BIOLASE, Inc.
Q4 2012 Earnings Call Transcript

Published: 7 Mar 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the BIOLASE 2012 Fourth Quarter Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, March 6 of 2013, and I would now like to turn the conference over to Lisa Wilson, Investor Relations for BIOLASE. Please go ahead.

[Lisa Wilson:]

Thank you. Good afternoon everyone and thank you for joining the BIOLASE fourth quarter and year-end 2012 financial conference call. Today’s call will include remarks from Federico Pignatelli, Chairman and Chief Executive Officer; and Fred Furry, Chief Operating Officer and Chief Financial Officer, followed by a question-and-answer period. When listening to this call, please refer to the press release issued earlier today announcing the Company's result for the fourth quarter and year ended December 31, 2012. If you do not have a copy of this release, it is available on the BIOLASE website at biolase.com. Before we get started, please be aware that a number of forward-looking statements will be made during this presentation. Forward-looking statements are any fact that are not historical facts and can be identified by words and phrases including, can be, may affect, may depend, believe, estimate, project, and similar words and phrases. These forward-looking statements are based on BIOLASE’s current expectations and are subject to a variety of known and unknown 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 as of any subsequent date. For the benefit of those who may be listening to the replay, this call is held and recorded on March 6, 2013. A replay of the call will be available on the BIOLASE website shortly after this call's completion. The Company’s 2012 fourth quarter and year-end results can also be found on the Company’s annual report on Form 10-K, which the Company will file with the Securities and Exchange Commission. With that, I’d like to turn the call over to Federico. Federico, please go ahead.

[Federico Pignatelli:]

Thank you, Lisa, and good afternoon, everyone. The fourth quarter of 2012 reflected a favorable and positive result of the significant restructuring that BIOLASE is undergoing during its turnaround over the past three years, where we have improved our financial condition and increased the growth in our core dental business. It gives me great pleasure to report that we exceeded our stated high range of revenues guidance for the 2012 fourth quarter by approximately 9%, with revenues of $19.1 million. This is the highest quarterly revenue for the Company since 2007. This growth was driven by the continued demand of our core line WaterLase all-tissue laser and our newly released EPIC soft-tissue diode laser. Our revenues were also augmented by sales of our in-licensed digital imaging products, including the initial sales of our CAD/CAM system. Additionally, our gross revenues for the year totaled $58.5 million after adjusting for the inventory repurchase in connection with the Schein termination agreement in Q2 2012. I'm very pleased to know that this result was the exact midpoint of our initial guidance for the year. This is also the highest level of sales by BIOLASE since 2010. We also achieved improved margins and reduced our general and administrative expenses enabling us to report net income for the quarter of $1 million, or $0.03 per share. I will discuss our business and key growth drivers in greater detail, but first I would like Fred Furry, our COO and CFO to review the financial information for the 2012 fourth quarter and full year. After that, Fred and I will be glad to answer your questions.

[Frederick D. Furry:]

Thank you, Federico, and good afternoon. For the quarter ended December 31, 2012, we reported net revenue of $19.1 million versus $13.2 million for the fourth quarter of 2011, representing quarter-over-quarter growth of 45%. The 45% increase in net revenue was due to the increased sales across all of our revenue streams, including our line of all-tissue WaterLase lasers, diode soft-tissue lasers, imaging systems and consumables, with the primary driver being higher sales of our all-tissue WaterLase system. Unit sales in our WaterLase product line increased by 42% in the 2012 fourth quarter as compared to the prior year quarter. Such growth was primarily the result of the continued success of our direct sales force in North America. Revenues from the sale of WaterLase systems during the 2012 fourth quarter totaled $11.7 million, an increase of $2.6 million or 29.2% as compared to $9.1 million in the 2011 fourth quarter. The number of WaterLase systems sold increased by a larger percentage than WaterLase revenues quarter-over-quarter as a result of our strategy to offer systems of varying capabilities at multiple price points. The iPlus is still our flagship product and our primary revenue driver, and we expect this to continue in 2013. By offering multiple product configurations across a range of price points, we believe that we can attract more customers, drive adoption, and generate more significant product and consumables revenue. WaterLase system sales comprised approximately 61.5% of net sales for the 2012 fourth quarter compared to 69.0% for the prior year quarter. The majority of these WaterLase revenues in both quarters were from the sales of the Company's flagship, WaterLase iPlus all-tissue laser system. Diode laser system sales comprised approximately 14.4% of net revenues for the 2012 fourth quarter compared to 11.6% for the prior year quarter. As you recall, our diode sales were impacted in the second and third quarters of 2012 due to the pending regulatory clearance of our new EPIC diode laser system. As we had expected however, sales of diode laser systems increased significantly in the fourth quarter, following receipt of FDA clearance in early October. Diode laser sales for the 2012 fourth quarter increased $1.3 million, or 79.9%, to $2.8 million compared to $1.5 million for the 2011 fourth quarter. We believe that the favorable price point of our EPIC diode soft-tissue laser system will continue to broaden the demand for lasers and create an up-sell opportunity for our more expensive, all-tissue WaterLase systems. Imaging revenues totaled approximately $1.6 million, or 8.6% of net revenue, during the 2012 fourth quarter as compared to $138,000, or 1.0% of net revenue, for the prior year period. This represents growth of over 1000%. We also expect that by leveraging our growing direct sales force, which has already affected in selling high-tech equipment and improving quarterly, to sell our high-tech in-licensed cone beam and CAD/CAM imaging products, we will create more BIOLASE customers who will ultimately have interest in our core laser product. Gross profit as a percentage of net revenue was 46.6% as compared to 42.2% for the prior year period. This year-over-year increase for the fourth quarter was primarily due to higher unit sales of our core product, combined with decreased costs of revenues as we continue to improve our manufacturing processes and quality and our service and warranty expenses continue to decline. It is especially notable that our margins continue to improve while sales of our in-licensed product also continue to grow as our in-licensed products generally have (indiscernible) lower margins than our manufacturing products. Operating expenses in this year's fourth quarter were $7.7 million, or 40.4% of net sales, as compared to $7.5 million, or 56.9% of net sales, in the 2011 fourth quarter. The increase in sales and marketing expense is primarily a result of sales commissions incurred on higher system revenues as well as higher payroll and consulting costs associated with the development of our direct sales force in North America and an increase in convention costs, which were offset by a decrease in the cost of supplies. General and administrative expenses and engineering and development costs were lower in the 2012 fourth quarter than in the prior year due to primarily decreased payroll and consulting fees. Patent costs and bank fees have increased while other legal costs have decreased. As a result, net income for the fourth quarter of 2012 totaled $1 million, or an income of $0.03 per share, compared to a net loss of $2.0 million, or a loss of $0.06 per share, for the 2011 fourth quarter. After removing interest expense of $99,000, non-cash depreciation and amortization expenses of $140,000, and non-cash stock-based, other equity instruments, and other non-cash compensation expense of $383,000, the 2012 fourth quarter resulted in non-GAAP net income of $1.7 million, or $0.05 per share, compared with a non-GAAP net loss of $1.3 million, or a loss of $0.04 per share, for the 2011 fourth quarter. Turning to the earnings results for the year-ended December 31, 2012, on a GAAP basis, net revenue totaled $57.4 million, compared to $48.9 million for the prior year. Adjusting for the inventory re-purchased in connection with the Schein termination agreement, which was offset against our 2012 second quarter revenues, non-GAAP adjusted revenue for fiscal 2012 was almost $58.5 million, which was the midpoint of our initial annual revenue guidance for 2012. This is an increase of $9.6 million, or 19.7%, as compared to net revenue of $48.9 million for fiscal 2011. When excluding both the 2012 inventory re-purchased in connection with the Schein termination agreement and the 2011 non-recurring event of equipment sales to Schein for irrevocable purchase orders of $5.9 million; non-GAAP adjusted revenue of $58.5 million for 2012 represents a 36.1% increase over non-GAAP adjusted revenue of $43 million for the prior year, which was right in line with our guidance of 36%. Domestic revenues were $40.6 million, or 70.7% of net revenue, for 2012 compared to $32.8 million, or 67.1% of net revenue, for 2011. International revenues for 2012 were $16.8 million, or 29.3% of net revenue, compared to $16.1 million, or 32.9% of net revenue for 2011. The number of WaterLase systems sold during 2012 increased by 37.1%, primarily due to increased sales of our flagship, WaterLase iPlus systems, and sales of our MD Turbo laser systems, including 100% of the laser systems that the Company re-purchased in connection with the Schein termination agreement during the 2012 second quarter. There repurchased systems were sold throughout the 2012 second, third, and fourth quarters at margins consistent with our other laser products. The inventory repurchase was a tremendous opportunity for BIOLASE and we demonstrated what a well-trained and properly motivated sales force can do. We will continue to offer our lower-priced new and used MD Turbo laser systems as well as our mid-priced MDX laser systems as all-tissue alternative to our flagship iPlus in 2013. GAAP net revenues from the sale of WaterLase systems, which includes the effect of the $1.1 million inventory repurchase from Schein during the 2012 second quarter, increased $6.8 million, or 23.1%, for 2012 as compared to the prior year. Excluding the effect of the Schein inventory re-purchase and the 2011 non-recurring event of equipment sales to Schein for irrevocable purchase orders of $2.3 million, non-GAAP adjusted net revenue from the sales of our WaterLase systems for 2012 increased by $10.2 million, or 37.7%, compared to 2011. WaterLase system sales comprised approximately 62.8% of gross revenues for 2012 compared to 59.9% for the prior year period. The majority of these WaterLase revenues were from the sales of the Company's flagship WaterLase iPlus all-tissue laser system. Revenues from the sale of diode laser systems decreased $2.9 million, or 31.2%, to $6.3 million for 2012 as compared to $9.2 million for 2011. Diode laser system sales comprised approximately 11% of our net revenues for 2012 compared to 18.8% for the prior year. Excluding the effect of the 2011 non-recurring diode sales to Schein for irrevocable purchase orders of $3.6 million, non-GAAP adjusted net revenue from the sales of our diode systems for 2012 increased by $729,000, or 13.1%, compared to 2011. Diode laser system sales were negatively impacted during 2012 due to market anticipation of our new EPIC 10 diode laser system which was cleared by the FDA in October 2012. Imaging systems net revenue, which includes our in-licensed cone beam and CAD/CAM products, totaled $3.4 million for 2012 as compared to $238,000 in the prior year. We added cone beam digital imaging to our product offerings in late 2011, and further enhanced our imaging products with the addition of CAD/CAM intra-oral scanning in late 2012. These in-licensed imaging systems are expected to generate greater revenue growth in future periods while increasing awareness in our core internally developed laser products. Other revenues comprised of consumable products, services, and license fees, and royalty revenue, increased approximately $1.4 million to approximately $11.6 million in 2012 as compared to $10.2 million in 2011. The increase was primarily the result of ancillary sales from a broader customer base. Gross profit as a percentage of net revenue was 46.2% in 2012 as compared to 43.6% for the prior year. The year-over-year increase was primarily due to increased sales of WaterLase systems and increased sales of consumables, coupled with lower costs of revenues, reflecting lower service and warranty expenses due to ongoing improvements in our manufacturing processes and quality. Operating expenses totaled $29 million for 2012, or 50.6% of net sales, as compared to $25.3 million, or 51.8% of net sales, in the prior year. The increase was primarily due to increased sales commissions earned on higher revenues, increased convention costs associated with the imaging product lines, increased payroll and consulting costs related to further development of the Company's direct sales force, and increased media and advertising costs. The net loss for 2012 totaled $3.1 million, or a loss of $0.10 per share, compared with a net loss of $4.5 million, or a loss of $0.15 per share, for 2011. After removing interest expense of $239,000, non-cash depreciation and amortization expenses of $513,000, and non-cash stock-based other equity instruments and other non-cash compensation expense of $1.9 million, the non-GAAP net loss for 2012 totaled $431,000, or a loss of $0.01 per share, compared to a non-GAAP net loss of $1.4 million, or a loss of $0.05 per share, for 2011. Turning to the balance sheet, as of December 31, 2012, we had approximately $7.5 million in working capital. Cash and cash equivalents totaled approximately $2.5 million compared to $1.3 million at September 30, 2012, and $3.3 million at December 31, 2011. Accounts receivable totaled $11.7 million compared to $10.3 million at September 30, 2012, and $8.9 million at December 31, 2011. Stockholders' equity was $11.8 million at December 31, 2012. In addition, the Company had two revolving lines of credit with Comerica Bank totaling $8 million, with $1.6 million outstanding and $6.4 million of available borrowings at December 31, 2012. Moving on to financial guidance, we are very excited as we look ahead to 2013 after closing 2012 on a strong cash positive note. We plan to invest heavily in sales, marketing and advertising efforts in North America and internationally during the 2013 first-quarter. We have already attended several trade shows and are committed to attending several more, including the WCLI Super Symposium. These events can be expensive but they generate sales from the events, generate significant interest in our product offerings, and create a large amount of lease (indiscernible) to the show. As a result, we anticipate that these efforts will be a draw on our cash flows from operations for the 2013 first quarter, but that they will provide a cumulative overall benefit and help the Company generate cash from operations through 2013 as a whole. Additionally, under the Affordable Care Act, which became effective in January 2013, semi-monthly instalments for a 2.3% excise tax on a substantial portion of our products sales to customers located in the United States becomes due on payable. We are evaluating our pricing strategy and operational initiatives to identify areas of cost savings that may help to offset the negative impact of this tax. With that, I will turn the call back to Federico.

[Federico Pignatelli:]

Thank you, Fred. 2012 fourth quarter was another productive and active quarter for BIOLASE with 35% growth quarter-over-quarter. This growth was driven by continuous growing demand for our flagship WaterLase iPlus and EPIC diode soft-tissue laser, for which we received FDA clearance in early October. A portion of the increase in net revenue in the 2012 fourth quarter is a direct result of the worldwide sales of these innovative (indiscernible). I continue to be extremely pleased with our efforts and success in the turnaround of BIOLASE. In addition, our testimony to our success, the Orange County Business Journal cited BIOLASE as being one of the fastest-growing public companies in 2012 for its two-year revenue growth of 58.5% for the 12 months ended June 2012 compared with the same period for 2010. I want to underscore the importance of our achievement and to know that BIOLASE achieved the successes despite facing strong headwinds caused by surplus of our own laser systems sold into the marketplace by Henry Schein in 2011 and early 2012. Nevertheless, our strategy to sell to end-users and to dealers that sell to end-users has led to significant revenue growth and no inventory accumulation at our distributor. It indicates that we have worked through the issues of past management involving inventory buildup and are completely beyond the overhang that this created for BIOLASE. We now have a clean slate from which to move forward and build the Company for continuous success in 2013. Furthermore, we expect to continue to benefit from the efforts of our (indiscernible) outside sales force and established inside sales organization, both of which continues to drive sales growth during the 2012 fourth quarter. We expect this traction to continue in 2013. Our inside sales representatives and lead generators work in partnership with our direct outside sales team to sell our lines of internally manufactured laser systems and in-licensed imaging products, renew customer, leverage the Company's existing installed laser system and drive new dentists to our sales seminar. We intend to continue to invest heavily in the training and education of our sales team because a well-trained effective sales team is critical to driving increased adoption of our product. Now, let me go into more detail about the business and our overall progress. WaterLase remains our core product line and this technology is what makes BIOLASE unique. Conventional surgical devices such as the scalpel, high speed drill, (indiscernible) electric bone saw, and even heat generating lasers, all create (indiscernible) to tissue and cause pain. WaterLase is a destructive technology that is changing the way that surgery is performed in dentistry. The WaterLase is a brand-new approach to surgery which greatly expands a dentist product offering and greatly increases patient acceptance. Further, additional sterilized surgical devices can carry pathogenic microorganism from patient to patient. (indiscernible) failed 15% of the times, to contaminate a dental burst, which by nature has very rugged surfaces, and 76% of the time to decontaminate (indiscernible) for root canal surgery. A recent article in Business Week from the February 25th to March 3rd, 2013 issue noted that over 100,000 people in this country die each year from hospital acquired infection. WaterLase technology is bacteria (indiscernible) and can significantly reduce cross-contamination in dental surgery. Our strategy within dentistry remains to broaden our WaterLase, diode and in- licensed product lines to drive adoption of our core products. The WaterLase iPlus delays is our flagship product and our primary revenue driver and we expect this to continue in 2013 but we also believe that by offering multiple product configuration at multiple price points, we will attract more customers and generate greater adoption and revenue. Further, the favorable price points of our EPIC diode soft-tissue laser system will also continue to broaden the demand for lasers and create an up-sell opportunity for our more expensive all-tissue WaterLase system. We have also (indiscernible) growing direct sales force which is really effective in selling high-tech equipment to sell our high-tech in-licensed cone beam and CAD/CAM imaging products. These products will of course add to revenue but they will also create more opportunities for our core laser product. During the 2012 fourth quarter, we launched the EPIC diode soft-tissue laser. This next generation diode soft tissue laser features ComfortPulse, BIOLASE's proprietary technology that allows dentists to precisely control the level of laser energy that penetrates the target tissue. ComfortPulse keeps patients more comfortable by avoiding pain inducing heat buildup at the surgical site, which can cause excessive tissue [damage] (ph). Further, the epic features a revolutionary intuitive application based user interface, with a high-resolution (indiscernible) program with 15 of the most commonly performed soft tissue procedure, including pain therapy, which is a highly popular treatment in the dental community for aggressive pain in the oral (indiscernible) region. We also executed a definitive five-year agreement with 3Shape Corporation during the 2012 fourth quarter, making BIOLASE a distributor of the TRIOS intra-oral scanning system in the U.S. and Canada to dentists, dental specialists and dental school. After launching the TRIOS at the ADA meeting in San Francisco in October, the initial reception has been very positive. We have already seen an impact from TRIOS revenues in 2012 fourth quarter and looked over the contributions that we will continue to have in 2013. Moving back to our core technologies, we currently have a number of 510(k) submissions filed and under review by the FDA, including three filed n the beginning of 2013, and we expect to submit several more key 510(k)s throughout the rest of the year. This pipeline of incremental opportunities will be important as we strive to build upon our core dental franchise and develop into new areas where we can maximize our expensive patent (indiscernible). Looking beyond our core dental platform and without taking our focus away from it, we also see many exciting opportunities for our innovative patent and laser technologies in various medical fields. As we have mentioned before, there are multiple applications available for BIOLASE in ophthalmology. We launched the Occulase website earlier this year to showcase how this wholly owned subsidiary can expand WaterLase technology as a related intellectual property into ophthalmology, where we believe there are a number of surgical and non-surgical applications. With minimal destruction to our core dental laser business, we are currently performing proof of concept for research and clinical standards with a system of various ophthalmic specialists under the supervision of Dan Durrie, Occulase's Chief Ophthalmic Advisor. At the same time, we are looking for strategic partners through a joint venture or added approach to invest in Occulase for an ownership percent to commercialize this tremendous opportunity. Counting on the deals of our Occulase announcement, we received a new patent covering the use of laser technologies with (indiscernible) various conditions of the eye, including (indiscernible), glaucoma, retinal disorders, and care products. BIOLASE currently holds a total of 19 issued and 21 pending U.S. international patents in ophthalmology. Another growing segment of medicine is pain management, reaching into the billions each year in revenue. (indiscernible) and economic factors can all impact the (indiscernible) pain and discomfort that they can create – that'd be effectively treated with our diode laser. Diode technology is extremely effective n anti-inflammatory manipulation in muscle and nerves, and can even be used to treat a bigger manifestation. Our EPIC and diode laser is already FDA cleared for this indication and we have seen significant demand for this product for (indiscernible) and providing temporary pain relief in dentistry. The current three clients who enter these large market with our modular EPIC plus point using an independent sales force separate from our core dental sales force, and approaching chiropractors for therapy office. In February 2013, we also received FDA clearance for the 940 nanometer Diolase and diode soft tissue laser for using over 80 different procedures in 19 additional medical markets. These new markets include general surgeon, ophthalmology, dermatology, plastic surgery, ENT, oral surgery, arthroscopy, gastroenterology, podiatry, GI/GU, genecology, eurosurgery, pulmonary surgery, cardiac surgery, thoracic surgery, urology, aesthetics and vascular surgery. These FDA clearance, these are first step in enabling BIOLASE to leverage its modular EPIC dental diode laser platform and consumable business across a wide range on multibillion-dollar medical market with a focused strategic partner. As an example, we have recently launched the EPIC beam (indiscernible) soft tissue that is laser, which is based on our modular EPIC dental laser at the 85th Western Veterinary Conference held in February 2013, at which we demonstrated the product and took advance orders. While these are (indiscernible) and will initially be addressed by our inside sales force and through an online store, we ultimately tend to spend this market segment through but (indiscernible) strategic distributor relationship beginning in mid-'013 second-quarter. To give a quick glimpse into the veterinary market, there are approximately 70,000 veterinarians and nearly 74,000 veterinary clinics in North America alone, as well as more than 100,000 veterinarians and 30,000 clinics in Europe. We can address this market with pain management, surgery, and dentistry. This presents an interesting market opportunity for BIOLASE as we believe that we are positioned to capture a portion of this emerging market with our technology to perform surgery and treat gum disease, which as an example is the most common medical problem for dog, category, and horses. In closing, as we move forward in 2013, we no longer expect to be troubled with a multitude of strenuous issues that we faced throughout our challenging turnaround, including accessing our exclusive global distribution relationship with Henry Schein, and returning to direct sales model in North America and multi-distributors (indiscernible) internationally. We reached a number of milestones in 2012 and we are proud of our many accomplishments. We look forward to 2013 and beyond as we expect the substantial acceleration in the adoption of laser, specifically our core WaterLase technology, in dental practices around the world over the next three to five years. We are very confident that al-tissue lasers will become the standard of care in dental practices worldwide as has been the case with diode soft-tissue laser. Now, moving to our financial guidance, we are currently projecting net revenues of $68 million to $72 million for the year ending December 31. The midpoint of this guidance of $70 million represents growth of 22% over 2012, net revenues of $57.4 million, and it also represent record revenues for the Company. For our 2013 first-quarter, we are projecting net revenues of $14 million to $15 million. The midpoint of our guidance for 2013 first-quarter of $14.5 million reflects growth of 18% quarter over quarter. Please note that after the 2013 first-quarter, we do not expect to provide quarterly guidance for the remainder of 2013. As Fred mentioned, while we not expect to generate cash from operations during 2013 first-quarter, due to significant investment in our sales and marketing efforts, we do expect to generate cash from operations overall for 2013. And finally, I have once again agreed to a symbolic annual cash salary of $1 for 2013. To reiterate what I have said in the past, if we make sense, to align my interest of a shareholder with that of all shareholders, the ultimate owners of BIOLASE. My goal is for BIOLASE to generate continued growth and improved financial performance, and as the chairman and CEO, I will not benefit unless our shareholders are benefitted. I currently own approximately 4.8% of the Company's shares on a diluted basis, the vast majority is which I purchased in the open market over time, and the only way that I will earn a profit is if our shareholders will earn a profit. These plans will remain in effect as the Company generates a substantial profit for our entire fiscal year. With that, we will now open the call for questions. Thank you.

[Operator:]

(Operator Instructions) Our first question comes from the line of Suraj Kalia from Northland Securities. Please go ahead.

[Suraj Kalia:]

Congratulations on a great quarter. So Federico, my analysis tells me, in Q4 you had sold a little over 220 WaterLase units. Am I close, is my math correct?

[Frederick D. Furry:]

We typically don't give guidance or information on the number of units sold but you make us smile, I'll put it that way.

[Suraj Kalia:]

In terms of the U.S. and oh OUS growth for WaterLase, can you guys shed some color there?

[Frederick D. Furry:]

In what regard? I mean we have some information that we've put out in the press release about our growth overall you're asking for. Typically about 30% of our revenues throughout the year are international and the product line are fairly consistent between the U.S. and international.

[Suraj Kalia:]

(inaudible) was fairly split?

[Frederick D. Furry:]

Yes. That is – remember, in 2012, our diode revenues were a little bit low because in Q2 and Q3, we were still waiting for the regulatory clearance, but overall your assumption is very accurate.

[Federico Pignatelli:]

The growth was stronger in the Q4 in North American markets, and also you have to consider that we had no imaging sold in the international market.

[Suraj Kalia:]

Right. In terms of fiscal '13, I think (indiscernible), to the extent that you all can share, how are you looking at the WaterLase, at least from an implied guidance perspective, and specifically if it can, again to the extent that you can share, when you looked at your entire guidance of 68 to 72, I'm very curious what are the building blocks specifically for WaterLase and for EPIC 10?

[Federico Pignatelli:]

The building blocks are that we continue to organically grow and penetrate the market. The iPlus is very well received. The more iPlus we have out there in the marketplace, in dental offices, the more patients, they are driven to these offices and the more we have dentists that feel the competitive – these are dentists compared to others that have it. So, they draw in the ranks of advancing their practices by adopting our technology. That is the new approach to dentistry. Also we have a slate of educational events obviously educating dentists, it is a revolution that we are bringing into the dental market with the conventional approach of dentistry. Regarding the EPIC, diode lasers, they are very well accepted today in dentistry and we believe that we have the best diode in the market, the most functional, priced extremely competitively, the 940 nanometer is we're the only one to have it, and it is a very efficient wavelength. So, we believe that the EPIC will be a very nice driving force in the revenue growth in 2013 and beyond.

[Suraj Kalia:]

Federico, in terms of sales reps and productivity, care to shed some color what it is currently, and where do you see let's say if we exit fiscal '13, what would your expectation be in terms of the number of reps and expected productivity for reps?

[Federico Pignatelli:]

We exited Q4 with 43 total, of which 8 were inside sales reps, so 35 in the field, (indiscernible) in the field. We clearly will increase in 2013 the number of sales reps strategically in the various regions and also we will add few of inside sales reps. So, that is the plan.

[Suraj Kalia:]

Okay. And Federico, right now, am I right in looking at it, let's say $19 million aggregate sales, 43 reps, if I just reduce macro level numbers, each rep is averaging, it looks like a little close to $450,000 per quarter. Is that approximately a good metric for me to use and try to extrapolate for fiscal '13?

[Federico Pignatelli:]

No, it's really not a very good way to do a projection in revenues because the fact is that we have several of these new sales reps that join our ranks in the past few months. So, it takes a certain time for them to gear up to really generate the substantial revenues. So, as these sales reps mature, their revenues would grow up. So, it's too simplistic to just take the overall revenues and divide it by sales reps. (indiscernible) the numbers, but again the young ones clearly getting out and learning from the best and going through some intense training and some. Also, let's not forget that 30% to 35% of our sales is towards international market, that is to distributors. So again, doing the kind of math that you do is not really the way to go.

[Suraj Kalia:]

Fair enough. Final question, Frederick, G&A went down in the quarter. Is this especially given – your net purchase, if memory serves me correctly, like 150 or so unit from Schein and you've pretty much sold it directly in the market. One would have expected G&A (indiscernible) but it actually went down, and am curious specifically how would you characterize the sudden drop of almost 200 bps in the quarter and at the same time, how should I look upon fiscal '13 from a housekeeping perspective?

[Frederick D. Furry:]

You got a couple of different things in there and they may not be entirely related. With the first part of your question, yes, we repurchased 153 units from Schein. Those were all sold into the market over Q2, Q3, and Q4, and those expenses would go through our sales and marketing, but those commissions were consistent and the margins were consistent with all of our other laser products. So, that really wouldn't have had – the relationship there would be, as our sales increase, our commissions increase. So, as a percentage, that percentage would stay fairly consistent. There are two things happening. One, our sales are growing, so we're outpacing our expenses, but also we're very cognizant of where we're spending money and we're trying to be frugal in certain areas so we do not overspend. I'm not really clear on the second half of your question, Suraj. Could you re-characterize that?

[Suraj Kalia:]

Fred, essentially, how should I look at fiscal '13 specifically from a G&A perspective and sales and marketing perspective as a percent of sales? What are the incremental synergies you'll expect to drive and now Henry Schein, although its headwinds are out, I'm curious again from a housekeeping perspective, how should I look into that?

[Frederick D. Furry:]

I would expect it track similarly to how 2012 interacted with 2011, where the dollar value will increase but the percentage may stay fairly consistent or decrease a little bit. But what we're really focusing on now is manufacturing and our cost of product sales and our warranty expenses and improving product quality, and obviously we've done a lot to maintain our expense levels in G&A, but we're really focusing in 2013 on improving our margin, our gross margin.

[Operator:]

Our next question comes from the line of Lenny Brecken from Brecken Capital. Please go ahead.

[Lenny Brecken:]

Thanks guys for a great good 2012, looking forward as we're now about a year in 2013, but I wanted to ask, if you look at the growth implied in your midrange, the midpoint of the guidance which is [accelerated] (ph) by 22%, which is similar to 2012, over 2013, So, at 2012 over 11, that's consistent, so the growth rate is similar. When I look at your business, there are many more things happening in '13 versus '12 and I think to Suraj's questions, we're trying to understand why the growth rate is consistent while new product portfolio is so much broader and better versus '13 over '12. So you implied growth rate should be higher. So, can you just help us understand that? In addition, if you just look at the overall picture, can you just outline the catalyst for accelerating WaterLase sales in 2013? Thank you.

[Federico Pignatelli:]

Thank you, Lenny. First of all, yes, we grew 20% and now we're going to grow another 20% but this is from a higher number, so the actual sales keep on growing at a higher pace obviously in total dollars. You are correct, and Suraj as well, I'll tell you we have many things at play. So how can we only forecast 20% growth. We like to be realistic and we like to be conservative given also the economic climate and the fact that we clearly believe in what we are doing but we also are clear in the challenges in what we are doing. We are destructive technology. The dental market doesn't move overnight. When it moves, the adoption rate accelerates significantly. We believe that we are very close to the (indiscernible) of that happening but we cannot actually forecast that way. So, when it will happen, we will be there with a facility that can grow up to $300 million in revenues as we have really established. So, we will not have problems in studies by demand, but we want to be realistic and I would say conservative and make sure that the numbers that we broadcast to the investors are met.

[Lenny Brecken:]

Okay, and can you just outline the catalysts for further acceleration in your core (indiscernible) what are you doing in marketing? I know you had the salespeople as you outlined, but what are the major initiatives for 2013?

[Federico Pignatelli:]

We have clearly, we are putting a lot of emphasis on education but also we have the catalyst, a (indiscernible) option of diode lasers in dental. I would say that diode lasers have become the standard of care now. So we believe that as a dentist converts to a diode laser technology, eventually over time, we'll upgrade to an all-tissue laser, that is WaterLase, it does all the soft and hard tissue. So, once the dentist starts thinking lasers, then you will eventually have a full line of products. And that means also acquiring our flagship product, the WaterLase. So, the WaterLase will be driven by several factors, but education is definitely a very important one. Then, we also have scheduled several World Clinical Laser Institutes, that is our laser institute around the country and in Canada, and these events, they create a lot of interest from dentist who want to learn about laser dentist and the WaterLase technology and they've been very successful so far. So, we are moving away from the conventional dental conventions and we will reduce the number of which we're going to go, we're going to be present in at least conventional show and we will instead promote more mere educational events towards the laser technology and high-end imaging.

[Lenny Brecken:]

I meant point, I wanted to just follow-up. It appears to me that you're getting more demand at unsolicited. Can you give a measurement of that demand, meaning dentist are coming to you because the awareness of lasers and the (indiscernible) are going up and buying the product rather than you going to them. Can you give some measure of that and on that same measure, what are you doing to educate the consumer and making them more aware that the technology exists?

[Federico Pignatelli:]

This is two-part question. So let me address the first one. Again, we have now roughly 20 sales seminars per month with a very good attendance. So clearly, more dentists, they are learning about the WaterLase technology, and if a few years ago, they would take us to talk to 15, 20 dentists to close a sale, now every two or three dentist we close the sales. So that is clearly a very strong indication of the fact that the dental community is finally seriously thinking to adopt WaterLase technology, an advanced dental practices into the era of high-tech dentistry. It is a fact that often we received calls from dentist that, our products they want to buy, and WaterLase and they' looking to buy WaterLase, essentially because (indiscernible) that is a very successful to move in their practice, and that is happening more and more and that is definitely a clear sign that things are moving in the right direction. Regarding consumers, that's a very interesting question that you're posing because we're making in 2013 various (indiscernible) efforts in educating the consumer. The fact is that 90% of dentists in North America, USA and Canada, they know of Biolase, they know of WaterLase technology, but they haven't moved yet in buying our technology, in adopting our technology. And the season is mostly that while we recognize (indiscernible) clinically and it has a lot of messages for the patient as for then the dentist. There is always an obstacle in learning a new technology and dedicating the time to education and some besides obviously the investment, even though that is not really a big concern because 80% of the dentists, they buy a WaterLase with the least, essentially the payment of his house in dollars amount and it is also back-to-back. But he's really taking the time, educate themselves and changed the way the practice dentistry in a conventional way. So our next step is to go to the consumers. Only less than 1% of the consumers in the United States and Canada, they are aware of their advantages, of WaterLase, or they are aware of the existence of WaterLase technology in dentistry. So we are out there to now make an effort in educating consumers, probably we're going to do it in a fairly economic fashion, in the sense that we're going to be very careful in how we invest the money in educating consumers. So, the education of consumers should drive the demand we expect because once the consumer is educated, there is a better alternative to a needle and a dental (indiscernible) and a scalpel, then we'll demand this technology, and today we have so many dentists around the country that use our technology, they can easily find a WaterLase dentist. Every year, thousands of dentists, they perform millions of procedures around the country using our technology. So that is the prognosis and we truly believe that now has come the time to move also not only to educate dentists but also to educate the consumer, the patient in knowing about the existence of these alternative technology, of these new ways to approach dentistry, to actively demand it from their dentist or to drive themselves to a WaterLase dentist.

[Operator:]

Our next question comes from the line of Joe Munda from Sidoti and Co. Please go ahead.

[Joseph Munda:]

Real quick, Fred, you were talking about the gross margin improvement in the quarter based on lower service and warranty expenses. Can you give us a little bit more color on that? I mean the sales that you guys are projecting forward and how is that trending going into 2013, and also I have a follow-up to that?

[Frederick D. Furry:]

With the gross margin, there are several things happening in there. We have, as everybody knows, we've done a lot to improve our production process from the basics of improving our supply chain, getting into the supply chain of our suppliers even with the addition of our VP of Ops, Rick Whipp a year and a half ago. We've really gotten down the road, taking the low hanging fruit. We still think there are some very, very basic ways to improve our manufacturing flow. As you come by, if you ever see a tour of our facility, if you had a frame of reference, it would look very different today than it did a year and a half ago. It's a linear production line, we have production sales, we are moving in the modified (indiscernible) systems where our vendors are holding inventory just in time for us and we need it and it's with a line of credit from Comerica Bank., this has given us more flexibility to produce X number of units per day throughout an entire quarter to keep some of our costs down there. So, we made improvements in our supply chain, we've made improvements in our usage of our overheads throughout a quarter. We've made improvements in the quality of our products because when somebody knows we're going to produce 10 units a day, just (indiscernible) 10 or five or whatever the number is, they're pretty good about the effort they've put into that. So, we're seeing great strides in our quality improvements. Plus the iPlus has just finished its second year in production, so we've been through the alpha to beta build, we have up pretty good team downstairs and they understand the nuances of the product and how it works. So, all of those things has been real positive and improving our margin, and all of that in light of the increased sales of our imaging products which typically have a far lower margin because they are in light to this product. So we do expect that trend to continue and we have several plans in place for 2013 to get a little bit more out of – I don't want to be too specific but we want to get more out of what we've done in our operation.

[Joseph Munda:]

I mean if you can, what was the gross margin on WaterLase and diode?

[Frederick D. Furry:]

Those are fairly consistent. We mentioned that several times in the script about how we're selling things at margins that are consistent among our products. We really haven't really ever gone into the details of the margins between the WaterLase and the diode. Obviously the diode lasers are lower cost, it has a lower building material, so we can offer it at lower price, but the service of a diode laser is much different than the service of a WaterLase. All of the field service engineers we have out there to help service our lasers are going to keep our customers happy. Those costs tend to go under the margin, right. So those are more applicable to the WaterLase, but then again the WaterLase has a higher selling price, so it covers a lot of those costs. The diode is a much more basic machine. So we've never really gotten too much into that, Joe.

[Federico Pignatelli:]

It's very simple. I mean, our laser products, they have a higher margin and our imaging that we licensed has lower margin. So, our laser products, they have higher margins than what our overall margin is.

[Joseph Munda:]

Okay Federico, since you put it that way, let me ask you it another way. The sales mix of products, WaterLase, EPIC 10, are we going to see a similar mix going forward in 2013 or do you think EPIC 10 is more of the mix in 2013?

[Federico Pignatelli:]

I think that EPIC 10 will gain more traction. As you've seen from the report, in 2012, we were lower in diode sales overall because we were launching the diode 10 and we got on the approver in October and so we get that production since then, and so we believe that diode lasers will increase nicely in 2013, but clearly we still feel that WaterLase will be the driving force of the revenue growth.

[Joseph Munda:]

Then, real quick two others. First off, Federico you talked a little bit about the team management and in terms of new products for key management, and with the guidance, is the guidance including any new products, like the veterinary or the team management that you spoke of, or is that more of a longer-term picture, a longer-term story?

[Federico Pignatelli:]

We have essentially not included it because whatever is new, we don't like to include simply because we like to be conservative.

[Joseph Munda:]

Okay, but I mean there are plans right now to develop those products and commercialize them?

[Federico Pignatelli:]

We already started, absolutely yeah. We already have taken orders for I think this year. I want you Joe to understand that it is a natural extension to what we're doing in dentistry because a great deal of problems in animals, they are in their mouth. The most common disease is (indiscernible). Surgery is like to the deepest (indiscernible). So, the mouth is the center of what a vet would do on an animal. Pain management is also another important market in that, and so it is a natural extension from our core dental business. And again, it is a large market. So very interesting opportunities there, there are 140,000 dentists in the United States and more or less the vet market is half that size. So overall, it is not a distraction from us, it's just an extension of what we're doing already in dental.

[Joseph Munda:]

Then my final question, on the decision to take a salary of $1, I mean is that going to change sometime soon after 2013, 2014? Would you think you would take a salary or is it going to be like that for a while?

[Federico Pignatelli:]

If I put on the bottom line a nice number and I grow revenues in a substantial way, and I feel that I could feel that my duty towards the shareholders, then I will keep the mind open, but at the moment I want the shareholders to be rewarded and I feel that I should be rewarded if I perform. So, I have a substantial position in the company. I will do well if everybody else is going to do well as a shareholder.

[Joseph Munda:]

I mean if the dividend as well plays actually a role as well, I mean if the Company continues to do well, would you increase the dividend?

[Federico Pignatelli:]

Frankly, we are not there at this stage to discuss increasing dividends. We have done the dividends for several reasons also because we like to keep rewarding shareholders that's out there for the long run versus the shareholder that trade stock. We like shareholders that believe in what we're doing and that stay with us, the really invest in the Company for long, and while they are investing, they also accumulating the shares through a stock dividend.

[Joseph Munda:]

Fred, also I forgot, one more housekeeping question, CapEx for the year in 2012 and your expectation going forward?

[Frederick D. Furry:]

That detail will be specifically in the Q that's going to come out next week, I don't want to jump the gun on that, but as Federico mentioned, our facility here is already built we could sustain growth up to $300 million with our facility without a whole lot of additional, maybe inconsequential buildout of a line next to our WaterLase line or another EPIC line. So our CapEx numbers are going to stay fairly consistent with what they have been.

[Federico Pignatelli:]

We also own a facility in Germany and that facility we might rethink to bring it out to as it used to be a production facility. At the moment, is just a service repair facility for all the European and Middle East markets, but has a substantial production capacity. So, in theory, we can approach $400 million in production level as we have, with very limited amount of CapEx.

[Operator:]

Our next question comes from the line of Chris Sassouni from Eagle Asset Management. Please go ahead.

[Chris Sassouni:]

Congratulations on a great quarter and a great year. It's been one amazing turnaround to watch this. One of the things I wanted to get a sense of at this point is, do you have a number of the cumulative number of WaterLase units that have been sold, since you first got approval for a WaterLase unit, roughly?

[Federico Pignatelli:]

We sold over 22,000 lasers and that's a combination of WaterLase and diodes and WaterLase system since was approved by the FDA is a little less than 10,000.

[Chris Sassouni:]

Kay, perfect. Alright. Would you say that the split of 70-30 U.S.-overseas still holds cumulatively or is it even more slanted towards the U.S. if you look at it cumulatively?

[Federico Pignatelli:]

Regarding WaterLase you mean or?

[Chris Sassouni:]

Yeah, just the total number of units, even if you combine WaterLase plus the diodes, I'm just trying to get a sense for how things are changing over time. In other words, initially was the vast majority of the units sold in the U.S., and then over time, do you started to migrate overseas?

[Federico Pignatelli:]

Actually, it was the opposite. First we started selling in Europe because we didn't have the FDA approval, but overall I would say that it is two thirds - one third.

[Chris Sassouni:]

Okay, that's fine. Next thing just real quick. Any particular focus that you will have at IDEA because it's such an important dental show and also because it only comes around once every other year?

[Federico Pignatelli:]

We have a lot of activity at the IDEA. We are going there and I cannot even tell you how much interest there is in WaterLase and our technologies. So we're working on many of that interesting things, but clearly I cannot discuss them. But we are very excited about the action of the company.

[Chris Sassouni:]

Okay. So, at the IDEA show, I take it that the focus in terms of a product point of view will continue to be iPlus plus the EPIC 10?

[Federico Pignatelli:]

Yes, but again, don't forget that we spend a substantial amount of money in R&D and we always look to expand our product offering and to innovate and so.

[Chris Sassouni:]

Okay, great. Next thing is just running a focus of overseas with the IDEA show, can you just give us an update on the distributors outside the U.S. and how those are configured, how many countries, what are you doing in various geographies that are important, there's particularly Germany, Far East, Middle East, what's going on there?

[Federico Pignatelli:]

We had (indiscernible) increasing consistently our presence internationally. I'm actually in few days I will be going to Europe for the IDEA. So after that I will meet with potential new dealers, and so it is a constant effort, and we definitely look at the international market as a very important driving growth in the future of the Company.

[Chris Sassouni:]

Okay, so let's just isolate down to probably the largest dental laser market in Europe, which is Germany. How many distributors do have there and have you ever contemplated going direct in Germany?

[Federico Pignatelli:]

We have a very good distributor in Germany and so we feel that we are in a good position there. It is a very interesting market, Germany. We have already a substantial installed base over there. We are the market leader and we have an association with Prof. Gutknecht of the Aachen University, he's a world laser expert, and he is entirely dedicated to the success of the WaterLase technology, he's a strong believer in what we're doing. So, we are very well positioned in Europe, but again Europe is softening at the moment, very strong economic recession, but notwithstanding that, we are expanding in all of these markets and going to the Middle East. Middle East is definitely a growing market and our interest in Turkey is a wonderful market. We were in the Emirates just recently at the [AEEOL] (ph) Show and we were awarded a prize of the most (indiscernible) convention and that is very important because if you want to know in essence where the interest lies in the dental community, it is interesting to see the activity in a dental show where it is, and if you see the dentist that are attracted to a certain goods rather than another one, then you understand that there's a lot of interest towards that type of technology, that type of product, and for us to have been the number one most visited booth, it is a very strong sign. Same in Chicago. Chicago just ended recently and The Dental Tribune, that is the world's dental newspaper, the most read, they posted BIOLASE on the cover with a picture as the cutting-edge technology. And actually the title of that article is 'Stay on the cutting edge', and it shows us. So, that is symptomatic of what we are doing in the field of dentistry. We are getting the word out in a strong way that the WaterLase technology is the new wave in dentistry and more and more, we are recognized as the innovators and more and more we see our technology being adopted and more and more interest is generated.

[Chris Sassouni:]

Okay, and my last question is, just since we're on the topic of being cutting edge, basically being the technology pioneers in the field of dentistry, so there are other competitors that have diode lasers that are being used as sort of a entry-level device to get familiar with lasers in general, but if you just look at the capabilities of the EPIC 10 versus any other diode laser, how does it exactly stack up? I mean it looks to me like there's something there is sort of pen-based and I can't really tell if they have the power, the capabilities that the EPIC 10 does, and is that slowly being recognized by dentists that are now getting exposure to the EPIC 10?

[Federico Pignatelli:]

First of all, we're the only 940 in the market and the 940 has the best penetration on tissue than any other wavelength but it is the most functional laser, is priced super competitively. So we believe that we are in a very comfortable position. Also, we are the only company in reality that offers a diode and also an all-tissue laser, a hard-tissue laser. So, we are the only laser company in North America with both.

[Chris Sassouni:]

All right. Again congratulations and a great quarter.

[Operator:]

At this time, I'm showing no further questions in my queue. I'd like to turn the conference back over to management.

[Federico Pignatelli:]

That was a very interesting two years of radical restructuring of the Company. I became the CEO at the end of August of 2010 and the Company at that time was running at a run rate of $18 million in revenues on a yearly basis and we grew from that to $58 million in 2012. So that is a very strong increase in revenues and we went from very large losses in 2010 to before we took over to a minimal loss of a few hundred thousand dollars in 2012 on a non-GAAP basis and we expect to turn 2013 into a profitable year and a cash generating year. So, we feel that we have built a very strong foundation to propel this Company to grow substantially and we overcame the incredible challenges and we feel very, very confident about the near and long-term future of BIOLASE and the WaterLase technology and all the technologies that we are promoting in transforming conventional dentistry into high-tech dentistry. Thank you very much.