BIOLASE Inc (BIOL) 2005 Q3 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the third quarter 2005 BioLase Technology earnings conference call.

My name is Audrey, and I will be the coordinator for today.

(Operator instructions.)

I would now like to turn the presentation over to Mr. Scott Jorgensen, Director of Finance & Investor Relations.

You may proceed, sir.

Thank you.

Good afternoon, and welcome to BioLase's third quarter 2005 earnings conference call.

I'm Scott Jorgensen, Director of Finance and Investor Relations, and with me is BioLase's Chief Executive Officer, Robert Grant, and BioLase's Chief Financial Officer, John Hohener.

Our comments today are centered on a corporate presentation, which can be viewed as part of our webcast, via the company's website at www.biolase.com.

To begin, John will provide a review of our financial results. Robert will then provide an update on the business's operational performance and outlook. Management will then conduct a Q&A session on this call.

And just as a reminder, we will be making some forward-looking statements. The words or phrases "can," "be," "expect," "may," "affect," "may depend," "believe," "estimates," "projects," and similar words and phrases are intended to identify such forward-looking statements.

Forward-looking statements are subject to various known and unknown risks and uncertainties, and BioLase cautions you that any forward-looking information provided is not a guarantee of future performance. Actual results could differ materially from those anticipated in these forward-looking statements due to a number of factors, some of which are beyond BioLase's control and may be discussed in BioLase's filings it makes with the Securities and Exchange Commission.

All such forward-looking statements are current only as of the date on which those statements were made. BioLase does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement was made or to reflect the occurrence of unanticipated events.

As a quick reminder, our third quarter 2005 press release and a replay of this conference call are available on our website at www.biolase.com. The company's third quarter results can be found on the company's Form 10-Q filed today with the Securities and Exchange Commission.

Now with that said, I'd like to turn the call over to John.

Thank you, Scott.

Today we reported results for the third quarter and nine months ended September 30, 2005.

Net revenue for the third quarter ended September 30, 2005, was 11.7 million, as compared to net revenue of 12.3 million for the same period of 2004.

Net revenue for the nine months ended September 30, 2005, was 43 million. This compares to net revenue of 41.6 million for the nine months ended September 30, 2004. In the face of many challenges, the company has continued to generate business with nominal growth during the first nine months of 2005.

Revenue from the company's principal product category, the Waterlase system, comprised approximately 78% of net revenue for the third quarter of 2005. Approximately 90% of the Waterlase category revenue in the third quarter of 2005 was comprised of the Waterlase MD product.

International revenue, which includes Canada, for the third quarter of 2005, was 28%.

Sales of our laser systems were low in the third quarter of 2005, compared to last year. We believe that our sales, as well as the sales of the second quarter 2005, have been impacted by delayed purchasing decisions associated with design changes of the Waterlase MD and operational disruptions stemming from the company's recent delayed filings. We believe this purchasing pattern may also impact our fourth quarter of 2005.

As you can see from slide No. 4, gross margins have been impacted since our introduction of the Waterlase MD due to higher production costs, cost of component design changes associated with quality improvements, and the cost of customer training, which has been outlined in our public filings.

In addition, as compared to the third quarter of 2004, the company has increased the cost of its fixed manufacturing infrastructure, including quality control, materials management, and other support activities.

During the third quarter of 2005 gross profit was 46%, as compared to 58% for the same period in 2004.

As you can see from which chart, we believe that the company has begun to turn the corner in terms of identifying and addressing the various production and quality challenges which have recently impacted the business. Through various root cause analyses and process improvements, the company yields a higher gross margin on lower sales volumes as compared to the preceding quarter, which was also affected by the MD production issues. In looking forward, this area represents the greatest potential for operating leverage in our business model.

As you can see, the company's revenue declined as compared to the third quarter of last year. The aforementioned production challenges, the filing delays, and the realignment of the domestic sales geographies and commission structures earlier this year have caused some disruption to our sales organization and sales performance. Over the past months, the company has experienced some involuntary and voluntary attrition in the domestic sales force, which we believe has impacted product sales as new representatives that have recently joined the company, ramp up to a full state of productivity.

Sales and marketing expense was 6.1 million, or 52% of net revenue for the third quarter of 2005, as compared to 5.7 million, or 46% of net revenue for the same period last year.

The increase in sales and marketing in the third quarter of 2005 is related to trade show and seminar activities, higher personnel costs and overall infrastructure support costs related to the sales and marketing functions. These increases were partially offset by reductions in advertising and promotions.

While some of the company's sales and marketing expenses are fixed, most are discretionary expenditures aimed at furthering market penetration and cost to support the education and training of potential customers.

General and administrative expense was 3.3 million, or 28% of net revenue for the third quarter of 2005, as compared to 2.5 million, or 21% of net revenue for the same period in 2004. Increases in general and administrative expense in the third quarter of 2005 are related to professional fees totaling approximately $400,000 associated with the audit of 2004 and the restated financial statements and the cost of approximately $100,000 related to compliance with the Sarbanes-Oxley Act, which includes professional fees, as well as temporary labor.

Additionally, in the third quarter of 2005 the company's administrative cost increased approximately 600,000 over the same period last year due to infrastructure expansions to finance, information technology, and human resources, both in response to the company's growth, as well as to meet the ongoing compliance requirements related to the Sarbanes-Oxley Act.

These increases were partially offset by a decrease in legal fees of $400,000 related primarily to the settlement of a lawsuit with Diodem.

As pointed out in our press release earlier today, the company is focusing its efforts, over the coming quarters, on right-sizing the business model through both hard and soft cost savings initiatives.

Some of these costs containment measures include headcount reductions in all functional areas of the company, as well as soft costs or belt-tightening policies to ensure that the financial resources of the company are being directed and utilized as efficiently as possible. As part of this initiative, the company intends to scale back its presence at its German facility by keeping its manufacturing and assembly activities at this location.

Also, all manufacturing and assembly and testing of the company's products will be done at our San Clemente facility.

Lastly, engineering and development expense was $1.2 million, or 10% of net revenue for the third quarter of 2005, as compared to 1 million, or 9% of net revenue for the same period last year. Increases in engineering and development expense are due primarily to higher employee costs, patent fees, and overall infrastructure support costs. As a result, the company's loss from operations increased from 2.1 million for the third quarter of 2004, to 5.2 million for the third quarter of 2005.

In comparing the third quarter of 2005 to the preceding second quarter, the company has been able to improve its gross margin on a lower volume of business and make significant reductions in the general and administrative expense line. The majority of these cost reductions are related to the professional fees associated with the financial audit and restatement of 2004.

We believe that as the company continues to improve upon the production issues related to the Waterlase MD and reduce operating expenses through the cost containment measures mentioned earlier, our financial performance will improve.

On Slide 7 we have some key operating indicators that we monitor and track with respect to evaluating the business financial performance and working capital management. Cash flow use and operating activities for the third quarter was $5.6 million. However, the balance sheet components of operating cash flow were nominally affected.

Average DSOs were 54 days, average inventory turns were 2.5 times, and the Waterlase category of sales was 78% of total revenue.

Now, in terms of our balance sheet, our financial position at September 30, 2005, reflects year-to-date cash used of $3 million related to the litigation settlement of the patent infringement suit and $2 million related to the Surrey (ph) light patent rights.

As of September 30th, cash, cash equivalents, and marketable securities was 17.8 million, and we have $5 million outstanding on our line of credit.

Total assets were 43.8 million, with net receivables at 6.3 million. Inventory remained flat at 10.5 million.

In November 2005, we entered into a fourth amendment to our credit facility with the bank which eliminates all of our financial covenants, including the minimum cash balance of $12 million. Under the new amendment we agreed to collateralize the facility with our short-term investment in U.S. Treasury Debt Securities, which has a fair market value of $9.9 million as of September 30, 2005.

Now, in summary, the company is focusing on improving operating performance and cash flow over the coming quarters. We have faced disrupting challenges to the operations during 2005. Gross margins have been impacted by production costs and design changes related to the Waterlase MD.

Additionally, we have incurred heavy expenses related to audit, legal and SOX Compliance costs, as well as other infrastructure expenses.

We have made strategic investments during the year, which include the acquisition of the Diodem IP portfolio, which impacted our cash balance by $3 million. And in addition, we utilized $2 million to purchase the SurgiLight patent rights for ophthalmic rights applications.

As the top line expands, the company has the opportunity to achieve substantial operating leverage and margin expansion.

With that, I would now like to turn the call over to Robert.

Thanks, John.

I'm going to spend some time now talking about the market opportunities that we're going after in this exciting field of dentistry.

Today there are more than 700,000 dentists in the industrialized nations of the world. In fact, according to the World Health Organization, there's more than 1 million dentists around the world. Of that, 150,000 dentists, approximately, are located in the United States, with about 120,000 practices.

I'm proud to announce that BioLase has now sold more than 4,000 Waterlase systems around the world, with the vast majority of those being sold in the United States. We've sold 5,400 total laser systems around the world. So that puts us still at less than 1% of total penetration against the total number of dentists in industrialized nations.

We also sell internationally. We sell in more than 25 countries internationally. And actually we sell in more than 45 countries around the world in total. The vast majority of our sales, however, fall in the United States, with approximately 22% of our sales falling outside the United States and the balance falling in the United States. We have a pretty significant presence in the European operations of the company. We also have a significant presence in the Asia-Pacific operations of the company.

We're also proud of the fact that we've been able to grow our business quite substantially in the Asia-Pacific theater, in particular, in Korea.

If you look at the next slide, the technology adoption curve. If you peel back the onion on all the things that the company has sort of been going through for the past 12 to 15 months -- actually, almost two years -- you'll notice that actually what we've done is we've crossed over from the innovators, which represent approximately 2.5% of any given market segment, into the early adopter segment of the market.

Early adopters represent a different type of customer. They tend to be more skeptical by nature. They want to see proof, they like to see science. We have validated this theory with third-party data, with survey data that is specifically significant.

In about the second quarter of 2004 we noticed a change in how our customers were reacting to our message. And we noticed a degree where we started to notice that there was a lengthening of the sales cycle by about two to six weeks in any given case when we met with customers.

In the past year we've been working very diligently to take a long, hard look in the mirror to understand exactly what has happened in the market and also what we can do to correct this very quickly. We've taken a lot of time to address those issues, come up with new messaging, and to understand, through our surveys, exactly what we need to do to optimize our business going forward.

The good news is the early adopter market is quite large. It represents approximately 13.5% of the total market segment. And actually, even with the same growth rates in the high double-digits range, it will take us several years to penetrate all the way through the early adopters.

We also note that through these surveys we found that these customers are very interested in BioLase's technologies and in Waterlase technology and in laser technology, in general, in the field of dentistry.

Interest is at an all-time high. We have more customers in our lead databases than we've ever had in our past. We just returned from the recent American Dental Association meeting where we had several thousand people come to our booth, meet with our sales representatives, and learn about our product and technologies, both from peers in the industry, as well as from our representatives.

This next slide shows you where our penetration levels are in the United States. In certain states, California at 6%, Texas at 5%, Florida also at 5%, we've been able to achieve and pass through that 2.5% range into the early adopters and we're seeing really good growth in all of these markets.

At the same time, in other areas, we're still underneath the 3% range. On average, we estimate our penetration to be approximately 3% across the whole United States. In certain markets like Hawaii. We've been able to see rapid growth. We're now at 11% penetration in the state of Hawaii, and we believe that that is as a result of the fact that it's a very closed market, with small towns, with only a small number of dentists in each town, and when one dentist buys the technology and adopts it and shares it with his customers and patients, the word spreads very quickly, and as a result the other dentists start to adopt the technology in that same town very quickly as well.

I mentioned that we had done a lot of survey work related to the company's products and related to the market. We commissioned a study that was done by Richter 7, a third-party consulting group, where we studied five different tranches of people and asked them questions on a third-party basis, all blind, they didn't know that we were actually surveying them and it was commissioned by BioLase, and we asked them several questions.

The first launch of 60 customers were customers that had had the BioLase product for more than a year. There we asked those customers, what do you think of our technology? What do you think of Waterlase dentistry? How has it impacted your practice? What has it meant for you economically?

In the next tranche of 60 dentists, we asked those dentists -- and these are the dentists that we termed as fence sitters, people that have been sitting on the fence for more than six months, for whatever reason, they had not decided to make a purchase, so we wanted to understand why, what was holding them back; what is it that we need to do with our messages, with our product technology in any regard in order to get their business.

The third tranche were prototypical dentists randomly selected through Yellow Pages across the country. There we asked them, what is your impression of BioLase? What is your impression of laser dentistry? How likely are you to adopt this technology during the next three years?

The fourth tranche were actually patients that had had Waterlase treatments. And we asked them, what was your experience with the Waterlase? How did it compare to treatments that you had had in the past using traditional dentistry?

And in the fifth tranche were general patients to which we asked, what are your impressions of dentistry in general? Are you afraid of going to the dentist? If so, then why?

We were able to compile all of this data, we put it together and we started to make real decisions about our investment in the market and how we need to penetrate into the market at a much greater speed.

This slides actually represents and shows you the difference between innovators, who we call Waterlase owners by virtue of the fact that they've already purchased the technology in the time line in which we did this survey, fence sitters, whom we now term as early adopters, and prototypical dentists, which we believe represent a large part of the majority of dentists around the country or the main stream.

We asked them, what is the most important source for you to basically make your purchase decision related to purchasing a laser or capital equipment in your office? Waterlase owners, by in large, answered that their most important source for making purchasing decisions was actually conferences and seminars; second was prominent dental lectures, well-respected dentists; then fellow dentists and peers; articles, journals, and publications fell at No. 4; sales reps and the relationship with sales reps was actually somewhere in the middle ranks; and then patient demand and sales materials and so on.

For the fence sitters, however, or as I've said, the early adopters, we found that the most important thing for them was articles, journals, and publications related to the company's science and technology.

The next most important thing for them was advertising, the website, as well as same conferences, prominent dental lectures, well-respected dentists, et cetera. As you go into the main stream, we start to notice the importance of the relationship with the sales representative. Coming in at No. 1, at 9, and again, these are all priorities, so the highest number within each of those columns is going to be their first priority.

Second, they also want to see prominent dental lectures, they're well-respected dentists. So as we've now started to panel our marketing messaging, as well as our marketing strategy, we are using all of this data -- and this is only one slide that probably comes from more than 300 slides related to this type of survey that we've conducted -- but we used all of this data in order to formulate our marketing strategy, and also make decisions about where we will be investing our marketing dollars in the future.

This next slide is an analysis that we've done to understand exactly what drives dentists to purchase our product, what is at the emotional epicenter of their purchase decision, and what is it that we need to do to make sure we answer all of their questions and get them not only in the funnel, but on the other side of it, make them happy customers.

The first thing that we note, especially with the innovators, as you can see on the left side -- and I know this is a complicated slide, so we apologize, but it's somewhat of a complex issue -- the first thing that's gets people interested in the technology is, buy in large, the patient experience. They really want -- and "they" being dentists -- really want to see an improvement in the offering they give to their patients and actually transform the dental experience for their patients on a daily basis. That's very important to our customers, both today, and our future customers, as well.

That message was given to them by the company through our no shot, no drill, no pain and nautilusy (ph) and sort of the buzz around that through all of our PR campaigns. This was a soft data point.

The second thing that innovators, in particular, had really good resonance with was they were very interested in reenergyizing their practice. Dentists, many of them, don't necessarily feel a great deal of job performance in what they do. We learned that in our survey as well. And as a result, many of them would really like to see purchasing a Waterlase or entering and adopting Waterlase dentistry as a means to actually reinvigorate their practice and make dentistry more fun again.

We were able to play to this and be very successful with it through our testimonials, especially at WCLI meetings. We had several customers who were very zealous about our technology who went forward and testified, as it were, to the new users of our technology that, hey, this is really the future of dentistry and it's going to reenergize your practice, as well as create a superlative patient experience for your patients.

The early adopters, however, don't simply make purchase decisions based on those first two factors, the patient experience, and reenergyizing their practice. The early adopters want more. Whereas the innovators, they would make a purchase decision right after the patient experience and reenergyizing my practice, they were risk takers by nature.

The early adopters, however, that still gets them interested. The patient experience is great; reenergyizing their practice, that sounds wonderful, too; put the fun into dentistry, that's great as well. But early adopters want to see that it truly is better dentistry. They want to see that through publications and podium time from top dentists around the country at the major meetings. They want to understand and know that it's lower to no swelling; that it's faster healing; that more procedures can be performed; that it saves healthy tissue; that it sterilizes while it cuts; that it is a reduced need for anesthesia, and they all believe that. They want to see hard data points, not just soft data points before they make their decision.

The next thing we learned through our surveys was that dentists, in general, don't really have a great understanding of what the acronym ROI stands for. Most of them answered that it was return of invest rather than return on investment.

And also, we asked them which messages had the greatest resonance with them, No. 1, you could have a risk of losing money with this device; No. 2, you can make a lot of money with this device; or 3, you're going to break even or get a payback on your device. The message that actually resonates best with them is one of they don't want to lose any money. Dentists are afraid of taking undue risk. And in particular, what we've learned through our survey is that their psychology says that they don't necessarily want to purchase a piece of equipment -- just as anyone else wouldn't want to as well -- that is going to sit in the corner and not be used. And to them, that means losing money, because they're going to be paying payments on this device that going to -- that sits in the corner and is not used. That is their concern.

So we need to, through hard data, through understanding and teaching the concept of return on investment, through showing greater revenue, through testimonials as well, and publications show, by the numbers, how they do not lose with Waterlase technology. And indeed, we have a lot of proof and backup that shows this.

But again, these two areas, better dentistry and the concept of that you're not going to lose money with this and assuaging their fears related to that are the two areas that we're putting a great deal of focus on today. And in the past, it wasn't necessary, with the innovators, as much to do that. There were times, obviously, that they wanted to understand the return on investment. And indeed, the message to the innovators resonated quite well, which said, hey, you're also going to be able to make money with this.

We're trying to show a solid investment in our Waterlase technology. We believe very strongly that the combination of the patient experience, reenergyizing the practice, better dentistry, through publications and podium time, from the top dentists around the country, as well as solid numbers that show that you will get a strong return on investment and that you're going to use this device every day and therefore not lose any money in making this decision or taking this risk will lead to a purchase decision. And that is the model that we are using. And that is the model we will continue to use as we continue to penetrate through the early adopters.

However, this process takes longer going through all four steps than just going through the first two steps.

Finally, one other thing that we noticed was that after the purchase decision, integral to our selling process and sales cycle is getting referrals. And referrals only come through excellent training that is performed for and on behalf of the dentists who purchased our product.

We noticed that we have more than 150 dentists around the world that teach for us. And actually, all of them have used different messages and different ways to teach. We've not had a standard curriculum, around the globe, to teach our dentists exactly how to use our technologies. That's one of the reasons why coming out of this survey that we've decided to establish BioLase University, with standard curriculum, where we're working together with our luminary doctors around the world to set standard parameters and not teach everything that the laser can do, but everything that you should perform with the laser technology. And that is something that is a key message for us as we work to make sure that we do not over-promise and under-deliver to our customers. We must focus on under-promising and over-delivering to them.

And by in large, one of the things we learned through our survey as well is that our customers are very happy with our technology, but they are a little bit confused at times as to how to use it on a daily basis, and that our training lacks a standard message that is cookie cutter. And that's what they want for this level of the market.

The innovators were willing to play with the gadget, to work it out, to figure out what it was that they needed to do, and then they could be very successful with it. And that's exactly been the case.

For the early adopters, they would like to see the manual that says Step 1, Step 2, Step 3. And that's what we're doing right now to ensure that we can penetrate successfully this market, and that the customers that we get are retained and provide us with a strong referral to their friends and family that are also dentists.

As I mentioned earlier, one of the key components and strategies related to penetrating the early adopter segment of the market is to compile research and scientific data. Now, we've had a lot of research and scientific data that's been intrinsic to the company for many years, however, we did not use it in our selling and marketing initiatives, because, frankly, it wasn't as necessary, at that time, to penetrate the innovators.

However, today, where we are, we have compiled all of the compendium of research and scientific data that we've had currently in the company, and also in the past, have put it into a book. And we've now started to implement that throughout our sales force and through our training materials and also in all of our marketing collaterals as well. We are trying to show that we have a strong compendium of research data already.

In addition to that, we are commissioning and working with dentists and researchers around the world to get new research performed on our technologies in the company. One of these initiatives is to show a comparison between cutting speed of the drill and the HydroPhotonic technology or the Waterlase technology.

Next is laser anesthesia, that shows the sensitivity that patients have on a quantitative basis versus (ph) a regular drill using anesthesia. We also want to show superior bond strength, and in addition, show exactly how the concept and how the actual product itself and technology of HydroPhotonics works. These are key areas that the business needs to focus on right now and to research and development efforts in order to ensure that we have a solid foundation on a go-forward basis that shows exactly why this technology represents truly better dentistry.

And speaking about the ROI analysis, we're not trying to focus on only a smaller number of procedures and refine our message so that, again, we're not trying to teach the dentists that the laser can do everything, but rather these are the things you should do with the laser because it is better dentistry.

And here you can see the CPT codes on the left side, which procedures can be performed, and, in general, a very conservative estimate of how many procedures of this could be performed.

One of the things we noticed, also, in our survey data, was that the average dentist that we polled prior to purchasing a Waterlase for his practice was gaining approximately 600,000 in revenue per year. That number had been static for many years. There are approximately three new publications that will be coming out about this in the not too distant future.

However, after they purchased the Waterlase technology, without any other major changes in their practice, they were able to transform the revenue profile of their practice from an average of $600,000 per year to in excess of 850 to $950,000 per year. This was something that we found very exciting, and again, it's something that we are putting quantitative data behind so that we can present it to our early adopter customers, as well as future main stream customers.

We will continue to use the World's Clinical Laser Institute around the world. We have meetings -- actually, today, there's one going on in Istanbul, Turkey, where we have approximately 180 dentists attending. We have these meetings -- again, in the United States, we'll be having our meeting in Huntington Beach, California in March of 2006. This is the largest clinical institute for laser technology in the field of healthcare in the world, who now have members, more than 4,000 around the globe.

We also have certification training, and we're working on integrating this new concept of BioLase University with standard curriculum, as well as teachers that are trained and certified through the process to ensure that we have a consistent, repeatable result with our customers.

We also have a goal with university programs in Slide 19 where we are now offering lasers on consignment, where we will actually service and install laser systems in universities in exchange for universities voluntarily putting those laser systems and teaching of those laser systems into the standard curriculum.

We have a goal to be within 100% of all 55 U.S. dental schools within the next three years. We're currently in approximately 15, and we have approximately 2 schools right now that are using this as part of their standard curriculum. We want to continue to grow that number. Again, we want to get to more than -- we want to get to 100% penetration of all the dental schools within the next three years through this new university program that we have just rolled out.

As far as the opportunity is concerned, we also asked them, through the survey, how likely are you -- and again, this was focusing on the fence sitters and the prototypicals -- how likely are you to adopt laser technology for hard tissue applications in dentistry over to next three years? There you can see the somewhat likely to purchase category in the likelihood to purchase column, for fence sitters, approximated 36.2%; for the prototypical, it was 24.1%; that are very likely to purchase, an approximate 6.9%; and for the prototypical at approximately 6.9% as well.

Through that we have seen the numbers represent a staggering opportunity for the company, even on a very short time line. BioLase is a growth company. We have a growth thesis. We will continue to be a growth company.

At the same time, we've been challenged over this past 18 months with many issues, the late filing, the E on our ticker, the quality issues related to the Waterlase MD, the destruction related to the launch of the Waterlase MD. We've had to retool a lot of our sales and marketing efforts and change our messages, and in some cases, we even had to change the messengers. With all of these things that have been ancillary and tangential to the performance of the company, it has certainly impacted our recent operating performance. However, we remain very confident in the future of this technology and its viability, as well as the interest in the field of dentistry today and into the future.

I spoke a little bit about the marketing message and about the emotional epicenter of our customers. What resonates most with dentists is that they really do want to transform the experience for themselves, as well as for their patients.

We validated this through a lot of marketing surveys, as well as questionnaires that we've had with our top dentists around the world. Dentists want to make procedures more comfortable for their patients, and they want to increase patient satisfaction.

We've rolled out a recent new campaign which has montages or pictures of the Waterlase and the Waterlase sitting next to a dental chair. And what we're trying to represent here, as you can see in this picture, is that the Waterlase will transform the experience and take you to a very comfortable, a very nice surrounding and place.

The Waterlase system gives dentists the tool to enhance the dental experience for their patients, and as such, we're trying to show that through the imaginary that we've represented here.

We've also, across the board, done a new look and feel targeted at the dentist's emotional epicenter. Our marketing materials also focus on better dentistry, as well as the idea that they can get a very strong return on investment and that they're not going to lose money with this investment.

These things, in combination, are all part of our new marketing strategy, which we have only very recently rolled out in the last few months. We've taken a lot of time at our national sales meeting to train our sales representatives around the world to ensure that they are saying the right messages to their customers and setting the appropriate expectations.

On the consumer awareness front we've also made a lot of progress this past year. We've been able to have product placements on The Swan, as you saw probably in the earlier press release that we put out this year, the Tony Danza show, as well as Dr. Phil. We've also worked with Dr. Sherri Worth, who was featured on The Swan. We've also gotten several other high profile dentists to work with us. We've been represented in the print media as well. And only these pictures here represent a small percentage of the types of coverage and media exposure we've been able to gain over this last year. We've had more than 150 TV spots in the past year as well.

We also have a new website called www.laserdentistry.com. And we're also working on rolling out a co-op marketing program to our customers around the world.

To date, Waterlase system revenue accounts for approximately 85% of our total revenue. The Waterlase MD represents approximately 90% of the total Waterlase category revenue. Frankly, this representation and mixed shift came as a surprise to the company and represented a significant challenge to the company.

We anticipated with the mixed shift would only go somewhere in the range of 60-40, maximum 70-30 in favor of the Waterlase MD because of the higher price point. We found the opposite to be the case and that we actually found 90% of our customers were wanting to pay the higher price for the Waterlase MD, a $20,000 higher price.

In fact, over the past year our average selling prices have continued to increase, not decline. They have continued to increase. What that says is several things. First of all, our units have decreased, to a degree. But secondly, in several polls that we've asked our sales reps and several times asked them over and over again, are you leaving business on the table because you need to be able to discount or be able to sell at a lower price and resoundingly we get the answer that no, that is not the case. In fact, we are seeing less and less discounting. This is a dynamic of the early adopter segment of the market, where margins generally can expand through average selling price increases. This is a trend we expect to continue over the near and midterm for the company's future.

We also sell the LaserSmile and DioLase product. These are diode laser systems primarily focused on soft tissue, and in the LaserSmile case, teeth whitening.

Now, this is a picture, in Slide 24, of how our technology works. We have a sapphire tip that you can see coming out of the tip of the hand piece. You can also see the HydroBeam illumination around that tip. The water spray converges out of three holes around those -- right next to the lights that you see through the HydroBeam, and it converges in front of the sapphire tip. That creates the HydroPhotonic interaction that results in tissue ablation.

Using this unique and proprietary technology we are able to cut human tissue rapidly, cold, coagulate while we cut, and we're able to do it in most cases without anesthesia. Today, versus a drill -- and we don't tend to tell this product as a replacement for the drill today in the market, it still has limitations. It has three, to be precise, in my opinion.

The first limitation of these three is that it cuts slower than a drill. That is true, it does cut slower than a drill. However, in our studies that we've been conducting and continue to conduct in the future, we see that when you add together the time to anesthetize the tooth for the patient, using a drill versus the time of using a Waterlase without having to anesthetize the patient, you see a significant reduction in the total time that the patient has to sit in the chair. That in and of itself is an advantage.

The second limitation on this technology is that not all of the time are we able to perform procedures on patients out using anesthesia. It's a high percentage, but at the same time, we believe, through our R&D initiatives, we're going to be able to continue to improve that through our air-water mixture and advances in the technology that eventually one day we're not going to have to use any anesthesia.

The third limitation on the technology is in addition to not being able to cut as fast as a drill, and then secondly, it's unable to cut tissue without anesthesia all the time, is that -- the third limitation is that it's unable to cut through amalgams, through metal. And the reason for that is because it doesn't have any pores in metal.

In order for us to cut successfully through tissue, we have to have pores or crevices or things for water to be able to gather into. Because the Waterlase technology seeks out water to find it to actually create a microexplosion from the inside out. If the tissue does not have any pores or is aporous, then we're not able to cut through the tissue, and as a result that is another limitation on the technology.

I'm proud to say that our R&D initiatives right now are focused on overcoming all three of those issues, and we will, in time, completely overcome the issue of anesthesia. We also believe that we're going to be able to cut, very shortly, much faster than a drill. And in addition to that, we're going to overcome the issue of not being able to cut through metal or amalgams.

This next slide actually represents the proprietary wavelength of YSGG and why it is different, and we believe far superior to erbium BI (ph) technology, which is principally the technology that all of our competitors presently use.

The YSGG technology comes in at 2.78 microns in wavelength. The erbium BI technology comes in at 2.94 microns in wavelength. There is a difference of 300%, as far as absorption into water is concerned between those two wavelengths. Because of that 300%, the Waterlase technology is able to have a superior cut in soft tissue with excellent hemostasis and is able to coagulate tissue while it cuts. That provides it with a significant advantage in the market versus erbium BI technology where you're still going to have a lot of blood and a lack of a visual field when cutting soft tissue. That's one of the major reasons why we have chosen this wavelength as our superior technology and allowed our competitors to license the erbium BI technology.

Another issue that's important to note is that we're also able to cut at a much higher efficiency in hard tissue than is erbium BI. The reason for that is because at higher temperatures and because of our peak post (ph) technology, we have a much higher absorption at water. As a result, we're able to cut faster and ablate tissue more quickly in hard tissue than we do with an erbium BI technology.

Finally, the third reason why YSGG technology or the Waterlase technology is superior to erbium BI technology is because it is able to cut through the hard tissue, as well as soft tissue, without significant sensitivity to the patient. This is an issue that's intrinsic to this modality and different from erbium BI technology. Because we're able to cut without anesthesia, in most cases, and a much higher percentage of the time than the erbium BI technology, this is why we have chosen to keep the YSGG technology for ourselves and use it in our Waterlase and not employ the erbium BI technology in the market.

We may decide at some point in the future to come out with an erbium BI laser to compete in the market with the other players at a lower price point. However, at this time we are very satisfied with our performance with YSGG technology and the intrinsic benefits that it has above and beyond erbium BI.

This is a picture of the Waterlase MD. We have more power in this MD laser compared to the Waterlase. It's 8 watts versus 6 watts. There are variable hertz for greater versatility. So we can actually take it from 10 hertz to 50 hertz. The smaller handpiece. It also had a 40% smaller footprint and a touch control screen that has a graphable user interface. It also has the HydroBeam illuminated handpiece, which I mentioned. The list price for this product is approximately $70,000. It's also FDA-cleared for hard and soft tissue.

Now let me go over the past 12 months. Some of these operations were significantly disrupted by several challenges. No. 1, in October of 2004 we announced a new management team, that's where John and I started. In January of '05 we acquired the Diodem intellectual property portfolio, which put aside this issue that was a major distraction for us in both 2003 and 2004.

In February we also acquired rights -- patent rights for ophthalmic applications from a company called SurgiLight. This is a field that we're very excited about and provides us with a diversification platform into the future.

In March of '05 we had to postpone our 10-K filing due to a financial restatement related principally to sales tax. We've been through that discussion on prior conference calls, but suffice it to say, that represented a significant disruption to our business and operations for a number of months.

In July of '05 we were able to file the 10-K, as well as the 10-Qs for fiscal '04. And in 2005 we decided to make an auditor change and move to BDO Seidman away from PWC, Price Waterhouse Coopers.

In September of '05 we filed the 510k submission for the Oculase MD for ophthalmology applications. And then finally, in October, our ticker symbol was restored to BLTI.

We've also had some changes in our sales force. Some of the recent changes include that we have restructured and resized our sales geographies. We had also taken five different commission plans and amalgamated them into one standard commission structure.

We've also standardized our sales methodology. We're training our sales reps on how to sell our products and how to ensure that we under-promise and over-deliver in the future.

We've also split the domestic sales force into regions. And we've been able to see some level of efficiency through our training efforts by doing so. Approximately one-half of our sales force, however, has less than one year with the company.

The challenges that have basically been along with the company over the past 15 to 18 months have had its impact on the company's sales representatives. In addition, the change in the customer has also made the selling process take longer, and this has discouraged some of our sales representatives. We also decided, in many cases, that we wanted to ensure that the message and the messenger of our product and technology was consistent one with another, and so we've made the tough decisions related to that in the sales force as well.

We have a lot of new sales representatives in our sales force. Like I said, approximately half, that have now been with the company for less than one year.

We're working diligently to train our new reps that have recently joined the company, as well, but I'd also like to say that during this last quarter we did not have any significant change in our turnover in the sales force whatsoever.

2005 has been a year of transition. It's certainly proven to be a challenging year. We've worked very hard to fine-tune our sales and marketing effort. We've had the surveys and the message development that I talked about. One of the, I suppose, silver linings in the cloud that we had with delayed filing is that we were able to do all of these things and sort of go deep inside the company and to really look introspectively to figure out exactly what we needed to do to get the company on the right track.

We also have had the product transition of the Waterlase MD, which has had numerous challenges related to that. Quality of parts and components from our vendors have been the primary crest of that challenge.

We've also had issues with SOX compliance in our infrastructure, as John mentioned earlier.

We've been working very hard to minimize our management distractions. One of those was the Diodem matter that we settled earlier this year, and it's positioned us very strategically vis-a-vis this market into the future, as well as to our competitors.

We are now working to rationalize and right-size our operating expenditures against our investment thesis. And we're trying to compare that up against obviously where we are with our current revenue profile to where we believe we're going to be in the future.

We have made significant changes across the company from a cost containment standpoint, and we will continue to do so as our focus right now is to return the company to cash generation and profitability. Once we're able to do that, we believe the company is going to be very well positioned for the future growth and the point of inflection as it occurs.

We are also working to leverage HydroPhotonics, the platform technology that we have that I described earlier, it has some limitations, but it is by far and away a paradigm-changing and disruptive technology.

During this past year, also, we've worked very hard with our board of directors, as well as the rest of our management team, to come up with our three-year strategic plan. We're very excited about this plan. We're in the process of executing it. It does not include any short-term fixes. The plan that we have is a long-term plan. The challenges that BioLase has faced over the past year have been long-term challenges. They do not require short-term solutions, they require long-term solutions. We are working very hard to put in place the appropriate structure, process, systems, et cetera, and people to ensure that we have long-term solutions to the issues that have faced us in the last year.

In our business development initiatives (ph) we are very excited about our ophthalmology presence. I just returned from the American Academy of Ophthalmology. There I saw all the other companies that were working in this field of presbyopia, which is really the holy grail in the field of ophthalmology, that and age-related macular degeneration.

Presbyopia is an indication that afflicts more than $110 million Americans that are over the age of 40 years old. Eventually, you will get presbyopia. You will have to wear reading glasses at some point in your life.

There are many different theories as to what causes presbyopia. We believe the most Salian (ph) of those theories is if the lens continues to grow until you die, like your ears and your nose.

As a result, the eye has less and less space inside of it in order for the lens to be able to accommodate. We have been working very closely with ophthalmologists in performing surgical procedures outside the United States for the treatment of presbyopia. We've had excellent results thus far, taking a mean jagger (ph) of 14, in those patients, down to a mean jagger of one.

That means that you can read a newspaper right up in front of your face.

We also have worked very diligently in our oral home care segment or LED-based products. We have a toothbrush that has LED lights in it that can whiten teeth, as well as treat things like periodontal disease, as well as gingivitis.

We also are working in the field of low-level light therapy.

As the company looks at opportunities to diversify, we will continue to measure those opportunities against the following criteria. They must first utilize BioLase's core technology of photonic in the field of oral care, and in particular, the HydroPhotonic platform. They must also be accretive to our growth rate. They must be accretive to our earnings. They should not be focused on dental channels, so if we go into the field of ophthalmology on a stand-alone basis, we will probably do it through either a separate sales force or through a strategic alliance with another company that's already got an established name in the field of ophthalmology.

We are also looking for products that would utilize a significant consumerable component or annuity stream to be able to platform and grow our business at a more steady and predictable manner.

And these new technologies that we will be considering must be leapfrog in nature. They cannot be a me-too product.

In summary, this dental laser market -- and I've been in this field now for about 15 years -- this dental laser market, in the whole picture of medical lasers, represents the largest market opportunity. With 700,000 dentists in the world, that is more points of sale than any other medical laser company can really address in the field of all medical lasers today. This is a technology that's disruptive in nature. It's not me-too. We are the market leader. We have greater than 70% market share on a year-to-date basis and we're very proud of this.

Our intellectual property position is now at more than 100 patents to protect our technology and provide us with a unique leverage point to be able to grow our business in the future, not only through the sale of our own products, but also through the sale to more competitors.

We have significant operating margin expansion potential, particularly in the gross margin line. We also have a sustainable and long-term growth opportunity.

We are very excited about all of the opportunities we have here at BioLase. In fact, when you look at it, the company has been through several issues this year. We've put the Diodem matter behind us. We had the restatement and the E, which is now behind us. The new product introduction and the challenges with the Waterlase MD are now largely behind us. We also had a recall on the water bottle that we mentioned in the last conference call. That issue is also now behind us. We also have gone through the first year of the unknowns related to Sarbanes-Oxley, and understanding what that means. That learning curve is also behind the company.

We've also built a lot of infrastructure and that side of it, from a systems standpoint, is in the process of also getting behind us. We have measured and weighed and understand exactly what we need to do in the business in order to put the appropriate automation in the business and we are going about doing that today.

We've also put behind us the understanding of our position in the market. This is something that's not only going to be behind us, but it's going to evolve over time. We'll have to continue to understand our customers and how they develop and what we need to do to make sure that we maximize our penetration into the market.

But these issues are now behind the company. We're going to focus now on what's ahead.

We have now the right messaging to our customers, that messaging that is focused on penetrating into the main stream of the market. We have a lot of interest in our technology. There are many companies that are interested in BioLase today. Many companies, CEOs, and executives of other management teams came to meet with me at the American Dental Association, as well as others of our management team, and congratulated us on getting the filings done, finally. People are watching BioLase. The whole industry of dentistry is watching the company and its penetration into the market, it's an exciting space.

We're working to get publications and podiums around the world with the top science and the top scientists behind our technologies and products.

Our ophthalmology platform is exciting. It addresses an unmet need in the market, but there are really no other real modalities that treat presbyopia well.

We've got economic articles coming out that show quantifiable data and why the Waterlase technology provides a significant return on investment and is not a risk for losing money for our customers.

In addition to that, we still have a lot of hard work ahead of us. The company is very busy. We've been working hard. We did make some headcount reductions. We reduced our headcount by approximately 10% in the past days. We are trying to cut in areas where we can improve our operating margin and operating model in a way that is not going to impact in any way, shape or form, our interface with our customers.

We're looking at every area in the business to focus the business today on cash generation and returning to profitability so that when we have the inflection of growth that we are expecting in this business very firmly, we're going to have a very solid footing and a strong foundation for the future. This business is a growth model. We have a growth thesis. We will continue on that path. Today, however, we are focused on ensuring that we get our operating model to the best pulse that we can possibility get it to, and that is where we're going to be putting our time and efforts over the coming months.

Thank you very much for your time. And now we're going to open the time up to question and answer.

Thank you.

(Operator instructions.)

And we will pause for just a moment to structure the list.

Again, ladies and gentlemen, thank you for standing by.

And our first question will come from the line of Alex Arrow with Lazard Capital Management.

You may proceed.

Thanks. Thanks, Robert, for all that very helpful detail.

You mentioned that your -- one of the R&D projects is going to be able to cut through amalgam or metal, and just curious, how -- for us to be able to look out to the future, since that would be a significant change, if you could give a little bit more on the time frame on such an amazing feat as that would be.

Well, basically we have intellectual property that we've acquired, as well as that which we have intrinsically inorganic to the business. And one of those things is to be able to enhance cutting speed through certain means and additives to the water.

In working through that technology, we believe that there is a possibility to be able to cut through metal, an amalgam, without having to use heat. Because lasers can cut through metal already, as you know. It's just the mechanism that would be used would be melting rather than actual ablation.

What we're trying to do is work on technologies in our R&D efforts to ensure that we can cut through amalgam in a way very similar to the way that we do it with hard tissue and teeth today, but not having to have a porous material to do so. So that's No. 1.

No. 2, I hesitate to say exactly what time line that effort will be undertaken on. It's underway now. We're working on it in our R&D labs. And obviously, as we come closer to that time, we will be notifying the market accordingly.

Okay. For the LaserSmile, I don't -- I missed it if you mentioned any statistics on that. You gave us the percentage of Waterlase and Waterlase MD. How is it -- sort of what you'd previously called I think the tag-along sale? Is that still happening, and to what extent, if you can comment, are sales with Waterlase also buying LaserSmiles?

Sure. Sure. I can tell you, Alex, that in our diode category our sales on a year-to-date basis have been approximately 250 units per diode-related products, that would include the DioLase Plus, as well as the LaserSmile product.

We are still selling those products, primarily as tag-along products on top of Waterlase MDs. We're not trying to go out in the market and sell those as stand-alone units, although there are times that those sales do happen. But to maximize our sales representative's time and not cannibalize on the average selling price, we try to ensure that we sell them together as a bundled package.

Okay. And I know they're both DioLase -- diode lasers, but they are, I think, sold for very different applications, either tooth whitening versus the soft tissue work. So can you say out of those 250 units, roughly, is it 50-50 LaserSmile-DioLase, or some other mix?

Yeah. On the year-to-date basis it's actually about 150 are LaserSmile units, and 110, approximately, are the DioLase units.

Okay. Then on to the MD, since that is the biggest piece, I understand you explained that roll-out as going a higher percentage than you thought as MD versus regular Waterlase. Have there been any conversion where somebody gets an MD and then the features -- or maybe you decide later that it's not quite worth the extra $20,000 and that they switch back? Or does everybody who gets an MD stay with an MD?

I don't know of a single case that someone has said, hey, I want to totally switch back. People that have gotten the Waterlase MD have been very happy with the features and benefits that they have with the Waterlase MD.

The times that they've not been fully happy with them has been because we've had some challenges related to servicing the product or something along those lines. But in general, they love the Waterlase MD product.

Okay. And anything you can say about the -- if there's not a -- I know there's not a formal trade-in program, but whatever the trade-in provisions that you're doing and whatever the impact that might have on ASTs for those who already have the regular Waterlase and want to upgrade to the MD.

In the first two quarters of this year, as well as at the end of last year, we did have certain cases where we had a program and said, if you already own a Waterlase product, we don't offer a trade-in; however, you can purchase a Waterlase MD at a discount. And in general, we were selling those laser systems, it was sort of a pat discount of approximately from 69,000 down to 54,000. So there was about a 15K discount if you were already a current user of the Waterlase product.

Most of our dentists and customers have more than one operatory, and so they saw this as an advantage, anyway.

However, we are not really offering that as a standard promotion today. Although, from time to time, we do make certain exceptions. In general, people are now buying the Waterlase MD as a separate, stand-alone product and paying higher average selling prices for it.

Okay. Great.

And then the last question, just on the World Clinical Laser Institute, you'd mentioned that there is some small portion of the revenue that's from that. Can you give us any guidance on what portion of revenue that is, has been, and will be? Even if it's just in rough terms, as far as total revenue goes.

No. We really have about one meeting a year that is what I would consider almost significant to our total revenue. And in general, the WCLI nets out for us in total revenue -- the supersymposium meeting that we have -- approximately 250 to $350,000. So it's not really what we would consider a substantive component of our total revenue. And that really occurs in the first quarter of the year, Alex.

Okay. But it is more of a substantive component of your cost of goods sold, I think, according to your --

Yes, it is. It is a more substantive component of our cost of goods sold.

Yes. Alex, let me amplify on that. Basically, what we need to do is when we take revenue for WCLI we have to actually take the corresponding cost with that. And because it's more of an educational tool, we actually find that we spend more money than we take in as revenue. So it actually is a higher cost of revenue per dollar of revenue than the revenue itself.

Okay. At some point in the future, would the margins of the device eventually improve if you no longer have to hold these world congress (ph) -- or is that a permanent feature of the selling process?

It certainly is a feature of the company has had and will continue to have. We right now are evaluating the number of events that we have and what portion of our sales and marketing dollars will go forwards those events.

Okay. All right. Thanks very much.

Thanks, Alex.

And your next question will come from the line of Dalton Chandler with Needham & Company.

You may proceed.

Good evening.

Hi, Dalton.

When you were still in the innovator stage in your market cycle, you used to say that you were targeting 40 to 50% year-over-year revenue growth. Is there a target you feel comfortable giving us now that you've transitioned into the LAs (ph) opti phase?

Right now, Alex, given all the stuff the company's been through in this last 12 months, we are not giving out any guidance on the near term for the business.

Having said that, however, I do want to mention that the fourth quarter of this year, as is any fourth quarter for us, it's seasonally our strongest quarter of the year. We do expect stronger sales growth in the fourth quarter, particularly as compared to the third quarter. And that's something that we've seen historically every year for the past several years.

At the same time, I see no reason, on a long-term basis, why the company would not be able to see the growth levels that we've seen in the past, you mentioned 40 to 50%, and actually in, in certain cases, even higher. As we get this recipe down and all of this introspective stuff we've done, and as we go through this turnaround curve, we believe very strongly that the company is going to return to very, very rapid growth.

But again, right now, we need to get focused on getting our operating model straight, stabilizing the business, and ensuring that our foundation is completely solid so that we're ready for that next point of inflection for the company to grow.

As we see in our surveys, we have a lot of interest and we have a lot of people out there who have already made basically decisions in their own mind to purchase Waterlase technology.

One of the things I did not mention as I went through the slide presentation was that of all the people that we surveyed, we asked them as well, if you're likely to purchase, either somewhat likely or very likely to purchase a dental laser for hard tissue application during the next three years, how likely are you to purchase it from BioLase? And how likely are you to purchase it from ConBio? Greater than half of the respondents already said they've already made the decision to purchase it from BioLase when they do purchase.

So this is an opportunity that we see as, again, a growth thesis for the company. However, we want to make sure we get our operating model straight and get the company back into profitability and cash generation today.

Okay. But you think that long-term it's possible to see 40% growth rates again, even though it's also a larger base today?

Absolutely. We believe with the right model in place, the right infrastructure, and all of these things in place, the market is certainly large enough to sustain very high levels of double-digit growth.

Okay. Could you -- you talked about the turnover in the sales reps. Could you just tell us how many you have today, and what your goal would be as we move through 2006?

Well, as far as the turnover is concerned, I mentioned that approximately half of our sales reps have been with the company for less than one year. Now, in general, that number is usually about 20 to 25%, not 50%. So that's where the result is. Because we always have some turnover in the sales force. I don't want people to think that we never had turnover in the sales force, because we always did, either by first attrition or otherwise.

But we anticipate that we will be growing our sales force over time commensurate with our revenue increase. Today we have 35 sales territories across the country. We have four regional sales managers.

And we believe strongly, also, as you look at that survey data, that one of the key drivers to success for us in the future will be to have a lot of feet on the street and to have relationships with dentists in the field. Okay?

Currently our sales representatives are capital equipment elephant hunters, if you will. They're not necessarily farmers. And as a result, they don't have a lot of relationships with dentists in the field today. So we may be looking at other distribution models to augment our capital equipment or elephant hunter sales force to grow that number of feet on the street very rapidly. And this is an area that we're looking into and considering right now as a company. So it may not necessarily mean that we have to continue to grow our intrinsic sales force, but there may be an opportunity for an alliance for us to be able to do so in the future.

Okay. You're talking about some sort of distributor relationship?

Something along those lines. When I worked at Coherent, I actually was involved in putting together a deal with Boston Scientific, where we utilized our sales force from Coherent of about 25 capital equipment sales representatives with the Boston Scientific model of about 75 to 100. And they worked together to mine leads, generate new business, holds seminars and meetings, et cetera, and it was a distribution alliance model.

That's kind of the model that we might be considering in the future, but obviously, we would have to find the appropriate partner, if we decided to do so.

But we do believe, as time goes on, and as we continue to penetrate the market, at some point in the future it will probably make sense for us to look at those types of avenues to get rapid adoption into the market.

Okay. And then just on the operating expenses, about 10.5 million for the quarter with your cost cutting and saving initiatives in place, should we expect that to trend down in the near term, or are you really -- is the goal to hold that constant?

I think you're going to see some -- obviously, there are some variable costs in the business as well. So as we grow our revenue, commissions are higher, et cetera, et cetera, that has an impact on a payroll. But in general, we expect the trend for operating expenditures, as a percentage of revenue, to decrease.

Okay. That isn't -- in absolute dollars, it may be steady or perhaps even up a bit?

Well, certainly, Dalton, what we're going to have when we go through these cost containment measures, initially, is we are going to have some severance costs and so forth, which are going to impact our P&L. But after those are taken, we should see some decreases in terms of the absolute dollars that we've seen in the run rate.

Okay. And then you mentioned the Oculase (inaudible), is there any update you can give us on the time line there that you're anticipating?

Well, in general, we expect -- I mean we only filed this very recently with the FDA. We expect to hear back from the FDA within the next few months. We have not heard, yet, back from them. It's not on their normal time line. In general, they've got -- they're 90 days in which to send back their first comment letter to us. So that time has not elapsed yet.

The 90 -- oh, because you filed in September?

Right.

Okay.

We should hear something back from the FDA, in our opinion, within the next few months. And it could be comments, they want more information, et cetera. But certainly we expect to hear back from the FDA in the not too distant future.

Well, the 90 days will expire in December, right?

Right.

Okay. All right. Thanks very much.

Okay.

Our next question will come from the line of Alex Arrow with Lazard Capital Markets.

You may proceed.

Oh, thanks. Just one follow-up. I noticed that the ADA shows, in the last couple years you guys have had a press release about the volume of orders that you were able to get right at the show. Are you -- would you comment on that this year? Or is that something you're not able to comment on this time?

One of the things going back to that slide -- and this is just sort of an aside, but going back to the slide that I mentioned what was, for our customers in the survey, what was the most important venue for them or source of information that was important to them relating to purchasing a product. And as you recall, back in that slide it mentioned that for the Waterlase customers, shows and conventions was the No. 1 source for them to learn about product and to make their purchase decisions.

As we go into the early adopters, that number is significantly less as to their priorities. And that's an area that we are now spending less time and less focus and less dollars at show sales.

Now, we had as many people in the booth this year as we've ever had in our booth. We had a bigger booth, we had a very strong presence, we had a lot of interest at the ADA meeting, it was an excellent meeting, and we run a lot of sales as well. However, we felt as a management, and also as a board, that it is probably potentially misleading for us if we start putting out press releases about how much we sold at one particular show, because it may or may not have a direct correlation on the total revenue -- either on the top side or on the bottom side of what we experienced for the total quarter. And we felt that there -- we didn't see any other peers in our industry doing it, and we felt it was probably inappropriate for us to continue to do it. So we've decided not to do that on a continuing basis, Alex.

Okay. Okay. Thanks.

And speaking of the other companies, the other laser companies, anything that you're willing to comment on on which, if any, of the competitors are front of mind as far as the ones that may have gained a little bit at your expense during the difficulties of '05 that now maybe you can take some back from or -- anything you can say about who amongst the known cast of characters has risen to the second place position, perhaps is the best way to ask it.

Well, I think it's the same company that's always been in the second place position, and that's been ConBio. They had a distribution alliance with Henry Schein and they -- we have seen their sales reports on a year-to-date basis, and from their sales reports, their sales did experience a slight increase, but it certainly wasn't one that we look at on a year-to-date basis and have a significant amount of concern about.

In fact, we looked at it as a very positive trend because we believe that the real competition in this market is to make the paradigm shift. And we like the idea that we have a little bit more competition in the market. Obviously, we don't always want it to be at our total expense, we'd really like to see the pie grow. And we believe by having more players out in the market, educating the market about laser dentistry, ultimately that will only benefit us as a company.

So -- but we haven't seen major shifts in market share or anything like that, if that's your question, Alex.

Okay. And has there been customers that have a DELight that then switch over to Waterlase? Do you give any kind of a trade-in for that? Does it have -- any comment you can make on whether you've gotten any of theirs or they've gotten any of yours?

No. We deal with those types of things on a case-by-case basis. But frankly, in most of the times that we're selling our products, we're not going up against competition.

Great.

So, ConBio's selling their systems -- and there is overlap, from time to time, that's for sure. But ConBio's off and selling their systems totally independent of when we're selling our systems. And the other party's not invited to the table, as it were.

To your knowledge, are any of these other guys working on those three research initiatives that you mentioned? If you're able to become completely pain-free, if you're able to cut through amalgam, will that be something that they're probably going to be right there with? Or do you think that will be a unique advantage?

Well, first of all, I think, from an intellectual property standpoint, we're in the unique advantage position that even the technologies that will cover those types of new developments we already have patented. So we are in a unique position from that perspective in our R&D efforts, and we feel very enthusiastic and confident about that.

I can't really speak to what the other companies have in their R&D initiatives today. But certainly I don't imagine that they're going to sit on their backsides and wait for the market to totally shift and change on them. They're pretty smart people, too.

So I would suspect that they understand that these are the similar limitations in the field of laser dentistry, and that they're probably trying to do some things to work on those issues as well.

Okay.

But I can't speak to it.

Okay. Last question on the competition, the Henry Schein distribution that DELight has, when -- anything about the pricing trends? I know your ASTs have been going up. Now that they're with a distributor, maybe they've got more flexibility, maybe there's -- or maybe they're putting less of a priority on it because Henry Schein distributes so much stuff. ConBio has been a fairly nonpromotional competitor so far. Any update you can give us on how that -- ?

Yeah. Actually, the average selling price trends on an end-use basis -- I'm not talking about sales to distributors like Henry Schein -- but on an end-use basis have been increasing --

(inaudible)

-- in general. And I'm talking about the total industry, not just BioLase. So Lumenis also have over the past couple of years increased their prices, and so has ConBio, on the end-use level.

Yeah, we still sell the Waterlase MD at a significant price premium to both of those competitors. However, that differential has had a declination to the delta over time.

Ladies and gentlemen, this now concludes your morning session. I would now like to turn it over to your managers for closing remarks.

Well, basically, again, we're very excited about the future of this company. We have a unique platform technology that has application that is widespread in the field of dentistry, as well as in the field of medicine. It's a disruptive technology and it's a fun technology to be involved in today.

We have our short-term challenges. We've put a lot of these challenges behind the company and we're looking forward, not backward. We're looking toward the future. We're making the tough decisions, making the changes, right-sizing our operating expense model, getting our operating model, in general, to a point where we can be at cash generation again, and really take advantage of the inflection point that we expect to see in the future -- in the not too distant future for our products, as we continue to streamline our efforts both in the marketing messaging, in the sales channel development, as well as in our R&D activities.

We want to thank you for your time today, and look forward to speaking with you again at our next conference call. Thank you very much.

Ladies and gentlemen, this does conclude your presentation. At this time you all may disconnect. And have a wonderful day.