BIOLASE, Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the BIOLASE 2014 Third Quarter Results Conference Call. During today's presentation, all parties will be on a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) For the benefit of those who maybe listening to the replay this call is held and recorded on November 4, 2014. I would now like to turn the conference over to Rene Caron of Allen & Caron. Rene, please go ahead.

[Rene Caron:]

Thank you very much and good afternoon, everyone and welcome to BIOLASE's 2014 third quarter results conference call. On the call today is BIOLASE's President and CEO, Jeff Nugent; CFO, Fred Furry; and Senior Vice President and Chief Medical Officer Dr. Alex Arrow. Jeff will begin the call with a discussion on the status of the strategic initiatives the company began implementing early in the third quarter. Alex will then discuss clinical and regulatory initiatives in progress and Fred will run through the company's financial results and comparisons to prior periods. After Fred's discussion, Jeff will make some closing remarks before we open up the call to your questions. Please be aware that a number of forward-looking statements will be made during this presentation, including forward-looking statements regarding our strategic initiatives and financial performance. Forward-looking statements are any statements that are not historical facts and can be identified by words and phrases including, will, may, believe, estimate, project, plan and similar words and phrases. 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 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 statements 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 as of any subsequent date. A replay of the call will be available on the BIOLASE Web site shortly after this call's completion. For the benefit of those who maybe listening to the replay, this call was held and recorded on November 4, 2014. When listening to this call please refer to the press release issued earlier today announcing the company's results for the third quarter and nine months ended September 30, 2014. If you do not have a copy of this press release, it is available on the BIOLASE Web site at www.biolase.com. The company's results for the third quarter and nine months ended September 30, 2014 can be found in the company's September 30, 2014 Form 10-Q, which the company plans to file with the Securities and Exchange Commission on November 7, 2014. With that I'm very pleased to turn the call over to Jeff Nugent. Jeff, please go ahead.

[Jeffrey Nugent:]

Thanks Rene and afternoon everyone. I want to thank you for joining us and welcome all of you to the BIOLASE 2014 third quarter results conference call. I'm pleased to begin today by saying that the transformation to a new more focused, more customer-centric BIOLASE is off to a good start. This is going to take time, but we have a made commitment to change this company and to deliver on the promise of laser dentistry. I'm absolutely confident we are on the right track to doing that. The third quarter was the first full quarter under our new management team and reshaped organization, which included several additions and changes. We added a strong globalization team led by Clark Barousse, our Senior Vice President for Worldwide Sales and Account Management. Clark has extensive experience in global executive level sales and is responsible for our customer acquisition and retention. Joining Clark on the team is Orlando Rodrigues, our new Vice President and Chief Marketing Officer. Orlando has a very solid background in global marketing and healthcare. He has created and implemented successful marketing and brand awareness programs for a variety of medical products including lasers. This is a very strong team. Fred Furry continues as our CFO and will provide the financial details of the quarter and the first nine months of 2014 in a few minutes. Dr. Alex Arrow is now our Senior Vice President and Chief Medical Officer, which is an important role in our reshaped organization. At this point, in the transformation of BIOLASE, we are still in early stages. This is a transition. Although, we only began making these strategic changes early in the third quarter, I'm encouraged with the progress we have made to to-date. I'm also extremely pleased with the earlier announcement today disclosing that a number of institutional and individual investors have agreed to purchase $35 million of unregistered shares of BIOLASE common stock and warrants to purchase on registered shares of BIOLASE common stock in a private placement transaction. We believe this is a strong statement of the confidence that our investors see in the significant opportunities within BIOLASE. This increased capitalization should be all that is necessary to achieve our growth and profit objectives. During this year's third quarter, we recaptured some of the ground we gave up to our competition in our poor showing in the second quarter. During the quarter, we increased our sales by approximately 3% as compared to third quarter of 2013 and approximately 25% from the second quarter of this year while reducing our loss on a sequential basis. These are positive achievements but slowing and reserving the effects from the revenue declines in the first half of this year has been difficult. Fred will explain more about these results in detail shortly. But our story today is not just financial; it is a story of fundamental change of a new direction and knowing how to execute. The process of creating a new BIOLASE is going to take some time. Again, we are already making progress in several of the most important areas. BIOLASE has always had superior technology unquestionably the best in the laser dentistry market and as we are also the world's leading supplier of dental lasers. The problem in the past can be described as a failure of clear focus and execution not about our technology and our products. We are committed to correcting those issues and putting this company on the right track for sustainable growth and profitability. As I discussed on our last call, one of the first things I did after taking over as CEO in late June was to establish in a clear overall strategic direction for BIOLASE. With focus on individual objectives and accountabilities for the senior management group. Our new strategy is based on seven basic initiatives which we began implementing in July. Just this past July and that is increasing customer satisfaction improving quality in everything we do, dynamic product innovation, evaluating other medical specialties for opportunities, increasing our clinical support and claims and redefining our corporate culture and improving operational efficiencies. Increasing customer satisfaction is our primary goal and achieving that goal requires commitments and contributions from everyone in this company to that end we started to measure and precisely manage our customer relations and when reaching out to our customers to solicit their feedback is part of a regular course of work. In my meetings with customers during my discussions at the recent American Dental Association Annual Meeting in San Antonio, I received positive feedback from a number of people about our new responsiveness to customer request as especially encouraging as an indicator that we are on the right track. Improving the quality of our products is of course one of the top as well. We are committed to ensuring that our shipments are defect free. We have already taken important steps to increase the standards and pre-market testing of all of our products. Based on my experience as the Head of Quality for all of Johnson & Johnson. The criteria I established at J&J globally is the perspective we are bringing to BIOLASE and we have already made significant progress based on those standards. Previously, we focused on selling features of our products rather than on the existing clinical evidence and significant benefits they provide. This is a major responsibility of our new Professional Dental Advisory Board being chaired by Dr. Sam Low as President of the American Academy of Periodontology and overseen by our Dr. Arrow. Our decision-making needs, a need to be guided by dental practitioners of the highest caliber and our new Advisory Board has been created to help us through this. With respect to innovation, our goal is to create a continuous flow of new solutions. That means making meaningful improvements for existing products and developing new products that our customers want. As I mentioned earlier we have begun the process of actively soliciting customer input in evaluating market data. We have also moved a core part of our research and development team offsite to hyperfocus on the next generation of laser products. As many of you know, our laser technologies have broad-based applications and significant potential in numerous adjacent markets. At this time, we are evaluating ENT, the ear, nose and throat specialty as an adjacent market opportunity. We have adopted one of our core products to fit these needs of an ENT physician. While this is still very early, I'm encouraged by the opportunity and excited about our ability to innovate in this way. In terms of improving our corporate culture and improving operational efficiencies we placed a new focus on strong cross functional teams. These teams work simultaneously on manufacturing products, selling products and developing new ones. Again, is early in the process but we have already energized our employees and began to see the results particularly in the gross profit area. All of these changes take time and I believe our well-defined strategic plan will make us more operationally efficient, more productive, bringing growth and better financial results. I'm absolutely convinced with this. I will now turn the call over to Alex for some remarks on our clinical initiatives and Fred will follow with a summary of the financial results for the quarter and first nine months of 2014. Then I will return for some closing remarks. Alex?

[Alex Arrow:]

Thank you, Jeff. As part of my new role, Jeff has tasked me with fastering the creation by clinician scientists of independently adjudicated clinical trial results published in non-laser peer review journals. BIOLASE has started the process of reaching this central component of any medical device companies market acceptance strategy. We believe this will help us solve the challenge that WaterLase dentistry is not yet widely recognized by mainstream dentists. The company already has a lot of single center case study style reports published mostly in laser specific journals. While these study have described the clinical benefits of the technology, they just don't carry the persuasive weight that multi-center studies that are either blinded or have independent results adjudication and are published in peer reviewed non-laser journals do. This is a key component of our growth strategy. We believe more dentist would see the need to invest in technology for their practice if the technology invest backing it. So we are working with dentist and dental specialists who have shown interest in participating in a new series of studies examining the diverse benefits of WaterLase for treating peridental and dental conditions. This activity doesn't show up in our Q3 numbers but developing a body of peer reviewed clinical evidence is a change in our company's culture and it begins the process of solving one of our greatest challenges cracking into that big middle of the bell curve of our target market. Our goal is to have dental laser industry takes its place along with well-established medical device field like cardiology, neuroscience, orthopedics and dermatology where evidenced based medicine reigns. This should play to our advantage. In regulatory news, we received a 510k clearance earlier this month for our EPIC 10-watt diode laser for a new non-dental indication to treatment of wounds in general surgery, dermatology, plastic surgery and podiatry. While this is not expected to materially affect revenue in 2014 or 2015, it does represent an additional medical market for an existing product platform of ours. Now, Fred will speak about our third quarter financials. Fred?

[Fred Furry:]

Thanks Alex. Our net revenue of $12.7 million in this year's third quarter represents an increase of $369,000 or 3% over the third quarter of 2013. And a sequential increase of $2.5 million or 24.8% compared to $10.2 million in this year's second quarter. The 3% increase in the third quarter of 2014 compared to the same prior year period resulted from increases in domestic imaging systems and services revenue and a change in accounting estimate holding $708,000 related to the period over which defer training services revenue is recognized. These positives were partially offset by decrease in domestic and international laser systems revenue and a slight decrease in consumables and other revenue. The 24.8% increase in our third quarter net revenue sequentially over the second quarter was driven principally by a significant increase in sales of our core WaterLase systems in North America and internationally. Increased sales of distributed imaging equipment and the recognition of additional deferred training service revenue from the change in accounting estimate in the period over which deferred training service revenue is being recognized. Gross profit for this year's third quarter was 42.4% compared to 31.0% of net revenue for the prior year quarter. For the nine months ended September 30, 2014, gross profit was 38% compared to 36.9% for the same prior year period. The improvements were primarily due to increased efficiencies in manufacturing processes during the third quarter and the impact from the recognition of $708,000 of deferred training services revenue resulting from a change in estimate during this year's third quarter regarding the period over which deferred training services revenue is being recognized. These positives were offset to some extent by additional warranty cost incurred from extending the warranty on our WaterLase systems for one to two years for systems purchased after January 1, 2014, which totaled $120,000 and $247,000 in the current year's third and second quarters respectively. In addition, for comparative purposes we incurred a $1 million charge for inventory obsolescence in the prior year third quarter which negatively impacted gross profit in the prior year comparative period. Our net loss for the 2014 third quarter declined approximately 46% to $3.5 million sequentially when compared to the $6.4 million net loss in the second quarter of 2014. The decline in the third quarter net loss compared to the second quarter net loss was due principally to increased sales of our core WaterLase products and revenues realized from deferred training revenue and significantly reduced general and administrative expenses from reduced legal expenses offset by increased sales and marketing efforts and increased R&D expenses. Our net revenue for the nine months ended September 30, 2014 totaled $34.4 million compared to $41.2 million in the same period in 2013. The year-over-year decline in the first nine months of 2014 resulted from decreases in domestic and international laser systems revenue, a slight decrease in imaging systems revenue and decreased consumables and other net revenue offset by the impact from the recognition of deferred training services revenues resulting from a change in estimate in the period over which deferred training services revenue is being recognized. We believe that our results for the 9 months ended September 30, 2014 were negatively impacted by the significant distractions caused by shareholder litigation and related disruptions in management and the marketplace as well as the lack of sales management. Reserving the downward revenue trend, we experienced in the first half of the year is not an easy process and as Jeff mentioned earlier, we expect our new sales and marketing team members Clark and Orlando to be an integral part of reshaping BIOLASE. With our third quarter 2014 net revenue is approximately 25% sequentially ahead of the second quarter, we believe that we begun the transformation. Total operating expenses in the third quarter and first nine months ended September 30, 2014 were $8.7 million and $27.2 million respectively compared to $7.7 million and $24.2 million in the same prior year period. The primary driver of the increases during the third quarter and first nine months of 2014 were increased legal expenses and professional fees of $1.1 million and $4.3 million respectively incurred by the company at the direction of former Chairman and CEO in connection with the litigation to resolve the dispute over our corporate governance and the composition of our Board during the first half of 2014 as well as new litigation brought by the former Chairman and CEO against the company in July 2014, which has been dismissed. The net loss of $3.5 million or a loss of $0.08 per share for the quarter ended September 30, 2014 compares to a net loss of $4 million or a loss of $0.12 per share for the same prior year period. After removing interest expense of 37,000 income tax provision of 28,000 non-cash depreciation and amortization expenses of $77,000 and non-cash stock based compensation expense of $301,000 we had a third quarter non-GAAP net loss of $3 million or a loss of $0.07 per share compared with a non-GAAP net loss of $3.2 million or a loss of $0.10 per share for the same prior year period. The net loss for the nine months ended September 30, 2014 totaled $14.8 million or a loss of $0.38 per share compared to a loss of $9.2 million or a loss of $0.29 per share for the same prior year period. The non-GAAP net loss was $12.7 million or loss of $0.33 per share for the nine months ended September 30, 2014 compared with the non-GAAP net loss of $7.1 million or loss of $0.22 per share for the same prior year period. As of September 30, 2014, the company had working capital of approximately $7.3 million. Cash and cash equivalents totaled approximately $2.8 million at September 30th, compared to $1.4 million at December 31, 2013. Earlier today, we announced that BIOLASE had agreed to sell an aggregate of 14,162,873 unregistered shares of its common stock at the price of $2.39 per share. The closing price quoted on NASDAQ on November 3rd, 2014 to institutional and individual investors in a private placement. In addition, the investors will receive an aggregate number of warrants to purchase up to 9,205,862 unregistered shares of common stock at an exercise price of $4 per share. Gross proceeds from the sale before the exercise of any warrants will total $35 million. The warrants become exercisable 6 months after the closing of the financing and have a term of 3 years from the date of issuance. The private placement is expected to close on or about November 7, 2014 subject to customary closing conditions. The proceeds will be used for working capital and general corporate purposes. As we announced in July 2014, the company raised gross proceeds of $12 million and a private placement of 6,250,000 unregistered shares of common stock sold at an discounted market price of $1.92 per share with no warrants. In late July of this year, we also paid in full all amounts due under the company's revolving lines of credit with Comerica Bank. I would like to summarize by saying that where there are still a number of challenges to over come, I'm personally very encouraged by the progress we have made since July. Today's investment from several existing stakeholders and new investors and by the opportunities I see ahead of us. While we have only recently begun to turnaround process, we are starting to see the positive impact of strong leadership and sound strategic management. Given time, I believe our new focus on customer satisfaction, product quality, innovation, accountability and efficiency will be reflected and grow within financial stability of BIOLASE. With that, I will turn the call back to Jeff.

[Jeff Nugent:]

Thanks Fred. I'd just like to make a couple of comments regarding our newly constituted and experienced Board of Directors being aligned behind the strategic changes that I have outlined today as the means to increase the size of the markets we serve as well as growing our strong global leadership position. We all believe that there is great value BIOLASE and it's our job to unlock it and get the company growing again. Changes like this required a right strategy, execution excellence and talented, dedicated people. I'm genuinely more excited and confident that this is world-class company and the more I learn – the more convinced I'm of that. Our task is very clear, we need to prove it. With that, I would like to turn this over to questions. Operator, would you like to begin?

[Operator:]

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Joe Munda with Sidoti & Company. Please proceed with your question.

[Joe Munda:]

Good afternoon guys. Can you hear me, okay?

[Jeff Nugent:]

Yes. Perfectly Joe.

[Joe Munda:]

Okay. Perfect. Fred, I was wondering just a – some housekeeping items, you gave us a lot of numbers there. But, I was wondering if you could breakout for us what laser systems sales were in the quarter, consumables, warranty and training that kind of stuff that you guys breakout in the Q? Thank you. And I guess my one follow-up, I'm sorry, in regards to litigation expense, are we expecting further payments going forward? Thank you.

[Jeff Nugent:]

Let me answer the last one first that there is no expectation for any additional litigation expense. We believe that we have put all that behind us.

[Fred Furry:]

All right. Into the breakout of revenues Joe, do you want numbers and percentages or just percentages for now?

[Joe Munda:]

However you want to do it, fine?

[Fred Furry:]

All right. We will start with percentages and if you want to follow up you can ask for a little bit more detail. But, laser systems 57.9%, this is for the three months. So 57.9% for laser systems, imaging systems 11%, consumables and others 12.6%, services 18.2% and then license fees and royalty were 0.3%. And I know one of the follow ups will be U.S. versus international, and 65.8% were U.S. and 34.2% were international.

[Joe Munda:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Suraj Kalia with Northland Securities. Please proceed with your question.

[Suraj Kalia:]

Good afternoon gentlemen.

[Jeff Nugent:]

Good afternoon.

[Suraj Kalia:]

So Jeff or Fred, my apologies, I tried to listen as carefully to the prepared remarks, the $708,000 can you give some color of the change in accounting and why now?

[Fred Furry:]

Suraj, this is Fred. First off and I know this is kind of a nitpicky thing to say, it's not a change in accounting, it's a change in estimate. So very different treatment for those and what occurred is in – with respect to our initiatives one of our primary initiatives is increasing the quality in everything we do. And one of those things is encouraging our customers to have their trainings earlier to get their trainings taken care of earlier. As we were looking through this in detail, it became apparent that we had a two years, 24 months worth of deferred training on the books. And that's only 1% of our doctors were using their training after nine months. The TMCs on our contract at training required within three months from installation so that's about four-month window, which didn't give our doctors a whole lot of time because sometimes training kind of rotates geographically around the country and if you're in a small area just wherever there is not training you may not be able to able to have it within the first three or four months, that would be ideal, but it's not practical per se. So we split the difference and we set up the TMCs to have training within six months of installation and then we reduced our deferred revenue, amortizations in nine months to give a little bit of flexibility there. And so that's the change in estimate that resulted in that $708,000 credit to revenues.

[Suraj Kalia:]

Fair enough. And Fred, what is the total installed base of WaterLase right now worldwide U.S. or OUS whichever way you want to split it?

[Fred Furry:]

So right now we're up to what 26,800 lasers throughout the globally sold today. And we believe about what 10,600 is our – that's about strategically good question, about 10,500 our –

[Alex Arrow:]

That's about – Suraj it's a good question about 10,500, of that 26,000 total lasers are WaterLase units. Of those we think about 6500 are in the U.S. and 4000 are OUS. And of those 6500 in the U.S., probably about 4000 of them are a unique customers because it goes to a lot of customers upgrade after having bought a previous WaterLase or buy a second unit for two [apertures] (ph). So the total installed base of WaterLase in the U.S., we think is about 4000 unique dentists out of the 140,000 dentists in the U.S.

[Suraj Kalia:]

Fair enough. And Jeff, one last question for you, hopefully I phrase this correctly, obviously there was a lot of disruption in Q2 and you entered the company and you've been few months you've – or being at the helm. When we think about Q3, do you get a sense that there were few customers in Q2 that just said look, there were a lot of noise in your front, settle it down, I'll come back to you when things settle down. Was it sort of a recognition that orders were there in the pipeline and they just moved over to Q3 or all that you have made tremendous changes on the quality front, on the organizational front, on the capital front, was it the new customers suddenly and your sales and marketing organization in Q3 suddenly said there was a pull through of new customers in Q3. Thank you for taking my questions.

[Jeff Nugent:]

No. That's an excellent question and I feel very strongly with our real quantitative data that I've been out to field when I talked to a number of dentists, number of current customers et cetera. And it was very clear that the uncertainty in Q2 was much more really moved beyond uncertainty to a very negative perception of the company. And while part of that resulted in delayed sales in Q3, there's been a semi-lasting question about BIOLASE that we are still in the process of repairing. So one could think that if there was a non-recurring item that happened in the previous quarter that was fixed with that pent-up demand would automatically occur in the following quarter. That's not what we're dealing with, this is a much deeper credibility issue that we have to reestablish and we're making progress, but it didn't all bounce back as quickly in Q3 as you might want to think. I hope that answers your question.

[Suraj Kalia:]

Fair enough. Gentlemen, thank you for taking my questions.

[Jeff Nugent:]

Sure.

[Fred Furry:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Kathleen McGrath with WallachBeth Capital. Please proceed with your question.

[Kathleen McGrath:]

Hi. Thanks for taking my question. I was wondering if there was any additional turnover in the quarter and how many sales members have been lost in total during kind of the turmoil that's being going on. And also under the new plans, the new direction under management, how many new team members will be added and how much time to reach productivity?

[Jeff Nugent:]

If you're focusing strictly on sales, is that your focus?

[Kathleen McGrath:]

I'm just trying to figure out kind of what's left on the sales team side and how many new members are coming on board?

[Jeff Nugent:]

Well, we have a sales force target of approximately 35 to 40 people and during the third quarter, we had approximately one-fifth 20% of those that were on-field. So that's certainly affected the third quarter results. But as you could imagine with a new leadership responsible for a sales organization there is going to be turnover and it's very clear to me that we have some very talented people in our sales organization, three very experienced regional managers that we are in a process of supporting them in a way that we never had before and making sure that we're keeping the best of the Group. So you've touched on a significant factor that impacted third quarter and we are replenishing the sales force as quickly as we can, in fact I know that Clark, our Senior VP is in Seattle today interviewing and hiring two new people for the Pacific Northwest. That's one of our higher priorities.

[Kathleen McGrath:]

Okay. With the additional capital ratio, should we be expecting accounts payable to start trending downward from here?

[Jeff Nugent:]

That would be a very wise assumption.

[Kathleen McGrath:]

Okay.

[Jeff Nugent:]

That's obviously one of the reasons that we wanted to make this race.

[Kathleen McGrath:]

All right. Thank you for answering my question.

[Jeff Nugent:]

Sure. Thanks Kathleen.

[Operator:]

Thank you. Our next question comes from the line of Keay Nakae with Ascendiant Capital. Please proceed with your question.

[Keay Nakae:]

Yes, thank you. First question is on your operating expense. So you just did $8.7 million in Q3, how should we think about this number going forward, you're going to have a slightly decrease in legal expense, but how should we think about the rest of the components of this and contributing to that overall OpEx number going forward?

[Fred Furry:]

I think it's going to be a little bit more than a slight decrease to our legal and professional fees. I think it's going to be a little bit more than slightly as you say. And also we are going to have some savings on some of our other legal cost surrounding our patent portfolio. We're being a little bit more selective in what patents we have and what geographic areas looking for those patents that really have an impact on the company. So on a go forward basis, what we're using for modeling, our percentages of revenue; they kind of resemble our run rate in 2012 as a benchmark for what we're looking at. I don't know if that will help you Keay, but that seems to be based on our own internal modeling where we're coming out at.

[Keay Nakae:]

Okay. I have those numbers. So second question kind of following on the last question, but you finally said in particularly you not having to operate on shoestring here, you some additional capital. So beyond the accounts payable, what do you do with the extra $5 million to $10 million in the near term that you now have in cash?

[Fred Furry:]

First, I'll let Jeff finish up when I'm done, but I think it's going to be a little bit more extra than $5 million to $10 million. Yes, we do have a backlog in our payables, in our accrued liabilities, you can see that on the schedules that were attached to the balance sheet. And we're going to absolutely clean those up and get those more current which we believe will create tremendous efficiencies in our cost of goods sold with our vendors. So we look at our cost of goods sold as a great place to start to generate internal capital by being more efficient in saving money on our margin. So we believe that this will dramatically impact that and allow us to really feel some efficiencies from being more proactive with our vendors and more timely with our payments.

[Jeff Nugent:]

And really the primary purpose of the financing is to provide growth capital to be able to drive this business both domestically and internationally at much higher levels of consistent growth. So as you would normally look at a company investing for growth we are going to be allocating more in R&D. We have not been nearly as progressive in marketing as we will be. And that there are certain infrastructure improvements that we need to make here to be able to have much tighter definition and tracking capabilities in terms of our customers both existing and new. So we have a very highly prioritized list of investments and at the same time making sure that this is the capital that we need to get to the levels of growth and sustainable profitability on a long-term basis.

[Keay Nakae:]

So that sounds like investments in a CRM system possibly or?

[Jeff Nugent:]

That's certainly one. We've been – we've developed our own and I'm very used to using a CRM system than the ones that was here, let's put it this way shaky at that. So, we have our own developed CRM Systems similar to what I've used at other companies and we are making this decision very shortly as to which up-end CRM System we are going to migrate to but that's certainly an example.

[Keay Nakae:]

All right. Thank you.

[Jeffrey Nugent:]

Thank you.

[Operator:]

Thanks. Our next question is from the line of Lenny Brecken from Brecken Capital. Please proceed with the question.

[Lenny Brecken:]

Well, it's been a long lonely road boys, it looks like you're – at least on the payment.

[Jeff Nugent:]

I think Lenny, good to hear your voice.

[Lenny Brecken:]

Thank you. Hey, Jeff, can you just on the last question regarding the use of capital, I would assume some of that is going into R&D. Can you just update us on what your focuses are in that respect?

[Jeff Nugent:]

Yes, Lenny. And within the limits of confidentiality here because a lot of R&D pipeline items need to be very closely guarded. But we're contrary to some rumors that I heard when I first assumed this role. We are focusing on the dental market and continuing to improve on the products that are currently in the market from many different standpoints. So there is product improvements as well as what I call breakthrough products that we currently have under wraps that is planned for launch, I got to filter myself here. But we spent a lot of time updating the pipeline and in fact a significant amount of the race is going to be going into increased R&D, that's one.

[Lenny Brecken:]

Yes, I'll just follow up with that. Do you think one of the grand debates was that 880 to 940-nanometer and the use of it and getting the cost curve down as a result and just being married to that particular wavelength and the way you are doing it? Just philosophically is the company married to that wavelength in that, of course it opens to other technologies or things like CO2 down the road?

[Jeff Nugent:]

Yes. Good question. And we are certainly paying a lot of attention and in fact looking at a number of different alternative technologies. But cost ramifications of staying with our current wavelengths still offers a significant opportunity to reduce our costs and increase gross profit. There is absolutely no doubt in my mind this company can dramatically improve its gross profit even by staying with the current wavelengths. And also to your point there are opportunities in some of the others like CO2 and others as well as in different markets beyond dentistry itself. So one of the things that I've placed a lot of importance is developing our own growth capital and the primary source of doing that is by reducing cost of goods and increasing gross profit, which is foremost in our plan.

[Lenny Brecken:]

Okay. Thank you.

[Jeff Nugent:]

Sure, Lenny.

[Operator:]

Thank you. Our next question comes from the line of Chris Sassouni with Eagle Asset Management. Please proceed with your question.

[Chris Sassouni:]

Good afternoon, Jeff.

[Jeff Nugent:]

Hi. Chris, how are doing?

[Chris Sassouni:]

How are you doing?

[Jeff Nugent:]

I'm doing great.

[Chris Sassouni:]

Okay. So I just wanted to ask you on the sales and distribution side, so not only is there turnover in the sales force. But I think more importantly are you going to make changes in terms of how the reps are trained and what they are trained on because there was always this tuck-up war between selling laser systems, selling diodes, and then the need to also sell consumable. So what's going to happen in terms of their overall training?

[Jeff Nugent:]

Chris, it's going to be like night and day. I've looked at the training that we've used in the past. And part of the conclusion is that we are going about it in about as opposite way as we can. Training is critical as you know and there are number of aspects to that. We have an outside resource coming into help train the sales force specifically. I won't get into training with dentists and our WCLIs and so forth. But, I think you are zeroing in on sales training, is that right?

[Chris Sassouni:]

Yes.

[Jeff Nugent:]

Yes. We need much better clinical training. So that the individuals can speak as closely aligned with the dental profession as they can. They need to understand the clinical benefits of the alternatives. They need better sales training in terms of how to manage a funnel of newly contacted customers to those who are currently examining it to those who are ready to purchase. And need that final push to get them over the line. There is a real science to selling. And we haven't provided that. So those are just a couple of the aspects, but we are not going to get the kind of the quality of BIOLASE sales and account managers out there unless we invest in them. And that's important itself. And I don't know if I mentioned this to you before. We no longer have sales people. We have sales and account management people. They are not responsible for just selling a unit and going to the next town. They are responsible for selling as well as maintaining relationships and positive satisfaction among those people to whom they have sold products. So this doesn't get at all the details of your question, I would love to get into a separate conversation. But, you picked a real priority of mine.

[Chris Sassouni:]

Okay. This is very helpful. So the next question I have is – at times, the OUS market has grown faster than the U.S. market, my sense is that there was also turnover or changes to the distributors you are using overseas. So what is the current status of the OUS distributors are they called that they were some shine distributors that were being used, but what's the status, where there is open geographies, is that still a work in progress?

[Jeff Nugent:]

Well, it's a work in a very expedited progress because when you look at the breadth of the world that is covered by BIOLASE that's both an advantage and an disadvantage. So one of the first things we are doing is focusing on a regional basis. Europe and Middle East, South America, Asia Pacific, we are including Canada and North America. So with a better sense of using the 80

[Chris Sassouni:]

Okay. You just speaking of APAC, do you have a full approval to market WaterLase system in Japan?

[Jeff Nugent:]

No. That's something that we are working with consultants to help move quickly that's very attractive market. Same thing with China we have been advised that we got to be careful about forward-looking statements here but we are expecting approval in China which is an enormous market as you know as early fourth quarter this year.

[Chris Sassouni:]

Okay, outstanding. Last question and it really gets to the heart of – what appears to be one of your very top priorities which spoke around the gross profit margin. So I can only imagine that your supplier, they have been running back and giving you the best of terms. So at this point there is really two questions around the suppliers that is a) have you lost any critical supplier and b) are they term now likely to improve now that you are balance sheet has shot up and finally, just qualitatively how much tier in the gross profit margins go with the existing WaterLase systems let's say a couple of years from now as you continue to refine the quality initiatives and the manufactured businesses? Thank you.

[Jeff Nugent:]

That I don't want to be too specific because I shouldn't but considering the opportunity in increased gross profit to be large that one of the things that is going to contribute to increased gross profit is by increasing quality. The cost of quality includes the efforts spent on equipment after they have been manufactured and after they have been put out in the market. And one of the success stories that we have had very recently is on our EPIC line of laser. We significantly improved the quality level and I feel very strongly about Six Sigma and we are moving in that direction on our diode lasers, our WaterLase products as well as the new products that are under develop. And one of the things that I've learned over the years is you build quality, you don't think about it after you built the product. So it's really a function of reliability and there are many ways to test that prior to shipment that we haven't been doing. Meantime between failure for example that's not something that BIOLASE has really attempted. And in equipment like this, we are setting out meantime between failure standards to be able to assure that the products are going to be as raggard as possible once they are on the field.

[Chris Sassouni:]

Okay. Thank you.

[Jeff Nugent:]

Thank you.

[Operator:]

Thank you. Our next question is a follow-up question from the line of Joe Munda. Please proceed with your question.

[Joe Munda:]

Yes. Jeff, just focus the need I guess to move R&D offsite, can you give us a little bit of color there and if any additional expenses things would be incurred as well as Clark Barousse's background at High Bridge and how it fills there, I guess transfer into what you guys are trying to do with your sales team? Thanks.

[Jeff Nugent:]

Well, as far as moving a core part of our best R&D people offsite, I have done that several times in the past and the real advantage is that it creates a much stronger sense of team; it keeps them as focused – more focused than they would be because by definition they are not as distracted as much. People leave them alone. And one of the things that convinced me of it is that my daughter works for Apple Computer. And she remains of several projects not the least of which is the iPhone where Steve Jobs took the people and moved them across Silicon Valley to a completely different facility. And essentially charged them with a outrageous objective and it has been proven many, many times that by separating a highly talented group of people, you get a much more focused and shorter development time because they are all out there with a number of psychological things that they are dealing with. But also knowing that there is a significant benefit to the company by getting their projects completed quickly. And I would be happy to talk to you more about that I could talk all day about it. But, as far as Clark Barousse is concerned, he really brings an addition to his sales leadership from companies like Smith & Nephew, Johnson & Johnson, Ethicon et cetera. I believe you know that he has been very involved in dental practice management. And assisting dentists and improving their practice. And that's one of the things that we are tapping into because he is very; very knowledgeable in this and when you look at our primary customer base the primary objective of good portion of those dentists is they want to improve. They are going to improve their working conditions their productivity the efficiency of the treating the patients in their practice et cetera. So there is a very nice mesh between what Clark brings to BIOLASE and what BIOLASE brings to Clark.

[Joe Munda:]

Thank you, Jeff.

[Jeff Nugent:]

Sure.

[Operator:]

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

[Paul Bornstein:]

Yes. How are you guys doing? Looks like he got some stability to the company finally, so that's good. I have two questions, your [x U.S.] (ph) your money, and I'm curious how you are going to leverage the R&D because the company has been good on R&D, but very poor on sales. And so you have a lot of R&D in the pipeline and you got very little sales outside the initial lasers, so that was the first question. And second, you are hiring new sales people and I'm wondering that's expensive, I'm wondering how long do you think it will be before they cover their cost and obviously, it depends on the type of the people. And then I guess, the question is, when you think I might be cash flow positive a year from on a GAAP basis, non-GAAP? So those are the three points I was interested in.

[Jeff Nugent:]

Well, I will deal with the last one first. And I'm in no position to give guidance on either top line or bottom line. But, as I mentioned it is clearly one of our most important objectives to get to a consistent cash flow positive while we demonstrate above average growth. So I can't be anymore specific than that. As far as sales, productivity improvements, we are – and I have been through this before many times. And one of the first things, we needed to do to fix this was to provide some leadership into what was a very [intensive] (ph) leadership inside of BIOLASE sales. And so with Clark coming in, his focus on the sales function, we are fortunate to have very strong regional managers who are also training to be stronger regional managers. But that's a real advantage because they know our products. They know how to sell. And they have been particularly productive. As to the rest of the organization that we are getting a very clear picture on the potential of the individuals in sales. And again, some of those sales people we have out there are very productive. But we are also looking at whether or not and that's a process of transition and some of those – in fact we are helping all of our sales people with increased access to information, better lead generation because when you think about it and if you are familiar with the Crossing the Chasm, Geoffrey Moore concept. Our penetration in the U.S. dental market for laser dentistry is approximately 5% and as Alex said before that means 5% of the 140,000 dentists are using a laser. Now, if you compare that to dermatologists 10 years ago approximately 5% of dermatologists were using a laser. Today 75% of dermatologists are using a laser. Now, what is that translate to for the potential in the dental market? You tell me, I don't know. But, I know it's a multiple of the 5% rev right now. And that means we are selling to different demographics we're selling to different customer types. And that's part of the training that training and selection of the sales additions that we plan on bringing in. And we are also going through an exercise where we are looking at – do we have all of our sales people in exactly the right locations. We are confirming that because I'm convinced that we've got some that are in the best places. So there is tremendous effort being made on increasing the total effectiveness of our sales organization. And as Alex said earlier, we haven't done a very well in using our clinical data as an important aspect of selling our products. So this is a multi-factorial issue. But, at the end of the day there is the invented pyramid because if you look I'm not going to say some chart usually I'm on top. I'm on the bottom and our sales people are on top. And those are the people closest to the customer, therefore, there a lot more important than me. So we are going everything we can to restructure this company to support those people to make them more effective.

[Paul Bornstein:]

Yes. Well, that's a key to the company's growth.

[Jeff Nugent:]

Absolutely.

[Paul Bornstein:]

I understand that.

[Jeff Nugent:]

And you had a third question?

[Paul Bornstein:]

I just wondering on the sales people I don't think you probably covered, I don't know if you can in terms of six months, nine months in terms of get an idea because the company has been through the process of hiring people. And obviously they're expensive upfront until they bring the sales. So I'm just wondering how they're getting compensated in a lot of front or more in the back end? And then I guess the last thing is leveraging all the R&D that you have in terms of what's different this time because you still have a lot that you really haven't leveraged yet that laser products along those line?

[Jeff Nugent:]

Yes, I think that in terms of 0 to 60 time, how long is it take a car to get the 60 miles an hour, how long is it taking?

[Paul Bornstein:]

Well, there is no exact answer, but I'm just trying to get a little bit of feel since you're involved, I mean these are the key aspects of building a company and there is no right or wrong answer, but I'm just trying to get a feel from the other people you're hiring. I mean does everyone started their kind of opening the door and figuring out where they are going or with your leadership. Just trying to get a handle on with who are hiring in terms of what's their qualifications are.

[Jeff Nugent:]

Yes. And I can contrast it to the previous model where, let me put it this way, the criteria were not optimal for their success but I've done this in a number of companies as well. And by more careful selection with applicable experience, our criterion is to hire people who hit the ground running. And the other part of that is call it an insurance policy or just call it good management. We've got three very strong regional managers whose job is to get these people up to speed quickly. Now this varies because we can get experienced capital equipment sales people who can become let's call it cash flow positive in a relatively few number of months we've got new hires out there right now who are doing better than some of the people who've been here for couple of years. Part of it is, how hungry they are, part of it is, how willing they are to take direction from their regional managers as well as a number of other things. So like a lot of things like this, it varies greatly, but we're obviously making decisions to get them up to speed quickly.

[Operator:]

This concludes our question-and-answer session. I would like to turn the floor back over to Mr. Nugent for closing comments.

[Jeff Nugent:]

Thank you very much. And I'd like to thank all of you for your interest and support in BIOLASE. I remain absolutely steadfast in my belief that we put the necessary pieces in place for a successful transition of BIOLASE. We are committed to delivering improved value for our customers and stakeholders and importantly delivering on what we say we will do, that's a very important part of our culture that we're installing. When we say we will do something, it's very important that we do that. So I look forward to speaking with you all again and meeting as many of you as I can. So have a very good evening. Thank you.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.