BIOLASE, Inc.
Q3 2013 Earnings Call Transcript

Published: 12 Nov 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the BIOLASE 2013 Third Quarter and Nine Month Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. (Operator Instructions) This conference is being recorded today, November 11, 2013. I would now like to turn the conference over to Dr. Alexandra Arrow, President and COO of BIOLASE. Alex, please go ahead.

[Alexander K. Arrow:]

Good afternoon everyone and welcome to BIOLASE’s 2013 third quarter and nine months results conference call. On the call with me is our Chairman and CEO, Federico Pignatelli and our CFO, Fred Furry. Federico will make some opening remarks and then he will turn the call over to Fred to run through our results and comparisons to prior periods. After Fred’s discussion I will discuss some of our business and clinical highlights. We will then open the call for your questions. Before we begin our comments today is Veterans Day and we’d like to acknowledge and thank all of our Veterans and those currently serving in the branches of our military for their dedication to our country and their sacrifice, some of whom have made it possible for those lucky enough to work in business to do what we do. Now please be aware there are number of forward-looking statements will be made during these presentation. Forward-looking statements are any statements that are not historical facts and can be identified by the words and phrases including, can be, may affect, may depend, believe, estimate, project, and similar words or phrases. These forward-looking statements are based on BIOLASE’s current expectations and are subject to a variety of known and uncertain risks and uncertainties that could cause the company’s actual results to differ materially from the statements contained in this presentation. These risk factors are discussed in the company’s filings with the SEC. BIOLASE cautions you that any forward-looking information provided is not a guarantee of future performance. Any forward-looking statements represent the company’s views only as of today and should not be relied upon as representing our views on any subsequent date. For the benefit of those listening to this on a replay this call was held and recorded on November 11, 2013. A replay of the call will be available on the BIOLASE website shortly after this call’s completion. When listening to this call please refer to the press release issued earlier today announcing the company’s results for the quarter and nine months ended September 30, 2013. If you do not have a copy of this release it is available on the BIOLASE website at www.biolase.com. The company’s results for the third quarter and nine months ended September 30 can also be found in the company’s September 30, 2013 Form 10-Q, which the company will file with the Securities & Exchange Commission. Note that the SEC is closed today so both these 8-K containing the earnings release and the 10-Q will be filed tomorrow morning. With that, I would like to introduce Federico Pignatelli. Federico, please go ahead.

[Federico Pignatelli:]

Thank you, Alex, and good afternoon everyone. I want to welcome you all to our 2013 third quarter and nine months results conference call. Today we will review the BIOLASE’s progress in 2013 and discuss several key initiatives that really impact the coming quarters. First, let me briefly recap the nine months and third quarter ended September 30, 2013. Despite the fact that net revenues have increased by approximately $2.9 million or 8% to $41.2 million from the nine months ended September 30, 2013, as compared to revenues of $38.3 million for the prior year period our revenues for the third quarter decreased compared to the prior year quarter. Net revenues for the third quarter totaled $12.3 million, a decrease of approximately $1.5 million compared to $13.8 million in the prior year quarter. We are dissatisfied with the results for the third quarter ended September 30, 2013 as we believe that the company’s result was probably due to inadequate execution within our sales force, its sub-par marketing efforts in highly challenging times and in connection from company’s transition from just selling one product, the WaterLase to selling a wider range of lasers, including soft-tissue diodes together with other technological solutions for dentist, digital audiography CAD/CAM Intraoral Scanners. While this transition is strategically essential for the longer term growth of BIOLASE as a total technology solution provider this evolution cause unanticipated short term inefficiencies which can occur during a strategic shift such as the one we have implemented in 2013. The effects from these inefficiencies were intensified by unforeseen market factors, such as the confusion over the implementation of the patient protection on affordable care act and the continued uncertainty related to the Congressional Impasse over the U.S. houses. And the debt ceiling which affected the buying decision profits of the dental community, which is comprised of 140,000 small business owners. Consequently we have developed plans to rapidly address all of the issues at hand including making a number of changes within our sales and marketing departments and implementing new strategies along with certain cost containment measures. We believe that these proactive changes are essential in developing a winning sales and marketing strategy for BIOLASE and in growing the company’s business. We view a company’s third quarter performance as the lowest part in this cycle of radical change of BIOLASE and we expect a strong recovery in the fourth quarter and in 2014 in all segments of our business driven by our WaterLase product line and the DaVinci Imaging and CAD/CAM line. We are very optimistic about the potential of several upcoming product launches such as the Galaxy BioMill System, a key advancement to complete our strategy in becoming a company that offers superior technological solutions to dental practices. We plan to introduce the Galaxy BioMill System and in office chair-side milling machines for dental implants at the upcoming Greater New York Dental Meeting, the largest dental congress and exposition in the United States which will be held from November 29 through December 4, 2013. One of the key management changes that we have made was to replace our Vice Presidents of both Sales and Marketing with an industry veteran with significant experience and a successful track record in sales, marketing and business development for both dental lasers and digital imaging systems, Brian Jaffe. Brian comes to BIOLASE from a direct competitor, Millennium Dental Technologies, where he held the position of Vice President of Global Sales. Prior to his role with Millennium, Mr. Jaffe was the Vice President of Sales and Marketing at Vatech America, a leading supplier of dental cone beam and digital radiographic systems, and Suni Medical Systems, a pioneer in digital radiography. We are enthusiastic with the depth and breadth of knowledge that Brian brings to BIOLASE for global sales in both dental lasers and digital radiography. As a further step our Board has authorized the company to seek the services of an investment bank to assist the company in exploring possible M&A transactions with a goal of maximizing shareholder value. The company is currently valued at approximately one time revenues while some of its assets could be worth significantly more. With developmental pre-launch business opportunities in ophthalmology, E&P orthopedics, podiatry, pain management and veterinary therapeutic laser products, BIOLASE has more opportunities than we can pursue on our own. Selling one or more of them could generate the funds that could give us the working capital we need for our core businesses. We are committed to conducting a review of potential opportunities as promptly as practical. However, there can be no assurance that any particular opportunities will be pursued or that any transaction will occur or on what terms or as to the time. We will provide additional information during the process as appropriate. Lastly given the current unsatisfactory performance of the business and stock valuation, this I have decided to refuse any proposed option compensation if offered by the Board. In the past the Board has awarded me equity compensation but this year I will not accept it and remain at my symbolic $1 annual salary. Alex will discuss our business in greater detail in a few minutes but first, Fred Furry, our CFO will review our financial results for the quarter and nine months ended September 30, 2013. Fred?

[Frederick D. Furry:]

Thank you, Federico. Before beginning as Alex mentioned today is Veterans Day and in addition to thanking all of our veterans and those currently in uniform, I would like to personally thank both our father and father-in-law for their service to our country. For the quarter ended September 30, 2013 we reported net revenue of $2.3 million, compared with $13.8 million in the 2012 third quarter, a decrease of approximately $1.5 million or 10%. Net revenue for the nine months ended September 30, 2013 totaled $41.2 million, an increase of approximately $2.9 million or 8% as compared to with net revenue of $38.3 million for the nine months ended September 30, 2012. The decrease in net revenue for the three months ended September 30, 2013 was primarily attributable to approximately $2 million in reduced laser system revenue, offset by slight increases in imaging systems, consumable and service revenues. The increase in net revenue for the nine months ended September 30, 2013 was primarily attributable to increased imaging systems revenues of approximately $1.6 million, increased consumables and other of $401,000 and increased service revenues of $743,000. For the nine months ended September 30, 2013 laser system net revenue increased by approximately $90,000 as compared to the same period of 2012, despite decreasing by approximately $2 million or 20% in the 2013 third quarter as compared to the prior year quarter. Our third quarter results met several of the positives that we have seen since the beginning of the year. Contrary to the contraction of our U.S. laser sale our international sale were up 22% for the nine months ended September 30, 2013 as compared to the same period in 2012. In addition imaging revenues were up 94% and consumables were up 9% in the first nine months of 2013 as compared to the same period in 2012. Our high margin domestic sales in the third quarter were weak however and as Federico and Alex have noted we have taken steps to address the strength, such as the establishment of a regional sales structure and contemplating modifications to our sales incentive compensation program. As these measures take affect we believe our top line will strengthen and grow. Imaging revenues, which included both cone beam, digital imaging and CAD/CAM intraoral scanners totaled approximately $961,000 or 8% of revenue during the 2013 third quarter as compared to $675,000 or 5% of net revenue for the prior year quarter. For the nine months ended September 30, 2013 imaging revenues increased by approximately $1.6 million or 94% as compared to the same period of 2012. The increases for the three and nine months ended September 30, 2013 were driven by increased sales efforts and increased equipment offerings at various value prepositions. Consumables and other net revenues, which includes consumable products such as disposable tips, increased by approximately 8% for the 2013 third quarter, as compared to the prior year quarter. For the nine months ended September 30, 2013 consumables and other net revenue increase by approximately 9%. Gross profit as a percentage of net revenue was 31% for the 2013 third quarter as compared to 46% for the prior year quarter. For the nine months ended September 30, 2013 gross profit as a percentage of net revenue was 37% as compared to 46% for the prior year period. The quarter-over-quarter and year-over-year decreases were primarily due to higher sales of licensed imaging equipment, which generally carry lower margins than our laser product and increased international laser sale which generally carry a lower margin than our domestic laser sales. In addition we increased our reserve for excess and obsolete inventory by $1 million during the third quarter due to changes in market factors and the decreased velocity of our inventory. The $1 million charge to increase our reserve for excess and obsolete inventory negatively impacted our gross margin by approximately 8.1% and 2.4% for the quarter and nine months ended September 30, 2013 respectively. Without this charge our gross margin would have approximated 39.1% and 39.3% for the quarter and nine months ended September 30, 2013. We also believe that as the changes we have implemented into the fourth quarter take effect and improve our domestic WaterLase sales that they will have a positive impact on our gross margin. Our results for the third quarter and nine months ended September 30, 2013 -- I am sorry operating expenses totaled $7.7 million or 62% of net revenue for the 2013 third quarter as compared to $6.7 million or 48% of net revenue in the 2012 third quarter. For the nine months ended September 30, 2013 operating expenses totaled $24.2 million or 59% of net revenue as compared with $21.3 million or 56% of net revenue for the nine months ended September 30, 2012 an increase of $2.9 million or 13%. The quarter-over-quarter and year-over-year increases were primarily driven by substantial investment in our sales and marketing opportunity in 2013, legal expense related to enforcing and protecting our intellectual property portfolio in class action lawsuits and increases to our allowance for doubtful accounts. Effective for sales beginning January 1, 2013 the Patient Protection and Affordable Care Act imposed a 2.3% medical device excise tax on certain product sales to customers located in the U.S. As a result we incurred excise tax expenses of $89,000 for the 2013 third quarter and $308,000 for the nine months ended September 30, 2013, both represent approximately 1% of net revenue in each respective period. Our net loss for the 2013 third quarter totaled approximately $4 million or a loss of $0.13 per share compared to a net loss of $548,000 or a loss of $0.02 per share in 2012 third quarter. After removing interest expense of $182,000, depreciation and amortization expenses of $141,000 and stock-based other equity instruments and other non-cash compensation expenses of $554,000 the 2013 third quarter resulted in a non-GAAP net loss of $3.2 million or a loss of $0.10 per share compared with a non-GAAP net income of $96,000 or income of $0.00 per share for the 2012 third quarter. For the nine months ended September 30, 2013 our net loss totaled approximately $9.2 million or a loss of $0.29 per share as compared to a net loss of $4.1 million or a loss of $0.13 per share for the nine months ended September 30, 2012. After removing interest expense of $386,000 depreciation and amortization expense of $439,000 and stock-based other equity instruments and other non-cash compensation expense of $1.5 million the nine months ended September 30, 2013 resulted in a non-GAAP net loss of $6.9 million or a loss of $0.22 per share compared with a non-GAAP net loss of $2.1 million or a loss of $0.07 per share for the nine months ended September 30, 2012. Moving on to our balance sheet, as of September 30, 2013 BIOLASE had approximately $5 million in working capital. Cash and cash equivalents totaled approximately $4.2 million at December 30, 2013 compared with $2.5 million at December 31, 2012. Net accounts receivable totaled $10.8 million at September 30, 2013 compared to $11.7 million at December 31, 2012. At September 30, 2013 the company had two revolving credit facilities totaling $8 million with $2.5 million in available borrowing capacity. In legal matters two shareholders lawsuits were filed against the company and certain officers and Directors in August 2013. We are working with our attorneys to rigorously defend the claims asserted in the lawsuits which we believe lack merit. As of September 30, 2013 the company had accrued $250,000 for legal costs expected to be incurred in connection with these matters. With respect to our liquidity and capital resources on September 23, 2013 the company entered into a subscription agreement with Camber Capital Management pursuant to which the company agreed to sell 2,688,172 shares of its common stock at a price per share of $1.86 for gross proceeds of $5 million. The net proceeds to the company were $4.6 million after deducting associated cost of $408,000 which included the placement agency of 5% to Northland Securities. The shares of common stock were sold issued pursuant to our prospectus supplement which was filed with the SEC September 26, 2013 in connection with Registration Statement on Form S-3 as amended which was declared effective by the SEC on September 19, 2013. On November 8, 2013 we amended our two revolving credit agreements with Comerica Bank to waive noncompliance with our minimum EBITDA covenant for the quarter ended September 30, 2013, to reset our EBITDA covenant for the quarter ending December 31, 2013 and to establish covenants for the remaining term of the agreements. In connection with this amendment we issued Comerica Bank 100,000 warrants and an amendment fee of $10,000. The amendment also includes liquidity ratio and liquid asset covenants and an equity raise requirement that established March 1, 2014 as the latest day which the company is required to raise at least $3 million. Regarding our financial guidance, the company is reducing its net revenue guidance for the year-ending December 31, 2013 to a range of $57 million to $59 million. With that I will turn the call over to Alex.

[Alexander K. Arrow:]

Thank you, Fred. Federico began the call by highlighting several major changes we’ve made in order to address the results for the third quarter. Our plan for reforming sales and marketing includes more than just replacing some of our Vice Presidents. We have also assigned five sales managers to regions that cover the United States and Canada which is a layer of sales management consistent with best practices and sales forces of our size but something that BIOLASE has not had in the past. These regional sales managers have histories of success and will travel with our sales force and ensure that they perform the things that sales representative must do on a daily, weekly and monthly basis to be effective. We believe training and closer management of these key performance indicators will improve the efficacy of our sales force. The regional sales managers will also be responsible for recruiting additional account managers to their regions. The promotion of some of our best reps to regional sale trends here is a change we’ve made and it’s directed clearly at addressing and correcting the flat sales results of our flagship WaterLase technology. As a show of our optimism this change is going to improve WaterLase sales specifically. We’ve decided that beginning with Q4 – sorry Q1 of 2014 we will be resuming the practice of disclosing WaterLase revenues separate from Epic and other ways of revenues providing clarity on the trend of each category. Another change in strategy has been our establishment of an imaging-specific sales group to assist our laser sales force, including sales of digital radiography and CAD/CAM intra-oral scanners. We began this recently as a pilot program in a select geographic region and it has met with initial success. As such we have hired imaging-specific sales specialists in recent weeks and we plan to hire more during the fourth quarter. We are also establishing a limited industry specific sales team to address our entry in the otolaryngology or ENT market, more on ENT in a minute. Operationally we have developed cost reduction plans relating to our cost of sales and sales and marketing expense categories. These are having an effect in the fourth quarter and are expected to be significant in 2014 as well. We expect that the operational changes we have carried out with our DaVinci Imaging products will result in a positive contribution to our gross margins as our volume increases. In July we entered into a strategic relationship with Valam Corporation to develop markets and sell office-based laser systems to otolaryngologists or ENT, Ear Nose and Throat doctors. The agreement provides BIOLASE with an ENT laser patent portfolio, patent portfolio plus the know-how and marketing support of Dr. Yosef Krespi, one of the world’s leading authorities on the use of lasers for surgical treatment of sinusitis, sleep apnea, and other ENT laser procedures. BIOLASE’S EPIC S 10 watt diode soft-tissue laser is cleared by the FDA for use in ENT surgical procedures. We formally launched it at the American Association of Otolaryngology or AAO in Vancouver on September 30. And we shipped our first two units to ENT clinicians in October. We are also establishing a limited industry specific sales team to address our entry into the ENT market. Our partnership with Valam includes an exclusive worldwide license to all our Valam ENT related patents and pending patents which when combined with BIOLASE’s existing ENT laser patents create a formidable patent stage in this niche. We look forward to being able to offer a line of elegant simple to use precise laser-based cutting tools to the 9,000 practicing otolaryngologists in the United States. Potentially even more lucrative than the Epic S diode laser in the ENT space is the prospect of a future clearance to use a version of our WaterLase for septoplasty and Chronic Rhinosinusitis. Initial ENT clinical feedback on this approach for these two large markets has been encouraging and we have a regulatory plan in place. I will now turn the call over to Federico.

[Federico Pignatelli:]

Thank you, Alex. Before concluding our remarks I would like to highlight that BIOLASE plans to introduce its Galaxy BioMill CAD/CAM system at the upcoming Laser, New York Dental meeting, the largest dental congress and exposition in the United States which will be held from November 29 through December 4, 2013. The Galaxy BioMill was developed and designed by BIOLASE in conjunction with imes-icore GMBH in Germany. It is a CAD/CAM system for scanning designing, milling and finishing crowns, inlays and veneers in the dental office in a single appointment. Also firm chair side milling the market is estimated to average 15% market penetration in the U.S. and according to independent reserves is one of the fastest growing segments in the dental markets. The Galaxy BioMill system will utilize 3Shape Corporation's Trios fast and highly accurate intra-oral scanner to capture higher resolution 3D digital images of the teeth and crown preparation site which are then processed through a CAD/CAM software program to design the dental restoration. The design is then transferred to the Galaxy BioMill to mill the crown using the latest aesthetically pleasing biological compatible and long lasting tooth collar material. The Galaxy BioMill is the next key step in the fulfillment of our focused technology solution. We will now be able to offer a complete portfolio of unique and standard of care changing hard and soft tissue dental lasers, 2D and 3D digital audiography and the best-in-class CAD/CAM systems. Now with the addition of Galaxy BioMill we can finally provide a true one-stop-shop for dentists for all major high tech dental capital equipment investments. With this innovative strategy we will allow dental practices to obtain training, service and support of multiple hi-tech units from one source instead of multiple sources. This concludes our prepared remarks. Each time you are called upon during the Q&A section of the call we ask you to limit yourself to one question and follow-up question. If you have additional questions, please go back in queue and allow for a larger number of people to ask questions. Thank you.

[Operator:]

(Operator Instructions) Our first question comes from the line of Suraj Kalia with Northland Securities. Please proceed with your question.

[Suraj Kalia:]

Good afternoon gentlemen. Federico, can you hear me okay?

[Federico Pignatelli:]

Yes. Hello Suraj.

[Suraj Kalia:]

So Frederica and Alex I just one of the main questions is what was the contribution of the core lasers in the quarter and given that imaging was approximately, per my math about $1 million sales how many reps were dedicated to imaging versus the core lasers, again that caused that seven step change in the quarter?

[Federico Pignatelli:]

Alex will answer

[Alexander K. Arrow:]

Hi Suraj, this is an excellent question. The core sales force is actually none of them are devoted purely to imaging. We just have this pilot sales force which we call the imaging specialists which are devoted completely to imaging. So we’ve got a 45% sales organization in North America that are devoted towards selling the core product line and have been assisting in imaging and some of their time is then used in imaging but none of them are fully devoted to imaging, it’s the new pilot force of the imaging specialist. Then the other part of your question is you are getting on a dollar break down you said there was, you were asking about the dollar…

[Suraj Kalia:]

Just trying to get the contribution of the core lasers in the quarter, just trying to stack up reps versus core laser contribution and if there was any disruption?

[Alexander K. Arrow:]

Sure, so the laser revenue in the three months ending September 30 was $8.1 million and imaging was just under $1 million. And I mean it’s impossible to dissect it entirely because it’s a team effort. This is part of our total technology solutions approach where a lot of time the dentists will be thinking about upgrading their practice and putting some money in the capital equipment and they think of imaging and then we’re in the conversation because we offer imaging and then we bring them to general lasers and likewise someone talking about a laser and then we – there can be an interest in the imaging device. So it goes back and forth and we can’t really give you, there doesn’t really exist a division of labor entirely like that but we do have this small imaging devoted force which is probably the best answer to your question.

[Suraj Kalia:]

Fair enough and I’ll just ask one question and get back in queue. Federico, question for you are you looking to sell the entire company or are you looking to selectively sell some of your assets, whether in orthopedics or E&T or what have you?

[Federico Pignatelli:]

We are looking to sell selective assets of the company clearly it is a fact that goes – [and this is] that if we would receive an offer for the entire company we would have to have the Board evaluate that offer. But we are right now looking to essentially market certain assets of the company.

[Suraj Kalia:]

Fair enough. I’ll get back in queue Federico.

[Operator:]

Thank you. Our next question comes from the line of Joe Munda with Sidoti & Company. Please proceed with your question.

[Joseph P. Munda:]

Good afternoon, can you hear me?

[Federico Pignatelli:]

Hi, Joe.

[Joseph P. Munda:]

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

[Federico Pignatelli:]

Well first of all regarding Canada and Germany things in both countries, they have improved recently. So we had not yet obtained unfortunately the diode approval for Canada. So that is an issue with Canada but and regarding Germany we have our distributor back in full force after his personal issues of losing his wife and the fact is that NMT, the company he leads is the best company in Germany, has the longest experience in selling dental laser. So we are very happy to have him back full force working to penetrate the German market and he’s also has entered into a very interesting joint venture with a much larger company to increase the reach of the dental market in Germany. So that’s a very positive event for BIOLASE. What has occurred in United States it is puzzling us, it is a fact. We have seen a slowdown in decision making from dentists in actually closing sales. There are a lot of time procedures, the highest number that we can think of, but when he comes down to actual put a signature on a contract there is a lot of anxiety in that. It is a fact that the dental market is composed by 140,000 and plus small businesses, it is a highly fragmented market. And there is a fact that Obamacare has created a lot of confusion we believe and we hear in the mind of dentists, that are now about insurance, reimbursement that are now about a potential repeal of – and also they didn’t know about the potential repeal of Obamacare 40 times in the first nine months for the year, Republicans strived to overturn Obamacare 40 times. So that clearly has created confusion, we hear and we believe in dentists in closing sales because Obamacare also imposes a tax on anything you buy. So dentists obviously they will have to pay more. We are reacting clearly and we have reacted to this difficult market conditions and so we have made changes.

[Joseph P. Munda:]

Okay and but what are -- that’s still confusing but what the changes that you are making, how is that going to affect or impact the decision making of the dentists? I mean I am guessing there is pent-up demand, it's just they’re delaying their purchasing.

[Frederick D. Furry:]

Joe I think it's fair to read into the fact that we are making these changes that we feel like we could have done better. So we are not representing that all of the issue is external factors. I mean the fact that we changed our sales and marketing leadership and we’ve changed the structure of our account managers and we’ve changed personnel at the account managers more than last quarter, that plus the leadership change. And we’ve made significant structural changes to our sales force because we came on the conclusion that we could have been doing better internally. So that has to be part of the answer to your question about what affected the results.

[Federico Pignatelli:]

Also it's important to understand that path of the change and Alex already has earlier talked upon this issue, the sales force was selling everything. In essence went from selling only WaterLase last year, one product only, to selling WaterLase diode and imaging and CAD/CAM. So that has created a learning curve for the sales force and inefficiencies. We have now established that we want to create a sales force that is dedicated to all DaVinci Imaging products that will also include the Galaxy that we will launch soon at the New York Dental Show. So all imaging products CAD/CAM, BioMill will be handled by a specialized sales force. So the core sales force can still concentrate on WaterLase and then collaborate with all the DaVinci product lines.

[Joseph P. Munda:]

Okay thank you.

[Frederick D. Furry:]

Thanks Joe.

[Operator:]

Thank you. Our next question comes from [Katherine McGrath] with Robust Capital. Please proceed with your questions.

[Unidentified Analyst:]

Hi guys, thanks for taking my question. A lot of is talk has been about improvement in 4Q and 2014. But how, what gives you confidence that the fourth quarter is going to see an improvement, Obamacare confusions likely are going to remain unsettling in to 2014. So I guess I am having hard time understanding what gives you increased confidence that 4Q is going to be better than 3Q?

[Federico Pignatelli:]

Well there is a hard stop in Q4 because of the tax advantages of rule 179. So clearly the dentist has at the certain point to take the decision to buy or not buy and take or not take the tax advantage. So we believe that, that will occur and Obamacare or not Obamacare that has created a lot of confusion case eventually dentists they have to run on with their business. And I know that we are not the only one that has been in the dental business, being suffering from the uncertainty in the dental market from everything that is happening. Dentists they listen a lot to their -- because they are small businesses they listen a lot to their accountants, for instance and in an uncertain climate they react quite emotionally. Now there is this hard stop at year end with tax advantages. So we are very positive on renewed growth and we are very strong about the fact that Q3 represents the low point of all this transitional phase in BIOLASE restructuring itself from a one product company to a multi-product company.

[Alexander K. Arrow:]

Kath, it’s also good to just look historically in good years and in lean years for BIOLASE the fourth quarter has consistently been our best quarter by material amount and even though for our third quarter 2013 results we are down year-over-year versus 2012 that doesn’t say anything about changing the normal seasonal pattern of the four quarters of the year that BIOLASE has had during the year out. So as you can tell from the guidance that Fred gave for our top for the end of the year if you do the math and subtract our guidance we’re actually guiding towards the fourth quarter which is somewhat down from fourth quarter 2012 but still up significantly from the third quarter 2013 because we believe that seasonal pattern is persisting. And that’s got to be part of the answer to the question you asked about why we feel confident that 4Q is going to be a bit of rebound.

[Federico Pignatelli:]

Also it’s very important to realize there is a huge amount of interest from dentist towards the WaterLase and towards lasers in general. So there is no war there at all. Like I said we have a record number of fence seaters, is that there is anxiety in the marketplace. And these are anxieties that can be justified by the important changes that have been happening in the overall healthcare.

[Unidentified Analyst:]

Okay. And for the ENT launch while that’s exciting, the softness this quarter was attributed to a sales force that’s may be into the learning curve as this adds on another product that is outside of the core dental market. So how should we be thinking about this from revenue ramp standpoint and how are you going to keep yourself course focused on driving the core dental market sales, while also the expenses of rolling out the ENT?

[Alexander K. Arrow:]

Sure thanks, unlike the launch of our imaging product lines, the ENT product lines are not going to be handled by our existing force. We have a limited ENT sales force planned and we have a couple of our dental sales reps that have ENT background that have helped us just on the one trade show we have gone through so far. So this is not a time sync for the dental sales team the way that you might think of another time, the expense on imaging. ENT is an interesting opportunity, it’s one of that haven’t been in before, it’s the first time we sold to a non-veterinary, non-dental clinician but it’s not part of our guidance or our forecast. So it’s really up to you as analysts to decide how much progress do you think we can make with the 9,000 practicing ENTs in this country. It’s got a better price points because it’s competing with much higher priced laser products for ENT. So it’s got better margins for us. But we’re not going to position now to quantify predictions or guidance for it, other than to say that there is some upside there that it seems like pretty low hanging fruit given the development cost is well behind us, it’s all been created and cleared and launched, it’s a question of starting to take baby steps into that market.

[Federico Pignatelli:]

It is definitely an upside opportunity for 2014.

[Unidentified Analyst:]

All right. Thank you for taking the question. I’ll get back in queue.

[Federico Pignatelli:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Kay [Natin] of Ascendiant Capital. Please proceed with your question.

[Federico Pignatelli:]

Hi, Kay.

[Unidentified Analyst:]

Hi, how is it going guys. This question is for Fred, Fred if you can, can you tell us what new negotiated covenant for EBITDA in Q4 is?

[Frederick D. Furry:]

Yeah, so it’s an EBITDA loss of $0.5 million.

[Unidentified Analyst:]

Okay, great. And then for either for any of you really, the cost reductions you are talking about, if I heard Alex correctly, some reduction in cost of goods sold, some reduction in margin, but can you be more specific about those cost reductions and any type of savings that you are looking to target?

[Federico Pignatelli:]

Well, let me answer to that. I mean we are looking at every expense lines of the marketing and redirecting dollars in a different manner. We have spent considerably in the first six months with a large increase compared to last year in print advertising and we don’t see that return on investment there as used to be. We also don’t see return on investments as we use to see in participating at trade shows. The attendance of trade shows has gone down drastically. The whole marketing of dental equipment is shifting in a different way that we are evaluating and assessing, it's really changing from what used to be traditional. And traditional is what we discussed before that is essentially trade shows that we use to participate four year then on a yearly basis, print advertising and some dentists they used to respond to all of that. Now there is a shift towards more Internet-based and localized clinical meetings and so we are actually moving towards a much large number of WCLI’s that is the World Clinical Laser Institute that we founded and that we own. And have many of these WCLI’s meetings that usually they are address to, from 5 to 20 dentists at a time to push the WaterLase technology, the way that is more efficient. So we moved away from the large trade shows, we are going to still participate to some of them but we are going to try to allocate dollars in a more efficient way with a higher return on investments towards smaller clinical meetings.

[Unidentified Analyst:]

Yeah, so I can appreciate how you are trying to be smarter, more efficient about how you spend your dollars. But are you targeting an actual cost savings now?

[Federico Pignatelli:]

Yes we do expect to save money as trade shows they’ve been very expensive and in fact the cost of them is the reason why the return on investments has dropped. So we will definitely -- we are looking in all possible ways to save and reallocate in the proper manner marketing money. And we have embarked any way in the cost saving mode on all aspects of the company, so not only certain markets.

[Unidentified Analyst:]

Okay, thanks I will get back in queue.

[Federico Pignatelli:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Robert Hoffman with Princeton Opportunity Partners. Please proceed with your questions.

[Robert Hoffman:]

Guys could you talk a little bit about the better structure for sales people in the related different products? Are sales people incented at the same or more to sell WaterLase? And if there are any business setups to marketing WaterLase versus the potential easier sale of sort of the imaging system? Thank you.

[Federico Pignatelli:]

Yes the highest level of commission they have on WaterLase and we reward clearly our sales force to concentrate more on selling WaterLase. But at the same time in 2013 we decided to take the step to have the sale force to think in a wider mode of products and push the diode line as well that it is almost one-eighth of the cost of a WaterLase. So clearly that was a necessary step that we needed to take because we needed to push the new product, the diode, Epic that we launched at the end of last year. And once it’s launched in the market from our sales force and we have hundreds of units in the market and it is appreciated as a laser diode laser then we can have our inside sales force that essentially operates on the phone to do telemarketing. And so we needed to have first EPIC be pushed by our sales people and be appreciated by doctors. And then once that phase has occurred we can have obviously different means to market the diode line. Regarding imaging being a product that is more standard of care we have lower commissions for our sales reps. But again we have moved now to a different mode where we’re going to have a dedicated sales force that we already have started to assemble for all the products that are under the DaVinci Imaging division. And so they are going to work together with our core sales force of WaterLase and diode sales force but they are going to handle specifically the ENT product line.

[Robert Hoffman:]

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

[Federico Pignatelli:]

It’s never been that way, it’s never been the same commission at all. We always favored the higher commission for the WaterLase what needs to be understood and I know it is difficult to accept lower results but BIOLASE has been traditionally a one product company, the WaterLase. We are now -- we have graduated BIOLASE to be a multi-product serving an entire line of high tech dental products for dental practices. We are strongly convinced that this is the right strategy for the long-term. So we are paying a price, this year in 2013 because of this transition. But we’re going to be rewarded in 2014 and beyond for this implementation of the new strategy where we don’t only sell the WaterLase it still remains our primary product, our core product but the fact that we have now a full line of all that a dental practice can need in hi-tech is going to help us tremendously in growth and in market penetration also with our core product and technology that is the WaterLase.

[Robert Hoffman:]

Great, thanks I’ll get back in the queue.

[Federico Pignatelli:]

Thank you.

[Operator:]

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

[Paul Bornstein:]

Yeah hi, I had one main question, I think I covered previously the sales issues and I know you are trying to get on top of it but you still have a lot of headwinds. But on the M&A transactions you have a lot of technology probably the pieces of what more than what the stock is than you have execution. And I am just wondering how quickly you got the YAG lasers, you have skin lasers. Are you looking for partners? Are you looking for someone to take over all the technology, partners meaning that can help with the sales process and getting out of the market place? Because seems like you guys are overwhelmed trying to get all the dental laser products out there which are numerous, great technology but the execution has not been very good as you’ve indicated. So I am just wondering how quickly and what kind of push are you putting on there so some of the value add should come even outside the dental arena since you have a lot of technology out there in the market place that hasn’t really been executed on?

[Federico Pignatelli:]

Paul, first of all let me say in clear letters we are very optimistic about the future of BIOLASE as a company. We are very optimistic that our strategy in the dental market will work and we are very optimistic that the WaterLase technology is a technology that will have a great level of penetration in the dental market. So nothing has changed. We have definitely so many applications for the WaterLase technology also in medical markets that we are exploring the possibilities of partnering of selling. We are exploring essentially all opportunities that can be beneficial to increase shareholder value. I clearly am against unnecessary dilution, so we will also look at ways to raise possibly cash to be dedicated to our core business. So we are open to all opportunities that we can and expect that they will.

[Paul Bornstein:]

And so this is one of the things that remains on your burner right now besides generating sales in the dental markets? You are actually trying to get some of this technology out there in the market place with a partner or an acquisition candidate? Is this one of the real big pushes you have on right now within that three to six months?

[Federico Pignatelli:]

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

[Paul Bornstein:]

Okay well, you’ve been with the company for years. So we can value that but obviously it's going to be on the execution. And maybe you should double your salary and you’ll have a lot more incentive, I am only kidding. So well, then.

[Federico Pignatelli:]

Well as you know is to have a stock that goes up on the side of the shareholder.

[Paul Bornstein:]

I know and I appreciate that. I just wish the sales people were on the same level dollar and then they get huge payouts for sales. Because obviously you guys are working through that process right now.

[Federico Pignatelli:]

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

[Paul Bornstein:]

Okay. We’re all looking forward to seeing the results in next couple of quarters?

[Federico Pignatelli:]

We will be there delivering.

[Paul Bornstein:]

Okay. Thank you.

[Federico Pignatelli:]

Thank you, Paul.

[Operator:]

Thank you. We have a follow-up question coming from the line of Robert Hoffman with Princeton Opportunity Partners. Please proceed with your question.

[Robert Hoffman:]

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

[Federico Pignatelli:]

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

[Robert Hoffman:]

It’s just confuses me that given the smallest of some of the ancillary businesses versus the largest of the dental opportunity and doesn’t it make more sense for somebody to say I am not go through all this I want to get all the upside of this technology, I mean I don’t just this little piece of the technology.

[Federico Pignatelli:]

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

[Robert Hoffman:]

And follow up on what somebody asked originally if the investment bankers were to find someone who said okay we want to pay 350 a share for entire shooting match that’s something that you would consider?

[Federico Pignatelli:]

Well I frankly would be extremely disappointed to hear a 350 but obviously whatever comes the Board has to evaluate. I mean we had an obligation to do that but let’s not forget that BIOLASE just in March 2013 was at $6. So I don’t expect that the 350 to pay any interest in the Board to BIOLASE but again any offer that is reasonable is done to buy the entire company but that is nothing to do with today. At any moment in the history of the company or in the future of the company it is an obligation of management to bring it to the attention of the Board and have the Board evaluate it or not. We do have a poison pill in place so clearly has to be a friendly deal otherwise you will not succeed.

[Frederick D. Furry:]

But Rob to get to the first part of your question about what is different today compared to previous efforts where we had a subsidiary OCCULASE created for ophthalmology technology and we had given to P&G on the laser toothbrush. We have some significant progress in ENT and veterinary that we didn’t have been. In both cases we have cleared products that have, we haven’t put marketing resources behind, but that are cleared on the market for a would be acquirer to who is interested in an ENT opportunity or a veterinary opportunity. The ophthalmology side of our business in OCCULASE has some really impressive human data for major ophthalmology markets. So it's not really a little piece of the technology that each of these divisions represents and we have a fundamental technology in WaterLase that is a achromatic way to oblate tissue that has major advantages over conventional cutting techniques in terms of being more bloodless and in certain applications with lower pain thresholds and then more natural tissues is preserved in the cutting process. It's not just a little piece of the technology that is each one of these opportunities, these are significant business opportunity. So we think there is really something there and the initial talks with potential bankers that we have been engaged on this assignment are encouraging, that there is a lot there for us to talk about.

[Federico Pignatelli:]

Just the applications of WaterLase in certain aspect of ENT can generate hundreds of million dollars in opportunities for BIOLASE. So and we are talking about having the potential in medical of very valuable opportunities; ENT, we mentioned, orthopedics is another one. We already have clearance to [cut capillaries], we expect in the future to get also approval to cut done. So there are several aspects of what we have being doing in the past few years that are starting to really bring value to everything that is over and above what the dental business contributes for BIOLASE. Again we believe that the opportunity for WaterLase technology and also our new efforts at becoming a total technology solution provider in dentistry it is enormous. So nothing has changed, yes we had issues in 2013 in the shifting of strategy, repositioning the company. We had some inefficiencies. We also were operating in a very difficult environment. The fact is that there have been a huge reform in health care and that has created a lot of confusion. We are not the only company suffering from it. So again I would like to remind the fact that the dental field is composed of 140,000 small business owners. We are not talking about hospitals, we are talking about 140,000 small business owners. So they react slower and more emotionally than in other field or medicines.

[Robert Hoffman:]

Great, thank you.

[Federico Pignatelli:]

Thank you.

[Operator:]

Thank you. We have a follow-up question coming from Suraj Kalia from Northland Securities. Please proceed with your follow up.

[Suraj Kalia:]

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

[Federico Pignatelli:]

Suraj, frankly we looked at that, I mean there is, to a certain extent everything is price sensitive. Obviously if I can offer a machine instead of $100,000 if I can offer at $75,000 I am going to increase demand but that will decrease obviously the gross margin. So I would say that price is really not a big issue, it’s selling of WaterLase. We feel that is mostly the level of anxiety of a dentist to say I am doing things in a different way and I have to make that step. So it is definitely about education, it is definitely about the environment in which he is taking that financial decision. It is a substantial investment, like anything else imaging of anything that is capable equipment and high tech it is going to give, I mean, just a certain level of anxiety in the dentist in moving towards a direction. But eventually everything is resolved because clearly technology is the new way in dental practices and if a dentist is not upgrading his dental practice with new technologies eventually will be cut out of the marketplace. And he would be losing patients towards every dentists and dental practices that are investing in technologies. So we believe that what has happened in 2013 is just a pause in what is a strong long-term trend in dentistry adopting in a big way new technologies and we can see that accelerating. So we are again very confident about adoption of WaterLase in the dental market as we are very confident in the new product launches that we have recently established in imaging CAD/CAM and very much also in the newly announced Galaxy BioMill System. We are providing the best of the technology and we believe that, that is the right strategy for BIOLASE to become much bigger company and very profitable.

[Suraj Kalia:]

Fair enough, thanks for taking my question.

[Federico Pignatelli:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Gerald [Gollorino with Gollorino] Consulting Services. Please proceed with your question.

[Unidentified Analyst:]

Yes I am wondering if Dr. Moll and Auris, if you still have a working relationship, concerning possibly whether it would partnering with the company or still have the working relationship with him and if he’s going to be maintained on the Board?

[Federico Pignatelli:]

Yes, he is on the Board and we do have the working relationship with Auris, that is a company that he has founded. And we’re very proud to have that working relationship with his company. In fact talking about Fred Moll, Fred has gotten to know BIOLASE at the beginning of 2013 and he has gotten to know the technology of BIOLASE the worth of the technology and he, that we all know he is a legend, Fred Moll in the medical field and he understands and he appreciates good technology. He really understood the value in medicine of the WaterLase technology. So when later on after he had evaluated for months that WaterLase technology also in relation to robotic in particular to ophthalmology because obviously he’s involved in the field, when invited he accepted to be part of the Board of BIOLASE. So I think that that is a very strong kind of endorsement from a person that really understand medical technology and the value of WaterLase technology and the incredible opportunities that WaterLase technology creates in medicine and in dentistry.

[Unidentified Analyst:]

Okay I want to thank you very much for that.

[Federico Pignatelli:]

Thank you.

[Operator:]

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

[Federico Pignatelli:]

Well thank you all for having participated. I know that 2013 has not been the most rewarding year that we have in the past few years. We turned the company around entirely we grew sales tremendously from 2010 when the new management took over. Again let's take the 40,000 feet view, we were running a $4 million on a quarterly basis and now we are at a much higher level. So overall we took a company that was really struggling and we made into a vibrant company, growing very substantially. Yes, we have lost money in the past two years but we also have lost money by investing in the future of the company and we have created a very strong transaction with this investment for the company to be projected in 2013 and beyond in a completely different level, not just being depended on one product but by multiple products that will have by the way the penetration in dental practices of the WaterLase technology that is our core technology and our core product. When we enter into a dental practice and we talk about whatever needs in high tech we have we establish a relationship with the dentist with the dental practice so we can further everything that we have. It is a much stronger strategy then just to knock at the door of dental practice and say I have one think to offer you, I have a WaterLase. So that is what has to be taken in consideration. We have invested in the past year and a half to create a new BIOLASE and this new BIOLASE we are very confident will make you very proud as shareholders. Thank you for that and I am looking forward to have you on the call next quarter.

[Operator:]

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