BIOLASE, Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Mar 2017

[Operator:]

Greetings and welcome to the BIOLASE 2016 Fourth Quarter and Year End Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Rene Caron. Thank you, Mr. Caron. You may begin.

[Rene Caron:]

Thank you, Tim, and good afternoon, everyone, and welcome to the BIOLASE conference call to discuss the results for the Company’s fourth quarter and year ended December 31, 2016. On the call today is BIOLASE President and CEO, Harold Flynn. After Harold completes his opening remarks, we will open the call for your questions. Please be aware that a number of forward-looking statements which are any statements that are not historical facts will be made during this presentation, including forward-looking statements regarding the Company’s strategic initiatives and financial performance. These forward-looking statements are based on BIOLASE’s current expectations and are subject to a variety of risks and uncertainties that could cause the Company’s actual results to differ materially from statements contained in this presentation. Such forward-looking statements only represent the Company’s views as of today. These risks factors are discussed in the Company’s filings with the Securities and Exchange Commission. A replay of this conference call will be available on BIOLASE website shortly after the completion of today’s call. When listening to this call, please refer to the news release issued earlier today announcing the Company’s results for its fourth quarter and year ended December 31, 2016. If you do not have a copy of the news release, it is available for investors in the Investors section on the BIOLASE website at www.biolase.com. The Company’s results for the year-ended December 31, 2016 can also be found in the Company’s annual report on Form 10-K, which the Company plans to file with the Securities and Exchange Commission on Friday, March 10, 2017. With that, I’m pleased to turn the call over to BIOLASE President and CEO, Harold Flynn. Harold?

[Harold Flynn:]

Thanks, Rene, and thank you all for joining us on the call this afternoon. After having the privilege of leading BIOLASE for 20 months now, I’m pleased to begin today by saying I’ve never been more excited about the promise of this Company and our prospects for making all-tissue laser dentistry the standard of care. My optimism is based on the tangible progress we made throughout 2016 and continue to make today in our most important overall goal, transforming BIOLASE into an expansive and disciplined commercial enterprise. Although our revenue growth was lumpy from quarter-to-quarter during the year, we achieved 7% year-over-year growth globally, highlighted by double-digit growth across our core laser franchises in our most important market, the United States. We expanded our margins and significantly cut our operating cash burn rate, and we continue to build out a new leadership team that will take us through our next phase of development. We continue to strengthen that team with the recent hiring of our new Chief Financial Officer, Mark Nelson, who will join us on March 27th. The best evidence of how far we’ve come is our success in creating and bring to market unique, new and potentially game-changing product. Product development in complex medical devices tests your entire enterprise. It involves creating, designing, manufacturing, testing and training, all to the requirements of federal and international regulators. Today, we’re up and running with two new products. Both of them portfolio expanding laser systems that promise to significantly increase the global penetration of dental lasers, the Waterlase Express all-tissue laser; and the Epic Pro diode soft tissue laser. The Waterlase Express is our smallest, easiest to use, most technologically advanced, customer-supportive and affordable all-tissue laser systems ever. It was designed with the elegantly simple user controls and learning tools, so that every dentist whether completely new to lasers or an experienced pro can easily learn its capabilities and start using it right away. As I said, when we launched the product, the user interface of the Waterlase Express is to other legacy laser systems what the Apple iPhone was to flip phone. Waterlase Express will enable us to climb the hill toward our tipping point. For roughly the same price as an intraoral scanner, which is a dental imaging device that arguably is reaching its stepping point now, a clinician can invest in Waterlase technology that has a much more positive effect for patient health and comfort and offers significantly higher financial return on investment. Waterlase Express also provides a good example of a more disciplined BIOLASE. It took us longer than we had hoped and frankly that hurt our financial results and cash flow for the fourth quarter. But unlike some of the previous BIOLASE product launches, we are determined not to make the mistake of launching the Express prematurely. It’s way too important to product launch to do that. We kept testing and fine-tuning and now we are all very excited about the product we ultimately introduced, and the initial feedback and the confirmation that product hits the mark. As I said, we paid a price in the shorter term and that the pipeline development weakened for our legacy Waterlase iPlus systems as we geared up for a possible late 2016 launch, including bringing in our sales force and training them on how to use and sell this game-changing new product. Partially as a result, our revenue for the quarter declined 5% overall, including 3% domestically and 9% internationally. The international decline was mostly a matter of a difficult comparison to a strong fourth quarter in 2015 in the few select jurisdictions, most notably China. Our Epic Product line received China regulatory approval in the fourth quarter of 2015 and resulted in larger initial stocking orders. Sales in two Middle Eastern countries were also down due to rebalancing of inventories. While I previously referenced the inherent seasonality in the dental market with the fourth quarter typically markedly stronger, we believe the fourth quarter was an unusual trend, given both our internal drivers discussed previously and the external drivers such as the softer Section 179 sales bump, noted by other dental equipment sellers where the urgency was reduced in 2016, given that there was more a certainty about the availability of the accelerated depreciation in 2017. A highlight of the year and the fourth quarter were signs of a healthy and growing diode laser franchise. Worldwide Epic revenue increased 8% for the year with the strong 21% increase in the U.S. for the fourth quarter. And now, we’ve added the Epic Pro, our premium diode laser solution which we launched in late January of this year, after receiving FDA clearance to market the product. There is nothing else like it on the market. It offers advancements and power, cutting speed, control and precision, as well as improvements in consistency and predictability, and allows us to access market segments we’ve not penetrated before such as the oral and maxillofacial surgeons. It’s note worthy that the Epic Pro is the first commercially available laser system, created in collaboration with IPG Medical Corporation. We’re working on several projects with IPG that we expect to yield additional, unique and innovative products in the future, and we remain very excited about the potential of this relationship. As I’ve said before, our overall goal of BIOLASE is to establish laser dentistry as the standard of care and substantially grow the laser dentistry market, wining over both dentists and patients. To accomplish this, I’ll reiterate our three imperatives to achieve long-term success. First, we need to break the status quo and demonstrate capability and value over traditional methods, and influence dentists around the world to perform procedures utilizing lasers. We believe laser dentistry provides better patient reported outcomes and can make every dentist a better dentist. Second, we need to educate dental professionals to high competence and give them confidence that they can achieve great results with lasers that are simple to use, and are versatile systems for all aspects of modern dentistry, then support them with clinical and business development activities that expand utilization of our consumables and services. And third, we need to create patient pool by getting patients and care decision makers, including spouses, partners and parents around the world to understand the compelling benefits of BIOLASE laser dentistry. We need to educate them, so they’ll demand laser treatments and seek out dentists who use our laser systems regardless of reimbursement consideration. We believe laser dentistry can make every patient happier and healthy patient. Before I discuss our financial details, I’d like to say how pleased we all are to welcome our new CFO, Mark Nelson, set to join us this month. Mark has been a Chief Financial Officer and a Chief Operating Officer. He has worked effectively in various stages of corporate development from startup to turnaround and in cash constraint situations. We are very excited to have an executive of his caliber to be joining our team. Mark is just one of the key leadership additions we have made since late September of last year. We also added a new Chief Dental Officer, Dr. Sam Low and a new Vice President of Europe, Middle East and Africa, Holger Arens. Our ability to attract this kind of talent is further evidenced with BIOLASE making progress and improving its hiring brand. I’ll now move on to review of our financial results for 2016 full year and fourth quarter, focusing on revenue, gross margins, operating expenses, profitability and liquidity. During my review, unless I indicate otherwise, all the comparisons I make will be with the comparable periods of 2015. Also, additional details about our financial results can be found in the financial tables included in the news release we disseminated earlier this afternoon. Our worldwide net revenue in 2016 increased year-over-year by 7% to $51.8 million, as compared to $48.5 million. The growth was driven by increases in domestic laser systems sales, imaging system sales, services, consumables and other revenue. As I mentioned earlier in my remarks, the fourth quarter of 2016 was impacted by difficult year-over-year comparison and the challenges of a new product launch activities. Net revenue for the fourth quarter of 2016 was $13.8 million compared to net revenue of $14.5 million. The 5% decline resulted from decreases of worldwide Waterlase sales, international Epic sales and services revenue, partially offset by increased domestic Epic sales, domestic imaging system sales, consumables and other revenue. License fees and royalty revenue remained flat over the prior period. Gross margin for 2016 was 39%, up from 33% for 2015, a strong year-over-year increase of 630 basis points. The improvements reflect an increase in net revenue and a larger concentration of domestic laser sales, which typically have higher product margins than our international sales due to higher pricing. Gross margins for the fourth quarter of 2016 and 2015 were consistent at 39%. Total operating expenses for 2016 were $35.3 million, down $595,000 from $35.9 million for the prior year. The decrease was primarily driven by a $1.7 million reduction in sales and marketing expenses and a $731,000 legal settlement realized in the first quarter of 2015, resulting in a credit to operating expenses associated with the recovery of prior legal expenses. Total operating expenses in the fourth quarter of 2016 were $9.5 million, up from $7.9 million. The $1.6 million increase was primarily driven by a $1.7 million reduction in legal fees pertaining to the positive settlement of the 2014 shareholder litigation matter, recognized during the fourth quarter of 2015. Net loss for 2016 was $15.4 million or $0.25 loss per share, down from a net loss of $20.3 million or $0.35 loss per share. Net loss attributable to common shareholders for 2016 was $17.2 million or $0.29 loss per share compared to $20.3 million, or $0.35 loss per share. The decrease in net loss was attributable to overall business improvements including the increase in net revenue, a reduction in the cost of revenue and decreases in operating expenses. Net loss and net loss per share attributable to common shareholders for the fourth quarter of 2016 was $4.4 million or $0.07 loss per share compared to a net loss of $2.5 million or $0.04 per share. The increase in net loss for the fourth quarter is attributed to the decline in net revenue and the increase in total operating expense. The non-GAAP net loss for 2016 totaled $11.2 million or a loss of $0.19 per share compared to a non-GAAP net loss of $15.9 million or a loss of $0.27 per share. The non-GAAP net loss for 2016’s fourth quarter total $3.5 million, or a loss of $0.05 per share compared with a non-GAAP net loss of $1.1 million or loss of $0.02 per share. The details of our non-GAAP disclosure and the reconciliation of the GAAP net loss and the non-GAAP net loss can be found in the financial tables included in our financial results news release disseminated earlier. As of December 31, 2016, we had approximately $16 million in working capital. Cash and restricted cash equivalents at the end of 2016 were $9.2 million compared to $11.9 million a year earlier and net accounts receivable totaled $9.8 million compared to $8.9 million. As we’ve said for the last several quarters, cash preservation continues to be a top priority for us, and the cash burn rate for 2016 reflects the positive impact of our cash management efforts. Even though we invested in the development of Waterlase Express and Epic Pro during the year, cash used in 2016 declined year-over-year 36% to $12.8 million. For the fourth quarter, cash used was $3.7 million, which included $1.1 million of investments in new product inventory ahead of our products launches. Excluding that investment and despite lower revenues, our cash burn still improved by 24% over the fourth quarter of 2015. Before I turn the call over for questions, I would like to summarize four key priorities from our strategic plan. First, we will continue to build out and professionally develop our commercial organizations and channels around the world. Second, we will continue to maintain a vibrant and innovative product development roadmap, developing products internally as well as collaborating with accomplished partners like IPG Medical. Third, we will continue to establish the efficacy and value of our laser products through clinical study and data collections, such as the landmark study we’re pursuing with the McGuire Institute, which we will utilize the Waterlase Express for. And finally, we need to continue to build the high-performance company culture that will enable execution of our plans and help us attract the best talent to BIOLASE for all functions globally. There is still hard work ahead. And as I’ve discussed, there will be occasional turbulence in quarterly revenue growth trends while we continue our plan. But today, thanks to the success of the 2016 and the launch of our fifth generation Waterlase Express, all-tissue lasers are finally ready for the majority of clinicians. We now laser systems for every clinic and every dentist around the world. These are products that can enable laser dentistry to become the standard of care and empower our customers to be better and more comprehensive dentists with minimally invasive dental procedures and can help make their patients healthier and happier. With that, I’d like to turn the call over to the operator for questions. Tim?

[Operator:]

[Operator Instructions] Our first question comes from the line of Brooks O’Neil of Lake Street Capital Markets. Please proceed with your question.

[Brooks O’Neil:]

I have couple of questions. First, I was wondering if you could give us any color at all on the initial response from the marketplace for Waterlase or Epic Pro. I know it’s pretty new, but what do you see and what are you hearing out there?

[Harold Flynn:]

Well, thanks, Brooks. Well, it is still early days, as you note, and you have the opportunity to see the excitement at the booths and the engagement of some of the customers, the feedback has been pretty universally positive on the concept, on the user interface. And for customers that were even coming in and looking at soft tissue laser diode solutions, they quickly migrated to learn more about all-tissue laser dentistry as we’d expect when we can put them in front of the many animations we have of our procedures to help them not only understand how they are performed, but also how they can be related to the patients. So, universally, we’ve had very positive response up to and including the participants in the McGuire Institute who came to train on the Waterlase Express, who were quite impressed with not only the unit’s operation, but its ease of use, its simplicity and its functionality, and some of those folks are laser users as well. But with respect to the Epic Pro, we certainly get a visceral response to people that cut with it relative to our EPIC X. As you know, it’s a premium product in a position in the market that doesn’t really exist today, and it will allow us to go into oral surgeons and digital dentists and those type of people that do a lot of procedures where cutting decision, cutting speed and efficiency is going to be welcomed. Outside of that, I won’t be sharing any order rates or the likes but we’ve begun shipping the products and so we’re starting to get some initial use out in the field and we’re excited about the possibilities.

[Brooks O’Neil:]

Great, that was very helpful. So, you’ve mentioned the -- let’s call it potential for unusual seasonality this year. And I can certainly understand that in terms of fourth quarter, the new product introductions et cetera. But can you give us any sort of sense just and a general feel for how you envision the sequence [ph] rollout this year in 2017 in terms of the quarter’s seasonality et cetera?

[Harold Flynn:]

Certainly, I can give some general view but I would like to start by clarifying that my comments were meant to indicate how the fourth quarter went, which was atypical for us being relatively flat with quarters two and three, versus seeing the typical growth in fourth quarter, just to be clear on commenting on. So, for us, I expect the dental market still has a seasonality, the most notable impact tends to be the third quarter, which is lowest, especially in the international markets and domestically where we see a lot of migration to different procedures or summer vacations, and vacations for clinics slowdown the dental activity. I would say for us, my expectation is that we’ll still observe some seasonality. But certainly my expectation with new products that are ramping up throughout the year would be to see year-over-year growth starting out modestly and then accelerating over the course of the year. And like any new product, the slope of that ramp is hard to predict, because not only will this create more discussions around Waterlase Express and Epic Pro but similarly across all of our product lines. So, I don’t expect that seasonality overall will change but we would see improvements as we go forward in the year, hopefully that gives you the answer you’re looking for.

[Brooks O’Neil:]

Yes, it’s very, very helpful. So, the last question I had is this is just to help me gain a better feel for the overall market. With Waterlase and Epic Pro, you have two high-quality, very capable machine. Are there any segments of the market that you’re not currently attacking that you think are important that are worth, at least helping us understand the dynamic for?

[Harold Flynn:]

I would answer it by saying there are segments of the market that we have engaged with the products previously that now we’re better enabled with the broader and deeper portfolio. The examples I would use is the periodontist, who is focused on a lot of soft tissue and gum and periodontal disease, as well as the oral surgeons are two cohorts where these two new products will really give us a better portfolio to go and exploit those segments. Similarly, we find that pediatric dentists really, once they engage with Waterlase technology are blown away by it. And parents are just thrilled with that fact that for t he most part their children will never have shots again when they go in to get their fillings done and they’ll have a much less anxious experience. So, we will be focusing our marketing efforts on these segments in a much more meaningful way because now we have more attractive economics for them in the case of the Waterlase Express, and more facilities for them in the case of the Epic Pro. So, I would say we still go -- we go after those segments with our previous portfolio. But I think we’ll be much more effective in meeting their needs at the price points that they need to have to make the economic make sense for them.

[Operator:]

Our next question comes from the line of Ed Woo of Ascendiant Capital. Please proceed with your question.

[Ed Woo:]

I wanted to dig in little bit more in terms of you mentioned that there was a little bit of sales disruption because of the I guess slight delay in launch of the Waterlase Express and the Epic Pro. Have those disruptions pretty much been cleared out now that’s kind of release [ph] or is there kind of a little bit of a lag in terms of that?

[Harold Flynn:]

Thanks, Ed, good to hear from you. I was really articulating the fact that we had expected and we’re on track to launch the products in the fourth quarter and expected some growth for it. And internally that means, gearing up your commercial organization, brining in the sales force and training them, providing the ability to demonstrate the product, so on and so forth. So, a lot of internal energy was focused upon that. As we continued through our reliability testing, as I mentioned, it’s really important to get this launch right for us from a quality perspective, we noted several software issues that would have been an annoyance and a reliability issue with our customers. And we thought the product was not ready enough to ultimately launch it. So, what happened was we were gearing up and spending up to launch the product with the lot of excitement and then when we held on the product launch, the legacy product pipelines were interrupted. So, we didn’t have enough time in the fourth quarter to recover and rebuild a larger Waterlase iPlus pipeline as an example in the all-tissue space. So, without going too much into detail, that’s not a persistent disruption, that occurred as part of the explanation why we didn’t achieve more growth in the fourth quarter. And now that we’ve launched the product in the middle of the first quarter, should not be an impediment going forward.

[Ed Woo:]

In terms of where you are positioning the Waterlase Express as well as the Epic Pro, do you see these being the main line products for your various lines, or they just add on complement to your full line of products?

[Harold Flynn:]

It’s a great question, Ed, and I’ll take it in two parts. The Waterlase Express, as we had discussed during the product launch and the Facebook Live session we did from the Chicago Midwinter Dental show is one quarter the size, one-third the weight and one-half the price, the U.S. list price of the Waterlase iPlus. And the positioning is such that it does the majority of what the iPlus does. What the iPlus does more or better or faster is actually the class 1 and class 2 cavities, cutting dents [ph] teeth. So, the Express does that but it doesn’t do that as fast. So, you have a more powerful instrument. But what you’re trading off for the very attractive economics is a highly supportive machine where the world-class user interface and on-board teaching tools and the ability to be very effective as novel [ph] with some initial training. So, we don’t necessarily position one or the other as the lead product. And what we’re finding even in early days is it’s starting conversations and opening doors. And the best skill a sales person can have is to listen to understand what the customer wants. And if the customer says, yes, I want to do a lot of restorative work and do fillings without shots, they may upgrade, if you will, or upsell to the more expensive iPlus. But the Waterlase Express plays an important part of bringing those people into the commercial funnel. On the Epic Pro side, that is a part of the market that does not really exist today in the premium space. So, we expect because of the price points and now we have a full peer of lasers from U.S. prices of 3,000 for the iLase to 7,000 to 8,000, depending upon the configuration for the EPIC X and now 12,000 for the Epic Pro that it’s not going to be the lead product, but it’s going to be a specialty product for those people that are advancing their use of diode soft tissue lasers. Hopefully that answers your question.

[Ed Woo:]

Yes, thank you. It’s very thorough, I really appreciate that. And then my last question is in terms of you guys obviously made a lot of investment, I know that’s a big priority for you this year. In terms of your R&D level for this year, do you think it’s going to be pretty comparable and do you think you will see advocates of introducing one or two big products a year.

[Harold Flynn:]

I think we certainly say that part of our strategy involves continuing to innovate. And I think we’ve demonstrated far superior innovation to the rest of the marketplace with two very impactful and in some cases, groundbreaking products. We will continue to invest, the nature of that investment in R&D may change somewhat as we focus more on clinical studies and few other items versus, some of the hardware developments that were required to miniaturize the Waterlase iPlus technology. But I would say materially from an R&D perspective, it’s still important to invest and we’re in a phase where we’re really going to be looking at clinical studies, which comes across in that P&L line. So, I wouldn’t expect material differences overall.

[Operator:]

Our next question comes from the line of Paul Bornstein of Black Diamond. Please proceed with your question.

[Paul Bornstein:]

Glad to see the Company is finally making some progress here. And it looks like you got the base well set up. I was just wondering if you could give a little more color on the sales process because I think when you joined, Harold, you were doing about $60 million in sales and obviously kind of looking at quality sales, but I’m trying to understand how you would really ramp up the sales because you got two new products? And I’m just wondering if you are going after new dentists or going after the existing dentists that you’ve already seen to get them to buy products and replaceables, so you can really ramp it up. And as you moved, since you joined, I’m wondering what the market is missing because the stock is significantly underperforming the market in the last year and a half and it seems like you are making some progress. And I’m not sure what the market is missing unless they are just looking for a huge jump in sales which might be coming in six to nine months. But that’s why I’m kind of focused on that issue?

[Harold Flynn:]

Thanks, Paul, and good to hear from you. Just to start with a little clarification, I’ve been here about 20 months. 2015 total net sales was $48.5 million, the year prior was $47.6 million and then 2016 is $51.8 million. So, I think in the history, if that’s all that I can comment upon with respect to the trend…

[Paul Bornstein:]

I’ve been in the stock too long because it probably was a year before, then it -- I know there was a $60 million revenue figure. [Multiple Speakers]

[Harold Flynn:]

I’ll accountability for a lot of things but not that one. So, really to get to your question, the sales process with respect to actually our focal point is to expand penetration. And I think we’ve had the opportunity to discuss before, and I have said in some of the investor presentations all-tissue lasers especially as a sub-segment, have really been in that early adaptor sort of part of the market in technology adoption, which tends to be in that 12% to 15%. And then, if you use the Crossing the Chasm model by Geoffrey Moore, you have to really come out with the pragmatic product or the everyday technology user. And that’s exactly what we’re focused on with Waterlase Express. So clearly, our focus is to expand the penetration. Just as you noted, even though we’ve had some success in upgrading these early adopters from one generation of technology to the next, when we do that, we don’t see the type of growth that we expect to see in consumable usage because it’s the same clinic, the same doctor doing roughly the same cases, just doing them perhaps more effectively or little faster. The real leveraging point for us will come when we can start posting penetration increases of new users. So, that’s clearly our focus and that’s the focus of both new products that are put out on the market recently. The Express with its user interface is so much less of a science experiment than the last generation of lasers where customers became very comfortable and would tolerate, I need to adjust power, I need to adjust frequency, I need to adjust air and water and I have my recipe for my various procedures. With the Waterlase Express, imagine a tablet, where you have three pushes of the tablet and preset settings are there and you can reference an animation or a video right before you start the procedure to remind yourself. There is no more thinking about the relationship of all of those variables relative to each other. If I take a second on Epic Pro, similarly cohorts like the oral surgeon and the digital dentist who may not have engaged as much in top tissue diode lasers are now fair game, because we can cut at the speed that they expect with the quality and the feedback we expect, because they have technologies that no other laser has. With that I’d have to leave it to you and many of the other people on the call as to the market’s reactions to our progress overall, because I wasn’t there to speculate on that personally.

[Paul Bornstein:]

Okay, that’s fair. But, I think if you execute on what you just talked about, the market will react and hopefully you’re getting closer to being cash flow positive on a GAAP basis, which will be another step in the right direction and shows that you’ve done something fantastic, because this company has never been there.

[Harold Flynn:]

Thank you for that and those are definitely milepost along our plan.

[Operator:]

Our next question comes from the line of Wyatt Carr of Western International Securities Please proceed with your question.

[Wyatt Carr:]

Thank you very much for taking my questions. Congratulations. I wanted to ask you about on Waterlase, the Expressed versus iPlus, is there any possibilities that there could be cannibalization between the two Waterlase products?

[Harold Flynn:]

Yes, and we actually expect some, when all we had was an iPlus to market, we would provide those solutions to clinicians that we’re seeking, but many of them probably we were looking for something more in the line of the Waterlase Express, depending upon their practice and their focus. So, the good news is that doesn’t take a lot of Expresses to overcome the cannibalization that we would expect on the iPlus. The primary note is that the overall placements and overall penetration should increase. And we see two dynamics happening with the Express and we’ve already experienced that in these short few weeks that we’ve been in discussions. People get very excited and come and learn about Waterlase technology generally. And when you are detailing the Express and you’re on the tablet showing these 4K images, these realistic and lifelike clinical animations, it gets people excited, number one, and allows all of my sales reps to give a consistent pitch and tell people what the machine does, number two. But number three, you can ask the clinician, is there anything there that you don’t feel comfortable doing every day. And you get a resounding no. You get a -- that looks easy. Then, you go to the question of how much restorative work do you do and is the Express going to be right for you or the iPlus? And we’re actually seeing some people migrate to the iPlus and spend more to have the greater versatility on some of those procedures, depending upon their practice. So, I really don’t look at one product cannibalizing another, but rather, the entire base of Waterlase improving much like you would expect if you were a car manufacturer and you only have the high-end luxury model, you’re interested in selling the most cars that you can. And the more successful cars tend to be the ones that are in the mid-range of price that are more affordable. And I am really excited by the fact that now we’re in the neighborhood of the same pricing as an intraoral scanners, which really does not provide as many patient or clinician benefits, frankly, as lasers do. And we are going to be really enabled to tell a much better story and a much cleaner story.

[Wyatt Carr:]

Great. Thank you very much for the detail on that. The new product development that you talked about and you’ve talked about clinical studies, primarily, but you came out with two new products, the Express and the Epic. What areas do you see that you might be delving into for new product?

[Harold Flynn:]

Yes, that one gets sensitive from a competitive perspective. But I believe that in several senses and as mentioned previously, not only do we have other accessories and indications that we can provide with Waterlase technology or soft tissue diode technology, there is the opportunity to provide additional value, and I think the future of dentistry also involves lasers and the use of regenerative medicine. And we see that there’s regenerative benefits of lasers generally. But I think working on the next generation of products and working with companies like IPG, who provides fiber lasers, that will make other wavelength available to us in a very economic manner, is really going to open doors and continue to make lasers a part of the normal armamentarium of dentists.

[Wyatt Carr:]

Okay. I understand the inventory build, and the question I have is with the revenues that were down in the fourth quarter, your accounts receivable went up quite a bit. And also your accounts payable went up quite a bit. Can you give a little color on those?

[Harold Flynn:]

Yes. I think typically for us, because we are capital transactions and basically two types of jurisdictions. One is the United States where the timing of the sale can really affect the receivables and when we actually get funded. The primary manner that a customer acquires a Waterlase system is through leasing. So, there’s a period of time after the sale for the leasing to fund and sometimes, that’s before the end of a quarter, depending upon the when we sold the instrument, and the proportion of how late in the quarter we sold. So, as we discussed, we had a plan A, if you will, of putting Express on the market and doing a number of other things, but we had to reflex back to our Waterlase iPlus, so we sold later in the quarter than we had in the previous quarters and the year prior. And so that moved when we actually do the cash receipts. In addition, outside of China, we are relatively flat in international markets and those tend to be longer payables. So, I would say, it’s a function of the mix and when in the quarter, we actually make the majority of our sales.

[Wyatt Carr:]

Okay, great. And I guess the question is with cash flow, do you have the cash to get -- the cash runway that you’ve talked about onetime to get to cash flow breakeven?

[Harold Flynn:]

Yes. We continue to look at liquidity as an important aspect, and we look at a number of different manners to try to make sure we have the resources we need to get there. Obviously, a 4 to 5-month delay of a major product line puts pressure on that cash for the reasons that we spoke about, and it moves our ramp out in time. I’m still very confident about our ramp. And now, we’re looking at things like asset-backed lines of credit and other aspects, but I can’t rule anything out with respect to that because we’re pretty excited about the possibilities and we need to make sure we provide the working capital to achieve the levels of growth with think we can. So, we’re doing everything we can, we’re focused on it, and I think will be in a better position as you start to see our ramp, to answer that question more fully.

[Wyatt Carr:]

Okay, great. And just a housekeeping, I noticed the shares are 67,000,566, both accounts fully dilutive. Is that a correct number to use?

[Harold Flynn:]

That is correct.

[Operator:]

[Operator Instructions] Our next question comes from the line of Chip Saye of AWH Capital. Please proceed with your question.

[Chip Saye:]

First question is just for modeling purposes. Can you let me know about the ASP at the Waterlase Express versus the iPlus?

[Harold Flynn:]

I’m sorry, we don’t share that level of detail and we’re still early days on the actual ASP. I will say, in the United States, the list price for the iPlus is about 84,500 for the iPlus and 40,000 for the Express.

[Chip Saye:]

Got it. That’s very helpful. Secondly, gross margin, going forward, sounds like with Epic Pro being a higher price and the Waterlase Express maybe being, you could leverage efficiencies there. What about the gross margin for the year? Can you comment on that?

[Harold Flynn:]

Yes. We don’t provide a specific guidance. But in previous calls and the discussions I’ve had with other investors, we are able with increasing revenues to leverage our fixed expense base and one of our largest fixed expense base is our service organization. So, we see some natural uplift obviously from the usual characters like price. We continue to work on reducing the cost. And with higher volumes of Waterlase, generally, we’ll get some leverage in our fixed overheads and manufacturing. But, we’ll also get some benefit from higher revenues on that fixed service base. So, we expect margins to expand is as far as I would go there. But I won’t give you, at this point, an end target for the year. But we should continue to make progress on expanding our gross margin as we accelerate growth, as we move forward to the next several quarters.

[Chip Saye:]

Okay. Also, you mentioned something and that may have affect in Q4 in addition to the year-over-year comparison in China. You mentioned something about accelerated depreciation. Can you go further on that?

[Harold Flynn:]

Sure. One of the let’s call it catalysts of sales in the fourth quarter and one of the reasons the fourth quarter tends to be higher for -- at the very least dental manufacturers and others that sell to small businesses, is a treatment that’s allowed for capital purchases by these business owners. In years past, the ability to use what’s call the Section 179 accelerated depreciation, and I’ll preface this by saying I’m not an accountant, so please check with those people that are CPAs. But basically, what it allows you to do is write off the expense of your purchase in the year that you purchase it up to a particular limit. And year-over-year, the Congress would typically approve that in December, and it would only be approved for the balance of that year. So, it created the sense of urgency and anticipation. While last year, the Section 179 was approved not only for last year, but going forward into 2017 as well. So, customers didn’t have that same sense of urgency that this tax break for buying a piece of equipment might go away because they know it didn’t have to or it’s not going to go away in 2017 and they can utilize that in their taxes for the coming year. Manufacturers have typically used that as a call to action to make the deal happen by December 31st and it had less of a punch than in last year’s.

[Chip Saye:]

Got it. Okay. And next on the seasonality question. I know Q1 is usually a lower quarter than Q4 because of some of those reasons you just talked. But, will that be the case, again, with the 2 product launches? Is that kind of what you’re saying today in terms of guiding to lumpiness? Is that it?

[Harold Flynn:]

Yes. I’m doing, -- I am commenting on lumpiness, but not guiding. And so, we are putting two new products into the market. So, we don’t provide any specific guidance, but I -- the seasonality of the dental market still exists. So what we have is to try to develop growth on top of that sign wave, if you will. So, we’re really not forecasting sequentially or year-over-year at this point, just knowing that or believing that our prospects for growth are very positive as we go forward. And we’re just kind of getting started here mid-Q1, so that’s as much as I’ll be able to say.

[Chip Saye:]

Okay. I appreciate that. And lastly, you’ve talked a little bit about the price of the new Epic Pro and you mentioned some of the advantages and maybe the new intended target market. What about the power; you mentioned one of the advantages was the power and precision. What is the power?

[Harold Flynn:]

Sure. Let me go through our portfolio. The iLase is 3 watts of continuous power at about $3,000. The EPIC X, which does pain therapy and whitening in addition to the soft tissue surgery is 10 watts of continuous power at about that $7,000 to $8,000 mark depending upon the configuration of the system. And then, the Epic Pro is 25 watts of continuous power, but at least a 125 watts of peak power. So, the technology of super thermal pulse and automatic power control allow you to get better consistency and better smoothness of the cut because there is essential like a cruise control that keeps the tip at a particular temperature and employs the power as necessary. Soft tissue cutting is better when you can actually pulse the laser because you add heat and then provide a small opportunity for the tissue to relax and then add heat, again, instead of continuous wave. We have that capability on the EPIC X as well; it’s just not as advanced.

[Operator:]

[Operator Instructions] This concludes the question-and-answer period at this time. I would now like to turn the conference back over to Mr. Harold Flynn, CEO for closing remarks.

[Harold Flynn:]

Thank you, Tim. For a conclusion, despite the slight decline in the fourth quarter that we discussed, we made material progress in 2016, executing the strategic plan we put in place soon after my arrival. We improved our financial performance and our cash burn, even in light of heavy investing in these developments and recently the launch of innovative new products. And we continue to build out our team with the talent and experience necessary to execute the next phase of BIOLASE’s transformation and ultimately drive laser dentistry through its tipping point to the standard of care. The excitement continues to grow amongst the team fueled by the optimism of improving commercial execution, coupled with versatile and high-utility new products that are easy to learn, easy to use, affordable and designed for use by most clinicians. Thank you all for joining us on the call this afternoon and for your continued support. And we look forward to speaking with you, again, when we announce our results and discuss our progress for the first quarter of 2017. Have a great day, everyone.

[Operator:]

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.