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Edited Transcript of BIOL earnings conference call or presentation 8-Aug-19 8:30pm GMT

Q2 2019 BIOLASE Inc Earnings Call

IRVINE Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of BIOLASE Inc earnings conference call or presentation Thursday, August 8, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Beaver

BIOLASE, Inc. - Executive VP & CFO

* Todd A. Norbe

BIOLASE, Inc. - President, CEO & Director

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Conference Call Participants

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* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst

* Kyle Royal Bauser

Dougherty & Company LLC, Research Division - Senior Research Analyst

* Lisa Springer

Singular Research, LLC - Research Analyst

* Todd Kehrli;EVC Group

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the BIOLASE 2019 Second Quarter Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Todd Kehrli of the EVC Group. Please go ahead, sir.

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Todd Kehrli;EVC Group, [2]

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Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's financial results for the 2019 second quarter ended June 30, 2019. On the call today from BIOLASE are Todd Norbe, President and Chief Executive Officer; and John Beaver, Executive Vice President and Chief Financial Officer. Management will review the company's operating performance for the second quarter before opening the call for questions.

Before we begin, I'd like to remind everyone that a number of forward-looking statements, which are any statements that are not historical facts, will be made during this presentation, including forward-looking statements regarding the company's strategic initiatives and financial performance. These forward-looking statements are based on BIOLASE's current expectations and are subject to a variety of risks and uncertainties that could cause the company's actual results to differ materially from the statements contained in this presentation. Such forward-looking statements only represent the company's view as of today, August 8, 2019. These risks are discussed in the company's filings with the Securities and Exchange Commission. A replay of this conference call will be available on BIOLASE website shortly after the completion of today's call. When listening to this call, please refer to the news release issued earlier today announcing the company's 2019 second quarter results. If you do not have a copy of the news release, it is available on the Investors section on the BIOLASE website at biolase.com. BIOLASE's financial results can also be found on the company's quarterly report on Form 10-Q, which will be filed with the SEC. The tables we provided in today's news release offer additional financial information, so we encourage you to review them. The tables include a reconciliation of unaudited GAAP net loss and net loss per share to non-GAAP net loss and net loss per share as well as the details of the company's other non-GAAP disclosures.

With that, I'm pleased to turn the call over to BIOLASE's President and Chief Executive Officer, Todd Norbe.

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [3]

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Thanks, Todd, and thanks, everyone, for joining us this afternoon. I appreciate your interest and continued support of BIOLASE. Today is my 1-year anniversary as CEO of BIOLASE. We've accomplished a lot over the last year and still have much to do. Coming from the dental industry, I was attracted to this technology and the opportunity that existed at BIOLASE to create a new standard of dental care. Our all-tissue Waterlase technology continues to amaze clinicians and patients alike with its capabilities, as we are well on our way to building a commercial infrastructure to support this great technology, allowing for expanded reach. During this past year, we have put in place the business processes that are necessary to successfully align BIOLASE's innovative technology with an approach that can achieve commercial success. We continue to get better, week in and week out. Our journey continues as we have more work to do to reach our ultimate goal.

While we continue to make significant progress, our revenues this quarter reflect the short-term impact of the strategic decisions to build a healthier business for the future. Rest assured that these changes are having the desired effect of positioning BIOLASE for long-term sustainable growth. At the same time, the prudent cost reduction initiatives have been implemented and have improved our financial position and puts us on track to reaffirm our goal of achieving EBITDA positive in the fourth quarter of this year.

Now let me talk a little bit more about the strategic decisions we made during the quarter and how they will strengthen our company. As we have been communicating with you for several quarters, we have been transitioning from an R&D-centric company to one that is disciplined around our commercial organization and driving best practices. To achieve this objective, we've evaluated our direct sales team and determined that we need to realign a significant portion of our team with this new direction. We are in the process of rebuilding our sales team and have added new sales talent during the second and third quarters. We continue to actively recruit and believe our assessment process is enabling us to attract and hire the right personnel. Our recent hiring has been across our commercial organization, including sales training and coaching, customer engagement events, our local direct referral incentive program and our focus on corporate dentistry or the DSO segment.

Although it's early to measure success, I can share with you that this new talent brings high energy, enthusiasm and change management to transform this culture. As we made the strategic decision to exit our imaging business, which was unprofitable and lacked any synergies, and we have also increased our discipline around dealing with our international distributors, reducing the discounting and shortening payment terms. While these decisions resulted in some lost revenue this quarter, it has improved our pricing discipline overall and is leading to better terms and pricing.

Again, while these strategic decisions impacted our Q2 results, we believe they were the appropriate value-enhancing decisions to ensure the long-term growth and profitability of our business. Concurrent with these changes, which again strengthened our business, we continue to experience strong growth in our Model Market Initiative, as revenues increased 31% compared to last year's second quarter. This growth demonstrates increasing interest in our technology and the success we are experiencing with our new go-to-market approaches.

We had great success with new go-to-market sales strategies that we rolled out in the pediatric market in LA, Orange County, and Dallas where this program, our increased training in collaboration with the customer has resulted in higher customer acquisition rates. As a result, we expect to roll this initiative out in other select markets in the U.S. in the fourth quarter. The early success of this new sales program is exciting, and it's all about putting education first.

While we continuously strive to improve, we are encouraged by the positive results we are seeing around our model market and commercial strategies. It increases our optimism and bolsters our confidence as we continue to transform the culture and the entire company. BIOLASE has always had best-in-class technology. And today, we are laying the foundation for a commercial engine that will drive growth as well as predictable results.

As a part of this effort, we continue to focus on our key growth pillars, which are expanding our influencer base, validating the return on investment of our technology through corporate dentistry, expanding our dental partner base and creating a new standard of care with a specialist. One way we're experiencing our -- expanding our influencer base is with the Advancing Dentistry Symposium, which is taking place later this year in San Diego. This 2-day event will provide dentists the opportunity to learn more about the latest cutting-edge technologies and techniques and includes a keynote address by Dr. Gordon Christensen, a world renowned dental educator, influencer and founder of Clinicians Report. We will also have a separate education track for the hygienists to further support their needs around the EPIC X product line.

The McGuire study is another important initiative for BIOLASE as we work to create a new standard of care for the specialists. In addition to comparing the clinical efficacy of Waterlase assisted treatments for periodontitis versus traditional open flat gum surgery, this study will also track the patients reported outcomes for each procedure. We continue to anticipate the 6-month interim data to be available by the end of 2019. And our expectation is that the full study of data will be published in a scientific journal during the first half of 2020.

In closing, I remain excited about our direction and growth prospects. We made a lot of tough decisions during the quarter that will strengthen BIOLASE and our go-to-market strategy, and we remain committed to expanding the adoption of our all-tissue lasers. The cost reductions we implemented in the first half of 2019, in addition to other operating initiatives, allowed us to reduce our operating expenses by 25%, increase our gross margins by almost 370 basis points for the second quarter. With our improved cost structure, new pricing discipline, we expect to achieve EBITDA positive outlook in the fourth quarter of this year.

With that said, I'll turn the call over to John for a review of our second quarter financial results in more detail. John?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [4]

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Thanks, Todd, and thank you all again for joining us this afternoon. And let me review the numbers. Total worldwide revenue for the second quarter of 2019 was $8.7 million, a 29% decrease compared to $12.2 million in the second quarter a year ago. Revenue from the U.S. for the second quarter of 2019 decreased 18% year-over-year. As Todd discussed earlier, the decline in U.S. revenue was due to the strategic decisions we made to realign a significant portion of our U.S. sales force during the quarter.

We are changing the culture of the company, increasing transparency and accountability throughout the organization. This sales turnover impacted U.S. Waterlase sales by 30% as 1/3 of our U.S. sales territories were vacant during the second quarter. We are actively recruiting new direct sales team members who fit our new disciplined commercial organization culture.

During the second quarter, our consumables and other revenue in the U.S. increased 2% year-over-year, reflecting increased utilization of our lasers. Internationally, total revenue for the second quarter of 2019 was $2 million, down about $2 million compared to the prior year second quarter. The decrease in international revenue was primarily due to our efforts to promote better terms and pricing discipline, which resulted in over $1 million in orders held back during the quarter. Also, the transition from direct sales to distribution in Canada has taken a little longer to implement than we originally anticipated, which resulted in a $0.3 million reduction year-over-year in net revenue for the second quarter. Having said that, the exclusive distribution agreement with Sinclair Dental is being ramped up this quarter, so we don't expect this to be an issue heading into the second half of the year.

Gross margin for the second quarter of 2019 was 39%, up 370 basis points from 35% in the second quarter of 2018, despite lower revenue. The increase in gross margin reflects a favorable change in product mix, along with a decrease in manufacturing overhead expenses and better pricing discipline. Total operating expenses for the second quarter of 2019 were $6.7 million compared to $9 million for the second quarter of 2018, a 25% reduction year-over-year. Sales and marketing expenses declined 30% year-over-year in the second quarter, while general and administrative expenses decreased 15% year-over-year. Engineering and development expenses decreased 17% year-over-year in the second quarter. In addition, operating loss for the second quarter of 2019 was $3.3 million, a decrease of 29% year-over-year when compared to an operating loss of $4.7 million in the second quarter of 2018. Net loss for the second quarter of 2019 was $3.9 million or an $0.18 loss per share compared to a net loss of $4.9 million or $0.24 loss per share for the prior year second quarter.

As a reminder, our earnings release includes a reconciliation between unaudited GAAP and non-GAAP net income. We believe non-GAAP net income provides a useful measure of the company's operating results by excluding depreciation and amortization expense, stock comp expense and expenses related to the disposal of internally developed software and the cost of our patent litigation settlement. The non-GAAP net loss for the second quarter of 2019, which excludes these items, decreased 31% year-over-year to $2.8 million or a loss of $0.13 per share when compared with a non-GAAP net loss of $4.1 million or a loss of $0.20 per share during the second quarter of 2018. Our basic and diluted share count at the end of the second quarter of 2019 was 21.6 million shares compared to 20.5 million shares in the year-ago quarter.

Now turning to the balance sheet. Cash, cash equivalents and restricted cash totaled $4 million as of June 30, 2019. We remain focused on wisely investing our cash in programs to drive future growth. In cost containment, prudent cash management continues to be a top priority, as always. Our cost containment efforts have helped lead to a 29% decline in operating loss for the second quarter of '19 as compared to '18.

Before I turn the call over to the operator for questions, let me summarize our remarks. While second quarter revenue reflects the impact of several strategic changes made during the quarter, we strongly believe those were the right decisions to position BIOLASE for greater long-term success. We continue to take steps to significantly improve our operational efficiencies, and we are laying the foundation to achieve our goal of sustained growth and profitability. This concludes our prepared remarks. I'll turn the call back to the operator to open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Kyle Bauser with Dougherty & Company.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [2]

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I joined a little late here. And so maybe I'll just start off with a couple of housekeeping questions. Can you break out the sales by bucket and laser, imaging, consumables, services? And maybe just talk about how those buckets were affected in the quarter? And then just a little bit more about the realignment of the sales force and what the plan is to recover the 1/3 of territories that were vacant in the quarter?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [3]

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Thank you, Kyle. I'll talk about the first question, and then I'll turn it over to Todd to discuss the vacant territories. So when we file our Q tomorrow, we will have the complete breakdown of the various segments -- or not segments, but areas of revenue. But in general, I will tell you that consumables were slightly up. Lasers were significantly down for the reasons that we mentioned, both internationally and domestic. Internationally, mainly due to the discipline on pricing and terms that we have begun to try to instill to our distributors, along with the slower-than-expected ramp up in Canada. From an imaging standpoint, we are now, I would say, as of middle of the second quarter, completely out of imaging in terms of revenue, so you will see imaging be 0 from here on out, and it was immaterial in the second quarter. So Todd, if you want to address the open territories.

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [4]

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Kyle, of the open territories. I think we have about 7 still open that are actively being searched for. I think the funnel that we put the hiring process through is a lot more rigorous today than it's ever been here with multiple assessments to make sure that we find the right DNA that fits where we're going as an organization. And as you can probably gather, as you start to radically change a culture and expectations around performance and discipline, some folks end up opting out of that new world, and we're actively searching for the right fit and the DNA that fits into the world where we're going into. We've been successful in hiring some of those backfills, but in the tight labor market as we're in. And it depends on the geography, it's taking some longer in certain geographies than it is in others.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [5]

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Got it. Makes sense. And the major push of yours, of course, has been DSOs and corporate dentistry. Can you speak -- just curious on a macro level, kind of the opportunity here, potentially provide some color on how big do you think this is? I mean, how -- in your assessment, how far are you and where do you think you can go? And maybe from a penetration standpoint? Just kind of any color around this opportunity?

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [6]

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Yes, I would tell you, Kyle, the DSO market, corporate dentistry, is here to stay. It's the largest and fastest-growing segment in the dental industry. There's a lot of drivers, as we've spoken in the past of why that is the case. We're working with one of the largest, as we've indicated before. And when you look -- work with very large organizations like this, we're seeing good progress but the progress is slow, but when it does happen, the opportunity is large in nature. But doing it right is also important and making sure that we have all the pieces in play so that education is first and foremost most important part to get the technology embedded. And the DSOs are no different than that. And they want to make sure that they have the right train the trainer programs in place to be able to absorb that new technology. And more importantly, get the return on investment of that technology. I think we've mentioned in the past, we've already validated the return on investment there at the DSO side. Now it's about scaling it, and we're still in very active conversations around how do we do that collectively between both parties.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [7]

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And some really nice progress on the leverage in the quarter, both gross margin and reducing operating expenses. John, as we look at the various OpEx buckets on the income statement, where do you see kind of the greatest opportunity for margin expansion? In other words, which levers do you think will be the most important for achieving the EBITDA positive Q4 that we're on track for?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [8]

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Right. I would say it's probably in -- predominantly in 2 buckets. One is on the manufacturing cost side, and this is twofold. We still continue to pursue manufacturing cost reductions. We've implemented some steps early in Q3, that you'll see the results in Q3 and Q4 with that. And we still have a couple more initiatives that we've already identified that we will implement before year-end. That you'll see the benefit of that fully in Q4. In addition, in Q4, we -- that is our seasonally our best quarter from a revenue standpoint, so we do expect certainly increased revenue over our Q2 number, for sure. And that just a volume of that with the fixed cost dilution that occurs with that, you should see a significant increase in gross margin. On the OpEx side, we actually would expect to see sales and marketing go up in Q4 from Q2 levels, but that is the majority of that. In fact, all of that is driven by higher sales as our variable comp sales commissions would go up accordingly with increased revenue.

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Operator [9]

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We'll take our next question from Bruce Jackson with Benchmark Company.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [10]

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Congratulations on the working capital management, the cash balance ticked up nicely. I'm curious to know, what are some of the other working capital initiatives you might have underway. So for example, in terms of the DSOs, I'm assuming you've got something in mind for collections and then also for the inventory turns, but if you could just give us an idea where you think working capital metrics might go?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [11]

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Yes. So thank you, Bruce, for the question. And you're right, we continue to focus a lot around working capital. I will say, from a days sales outstanding AR balance, our biggest challenge is on the international side. And last quarter, we spoke about some of the issues that we had with our Chinese distributor. We changed distribution partners late in Q2. However, we still have the issue with an unpaid balance from the old distributor so we are hoping and expecting that some of the pricing and term discipline, that we spoke to that we started implementing in Q2, will improve overall pricing terms as we go forward in the second half of the year -- excuse me, payment terms. And so we should see a reduction in international DSO going forward. We really don't have that issue in the U.S., we get paid quite quickly from the majority of our sales in the U.S., so it's more of an international receivables issue.

In terms of inventory, we are looking at ways to reduce inventory. However, some of the initiatives that we will be rolling out in fourth quarter, such as the one we referenced that we did in the model markets in second quarter will actually require a little bit of additional inventory for the structure of those deals. And so inventory, there will be some pluses and minuses, our goal is to reduce it slightly, but it won't be as big of a decrease in inventory as we are expecting if we do the international receivables initiative correctly. And that kind of leads maybe to your next question, which would be, even though we had $4 million of cash at the end of the quarter, does that give us enough liquidity runway to do everything we need to do? And I will tell you that, that is tight. So we'll continue to pursue and evaluate various additional capital raise alternatives, which could include anything from debt, to equity to a combination of the 2.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [12]

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Okay. That's helpful. Then if we could talk a little bit more about some of the sales force initiatives that you've got underway. So you spoke about coming up with the right hiring profile. Where -- and you've got the worm, of course, with the metrics and the better monitoring of the sales process. Are you doing anything else in terms of training or sales force management that you're seeing some progress with?

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [13]

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Yes. So Bruce, this is Todd. And I think when you were out here, you saw a lot of the visual management that keeps a lot of these metrics front and center, and as an ongoing weekly conversation. But I think first is around assessment, understanding what you need in the organization from a talent standpoint is, I think the first box you need to check off. And once you understand that, then how do you create an assessment process that allows you to hire the right talent is probably the most important thing that we do here organizationally.

And specifically around the selling organization and where we're going as an organization. So we've used The Brooks Group extensively to do that. It helps our regional sales directors really get to a finalized candidate and either get to yes or no. And I think that's really benefited the organization from that standpoint. We've also increased our discipline and structure around the training program and bringing in talent that is world-class around building a training program and making sure that we had the right program in place to do that.

And we'll be looking at a learning management system shortly here so that we can test and assess the competency in how that new rep coming and their onboarding process is progressing and where the gaps are, so that we can help them get better faster. We never had anything like that in place here at BIOLASE, that's what we're building now, and we've been after that probably over the last 8 to 10 weeks as a key initiative now that we have the talent on board that can lead it.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [14]

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And then my last question is about the DSOs. So you mentioned that you're in active conversations with them. When do you think the -- you might start to see some of those conversations turn into expanded relationships? And are there any things that you need to do in terms of, for example, generating data, either cost effectiveness data or clinical data in order to get the DSOs to the next level?

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [15]

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Yes, good question. When you look at our technology and look at the ability, not only what the technology does, but the feedback that it gives not only the customer and BIOLASE in reference to our software and WiFi enablement, it allows, especially for a DSO, who's tracking metrics, just like a business to say, here's the procedures my dentist did and here's the number of procedures and then also look at it versus the peer group in reference to what best-in-class looks like. So that is really advantageous for not only the customer, but for us to help coach and teach around that and making sure that the utilization rate is where it needs to be.

And more importantly, for the DSO to drive their return on investment. We did that extensively in our trial with one of the largest DSOs, Heartland, and that was a huge advantage for them to be able to really look at the data and understand where that return on investment was coming from and specifically in what procedures, and many of those procedures were focused around soft tissue management which is an area that many GPs don't spend a lot of time on, but is an opportunity for additional revenue within those GP offices. And that was the main driver for them as a DSO.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [16]

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Congratulations on all of the progress during the quarter.

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Operator [17]

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(Operator Instructions) We will take our next caller, Lisa Springer with Singular Research.

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Lisa Springer, Singular Research, LLC - Research Analyst [18]

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I wanted to ask you about the 31% increase in the market revenues, what was kind of the breakdown of that between Los Angeles and between Dallas?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [19]

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Yes. So Lisa, we don't break down those between the 2 markets. I will say directionally, the percentage was higher in Dallas than in LA, Orange County. And you may recall that we started this process initiative in the second quarter of last year in LA. So it was a pretty high comp year-over-year in LA, Orange County, but they were both, they both showed increases.

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Lisa Springer, Singular Research, LLC - Research Analyst [20]

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And you mentioned in your remarks that the slower-than-expected ramp up in Canada with Sinclair, how important a component is Canada of the overall international revenue picture?

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [21]

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Canada is obviously an important component. It's one, obviously, that's close to us here in the United States to be able to leverage some of the things that we're doing state side here and repurpose up there. We believe with the opportunity in reach that Sinclair brings that we haven't had before, just because of the geography within Canada, it provides a couple of opportunities for us. One is around our diode and reach around that with hygienists and dentists, but also Sinclair has had prior experience in selling lasers, and there's a huge opportunity for us to upgrade an installed base there, and we're seeing some really early progress around that this quarter already.

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Lisa Springer, Singular Research, LLC - Research Analyst [22]

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And then you mentioned in the press release about rolling out the Model Market Initiative in additional geographic areas. Would we expect to see 1 more market this year? Or is it possible you may enter more than 1 market?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [23]

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So Lisa, this program that we will be rolling out, we're looking at multiple cities in the kind of 7 to 10 range. And so it will be significant, and this is -- we're not -- to be clear, we're not rolling out additional model markets. We think the testing grounds that we have in LA, Orange County, and Dallas are sufficient to try different things, call it our petri dish, but this is an example of one thing that we tried in the model market that was significantly successful that we're now rolling out to other areas. And if we're successful there, I think it will be part of our standard go-to-market strategy.

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Operator [24]

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There are no further questions at this time. I would like to turn the conference back over to our company for any additional or closing remarks.

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [25]

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Thank you, everyone, for your interest in BIOLASE. This concludes our call. Have a great day.

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Operator [26]

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Once again, this does conclude today's conference. Thank you for your participation. You may now disconnect.