BIOLASE, Inc.
Q3 2015 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the BIOLASE 2015 Third Quarter and Nine Months Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open up for questions. [Operator Instructions] For the benefit of those who maybe listening to the conference call replay, this call was held and recorded on November 4, 2015. I would now like to turn the conference over to Rene Caron of DresnerAllenCaron. Rene, please go ahead.

[Rene Caron:]

Thank you, Rob. And good afternoon, everyone and I too would like to welcome you to the BIOLASE conference call to discuss the results for the third quarter and first nine months ended September 30, 2015. On today's call is BIOLASE's President and CEO, Harold Flynn; and David Dreyer, the Company's Chief Financial Officer. Harold will begin the call with a brief introduction, discuss the company's strategy for growth and provide an overview of progress being made in a number of key strategic initiatives. David will then review the company's financial results and provide additional background and color on the financial results, afterwards we will open the call for your questions. Please be aware that a number of forward-looking statements will be made during this presentation, including forward-looking statements regarding the company's strategic initiatives and financial performance. Forward-looking statements are any statements that are not historical facts and can be identified by words and phrases including, will, may, believe, estimate, project, plan and similar words or phrases. These forward-looking statements are based on BIOLASE's current expectations and are subject to a variety of risks and uncertainties that could cause the company's actual results to differ materially from the statements contained in this presentation. These risk factors are discussed in the company's filings with the Securities and Exchange Commission. BIOLASE cautions you that any forward-looking information provided is not a guarantee of future performance. Any forward-looking statements represent the company's view only as of today, and should not be relied upon as representing our views as of a subsequent date. A replay of this conference call will be available on the BIOLASE's website shortly after the completion of today's call. When listening to this call, please refer to the news release issued earlier today announcing the company's results for the third quarter ended September 30, 2015. If you do not have a copy of the news release, it is available in the Investors Section on the BIOLASE website at www.biolase.com. The company's results for the third quarter ended September 30, 2015 can also be found in the company's Quarterly Report on Form 10-Q, which the company plans to file with the Securities and Exchange Commission on or about Friday, November 6, 2015. With that, I'm pleased to turn the call over to the BIOLASE's President and CEO, Harold Flynn. Harold, please go ahead.

[Harold Flynn:]

Thank you, Rene and thank you all for joining us on the call this afternoon. I'll begin my remarks by expressing that while we had a productive third quarter on many key initiatives, I and the leadership team were disappointed in our overall commercial and financial performance in the third quarter. We did not achieve growth in our core laser franchise, and we fell short of our revenue in operating profit goals which had a corresponding negative effect on our cash flow. We believe we understand many of the drivers of this underperformance and we enacted significant changes late in the quarter in our commercial functions and approaches to address these issues, especially in the United States. David will go over the details of our financial results a bit later but as we noted in our press release today, worldwide revenues in our core laser business were basically flat compared to last year's third quarter. International laser sales grew 5.4% year-over-year, offset by a 5.5% year-over-year decline in the U.S. laser sales. We were encouraged by worldwide diode system sales in the quarter which grew 11% overall compared to last year, up 16% internationally and 5% in the U.S. Despite the disappointment in our top line, I'm pleased that we made solid progress during the quarter on the underlying transformation process that's underway at BIOLASE, including executing significant payroll related cost structure improvements that David will detail for you later in this call. As most of you know, the third quarter was my first full quarter of BIOLASE and while I'm new into BIOLASE my eight years of experience leading Zimmer Dental allowed me to hit the ground running. Having worked closely with dentist and developed an understanding of their needs and how they deliver patient care. In my first hundred days I augmented my dental market knowledge, specifically with respect to laser dentistry by engaging in a number of learning opportunities; including meeting with current prospective customers and members of our sales team at the California Dental Association meeting and the associated hands-on laser workshops. Meeting with some of our luminaries and key opinion leaders, attending the annual two-day Asia Pacific regional symposium of the world clinical Laser Institute. With over two hundred attendees in Taipei Taiwan. Meeting individually and as a group with all of our Asia Pacific distribution partners, touring our German headquarters facility and meeting with the distribution partners that represent around half of our business in Europe, Middle East and Africa. Extensive discussions with our team members inside the business; domestically and internationally, and holding a three-day working session with our North American sales marketing leadership where we conducted a thorough review of each territories performance, discussed our challenges and planned solution. Combining my past leadership experience and market knowledge with new and continued learning about the laser dentistry market and the analysis of BIOLASE's strength and weaknesses has enabled the team to develop a strategic plan for the next several years with the focus on significantly increasing our enterprise value. This plan articulates for our team members and our Board of Directors, our strategic priorities on how we will invest our relatively scarce resources. And it frames the context for our operational decision making in budgeting. To my knowledge such a business planning process has not occurred within the company in well over five years, and certainly not since the significant changes in the dental marketplace where practitioners have seen average net incomes declining significantly. Within this plan we've established a product and services roadmap for research, engineering and development, clinical study and commercialization that will concentrate on the procedural areas of everyday dentistry where our technologies and solutions contribute most to better patient reported outcomes allowing dentist to practice better dentistry, and in turn, achieve better business results. When I spoke to all of you last time I noted that I was impressed with our intellectual property portfolio, our current product offerings, and our prospects for introducing new products. Today after a much closer look I continue to strongly believe that we can and will accelerate the pace of innovation and launch meaningful high value products and product improvements into the market. While it can be very tempting in the near-term to rush products to market, we need to ensure the product, our processes, our training, and the service and support infrastructures are all in place for a great customer experience after the sale. Candidly, BIOLASE has fallen short of some of these areas in the past, and we need to really elevate our level of play, and that takes time and effort. Our goal is to roll out new products and applications that will have a meaningful impact on the dental marketplace and drive sustained revenue growth for the company. The new products on the roadmap focus on technologically advanced laser systems, as well as new consumable products and services that will drive a higher percentage of predictable higher margin recurring revenue. We continue to focus on industry-leading easy-to-use graphical user interfaces including the use of increasingly popular apps-type procedural protocols where we establish the various initial laser system setting so the clinician can focus their efforts on the patient and the procedural technique. This turnkey procedural applications make it easier to perform complex procedures wherein the laser technology excels resulting in better patient outcomes. This is a good example of an advance that I believe the dentist really want, and frankly they need. And they are positively responding to it. To this end this week we announced a new application for the WaterLase iPlus 2.0 for treating Peri-implantitis, a growing problem in the expanding field of implant dentistry. This new application resembles our initial turnkey step-by-step protocol introduced in 2014 called repair for treating periodontitis. As part of a recent restructuring, I've taken on direct leadership of our marketing function for the near-term to learn more about our various marketing channels and their effectiveness, and to directly lead the efforts to build a more focused, collaborative and efficient sales and marketing operation. I'm very pleased with the progress in this area to date having made the change in mid-September, and I expect this to benefit from these new operating approaches in the near-term. Given my background as an engineer and my experience in research and development, I've also been very actively involved in the oversight of the company's product development efforts where the cross-functional development teams have stepped up their games. And I'm confident they'll continue to improve in planning and execution. I also mentioned on the last call that BIOLASE has taken some important initial steps providing superior customer service, training, and support. The BIOLASE Practice Growth Guaranteed initiative was a great start and it is still resonating well with the new customers as we support them through training and utilizing the full benefit of using their WaterLase iPlus lasers daily in their practices. We have learned a good deal from the Practice Growth Guaranteed program that we need to integrate into our normal processes and into our culture. And there is a good bit of work ahead of us here in this area. Customer service and support, training and education are areas I'm very familiar with from my experience with them or dental. I have seen overwhelming evidence that these areas are crucial for selling success in the dental market. At BIOLASE we must not only embrace our excellent technologies and products, but we must also embrace our customers and help them provide better care for their patients. And in turn obtain better business results including higher positive cash flow. It is in that spirit that I'm delighted to announce that we've just completed work on a major investment over the last quarter. Our brand new over six thousand square foot BIOLASE learning center in Irvine California with large flexible didactic lecture facilities that can hold up to 150 participants, breakout rooms, and a state-of-the-art hands-on laboratory that can accommodate up to 24 participants each session. In my last role that at Zimmer Dental, we invested in three learning institutes globally, collectively the Zimmer Institutes. That were the envy of the dental implant industry and we were widely regarded for leadership and training and education. These facilities where the foundation of a differentiated and critical value offering related to our products and services. I intend to leverage similar investments here at BIOLASE as we have the capacity to integrate the investments in our operating plans. As we prepare to launch new products and further improve our current ones, we expect to offer in-depth cost effective training and support and presented in a much more efficient way than we have to-date. To reiterate a point from our last call, our success at BIOLASE depends upon more than developing and making great products and great marketing and sales. We also need to ensure that our customers can use our products safely and effectively, and that they fully understand how our products help them achieve their patient and business goals. Finally, three months ago I discussed that this role leading BIOLASE was the right choice for me and I'm even more convinced for that now. I'm excited by and highly engaged in helping the organization transform itself across all aspects of the enterprise. We have articulated our higher purpose which is to change the practice of dentistry in the management and resolution of dental disease and reduce the pain and anxiety that the patient experience. While change can be painful and slower than we would like or expect, I'm proud of this team's effort to-date. They are leaning in, doing the hard work to transfer BIOLASE in positive ways that will make a significant difference to our customers and their patients. And that in turn will improve our performance, expand our leadership position, and significantly increase shareholder value. Before I turn the call over to David for the financial results, I'd like to announce that we will be very active with current and prospective customers during the fourth quarter exhibiting at three major dental events in the United States. They include the American Dental Association Meeting in Washington D.C. which I am attending now, The American Academy of Periodontology meeting in Orlando, November 13-17. And the greater New York Dental Show meeting November 29 through December 3. These promised to be important events for us and we spent a good deal of time preparing for that, including modifying our value proposition and messages that we are eager to engage customers with. We believe meetings like this and all the work we're doing to transfer BIOLASE into more commercially effective company will drive increasingly better results starting with the fourth quarter of this year and on into 2016. With that, I'll turn the call over to our CFO, David Dreyer. David?

[David Dreyer:]

Thank you, Harold. Before I dive into the financial results, I wanted to say that all of us in BIOLASE have been truly inspired by Harold's quick grasp of the business and impressed with his vast knowledge and experience. While he just shared a partial list of his accomplishments during the first 100 days, I can attest that his strong drive and leadership are having a very positive impact on both, morale and the establishment of clear direction throughout the BIOLASE business. Today I'm going to focus on four key financial areas; revenue, gross margin, operating expenses and liquidity. Net revenue in this year's third quarter was $11.2 million compared to $12.7 million in last year's third quarter. The year-over-year decrease in this year's third quarter revenue was doing a large part to $682,000 decrease in imaging systems revenue and $640,000 decrease in services revenue. Services revenue results from providing our customers extended warranty contracts, advanced training programs, and other related services. During the third quarter last year, we had a favorable impact of $708,000 resulting from a change in accounting estimate that reduced the period that we used to recognizing deferred training and service revenue from 24 down to 9 months. Absent to this one-time change, our services revenue actually increased year-over-year by $68,000. The $68,000 in services was mostly due to increased demand for and training courses related to sales of the laser systems and our recognition of previously deferred revenue associated with the Practice Growth Guaranteed Program that we've discussed on earlier calls. The decrease in net revenue from imaging systems was attributable to our ongoing primary sales focus on our flagship WaterLase products. Consumables and other net revenue which consist mostly of consumable products such as the disposable tips, decreased by 8% year-over-year. Laser systems revenue remained relatively unchanged year-over-year while revenue generated from sales of the WaterLase laser systems decreased by 5% worldwide on a year-over-year basis. Revenue generated by our diode laser systems increased 11% worldwide during the same period. Next, I'll review our results of operations for the nine months ended September 30, 2015. Net revenue for this year's first nine months was $34 million compared to net revenue of $34.4 million for the same period last year. This relatively small decrease in the period-over-period revenue resulted from a combination of changes in our revenue mix, including lower revenue in imaging systems and services, partially offset by increases in revenue from domestic and international laser systems, consumables and other, and license fees and royalties. Laser systems revenue increased by $1.4 million while revenue from imaging systems decreased by $1.7 million. The decrease in net revenue also resulted from last year's change in accounting estimate which I mentioned earlier, along with our extension of the warranty period for the WaterLase systems in the third quarter of last year going from one to two years for systems that are purchased after January 1, 2014. The extension of the warranty period has resulted in smaller amounts of deferred service revenue being recognized over a longer period of time. As we continue building our worldwide leadership position in dental lasers by providing the best-in-class products and services to our professional customers and their patients. The past historical trend of declining WaterLase sales has been reversed. For the nine months ended September this year, revenue generated from our WaterLase laser systems increased by 10% worldwide compared to the same period last year, including increases of 8% and 12% for domestic and international sales. Revenue generated from sales of our diode lasers systems during the same nine months increased by 1% worldwide including an increase of 15% for domestic and a decrease of 6% for international sales. Consumables and other revenue decreased by 13% period-over-period. The increase in consumables and other net revenue resulted from growing auxiliary sales to this year's larger laser customer base. Gross profit as a percentage of revenue typically fluctuates with product in regional neck. Selling prices, material costs and revenue levels. Gross profit as a percentage of revenue for the third quarter and nine months ended September 30, 2015 was 30% for both, compared to 42% and 38% respectively for the same period. These declines were mainly attributed to the 2014 change in accounting estimate that I discussed earlier. Increased international sales volume which -- they generally have lower selling prices and increased promotions related to the launches of WaterLase iPlus 2.0 and Epic X. In addition, gross profit related to the international sales that are denominated in foreign currency for this year's nine month period was negatively impacted by a stronger U.S. dollar as compared to last year's nine month period. Total operating expenses in the third quarter and nine months ended September 30, 2015 were $8.7 million and $27.9 million respectively compared to $8.7 million and $27.2 million for the same for your period. The modest increases in this year's operating expenses were due to a combination of increased spending in engineering and development for new products, increased spending on sales and marketing, primarily on product promotions, and expenses related to the recent corporate restructuring activities which I'll discuss shortly. These increases were partially offset by lower spending in general and administrative expenses, attributed to reduce legal expenses, and a credit relating to a favorable legal settlement with the competitor that we recorded in the first quarter of 2015. The net loss for the third quarter and nine months ended September 30, 2015 was $5.3 million and $17.8 million respectively or $0.09 and $0.31 loss per share compared to a net loss of $3.5 million and $14.8 million or $0.08 and $0.38 loss per share for the same period last year. The increase in net loss was mostly due to lower gross profit margins and increased operating expenses in 2015 as compared to 2014. During this year's third quarter, we concentrated on activities to improve our cash flow which included measures to reduce operating expenses. In September of this year, we took steps to streamline operations and reduce payroll-related and consulting-related expenses by approximately $2.4 million on an annualized basis. Total expenses incurred and related to this recent restructuring totaled approximately $246,000. We will begin to realize the full favorable impact of these cost saving measures in the fourth quarter of 2015 and throughout the year 2016. In addition, we've implemented tighter cost controls to monitor spending levels more carefully in order to quickly take action to contain or further reduce our spending going forward. As of September 30, 2015, BIOLASE had approximately $22 million in working capital and $15.4 million in cash and restricted cash equivalent and $9.2 million in net account receivable. The company's cash and cash equivalent total of $15.4 million reflected cash used during the quarter of $4.7 million, an increase of $900,000 over the previous quarter, mainly due to lower than expected revenue streams this last quarter. As I mentioned earlier, we took immediate action in September to further reduce their operating expenses by $2.4 million on an annualized basis. This was in addition to cost cutting measures that we made previously which resulted in our third quarter operating expenses coming in lower by $2 million sequentially as compared to last quarters spending. We're projecting sequential revenue growth and historically strong fourth quarter which we expect will have a meaningful improvement to our cash flow during the fourth quarter. In the short term, we remain focused on successfully executing our sales strategy to achieve growth and carefully aligning our spending in both, operations and product development while keeping a pervasive focus on managing our cash flow. In order to become both, profitable and in cash positive during 2016 With that, I'd like to turn the call over to the operator for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Ed Woo with Ascendiant Capital. Please proceed with your question.

[Ed Woo:]

Yes, thank you. Congratulations I guess, Harold for joining in and jockeying on full steam. I have a question just sort of high level overview. But you mentioned -- you did some recent week structuring, you said you're going to focus on engineering and focusing on sales. Was that possibly a result in and additional or do you think that guys laid down the right kind of system in place right now to go forward.

[Harold Flynn:]

Yes, thanks Ed. Hi, I think for we have basically paired out that expense base, restructured the cost and while we can never say that we won't have to make additional unjust adjustments there are none currently planned. Part of getting this right was kind of entering into the marketing space to work closely with the sales organization, to understand why we haven't been achieving the potential that I and so many others believe we have. So we've gone down a little bit to bare a metal. If you will with respect to our processes and what we're investing in and those things that we know or we have experienced and the data shows us that, move the needle with respect to generating leads. And ultimately closing sales because obviously our near-term sales are what's going to fund our success. And our continued reinvestment to grow at the level that we need to grow to add value. So if I understood your question correctly -- we're looking across the entire enterprise but I don't expect that we'll be restructuring if we're successful with. These and initiatives and these endeavors in the near term. But again, the economy and a number of other external factors may drive, need to do something at any given time. Which the company has been very clear on and we were very open and transparent with our challenges and the reasoning behind our restructuring during our process. So, I don't know if I -- hopefully I answered your call -- I answered your question.

[Ed Woo:]

Yes, thank you and good luck.

[Harold Flynn:]

Thank you very much.

[Operator:]

Our next question comes from the line of Wyeth Kar [ph] with Securities. Please go ahead with your question.

[Unidentified Analyst:]

Thank you very much Harold and David for taking my call. My question is, in the sales and marketing and product promotion, was this -- did this impact WaterLase and help on the international sales? And did it also -- it impacted gross margins as WaterLase is one of your highest gross margin products. Also with diodes, I don't know if you give this number but was that also a factor in spite of the fact that it was up 11%. Did it bring overall margins down?

[Harold Flynn:]

I'm trying to -- we're trying to make sure that I understand your question, specifically with respect to the sales and marketing changes.

[Unidentified Analyst:]

Right, you indicated that your expenses were up in sales and marketing. And then also on product promotion in the news release.

[Harold Flynn:]

Yes. Well that wouldn't have affected our gross margin specifically, right in sales and marketing. Obviously, volume and the mix as David discussed will have effects on it but the changes in marketing that we've discussed and the restructuring -- it would really be pointed at increasing the level of demand generation and ultimately closed sales to bring our volumes up. And which would then improve our margins because margins are a direct result of volume and geographic mix, and pricing, and a number of other things as you know. But I'll also let David make a comment if there is anything else that he thought of during the question.

[David Dreyer:]

Well, no. Thank you, Harold. We did mention, why is that part of the year-over-year change in our gross margin being lower. It had to do with the launches of the WaterLase iPlus 2.0 and the Epic X. And that's because when we launched the products there is basically some promotions like product exchanges and things like that, that we anticipated when we do launches and so that had some impact, it was lesser of the variances that I explained. But basically that did affect some of the margin in 2015 versus 2014 as well.

[Unidentified Analyst:]

Okay. And David, one of the things you had indicated was that conservation of cash this year was chief concern and it appears that the burn rate was up, I'm not sure whether it's up sequentially, I think it looked like it burned about $3.8 million, it was up sequentially. And you had also indicated that you had a fairly short run rate, both we're talking about this being a short runway for -- as you turned to start-up. Is this is the kind of burn rate that you would expect or do you expect that this will continue to come down when you instituted those additional cuts?

[David Dreyer:]

We definitely anticipate that the third quarter burn rate was higher than expected. In fact, it was $900,000 higher than second quarter. And as we've pointed out, it was really because our sales level -- below $12 million definitely impacts our cash flow. And conversely when we look at the fourth quarter which is historically a much stronger quarter, then as do tax planning etcetera for year-end, there is a lot of trade shows as Harold mentioned, etcetera. So we're hoping to -- and we expect to basically help offset that, and basically make up some of that excess burn in the fourth quarter. So certainly it was not what we would expect going forward. We're working through that rate get lower and lower in order.

[Unidentified Analyst:]

Okay. And my last question is on the September reduction of $2.4 million on an annual basis, is that front-end loaded, are you expecting to get a large portion of that into the fourth quarter or is that going to be pretty much distributed throughout the year?

[David Dreyer:]

The $2.4 million?

[Unidentified Analyst:]

Right.

[David Dreyer:]

I'm trying to recollect those, there a couple of them that we talked about.

[Unidentified Analyst:]

David, I think it's just really -- I think when we look at the rate, the savings should begin in the fourth quarter.

[David Dreyer:]

It does and it's largely a headcount and consulting. So it will be fairly equal over the quarters as we go. Even the consultants were basically full-time, largely people that were working with us in various capacities. So it's really going to be gated fairly consistently that savings on a quarterly basis going forward.

[Unidentified Analyst:]

Okay, great and good luck with these conferences you're going to be attended, I hope that really helps you in the revenue department.

[Harold Flynn:]

Yes, we really hope so -- the attendance of the three shows combined, I think is reported to be over 70,000 dentist. So November is a big month to get in front of dental eyeballs.

[Unidentified Analyst:]

You bet. Thank you very much.

[Harold Flynn:]

Thank you.

[Operator:]

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

[Paul Bornstein:]

Yes thanks. It's good if I think the new leadership is taking charge and hopefully getting the leverage available for the company so when the sales come through we really see it impacting the bottom-line. I'm just curious, I heard, the sales issues for probably three or four years and then you had Oracle coming in, be an activist and trying to make changes and/or a couple years later, the stocks bounced significantly. It seems like you are on-track to bring the leverage to the equation, but -- and then you just have a little sales fallen down in the past quarter. So I'm just curious with your analysis, you're taking action but we won't know it whether that you're going to be successful until and we see some of the sales results coming through. I'm just kind of curious from the analysis you've done, what was done wrongly in the past? Was there are a product problem, people not interested in in the products. And we only saw one set of products and then you have some of that despite a lot of sales going on because you can't focus on every area. So I'm just wondering if you can give us a couple of colorful points in terms of your expectations to generate some meaningful sales finally at this company. It's been not available for probably five years, at least. So as you come in…

[Harold Flynn:]

Thanks very much for your question and I appreciate it. I'll try to give you a few and then you can come back to see if I've touched upon the things you're talking about. So, I think one of the things I mentioned in the last call perhaps in the Q&A, we have great technology and great products and there differentiated and many will say who are experts in the area that we have the finest laser but we get very caught up in marketing and selling our technology and leaving our sales reps to do hand-to-hand combat with features and benefits. So there is a lot of noise in the system if you go features and benefits, especially with a group that's not technologically savvy. So it winds up being not as efficient and effective as it could be otherwise. The pain point for dentists and I mentioned it a little in the call, they've had declining average net incomes for ages. So we focus on what the laser can do and it can do dozens and dozens of great things. But in the end of the day we need to have a compelling value proposition that gets them into the sales funnel quickly, which means you need to boil it down to the two or three or four key areas that the dentist or the clinician will think they can do, and that we can show that a compelling ROI story that hits both engines if you will of the twin engine plane. The first being better dentistry and the second being better business. So what we hear back a lot of times is that it's hard to get people in and we've been selling people things they don't need, and I absolutely disagree with that, that we're going to change dentistry in a way that people understand that they do need this tool in their armamentarium. So what we're doing is we're focusing on that pain point and showing how three procedures can result in positive cash flow, and then be able to have you afford all of the other dozens of benefits that you have with the lasers instead of trying to bury them with the value proposition. That's kind of at a very high level. Our marketing efforts were also quite a bit focused on brand and not as much focused on procedures and things that resonate with the clinician in their everyday practice. So we're tightening all of that up and even at these trade shows we've done a fairly quick change of some of our trade show group properties to really try have more stopping power in that regard and really convey the value proposition in a much more meaningful and quick way. I speak with the people inside the company, if you can't catch me in 120 seconds, right at the proverbial elevator pitch, then you're not likely to get me into the sales funnel on the sales process because there is hundreds of other people promising practice growth or improved dentistry. So that's at a very high level. I will also say that we have a lot of room for improvement on the collaboration, and the cooperation between the sales and the marketing function. I think in this three-day session we did with the sales leadership for North America, they responded they've never had these types of discussions and detailed planning, and the ability to kind of review what's wrong and be responsive to it in a more meaningful and tactical way, instead of some very high order brand marketing type of campaign. So, the folks that came before I had a lot of great experience in a lot of great areas, and unless you've spent some time in the dental areas you might not be as clear to you what types of things will resonate most with that particular group. So I'll pause there as a couple of the keys that I think about, and also just kind of generating this local interest in these local leads. Dental professionals have very small local networks, and you have to accommodate that as you go into your sales and marketing channel.

[Paul Bornstein:]

Okay, it makes some sense. Well, you're actually focusing on trying to impact instead of just going to general pass a little marketing organization. [Multiple Speakers] It often looks like nothing got started in the past.

[Harold Flynn:]

I think people were doing good work and really looking at programs but what we've done in this strategic plan is lined up all of the procedures, and we evaluated four or five different key attributes of our technology against that procedure to prioritize them in which one should have the most appeal in changing every day dentistry. And at the same time provide a return for the customer. So I think it's really that analysis and doing things in kind of a more analytic way and using some rational problem solving tools and other things to at least get a cogent message that can be delivered by an entire sales force instead of having every territory on its own to deliver its own message.

[Paul Bornstein:]

Yes, and I'm sure you've done the analysis where you can get the most leverage out of that revenue. So you're focusing on that because that's the key to generate value for shareholders that there's really been no value generation, and I think that's the leverage out of the sales and you've got to start somewhere.

[Harold Flynn:]

That's right.

[Paul Bornstein:]

So hopefully this fourth quarter which is one-third over -- you'll get the benefit with that reduced cost and you'll surprise us on the upside. So maybe you'll be at -- eventually get to a $60 million run rate.

[Harold Flynn:]

That's our aim and beyond ultimately, right.

[Paul Bornstein:]

Yes, well it's good. Now it seems like you have some thoughts and you're trying to execute on those. I know you haven't been on Board very long and you've got a lot of cleaning up to do. So you can do it quicker you'll be all right to take it anywhere. [Multiple Speakers] Yes, okay.

[Harold Flynn:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Martin Cohen with PTX Securities. Please go ahead with your question.

[Martin Cohen:]

I have two questions. One is, really the stage of the market -- the prior management was saying we're really in an early adapter phase, heading into a more mature market. And I'm just wondering what your sense is, where we are the size of the market, whether the technology is being generally accepted in the dental schools and by the dentist? And what do you think the -- really the vision is where you can take the company with the kind of market we have out there?

[Harold Flynn:]

That's the question number one?

[Martin Cohen:]

Yes, the second question is maybe -- behind you, but at one point to the company was out licensing the technology and ophthalmology in another fields to basically, I guess generate royalty income and haven't heard anything about that, is that been suspended or is there still potential for licensing applications for the laser technology?

[Harold Flynn:]

Okay, great. Thank you, Martin. On the first, I think there is a number of different ways that people look at markets and they model them. Sometimes it certainly can make it easier in discussions and the crossing mechanism model where we have early adopters and the early majority and the late majority, it's something that's been used effectively including in this market. So one of our efforts in our strategic planning was to take a step back, and instead of using just the number of dentist that have been registered to really try to get a better feed on the market opportunity that's out there in the level of penetration and using, let's call it locations or offices as the denominator. And ones that -- when you look at any given market there is a total theoretic market, there is an addressable market and then there is a served market, and there is a few in between if you get really detailed about these definitions. But if you look at the kind of total addressable market around the world -- and if we used the United States as an example, there are some 95,000 clinics or so as per my recollection that would be reasonable targets for this technology when we're talking about the all-tissue lasers. The penetration of diode lasers is much, much higher and it's a more mature phase of its market. To use that same market model that probably would be in the late majority area by way of penetration and how many are out there, and we participate in that and lead in that market as well. But this all-tissue laser market, if we look at across what we expect have been -- kind of whether it's unique penetration and such, you come up with the number somewhere between 7% and 9%. And so that's still early stage, there is still a lot of opportunity but it really also comes back to what your product portfolio. If you only have -- and I will often use the automobile industry as an example, if you don't have a portfolio that can appeal to every segment of the market and get reasonable value for customers along the way, then your market will be limited and it's not as much -- are they early adopters or they are late adopters, it's that you don't have a compelling value proposition that they can see how this changes. So the market matures, both -- as things become available, and as people become aware of these products and services. But it also matures as you are more disruptive in the market. And sometimes disruption also takes business model changes, right. A lot of disruptive technologies come along with less expensive ways to do things and different ways that the business model works. So we look at all of that and I would say it's still -- even though it's been around a long time, this is not a time phase maturation process, it also is one that you can actively change the trajectory of. And that's what our strategic plan intends to do which is to have a portfolio of products that has both, breadth and depth, to be able to appeal to a number of other segments and kind of move past this theory of early adoption. The other early adoption -- the technophiles, and those types of people that will take on technology, help us leverage and cross the chasm overtime. But I think we have to be an active participant in that process. So I think it's been slowly moving forward, I think it's been -- the penetration has been growing from the data that I've seen, but at a very, very small pace. And we need to be thinking about a pace of growth that's far higher to get penetrations up. You mentioned dental schools, and I think I spoke about this a little bit on the last conference call where it's hard to elbow your way into the curriculum, certainly of the undergraduates. But we've got to make investments in the graduate areas and the fellowship areas, and in some of the other places that there are opportunities to start to expose dental students to lasers and not have them sit in a corner somewhere. So that not comes back to the training and education. So a very probably long way around your question but I think the market stalled in this early adopter stage and we don't need to be victimized by it, we can actually do something about it by changing the dynamics of the market, and that's the overall objective of our strategic plan.

[Martin Cohen:]

Good answer.

[Harold Flynn:]

The second part, we do have quite an intellectual property portfolio and I would say that I would not share specific conversations but we are in regular contact with different parties related to different parts of that intellectual property portfolio. So that opportunity is there, the intellectual portfolio is leverage but it's not something that frankly I'm going to rest on and market our great growth out of because I think we need to be successful in our core businesses and string some successes together, get our financial performance moving in the right direction, and then be able to invest in some of these but we will opportunistically look at our licensing, some of this intellectual portfolio to others as we get an attractive valuation for it. So that's how I would leave, so it's not dead, it's not suspended but it's certainly not forefront in what I want to be talking about as far as the company and its performance is going.

[Martin Cohen:]

Right now I have one point, the management has indicated they have made some major penetration of the ophthalmology market, and there was some parallel joint ventures underway and then there was no further information about it. So I didn't know if anything was in the pipeline or not. So that was really the reason for the question.

[Harold Flynn:]

Yes, I think in one of the things as a public company that if we do have material developments in that respect, we do have to disclose them. And it would be something we would talk about on the conference call. And like -- I know that, I'm aware of that. In the past and a few years ago there have been trials of various technologies in some of the ophthalmic areas and then there were some initial development investigation agreement. But there is nothing material to report at the time.

[Martin Cohen:]

Okay. I appreciate the color. Thank you.

[Harold Flynn:]

Certainly, thanks for your interest.

[Operator:]

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

[Chip Saye:]

Hello, gentlemen. I have a question, I like the strategic path that you've discussed today and we talked after the second quarter call about what is your plan and you said you'll be able to tell us more on the Q3 call, so I appreciate that. I also appreciate the effort that cost cutting. I have a question for you, if I'm a dentist at the New York Dental Show, and you come with the better dentistry, better business argument, if you can convince dentist of the better dentistry argument, I think the better business component will be easy. I know several of your predecessors have tried to approach the better dentistry angle by saying, it's faster to drill or if it's a germ issues this is a lot cleaner than a drill; and different other takes on better dentistry. If you don't mind, I don't want to put you on the spot, but if you don't mind I'm a dentist at the New York Dental Show and I walk by, how -- what are you going to tell me from someone who has heard the previous stories and maybe didn't believe it. And what are you going to tell me that's going to convince me that I should stick around to listen to the better business component after the better dentistry argument?

[Harold Flynn:]

Yes, if I could just preface my pitch to you for a moment with -- I believe that the reason that laser dentistry had slower growth and penetration is that, in general it had a false start because of promises that couldn't be kept. So and then, dentist have -- I've heard that before, the no shot, no pain, no drill. And that was really overreaching the capabilities frankly of any laser system. And the notion of being faster or slower than a drill. When working on teeth and drilling fillings it was kind of an easy conceptual sell but ultimately in the end of the day it fell short and couldn't be delivered. Now we have people that will report 75%, anesthesia free, and you'll see people kind of all over the place with respect to how much of the restored of aspects the work on. But I believe that positioning was part of our problem and those are not the better dentistry arguments we're making. So this notion that I've talked about, before we look at all the procedures that dentists do and see every day. And then we look at where lasers can make a huge difference in patient reported outcomes, certainly certain types of cavities like Class 5s, especially for older adults who get dry mouth as a result of medication is right up there. But a lot of it is periodontal disease. And the fact that we have an all tissue laser makes it the perfect tool to debride the area, the epithelialize the soft tissue, and the like. So at the New York dental show when you come by, You know we're going to say, we can show you for procedures that you're seeing patients every day that you're not treating. And these three or four procedures we will teach you and support you how to use this technology to treat them better, so that their peril pockets are less deep or they don't progress. And if you do these, and you should be able to see this many people during a given quarter given or a given month rather that you will generate $3,000 of positive cash flow. Are you interested in talking more? All reimbursable procedures, and the other thing that got a little bit twisted is that if you're drilling on teeth, how are you actually generating reimbursable revenue because you're still doing the same procedure you did with the drill. And so it's a secondary benefit of having more patients which we absolutely believe in. And the patient reported outcomes will be ultimately which moves – ultimately what moves laser dentistry forward. But I think the focal point of the procedures have not been the right sweet spot. And we're going to be trialing in testing those that these three shows coming up. But without getting very specific about what we're doing to unveil their it's really going to be – Doctor, you see these procedures every day do you not? Yes we do. And often times you do nothing or wait for it to get bad enough to send it out to the periodontist, better dentistry is intervening sooner and giving the patient a better clinical result and in the meantime you actually will increase the number of procedures not only that you do but the periodontist does as well. The rising tide favors all boats. You know periodontal disease and in the implant space peri implantitis are growing issues in dentistry and they see it every day. And it's something that they can intervene and help with and save teeth and restore the periodontal ligament attachment so that people don't lose teeth. So I may have gone around a little bit but hopefully I answered your question there.

[Chip Saye:]

My next question I guess I'll direct to David is the time aspect I mean I think this sounds like a good plan but your cash burn rate, I know you’ve talked about it coming down in Q4 but then generally Q1 is a weaker period in terms of sales. So what is a cash burn run rate if you had to guess is it 4 million - 3 million in Q4, what was the run rate that we can think about to then see how much time you guys have before you have, you need some capital whether equity raise or debt or something?

[David Dreyer:]

It's a tough question, I don't want to dodge it let me be clear. When you go back and look at like the second quarter our burn rate was 3.8 million over the quarter so basically it was about 1.2 million a month. It was higher than that in the third quarter but again our revenue really came in lower than we had expected had it been you know I'm going to estimate let's 12 million and we probably would have had more comparable burn rate. It does relate clearly to our revenue levels and it's also the gating the timing of our sales which we've gone through a lot of effort to improve gating, not just happen at the end of the quarter but basically you know a nice build throughout the quarter that way we're able to collect more of the cash during the same quarter. So all these play into it and then of course the third variable out there is going to be lowering expenses and that somewhat reactive which is least desirable. The most desirable is that we achieve our sales goals. I think we're feeling much more confident with the goals that we have going forward and so assuming that you meet those our costs are pretty much going to be as planned. So I'm not going to pick a quarter where we're going to breakeven or anything but '16 is clearly a year of transition and it's a delicate dance the kind of balance making investment in new products and marketing and market research etcetera, we’re reprioritizing where we spend because we do have limited resources to spend. So you're probably going to see some comparable burn rates like we had last quarter in and Q2 going forward because you know we need to manage the cash accordingly. So it's not going to grow it's going to go back to a level that will utilize stretch our existing cash to the point of getting the cash flow positive later in 2016

[Harold Flynn:]

Yeah. I just add you know if I may chip that as much as it may be frustrating for models, our cash flow is not really a run rate or a readable thing if you can look at the trend, but I'll give you the example of we did spend a fair amount of cash that was highly leveraged in the investment of capital including our lease holder improvements which we had a matching amount from our landlords as we renegotiated our lease. So it was a timing issue, but it was not related to kind of operational decisions but certainly capital investment decisions and I think that's going to be heavily leveraged going forward. So each quarter has its own personality if you will, but certainly David articulated many of the major levers one of the other ones will be investment spending both in areas like putting in a state of the art educational facility as well as starting to invest in tooling and other areas for new product introduction which always ahead of the curve. So we'll do our best to kind of articulate the dynamics but we're so small and sensitive to a $1 million or $2 million in our revenue line that I would caution people against run rating it per se, if you use that logic in the first quarter 8 million we'd be out by next quarter and clearly we won't be. So I just add that color commentary myself.

[Chip Saye:]

Yes I appreciate that it's just pick a number where there is two, three, he said three, eight, 2Q numbers so pick three and then look at your 3 million a quarter. What is the plan equity raise or debt or what's the thought around that?

[David Dreyer:]

I'll just share with you, we're not necessarily able to share a lot of that but I have a very strong desire to not raise additional capital. So our strategic and operating plans are have the goal and the objective of not having to do that. So we don't have a timing right now because it's our plan not to have to do that and if we're successful executing our plan. You will be more evident probably in the middle of next year how well we're doing against that plan.

[Chip Saye:]

Okay and along those lines if the numbers don't come through like you think they will. Is there more room to make cuts like you did this September? And if so what amount?

[Harold Flynn:]

I think we would reserve comment on that specifically. Theirs is always a delicate [indiscernible] as David put it with this type of activity as well, you can't save your way to growth ultimately, but there are there is always room in some respects many expenses are discretionary but you mortgage your future when you make those. So that's a detailed set of planning and discussion that I will be going through with our Board of Directors to get our best thinking together, to that plot course out. So I would not say how deeply we could cut with respect to expenses at this point.

[Operator:]

We have time for one last question today, that will be coming from the line of George Eckel [ph], Private Investor. Please proceed with your question.

[Unidentified Analyst:]

I've been an investor in your company much longer than I care to believe but, this is about the third management position changes as many years and everything else. The long and short of this thing is that I look at you drop your gross profit by 20% -- over 20% and really didn’t get any increase in sales, how did that happen?

[David Dreyer:]

Again background on our margins that, are you talking about our gross margin rates?

[Unidentified Analyst:]

Yes.

[David Dreyer:]

In the 30% as compared to being in the upper 40s, there has been a trend that really started at the beginning of the year. Many of the things that I had mentioned in that nine month analysis for example the change of the warranty periods for the WaterLase system actually added cost in the cost of sales that impacts you know the gross margin rate and there's a number of other variables that we are steadily working to improve. Many of them are controllable, not all of them are the currency exchange rate hit us in 2015, didn't have that issue in 2014 and in addition even though it's not as big launching the new product, the iPlus 2.0 and the EPIC X. There was some initial promotions which involved basically affecting the margin rates. We have tried to explain before trade ins and things like that. So what's controllable and what we can manage to directly we are absolutely are making those changes. While it appears fairly small like 29% - 30% we're definitely working up upward and I think focusing on the things that we can directly control. So we're not happy with that margin rate. It's basically started at the beginning of the year but we are clearly working to move that up and address the things that are really controllable. And I think you'll start to see that on a go forward basis.

[Unidentified Analyst:]

Well it didn't appear to greatly increase any of your sales and needless to say it's been more than reflective in your stock prices. I don’t know, I hope you guys are on the right track.

[Harold Flynn:]

In our cost of sales because we're a capital equipment company, there's also a cost of service and we have a network of service engineers out in the field. So if you think in terms of absorption of manufacturing expense there's also an absorption if you will of our service expense. So there are a number of fixed costs that need to be absorbed if you will certainly with the sales. And then the variable cost I look at both the resulting gross margin but our incremental sale of a WaterLase, iPlus 2.0, if not at 30% gross margin it's higher than that. So when you see the levels and the sales levels increase and return to a higher amount you'll see those get healthier quicker. Number two as we demonstrate better improvement in a number of our components that we have and we looked at the data and we look at it quarterly in our quality management reviews. We'll have the opportunity to come back from a two year warranty on our product which was done appropriately when we had quality issues that the organization has gone about attacking and fixing. I think if I recall correctly David that might even be as much as a few hundred basis points as an example.

[David Dreyer:]

So I think hopefully we'll be having a -- well we intend to have a much different discussion about this as we get to higher levels of sales and we start to see that fall through over and above this kind of marginal level that we're at today.

[Operator:]

Thank you. Ladies and gentlemen this concludes the question and answer session. I would now like to turn the conference back over to Mr. Flynn for closing remarks.

[Harold Flynn:]

Okay. Thank you very much, Operator. While we had hoped for a stronger financial results in this year's third quarter we did make solid progress during the quarter in reducing costs and implementing cost controls, becoming more efficient in sales, marketing and manufacturing and improving our ability to execute in all of these areas. As a result I'm optimistic about the outlook for improved financial results in this year's fourth quarter and in 2016. Well there's a lot of hard work ahead of us we're transforming Biolase into the kind of company that will be successful in today's dental market. We'll continue to take the steps needed to constantly improve the execution against our strategy and become more customer focused to develop products that will improve patient outcomes and have meaningful impact on the practice of dentistry and help dentist be successful both clinically and in their business results. This will take some time as I discussed on the last call but we believe we're going in the right direction. We’re the global leaders of dental lasers and we're working to expand that leadership, drive sustained revenue and bottom line growth and build value for all of our customers and our shareholders. Thank you all very much for attending our call today and I look forward to talking to you again in early 2016 when we announce our results for the fourth quarter and full year of 2015. Take care.

[Operator:]

Ladies and gentlemen today's conference has concluded. Thank you for your participation.