. They follow experts in fields. And the WCLI and the AALZ is exactly composed of this group of people. So it is very important to start again in educating dentists and put them in contact with users and have them understand the clinical advantages that are tremendous of the Waterlase technology.

So we will continue the WCLI on a regular basis. Actually, we are planning to have several WCLIs on the west coast, the Midwest, and then on the east coast because we found them extremely effective.

I hope that answers your question.

Yes. I appreciate you talking about the iPlus. That is what I meant.

But I guess I'm not following you, that last part, Federico. The WCLI -- are these smaller symposiums? Is that how -- ? I guess I'm not really following that part of it. If you could explain that --

The WCLI that we had in San Diego was a very large one. But we intend to have a large one on a yearly basis. And we are planning to have maybe another large one on the east coast and maybe two or three smaller ones in different regions throughout the United States.

Okay. And so these leaders in the industry in Germany -- even the US dentistry profession follows their lead or listens to what they have to say? Is that a correct way of interpreting that?

Well, on an international basis, Professor Gutknecht is a sort of oracle. And so it is definitely what he says that is the right technology dentists buy. He is also known in the United States. But, here in the United States and in Canada, we do have opinion leaders that are very valuable to us and to the Waterlase technology. So, again, it is very important that opinion leaders guide the dentists, in general, also to the publications of studies of use of the Waterlase technology.

One thing that I would like to point out is that we noticed that trade shows -- they are less effective than they were in the past. The internet world has changed also the attendance at trade shows. So we are determined to limit our presence to the most significant trade shows -- I would say, probably, to only four or five and, instead, expand this activity of the WCLI and other marketing and chief activities like lunch and learn, over the shoulders, and so on, and so on. The more the dentist is in connection with another dentist that uses a Waterlase, the more he's convinced in the validity of the technology and in the return of investment.

Okay. Thank you. I'll jump back into the queue.

Chris Sassouni, Eagle Asset Management.

I want to circle back to a question that was alluded to earlier, not so specific to the 3Shape but just in general. As you move into imaging, since you're not the manufacturer of the imaging equipment and you don't have the associated R&D either, when you look at the margin that you'll be able to generate from those imaging products on an operating basis, are they neutral, additive, slightly dilutive to your overall margins, or it remains to be seen based upon mix?

Yes. Clearly, the margins that we have in imaging products is not comparable to the margins that we have in lasers, but they are a tool, a very important tool, to enter dental practices by being the sole provider, essentially, of technological solutions. Many dentists, many dental practices -- they don't like to buy a piece of equipment from one company and another one from another company and another one from another company because they like to have one provider, one company to call, one service guy to call and, basically, fix it all and service them all once he's there. So it makes sense to have that line also because high-quality imaging and microsurgery with lasers -- they go very well together.

But, again, we are not thinking of becoming a very strong distributor in imaging. It will be, definitely, an important and sizeable part of our revenues, but the lion's share will be, by far, lasers, if that answers your question.

It does. So, in a sense, what you're doing is you're changing the image of BIOLASE and the -- you're changing the value proposition to the dentist in that, before, they might think of BIOLASE strictly from the standpoint of you sell dental lasers. And, now, you're saying we, on a direct basis, can offer you a full spectrum of technological solutions for your practice. Is that the way to think about it?

Yes. That's the way to think about it. Also, Chris, it is, very often, a dentist may be interested in buying imaging equipment, and then, in the end, he comes out in buying also laser. So it's a very good opportunity for us to approach dentists that are interested in imaging because we know it is widespread in adoption now and introduce them to lasers.

Okay. And then my last question is -- do you think that the EPIC will be approved here in the US? I know you can't forecast with the FDA, but you probably are still having dialog with them. Do you think that the EPIC will be ready for the October American Dental Association or the New York Dental Association in December?

Well, I would say that, by December, yes. We are more optimistic than that. But, again, we are very pleased from the reception of the EPIC, very pleased. We believe that it's going to be a strong success for BIOLASE. But the FDA has become more stringent, in fact, in case approvals. And so, basically, the timeframe is a little longer than in the past. But we are quite optimistic that, in the near future, we should receive it. We don't know if it's going to be in Q3, clearly. But we are pretty soon -- positive, let's say, that we will have it by December.

Okay. Thank you.

(Operator Instructions). Sam Bergman, Bayberry Asset Management.

A couple questions. In regard to the line of credit and the increase in marketing and R&D, are we getting ahead of ourselves because the revenue is not pacing itself quick enough for the spend? Or do you feel that, by the fourth quarter, that that will take care of itself -- and the first quarter of 2013?

Well, we expect the revenues to increase, and we expect to -- our goal is to be cash flow positive in Q4. Clearly, the elections -- they are now playing to our favor at the moment because there is a lot of wait-and-see in the marketplace. And so that is why we're pretty cautious. Otherwise, we would be more aggressive.

We also don't know if we can receive or not clearance for the EPIC in Q3. So, as you can see, the guidance is quite wide, $13.5 million to $15 million, because of that reason -- because of both reasons. But, yes, we think that we will enjoy an acceleration in revenues.

And, again, let me remind all of you that are listening to the conference call that we have performed quite a miracle in a short amount of time here at BIOLASE. Besides reorganizing the entire Company and reorganizing the entire production and R&D, we have introduced a slate of new products. In essence, we have all new products and more to come. So, clearly, an acceleration of revenues is expected.

And the last question in terms of the Schein agreement. So, that was a costly agreement for you. It's over with. Are they presently buying from you? And, if they are or not buying from you, do you have the ability or are you close with another distributor as a non-exclusive that could give you a much more -- a much greater potential of revenue increase than Schein did in their short history with you guys?

Well, we have a nice relationship we really like, Benco. We have been talking to them (technical difficulties) purchase this inventory that (technical difficulties) because of this uncertainty in the market. (technical difficulties) to have repurchased this MDs (technical difficulties). We have to remind everybody that we sold them in the past at $52,000 to Schein. (technical difficulties). It is a purchase at a discount because, if we would have to go and buy (technical difficulties) cost more than what we are paying for the MD.

Regarding Schein, if Schein wants to buy equipment from us, they will be treated as any other distributor. Obviously, we are completely free of the old agreement that lasted six years. We have no obligations one way or the other, reciprocally. So we are freed from any obligations towards them, and they are free of any obligations towards us. We regard Schein as a very strong and large organization. We have some of the regions of Schein working efficiently in selling lasers. We have some international markets where Schein is strong -- a strong presence and efficient. And so we, at our, only, choice -- we can deal with them on selected international markets and in the United States and Canada. We can sell them at the same price as we sell to other distributors.

Thank you very much.

Dalton Chandler, Needham & Company.

I just wanted to clarify on your guidance for the third quarter. The non-GAAP adjustment you're making here, is that to the year-ago quarter and you're taking out Schein revenue? Or is there something else going on there?

No. Last year, in Q3, we paid the last portion of the $9 million that they advanced us and is equivalent to, to be precise, $908,000. So, if you deducted $908,000 from the revenues of last year, then you have a number that is the number that you essentially should take in consideration as the number that is the true number because it is the direct sales. So $13.1 million less $900,000 is $12.2 million. That is the number that we should take in consideration to measure BIOLASE.

But this is the last quarter that you'll have past period adjustment for Schein. Is that correct?

It is absolutely correct. We're very happy about that. I am thrilled about that because of how there's going to be no more confusion on what BIOLASE is, how much we're growing. And we don't have to talk about Schein ever again in comparisons, et cetera. They're going to be just a client if they want to be, and they will be. Like I said, it's a large company, and within this company, we have some groups of dentists that love our technology and some of the regional people that are very well active in selling. So we will be treating them fairly, as any other distributor.

But, like I said, we have some preferences in talking to non-exclusive, particularly in areas in which we are not strong on a direct basis. We have been talking to Benco, and we like the way that Benco works. We think it's a great company, and it's expanding very rapidly. So we are pleased, and we will be pleased to increase our dealings with them.

Okay. Thank you.

Greg Garner, Singular Research.

(technical difficulties) patent related to the endodontic probe. It appears that this is a consumable product that would be -- lead to repeat sales. I just wanted to verify that.

Also, I'm curious as to whether or not this was -- is this something that was developed as an application because BIOLASE recognized you could do this, or was this sort of a request from the endodontic -- endodontists?

Well, first of all, there are two things that I would like to say. One is that periodontal disease is incredible area of expansion for the Waterlase technology. The other incredible opportunity is endodontic. In the conventional way, a dentist would use a metallic file that is flexible, and he would extract the root by using -- by moving up and down this flexible, metallic file that, by the way, many independent studies say that are infected with bacteria and viruses to a proportion of 70%, meaning there is a high, high risk of cross contamination. And this is even if they've been properly sterilized. The same thing goes with the bur, by the way, and that is another big issue.

So safety is something that we have not even started touching on it. But there is a big issue. When you go to the dentist, the dentist is supposed to throw away the bur that he uses in the mouth of a patient, and so an endo file, and then go and buy new ones per every patient. And, per patient, he uses more than one bur because he uses different kind of size of burs and so on. So, basically, his monthly bill can become a few thousand dollars just in burs and endo files.

And there is where using Waterlase -- not only there is a total safety because the laser component kills any bacteria and any virus, but also become very economical. But that is all about educating the public, educating and demanding safety when going to the dentist. Cross contamination is a huge issue. And, regarding endo, in essence, one out of four, on average, root canals gets re-infected in the conventional way, while, using this new technology, which we've got a very important patent just a few days ago -- but we have a total of 33 patents surrounding that technology. We have the possibility of sterilizing the root canal very, very close to 100%, 99.7%.

So it is, in essence, an incredible savings because, if you calculate that one out of four goes re-infected and that means that the patient has to go back to the dentist and the dentist has to reopen an infected canal and the patient has to take antibiotics before going to the dentist because he's already infected and the dentist has to be even more careful this time around to clean up well the canal, you are talking about hundreds of dollars that, in essence, the dentist has to pay on his own. Some dentists charge the patient because they don't guarantee the patient. And, also, there is insurance, basically, that kicks in. So the saving just in the United States by using a sterile instrument for endo alone is around $3 billion to $4 billion. So it is a huge, huge advantage and is a consumable. So the (inaudible) is something that is single-use, and you just throw away after you have treated the patient.

Okay. Thanks. I appreciate the color on that. And, I guess, if I could ask you, Fred, a question -- regarding the comp that you're using for prior year, it appears [if] it's really doing a good job of identifying how well the direct marketing team is doing, and I really appreciate that. But, to make sure I'm looking at this correctly -- it would appear, also, the fact that there was $2.1 million, I believe it was, in last year second quarter of iPlus sold to Henry Schein still means that there was that amount moved to the market. But I guess we don't really know if that went to the end customer during that quarter. Is that right?

Greg, that was all over the world too. So we might have sold half a dozen units to Italy or half a dozen units to France or ten units in the US. So, if you look at the numbers and the ASDs, you're talking maybe 20 or 50 units or so. And that's spread all around the world in a variety of different geographic markets. So, yes, there have been some placed, but there could be some of those units in inventory. We're not -- I don't have the numbers in front of me, so I can't really comment on how much they might have in inventory. But, whatever they do have is not material to us at all.

If they have inventory, it is a little inventory. We're talking about two units internationally, simply because they decided not to return it because they want to sell them. But we cleaned up the entire inventory in North America. And, again, when I became the CEO of the Company a year and a half ago, they had 440 MDs, and we purchased 150-some MDs. So they sold close to 300 to end users. And that is very important to understand because their effort, even though it's been aggressive pricing, has increased the population of 300 users of (inaudible) lasers. And these users -- they are our clients now, and they will, obviously, generate revenues with warranties, with service, and with consumables.

By the way, I would like to add that the radial filing tip can be used with any of the Waterlase lasers and also with the iLase and with the new EPIC. So we can sterilize a root canal using any of our lasers.

Okay. And I guess it would be good for other procedures too. Or is it -- ?

The radial firing tip is, essentially, for the root canal and for pockets in the gum.

Back to what Henry Schein, units they might have, first of all, they aren't allowed to sell in the US though. Right?

No. They are. But what we're trying to say is that that $2.1 million in the third quarter last year went to all of their markets. Some went to the US and, even if it's half and half went to international, of that -- that's a year ago. So a vast majority of those have been sold through. None of those iPluses sold in Q3 of last year were part of that buyback. I want to make that crystal clear the units we repurchased were from 2006/2007 and the original MD sales to them.

So your sense on any inventory they may have for the iPlus is quite low.

Yes. We're not concerned about it. We don't feel that there's any inventory overhang. We're are managing the number of units that we sell to all of our distributors, including Henry Schein, to make sure we don't have any issues with that.

Okay. Great. Thanks.

Anyway, a little correction. The ones that we purchased back, the MDs, they are basically 2009 and 2010, so they're not that old. But, clearly, the MD has become an older unit compared to the iPlus that we introduced. And, also, Schein had a direct sales force that they essentially decided to move away from it to have a dedicated sales force to sell all these lasers. So they got very aggressive in pricing. And they created, obviously, a lot of confusion in the marketplace for us and for the dentists because of it.

But, now, that is completely gone, and they -- if they want an iPlus, they will buy it from us at the regular dealer price. And they will want to make their own normal profit, and so, basically, it will be short of ala carte order. If a dentist that is a Schein dentist wants one, they will be happy to sell it and make their margin. But the issue of the so-called phantom inventory that many people have been talking about is gone, as well as they have sold well in excess of 1,000 EzLaze that they had in inventory. They sold them all. So we are talking about Schein having moved close to 1,500 or 1,600 lasers in the market between hard tissue and soft tissue in a little more than a year, 16 or 17 months. So that is clearly beneficial to us because, like I said, as we go on, revenues in the warranties and service and consumables in all these customers are customers that now they are aware of laser dentistry and BIOLASE.

Great. Thank you. I appreciate that.

Lenny Brecken, Brecken Capital.

Two questions. Fred, can you give us a 10,000-foot overview of the sources and uses of cash that's been on the cash flow statement? And I'm mainly looking for a sequential kind of comparison; basically, (inaudible) cash from last quarter. What corresponded to the spend -- some sense of where that went.

And the second question is -- Federico, you said --

Lenny, I'm sorry to interrupt you. But you are on a speaker phone, and, really, it is very difficult to understand what you're saying.

Okay. I'll repeat the question. Fred, can you give us a 10,000-foot overview of the sources and uses of cash relating to the change in cash sequentially?

Yes, sure. At the highest level, we would have -- there is an impact in, obviously, the changes in operating assets and liabilities. You'll have more clarity tomorrow when the 10-Q comes out. But there's also -- we did have about $0.5 million in additions of property and equipment with some of our build-outs and some of our expansion. We had some issue costs related to the line of credit where we spent cash. And, again, in the operating assets and liabilities, you'll see certain expenditures related to our core development of technology and then expenditures with respect to moving into some of these other medical platform areas.

Well, you also have to consider that we have to do surveys -- some people to survey these MDs that we bought back. We had to pay to transport them from many, many different locations back to Irvine where they're stored. And we had legal expenses because we closed the deal, and it was quite a deal to close. And so --

Just quantify what's core use of cash versus nonrecurring. That's what I'm trying to get at.

Well, it's difficult to answer core and noncore. We can get back to you. We can go there, and (inaudible). You will see -- I don't know. There's going to be more (inaudible) in the 10-Q. But we are not going to get into these details.

If you're worried about how much we're spending in noncore, meaning lasers, I can tell you that we are very careful in how we are spending money in ophthalmology and in the development of the laser toothbrush. We're not throwing money around. I can assure you of that. But we are doing it because (inaudible), as they come to fruition, if they come to fruition as we expect, the return can be meaningful. And so it would not make sense not to invest some money in that direction.

Okay. And just one last follow-up. Federico, you said you're nearing the tipping point. But, when I look at the guidance and the 2Q results, including and excluding imaging, I don't see a really big change in iPlus sales. So I want you to be specific on exactly what gives you the comfort to make that statement. What do you see forthcoming in this third quarter and the fourth quarter that you're feeling more comfortable that demand is actually accelerating for your core product? Thank you.

Well, that's the $1 billion question. And what we see is that there is a lot of interest. Dentists -- they have embraced, finally, the concept of laser dentistry to stay and expand. There is still some uncertainty in maybe making the final move, and they need a little time here and there in taking the decision. Some doctors -- they need -- it takes them six months to be ready to put their signature on a contract. Some other dentists -- they are worried about financing. So we are looking at different alternatives there.

But I have here Bill Brown that is the VP of our sales and marketing. And very interesting to report is that, yesterday, came out this technology census of 2012 dental products report, and, with our great interest, we see that we are actually -- turn the first page from tech census 2012. The first thing that you see is lasers. And the title is -- if no, do you plan to buy one? And 19% of dentists said yes, in the next 60 days. 22% said yes, in the next year. 22% said no, not a good fit for my practice. 16% said no, can't afford one right now. 22% no, still need more information on the technology. So we are talking about 41% that said yes, in the next 60 days, and yes, in the next year. 41%.

Why haven't you seen that in the near-term business yet? You think there's just a delay?

Well, let me first say, to be precise, that this also includes diode lasers. So it's not only hard tissue. That's the next -- If yes, what kind? 81% -- they would buy a diode laser. 30% -- they would buy a YSGG, or Erbium (inaudible), 30%. Now, why this is important -- why it's important that, as you turn the first page of the tech census 2012, you have lasers as number one. This was unthinkable ten years ago, five years ago.

So we are very pleased because we see a lot of dentists. I mean, my own dentist that I use -- I had some major dental work, and I went to Italy because there's a dentist that is a luminary in Italy. And, maybe because I'm Italian, I trust him. And I really like him. And he fixed my mouth. I had some major problems. He was -- he's the kind of dentist that uses a microscope to perform dentistry. And he was entirely, two years ago when he fixed my mouth -- entirely uninterested in lasers. He has now completely turned around, and he is extremely interested in all the endo and perio aspects of the use of lasers. And we are talking about him to be part of our advisory board by yearend and be an active proponent of laser technology in Europe. And he's an opinion leader.

Federico, by the way, your math from what you just disclosed -- I would love to see this in a press release so that I can get my hands on it to read it. But, by your math, that means 12% of the market is going to buy a laser in the next 12 months from what you said, hard tissue laser.

Well, this is not based on 140,000 dentists. They have taken, obviously, a group of dentists that are interested in technology. Okay? So this is a magazine that is all about technology. And they go on about CAD/CAM how many they would buy, the CAD/CAM system. (Inaudible) about that too. But this is a magazine that is dedicated about technology. So dentists that are interested in technology -- they are looking at lasers. And that is very encouraging.

If we would be at 12% market penetration or close to it, the stock would be at a much different valuation than around (inaudible) with $50 million market cap. So we are talking about the beginning of a phenomenon.

And, again, I went to look at an interesting chart, and it made me very curious because Chris Sassouni actually gave me the idea of looking at Intuitive Surgical because he came -- he actually took the time, and we were very happy to see him in San Diego at the WCLI -- and it's not a secret that Chris Sassouni used to be a dentist, and he understands dentistry very well. And, also, his fund is a very large shareholder of BIOLASE. And his comments were -- and he's here on the phone, so he can confirm it -- were quite enthusiastic about the WCLI. But he also told me -- you know, Federico, I feel that I am revisiting an old story here when I went the first few meetings of Intuitive Surgical, and the stock was a $6 to $10 stock. And then look where the stock is today.

And I went to look at the chart. The company went public in 2000 at $16. In 2001, it was at $6. And there is a [flat] kind of chart between $6 and $20 or $6 and $18, something like that until 2004. And then the stock went to $600. So we're talking about from $6 in 2001 to $600, and it's $500 now. And what Intuitive Surgical that is a great company has done, really, is to bring automation, robotics, in essence, to conventional surgery.

What, instead, the Waterlase technology is is to change surgery, is to cut human and animal tissue in a different mode, completely different mode.

Federico, most people just want to hear what is translating into near-term revenue growth, honestly.

Lenny, I completely understand. You are a Wall Street guy. I'm an ex-Wall Street guy. We look at things quarter by quarter. And the market now is extremely -- this is probably the most short-sighted stock market I've seen since I got interested in investing in the stock market. And I used to be a stock broker in my early age. And so I completely understand your point of view. It is frustrating. And that's why, also, BIOLASE went in the market and bought some stock, because we got frustrated in seeing a market that is so myopic to what is tomorrow and after tomorrow, and they only look at what is today or tomorrow -- but the immediate tomorrow.

So, when you look at the 40,000, not the 10,000, the 40,000 -- when you take the view of the 40,000 feet and you look down at this little company what has done and how has perfected this technology to bring it to the level of the same speed than a high-speed dental drill from the first laser, the first Waterlase that was approved in 1998, we are talking about a miracle in technology advancement.

And the clinical advantages -- they're so strong. And the safety -- it is so paramount to me and will become to many because we can't forget that 100,000 Americans get sick every year, and they die because they cannot be cured by going to doctors, die going for another surgery and they get bacteria and viruses that are unrelated. And they are [uncurable]. And then there is an incredible amount of people that get sick, and they damage certain organs. We have 80,000 Europeans every year dying by going to doctors. 50% of the population in the United States is, to some degree, not susceptible anymore to antibiotics. So it is a very, very serious problem. And we are -- BIOLASE, the Waterlase technology is a solution to safety, not only better dentistry but also to safety. And that's very important.

Thank you. And there are no further questions in the queue. I'd now like to turn the conference back over to management for closing remarks.

Well, thank you for your very interesting questions, and thank you for participating. Thank you for being patient, long-term investors. We like the fact that you, notwithstanding the difficult times on the stock market, the uncertainty in the economy, and the stock price, for sure, has not been stellar, on the contrary, you are there as believers. And thank you also for the interest in this Company that it is really revolutionizing conventional surgery and that is moving dentistry and medicine to the next stage of innovation. It is a big undertaking, but we are very optimistic that we will be successful. Thank you, again, and we will be hearing from you, hopefully, in Q3.

Thank you. Ladies and gentlemen, that concludes the BIOLASE 2012 second quarter and six months results conference call. Thank you for your participation. You may now disconnect.