BIOLASE Inc (BIOL) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the BIOLASE 2013 third-quarter and nine-month results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.(Operator Instructions). This conference is being recorded today, November 11, 2013.

I would now like to turn the conference over to Dr. Alexander Arrow, President and COO of BIOLASE. Alex, please go ahead.

Good afternoon, everyone, and welcome to BIOLASE's 2013 third-quarter and nine-month results conference call. On the call with me is our Chairman and CEO, Federico Pignatelli; and our CFO, Fred Furry. Federico will make some opening remarks, and then he will turn the call over to Fred to run through our results and comparisons to prior periods. After Fred's discussion, I will discuss some of our business and clinical highlights. We will then open the call to your questions.

Before we begin our comments, today is Veterans Day, and we would like to acknowledge and thank all of our veterans, and those currently serving in the branches of our military, for their dedication to our country and their sacrifice, some of whom have made it possible for those of us lucky enough to work in business to do what we do.

Now please be aware that a number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts, and can be identified by the 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 represent the Company's views only as of today, and should not be relied upon as representing our views on any subsequent date.

For the benefit of those who are listening to this on a replay, this call was held and recorded on November 11, 2013. A replay of the call will be available on the BIOLASE website shortly after this call's completion. When listening to the call, please refer to the press release issued earlier today announcing the Company's results for the quarter and nine months ended September 30, 2013. If you do not have a copy of this release, it is available on the BIOLASE website at www.biolase.com.

The Company's results for the third-quarter and nine months ended September 30 can also be found in the Company's September 30, 2013 Form 10-Q, which the Company will file with the Securities and Exchange Commission. Note that the SEC is closed today, so both the 8-K containing these earnings -- the earnings release and the 10-Q will be filed tomorrow morning.

With that, I'd like to introduce Federico Pignatelli. Federico, please go ahead.

Thank you, Alex, and good afternoon, everyone. I want to welcome you all to our 2013 third-quarter and nine-month results conference call. Today, we will review BIOLASE's progress in 2013 and discuss several key initiatives that will impact the coming quarters.

First, let me briefly recap the nine months in third quarter ended September 30, 2013. Despite the fact that net revenues have increased by approximately $2.9 million or 8% to $41.2 million for the nine months ended September 30, 2013 as compared to revenues of $38.3 million for the prior-year period, our revenues for the third quarter decreased compared to the prior year quarter. Net revenues for the third quarter totaled $12,300,000, a decrease of approximately $1.5 million compared to $13.8 million in the prior-year quarter.

We are dissatisfied with the results for the third-quarter ended September 30, 2013, as we believe that the Company's results were primarily due to inadequate execution within our sales force, its subpar marketing efforts in highly challenging times, and in connection with the Company's transition from just selling one product, the WaterLase, to selling a wider range of lasers, including soft tissue diodes, together with other technological solutions for dentists, digital radiography, and CAD/CAM intraoral scanners.

While this transition is strategically essential for the longer-term growth of BIOLASE as a total technology solution provider, this evolution caused unanticipated short-term inefficiencies, which can occur during a strategic shift, such as the one we have implemented in 2013. The effects from these inefficiencies were intensified by unforeseen market factors, such as the confusion over the implementation of the Patient Protection and Affordable Care Act, and the continued uncertainty related to the Congressional impasse over the US budget, and the debt ceiling, which affected the buying decision process of the dental community, which is comprised of 140,000 small business owners.

Consequently, we have developed plans to rapidly address all of the issues at hand, including making a number of changes within our sales and marketing departments, and implementing new strategies along with certain cost-containment measures. We believe that these proactive changes are essential in developing a winning sales and marketing strategy for BIOLASE and in growing the Company's business.

We view the Company's third-quarter performance as the lowest part in this cycle of radical change of BIOLASE, and we expect a strong recovery in the fourth quarter and in 2014 in all segments of our business, driven by our WaterLase product line and the DaVinci imaging and CAD/CAM line. We are very optimistic about the potential of several upcoming product launches, such as the Galaxy BioMill System, a key advancement to complete our strategy in becoming a company that offers superior technological solutions to dental practices. We plan to introduce the Galaxy BioMill System, an in-office chairside milling machine for dental implants at the upcoming Greater New York Dental Meeting, the largest dental congress and exposition in the United States, which will be held from November 29 through December 4, 2013.

One of the key management changes that we have made was to replace our Vice Presidents of both Sales and Marketing with an industry veteran with significant experience and a successful track record in sales, marketing, and business development for both dental lasers and digital imaging systems -- Brian Jaffe. Brian comes to BIOLASE from a direct competitor, Millennium Dental Technologies, where he held the position of Vice President of Global Sales. Prior to his role with Millennium, Mr. Jaffe was the Vice President of Sales and Marketing of Vatech America, a leading supplier of dental Cone Beam and digital radiographic systems; and Suni Medical Systems, a pioneer in digital radiography. We are enthusiastic with the depth and breadth of knowledge that Brian brings to BIOLASE for global sales in both dental lasers and digital radiography.

As a further step, our Board has authorized the Company to seek the services of an investment bank to assist the Company in exploring possible M&A transactions, with the goal of maximizing shareholder value. The Company is currently valued at approximately one time revenues, while some of these assets could be worth significantly more. With the development of a prelaunch business opportunity in ophthalmology, ENT, orthopedics, podiatry, pain management, and veterinary therapeutic laser products, BIOLASE has more opportunities than we can pursue on our own. Selling one or more of them could generate the funds that could give us the working capital we need for our core business.

We are committed to conducting a review of potential opportunities as promptly as practical. However, there can be no assurance that any particular opportunity will be pursued, or that any transaction will accord, or on what terms, or as to the timing. We will provide additional information during the process, as appropriate.

Lastly, even the current unsatisfactory performance of the business and stock valuation, this year, I have decided to refuse any proposed option compensation if offered by the Board. In the past, the Board has awarded me equity compensation, but this year, I will not accept it and remain at my symbolic $1.00 annual salary.

Alex will discuss our business in greater detail in a few minutes. But first, Fred Furry, our CFO, will review our financial results for the quarter and nine months ended September 30, 2013. Fred?

Thank you, Federico. Before beginning, as Alex mentioned, today is Veterans Day, and in addition to thanking all of our veterans and those currently in uniform, I would like to personally thank both my father and father-in-law for their service to our country.

For the quarter ended September 30, 2013, we reported net revenue of $12.3 million compared with $13.8 million in the 2012 third-quarter, a decrease of approximately $1.5 million or 10%. Net revenue for the nine months ended September 30, 2013 totaled $41.2 million, an increase of approximately $2.9 million or 8% as compared with net revenue of $38.3 million in the nine months ended September 30, 2012. The decrease to net revenue for the three months ended September 30, 2013 was primarily attributable to approximately $2 million in reduced laser system revenues, offset by slight increases in imaging systems, consumables, and other, and service revenues.

The increase to net revenue for the nine months ended September 30, 2013 was primarily attributable to increased imaging systems revenues of approximately $1.6 million; increased consumables and other of $401,000; and increased service revenues of $743,000. For the nine months ended September 30, 2013, laser system net revenue increased by approximately $90,000 as compared to the same period of 2012, despite decreasing by approximately $2 million or 20% in the 2013 third-quarter as compared to the prior-year quarter.

Our third-quarter results masked several of the positives that we have seen since the beginning of the year. Contrary to the contraction of our US laser sales, our international sales were up 22% for the nine months ended September 30, 2013 as compared to the same period in 2012. In addition, imaging revenues were up 94%, and consumables were up 9% in the first nine months of 2013 as compared to the same period in 2012. Our high-margin domestic sales in the third quarter were weak, however. And as Federico and Alex have noted, we have taken steps to address this trend, such as the establishment of a regional sales structure and contemplating modifications to our Sales Incentive Compensation Program. As these measures take effect, we believe our top line will strengthen and grow.

Imaging revenues, which included both Cone Beam, digital imaging, and CAD/CAM intraoral scanners, totaled approximately $961,000 or 8% of net revenue during the 2013 third-quarter as compared to $675,000 or 5% of net revenue for the prior-year quarter. For the nine months ended September 30, 2013, imaging revenues increased by approximately $1.6 million or 94% as compared to the same period of 2012. The increases for the three and nine months ended September 30, 2013 were driven by increased sales efforts and increased equipment offerings at various value propositions.

Consumables and other net revenue, which includes consumable products such as disposable tips, increased by approximately 8% for the 2013 third-quarter as compared to the prior-year quarter. For the nine months ended September 30, 2013, consumables and other net revenue increased by approximately 9%. Gross profit as a percentage of net revenue was 31% for the 2013 third-quarter as compared to 46% for the prior-year quarter. For the nine months ended September 30, 2013, gross profit as a percentage of net revenue was 37% as compared to 46% for the prior-year period.

The quarter-over-quarter and year-over-year decreases were primarily due to higher sales of licensed imaging equipment, which generally carry lower margins than our laser products, and increased international laser sales, which generally carry a lower margin than our domestic laser sales. In addition, we increased our reserve for excess and obsolete inventory by $1 million during the third quarter, due to changes in market factors and a decreased velocity of our inventory.

The $1 million charge to increase our reserve for excess and obsolete inventory negatively impacted our gross margin by approximately 8.1% and 2.4% for the quarter and nine months ended September 30, 2013, respectively. Without this charge, our gross margin would have approximated 39.1% and 39.3% for the quarter and nine months ended September 30, 2013. We also believe that as the changes we have implemented in the fourth quarter take affect and improve our domestic WaterLase sales, that they will have a positive impact on our gross margin.

Our results for the third quarter and nine months ended September 30, 2013 -- I'm sorry -- operating expenses totaled $7.7 million or 62% of net revenue for the 2013 third-quarter, as compared to $6.7 million or 48% of net revenue in the 2012 third-quarter. For the nine months ended September 30, 2013, operating expenses totaled $24.2 million or 59% of net revenue as compared with $21.3 million or 56% of net revenue for the nine months ended September 30, 2012, an increase of $2.9 million or 13%. The quarter-over-quarter and year-over-year increases were primarily driven by substantial investment in our sales and marketing efforts during 2013; legal expenses related to enforcing and protecting our intellectual property portfolio and class-action lawsuits; and increases to our allowance for doubtful accounts.

Effective for sales beginning January 1, 2013, the Patient Protection and Affordable Care Act imposed a 2.3% medical device excise tax on certain product sales to customers located in the US. As a result, we incurred excise tax expenses of $89,000 for the 2013 third-quarter and $308,000 for the nine months ended September 30, 2013. Both represent approximately 1% of net revenue in each respective period.

Our net loss for the 2013 third-quarter totaled approximately $4 million or a loss of $0.13 per share compared to a net loss of $548,000 or a loss of $0.02 per share for the 2012 third-quarter. After removing interest expense of $182,000, depreciation and amortization expenses of $141,000, and stock-based other equity instruments and other non-cash compensation expense of $554,000, the 2013 third-quarter resulted in a non-GAAP net loss of $3.2 million or a loss of $0.10 per share, compared with a non-GAAP net income of $96,000 or income of $0.00 per share for the 2012 third-quarter.

For the nine months ended September 30, 2013, our net loss totaled approximately $9.2 million or a loss of $0.29 per share as compared to a net loss of $4.1 million or a loss of $0.13 per share for the nine months ended September 30, 2012. After removing interest expense of $386,000, depreciation and amortization expense of $439,000, and stock-based other equity instruments and other non-cash compensation expense of $1.5 million, the nine months ended September 30, 2013 resulted in a non-GAAP net loss of $6.9 million or a loss of $0.22 per share, compared with a non-GAAP net loss of $2.1 million or a loss of $0.07 per share for the nine months ended September 30, 2012.

Moving on to our balance sheet, as of September 30, 2013, BIOLASE had approximately $5 million in working capital. Cash and cash equivalents totaled approximately $4.2 million at September 30, 2013 compared with -- to $2.5 million at December 31, 2012. Net accounts receivable totaled $10.8 million at September 30, 2013 compared to $11.7 million at December 31, 2012. At September 30, 2013, the Company had two revolving credit facilities totaling $8 million, with $2.5 million of available borrowing capacity.

In legal matters, two shareholder lawsuits were filed against the Company and certain officers and directors in August 2013. We are working with our attorneys to vigorously defend the claims asserted in the lawsuits, which we believe lack merit. As of September 30, 2013, the Company had accrued $250,000 for legal costs expected to be incurred in connection with these matters.

With respect to our liquidity and capital resources, on September 23, 2013, the Company entered into a subscription agreement with Camber Capital Management, pursuant to which the Company agreed to sell 2,688,172 shares of its common stock at a price per share of $1.86 for gross proceeds of $5 million. The net proceeds to the Company were $4.6 million after deducting associated costs of $408,000, which included a placement agent fee of 5% to Northland Securities.

The shares of common stock were sold issued pursuant to a prospective supplement, which was filed with the SEC September 26, 2013, in connection with the registration statement on Form S3 as amended, which was declared effective by the SEC on September 19, 2013. On November 8, 2013, we amended our two revolving credit agreements with Comerica Bank to waive noncompliance with our minimum EBITDA covenant for the quarter ended September 30, 2013 to reset our EBITDA covenant for the quarter ending December 31, 2013, and to establish covenants for the remaining term of the agreements.

In connection with this amendment, we issued Comerica Bank 100,000 warrants and an amendment fee of $10,000. The amendment also includes liquidity ratio and liquid asset covenants, and an equity raise requirement that established March 1, 2014 as the latest date by which the Company is required to raise at least $3 million. Regarding our financial guidance, the Company is reducing its net revenue guidance for the year ending December 31, 2013, to a range of $57 million to $59 million.

With that, I will turn the call over to Alex.

Thank you, Fred. Federico began the call by highlighting several major changes we've made in order to address the results for the third quarter. Our plan for reforming sales and marketing includes more than just replacing some of our Vice Presidents. We've also assigned five Sales Managers to regions that cover the United States and Canada, which is a layer of sales management consistent with best practices from sales forces of our size, but something that BIOLASE has not had in the past.

These Regional Sales Managers have histories of success, and will travel with our sales force, and ensure that they perform the things that sales representatives must do on a daily, weekly, and monthly basis to be effective. We believe training and closer management of these key performance indicators will improve the efficacy of our sales force. The Regional Sales Managers will also be responsible for recruiting additional account managers to their regions.

The promotion of some of our best reps to Regional Sales Managers is a change we've made directed squarely at addressing and correcting the flat sales results of our flagship WaterLase technology. As a show of our optimism, this change is going to improve WaterLase sales specifically. We have decided that beginning with Q4 of -- I'm sorry -- with Q1 of 2014, we will be resuming the practice of disclosing WaterLase revenues separate from EPIC and other laser revenue, providing clarity on the trend of each category.

Another change in strategy has been our establishment of an imaging-specific sales group to assist our laser sales force, including sales of digital radiography and CAD/CAM intraoral scanners. We began this recently as a pilot program in a select geographic region, and it has met with initial success. As such, we have hired imaging-specific sales specialists in recent weeks and plan to hire more during the fourth quarter. We are also establishing a limited industry-specific sales team to address our entry into the otolaryngology, or ENT market. More on ENT in a minute.

Operationally, we have developed cost reduction plans relating to our cost of sales, and sales and marketing expense categories. These are having an effect in the fourth quarter, and are expected to be significant in 2014 as well. We expect that the operational changes we have carried out with our DaVinci imaging products will result in a positive contribution to our gross margin as our volume increases.

In July, we entered into a strategic relationship with Valam Corporation to develop, market and sell office-based laser systems to otolaryngologists, or ENT -- Ear, Nose and Throats doctors. The agreement provides BIOLASE with an ENT laser patient portfolio -- patent portfolio, plus the know-how and marketing support of Dr. Yosef Krespi, one of the world's leading authorities on the use of lasers for surgical treatment of sinusitis, sleep apnea, and other ENT laser procedures.

BIOLASE's EPIC S 10-watt diode soft tissue laser is cleared by the FDA for use in ENT surgical procedures. We formally launched it at the American Association of Otolaryngology, or AAO show in Vancouver on September 30, and we shipped our first two units to ENT clinicians in October. We are also establishing a limited industry-specific sales team to address our entry into the ENT market.

Our partnership with Valam includes an exclusive worldwide license to all of Valam's ENT-related patents and pending patents, which, when combined with BIOLASE's existing ENT laser-related patents, creates a formidable patent estate in this niche. We look forward to being able to offer a line of elegant, simple-to-use, precise, laser-based atraumatic cutting tools to the 9000 practicing otolaryngologists in the United States.

Potentially even more lucrative than the EPIC S diode laser in the ENT space is the prospect of a future clearance to use a version of our WaterLase for septoplasty in chronic rhinosinusitis. Initial ENT clinical feedback on this approach for these two large markets has been encouraging, and we have a regulatory plan in place.

I will now turn the call back over to Federico.

Thank you, Alex. Before concluding our remarks, I would like to highlight that BIOLASE plans to introduce its Galaxy BioMill CAD/CAM system at the upcoming Greater New York dental meeting -- the largest dental congress and exposition in the United States, which will be held from November 29 through December 4, 2013. The Galaxy BioMill was developed and designed by BIOLASE in conjunction with Imes-icore GmbH in Germany. It is a CAD/CAM system for scanning, designing, milling, and finishing crowns, inlays, and veneers in the dental office in a single appointment.

Old soft-termed chairside milling, the market is estimated to reached 15% market penetration in the US, and according to independent research, is one of the fastest-growing segments in the dental market. The Galaxy BioMill System will utilize 3Shape Corporation's Trios' fast and highly accurate intra-oral scanner to capture high resolution 3-D digital images of the teeth and crown-preparation site, which are then processed through a CAD/CAM software program to design the dental restoration. The design is then transferred to the Galaxy BioMill to mill the crown using the latest in aesthetically pleasing biological compatible and long-lasting tooth-colored materials.

The Galaxy BioMill is the next key step in the fulfillment of our total technology solution. We will now be able to offer a complete portfolio of unique and standard-of-care changing hard and soft tissue dental lasers, 2-D and 3-D digital radiography, and the best-in-class CAD/CAM systems. Now, with the addition of the Galaxy BioMill, we can finally provide a true one-stop shop for dentists for all major high-tech dental capital equipment investments. With this innovative strategy will allow dental practices to obtain training, service, and support of multiple high-tech units from one source instead of multiple sources.

This concludes our prepared remarks. Each time you are called upon during the Q&A section of the call, we ask you to limit yourself to one question and one follow-up question. If you have additional questions, please go back in queue and allow for a larger number of people to ask questions. Thank you.

(Operator Instructions) Suraj Kalia, Northland Securities.

(multiple speakers) So, Federico and Alex, I guess of the main questions is, what was the contribution of the core lasers in the quarter? And given that imaging was approximately, per my math, about $1 million sales, how many reps were dedicated to imaging versus the core lasers that caused a sudden step-change in the quarter?

Alex will answer.

Hi, Suraj. That's an excellent question. The core sales force is actually not -- none of them are devoted purely to imaging. We just have this pilot sales force which we call the Imaging Specialists, which are devoted completely to imaging. So, we've got a 45-person sales organization in North America that are devoted towards selling the core product line and have been assisting in imaging. And some of their time has been used in imaging, but none of them are wholly devoted to imaging. It's this new pilot force of the sales -- of the Imaging Specialists.

Then the other part of your question is you were getting a dollar breakdown; you said there was a -- you were asking about the dollar contribution --?

Yes, I was just trying to get the contribution of the core lasers in the quarter, just trying to stack up reps versus a core laser contribution, and if there was any disruption in that product.

Sure. So the laser revenue in the three months of ending September 30 was $8.1 million, and imaging was just under $1 million. And it's -- I mean, it's impossible to dissect it entirely because it's a team effort. This is part of our total technology solutions approach, where a lot of times a dentist will be thinking about upgrading their practice and putting some money into capital equipment. And they think of imaging, and then we're in the conversation because we offer imaging, and then we bring them into dental lasers. And likewise, someone is talking to us about a laser, and then we start -- we interest them in imaging devices.

So it goes back and forth, and we can't really give you a -- there doesn't really exist a division of labor entirely like that. But we do have this small imaging-devoted force, which is probably the best answer to your question.

Fair enough. And I'll just ask one question and then get back in queue. Federico, a question for you. Are you looking to sell the entire Company? Or are you looking to selectively sell some of your assets, whether in orthopedics or ENT or what have you?

We're looking to sell selective assets of the Company. Clearly, that is -- it is a fact that goes -- I guess we said that if we would receive an offer for the entire Company, we would have to have the Board evaluate that offer. But we are right now looking to essentially market certain assets of the Company.

Fair enough. I'll get back in queue, Federico.

Joe Munda, Sidoti & Company.

Federico, Alex, and Fred, I'm a little confused. I believe last quarter, there were some issues in Canada. There was some issues with the distributor in Germany. This quarter, it seems to be the ACA and the government shutdown, as well as -- but then you're reorganizing the sales force. So, there's a lot of noise here. I'm just wondering really what caused the slowdown in laser sales? And what -- if you could give us a little bit more color on what you guys are going to do going forward to help alleviate some of those concerns.

Well, first of our all, regarding Canada and Germany, things in both countries, they have improved as recently. So we have not yet obtained, unfortunately, the diode approval for Canada. So that is an issue for Canada.

But regarding Germany, we have our distributor back into full force after his personal issues of losing his wife. And the fact is that NMT, the company that he leads, is the best company in Germany and has the longest tradition in selling dental lasers. So we're very happy to have him back full force, working to penetrate the German market. And he's also has entered into a very interesting joint venture with a much larger company to increase the reach of the dental market in Germany. So that's a very positive event for BIOLASE.

What has occurred in the United States, it is puzzling us. It is a fact. We have seen a slowdown in decision-making from dentists in actually closing sales. There is a lot of fence-sitters -- the highest number that we can think of. But when it comes down to actually putting a signature on a contract, there is a lot of anxiety in them. It is a fact that the dental market is composed by 140,000-and-plus small businesses. In reality, a highly fragmented market. And there is a fact that Obamacare has created a lot of confusion, we believe and we hear, in the mind of dentists. They don't know about insurance reimbursement, they don't know about a potential repeal or not, but they didn't know about the potential repeal of Obamacare -- 40 times in the first nine months of the year, Republicans try to overturn Obama care 40 times.

So, that clearly has created confusion, we hear and we believe, in dentists in closing sales. Because Obamacare also imposes a tax on anything you buy. So, dentists, obviously, they will have to pay more. We are reacting clearly -- and we have reacted to these difficult market conditions and so we have made changes.

Okay. But what are the -- that's the confusing part. What are the changes that you're making? How is that going to affect or impact the decision-making of these dentists? I mean, I'm guessing there is pent-up demand; it's just they're delaying their purchasing, so --

Joe, I think it's fair to read into the fact that we're making these changes that we feel like we could have done better. So we're not representing that all of the issue is external factors. I mean, the fact that we changed our sales leadership -- our sales and marketing leadership, and we've changed the structure of our account managers. And we've changed personnel at the account managers -- more than last quarter, that plus the leadership change.

I mean, we've made significant structural changes to our sales force because we came to the conclusion that we could have been doing better internally. So that has to be part of the answer to your question about what affected the results.

Also, it's important to understand the path of the change -- and Alex already has earlier touched upon this issue. The sales force was selling everything. In essence, went from selling only WaterLase last year, one part only, to selling WaterLase diodes and imaging in CAD/CAM. So that has created a learning curve for the sales force and inefficiencies.

We have now established that we want to create a sales force that is dedicated to all DaVinci imaging products that will also include the Galaxy that we will launch soon at the New York dental show. So, all imaging products -- CAD/CAM, BioMill -- will be handled by a specialized sales force. So the core sales force can still concentrate on the WaterLase and then collaborate with all the DaVinci product line.

Okay. Thank you.

Kathleen McGrath, WallachBeth Capital.

Thanks for taking the questions. A lot of this talk has been about improvement in 4Q in 2014, but how -- what gives you confidence that the fourth quarter is going to see an improvement? Obamacare confusion is likely going to remain at least heading into 2014. So I guess I'm having a hard time understanding what gives you increased confidence that 4Q is going to be better than 3Q?

Well, there is a hard stop in Q4, because of the tax advantages of Rule 179. So, clearly, a dentist has at a certain point take a decision to buy or not buy and take or not take the tax advantage. So we believe that that will occur, and Obamacare or not Obamacare, it has created a lot of confusion. Okay, it's eventually, dentists they have to run on with their business. And, I know that we are not the only one that has been, in the dental business, been suffering from the uncertainty in the dental market from everything that has happened.

Dentists, they listen a lot to their -- because they're small businesses -- they listen a lot to their accountants, for instance. And in an uncertain climate, they react quite emotionally. Now, there is this hard stop behind with tax advantages. So, we are very positive on renewed growth and we are very strong about the fact that Q3 is and represents the low point of all these transitional phase in BIOLASE restructuring itself from a one-product company to a multi-product company.

And Kathy, it's also good to just look historically. In good years and in lean years for BIOLASE, the fourth quarter has consistently been our best quarter by a material amount. And even though we're, for our third-quarter 2013 results, we're down year-over-year versus 2012, that doesn't say anything about changing the normal seasonal pattern of the four quarters of the year that BIOLASE has had year-in and year-out.

So as you can tell from the guidance that Fred gave for our top line for the end of the year, if you do the math and subtract our guidance, we are actually guiding toward the fourth quarter, which is somewhat down from fourth quarter 2012 but still up significantly from third quarter 2013. Because we believe that that seasonal pattern is persisting. And that's got to be part of the answer to the question you asked about why we feel confident that 4Q is going to be a bit of a rebound.

Kate, also it's very important to realize that there is a huge amount of interest from dentists towards the WaterLase and towards lasers in general. So there is no wall there at all. Like I said, we have a record number of fence-sitters, is that there is anxiety in the marketplace. And it is an anxiety that can be justified by important changes that have been happening in the overall healthcare.

Okay. And for the E&P launch, while that's exciting, part of the softness this quarter was attributed to the sales force that is moving through the learning curve. And this adds on another product that is outside of the core dental market. So how should we be thinking about this from a revenue ramp standpoint? And how are you going to keep your sales force focused on driving the core dental market sales, while ultimately the expenses of rolling out the ENT?

Sure. Thanks, Kathleen. Unlike the launch of our imaging product lines, the ENT product lines are not going to be handled by our existing sales force. We have a limited ENT sales force plan, and we have a couple of our dental sales reps that have ENT backgrounds that have helped us just on the one trade show we've gone to so far.

So this is not a time sink for the dental sales team the way that you might think of with the amount of time they spent on imaging. ENT is an interesting opportunity. It's a -- it's one that we haven't been in before. It's the first time we sold to a non-veterinary, non-dental clinician. And it's -- but it's not part of our guidance or our forecast, so it's really up to you as an analyst to decide how much progress you think we can make with the 9000 practicing ENTs in this country.

It's got better price points because it's competing with much higher-priced laser products for ENT, so it's got better margins for us. But we're not in a position now to quantify predictions or guidance for it, other than to say that there's some upside there. And it seems like pretty low-hanging fruit, given that the development cost is all behind us already. It's all been graded and cleared and launched. It's just a question of starting to take baby steps into that market.

It is definitely an upside opportunity for 2014.

All right. Thank you for taking the questions. I'll get back in queue.

Keay Nakae, Ascendiant Capital.

This question is for Fred. Fred, if you can, can you tell us what the new negotiated covenant for EBITDA in Q4 is?

Yes, it's an EBITDA loss of $0.5 million.

Okay, Great. And then for either -- for any of you, really, the cost reductions you're talking about. If I heard Alex correctly, you still have some reduction in cost of goods sold, some reduction in marketing. But if you could be more specific about those cost reductions and any type of savings that you're looking to target?

Well, let me answer to that. I mean, we are looking at every expense line in sales and marketing, and we're directing dollars in a different manner. We have spent considerably in the first six months, with a large increase compared to last year in print advertising. And we don't see that return on investment there as used to be. We also don't see a return on investment as we used to see in participating tradeshows. The attendance of tradeshows has gone down drastically.

The whole marketing of dental equipment is shifting in a different way that we are evaluating and assessing, is really changing from what used to be traditional. And traditional is what we discussed before, that is essentially tradeshows, and we used to participate in 40 of them on a yearly basis. Print advertising and some dentists, they used to respond to all that. Now there is a shift to -- towards more Internet-based and localized clinical meetings.

And so, we are actually moving towards a much larger number of it WCLI's that is the World Clinical Laser Institute that we founded and we own, and have many of these WCLI's meetings that usually they're addressed to -- from 5 to 20 dentists at a time to push the WaterLase technology the way that is more efficient. So, we move away from the large tradeshows. We're going to still participate to some of them, but we're going to try to allocate dollars in a more efficient way with a higher return on investment towards smaller clinical meetings.

Yes. I can appreciate how you're trying to be smarter, more efficient about how you spend your dollars, but are you targeting a actual cost savings amount?

Yes, we do expect to save money, as tradeshows have been very expensive, and in fact, the cost of them is reason while the return on investment has dropped. So we will definitely -- we are looking in all the possible ways to save and reallocate in the appropriate manner marketing money. And we have embarked anyway in a cost saving mode on all aspects of the Company. So not only sales and marketing.

Okay, thanks. I'll get back in queue.

Thank you.

Robert Hoffman, Princeton Opportunity Partners.

Guys, could you talk a little bit about the incentive structure for salespeople in the related and differing products? Are salespeople incented at the same or more to sell WaterLase? Is there any disincentive to marketing WaterLase versus the potential easier sale of some of the imaging systems? Thanks.

Yes. The highest level commissions they are on WaterLase, and we reward clearly our sales force to concentrate more on selling WaterLase. But at the same time in 2013, we decided to take a stab to have the sales force to think in a wider mold of products, and push the diode line as well, that it is almost 1/8 of the cost of a WaterLase. So, clearly, that was a necessary step that we needed to take, because we needed to push the new product, the diode EPIC that we launched at the end of last year.

And once it's launched in the market from our sales force, and we have hundreds of units in the market, and it's appreciated as a diode laser, then we can have our inside sales force that essentially operates on the phone do telemarketing. And so we needed to have first the EPIC be pushed by our salespeople and be appreciated by doctors. And then, once that phase has occurred, we can have obviously different means to market the diodes, the diode line.

Regarding imaging, being a product that is more standard of care, we have lower commissions for our sales reps. But again, we have moved now to a different mode where we're going to have a dedicated sales force that already has started to assemble for all the products that are under the DaVinci imaging division. And so they are going to work together with our core sales force of WaterLase and diodes sales force, but they are going to have to handle specifically the DaVinci product line.

I guess I was under the impression that one of the challenges of the last quarter, the second quarter, was that the percentage commission on both in imaging and on WaterLase was about the same. So if you sold $40,000 worth of each, you got the same commission. And if the imaging sale was easier, that salesmen are human and they'll take the easier route to make the same amount of money. So has that been tweaked at all?

It has never been that way. It has never been the same commission at all. We always favored the higher commission for the WaterLase. What needs to be understood, and I know it's difficult to accept lower results, but BIOLASE has been traditionally a one-product company, the WaterLase. We are now -- we have graduated BIOLASE to be a multi-product serving the entire line of high-tech dental products for dental practices.

We are strongly convinced that this is the right strategy for the long-term. So we are paying a price this year in 2013 because of this transition. But we're going to be rewarded in 2014 and beyond for this implementation of a new strategy, where we don't only sell the WaterLase. It still remains our primary product, our core product; but the fact that we have now a full line of all that a dental practice can need in high-tech is going to help us tremendously in growth and in market penetration also with our core product in technology that is the WaterLase.

Okay, thanks. I'll get back in the queue.

Thank you.

(Operator Instructions). Paul Bornstein, Black Diamond.

I had one main question. I think I've covered previously the sales issues, and I know you're trying to get on top of it, but you still have a lot of headwinds. But on the M&A transactions, you have a lot of technology. Probably the pieces are worth more than what the stock is, if you have execution. And I'm just wondering how quickly -- you know, you've got the vet lasers, you got skin lasers -- are you looking for partners? Or are you looking for someone to take over all the technology? Partners, meaning that can help with the sales process and get it out in the marketplace.

Because you -- it seems like you guys are overwhelmed trying to get all the dental laser products out there, which are numerous -- great technology, but the execution has not been very good, as you indicated. So I'm just wondering, how quickly and what kind of push are you putting on there so some of the valuation come out, even outside the dental arena, since you have a lot of technology out there in the marketplace that hasn't really been executed on?

Well, first of all, let me say in clear letters, we are very optimistic about the future of BIOLASE as a company. We're very optimistic that our strategy in the dental market will work. And we're very optimistic that the WaterLase technology is a technology that will have a great level of penetration in the dental market. So, nothing has changed.

We have definitely so many applications for the WaterLase technology also in medical markets, that we are exploring the possibilities of partnering, of selling. We are exploring essentially all opportunities that can be beneficial to increase shareholder value. I clearly am against unnecessary dilution, so we will also look at ways to raise possibly cash to be dedicated to our core business. So we are open to all opportunities as they will come, and we expect that they will.

Is this -- so this is one of the things that's main on your burner right now, besides generating sales in the dental markets? You're actually trying to get some of this technology out there in the marketplace with a partner or an acquisition candidate? Is this one of the real big pushes you have on now? Within the three to six months?

(multiple speakers) Everything is on push here. It is generating sales, controlling expenses, directing investments where we can get the highest return on investment. And also, looking for partners and increasing shareholder value. We are doing everything that is necessary, and we are very dedicated to all that we're doing. And again, I want to reiterate that even though the performance in 2013 so far has not been a good one -- not at least what we, at the beginning of the year, expected -- we are very optimistic going forward.

Okay. Well, you've been with the Company for years. So, we can value that, but obviously it's got to be on the execution. And maybe you should double your salary and you'll have a lot more incentive. I'm only kidding. So (multiple speakers) --

(laughter) Well, then, my incentive, as you know, is to have a stock that goes up on the side of the shareholders, so.

I know. And I appreciate that. I just wish the salespeople were on the same level of dollar, and then they get huge payouts for sales. Because obviously there's -- you guys are working through that process right now.

Well, we -- all that we're doing, including the launch of the Galaxy BioMill that we have announced today, is directed to increasing revenues and profitability. And we have now created a company that is unique in the sense that there is no other company in North America that can sell all that we can sell. None. There is no company that can sell all the products that we have under the DaVinci imaging, that is imaging CAD/CAM, BioMill and milling machine, and a full line of lasers like we have. So, we are now positioned in a new unique way towards many dental factors to become eventually the provider of all the high-tech needs that they have. So we feel very good about that, and we believe strongly that it's the right strategy to pursue.

Okay, well, I'm looking forward to seeing the results in the next couple of quarters.

We will be there delivering.

Okay. Thank you.

Thank you.

Robert Hoffman, Princeton Opportunity Partners.

I just wanted to dig in a little bit on the M&A. Because, clearly, in the past, you've been -- you've set up what you called OCULASE to try and partner on the eye part of the business, and you've been in discussions with P&G to -- or was it Colgate? I can't remember -- on the toothbrush side. I'm just trying to figure out what is different about this announcement and what you've been going through for the last year or so in trying to find partners for those businesses in particular?

Well, what is different is that now we are -- we feel that we are ready and stronger than ever with all the patents and clearances that we've gotten. And we are actually using investment bank in helping us, while in the past we didn't do it.

It just confuses me that if given the smallness of some of the ancillary businesses versus the largeness of the dental opportunity, doesn't it make more sense for somebody to say, if I'm going to go through all this, I want to get all the upside of this technology? I mean, I don't want just this little piece of the technology?

Well, again, we will see what the results of our search will bring. The fact is that going back to your initial question, we are more ready now than a year ago, with actual products and more clearances than ever. So, we believe that we can generate a much higher interest today in potential partners and/or acquirer of certain technologies. Again our technology, the WaterLase technology, has brought applications in medicine. And not necessarily who is interested in the dental is interested in ophthalmology and/or orthopedics and so on. So they're very specific medical fields, and so we believe that we can generate the interest of companies in that specific -- in those specific fields.

And I'll follow-up on what somebody asked originally. If the investment bankers were to find someone who said, okay, we want to pay $3.50 a share for the entire shooting match, is that something that you would consider?

Well, I frankly would be extremely disappointed to hear $3.50. But obviously whatever comes, the Board has to evaluate it. I mean, we have an obligation to do that. But let's not forget that BIOLASE just in March 2013 was at $6.00. So, I don't expect that at $3.50, to create any interest in the Board of BIOLASE.

But again, if any offer that is reasonable is done to buy the entire Company, but that has nothing to do with today. At any moment in the history of the Company or the future of the Company, it is an obligation of management to bring it to the attention of the Board and have the board evaluate it or not. We do have a poison pill in place. So clearly, it has to be a friendly deal. Otherwise you will not fly.

But Rob, to get at the first part of your question about what is different today compared with previous efforts where we had the subsidiary OCCULASE created for our ophthalmology technology, and we had dealings with P&G on the laser toothbrush. We have some significant progress in ENT and veterinary that we didn't have been. In both cases, we have cleared products that have -- we haven't put marketing resources behind, but that are cleared and on the market for a would-be acquirer who's interested in an ENT opportunity or a veterinary opportunity.

The ophthalmology side representing OCCULASE has some really impressive human data for major ophthalmology markets. So it's not really a little piece of the technology that each of these division represents. We have a fundamental technology in WaterLase, which is an atraumatic way to ablate tissue that is -- has major advantages over conventional cutting techniques, in terms of being more bloodless, and in certain applications or lower pain thresholds and more natural tissues is preserved in the cutting process.

It's not just a little piece of the technology that is each one of these opportunities. These are significant business opportunities. So, we think there's really something there. And the initial talks with potential bankers that we would be engaged on this assignment is encouraging, that there's a lot there to -- for us to talk about.

Just the applications of WaterLase in certain aspects of ENT can generate hundreds of millions of dollars in opportunities for BIOLASE. So, we are talking about having the potential in medical of very valuable opportunities. ENT, we mentioned; orthopedics, is another one. We already have clearance to carve cartilage. We're expecting the future to get also approval to cut bone. So there are several aspects of what we have been doing in the past three years that are starting to really bring value to everything that is over and above what the dental business constitutes for BIOLASE.

Again, we believe that the opportunity for WaterLase technology, and also our new approach of becoming a total technology solution provider in dentistry, it is enormous. So, nothing has changed. Yes, we have issues in 2013 in the shifting of strategy, and repositioning the Company, we had some inefficiencies. We also were operating in a very difficult environment. The fact is that there's been a huge reform in healthcare, and that has created a lot of confusion. We're not the only company suffering from it.

So again, I would like to remind the fact that the dental field is composed of 140,000 small business owners. We're not talking about hospitals. We're talking about 140,000 small business owners. So they react slower and more emotionally than in other fields of medicine.

Great. Thank you.

Thank you.

Suraj Kalia, Northland Securities.

So, Federico, a lot of questions have been asked, and hopefully, this question -- I want to be fair about asking this. Federico, I know you guys internally, at least that we remember, were looking at making the WaterLase product, at least an iteration of it, a little more cost-effective, if I remember correctly. I guess where I'm headed with this is, do you think there is price elasticity of demand, that in case you introduce, let's say, a different version of the WaterLase, some the core features intact but at a different price point, do you think it could, in the current environment with the current transition of sales force, help provide any incremental benefits?

Suraj, frankly, we look for that. I mean, there is, to a certain extent, everything is price-sensitive. Obviously, if I can offer a Mercedes instead of $100,000, we take an offer at $75,000, I'm going to increase demand. But that would decrease obviously the gross margin.

So, I would say that price is really not a big issue in selling a WaterLase. We feel that is mostly the level of anxiety of a dentist to say now I'm doing things in a different way, and I have to make that step. So it is definitely about education, and it's definitely about the environment in which he is taking that financial decision.

It is a substantial investment. Like anything else, imaging or anything that is capital equipment and high-tech, it is going to give -- I mean, there is a certain level of anxiety in the dentist in moving towards the direction. But eventually, everything is resolved, because clearly, technology is the new way in dental practices. And if a dentist is not upgrading his dental practice with new technologies, eventually will be cut out of the marketplace. And he would be losing patients to other dentists and dental practices that are investing in technologies.

So, we believe that what has happened in 2013 is juxtaposed in what is a strong and long-term trend in dentistry adopting, in a big way, new technologies, and we can see that accelerating. So, we are, again, very confident about adoption of WaterLase in the dental market, as we are very confident in the new product launches that we have recently established in imaging and CAD/CAM, and very much also in the newly announced Galaxy BioMill System. We are providing the best of the technology, and we believe that that is the right strategy for BIOLASE to become a much bigger company and very profitable.

Fair enough. Thanks for taking my question.

Thank you.

Gerald Golino, Golino Consulting Services.

I'm wondering if Dr. Moll in Auris -- if you still have a working relationship concerning possibly, whether it be partnering with the Company or still have a working relationship with him? And if he's going to be maintained on the Board?

Yes, he's on the Board, and we do have a working relationship with Auris, that is a company that he has founded. And we are very proud to have that working relationship with his company. In fact, talking about Fred Moll, Fred has gotten to know BIOLASE at the beginning of 2013, and he has gotten to know the technology of BIOLASE, the WaterLase technology. And he -- that we all know he is a legend, Fred Moll, in the medical field, and he understands and appreciates good technology. He really understood the value in medicine of the WaterLase technology.

So, when later on, after he has evaluated for months the WaterLase technology -- also in relation to robotic, in particular to ophthalmology, because Auris is involved in that field -- when invited, he accepted to be part of the Board of BIOLASE. So I think that that is a very strong kind of endorsement from a person that really understands medical technology on the value of WaterLase technology, and the incredible opportunities the WaterLase technology creates in medicine as in dentistry.

Okay, I want to thank you very much for that.

Thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Well, thank you all for having participated. I know that 2013 has not been the most rewarding year that we have; in the past three years, we've turned the Company around entirely. We grew sales tremendously from 2010, when the new management took over. Again, let's take the 40,000 feet view. We were running at $4 million on a quarterly basis, and now we're at a much higher level.

So, overall, we took a company that was really struggling, and we made it into a vibrant company, growing very substantially. Yes, we have lost money in the past two years, but we also have lost money by investing in the future of the Company. And we have created a very strong foundation with this investment for the Company to be projected in 2014 and beyond, in a completely different -- at a completely different level, not just being dependent only by one product but by multiple products, that will help, by the way, the penetration in dental practices of the WaterLase technology that is our core technology and our core product.

When we enter into a dental practice, and we talk about whatever needs in high-tech we have, we establish a relationship with the dentist, with a dental practice, so we can further everything that we have. These are much stronger strategy than just to knock at the door of a dental practice and say I have one thing to offer you; I have a WaterLase. So that is what has to be taken in consideration. We have invested in the past year-and-a-half to create a new BIOLASE. And this new BIOLASE we're very confident will make you very proud as shareholders.

Thank you for that. And I'm looking forward to have you on the call next quarter.

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