BIOLASE Inc (BIOL) 2003 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter/nine month Biolase Technologies earnings conference call. At this time, all participants are in a listen-only mode. My name is Brian, and I will be your coordinator today. If at any time you do need assistance during the call please key star, then zero, and an operator will be happy to assist you.

I would like to now turn the program to your host for today's call. Mr. Michael Porter. Please proceed sir.

Thank you, Brian. Good morning ladies and gentlemen and welcome to the Biolase Technologies conference call. The important factors which cause actual results to differ material from anything in our release as far as forward-looking statements include, among others, a downturn or leveling off of demand for our products, the loss of key distributors, the effectiveness of our expense and product cost control efforts, the availability and pricing of competing product and technologies, intellectual property disputes and other factors detailed in Biolase's filings with the SEC, including its prior filings on Form 10-K and Form 10-Qs.

On September 30th, 2003, the company restated its consolidated financial statements as of December 31 '02 and '01, and for each of the three years ending '02, as well as the quarterly period ended March 31, '02 through '03.

For more details, you'll see at the end of our release of all the cautionary statements, which the lawyers required us to read. Without further ado, I'd like to turn the meeting over to Jeff Jones.

Jeff, the floor is yours.

Thank you, Michael, and good morning from all of us here at Biolase. It's been another good quarter, and the company, the team, we are on track and on plan. We are pleased to review the results with you this morning, and the way that we will proceed is, I will cover some of the highlights of the quarter initially. Our CFO, Ed Rood, will then give a more detailed review of the financials, and then Keith Bateman, who is the Executive Vice President, will provide an update on the sales and marketing and marketplace in general.

And anyway, for the quarter, sales were $13.4 million, of which $10.7 million were current quarter activities and the additional $2.7 million is revenue recognized from the deferred account. This is a substantial increase from the $6.8 in the prior year same quarter. And on the bottom line, net income grew to $2.5 million, or more precisely, $2,567,000 for the quarter again, and this is from $382,000 in the prior year same, and this equates to 11 cents a share, or two cents -- as compared to two cents on the prior year, and again, Ed will get into the detail of the breakdown of that. And actually right now, we'll turn it over to you, Ed. And after Ed is done, again, Keith, and then I'll follow up.

So go ahead, Ed.

Thank you, Jeff. As Jeff mentioned, the net revenue for the third quarter was really comprised of two pieces. First, $10.7 million of sales related to third-quarter activities, about $2.7 million in revenue that had been deferred at June 30, 2003.

The level of the new sales activity was consistent with our historical seasonality patterns, in which third quarter sales can be flat with or lower than second-quarter sales due to the vacation patterns of dental professionals. About 25% of third-quarter sales activity were international sales, and 80% of the third-quarter sales activities were sales of our Waterlase system.

As for the nine months, including the $2.7 million of deferred revenue totaled $33 million. As of June 30, we were effectively on a cash basis of accounting for the majority of our sales. And in the third quarter, we modified our sales arrangements and began recognizing revenue upon shipment, which was our practice prior to the restatement. So comparisons between the three and the nine months ended September 30, 2003, and the prior periods need to take into account the change in revenue recognition methods as well as the change in the deferred revenue and the deferred charge line items for balance sheets for the period being compared.

The effect of the change in the deferred accounts between June 30, 2003 and September 30, 2003, was a reduction in the deferred revenue of $2.7 million, which was revenue in the third quarter, and the reduction of deferred charges of $955,000, which was expense in the third quarter. That leaves about $1 million of deferred revenue and about $460,000 of deferred charges on the balance sheet as of September 30.

Also during the third quarter, we adopted EITF, or Emerging Issues Task Force 00-21, in which we are required to defer a portion of each sale for which installation is accomplished after the balance sheet date. At September 30, that deferral was approximately $50,000.

Our gross margins for the three and nine months ended September 30, 2003 were 62.5%, yielding gross profits of $8.4 million for the quarter and $20.6 million for the nine months. Operating expenses for the quarter included a very large increase in professional fees and were skewed by about $450,000 in non-recurring fees relating to the restatement. There were also fees related to our registration statement that could not be capitalized, and then in addition, we saw amortization expense of about $50,000 increase due to the amortization of intangible assets acquired from American Medical Technologies in May, 2003.

Operating expenses, therefore, were about 47% of net sales, excluding the one-time expenses report that the -- sales and marketing expense at 33%, G&A at about 9%, excluding the $450,000 and engineering and development costs at 5%.

Net income from the quarter, all in, was $2.6 million, or 11 cents per diluted share, and for nine months, net income was $4.8 million, or 21 cents per diluted share. On the balance sheet, cash at September 30 was $6.1 million. The on October 7th, right after the end of the quarter, we paid off the debt related to the acquisition of our manufacturing facility in Germany. That payment was 986,000 euros, plus a refundable value-added task of 16%. That's the summary of the financial picture for the third quarter and nine months.

And I'll now turn it over to Keith Bateman for an update on sales of our funding activities.

Keith?

Good morning, Ed. Thank you very much.

Our third quarter sales were solid and they continued to demonstrate the great acceptance of Waterlase dentistry in the dental community. During the third quarter, we continued to expand our management infrastructure in the company, and also in the sales area. Most recently, I promoted one of our salespeople in the Midwest to the position of Eastern Area Manager, and this is the first time that we have ever had full-time sales management in the field.

We also recently hired a Chief Operations Officer, and that's had a very positive impact on sales. And going to turn it over to Jeff briefly to introduce our new COO.

Thank you, Keith. Robert Grant is who we were fortunate enough to recruit as the COO for Biolase, and Robert Grant has in his short career, because he's actually quite young, but he has lived in Japan, managing medical device companies. He's lived in Australia, he's lived in Germany. He was in Germany for Coherent, managing European operations for Coherent and has a vast amount of experience in medical devices and the overall operations, and U.S. of course as well. He's spent a lot of time here.

Robert speaks several languages as a result of his moving around. He speaks Japanese, he speaks German, Spanish, French and is a very well-rounded individual, very organized and I think we're very fortunate to have him join the team as part of the critical steps of building the infrastructure to ensure that we don't let our growth get ahead of us.

And with that, Robert, would you introduce a couple of the key people that you've put on the team recently?

Thank you, Jeff, and good morning. I'm also pleased to announce the appointment of as Director of International Marketing. brings 20-plus years of experience in the laser industry to Biolase. He has held several senior management positions, including Regional Sales Manager, Director of Marketing and VP of Marketing including and Coherent, which was later acquired by .

In addition to Tom, I'm also pleased to announce the appointment of as Director of European Operations. brings significant laser sales and marketing experience from the European theater. was previously the managing director of German operations for Candela and the European Distributor Manager for Coherent, which was also later acquired by as I previously mentioned

Thank you, Jeff.

In addition to his other duties, Robert is focusing on areas such as management of the international sales and marketing and also technical service, which of course plays a very important and critical role and has a direct impact on ourselves. Robert has been working to implement programs to provide our customers with increasingly better technical support, which is an important element of growth in any high-tech industry.

As we know very well here at Biolase, happy, enthusiastic customers have been and will continue to be key to our growth strategy. We also have launched a more aggressive consumer marketing and PR campaign across the company based on consumers and prospective patients. We're doing this in cooperation with marketing and PR activities with our customers, where we're sharing the cost and also the work that goes into putting those together.

There's a broader range of materials and support for marketing, PR for our customers, directed at their patients, that are being offered to both our current customers, but also to all new customers that are coming on board. These materials, focusing on the clinical benefits of Waterlase dentistry include postcards for mailings, brochures for their offices, ads for their local newspapers, yellow page ads, and other publications, press releases, radio and TV spots.

In August at the World Clinical Laser Institute Meeting in Atlantic City, we offered our first patient consumer marketing courses, and we have also scheduled specific day-long marketing courses for our customers around the country. During Q3 and so far in Q4, we continue to refine and focus and increase our marketing activities directed at the dentist. Recently, our new FDA clearance for the LaserSmile played a role in generating news and PR both within and outside of the dental community.

This was the first-ever FDA clearance for periodontal procedures for both early and advanced stages of periodontal disease for an 810 nanometer laser for the LaserSmile. Our most current sales event was the annual meeting of the American Dental Association, held just last weekend in San Francisco.

From a sales perspective, this was the most successful meeting we have ever participated in, exceeding our aggressive sales goal that we had set for the meeting. For the first time, we had two booths, one for the World Clinical Laser Institute, and another based on just Biolase and our products. Both booths were fully staffed with salespeople, Waterlase dentist and leasing people to make sure that we could give the people the information they needed and finalize sales. We had a very high return from our pre-ADA marketing activities, and our booths were both very busy throughout the entire meeting.

All of the above were activities that were according to our plans and our ongoing growth strategy. And so at this point I will hand it back over to Jeff.

Thanks, Keith. Thanks, Ed, and thanks Robert.

I need to remind everybody, before we go to questions and answers that we are still under the quiet period rules, which means that we can answer questions regarding the quarter, but unfortunately, we are a little limited or quite limited as to anything forward-looking. And with that said, we will turn it to questions.

At this time, ladies and gentlemen, if you wish to ask a question, please key star, then one, from your touchtone phone. Again, if you would like to ask a question, please key star, then one, from your touchtone phone. The first question comes from Peter Cardillo of Global Partners Securities.

Hey, Jeff.

Hi, Peter.

Congratulations. Good quarter. Keep up the good work -- I'm pretty impressed with the progress with both the margins and of course the quarter itself. Just one question. Since the dollar has been quite week, is this helping out your European sales? Do you see growth expanding both in Europe and in Asia due to the dollar weakness?

That always does help. Obviously, we are a dollar-based company and it does make the products more affordable, so the answer is, yes, it is a benefit to us.

OK, thanks.

Thank you, Peter.

And your next question is from of Blackbird. Please proceed.

Good morning, everyone. Actually, a couple of questions if I could . Starting in the P&L, it looks like the gross margin on the deferred revenue you flowed in the $2.7 million. It looks on the the press release it's about 74% gross margin. If you could just talk a little bit about that. I've gone back and sort of penciled in some numbers for the last 12 months, and I don't see any prior period where the gross margins on anything you reversed out were above 70%. So if you could just sort of clarify that, that'd be great.

Yes, I can answer that, . This is Ed Rood. When we did the restatement, we didn't back out the fully loaded cost of sales. There were some expenses in cost of sales which are accounts and us felt were not appropriate to back out because they weren't related to specific units sold.

So the cost of sales backed out when we restated are now back into cost of sales didn't include all of the normal costs that you'd expect.

Got you. OK. And then if I could just move on down the P&L a little bit more, I just want to clarify. It looks like -- you had mentioned 25% of sales international during the quarter. Is that 25% of the $10.7 million core, or is that 25% of total?

That's 25% of the $10.7 million.

OK. OK, great. And then 80% of the $10.7 million is Waterlase.

Right.

On the balance the balance sheet, it looks like there's a pretty big drop in the AR allowance. Dropped about $302,000 to 0.86% of gross AR. And it looks like it was about 10% of gross AR last year. Is there any thought process going into that you could share with us?

The reserves were adjusted as part of the deferred accounting, and some of what would have been reserves were applied to the deferred accounts and the reserve only applied for the non-deferred revenues.

OK. OK. Then on the leasing side of things, are you going to be giving -- do you have any kind 0of an idea how much -- what percentage of sales is quarter or financed by National Tech?

Yes, the same, about a third went to National Tech.

You know, I was going through the S-3, and it looks like you indicated in the most recent S-3 that 33% of year to date '03 sales through June were financed by National Tech, and as I recall in the September 29th, S-3, you had said that 28% was financed by National Tech. Were there some sales to them that were reclassified or something like that, because it looks like that was about $1 million of sales that was added to the National Tech .

That's correct. We were updating the numbers and added that additional sales.

So those were just sales that you hadn't identified those yet, I guess.

so those were 33%.

You've got to bear in mind that we always sell directly to dentists, and all of our sales are to dentists. But as dentists, they take these leasing companies and to time an , they may at any point before they pay us have someone else pay us in their behalf, but our sales are to the dentist.

OK, OK. But I guess that you found that the percentage was a little bit higher than you originally thought, I guess.

That is true.

Just a couple of other quick ones and I'll open the floor. It looks like -- I'm just doing a back-down, a little cash flow calculation, and it looks like you were, excluding D&A about $534,000 negative operating cash flow, versus about $330,000 of positive operating cash flow last year's third quarter. Can you talk a little bit about that? Maybe the factors driving the negative operating cash flow this quarter.

I don't think there's anything unusual. We had the extraordinary expense -- well, it's not extraordinary from a technical/accounting sense, but there was a one-time very large G&A expense of almost $0.5 million, which of course was a cash item. And then our accounts receivable did spike up to about $7.4 million for the quarter, and inventory also increased. So that absorbed a fair amount of cash.

OK.

The nine months, we are still, as you know, cash flow positive by almost $900,000.

And finally, I just want to clarify something. Have you guys filed any lawsuits against dentists, like in the last week or so?

Things like that we wouldn't -- it wouldn't be appropriate for us to disclose if we had or hadn't.

OK. OK. OK, very well. Thank you all.

And your next question comes from Dalton Chandler. Please proceed.

Hi, guys. I just wanted to further clarify the question on the gross margins and the fact that what you backed out wasn't fully loaded. So the net impact of that was to bring some expenses forward. Is that correct?

I'm sorry, to leave some expenses back in the last quarter.

That's correct, yes. For example, we didn't include warranty costs when we backed out cost of sales in the restatement. Those were felt to be costs that would have occurred anyway, regardless of the timing. So expenses like that were not included in the backing out when we did the restatement, and now they're not included when they come back.

OK. And do you have any sense of what the deferral impact will be for the fourth quarter?

Well, we would expect that most of that would vanish, but I suppose it's possible could remain after that.

OK. But it would be a -- you're expecting a very small number, if anything, is that ...

Yes.

OK, and what was the impact of American Dental Laser in the quarter?

Ed, I'll answer that one. As you'll recall, the key motivations for acquiring American Dental Laser were leveraging our marketing, and they have some patents that were valuable as well, and we did want to expand the product line for market entry. We are not breaking out their sales, but we will tell you that the amount of sales of the expanded product line are not real big, but it has been very successful in bringing or drawing the entry level dentist and the good news is that it has worked as we had hoped it would, that the majority, the vast majority of this new line of customers, once they become educated as to the benefits of a Waterlase, they buy the Waterlase or the LaserSmile. So that is the status of the American Dental Laser. The leveraging of the brand name is working as we had hoped it would.

OK, I was just wondering if if may have had any sort of negative impact on margins at all, given that I assume there is some cost associated with it at this point?

No, there was no negative effect. It was positive. I mentioned the amortization expense, but there were positives that more than offset that.

OK, thanks very much.

Thank you, Dalton.

And your next question comes from Chris Bonomo of ECM. Please proceed.

Hi, gentlemen. Just had a question to sort of go through the numbers and understand -- kind of take out the deferred. When -- so these numbers that you gave us, the $2.7 million of sales, the $700,000 of cost of sales, $248,000 of sales and marketing, I should back those out to sort of get a run rate. I guess also I should back out the $450,000 of expenses for the restatement to get to sort of what the business was really generating from a profit standpoint.

Well, there are several ways to approach that, but that is one. It is one. It isn't real clear what the best way is. We admit it's somewhat confusing, but that's why we presented it the way we did. Very clearly, this is the revenue from the current quarter. This is the revenue that was recognized in the deferred account. And on the cost that moved. As Ed said, all of the cost of goods sold, they were also recognized from -- related to that, ad Ed, as well as commissions, correct? In the direct selling?

That's correct.

So if I take that out I get sort of a five-cent quarter. Is that about right, Ed?

That's pretty close.

OK. The other question that I had was in regards to the receivables and could you explain a little bit why they went up a couple million dollars ?

Sure. The summer pattern really kind of accentuates the normal pattern of sales, because in the July and the August months, it's very slow, because vacation patterns not only in the U.S., but especially in the Europe and elsewhere. So it bunches up sales in the last half of the quarter, and particularly in September. And those sales are still in receivables.

And Ed, let me add a comment. If you're trying to really compare the quarter, you also have to look at the approximate $500,000, which is over two cents which is expenses regarding that that were directly stemming from the accounting fees and legal fees regarding the restatement. So you'd have to add that back in your same calculation, which would push you over seven cents.

OK, hold on -- $500,000 or was it $450,000? I thought I was doing that right

Yes, $450,000.

So i take out the $2.7 million to get down to $10.7 million. I take out $700,000 from cost of sales to get to $4.3 million. I get to the gross profit of $6.4 million. Then I remove sales and marketing expenses of about $248,000. Then I remove G&A of $450,000. My operating profit goes from $2.5 million to $1.2 million.

I think your logic is pretty much correct.

OK.

I'd recommend, however, that for the sake of simplicity, and it's what we're doing, is we simply go with the restated numbers. Otherwise we're going to wind kind of left on here, and measure them going forward from the beginning of the restatement period.

There are so many factors involved there we're not going to sort that out to make it any clearer. It'll just get more confused if we try to do that on the call here, but you've got the fundamentals. The only one you were missing was the $450,000.

OK, I don't think I was missing the $450,000. That's what got me to the nickel.

That's right.

The nickel. OK, good. And the other question was, the $1 million that's left in deferred revenue, that was sales made in the second quarter that still haven't been installed? Is that the idea?

Which deferred revenue? I'm sorry.

OK, so on the deferred revenue as of September, there's still a hair over $1 million left.

One million dollars left, .

So those ...

Second quarter and three quarters.

It means that it's uncollected. There could be a combination of things, but for the most part, remember most of our sales are domestic, and the domestic sales were eventually restated on a cash basis and that's -- so most of that would likely simply be that it has not been collected yet.

And when -- sort of when exactly did the change in the revenue recognition take place? Was it halfway through the quarter or something like that?

It was in early August.

And just to reconfirm that the deferred revenue is all domestic, correct?

It will have small amounts of other things in it.

OK.

The domestic.

Well, you know .

OK, thanks very much.

And your next question is from Ryan Sarnataro of Integrated Investments. Please proceed.

Hello. I -- sorry to try and beat a dead horse here, but I am trying to fully understand the deferred revenue as to whether any of the product that was shipped in the third quarter is now deferred revenue. That is, was that $10.7 million a net figure, or is it really the full amount that you shipped in the quarter.

It's the amount recognized as sales in the third quarter. There are a few sales that were still in the deferred account that occurred before we switched the policy back with the change in the documents.

So for year over year revenue comparisons, I really should be using a number a little bit in excess of $10.7 million.

That's correct.

OK, on the percentage of revenues that are Waterlase, does that include the consumables?

No, that's just the .

OK. And does it include warranty costs for extended, or anything other than the machine purchase price?

No. No, the 80% is just the product itself. The other items you mentioned are in other parts of sales.

OK. And how about the LaserSmile, what was the percentage last quarter for that product?

I don't have that right in front of me, but it's most of the rest. The percentages are attributable to extended warranty and consumables is a very small percentage. So most of the balance of the 20% is LaserSmile's.

OK. In the past, you'd stated that at some point consumables were going to become a significant portion of revenue, and it seems that that's happening later than it might have. Could you talk about the factors that have driven that?

Number one is the equipment sale is what our focus is, and because that is going extremely well, as we would have hoped it would and it is, that our concentration is on that. When you can sell a box for $50,000 versus $250 and you're a company the size we are, we put our focus and resources still where the highest return is, and it's just basically that simple. And we still use them a lot for showing appreciation to dentists, because a very large percentage of our sales come from dentists referring other dentists.

There's just simply -- love the product and salesmen are allowed to recognize and get some appreciation and give out some of these no charge. Although they all buy them. They know what they cost and everybody buys them, but it isn't our focus right now. We still have every intention that it will become more and more so, but at this point it isn't.

I guess, kind of the point of my question was whether dentists are figuring out how to get more procedures per consumable than you had originally expect them.

That's hard to say. I wouldn't want to try to quantify that too much right now, but I'm certain that certain dentists use their tips a lot more than we would like them to on the reuse side, but in general, the expanded procedures we believe is going to counter that to more to where consumable sales will eventually get driven higher.

OK. When you say more than you would like them to, is that because there are any kind of safety issues with the tips, or is it simply that -- not safety issues, just effectiveness of the laser issues around extra use of the tips?

I'm sorry. I don't quite understand your question. You're saying that they would keep using it because of the effectiveness of the laser?

What I'm saying is if they're using tips past what their life should be, are they getting a less exact -- a less exact cut out of the laser?

It's like anything with consumables. The newer the tip, the better the result. And I'm sure the longer they use it, there is some tradeoff there.

OK, all right. Well, thank you. That's all my questions for you.

Thank you.

And your next question comes from of Kenisco Capital. Please proceed.

Hi, most of my questions have been answered. Just had a couple of things. And missed the first five minutes, so I apologize if this was covered, but do you have the DSO number for the quarter, or did you already give that?

About 53 days.

Fifty-three days. OK. And I was just a little confused on the explanation on the AR allowance and as it relates to the deferred accounting. But I was just looking at the AR allowance as a percentage of total receivables, the $64,000. Is that -- I guess it's a little bit under 1% of total AR. Is that a good -- is that kind of a good run rate going forward, do you think, or based on historical connections, or how would you look at that?

I think it's pretty good right now based on our analysis of the portfolio of receivables. I mentioned earlier that some of these receivables that apply to revenue that's deferred are gone because you'd be doubling up on your reserves deferred account at the same time.

And has the collections kind of -- has there been some improvement in collectability over prior quarters that contributed to the ability to reduce the reserve?

I think our collectability has been pretty consistent. The days and receivables have grown somewhat because just of the growth in the volume of the sales and the bunching up towards the end of the third quarter that I mentioned earlier, but collectability has been pretty consistent.

OK, thanks a lot.

And your next question comes from Jim Carruthers of Eastbourne Capital. Please proceed.

Good morning, gentlemen. I'm trying to track international sales, and if my math is correct, your international sales this quarter were about $2.675 million if it's 25% of the $10.7. Is that right?

About right.

So I went back and I was trying to compare this to your restated Qs, and in the restated Q for Q1 of '03, you reported $2.3 million of international sales. Is that right?

I don't have that in front of me, but that's probably ...

I do. That's the number. And then on the second quarter, restated Q, you reported $3.1 million of international sales, but you reported $4.2 year to date, which would have been $1.1 million implied in the first quarter. Wondering which number is right. Did it go from $2.3 million to $1.1 million to $2.675 million, or $2.3 million to $3.1 million and then down to $2.675.

Well, I don't have those numbers in front of me, but I think it's been pretty consistent at around 25% of sales for the year to date.

But why would be the numbers be wrong on the Q?

Well, it could be that we're getting some of this restated. It affects the numbers that are counted as sales. When I say it's been about 25%, I mean shipments to international customers have been around quarter shipments, and how they're counted in revenues depends on the revenue recognition policy in effect at the time.

So I'm not sure what you're looking at and I'd probably have to go back and research that, but I can tell you that of our business, about a quarter of our business this year is the international.

Right, but you don't estimate international sales, correct? You actually add up international sales and put them in the Q?

We do, but some, if they're deferred, won't be a sale until it's installed or collected.

carruthers; OK, well anyway, there is a discrepancy in the first two restated Qs, so get back to me or put something out for all of us tomorrow.

Well, remember those numbers, when they go through the deferred, it's not nearly as easy to understand as it might be, so that would have to be analyzed very carefully on how the deferreds affected it, but the net-net is that we do approximately 25%.

I don't think there's any implication here for deferred revenue. It's stated in the second Q, restated Q, that you did $3.1 million in sales for the second quarter and then $4.2 million year to date. So there's just something wrong. I just wanted to get it cleared up to figure out how international sales are trending.

Again, I appreciate the comment and we will it.

OK, thank you.

And your next question comes from Peter Cardillo of Global Partners. Please proceed.

Yes, hi, this is Peter again. I just want to get back to the San Francisco show. Can you tell us more or less how many units were sold?

You know, reporting on the individual show, we're not in a position to do that, but as Keith told you, the show was very strong, the unit sales were every bit of what we would have expected and more. But the -- we're not reporting units by event.

OK, thank you.

Thank you, Peter.

And we have another follow up question from from Blackbird.

The question was answered. Thank you.

And your next question comes from of ETech Advisors.

Good morning. I had a question on your soft-tissue strategy. You have three products now. Do you see that being rationalized to less than three products?

We do. They're all quite different in how they can be used. For example, if you buy the Waterlase, the dentist will most of the time captivate that laser in one of of his operatories. And then if he has a LaserSmile in a operatory, it may be for his convenience to have it there, or it may be to increase his productivity in the states where they're allowed, which is more than half, for the hygienist to use that product and expand what she's doing in her practice, which is the total practice benefit, of course.

So you could have the LaserSmile in an operatory. In fact, we already have practices where the dentist has a Waterlase in an operatory, a LaserSmile in an operatory, and a DioLase in an operatory. So it sounds confusing, but it really isn't, and to the sales force, it's pretty straightforward.

OK. I noticed there was an FDA approval for a 980 nanometer laser out of ADT. Is that part of the purchase when you bought the product lines from ADT?

The 980 approval is something that Biolase has always had at its access, but it isn't something that we intend to market right now and it more relates back to your original question. We don't see enough advantage, given our current marketing strategy, to introduce a 980 at this point.

And on training, there was some news out of San Francisco that you have improved the training offering for new purchases. Can you talk a little bit about that, please?

Keith, you want to do that?

Yes, one of the things that we were offering -- it isn't really that we've improved it, but we packaged it with the sell of a laser, where in addition to the standard training that they get with one of their laser specialists in their office and also in another dentist's office, they get advanced training going to two different World Clinical Laser Institute meetings, and also to one of the several independent Waterlase courses that has sprung up around the country, where different dentists from around the country are setting up their own independent courses.

So we've included all of those things as part of the package deal that we've added on to the sell price of the laser, which would take them probably through six to 12 months of training that they normally would get.

How much are you adding to the package for the cost of the training?

Five-thousand dollars.

OK. On the tech service on international hires, at -- the Robert Grant hiring. Are you setting up the tech services nationally the same way you're setting up service in the U.S.?

No. International is not the same. We do have Biolase Europe, which provides for certain close markets there, direct service, but each country has its own plan according to what the distribution is there. Some dealers have engineers, which we train, and in most countries outside of the Germany area, the dealers' engineer is certified by us to do the tech service.

OK. And on R&D, I noticed the expenses on R&D has about doubled in the last year. Can you tell us what you can about R&D, what you have that's in the works?

Just simply the company is putting a lot of commitment into development, both for expanding what the Waterlase can do and other things. And what I can tell you is that the Waterlase applications, we are continuing the expansion of what the product can do for the dentist and how fast and how well it can do what it already does.

This is -- is there more of a focus on soft-tissue R&D, or about the same as before?

No, it's about the same. The spread of the applications is quite across the board. It's hard tissue. It's bone, as I think everybody has noticed. Biolase has the only FDA clearance for doing any bone in the oral category, and there's such a broad array of procedures. It really can have a big impact on dentistry in general. Our acceptance into not just the and periodontists and other fields, but the general dentist, it allows them to do so many things that before were very difficult or referred to a specialist, or as often as not, just not done at all.

So the bone application has been extremely important for Biolase, and we expect that to continue to be very important for us.

OK, thank you.

Thank you.

And your next question comes from of CSV. Please proceed.

Yes, on your San Francisco show, you mentioned that it was well -- the acceptance was very good and the attendance. Did you take orders at the show itself, and are those orders deliverable in the fourth quarter, is that for something looking out, and then I have a follow up?

Want me to answer that, Jeff?

Sure.

Yes, whenever we go to any medium, our goal is to sell, take orders, and at the San Francisco meeting we obviously did that to a greater extent than we ever have, and those obviously will be shipping in the near future.

And what percentage of that is deliverable in the fourth quarter.

That's always going to depend on the individual customer when they want delivery, et cetera.

And as far as your distribution channel, and especially penetration in Japan is concerned, is that through direct to the dentist or is that through distribution network -- or is that something that you're in the process of establishing.

So can you rephrase that, sorry?

Yes, I said your Japan penetration strategy. Do you sell directly to dentists, or is that like in the U.S. or do you sell to distributors who in turn sell it into a dentist?

No, the Japanese dentists purchase directly from us.

OK, good quarter.

Thanks.

At this time, ladies and gentlemen, I would like to turn the conference back over to Mr. Jones, as there are no more calls in the queue.

Well, thank you everybody for joining us on this call, and we look forward to talking to you at the end of the fourth quarter. And with that, have a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines, and have a great day.