To My Fellow BIOLASE Stockholders,
Through a series of Letters to Stockholders published in this newspaper I have voiced deep concern about BIOLASE, its executive management team and its Board of Directors together with the various false statements they have made about the past and present business of our company, including about me and my accomplishments as CEO.
Understanding that organizational change is most effective when it comes from within, I am writing today to inform you that I am actively exploring various options including putting forth a full slate of five Director Nominees and utilizing the proxy process to gain control of our company's Board of Directors. I may be pursuing this proxy battle at the next BIOLASE annual meeting of stockholders or possibly sooner, and at the appropriate time I will be making public the names of my Director Nominees.
I am taking this action because BIOLASE is not being managed for long-term growth and sustainable business success, and decisions are not being made in the best interest of all stockholders. Instead BIOLASE is being managed for as-yet undisclosed short-term purposes and in the interest of a tightly aligned group of stockholders led by Larry N. Feinberg and Jack W. Schuler, two corporate raiders who appear to be acting in concert and coordinating activities, yet they have failed to disclose their common purpose as SEC regulations require. Mr. Feinberg is founder and principle of Oracle Partners, BIOLASE's largest stockholder, and Mr. Schuler is BIOLASE's second-largest stockholder and founder of Crabtree Partners.
I am alarmed and dismayed by the ongoing exodus of talent from BIOLASE. Many long-serving, key employees have been terminated or otherwise left our company over the past few months, and with them we have lost not only knowledge but also important relationships. BIOLASE management is abandoning critical projects with potential for significant benefit over time, and instead appears to be conducting a staged liquidation of our company in preparation for a hasty and poorly orchestrated sale to an industry player without a proper marketing process as the Delaware Chancery Court mandates to maximize value for all stockholders.
I fear that this liquidation and takeover will be completed in only a few months' time as even the lease on our company's corporate headquarters building is up for renewal in mid-2015, and to the best of my knowledge no plans have been made for renewal or relocation. In addition, it is my understanding that efforts are underway to close BIOLASE's European headquarters office in Germany, which represents a critical presence for servicing our international markets.
It should come as no surprise that this mismanagement is reflected in the value of BIOLASE common stock, which has seemingly settled into the mid-$2 range, nearly one-half the average price that it was during the years of my leadership.
Management's self-serving ways are further evidenced by their manipulation of the timing of recording revenues to favor quarters after I stepped down as CEO last June, thus making the company's financial performance look worse under my leadership and better under theirs. This manipulation involved shifting the recording of nearly $3 million in diode lasers revenues from the 2014 second quarter to the 2014 third quarter.
The current management and Board also manipulated the November 2014 termination of Alexander K. Arrow, M.D.
Dr. Arrow served as President and Chief Operating Officer of BIOLASE until September 2014, and was a Named Executive Officer of the Company. Approximately two months prior to being terminated, Dr. Arrow was demoted to Chief Medical Officer. As a result, the company took the position that there was no legal requirement to make the terms of his severance package public, averting appropriate transparency.
Dr. Arrow did not have an employment agreement that likely would have included a termination clause, as indeed no one at the company during my years of leadership (myself included) had any such agreement. Without an employment agreement, Dr. Arrow's severance was entirely at the discretion of management and the Board, and amazingly they chose to reward his failure with a termination package of two years' salary, costing the company approximately half a million dollars in cash.
In stark contrast, effective as of January 31, 2015, Frederick D. Furry resigned as Chief Financial Officer of BIOLASE, which likely was a termination as his severance package included the reasonable cost of outplacement services. He, too, had no employment agreement, consistent with my management style. But notably Mr. Furry – whose tenure as a BIOLASE executive was more than twice that of Dr. Arrow – received only three months of salary as a severance payment, as compared with the ludicrous two years Dr. Arrow received. In contrast, Mr. Furry's severance terms were promptly disclosed in an SEC filing.
As I have made clear in previous Letters, Dr. Arrow committed perjury by giving contradictory and false testimony when under oath in court about his resignation as a Director that, ultimately, led to Messrs. Feinberg's and Schuler's agents gaining control of the Board by just one vote. It is credible that receipt of this gratuitous and senseless excessive severance package with no public reporting of it is related to mere recompense for his false testimony. That testimony allowed the group comprised of Larry N. Feinberg, Jack W. Schuler, Paul N. Clark, Jeffrey M. Nugent, James R. Talevich, Jonathan T. Lord, Alexander K. Arrow, Frederick D. Furry and company counsel Mike C. Carroll to wrestle control of BIOLASE from all stockholders and their duly elected Board.
The current Board has also blatantly disregarded the terms of the "poison pill" that was implemented by a prior Board to protect the company's stockholders. Clearly there is a "group" comprised of owners of more than 20% of the company's stock acting in concert and coordinating activities to influence company policy and control.
Under the provisions of the company's "poison pill," once an investor or investor group surpasses a predetermined ownership threshold of 20%, all other stockholders are entitled to receive a distribution of rights to purchase shares at a significant discount to the market value of the company's stock. Issuing those rights would serve to transfer millions of dollars in value from the group (which, in this case, would include members of the Board) to the unaffiliated stockholders and, in turn, dilute the group's ownership stake and influence over our company. The Board is not affording all stockholders the protections intended by the "poison pill," no doubt because it would inure to the detriment of members of the Board, and their affiliates, who are acting in concert.
Only the Board is in a position to administer the "poison pill" and, indeed, it is their legal responsibility to do so. Yet not only have they failed to afford stockholders the intended protection and benefit, , but they have allowed the group, including Board members and members of senior management, to accumulate even more shares of our company through privately negotiated transactions at a price representing a discount to market.
Also, as I have written in previous Letters, there exists the very real possibility that current and former Directors with loyalties to Oracle have misappropriated corporate opportunities belonging to BIOLASE and also have inappropriately shared details of proprietary, confidential BIOLASE technology with others with heretofore unknown intentions. Our proprietary technologies are of great value to our company and represent game-changing potential in the field of dentistry and general surgery.
I am deeply committed to preserving the BIOLASE business franchise and enhancing stockholder value. BIOLASE has an exceptional portfolio of current and potential product offerings, technologies and intellectual property, most of which were developed under my leadership. If properly exploited, these products will radically change the way surgery is performed in many fields of medicine and in dentistry, substantially enhancing BIOLASE stockholder value and supporting the creation of additional value over the long term.
I look forward to continuing my advocacy on behalf of all BIOLASE stockholders, and I thank you for your ongoing interest in the success of our company.
Sincerely,
Federico Pignatelli
February 12, 2015
Federico Pignatelli Withdraws His Name as a BIOLASE Director Nominee
LOS ANGELES (April 22, 2015) – Federico Pignatelli, former Chairman and Chief Executive Officer of BIOLASE, Inc. (NASDAQ: BIOL), announces the withdrawal of his name from nomination as a Director of BIOLASE, Inc. (NASDAQ: BIOL).
According to Mr. Pignatelli, "Placing my name in the Proxy Statement for the April 27, 2015 annual meeting of stockholders was largely a symbolic gesture required under a June 2013 agreement, and the Board, quite predictably, recommended stockholders not vote FOR me, which is a farce. Yet the reasons for my withdrawal are anything but symbolic."
The following is the complete statement by Federico Pignatelli:
I am disheartened by the management – or more accurately, the unabashed mismanagement – of BIOLASE, and I recently sold all but 1,000 shares of my previous holdings of 1.5 million shares and surrendered all of my stock options.
Sadly, seated at the helm of BIOLASE is, in my opinion, a group of bureaucrats of highly questionable integrity who have no vision for the company, and instead are pursuing the clear goal of personal entrenchment and enrichment at the expense of the company's minority stockholders. As but one example, it's ludicrous how Officers participated in equity capital raises for the company, and then withdrew huge sums of money from it in their favor. In essence, as they gave with one hand they took away with the other! When I led BIOLASE my salary at all times was only $1, and my option grants were based only on real performance such as revenue, gross margin and stock appreciation. That is honesty and that only is aligned with the interests of all shareholders.
BIOLASE is being managed in the interest of a tightly linked group of stockholders that now controls in excess of 40% of the shares, in blatant violation of the poison pill the company has had in place for years. The group is led by the company's Chairman Paul Clark, along with Larry N. Feinberg and Jack W. Schuler, two corporate raiders who routinely appear to be acting in concert and coordinating activities, yet have not disclosed their common purpose as SEC regulations require and knowingly violated the 20% threshold of the company's poison pill. Mr. Feinberg is founder and principle of Oracle Partners, BIOLASE's largest stockholder, and Mr. Schuler is BIOLASE's second-largest stockholder and founder of Crabtree Partners.
I believe Messrs. Feinberg and Schuler are infamously questionable Wall Street players and have been the subject of multiple inquiries and investigations, and several of their controlled companies, such as of late Accelerate Diagnostic, have been the subject of class-action litigation for various violations such as misleading shareholders.
Regarding Mr. Clark, he had been investigated in his capacity as Chairman and CEO of ICOS for the sale to Eli Lilly that came under swift and harsh criticism, with allegations from both institutional investors and proxy-advisory firms that he sold the company too cheaply and was personally rewarded too well. Mr. Clark was also criticized for withholding what many stockholders considered to be material information when promoting the transaction, including clinical and regulatory updates on at least two drug programs, as well as information about higher-than-expected sales of the company's flagship product and the fact that profits for that year were to be more than triple earlier estimates. The Board also awarded a last-minute round of sizeable retention bonuses to senior management, including an additional $4.3 million to Mr. Clark on top of a so-called "golden parachute" set to exceed an astounding $23 million.
Mr. Clark is also a Director of what has been, up to now, considered a reputable company, Agilent Technologies, Inc. Amazingly he is a member of their Audit and Finance Committee, as well as their Nominating Committee. In my opinion, Agilent loses enormous credibility by having such an individual on its Board.
Time and space limitations prohibit me from providing a full chronicle of the unlawful conspiracy by other Board Members such as Frederic H. Moll, Jeffrey M. Nugent and James. R. Talevich and the subsequent downfall of this once-promising growth company. Yet the following establishes part of the story of incompetence, greed and selfish motivations by this group of individuals, in my opinion.
Deteriorating Financial Performance and Revenue Shenanigans
It is my strong belief that net revenue for the first quarter of 2015, when reported by BIOLASE in a few days, will be $9 million to $10 million. At the midpoint this represents a decline of 17% from the first quarter of 2014 and a decline of 35% from the first quarter of 2013, when I ran the company. This performance could be even more disappointing as during the quarter BIOLASE initiated a campaign to sell lasers with an uncommon guarantee of immediate customer satisfaction and revenue growth for dental practices that venture to buy one (see www.biolase.com). This guarantee should be a significant issue of potential review as to "revenue recognition" by BDO, the company's independent auditor, as final sales cannot carry future liabilities such as any sort of guarantee, particularly as vague and open-ended as the one now offered. Under my past management, all sales were final with no strings or obligations of any sort.
This anticipated terrible performance is likely a contributing factor behind the unusual scheduling of the annual meeting prior to reporting first quarter financial results, and exactly four months earlier than last year's annual meeting.
I also believe that net revenue for 2015 will be in the mid-$40 million range, which represents a decline of 6% versus 2014 and a decline of 20% versus 2013. With an expected cash burn for 2015, in my estimation, of $15 million to $20 million, the company will drain its year-end 2014 cash balance by more than half. Quite simply BIOLASE is imploding, as not only is there poor revenue performance, but expenses have skyrocketed particularly at the managerial level.
This financial mismanagement is not new, but rather it started nearly a year ago. Management clearly manipulated the timing of recording net revenue to favor quarters after I stepped down as CEO in early June, thus making the company's financial performance look worse under my leadership and better under theirs. This manipulation involved shifting nearly $3 million in diode lasers revenues from the 2014 second quarter to the 2014 third quarter, the first full quarter under the new management. Such financial manipulation has likely misled investors.
The executive team has incurred exorbitant legal bills by engaging not one, but two top-tier law firms to defend their assault, incompetence and risky decisions in the legal battle involving Board composition in the context of a dispute with the hostile shareholder Mr. Feinberg. The law firm I hired to protect the company from a no-premium hostile takeover cost nearly $2 million (an amount that, to my best knowledge, remains unpaid under the directive of new management), while the second one was hired against my strong opposition. That decision was made by Mr. Talevich, then Chair of the Audit Committee and still a Director, along with fellow Director Mr. Moll. Messrs. Talevich and Moll aligned themselves with the interests of the Feinberg-Schuler group, not BIOLASE shareholders.
That firm, Ropes & Gray, racked up a fee of more than $2 million to perform work the incumbent firm was fully capable of providing, and at a substantially lower cost. In essence, of the $4 million in legal fees that have been misleadingly credited to me, more than half are accountable to Messrs. Talevich and Moll, both "puppets" of Mr. Feinberg. It is of note that Ropes & Gray was promptly paid and in full.
No New Products yet a Risky Guarantee of Growth
Despite management's claims of introducing three new products, none is in fact new and all were developed under my years of leadership. The company's previous EPIC diode laser has been renamed EPIC™ X and another "new" product is simply a downsized version of an older one: the WaterLase iPlus™ 10 Watts is now the WaterLase iPlus™ 2.0 (2 Watts). It is my view that fooling customers is not an easy task, and anyway an immoral and illegal one!
The same holds true for the iLase product, the first true portable laser portrayed as a brand new one by current management. Under my management the company sold thousands of units in all three of these product categories. It is astonishing and dishonest that current management fools shareholders and customers with marketing them as brand new products.
Stunningly, the WaterLase iPlus 2.0 (simply a downsized version of the WaterLase iPlus) comes with the Practice Growth Guarantee whereby customer satisfaction and revenue growth are guaranteed from Day 1. This guarantee is an industry first and I am amazed that any product in any industry can guarantee customer satisfaction and revenue growth from Day 1. Having served dentists for nearly two decades, I can attest to the fact that theirs is a profession that implements change slowly and cautiously, and will surely take maximum advantage of any guarantee, to great cost and disadvantage to BIOLASE.
Again, I defer to BDO for guidance on how BIOLASE can possibly record an open-ended liability on WaterLase iPlus 2.0 purchases, and I foresee a series of restatements in the company's future if the auditors do not address this situation immediately.
Excessive Compensation and Hidden Severance Packages
During the years I served as Chairman, all non-employee Directors received $42,000 per year, plus modest additional compensation for Committee service. Members of the BIOLASE Board now receive $80,000 per year, meaning they are paying themselves nearly twice what they made under my management. It's startling Mr. Clark received more than $130,000 in compensation during 2014 and CEO Mr. Nugent has a base salary of $300,000, plus an exorbitant expense account owing to the fact he lives in New York City and BIOLASE headquarters are in California.
The newly hired CFO will be outstandingly compensated at more than $400,000, bringing the top management compensation and expenses as a group to well over $1 million (including options and shares, the total exceeds $1.5 million). As Chairman and CEO, my compensation was only $1 and my expense account was minimal. The CFO under my management was paid $220,000, so total cost of top management was just a fraction of where it is today.
Yet the truly egregious payments have to do with the recent departures of two executives, and a severance package that was paid but not reported publicly.
According to the Proxy Statement, regarding Alexander K. Arrow, M.D., "Dr. Arrow was not a party to any severance or change in control agreement through his resignation on December 6, 2014." This may be true, but upon information and belief it's only because Dr. Arrow received a severance package of nearly $500,000 subsequent to the date of his resignation.
Because approximately two months prior to being terminated Dr. Arrow was demoted from President and Chief Operating Officer to Chief Medical Officer, and was no longer a Named Executive Officer, BIOLASE took the position there was no legal requirement to make public the terms of his severance. Dr. Arrow did not have an employment agreement (no one did during my years of leadership, myself included). Without an employment agreement, Dr. Arrow's severance was entirely at the discretion of management and the Board, and they chose to reward his failure with an outsized payment.
Regarding Frederick D. Furry, former CFO, the Proxy Statement states, "Mr. Furry was not a party to any severance or change in control agreement through his resignation on January 31, 2014 [sic]." As of January 31, 2015, Mr. Furry resigned as CFO. He, too, had no employment agreement. But notably Mr. Furry – whose tenure as a BIOLASE executive was more than twice that of Dr. Arrow – received only three months of salary as severance and, in contrast, the terms were promptly disclosed in an SEC filing. So how can we rely on the Proxy Statement as being accurate?
A Takeover without Paying a Premium
Following publication in August 2013 in Seeking Alpha of a negative opinion based on incredibly false information, written by Richard Pearson, BIOLASE stock plummeted 70% on high volume in just two trading days. Mr. Pearson is a contributing editor to my credence close to Messrs. Feinberg and Schuler, and I strongly suspect that Mr. Feinberg was behind this article. Unsurprisingly, within days Mr. Feinberg approached me with an offer to pay $10 million for 10 million shares of BIOLASE common stock at $1 per share (below the then-current market price) plus a further 10 million warrants, an offer that I firmly declined.
At the time BIOLASE had 32 million shares outstanding (versus the astonishing 58 million shares outstanding today, with two incestuous capital raises blessed by a corrupt Board at senselessly low prices, plus 10 million warrants), making this an evident acquisition of control of the company that entirely disregarded minority shareholders.
Such destruction of the BIOLASE capital base has caused an impossible scenario for capital appreciation for all shareholders. In fact, assuming the company could hypothetically earn $6 million, that would be only $0.10 per share with such an absurd share count, and that translates to the current stock price at a P/E multiple of 25. And while I expect huge losses, not earnings, even if by dream earnings do materialize they would not give rise to opportunity for any capital appreciation.
Lastly I would like to highlight that under my management I raised $17 million in capital at an average of $4.50 per share, versus the bizarre $47 million at around $2 per share under current management.
In conclusion, the BIOLASE Board has incredibly and blatantly disregarded the terms of the poison pill implemented by my management and prior Board to protect all company stockholders. It is evident that there is an existing group comprised of owners of more than 20% of the company's stock acting in concert and coordinating activities to influence company policy and control, led by Messrs. Clark, Feinberg, Schuler and Moll.
Together this group surely triggered the pill as together they currently own approximately 42% of the company. Indeed in a Schedule 14A filing with the SEC of a presentation that was used by BIOLASE with a proxy advisory firm for the sole purpose of discrediting me, slide 9 contains lockstep quotes from Messrs. Schuler and Feinberg, who together own 39.7% of the shares outstanding. These two investors alone exceed the 20% threshold.
Mismanagement is Reflected in a Stagnant, Depressed Valuation
It should come as no surprise that this mismanagement, lack of vision and deplorable execution is reflected in the value of BIOLASE common stock, which remains in the mid-$2 range, nearly one-half the average price it was during my years of leadership.
Time will tell what excuses and blame management has for their inevitable poor performance and implosion of the company."
For more history and details, please visit www.pignatelli-biolase.com.
About Federico Pignatelli
Mr. Pignatelli served on the BIOLASE Board of Directors from 1991 through August 2014. He was Executive Chairman from 1994 through 2006, and Chairman Emeritus from March 2006 to July 2010. He was Chairman of the Board and Chief Executive Officer from September 2010 through June 2014, during which time and at his request he was paid an annual salary of only $1.
From 1994 to early 2006 when he resigned as Executive Chairman, revenues grew from approximately $1 million to approximately $70 million and the company's market capitalization increased from approximately $3.5 million to approximately $500 million. In his second round as Chairman and CEO, he managed a business and financial turnaround by restructuring what was essentially a bankrupt BIOLASE into a success again, tripling revenues to approximately $60 million with an increase in market capitalization from approximately $15 million in August 2010 to approximately $130 million in February 2013, twice exceeding $200 million during the period.
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