BIOLASE Inc (BIOL) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the BioLase Technology Incorporated 2009 Second Quarter and Six Months Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, August 6th, 2009

I would now like to turn the conference over to Miss Jill Bertotti. Go ahead, ma'am.

Good morning, everyone, and thank you for joining us today for the BioLase Technology 2009 Second Quarter and Six Months Results Conference Call. You should have all received a copy by e-mail this morning of the release announcing the company's results for the quarter and six months ended June 30th, 2009. If any of you did not receive a copy of the news release, please call our office after the conference call at 949-474-4300 and we'll be happy to e-mail you a copy of the release.

Before we get underway, I've been asked to make the following statement. The words or phrases can, be, expects, may effect, may depend, believes, estimates, projects and similar words and phrases are intended to identify 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 with the Securities and Exchange Commission. All such forward-looking statements are current only as of the date on which the statements are made. BioLase does not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which any such statement was made or reflect the occurrence of unanticipated events.

Also, as a quick reminder, a replay of the conference call will be available on BioLase's website at www.biolase.com. The company's 2009 second quarter and six month results can also be found on the company's quarterly report on form 10-Q, which the company plans to file tomorrow, August 7th, with the Securities and Exchange Commission.

With me on the call today from BioLase are Dave Mulder, the company's Chief Executive Officer and Brett Scott, Chief Financial Officer. Dave and Brett will review some prepared remarks, including an update on the business operational performance and outlook. They will then conduct a question-and-answer session and end the call to few closing remarks.

During today's conference call, we'll be taking questions by e-mail, which time permitting, will be asked at the end of the telephone question-and-answer session. For those participating on the call over the internet and who wish to submit a question by e-mail, to be considered for the Q&A period, please send your question to Nathan Adler, at nathan@allencaron.com. Please submit your questions as early in the call as possible. If questions sent in by e-mail have not been previously answered during management's opening remarks or in response to an earlier question, they will be asked of management as time permits.

With that said, I'd like to now turn the call over to Dave. Good morning, Dave.

Morning, Jill and thank you. Welcome to all of you to our second quarter and six months results conference call and thank you for participating. First, as Jill said, I'm pleased to have the newest member of our executive team, Brett Scott, who joined us last month as CFO joining us here today. We're very fortunate to have attracted an executive of this caliber to our team and it's already clear he's a great fit and most importantly, I'm very pleased that he's going to participate on today's call with us, too.

So before we get started, I would just like to ask Brett to make a few comments about his background and what he identified as the opportunity here at BioLase. Brett?

Thanks, Dave. It's great to be here today. Let me tell you a little bit about where I came from. I have served as CFO for a variety of publicly traded medical device companies. During those stints, I was responsible for a number of strategic financial initiatives, including start ups, turn arounds, IPOs and dispositions. I have met some of you through my recent associations with Alsius and North American Scientific.

I'm honored now to be a part of the team supporting BioLase as it continues forward with its long term growth initiatives. From my perspective, that's why I came to BioLase, to be part of an exciting growth story with segment leading technology and a huge market universe. I'm also committed to help Dave and the Board communicate our progress to you, our investors. Thanks again. Dave?

Welcome, Brett. And I believe all of you will enjoy working with Brett here in the weeks and months ahead. Today, we will review the progress we've made here at BioLase since our last call, including some of the key strategic initiatives underway. Brett will summarize the financial results for the quarter and then, we will open up for your questions at the end of the program.

As you noted in our press release this morning and our revenue pre announcements, results in the second quarter were marked improvement from the first quarter and put us on much more solid footing as we look out into the future. It was a pleasure to announce that not only did we produce revenues that were double from the first quarter, those revenues translated into cash generation and a higher level of profits. In fact, this was the most profitable quarter we have had in six years.

During the last six months, we've been leading the company in a new direction. We have streamlined operations, which reduced operating costs and improved margins, we moved to a distribution model internationally that took up direct infrastructure costs which drove over $4 million a year in losses. We restructured our agreement with Henry Schein and together, we continue to develop new approaches to making lasers a solid day to day tool in dentistry. The results of these efforts, not only by ourselves, but by our partners, were to achieve the results as reported for the second quarter. We are very grateful to all those who helped in this effort, especially Henry Schein.

As we mentioned on our last call, the first couple of months of 2009 were very difficult as the purchasing environment for capital equipment seized up almost completely. But with our new product offering of the turbo and the changes in our selling approach, we saw some signs and improvement late in that period and fortunately, that improvement continued throughout the second quarter.

One of the highlights of the second quarter was a continued benefit generated from the global launch of the Waterlase MD turbo hard and soft tissue dental laser system. Dentists responded positively to its faster cutting speed and improved range of clinical applications. On the upgrade kits, we went into an immediate backorder situation with demand for hundreds of units based primarily on word of mouth. We will be caught up with the backorders this month and then, we'll be formally marketing the upgrade kit.

As I mentioned last quarter, cutting speed has been a key objection of dentists who have not yet moved into laser dentistry. The sales force enjoys -- is enjoying revisiting many of those dentists and demonstrating the new device. They are definitely seeing renewed interests, so it is an effective door opener for us in what is still a tough economic environment.

In addition to the continued focus on the new system, we also created and rolled out a number of compelling sales incentives alongside our distributor during the second quarter. These programs helped to drive a sales rebound from the first quarter and we will continue to seek ways to spur the selling decision throughout the remainder of the year and until we emerge from this sometimes difficult economic cycle.

On international fronts during the second quarter, we saw a rebound in sales. Total international sales grew 50% from the 2009 first quarter. Sales in countries served by our foreign subsidiaries located in Germany, Spain, Australia, and New Zealand transitioned to our distribution partner Henry Schein. Those transitions are moving forward as planned and we are also entering more countries around the world where we do not already have a presence.

Examples of this expansion are first time sales in countries of Kuwait and South Africa by our distribution partners. Perhaps the most exciting international news for the long run is that we believe we are about to complete the technology registration process in China and will begin shipping product there in the coming quarters. Now that we have clearance to that large market, we will continue to work with our distributor to maximize our penetration while maintaining a conservative cost structure for that effort.

We also had success in reducing operations at those foreign subsidiaries which had been recording significant losses for the year. The result of this was that some of the cost savings that translated into profits in the second quarter. That said, we have not and will not abandon any of our customers or our doctors in any country where we are implementing a smooth transition to take care of them all.

As we indicated in the press release, cost reduction measures implemented in the first and second quarters throughout all functional areas of the business have us operating at a level that should allow us to maintain a positive cash flow even at the revenue levels established as minimum under our current agreement with our distributor. While we are committed to holding the line on our expense levels, it's very important to remind you that despite these necessary cuts, we intend to maintain our position as the leader in top notch customer service and laser dentistry training, as well as to continue our tradition of leading innovation and product development in the dental and medical laser field.

Our R&D budget for 2009 is expected to be around $4 million and includes new product development projects and enhancements designed to widen our product family of innovative lasers contributing to our penetration and expansion in the marketplace. Our primary strategy is still to expand the day to day use of lasers. Other prongs to our long term strategy include expanding our dentistry presence with our brand as leverage and expand the use of our technology into medical areas outside of the dental space.

Future initiatives being considered as we focus on commercializing our intellectual property include but are not limited to pain management, ophthalmology and light based oral care devices including toothbrushes. We are currently fine tuning our approach on entering the pain relief market after the recently announced receipt of 510(k) clearance from the FDA to market our ezlase diode system for therapeutic applications including temporary pain relief. We believe we are on track for initial sales into new channels to begin as early as the fourth quarter of this year.

Secondly, we've been reviewing specific new applications into the field of ophthalmology that other lasers are not capable of duplicating. We believe development efforts could bring a product to market as early as the mid 2010 and we are actively seeking partners to help in final development and distribution. Lastly, we continue to see opportunity with light based oral care devices, including laser toothbrushes in both the professional field, which we retain rights to, and the consumer field.

We are currently in direct discussions and negotiations with Proctor & Gamble regarding specific plans on proceeding forward. In my visit most recently to Cincinnati, I was very excited to be working with such a fine organization. After cleaning up all of our legal issues in the past months and cutting our costs almost in half, spending time on these initiatives is reinvigorating for myself and the team members helping us to move them along.

Looking to the future, despite some potential seasonal variations in our future quarterly revenues, our goal of remaining cash flow positive at minimum purchase levels continues. When we look at risks, we believe that given the results of this quarter, we may receive requests to renegotiate some of the programs that we've been putting in place over the last six months.

However, the foundation of the current minimum purchases are $4 million in ongoing R&D expenditures and a driving focus on commercializing our intellectual property is expected to enable us to move forward on a number of initiatives. We are looking forward to realizing our long term goals and sharing our progress with you on our efforts involving the development of our technology for applications outside the dentist's office.

Despite the current economic environment, we feel that our new programs and approach to the market is gaining some momentum. As a matter of fact, we see that in this environment, there may be a sense of urgency being created with dentists to do something different. We are in the middle of a paradigm shift and building a new approach to our marketing effort. Out lasers have proven to be a fantastic tool that adds new dimensions and capabilities to everyday dentistry and helps dentists build their practices.

The paradigm shift and what we are doing now is to make lasers a part of every day dentistry on a broader scale. We want to take lasers to dentists as a great tool to build and improve their practices versus trying to take dentists to lasers. Lasers are a regular necessary tool for a full practice, not a luxury.

We fully intend to maintain our worldwide market share in laser dentistry as well as to continue our tradition of leading innovation and product developments in the dental and medical laser field. We are also committed to better positioning BioLase to prosper as the economy improves and revenues begin to rise in a predictable and steady fashion again.

With that, I now hand the call over to Brett Scott to go through the highlights of our financial results for the quarter.

What did you bring up?

Thank you, Dave. Total 2009 second quarter and six month sales were $14.3 million and $20.9 million respectively, compared to $18.7 million and $37.7 million in the same periods last year, a decline of 23% and 45%. Revenues during these periods continued to be impacted by the economy and credit markets resulting in delayed decisions by dentists to purchase higher priced capital equipment. Sequentially, revenue rebounded from the $6.6 million reported in this year's first quarter due to the new distribution commitments from Henry Schein, aggressive new sales and marketing programs, and the launch of the new Waterlase MD Turbo.

Total laser system net revenue for this year's second quarter at six months was $11.4 million and $15.2 million respectively, compared to $15.6 million and $30.9 million in the prior year periods. Non-laser system net revenue, which includes consumable products, advanced training programs, extended service contracts and shipping revenue increased 16.4% during the quarter to $2.5 million from $2.2 million in the year earlier period.

For the six months of 2009, non-laser net revenue decreased 2.3% to $4.9 million from $5.0 million in the first six months of 2008. License fees and royalty income for the 2009 second quarter and six months decreased to $430,000 and $905,000 respectively compared to $868,000 and $1.9 million in the second quarter and six months of 2008.

Now, I would like to provide a break out of sales by region. For this year's second quarter, domestic sales were $11.2 million or 78% of net revenue, compared to $14.5 million or 77% of net revenue for the prior year period. For this year's first six months, domestic revenues were $15.8 million, or 76% of net revenue compared to $28.5 million or 75% of net revenue for the 2008 six-month period.

International revenues for the 2009 second quarter were $3.1 million or 22% of net revenue compared to $4.2 million or 23% of net revenue in the second quarter last year. For the six months of 2009, international revenues were $5.1 million or 24% of net revenue compared to $9.2 million or 24% of net revenue in the prior year period.

Moving on to gross profit. Gross profit for the second quarter of this year was $8.1 million or 57% of net revenue and this compares to gross profit of $10.1 million or 54% of net revenue for the prior year period. For the first six months of this year, gross profit was $9.9 million or 47% of net revenue compared to the year earlier period of $19.7 million or 52% of net revenue.

Operating expenses for the second quarter and first six months of 2009 were $5.6 million and $12.3 million respectively, compared to $9.7 million and $19.9 million in the year earlier periods. This year's six-month period included $602,000 in severance and related costs associated with the departure of our former CEO and the workforce reduction at our international operations.

Net income for the second quarter of 2009 was $2.3 million, or $0.10 per share compared with net income of $0.6 million or $0.03 per share in the prior period. Excluding stock based compensation expense of $0.3 million, non-GAAP earnings were $2.6 million or $0.11 per share on a non-GAAP basis for the second quarter of 2009. Net loss for the first six months of 2009 was $2.3 million or $0.10 loss per share compared to net income of $0.6 million or $0.03 per share for the same period last year. Excluding stock based compensation expense of $0.8 million, non-GAAP net loss was $1.5 million or $0.06 per share on a non-GAAP basis for the first six months of 2009.

Turning to the balance sheet, as of June 30th, 2009, we showed cash and cash equivalents of $3.5 million, up from $1.8 million at March 31st, 2009. Total assets of $22.4 million and total stockholder's equity of $7.7 million. We believe that with the minimum purchase agreement, cash flows twice a month and our lower cost structure, we will have sufficient resources to meet our obligations and sustain operations.

That concludes our formal prepared remarks. We would like to now open up the call to questions. Operator?

Yes, thank you sir. (Operator instructions).

And our first question comes from the line of Dalton Chandler of Needham and Company. Go ahead, sir.

Hi, good morning and congratulations on the turnaround from the first quarter. Let me start with a little bit of housekeeping stuff. When you went through the break out of the revenue between the Waterlase, the diode, et cetera, I just missed that, could you repeat that?

Sure. I don't think we broke out the [diolodes]. What we did was -- okay, here we go. Total laser system net revenue for this year's second quarter and six months was $11.4 million and $15.2 million respectively compared to $15.6 million and $30.9 million in prior year periods.

Okay.

Non-laser system net revenue, which includes consumable products, advanced training, et cetera. increased 16.4% during the quarter to $2.5 million from $2.2 million in the year earlier. For the six months of 2009, non-laser system net revenue decreased 2.3% to $4.9 million from $5.0 million in the first six months of 2008.

Okay, great. Thanks for that. And your gross margin came in actually well above the range that you had previously announced, is that sustainable or was there something unusual in that?

I think we enjoyed the benefit of a cost cutting program that we had started at the beginning of this year. On a go forward basis, we expect -- we would expect the margins to stay in that 50% territory.

They were a little bit higher this time. I think we just had a -- we had a richer mix of sales in the states this period. I believe in future periods we'll have more of a better blend as we see improvements in international. But we had a richer mix of the US and at the -- at the higher sales levels, that also gave us a boost because our fixed cost structure in manufacturing is relatively stable. So as sales rise or fall, we see a little bit on extra boosts in margins. As Brett had said, we expect to be staying right around the 50% territory plus or minus, on a go forward basis.

Okay, and your operating expense actually declined again even after you made some big cuts last quarter. I guess I'll ask the same question. Is that a sustainable number?

We think that the operating expenses should be a sustainable right around that territory, right around the $6 million territory, perhaps sometimes a little more, perhaps sometimes a little less. We're looking at a lot of programs right now but we are very strictly trying to control every expenditure that we make.

Okay, and then just looking ahead a little bit, in terms of revenue, third quarter is seasonally typically one of the weaker quarters, this isn't exactly a typical year, would you expect to see that same pattern repeat or do you think due to pent up demand or some other reason that 3Q could be as strong as the second quarter?

I think you're exactly right. It's a seasonal -- I think the seasonal trends that we usually see will be repeating in the third. Everyone -- a lot of people are just plain on vacation in the industry, dentists are on vacation, sales people are on vacation, Schein reps take vacation during the period and the dentists often want to talk to their accountants who are also off and on vacation. So the delays during the period, it's just a seasonal thing that we see every single year.

Okay, and then do you have a sense of the sell through at Schein from the units they ordered from you during the quarter?

We usually don't get into the sell through in individual accounts. But we did -- we did feel good that sell through did definitely improve from the first quarter, which was very positive. We felt very good about that.

Okay, and then just last question, can you expand a little bit more about the new programs you talked about in pain management and ophthalmology? Any more detail on the specific indications and the channels you would expect to sell through?

Yes, I can fill in a little bit more there. In pain management we have some initial indications, we working on expanding those out. We think that will take some time, but we also believe that we have enough indications now on pain management and Ezlase has been used there enough where we're currently planning on doing a very similar laser to it and launching it probably in the fourth quarter. We anticipate launching this on a very small scale at this time. We'll be going primarily after chiropractic.

We see some very high prices lasers there now and we believe with the economies of scale that we have with the Ezlase and other lasers that we can be very profitable there. We do not plan on hiring a full major sales force, instead we will do what the company did many years ago when it started out into dentistry and we will be using some commission only manufacturer reps in the field to take this forward. So we're going to put very low costs into it and we're hoping this thing is going to be self funding for us.

On the ophthalmology, we have found some -- we have been looking at ophthalmology in a very different way than we used to look at it. Most laser companies go for very, very specific and exact procedures and they build off of that and they've done well and that is kind of a crowded space.

One thing that we have found is that with our YSGG, we have the best, bar any, we have the best soft cutting tissue laser in the world and because it cuts without charring or anything else, many, many lasers that are currently being used right now who do not have that ability cannot be used in highly sensitive areas around the eye, cutting muscle tissue, et cetera which bleeds very, very heavily. A lot of those procedures still today are being done with the scalpel or with scissors and they're very bloody and they're very messy.

We believe that our laser and some preliminary work we started doing could become the general knife of the industry and that is very exciting to us and so rather than focus on individual procedures, we could be an assisting laser in multiple procedures on a broader scale.

Now, this has some very interesting applications. We recognize there's a lot of expertise in the market already and so what we are doing right now is developing it a bit further and then we will be talking specifically with partners who can help us enter that field. So, we're quite excited about it, we do think it will take some time to get going and if it goes we envision it will probably be somewhere around the middle of 2010. And again, there's development work there, we see very positive results so far though.

Okay, thanks very much.

Sure.

(Operator instructions).

And our next question comes from the line of Paul Bornstein with Black Diamond Advisors. Go ahead, sir.

Yes, hi. Guess I won't have too much of a chance to buy the stock under $2.00 again. So that's good on the cost cutting side that you got everything kind of lined up. Have a question on sales, here in the US since most of your sales, I'm just curious, you've indicated a couple times about the changing some of the strategies going after the dentists. Are those all in place now and do you think the momentum will start building now when the dentists come back from their vacations and what have you.

And then secondarily, are there any large or unexpected costs that you might see as you enter into some new international countries such as China and I'm just curious how that market looks like if you get into that, because that's a huge market, I'm just kind of wanted to see how you're going to step into that one. What the cost might be?

Sure. For the China market, we'll start with that one. I'm very enthusiastic about it. I've spent a bit of time over there myself preparing with the distributor to get launch there. We are already approved in selling the device in Taiwan and Hong Kong on a smaller scale and so we actually have a tremendous amount of literature already prepared in mandarin Chinese and the partner that we have in Taiwan is actually associated with our expansion into China.

I've spent some time over there. We have a distributor poised and ready to go as soon as we get our registration and he already tells me that he has quite a few leads. So we're very excited about getting China going. We have moved. One of the changes, I've said, to a distribution model internationally completely. We do still have some key great specialists helping us around the world that still work for the company, these are terrific guys, Peter and Pedro.

One for primarily for Europe and middle east and the other primarily for Asia, these are very strong guys who know the product and support us well, but going to the distribution model, all the costs will go to the distributor. They will pick up just about everything. We will do some minimal support, we will not do a lot of high costs and that is a -- that is what we're looking for. And in exchange for that, of course, my international distributors get a break on price and they get it at a lower price so their improved margins will pay for all that.

Okay.

Help me out -- good to talk to you Paul, help me out on the first part of your question. I get excited about China and I want to make sure I hit the first part of your question as well.

No, just curious in terms of your marketing plan with the US dentists, are those pretty much -- you're just waiting for them to I guess come to fruition or are there any other strategies that you're looking at to kind of get the US dentists more interested in buying the product given the current economic situation. I guess a lot of the dentists are seeing?

I believe we've only just -- we've only just begun. Working with Henry Schein, we've put a lot of programs in place to get their people better trained, to spend more time with them, we've put in a lot of different programs for selling, and we've adjusted our approach. When I started looking at the company some time ago, one of the key things that I found out in the field was that a lot of people saw lasers as a luxury.

I also found that a lot of dentists actually believe they will one day purchase a laser, they just don't see it in the near term, however with the economic environment, I believe that if we position this and explain this very, very clearly, I believe a lot of dentists will want to make that change right now. And we're working on that.

I do believe that in our history we have taken an approach that was very strong and very good at bringing in the early innovators of a market. We have a lot of innovators that are terrific guys, close friends of ours and however sometimes, as you pull in the innovators, the same approach doesn't necessarily work for the early majority.

We're adjusting our approach a bit to focus on the early -- the early adopters which is a much broader group in dentists and we believe that that group needs much better training, which we've been focusing heavily on. That group needs to have more papers that they can see, they need the more solid support and we've got it all and we want to bring that to them.

We're moving away from -- we don't want lasers to be seen as a special club and one thing that I've been doing very differently and I've just arranged it with some of my partners at Henry Schein, we've been talking to people outside of lasers. We keep talking, I think we've been talking often to the same people over and over again who are already sold on lasers, already have them, are already in a laser institute.

We've been spending more time now talking with guys outside of lasers who aren't there yet and getting their points of view and working very closely to develop new programs to move it forward, I believe we've only just begun to touch that and I think that as we move forward and spend more time with people who don't have lasers, I believe our programs are going to get better and better and our approach is going to be something that they're going to be -- that those doctors will be much more comfortable with. So I see a lot of improvements to come.

Okay, thank you.

Yes, sir.

And our next question comes from the line of [Gary Hatten] with [Clanahan Investment]. Go ahead, please.

Hi, Dave.

Hi.

Can you -- you probably already went over this, but could you just remind me what the advantages are of the turbo?

Yes, the turbo cuts about three times faster than the old Waterlase. It cuts -- in a lot of places it's very comparable to the cutting speed of a high speed drill. We have had dentists who absolutely have loved our product, it's changed their lives around, changed their love for dentistry. And they've been very happy with it. And we've also had dentists that walk into the booth, at a show, they pick up the device, they start cutting with it, they say it's not as fast as my high speed drill, let's talk when it is, and they put it down. And I believe right now that this cutting speed is going to -- we believe this is going to make a major mark on dentists opening their eyes to it and taking a look at it.

How long has that been out?

We just -- we introduced it at the end of the third quarter at -- in March. We didn't have a whole lot of the turbos available --

First quarter.

Oh yes, the end of -- yes, sorry the end of the first quarter in March and we immediately went into a backorder position of the current existing base of users who have our product. I think we've shipped already 500 or 600 to them as well as sold a lot of the new lasers with the product and we've -- and largely this has been just a press release and word of mouth. We have not formally marketed it but it is so popular with the current users that we are now just starting to catch up with an extensive backlog of orders there and then we'll probably start formally marketing it to the rest of the group.

And how is it priced, relative to the other products?

The turbo, what we decided to do with our partners was we would not change the price of the overall turbo MD from the old Waterlase MD. The -- right now the price point of the upgrade kit to the outside world, I think Schein is selling it for right now for -- do you know what they're selling? Oh no, no, much more than that. The price point is under $5,000. I hate to share too much about exact price points because we have different price points at different parts of the world, but our distributors are finding this a very nice profitable pick up for them right now.

That's the upgrade, right?

Yes, that's the upgrade kit that -- we decided to take the turbo and rather than redesign the MD to a completely new product, we decided to make something that we could upgrade. We just want our customers to make sure that they can count on us to keep improving the technology that they have and that they bought from us.

And remind me what the Waterlase goes for?

The Waterlase currently is selling -- and again, we have different price points around the world.

Yes, yes. Just following that.

I hate to say too -- it generally retails for around -- its historically been listed at around $80,000 and it has sold higher in certain countries because obviously you have duties and -- quotas and duties coming in. and more recently there's been some specials out there that have taken the price point to a very aggressive level during these tough economic times.

Okay, thank you.

Sure.

And our next question comes from the line of Robert Hoffman with Princeton Capital. Go ahead, sir.

Good morning and congratulations. You made some comments about renegotiating and I must admit I wasn't paying as close attention. Could you repeat either -- either repeat what you said or elaborate a bit on that?

Sure, I always try to give a balanced view. I always try to take -- make sure that I share openly what risks I see in the future. Right now the company has not had a quarter this profitable for six years and it's my belief that with that out there I will probably start hearing from various parties on wanting a piece of that. We've been very tight with our programs. We've been very tight with how much we've been paying for things and want a bigger piece of the pie. I think it's just going to be a normal reaction.

You kind of broke up there, I don't know whether it was my end or your end. So, it that referring to Henry Schein most specifically?

Not referring specifically to Henry Schein. We have deals with many, many vendors, many customers, many people servicing the company. So it's not specifically addressed to Henry Schein.

Okay, because I mean yes you are profitable and yes that's good news but you've need to keep your profits and not give them away.

That is absolutely precise and that is a message that I think in my last release, as we've started talking about positive things, we've been trying to make very strong statements about holding what we've won and that we will certainly try to do. It's just I recognize that it is a risk and it -- from multiple angles, and we are going to do everything we can to hold what we've won and keep things moving positively forward.

Changing gears, in the past you guys have -- not necessarily you, maybe it was Jake and prior to that, very tight lipped about what P&G was interested in. why the change in terms of are they allowing you to be more open about what they're working on there or are you closer to launching something is that the purpose?

Well, right now, the deal that we had with Proctor and Gamble gave them a complete exclusive and to keep that exclusive they were going to be -- they were making quarterly payments to us.

Correct.

That time period expired, and right now we're in the negotiation process of figuring out where that's going. And that's been -- we've disclosed that in our 10-Q. I've -- P&G historically has been working primarily on their own. Recently, I've taken a very strong interest in this and I've grabbed two of the guys that I've had from my -- from the field, one a practicing dentist, and I've gotten involved with the much more actively. P&G actually has programs where they often partner with smaller companies, with technology. I was very impressed with that program and we've been taking a much more active role with them.

I'm figuring out how we might roll something forward, how we might take it through into the professional markets and other markets. I feel very good about that. I'm not sure exactly where it will come out or what we will have, but I think there is some very strong indications there. There's a likelihood of a very strong product -- products in that category and right now we're in active discussions and I just thought it appropriate to share with my shareholders that we're having those discussions. I can't say exactly where it will come right now and I would like to say more about it later, but I thought at this point it's interesting enough to start saying that we're in those discussions.

So in the second quarter that you just released, there is a license fee from them correct?

In the second quarter there was not a license fee from them.

So in the revenue line there is no license in there.

That is correct.

Okay, great.

Yes, and but -- and we are going -- we are together I think working -- working together towards a win/win situation and obviously if we can't find one, then the exclusivity that they have for consumer is no longer there and we're open to do something else, however P&G spent a lot of time and effort, they have some of their own IP in it and I would very much like to work something out with them.

Great. Okay, thank you.

And our next question comes from the line of Mark Haas with Inter Invest. Go ahead, sir.

Hi, David, actually my question was somewhat addressed by the previous caller, concerning your negotiations with -- in terms of Schein, what's on the table for your negotiation? Is it just the price at when you sell it in or are the minimums in question?

Right now there's nothing under negotiation with Schein. We've come to an agreement together and that agreement was signed and they've been living up to that agreement.

Okay, and you said also that you've been working a lot with non laser dentists, what are their hang ups apart from obviously the cost and the amalgam filling?

I think one of the biggest ones is they just want the assurance that they're going to be successful at using it. I think our approach has been to talk about a significant number of guys who've picked up the laser, they've grabbed it, they've used it, they were very successful with it. I think some of the -- a lot of those successful dentists have been day to day guys running at about a midsized practice around the $500,000 to $800,000 area and a lot of those dentists have picked it up and run with it.

A lot of the innovators have, but a lot of the guys in that territory, who are on the cusp, they've seen, they've kind of hit a wall, they're not growing anymore and they think they need something to get beyond, sometimes telling them a story of a $2 million practice guy or some of the high level things that he's doing, a lot of the dentists say I can't -- that's not for me and maybe I can't do that, or I need some comfort level that I too can do this as well as they can because this is going to take some retraining and some time.

These guys can do it, we've seen lots of them do it and I think we need to adjust our approach to take this to them and give them that comfort level that they can cover it. And so we've been talking to more of those guys on how do we address your issues and when we talk to a lot of those guys and they talk about equipment they're buying for the future, lasers are still very much on their list. When asked the question, are you going to be buying a laser, the answer is typically, yes? Absolutely. Are you going to be buying one within the next three years? Yes, absolutely.

Are you going to be buying one within the next 12 months, which is a key question. Often they say no, and we would like to get them to that comfort level where they can move forward, because a lot of dentists know it's there, different ones have different reaction, there's always going to be a few guys who just don't want something and that's okay by us and there's always going to be a few guys who may not succeed and as there are in any business and we'd rather not sell those guys a laser. But there's a lot of guys who can move forward, get comfortable with this.

Another thing that we think is very important to teach them is how do they integrate it into their practice, because we've seen guys who've picked up a laser, they use it, they love it. We've seen guys who've picked up a laser and we call their offices and they don't really -- no one in the office mentions it or talks about it. some of the most successful guys -- some of the most successful dentists out there actually have almost scripts that their people talk to people about for all parts of their practice, including the laser.

I mean you could mention -- are they mentioning on calls the things that will help drive their sales. There's a lot of things around there that they could be doing better. We see some of the best guys doing it and I think once we work on giving the day to day guy the formula and the recipe for how to do this, we can make a much bigger impact and I'm absolutely convinced that this will be very positive for them and we just need to adjust our approach a bit and give those dentists that comfort level.

All right, great. I'm comfortable with that. But in terms of Procter & Gamble, I just want to go into a bit more detail. I don't remember the specifics exactly, I think you were receiving, what is it like a quarter million per quarter in cash? Which will eventually offset the royalties on the roll out of the product, is that right?

That has been the historic deal, yes.

Okay, is there any clue on the year let's say, or the roll out of the P&G product?

I'm a guy who likes to do things very, very quickly. I'm a guy who likes to do things right now and I don't think it will unfortunately be right now, but I think that if something comes out, I think we have a real opportunity to do some sort of small test case to get it rolling and then something to expand it out. I don't -- I would see this probably happening sometime in -- my goal would be to make something happen in 2010. I believe if I work out a deal with Procter and Gamble it will be 2010, on a product. I believe if I have to go someplace else I believe there will be a little more development time and it won't be 2010.

Okay, fair enough. In terms of the offsetting of royalties is that going to persist after your renegotiations? I mean presumably if they do roll out in 2010?

Well, right now -- right now we're in a phase where we were the $250,000 a quarter has stopped, but we're in a discussion on what else we might want to do differently. And one of the key discussions that we've had is that we know the professional market extremely well. We've educated the professional market on trend new products, we have 10,000 users of our various products out there who think the absolute world of BioLase and if we take them something and say give this a try I think they would be very opened to it.

Particularly with the experiences that they've -- we've had with them. So when we went to talk to Proctor and Gamble again, I'm very interested in starting something out in the professional market. I believe that what we have and what they have is something that would do well in the -- very well in the professional market, as far as the consumer market goes, I would love it to do well there too, if something were to take off in the consumer market, what would then happen is, as it often does, the professional market may wind down.

For instance, when many powered toothbrushes were launched through dentists, dentists enjoyed a nice margin on them, selling them through. Suddenly they started appearing in general retail and that sort of wound down dentists selling them. This could happen and I would love it because then I'm getting royalties on a much broader base.

But I think there's -- I believe that there's something that we can do here and I'm very focused on it, I'm not sure when we can get it through. I think it will take a little time and we are -- but I don't think it's something that's going to cost us a whole lot of money in R&D or anything else and I think there's a good win/win situation between us and P&G that can be worked out and I just wanted to share with everybody where that was.

All right, well thanks for answering my questions then. Congratulations on a great quarter.

Thank you, very much.

And our next question is a follow up question from Mr. Dalton Chandler with Needham and Company. Go ahead, sir.

Yes, hi. Maybe you could clarify a little bit what you're contemplating with P&G, are you -- you're talking about launching a consumer product in the professional market and potentially transitioning to the consumer market or --

I would like to launch something --

-- talk about different products?

Right. I would like to launch something in the professional market, which we own, through our own channels, possibly Henry Schein. I want to make sure we have something solid to offer them. I would like to -- I would like to launch something through those channels and that would be sales that we own. Those are sales that we own and we would in some way do a sharing relationship with P&G.

Ultimately, if that product were to transition to the consumer market, then I believe it would belong to P&G or another consumer products company who would be taking it up to much higher sales levels, that would wind down our sales into those professionals markets but then we would be picking up the royalties on a much broader base.

So are you contemplating that you would manufacture the product for the professional market or would P&G do that?

These are all -- these are all discussions.

Okay, and just one other thing I wanted to come back to. I thought in your prepared remarks in you mentioned there was some special incentives for Schein sales reps during the quarter. Did I understand that correctly and if so are they ongoing or have they been replaced by different incentives?

Schein has decided to take the incentives that they rolled out in the second quarter and largely carry them forward completely into the third quarter.

Okay, all right thanks again.

Sure, my pleasure.

And our next question comes from the line of Mr. Kent Holden with HAM Funds. Go ahead, sir.

Good morning, gentlemen, congratulations. I was intrigued by the product discussion on ophthalmology and pain management and was curious what kind of cost you might be looking at for development testing that type of thing and then, Brett, congratulations on joining the firm.

Thank you.

And I believe you've had some experience in raising capital, I was curious what's your capital raise thoughts were going forward?

Thank you. It's a pleasure to be here. Raising capital right now, I've been here three weeks, so I'm working with the team and the board and I would want to continue doing what we're doing in terms of the day to day operations and continuing to be cash flow positive and seeing the stock -- hopefully the stock will reflect some of that success that we're seeing in the second quarter and going forward. And when the time is appropriate I think it would be perhaps to our benefit to have a small raise, but of course that's subject to discussions and what the board of directors may want to do in the future.

What kind of costs would we be looking at to move forward on an ophthalmology or pain management product?

I'm trying to keep this cost very much down to a minimum. Right now we have actually in the past worked with several -- we actually have a very strong ophthalmologist on our Board, [Dan Dury] and we have many contacts together who have actually volunteered to work on this without a lot of costs whatsoever. And to help develop it a little further.

I believe that this is something where I don't want to throw a lot of the financial resources we have into it at this point. I also believe that this is something where if we find the right partner we think that we could probably does this with minimal costs to ourselves or our shared cost structure and to get something going. This is -- we do not plan on, at this point, spending a lot of money in that area.

Okay, all right. And then going back to the sales this past quarter on the upgrades, you'd said you thought it was 500 or 600 upgrade kits. What is the current installed base on the older version Waterlase that is upgradeable?

It's about 3,500 units.

And the backlog that you've got that you're working off now, how many units is that?

The backlog, I think we have just caught up with the domestic backlog last week and right now we are -- this week we are shipping and cleaning up the international backlog.

Okay.

And that will be a total of about probably about 600 units, 600 upgrade kits.

Okay, and those are about $5,000 each, your selling price.

That's -- yes, that's the -- that's the selling price at Schein, a little under $5,000 even.

Okay, thank you very much.

Yes. And by the way, I'm sorry to be vague on pricing, but I have different distributors who price at different levels around the world. I'm often selling something to a distributor someplace where he has to add duties and quotas to it, he's -- he has special taxes in his country or something else he has to add to it and then for me to do a favor of quoting a specific exact prices in our home country where none of those add ons take place is not always doing him a favor. So I want to recognize that and so that's why I'm being a little vague on exact prices.

If anyone wants to talk to me individually or Brett, we can share very exact pricing without a problem.

And our next question comes form the line of Austin Hopper with AWH Capital. Go ahead.

Hi, thanks for taking my question. The products and service revenues were $13.9 million in the quarter, I guess I'm confused as to Waterlase MD turbo's contribution to that. Is that a new machine, is it just an upgrade kit, first of all? And then what percentage of revenues were attributed to Waterlase MD turbo?

The Waterlase -- the Waterlase turbo we used to -- we have typically sold, historically been selling the Waterlase MD and what we have done is we have added the turbo to every single unit that we've had in inventory and that our distributor has had in inventory and now they're generally selling the Waterlase MD now with the turbo kit and hence the call the entire system the Waterlase MD turbo.

And then there's also the upgrade kits and the upgrade kits we sell -- that would be the turbo and the software to get it -- to get an existing Waterlase MD fully up to speed. The bulk -- the bulk of our revenues will be sending out, I believe we actually break it out in our queue, don't we? We'll be breaking it out more specifically in t he queue, but the vast majority of the revenue generally comes from the Waterlase MD, probably -- and generally its usually in the 70% to 80% territory, closer to 80% plus.

Ezlase, which is our diode, is a product that makes up the rest in the laser category.

Okay, and then -- so you're arrangement you have with Schein currently, I guess the first term over a period is 14 months and it's a minimum revenue commitment of $42.7 million, I think.

Yes.

If you were to -- if you were just to get the minimum of that would it -- how would the revenue occur? Would it be kind of $3 million a month, just sort of regularly over the time period?

Yes, the minimums from Schein, the way that occurs is that's about $9 million a quarter, spread out fairly evenly throughout the quarter and then over and above that we have some sales -- some international sales to other distributors and we also have then some training revenues and some other revenues that go beyond those minimums.

Okay.

Which generally put us -- which generally if you're looking at it might be a $1.5 million, $2 million a quarter, in addition.

Okay, great thank you.

Sure.

And we have a follow-up question from the line of Robert Hoffman with Princeton Capital. Go ahead, sir.

Just quickly, the -- when they upgrade kits go out does that satisfy some of the Schein minimums? Is that correct?

Yes, it does.

Okay, thank you.

Yes, it does.

And ladies and gentlemen, that does conclude the audio portion of our question-and-answer session. I will now turn the call back over to Miss Jill Bertotti with e-mail questions. Go ahead ma'am.

Thank you, Joe. We do have a few e-mail questions I'd like to go over. So Dave, the first question, who or what technologies will you compete with in pain management?

That's a good question, right now pain management is very spotty and there are a lot of very, very small competitors. I don't think they have very much economy of scale and most of those units are selling at some fairly high price points. So there's a broad variety of small ones out there and so we feel pretty good that we're coming in with a better product and a better priced product.

Okay, what is the expected market size of the ophthalmology market?

Ophthalmology? We're still studying that market. The kind of numbers that we're hearing about guys who might use this as a general knife range -- I mean some people have told me as low as 2,000, others have told me as high as 14,000 to 20,000. So right now we are still studying the market, but even our lowest expectation says that there is a decent market worth pursuing with the right partner.

Okay, and then a final question I'll ask, due to time, when should we expect to see some announcements related to your R&D work, [ticks beyond] your product line and can you provide any details on those projects?

Yes, we've actually had some projects that were underway and I think we had shared last year that some of those projects might have been coming out right about now or a little earlier. When I took over I looked at some of these projects and one or two of them I cancelled and some I stripped down to a product that would be more in line with today's environment and that went back into the R&D process. When we come up with a product I want to make sure it's absolutely crisp and ready for the environment that we're in today.

So there's been some delays in some of the new products that we wanted to launch as we've revamped them and rethought them because the market's simply been changing rapidly, there's a new economy, and we're redesigning it to fit for that. I wouldn't look for any announcements probably for the next, probably at least in the third quarter we might be close to something in the fourth or in the first, but we want to get this product exactly right before we launch.

Okay, well thank you. That was our last e-mail question for today's call, so now I'd like to turn the call back over to you for closing remarks.

Okay, thanks very much. Since we don't have any more questions, I wanted to thank everybody for joining the call today. We look forward to talking to you again at the end of the next quarter. Thank you very much.

Ladies and gentlemen, this does conclude the BioLase Technology Incorporated 2009 Second Quarter and Six Months Results Conference Call. You may now disconnect.