BIOLASE Inc (BIOL) 2013 Q1 法說會逐字稿

Good afternoon and welcome to the Biolase, Inc., 2013 First Quarter Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sharon Weinstein of Porter, Levay & Rose, Investor Relations for Biolase. Thank you, Ms. Weinstein, you may now begin.

Thank you, Shea. Good afternoon, everyone, and thank you for joining the Biolase Financial Results Conference Call for the first quarter of 2013. Today's conference will include remarks from Federico Pignatelli, Chairman and Chief Executive Officer, and Fred Furry, Chief Operating Officer and Chief Financial Officer, followed by a question-and-answer period.

When listening to this call, please refer to the press release issued earlier today announcing the Company's results for the first quarter ended March 31, 2013. If you do not have a copy of this release, it is available on the Biolase website at Biolase.com.

Before we begin, please be aware that a number of forward-looking statements will be made during this presentation. Forward-looking statements are any facts that are not historical facts and can be identified by words and phrases including can be, may affect, may depend, believe, estimate, project, and similar words and phrases. These forward-looking statements are based on Biolase's current expectations and are subject to a variety of known and uncertain risks and uncertainties that could cause the Company's actual results to differ materially from the statements contained in this presentation.

These risk factors are discussed in the Company's filings with the SEC. Biolase cautions you that any forward-looking information provided is not a guarantee of future performance. Any forward-looking statements represents the Company's views only as of today and should not be relieve upon as representing our views as of any subsequent date.

For the benefit of those who may be listening to the replay, this call was held and recorded on May 7, 2013. A replay of the call will be available on the Biolase website shortly after this call's completion.

The Company's 2013 First Quarter Results can also be found on the Company's March 31, 2013 Form 10-Q, which the Company will file with the Securities and Exchange Commission later this week.

With that, I'd like to turn the call over to Federico Pignatelli. Federico, please go ahead.

Thank you, Sharon, and good afternoon, everyone. The first quarter of 2013 reflected Biolase's continuing progress in building awareness of our products and on petitioners and end users across multiple markets, strengthening our intellectual property position and increasing our revenues.

While our revenue of $14.6 million was slightly above the midpoint of our guidance for the quarter, it is to be noted that certain domestic products revenue generated from our WCLI Super Symposium held March 21-24 will not recognize until after the close of the first quarter. The 2013 first quarter was also heavily geared towards international revenues as a result of the AEEDC Dubai held in February and the Biannual International Dental Show held in Germany in early March.

Our international revenues have grown as a result of these efforts, and Biolase now has distributors in 71 countries around the world. We are confident that these efforts will continue to increase our international business throughout 2013 and beyond.

The Company reported a loss of $2.6 million for the 2013 first quarter compared to a loss of $1.7 million for the prior-year quarter. The increased loss during the 2013 first quarter is probably due to our heavy investments in sales, marketing, and advertising efforts in North America and internationally as well as additional legal costs incurred in to enforce and protect our valuable IP portfolio.

Although we expect sales and marketing expenses to decrease overall as a percentage of revenue for 2013 as compared to 2012, many of the dental industry's largest and most important tradeshows occur during the first quarter of the year.

Attending these shows places and additional burden on Biolase because our first quarter is traditionally our slowest, and these events do require a substantial investment. In addition to our standard tradeshow, we attended International Dental Show in Cologne, Germany, March 10 to 14, which is the largest dental show in the world and occurs every other year.

Further, we attended the 85th Western Veterinarian Conference and, lastly, we hosted the WCLI Super Symposium, which was held March 21st to the 24th. These events were over and above the many other regional shows and one- and two-day WCLI events we attend during the quarter. We strongly believe that investing in these marketing activities will result in increased revenues throughout the remainder of the year.

I will discuss our business in greater detail in a few minutes, but first Fred Furry, our COO and CFO, will review our financial results for the 2013 first quarter.

Thank you, Federico, and good afternoon. For the quarter ended March 31, 2013, we reported net revenue of $14.6 million versus $12.3 million for the first quarter of 2012 representing quarter over quarter growth of 19%. The 19% increase in net revenue was due to increased international sales of laser systems as well as strong demand for our digital imaging product. Net revenues from our core laser systems increased by $814,000, or 9% over last year's first quarter.

Revenue from our diode lasers contributed to our core growth in the 2013 first quarter, and we expect that the EPIC 10 will continue to be a strong contributor to revenue in the second quarter and beyond. Along these lines we are very pleased that the Company obtained FDA clearance for the EPIC soft tissue diode laser platform for over any indications in 19 additional medical markets in April 2013. It is gratifying to have obtained this clearance so quickly.

Imaging revenues, which included both Cone Beam and CAD/CAM intraoral scanners totaled approximately $1 million, or 7% of net revenue during the 2013 first quarter as compared to $143,000, or 1% of net revenue for the prior-year quarter.

As a reminder, Biolase added Cefla and NewTom Cone Beam digital imaging to its product offerings in late 2011 and further expanded its imaging product offerings with the addition of TRIOS family of intraoral scanners in late 2012. Revenues from these product lines continue to grow quarter over quarter, and we expect this positive trend to continue throughout the year as we gain traction in the market and increase our imaging product offerings.

Digital imaging is not only a tremendous market opportunity but is an excellent complement to our core internally developed laser products.

Gross profit as a percentage of net revenue was 40% as compared to 47% for the prior-year quarter. This quarter over quarter decrease is primarily due to higher sales of WaterLase and diode systems internationally, which generally carry a lower margin than our direct sales in North America and the increase in sales of our licensed imaging equipment systems as a proportion of revenue, which also carry lower margins than our core laser products.

Domestically, we made a concerted effort to encourage our growing salesforce to sell our entire product line. We offer a full line of high-tech products, and these efforts will help us penetrate further into high-tech dental offices. We will also continue to leverage our diode laser penetration, which leads to WaterLase adoption.

We have suffered in the short term, but we believe this will provide greater benefits on a go-forward basis. Based on our projected revenues and expenditures for the remainder of 2013, we expect our gross margin to return to historical levels ranging between 44% and to 46% for the rest of 2013.

Operating expenses totaled $8.6 million or 59% of net sales for the 2013 first quarter as compared to $7.4 million or 60% of net sales in the 2012 first quarter. The increase of $1.2 million was primarily driven by a substantial investment in our sales and marketing efforts during the 2013 first quarter. As Federico mentioned, and increased legal expenses related to enforcing and protecting our IT portfolio.

Sales and marketing expenses totaled $5.3 million for the 2013 first quarter, an increase of $1.3 million, or 30%, as compared to $4 million for the prior-year quarter. The increase was primarily due to significantly increased convention costs as well as continued development of the Company's direct salesforce and increased media and advertising costs.

While we are committed to attending several more major dental and orthodontic association meetings and shows scheduled during the rest of the year, we have begun shifting our expenditures for such tradeshows to our one- and two-day WCLI seminars. We view these WCLI events as crucial investments that yield excellent returns. Sales are, of course, generated at these events, but these events also generate significant interest in our product offerings and result in a large number of solid leads that subsequently materialize as sales throughout the rest of the year.

Industry shows and these WCLI events are important to drive awareness and interest in our product offerings. While we recognize that these large capital expenditures impacted our near-term cash flows from operations for the 2013 first quarter, we believe that the investment will provide a cumulative overall benefit and help the Company generate cash from operations for 2013 as a whole.

General and administrative expenses total $2.2 million during the 2013 first quarter, essentially in line with prior-year quarter despite significantly increased legal expenses primarily related to the enforcement and defense of the Company's IP portfolio.

Our IP portfolio is a tremendously valuable asset. Several of our competitors currently license our IP and their own laser products, and we will not hesitate to continue to enforce and protect our valuable IP portfolio.

As an example, the US Patent and Trademark Office recently issued an office action in a reexamination proceeding rejecting all of the claims of Utah-based CAO Group's patents that were subject to reexamination. This is the second office action in which the USPTO has rejected those same claims. Filings initiated the reexamination in response to the lawsuit the CAO Group filed against Biolase on April 24, 2012, for alleged patent infringement on our ezlase diode soft tissue laser. Naturally, we are very pleased with the results of this latest office action issued by the USPTO, which rejected all 37 claims in the CAO Group's patent that were subject to reexamination as it clearly supports our assertion that we have had from the beginning that the allegations of patent infringement levied by CAO in this case are totally without merit.

Engineering and development totaled $1 million during the 2013 first quarter, essentially in line with the prior-year quarter. As a result, the net loss for the 2013 first quarter totaled $2.6 million, or a loss of $0.08 per share compared to a net loss of $1.7 million, or a loss of $0.05 per share for the 2012 first quarter.

After removing interest expense of $87,000, noncash depreciation and amortization expenses of $145,000 and noncash stockbased other equity instruments and other noncash compensation expense of $494,000, the 2013 first quarter resulted in non-GAAP net loss of $1.9 million, or $0.06 per share compared with a non-GAAP net loss of $873,000, or a loss of $0.03 per share for the 2012 first quarter.

Moving on to our balance sheet, as of March 31, 2013, Biolase had approximately $5.2 million in working capital. Cash and cash equivalents totaled approximately $1.2 million at March 31, 2013, compared to $2.5 million at December 31, 2012.

Accounts receivable totaled $10.6 million at March 31, 2013, compared to $11.7 million at December 31, 2012. Stockholders' equity was $9.7 million at March 31, 2013, and March 31, 2013, the Company had two revolving credit facilities totaling $8 million, with $4.7 million of available borrowing in excess of the $3.3 million outstanding. Today we amended our credit agreements with Comerica Bank, increased our total credit facilities to $10 million.

Specifically the amended credit agreements increased our domestic revolver from $4 million to $6 million for a combined aggregate commitment of borrowings up to $10 million. Further, the interest rates on the outstanding principal balances of the credit agreements were reduced to 5.25%, which is the prime rate plus 2% for the domestic revolver, a reduction of 1%, and 4.75%, the prime rate plus 1.5% for the XM revolver, which is a reduction of 0.5% from the prior agreement.

In addition, the amended credit agreement will provide for $1 million of additional flexible borrowings against inventories for 30 days during the middle of the quarter.

We are very pleased with the terms established for the second year of our credit facility and thankful for the relationship we have developed with Comerica Bank. Management has worked diligently throughout the turnaround, and the amendment to our credit agreements highlight Comerica Bank's confidence in the changes we have made and illustrates their belief in Biolase's future.

With that, I will turn the call back to Federico.

Thank you, Fred. The 2013 first quarter was a very active period in which we focused on our strategic sales and marketing efforts to position Biolase domestically as the premier total technology provider in dentistry and to broaden our profile internationally.

Domestically, we focused on expanding our efforts as the premier total technology provider in dentistry by intensifying our efforts in selling digital imaging and CAD/CAM intraoral scanners, which is evidenced by the 619% growth quarter over quarter.

Our total technology solution is a key component in our strategy to push forward production of lasers as high-tech dentistry and lasers becomes the standard of care in dentistry versus traditional conventional methods. We are the only company in North America that currently provides a full line of high-tech products, which includes our wide range of WaterLase all-tissue lasers and diode soft tissue laser products, CBCT digital imaging products and CAD/CAM intraoral scanners.

While this Q1 shift in revenues negatively impacted our gross profit in the short term, we believe that the long-term benefits will be sound. We have already felt some impact from our marketing efforts, and we are pleased with the level of WaterLase sales we experienced in April. We expect the aggressive marketing efforts we undertook in the first quarter to continue to pay off as we progress in the second quarter and the rest of 2013.

We also have recently entered into an affiliation agreement with Sun Dental Lab LLC to form a strategic partnership to sell preshaped TRIOS family of intraoral scanners. Under the agreement, Biolase will provide the primary inside and outside sales teams, installation and training services, and after-sales support. Sun Dental Labs will provide access to its expansive customer base of dentists and dental laboratory associates, provide marketing material, schedule appointments for Biolase sales representatives, and provide a rebate to Biolase previous owners who utilize its services.

All IOS's sold under this arrangement will be preprogrammed with Sun Dental's labs direct connect as the preferred laboratory provider. Sun Dental Labs currently have thousands of doctors utilizing their digital dental lab network in the United States alone. Their significant customer base represents nearly 5% of all dental offices in North America.

This is a tremendously valuable network, and Sun Dental Lab has already provided our salesforce with several qualified referrals.

In consideration of this marketing alliance Biolase's Board of Directors granted Sun Dental Labs an initial warrant for 500,000 shares of common stock on April 26, 2013, at the market closing price of $5.90 per share. Their warrant will be vested on performance only and at a rate of 1,000 per each TRIOS IOS sold in conjunction with the agreement. For the purpose of this agreement, a sale is defined as a three-year IOS that has been installed at the customer's place of business and is fully operational where the customer has been trained and the TRIOS IOS has been paid in full by the customer.

This is a sound opportunity for Biolase. Not only will this generate incremental sales of TRIOS IOS but will also create prospects for our core laser products as well as our CBCT digital imaging equipment at hundred and potentially thousands of high-tech dental practices.

We continue to move forward with our strategy to provide high-tech dentists with our total technology solution and expect these types of efforts to provide significant opportunities for our core laser products. I want to reiterate that this warrant is purely performance-based. In order to earn all of the warrants, Sun Dental Labs will have to provide (inaudible) to generate gross revenues by approximately $16 million to $20 million for Biolase and contribute significantly to the cash we generate from operation over the next 12 months. Any unvested warrant shares will expire on April 24, 2014.

Sun Dental Labs preference of the warrant over a conventional commission or discount also demonstrates their belief in Biolase and the value they see as a stakeholder. As a result of granting the warrant, we will preserve Biolase's [full] margin on the TRIOS IOS product plan while providing a substantial benefit to our bottom line. The agreement will also give us a strong entry into the high-tech dental practices currently serviced by Sun Dental Labs.

Biolase has also enjoyed several important clinical achievements recently that will also serve to strengthen our position as a premier total technology provider and will help to expand our core technologies into new medical fields.

We received FDA clearance for the Biolase (inaudible) diodes soft tissue laser and much more importantly, the EPIC 10-S for a broad spectrum of more than 80 procedures in 19 additional medical markets. This clearance gives us the ability to leverage our EPIC 10 model of soft tissue diode laser platform and consumable business across a wide range of multi-billion dollar medical markets with the focused strategic partners and core (inaudible).

With the vast number of procedures now available for the EPIC, the opportunities for this model of platform are tremendous.

The excitement around Biolase is continuing to build among industry leaders, academics, and clinical practitioners. As evidence, we are pleased to note that 24 new articles regarding our WaterLase technology were published in the English language during the 2013 first quarter alone. Here are three significant examples -- first, the article, "Influence of the Organ Chromium YSGG Laser Irrigation on Enamel Caries Prevention," published in the Open Dentistry Journal; presented (inaudible) using (inaudible) Recalcitrant Periodontal Market with a Periodontal Bone Defect resulting in a Successful Resolution of the Pocket and Significant Bone Fill on X-ray. The authors concluded that this procedure presents a less invasive alternative to open flap periodontal surgery. Addressing the periodontal market is a tremendous opportunity for Biolase.

Second, the article, "Organ Chromium YSGG Laser (inaudible) of Peripheral Giant Cell Granuloma, a Novel Technique," published in the International Journal of Laser Dentistry shows that the WaterLase is the best-of-kind laser to carry out various procedures with minimal use of anesthesia in a near bloodless field causing minimal discomfort to the patient with no operative side effects and no scarring.

And, finally, the article, "Use of Laser in (inaudible) of Mucocele, Two Case Reports," also published in the International Journal of Laser Dentistry shows that procedures performed with our WaterLaser and diode laser both to be comfortable for both the patient and surgeon. The authors concluded that compared to conventional scalpel treatment with placement of sutures, laser treatment is a welcome alternative with no need of suture and quicker and uneventful healing.

To summarize these findings, the authors determined that the WaterLase was less invasive, does not require anesthesia, allowed the dentist to work in a near bloodless mode, caused minimal discomfort to patients and no post-operative side effects or scarring, offered uneventful healing, did not require sutures and was comfortable for both the patient and surgeon.

These are just a few of the publications that provide clinical support for the clinical benefit of our core technology to dental practitioners.

Biolase was also delighted to recently be featured in the Health and Wellness section of the prestigious Wall Street Journal on April 30th in an article that reporter, Laura Johannes, discussing the benefits of lasers versus conventional drilling in treating tooth decay. In the article, Ms. Johannes referenced a study in which 94% of the patients did not require anesthesia with a WaterLase. Articles such as this encourage consumers to demand the best technology available from their dental practitioner, which, in turn, helps drive demand for our products.

Our plan remains to focus on growing our core laser business in the dental market, but we will also continue to expand the capabilities, applications, and indications for these core technologies in other medical markets as well.

For example, we recently expanded our offering in the veterinarian market with the launch of the EPIC V series, a veterinary soft tissue diode laser. We also issued a broad new patent for treating eye conditions, including presbyopia, cataracts, and glaucoma, which provides additional support for our expansion into ophthalmic applications.

Further, we recently launched a website to showcase Biolase's wholly owned subsidiary, Occulase, and to expand the multiple applications of our proprietary WaterLase technology in ophthalmology. We are currently working with several ophthalmic experts, interested parties, and potential investors. While we are unable to expand on these efforts in detail at this time, we remain very optimistic about the potential of our revolutionary technology in ophthalmology.

Biolase also recently joined the organization for safety, asepsis and prevention as a member of its prestigious super sponsor partnership as advocates for safe and infection-free dentistry. ASOP membership program unites a committed community of clinicians, educators, consultants, associations, policymakers and companies, all (inaudible) shares, (inaudible) global vision for safe oral health care for people everywhere. ASOP's super sponsor represents the highest level of commitment to ASOP's missions and progress. Cross-contamination in dental and medical practices is a very real threat and a significant issue that remains to be solved.

As an example, approximately 7,000 patients in Tulsa, Oklahoma, were recently notified that they had been exposed to hepatitis B and C, and the human immunodeficiency virus, which causes AIDS, after a patient who had no known risk factors other than receiving dental treatment tested positive for hepatitis C. Of 3,122 patients tested so far by the county health department, 57 tested positive for hepatitis C, three tested positive for hepatitis B, and at least one tested positive for HIV. These represent an alarming 2% incidence of contamination. These terrible results for these unknowing patients are absolutely tragic, and the cost of this blood testing for the government agencies has already reached over $700,000. Unfortunately, both are expected to increase as more people come forward.

This is not an isolated incident. As many other surface in the media, the (inaudible) Department of Health has recently warned patients who visited a dental practice during a three-month period that they may have been exposed to infectious material. Further, a few months ago a dentist in Colorado was found to have been reusing needles on different patients.

These examples illustrate the very real risk of cross-contamination and the possibilities of becoming infected with poorly sterilized and/or difficult to sterilize dental instruments. The bacterial effect of Biolase's revolutionary WaterLase and diode technologies are well documented and can drastically reduce the risk of infection in cross-contamination that may be associated with the reuse of conventional burrs and root canal files.

Moving on to our financial guidance, we were clear in our year-end earnings call that we did not expect to generate cash from operations during the 2013 first quarter due to significant investments we expected to make in our sales and marketing efforts. We remain confident, however, that these efforts will create additional opportunities in 2013. For the year ending December 31, 2013, the Company is also reiterating its revenue expectation of approximately $68 million to $72 million. The midpoint of $70 million represented a 22% increase over 2012 net revenues and would also represent record revenues for the Company.

We also reiterate we expect to generate cash for operations for the year ending December 31, 2013.

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. Thank you.

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions) Suraj Kalia, Northland Security.

Federico, Fred, congrats on a nice quarter.

Thank you.

So, Federico, I have to ask the most obvious question -- what were the lessons of bookings or -- after the WCLI that or at least sales leads that could not be recognized as revenues. Care to give us some color on the level of expectant revenues that could have been recognized but were pushed off into Q2?

Well, we will not give -- provide the exact number, but we will have exceeded the high end of the guidance.

Okay. Federico, would you care to quantify the number of WaterLase units you all could have potentially sold more in the quarter?

No, we will not enter into the details of how many units. Again, we have closed business, but we also, again, a substantial amount of leads, and so it is difficult to determine exactly how many that would be closed from the WCLI. The WCLI was a major event with, roughly, 600 people in attendance, and it is one of the major tools that we use at Biolase to close sales, and it is very efficient for us in selling WaterLase and the rest of the product line.

Fair enough. And, Federico, you mentioned, if I heard it correctly in your prepared commentary, that you were pleased with WaterLase uptake in April. Can you give us some color and at least some qualitative assessment of how the uptake in April stacked up this (inaudible) uptake in April of 2012?

Well, there was not really a comparison towards April 2012. We are just satisfied from the level of sales in April 2013. So -- I -- it's not that we are doing a comparison to 2012. The first month of the quarter usually is pretty calm, and we are very pleased to see the level of activity that we have now -- that we are experiencing now in April.

Right, and that level of activity you would say has been higher than normal what you all have seen, let's say -- I'm just trying to get a sense of what it was (inaudible) last year.

It is correct. It is definitely higher than the previous quarter, but I cannot quantify the percentage because we don't do this kind of calculation on a monthly basis. But the month of April of Q2 has been far more active than it is usual in the first month of any quarter.

And forgive me if I just squeeze in one more question -- Fred, you had mentioned the EPIC 10. You'll expect a good uptake trajectory over the coming quarters. Give us some idea or at least shed some color -- how should we quantify the EPIC 10? Because, obviously, it's a pretty big thing for Biolase in the future, but is it from strategic partnerships or different non-dental opportunities? I think so we see that -- help us, at least, from a modeling perspective to the extent that you can on EPIC 10. And, again, thanks for taking my questions.

Sure, Suraj. For modeling, we said a couple of times that we expect the EPIC to be a strong contributor to our growth. Our growth for the year we projected 22% growth to our midpoint, the majority of which is going to come from our core laser platforms.

So that's how I would think about it from a modeling perspective. We currently don't have anything in our models for anything outside of dentistry for the EPIC.

Thank you. Gerald Munda, Sidoti & Company.

Real quick, Fred, I was wondering if you could break out the legal expenses and convention costs in the quarter?

That's something that we might show a little bit more in the Q, but we -- I mean, I'm sort of asking Federico right now if he's comfortable with me saying what those numbers are.

But we don't want to break down exactly how much we spend in protecting our IP portfolios. But we definitely have a very strong activity in doing so. And the CAO case that we announced today is a demonstration of that. We also have advised several infringers of our patents that they need to pay up royalties past and future. In capital cases, we've been successful in doing so. So these activities towards upholding our patent portfolio and, in fact, our royalty income was up. But we expect more to come.

Right, okay. So, Federico, on that comment, are we expecting further legal expenses, going forward or was the first quarter kind of a one-time issue?

Legal expenses -- they are always there, and it's very difficult to forecast them. But, obviously, we do a pretty good job in keeping them under control. But if we have an infringer, we will protect our IP portfolio because it's a very important asset of the Company. But the recent effort undergoing in going -- in advising infringers internationally not only domestically, to respect our IP portfolio.

Okay, and then, Fred, I was wondering if you could break out international revenue versus domestic?

Yes, that will obviously be out in the Q in a couple of days but I don't mind talking about that one here. International for the quarter was about 38% compared to the normal trends of low 30. So it was pretty up for the quarter.

All right, okay. And what was the growth year-over-year, I'm wondering.

Yes, that will come out in the Q. You'll be able to see that. I don't want to talk about that too much yet because we're still wrapping a few things up in the Q, Joe.

Okay. And then --

It's important to understand that because of the IDS that is the largest dental show in the world, we'd have [tens] of over 100,000 people. The activity on the international side in Q1 has been rather strong compared to domestic.

Okay. And then, Fred, I was just looking, actually, to see if you had a number for consumable sales in the quarter.

Well, the consumables typically track about $1 million a month, give or take $100,000, and we haven't seen much change to that. More detail will come out with the Q on Friday with that as well, Joe.

On Friday -- and is there any chance you break out -- I know somebody else -- Suraj, I think -- commented -- any chance to break out diode or how much has that increase in laser sales was weighted towards WaterLase compared to diode laser?

I think we typically just talk about our overall growth in lasers, and we're pretty happy with that. But we have said a few times that the diode has been a strong contributor to that, and we expect that that will continue.

Again, it is very important to understand that diode sales, they will serve as a platform for future sales of WaterLase as a dentist gets a diode laser that is far less expensive. He switches to laser dentistry and eventually will be later upgraded to a WaterLase that is all-tissue laser. We believe that 25% of market share today belongs to the diode laser. So it has become a technology widely used by dental offices, and leveraging the diode laser technology in educating the practitioners in the more sophisticated all-tissue WaterLase, it is an effort that will pay down very well for us in making sure that the same rate of adoption occurs for the WaterLase technology.

Greg Garner, Singular Research.

I wanted to look at the Sun Dental agreement that you were outlining, Federico. My understanding from what you had to say is that you'll have access now to all of their installations -- 5% of the dental market in the US and, with that, that means you'll be servicing them, and so there will be that cross-selling opportunity. And there is the obligation or, let's say, the goal that the leads must lead to $16 million to $20 million in revenues of additional products within the next 12 months from now. And I wonder if that's -- since the guidance also hasn't changed since a quarter ago for the fiscal year 2013, would that be upside to the guidance?

Yes, that would be upside because when we gave that guidance, we didn't have a deal formulated with Sun Labs -- Sun Dental Lab. So, in essence, we cannot exactly quantify how successful it is going to be -- if we're going to sell 1,500 or 500 machines or even more than that. So we consider that as an upside. But, definitely, it is a very, very interesting sort of a partnership, and we are very pleased of the fact that instead of them requesting an overall discount, a special price for -- on quantities, they decided to actually get a warrant to purchase shares at $5.90. So that means that, clearly, they have a strong belief in what Biolase is doing overall with -- in building our business. They strongly believe in the WaterLase technology, and they strongly believe in leveraging imaging with the WaterLase technology and the diode technology that is Biolase's.

So we believe that is a great transaction for us because it opens the doors to thousands of dental offices that are, by definition, high-tech because they use high-tech equipment, and so that is sort of a marketing alliance that, in our opinion, will give very positive results in 2013 and beyond.

Okay, thanks, I appreciate that, and I'd like to follow up with a question about the marketing force, which relates to the Sun Dental but also I know the EPIC 10-S and what the new markets that it's been approved for, and there's been a development of the direct salesforce. First of all, I guess, are you comfortable with the level of productivity with the current salesforce? And any quantification there could be 25% more productive because there are 25% newer feet on the street? And what's the thought process, looking forward, with this Sun Dental, the other markets that the EPIC 10 could address? How best to address all these opportunities from the marketing standpoint and how that might affect, obviously, our modeling, going forward?

Well, by definition, we are never happy with the performance of the salespeople. We always want more, and we are there to help them. They want more, too, because a great deal of the compensation is commission-based. So we both want more. We want more, they want more. So we are, with our sales reps, in a very strong alliance to make things happen better and smoother. And, obviously, for instance, this transaction with Sun Dental will help them because Sun Dental will provide qualified leads to dental offices. So that is a great help to them because they don't have to actually go and look for a qualified leader at that point but will be provided by them is having thousands of dental offices at their disposal in which they can just go and essentially educate them to the WaterLase technology, our diode technology, and our imaging products and close the sale.

But does that mean you have to expand the salesforce to address that? I mean, a larger market domestically?

But we are, and we say that several times, that we are expanding our salesforce. We are in the process of doing that. It is a continuous process, and we want to get to a level of 45, maybe even more. So it is definitely an undergoing effort that we have. And along with that, we will have a certain number of specialized reps that will take care of the imaging division, the imaging products -- sort of experts in the field.

Lenny Brecken, Brecken Capital.

I just want to clarify -- the domestic -- if you just look at domestic laser system, specifically WaterLase, was there any change in gross margin or pricing in the quarter? And what -- I know you're not going to break it out, but I'm going to ask, anyway -- did those systems -- if you just look at the WaterLase -- actually grow domestically?

Lenny, overall, laser sales grew -- there were no lower gross margins. The issue is that we launched, a year ago, our digital imaging division, and it was a difficult transition for our sales rep to go from selling only WaterLase and mainly WaterLase and diodes to also selling imaging.

So we decided that we needed to train them and push them as of the beginning of the year and concentrating their energies in selling the full product line of the Company. So, in essence, in Q1 to really concentrate on selling imaging because we want imaging to become a substantial division of the business of Biolase because it will help us to become even stronger in all the high-tech dental practices and so further our penetration of the WaterLase and our diode technologies.

So it was a strategic move to have them to concentrate domestically because we are selling domestically in -- I mean, in US and Canada we are selling imaging -- not overseas. So to make a concerted effort in Q1 to really push strong in realizing sales in imaging so they would get used to also sell imaging -- something that last year was not occurring. So -- that push was successful, and we will clearly feel the payoff in the rest of the year.

And I guess that may be a misunderstanding why maybe you have a long-term significance of that that I'm not really understanding. I know the synergies between the local long term are very (inaudible) again, but I guess by doing so in the short term --

You are on a speakerphone, and there is an echo.

I'm sorry. So, but, you do understand even though there may be some long-term benefit, the short term you cause the gross margin year-over-year to stagnate, it didn't grow, if you look at the dollars. And I think that's -- everyone is trying to ask questions regarding should I be concerned about it or not, going forward? And I guess the way to clear it up is everyone is trying to get at whether you think revenues are going too close sequentially and then to put the issue to rest.

I don't know if you want to comment on that or not, but --

[Similarly], Lenny, revenues, they will grow, and they will grow not only with WaterLase and diodes but also now with imaging, because now we have trained our sales reps in pushing imaging, as well, in understanding it. We put them under substantial training that was necessary. They have been traditionally selling only lasers, and so it was a shift to selling an entire product line.

So -- while we have taken a hit in Q1 was a clear strategic move and as of Q2 everything gets normalized, and we will see the benefit going into the rest of the year and beyond.

Okay, so just to reiterate, you're comfortable with sequential revenue growth whatever it may be?

(inaudible).

Okay, that's fine, and that's why I wanted to clarify that point. Let me just get into another question. Conceptually speaking, you were expected to do $70 million or so in 2011, going forward into the 2011 year. And you were at this run rate before in your history as a Company. What is different this time around? Can you summarize it in one or two minutes exactly why you think that this is a true secular growth? You're at the early stage of a true secular growth time for the Company versus before you had stops and starts. Thanks.

Well, Lenny, these are pretty lengthy and deep questions to answer, but I will try to do my best. First of all, we reached $70 million -- actually, $69.7 million in 2006, and that was because we entered into an agreement with Schein, and Schein purchased a lot of lasers as inventory and as training units. So the $69.7 million in sales, in reality, they were artificially increased by us entering into a transaction -- I'm sorry -- into a distribution agreement with Schein. So that is the first difference.

So -- this number -- these record numbers this year will be way more solid than what used to be back then because there was a specific factor that inflated sales back then.

What also is different is that back then we didn't have a level of adoption of lasers as we have now. Laser dentistry in the past few years has acquired a lot of recognition in the dental and academic field. So we have way more clinical papers; we have a clear mode of acceptance and interest in laser dentistry that we didn't have back then. Let's look at the adoption rate of diode lasers in 2006 and seven years later we grew essentially from 5% or around there to around 25%. So we have a base today from which to grow that is way more solid because dentistry has finally adopted laser technology into their practices.

Clearly, we have a long way to go in becoming standard of care with the WaterLase but not so much as a few years ago. What we see is that dentists now, they understand the value of laser technology, and they've started, clearly, directing their interest towards diodes -- much lower cost than the WaterLase, but now they are laser dentists. They think in a different way than they used to think 10, 15 years ago. They understand that laser technology in dentistry is there to stay, and so -- and to grow -- and so we have a base of customers now that is very significant to upgrade them -- not only to sell them more diodes but also to upgrade them to the WaterLase technology.

Chris Sassouni, Eagle Asset Management.

Good afternoon and congratulations on a good quarter. I just have a couple of extra questions just to make sure I understand. First of all, at this point you've said that your goal is to have 45 reps. So maybe we can break this down into what your goals are in terms of having the number of outside reps you plan to have, inside reps you plan to have, and then what the status of the overseas distributors are. Roughly, how many of them are there and what are the opportunities to increase the number of distributors. And I'll stop there, and then I want to talk about some of your marketing and advertising initiatives to increase both brand awareness and just awareness of the technology with consumers.

So -- our goal is to have -- and, Chris, thank you for the question, it's a good one. Our goal is to get to 45 outside sales reps to have 12 to 15 -- to go to 12 to 15 inside sales and support people, and to have six imaging experts to help closing sales also for the reps that sort of specialize in the laser field. So that is the plan for United States and Canada.

Regarding other international markets, the rest of the world, we are in 71 countries now, and we are planning to add several few countries this year, and we plan to start leveraging these [bold retrials] to the international markets. And so we believe that international markets will grow very nicely in -- as of 2013 and forward.

Okay. So is it fair to say that usually for each -- that one distributor equals one country? Or are there certain distributors that are more than one country?

In certain countries we can have multiple distributors.

Okay, got it, all right. And so the next thing I just wanted to turn to then was -- so my sense, based on the things that I've read, is that the awareness of lasers with dentists has increased dramatically over the years, but the awareness of the patients with lasers is still relatively low and, a, I want to ask you is that accurate and then, b, the second question is what can you do -- obviously, the Wall Street Journal article helped -- but what can you do to drive better awareness with the consumer so that they start to ask their dentist if they can have treatment with the dental laser?

Chris, this is my favorite question. Biolase has done a terrific job in promoting WaterLase technology and laser technology at the level of practitioners. The Biolase brand and WaterLase technology is known by 90% of US and Canadian dentists. But what Biolase has not done and is doing now is to educate the public about WaterLase technology. Less than 1% of the public knows about WaterLase technology and the advantages of WaterLase and also diode technology.

So we need to educate the public to demand their own dentist to have such technologies -- laser technologies used on them. And we are doing that with social media, we are doing that -- I mean -- just as an example -- Facebook grew from 3,000 viewers, or members, as you want to call it, to -- I'm sorry -- visitors -- to over 65,000 since December. We believe that we can grow to 250,000 and more by year-end.

So the word is getting out, but we are doing more. We are not ready to discuss exactly what, but clearly reaching out to print media, to specific journalists that have an interest in new medical technologies. For instance, this article in the Wall Street Journal is very significant. Hopefully, there are going to be more to follow. And we are there to, in essence, [fear] the interest of the national media. That can be print, that can be Internet-based, website specialized in medicine, in health, and so on.

So there is a concerted effort there, and I think that it is very, very important. I mean, if we see what a great company -- one of the greatest success in medicine and also as a performance in the stock market that is Intuitive Surgical that I take very much as an example, they have done exactly that. They have a great technology, a robotic technology to perform surgery remotely, and then when the Iraq War ended, and their market started shrinking because the government was their primary purchaser of their equipment, they initiated a strong consumer campaign to have consumer demand robotic surgery and particularly for prostate cancer because it provided better results.

And so we want the same to happen with WaterLase, and we know that Intuitive Surgical flourished dramatically by having -- by building the consumer awareness and having them requesting robotic surgery, and that was reflected in the stock growing from $6 to $600 in few years.

So -- tremendous performance, and I believe that today is -- that now, essentially, is the right time for Biolase to do so -- to build on this consumer awareness, because we have thousands of WaterLase doctors out there in the marketplace.

So when consumers get aware of the world of this technology, they can just go on our website or on the nopaindentistry.com website, put in their zip code, and different WaterLase dentists, they will appear nearby to where they live or to work and so on -- we believe that this is the right moment to initiate that campaign.

Okay, last question, real quick. Just what's happening to the sales cycle right now? Just -- either qualitatively or quantitatively. A year ago it was taking "x" amount of time to close a sale. Today it's taking how much time -- roughly?

Well, it's difficult to say, Chris. Clearly, we are getting better year after year. The more dentists that know about the WaterLase technology, heard about it years ago, and they haven't moved yet. So they start getting warm about it and so on. Before we needed to talk to a much larger number of dentists to close a sale, now that number has reduced dramatically, but it's still not an easy sale. So -- we need to make more efforts there, and that is why we like to become more and more -- the technology company for a dental practice. A dental practice doesn't want to deal with three or four different vendors buying high-tech equipment from this vendor or the other vendor.

So if we can offer to a dental practice all the high-tech products that they need, then it's easier for us to become the preferred vendor and just deal with us and so we can have a faithful customer to develop over the time and further the WaterLase technology.

I feel that, frankly, we are quite close to the point -- to the tipping point -- in which the curve of adoption of WaterLase is starting to accelerate, and we accelerate further in 2014 and 2015 as happened for the diode laser technology. Again, we went from 5% in few years, in seven, eight years, to 25%. That is a tremendous adoption -- 25% adoption in dental offices in the United States. That is a tremendous result. And so now the next movement will be for all-tissue lasers, meaning the Water Lase technology. We have essentially no competition or very little competition in that field, I would say, worldwide, and particularly North America.

(Operator Instructions) Robert Hoffman, Princeton Opportunity Partners.

Yes, a quick question on the Lambda IP agreement that you announced in April. I'm assuming that that is not hitting the royalty, $108,000, that you got in the first quarter, correct?

I think that some was accounted in the first quarter but is a question for Fred. But --

The real essence of the question is is it possible to quantify the significance of that? Obviously, you're spending money to extend your IP, and you now have an agreement. Is there any way of helping us model how important that is? Obviously, it should be 100% -- or it should be 100% margin business when it does come in.

It is 100% margin, but I can assure you that with Lambda it was extremely easy. They are a very professional company. We didn't have to use a lawyer in any shape or form other than to review the contract. They absolutely agree that they were infringing, and so they paid up for past royalties. I believe it was a number that was to close past sales, and they agreed in paying for future sales. But Lambda really doesn't sell too many of these all-tissue lasers in the dental arena. They are more towards dermatology.

But what is significant is the fact that they agreed to pay a royalty. So that creates a precedent. And so it is much easier when you have a precedent to go to other infringers and say, "Well, now, given the precedent of the company recognizing our patents, we ask you to pay up as well." And that facilitates the -- facilitates the whole process.

Lambda is going to pay you a royalty on lasers sold into the dermatology arena, correct?

No, only in dental. And, again, it is not to be expected a high level of royalties from Lambda because they don't really sell too many -- they probably would sell, I don't know, 20 or 30 a year to dentistry. Let's not forget that Biolase is the world leader with essentially a 90% market share. So don't expect royalties to become a huge streamer of income, given the fact that we are so strong.

The reason why we want to have them pay royalties is because we want to make sure to protect our IP. But we are doing it very smartly without spending a substantial amount of money. When we get attacked directly from companies like CAO, that attacked us for violating their patents, well, there, unfortunately, we have to spend money. And we are pleased to have announced that the USPTO rejected all their claims.

Keay Nakae, Ascendiant Capital.

Thank you. Getting back to the Sun Dental agreement, you talked about them having access to 5% of the dentist practice in the country. Can you give us a sense for how large a market share that is for any one lab? How fragmented is the services that they provide?

I'm sorry, how fragmented is -- ?

Is the dental lab business in the US? In other words, is that a large market share for an individual dental lab company?

I'm going to have Bill Brown answer to this question, because he is more in tune into what the dental lab market is.

Yes, Keay, thanks. Sun Dental is in the top 1% of dental laboratories.

Okay, so given that they're a larger player, are there other -- it leads to the question, are there other larger dental labs that you now -- you can go after. Who may also be far along the curve as far as their adoption of those CAD/CAM technologies that your intraoral scanner can be the front end of?

Yes, we are in discussions with other labs, but not in an arrangement like we have with Sun Dental.

Okay, that's all I have.

Yes, I guess I could just clarify a little bit -- the doctors, in general, have a lab partner that is very familiar with their particular style of dentistry -- how they make their crowns and how they like to do shades and things like that. So -- the -- what we're looking for is a partnership between those labs that work closely with the doctor as well as Sun Labs that can work with their lab to provide the digital products that come from the scanner, or actually we can support the local lab if they have all the appropriate software.

Thank you. Lenny Brecken, Brecken Capital.

Just two follow-ups, and, Bill, I didn't realize you were on the line. Let me ask you this, related to the other question on what has changed this time around versus labs in terms of getting to historical revenues a little over $70 million. Bill, I mean, if you look at the map, right -- if the salesperson sells 1.5 units per month domestically, and you make some assumption, reasonable (inaudible) the international sales, I mean, you should be doing well over $20 million a quarter. As the head of sales, are you starting to see that realization of productivity, and that's what's giving the company comfort that you're well on your way to a record quarter -- record year, excuse me.

No, it's -- you're making a very good point. The salesforce productivity is really my top priority right now. And we had a national sales meeting in April and provided additional training -- technical training for the whole product line and getting the new employees, the younger employees, getting them up to speed faster will be a key to the next level.

Okay, but, I mean, can you just provide, if Federico and Fred are comfortable, some data points to give us some comfort that productivity is starting to kick in?

Lenny, I'm sorry, if you will get off the speakerphone, it would be helpful because we have a -- I'm sorry to ask you for (inaudible).

Yes, we do see clearly increases in productivity from our sales reps, like Bill already said -- we unify training for all of our reps, and something that was never done before. And so, in essence, we are very keen in increasing productivity of all reps. Clearly, there is always a superstars -- there are the superstars, and we ask, actually, them to also train the newer ones. And so with that process we try to elevate all salespeople to produce [enough]. And, clearly, as we are increasing the salesforce, we are getting to that interesting concept of yours. I think, if you want, that is a consequence of increased productivity and larger number of sales reps. Increasing productivity and a larger number will bring you to higher numbers, and -- but, again, our confidence in higher numbers comes from a number of factors, not only higher productivity from our sale reps but also from the fact that there is a real drive towards adoption of lasers in dentistry and the amount of interest that we see from dentists towards our technology and our expansion in becoming a total technology solution company where we can provide all high-tech equipment to a dental office.

So -- we will grow definitely quite fast. The imaging side of the business, the Biolase business, because of all of that. And Q1 was clearly the beginning of this movement. We want to have the digital imaging division as an important division of Biolase because we'd allow to make our laser division even stronger. There are a lot of synergies between the two and also the end client is the same -- is essentially the high-tech dentist that cares about investing in new technologies.

That's a very clear point. I think that makes my question I had before even more clear. Fred, are you comfortable with giving us some insight in the noncore market areas of further commercialization -- like in veterinary? Are there any areas where you're close to, let's say, in 2013 do you expect to commercialize other areas with the EPIC 10?

Well, we have started with veterinarian, and we are seeing some results there, and I would say they're good results. But we haven't really put any forecast for 2013 outside dental. So in our forecast, what you see is lasers, imaging, outside of the Sun Dental deal, obviously, because that came after, and we cannot really quantify the success of that transaction. But we believe that it will be successful, and it's a very interesting one. So that will be an upside as also anything outside dentistry in the medical field that will be an upside. And, yes, we are planning to introduce product to more medical applications in 2013 and 2014 and beyond, yes.

I will now turn the floor back over to Mr. Pignatelli for closing comments.

Well, thank you for following Biolase. Thank you for believing in Biolase, and thank you very much for believing in what Biolase is doing that is about changing conventional dentistry into becoming high-tech dentistry and supporting us in this very, very interesting evolution. Not only your dentist but also medicine by adopting advanced laser technologies.

With that, we will talk again in Q2. Thank you.

Thank you, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.