BIOLASE Inc (BIOL) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the BIOLASE Technology Incorporated 2011 third-quarter and nine-month 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 your questions. (Operator Instructions).

This conference is being recorded today, Monday, November 7, 2011. I would now like to turn the conference over to Matt Clawson of Allen & Caron.

Thank you, Lisa, and good morning, everyone. Thanks for joining us today for the BIOLASE Technology 2011 third-quarter and nine-month 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 third quarter and nine months ended September 30, 2011.

Before we get started, I have been asked to make the following statements. The words and phrases can be, may affect, may depend, believe, estimate, project 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 & Exchange Commission. All such forward-looking statements are current only as of the date on which statements are made. BIOLASE does not undertake any obligation to publically update any forward-looking statements to reflect events or circumstances after the date on which the statement was made or reflect current unanticipated events.

Also, as a quick reminder, the replay of the call will be available on the BIOLASE website at www.biolase.come. The Company's 2011 third-quarter results can also be found the Company's quarterly report on Form 10-Q, which the Company will file with the Securities and Exchange Commission.

With me on the call today from BIOLASE are Federico Pignatelli, Chairman and Chief Executive Officer, and Fred Furry, Chief Operating Officer and Chief Financial Officer. Federico and Fred will review the prepared remarks, including an update on the business, operational performance and outlook. There will be a question-and-answer session at the end of the call, followed by a few closing remarks.

With that I would like to turn the call over to Federico. Good morning, Federico.

Good morning, Matt, and thank you. I want to welcome all of you to our third-quarter and nine-month results conference call and thank you for participating. Today, we will review the progress and various accomplishments achieved by BIOLASE in the third quarter and so far in 2011. These will include an update on our progress, as we continue to diversify our product line with additional products that combine to create BIOLASE's Total Technology Solution for our dental customers.

Before we begin, I would like to bring attention to the fact that the consensus estimate listed on the major services is inaccurate. The accurate ones are published reports as of this morning's press release listing Q3 average consensus of $13 million and a Q4 consensus of $16.4 million.

In the quarter, there were a number of commercial and operational highlights, including our ability to take advantage of the excitement and interest generated in international markets by regulatory approvals of our flagship laser system, the Waterlase iPlus; the continued strengthening of our management team; the improvement of our manufacturing operations; the successful construction of our supply chain that will greatly reduce the chance of production constraints in future periods; and the introduction of the BIOLASE DaVinci Imaging division. I will touch on these topics and then Fred will then summarize the financial results for the quarter, after which we will answer questions.

Now, proceeding with the business of the Company and third-quarter progress. In general, our turnaround year is approaching its end, and overall has been extremely successful. Our rate of year-over-year revenue growth for the core product lines was very strong, more than 110% for the third quarter and 116% for the year. During the third quarter, we did experience some resource constraints caused by inefficiencies in our supply chain. These constraints made it necessary to rearrange our commercial efforts for the period.

The demand that emerged from our international markets was very strong due to some key approvals obtained during the quarter and several anticipated in the fourth quarter. This was especially true in Canada and Korea, for example, where we have always enjoyed strong business; so the recognition of our brand offerings is quite high.

Distributors and end-users in these markets created demand greater than we had expected and we decided, by design, to satisfy such demand in order to build upon the momentum of the approvals.

In terms of the shortfall relative to our annual guidance of $60 million to $65 million, it is attributable to a shortfall in the distribution sales arrangement with Schein for the iLase product specifically. We are now evaluating alternative distribution venues as the gross underperformance was related to a lack of marketing and not demand related. In fact, we believe that the iLase is an extraordinary product and we will take all necessary steps to relaunch such product in the appropriate way and with further innovation.

To a lesser extent, the delay in imaging approvals also contributed to the lower revenues, but such issues are being resolved.

In essence, so far in 2011, BIOLASE has been substantially a one-product Company, relying on our newly-introduced flagship Waterlase iPlus for our growth. As we launch several new products in early 2012, we will become a multi-product Company in dentistry and also expand in medical fields.

Further, during 2011 we have been severely capacity constrained in the supply chain of critical components for the iPlus. We have worked diligently to correct this deficiency and expect that 2012 will enjoy a normalized supply and production flow.

Our newly-diversified product portfolio will also lend more stability and visibility to quarterly sales as we continue in ramping up digital imaging, increasing the number of our dental products and introducing several products for medical applications. We expect that each of these products can contribute 5% to 10% or more to total Company sales in 2012.

Further, we will be significantly more diversified geographically in 2012 versus 2011, as our strategy of building an international infrastructure will start paying off substantially. This global strategy lowers risks for the Company and positions BIOLASE for substantial upside and broader momentum in 2012.

We will continue to leverage our strong brand in laser dentistry and expect to pursue further opportunities in dental CAD/CAM and 3-D laser intra-oral dental scanners. We also plan to expand into other areas of medicine, such as ophthalmology, orthopedics, aesthetics and pain management in 2012 and beyond.

We expect to achieve these goals with our current technologies as well as technologies that will be new to BIOLASE. We are very excited about our future in becoming a multi-product, multi-platform Company.

Before we address some of the commercial highlights and future plans, I would like to quickly summarize our financial results for the third quarter and first nine months. For the quarter ended September 30, 2011, we experienced year-over-year growth in net revenues of 110%. Excluding royalty income from both periods, our net revenues increased 117% period-over-period.

Results did come in short of GAAP profitability for the period, due in part to the constraints I mentioned, as well as investments we are making in our manufacturing process and capabilities, our sales team and our marketing efforts. Obviously, those investments will pay off in both top- and bottom-line success and efficiencies in the coming periods.

As of September 30, 2011, our sales force in North America totaled 31, which was up from 24 six months earlier. The demand of the Waterlase iPlus continues to progress, and the product is now selling well in key international markets, led by Canada and India. In the third quarter, we continued to experience a growth in new customers in the US, as new customers accounted for approximately 44% of our domestic iPlus sales.

Internationally, new users and distributors accounted for 52% of our unit sales. We are very pleased with these trends and continue to receive feedback from our users that the ability of our technologically-advanced Waterlase iPlus to match or exceed the speed of a high-speed conventional dental drill, virtually without causing pain, combined with its easy-to operate, intuitive user interface, are the principal reasons customers like our iPlus, and why we are penetrating into a broader base of dentists.

Finally, on the marketing front, I'm happy to announce the return in the spring of 2012 of the BIOLASE-owned World Clinical Laser Institute for WCLI's Super Symposium, the single largest and most successful laser dentistry conference worldwide. This program was held annually from 2001 through 2009, and was highly successful in attracting, educating and energizing dentists from all over the globe. While the event has been on hiatus for the past two years, under the exclusive distribution agreement with Schein, we certainly recognize its importance. And now that we are on sound financial footing and have returned to a growth trajectory, we have decided to reinstitute this powerful annual meeting.

The dentists that attend will have the opportunity to hear and work side-by-side with the finest laser dentists and their staffs. They will learn new clinical techniques, practice management tools and guidelines for using the laser to generate more business and wealth from their laser equipment investments.

I will now hand the call over to Fred Furry to go through the highlights of our financial results for the quarter.

Thank you, Federico, and good morning. On a GAAP basis, revenue for the third quarter of 2011 totaled $13.1 million, up 110% from $6.2 million in the same quarter for 2010 and up 8% sequentially from $12.1 million in the second quarter of 2011.

Net revenue for the first nine months of 2011 was $35.7 million, up 116% from $16.5 million in the prior-year period.

Such increases in revenue volume were primarily driven by our exit from an exclusive distribution arrangement in August 2010 with Henry Schein and a return to a direct sales and multi-distributor business model, which was initiated during the fourth quarter of 2010.

Approximately 63% of our revenues for the third quarter and 57% of our revenues for the nine months ended September 30, 2011 were from the sale of our all-tissue Waterlase system, the vast majority of which have been our revolutionary Waterlase iPlus. Sales of our Diode Laser systems made up approximately 17% and 21% of total revenue during the third quarter and nine months ended September 30, 2011, respectively.

We also received our first revenues totaling $100,000 from our new state-of-the-art BIOLASE DaVinci Imaging dental imaging devices, which were delivered during the quarter. Excluding royalties of $14,000 and $218,000 in the third quarters of 2011 and 2010, respectively, net revenue increased $7 million, or 117%, period-over-period.

The percentage of net revenues in this year's third quarter from the US and international markets, including unit sales and consumables, totaled approximately 50%, respectively, as compared to approximately 64% and 36% of net revenue in the prior year's comparable periods.

As Federico mentioned, we allocated our selling resources during the quarter to the international markets in order to take advantage of recent international regulatory approvals which created market opportunities for the Waterlase iPlus in Canada, Russia, Taiwan and other countries.

In the third quarter, international sales accounted for 53% of our iPlus sales, while during the second quarter, the ratio was 30% international and 70% to the US.

Gross profit as a percentage of GAAP net revenue for this year's third quarter and the first nine months was 41% and 44%, respectively, compared to 29% and 24% for the prior-year comparative periods. The year-over-year increases were primarily due to higher sales volumes as a result of expanding our product offering, better utilization of fixed costs and reduced expenses.

The gross profit in the third quarter of 2011, however, decreased from 46% in the second quarter of 2011, primarily due to the decline in Procter & Gamble royalty revenue and reduced margins from the higher volume of international revenues during the quarter.

The gross margin is expected to improve substantially in the fourth quarter, as total sales and the percentage of US sales increase.

Operating expenses in the first nine months of 2011 were $17.8 million compared to $15.8 million in the prior-year period. Operating expenses improved as a percentage of net sales to 50% for the first nine months of 2011 from 96% for the same period in the prior year.

On a GAAP basis, our net loss for the third quarter of 2011 totaled $953,000, or a loss of $0.03 per share, compared to a net loss of $2.7 million, or a loss of $0.10 per share, in the third quarter of 2010. After removing non-cash depreciation and amortization expenses of $151,000 and non-cash stock-based equity instrument and non-cash compensation expense of $403,000, this year's third quarter resulted in a non-GAAP net loss of $397,000, or a loss of $0.01 per share, compared with a non-GAAP net loss of $2.2 million, or a loss of $0.08 per share, for the third quarter of 2010.

The non-GAAP net loss in the third quarter of 2010 included the removal of interest expense of $157,000. There was a nominal interest expense incurred during the third quarter of 2011.

Our net loss for the first nine months of 2011 totaled $2.5 million, or a loss of $0.09 per share, compared to a net loss of $12.2 million, or a loss of $0.48 per share, for the same period in the prior year. After removing interest expense of $306,000, non-cash depreciation and amortization expenses of $562,000 and non-cash stock-based equity instrument and non-cash compensation expense of $1.4 million, this year's non-GAAP net loss was $175,000, or a loss of $0.01 per share for the nine months ended September 30, 2011, compared with a non-GAAP net loss of $10.6 million, or a loss of $0.42 per share, for the same period in 2010, an improvement of 98% year over year.

Turning to the balance sheet, during the third quarter, the Company invested in the build-out of inventory in response to some of our recent supply issues and our anticipated sales for the fourth quarter. As of September 30, 2011, we had cash and cash equivalents of approximately $5.8 million, accounts receivable of $8.1 million, inventory of $9.8 million, and shareholders' equity was $14.3 million.

Our improved balance sheet puts us in a stronger position when it comes to dealing with suppliers and vendors, and allows us to fuel sales and marketing efforts that have been on the back burner, as well as attract top industry professionals. It also gives us the opportunity to make strategic acquisitions.

Thank you, Fred. Before we hand the call over to the operator for questions, I have several concluding remarks. As we have discussed and announced over the past year, we are aggressively pursuing markets outside of dentistry through the utilization of our vast and promising IP portfolio. In ophthalmology, for example, we are rapidly moving towards treatments for dry eye and glaucoma, and an IDE for presbyopia. Extending our technology into ophthalmology, as well orthopedics, aesthetics, podiatry, and other areas of medicine remains a very strong focus for BIOLASE in 2012.

This past quarter, we took the next step in that diversification process as we formed a new business entity, OCCULASE, Inc., a Delaware corporation and a wholly-owned subsidiary of BIOLASE. OCCULASE will give the Company flexibility maximizing the value of the ophthalmology technology products and portfolio.

As an update, we continue to progress in our positive collaboration with Procter & Gamble on the development of a line of laser toothbrushes.

There are currently analysts from four companies publishing records publicly on BIOLASE. These companies are Needham & Company, Rodman & Renshaw, WJB Capital Group and Ascendiant Capital Markets. The average consensus revenue estimate from their reports for the third quarter of 2011 was $13 million. The average consensus revenue estimate for the fourth quarter of 2011 is currently at $16.4 million.

Our revenue guidance for the fourth quarter is $16 million to $18 million, net of equipment sales to Schein.

This concludes our formal prepared remarks and I would like now to open up the call to questions.

(Operator Instructions) Dalton Chandler, Needham & Company.

Good morning. I'm wondering if you could give us any more detail on what is going on in your markets. You said last quarter you diverted resources to international to take advantage of momentum there. But now this quarter, you expect it to swing back to the domestic market. So can you help us understand a little better what is going on?

Good morning, Dalton. Yes, it is quite simple. We have received several approvals in important international marketplaces. And our distributors have put a lot of effort, together with us, in getting such approvals.

So we don't want to break their momentum when they get them, and so we decided to provide them products for that approval cycle. Obviously, it is a little longer than our direct sales cycle in the United States and Canada. So by providing them necessary products, they can build on that momentum of the approval. Because we have been capacity constrained in Q3, we decided to divert sales of lasers to the international market as an investment in Q4 in 2012 particularly, and sacrifice the domestic market on the short-term basis.

So for the fourth quarter, are you saying you expect to see international sales roughly the same as the third quarter, but it will swing back to domestic because the domestic demand will be higher? Or is international actually going to decline?

Because domestic sales will be higher and international sales will be stable to a little lower, I would say substantially stable. But the domestic sales will increase.

Okay. And then you talked about a lot of new products and a lot of new markets for 2012. What gives you confidence that you have the resources available to execute on all of these?

Because we are very well-advanced in the development of such products, we have the resources in-house.

So you are doing these yourselves, you're not partnering with someone else who is already in those markets?

No. Any new development is in-house.

Okay. And then just a final question. You mentioned a couple of times the capacity constraint. And it sounded like it was more of -- it wasn't that the components weren't available, but there were just some snags in the supply chain. Can you talk a little bit more about what happened there and what you have done to fix it?

Dalton, really, it is that there are a few components that have lead times up to six months, seven months. And we cannot forget that we just launched the iPlus at the end of January in Boston. So we did have some delays in getting some critical components with long lead times and we have been working through those issues. And it is not only about getting parts, but also quality parts.

And so basically, we have reorganized a great deal of our supply chain, and we feel very comfortable regarding Q4 at this point and very comfortable for 2012 and moving on.

Okay. And -- I'm sorry -- I had one last question, and then I will give someone else a shot here. But can you just talk about what you see in the pipeline for the imaging products?

The imaging product line has been affected by delays in approvals, but the interest is very strong. And we are definitely seeing a very good response to our portfolio of products. But we have not yet commenced, a strong marketing campaign because of lack of approvals.

So while we will generate some revenues in Q4, the bulk of revenues in digital imaging will happen in 2012. And we believe that will become a very substantial division of BIOLASE businesswise.

Okay. All right, thanks very much.

Thank you.

Suraj Kalia, Rodman & Renshaw.

Good morning, guys. Federico, let me just follow up on Dalton's question a little differently. On one hand, venturing into ophthalmology, orthopedics, potentially entails risk mitigation; you are diversifying. This is good.

The question I have is you all have internally -- I am sure you have internally planned it out, that, hey, we are going to go into market one, market two, market three, and we are going to diversify from dental. So can you help us understand what all components have been laid out so that there is no disruption, quote, unquote, within the domestic dental market?

The dental market is our priority and is a multibillion-dollar opportunity. We like to remind our investors and analysts that every 1% market penetration worldwide is an opportunity, just with the iPlus, of $600 million; 1% penetration. So we see a great opportunity for years to come in dental.

So please, it is very important for all to understand that BIOLASE is not directing its attention away from dentistry in any shape or form. What we are doing is simply leveraging our technology for cutting human tissue, using a novel technology, the Waterlase YSGG technology, with tremendous applications in many diverse medical ventures.

So we have a very concerted effort in ophthalmology, and with that purpose, we have formed OCCULASE as a Delaware corporation that is fully-owned by BIOLASE to give us flexibility in how to leverage the products and the IP portfolio in ophthalmology.

But we are looking at orthopedics where we will approach that market by partnering with some of the major players. And aesthetics, it is a market that we are working on. And again, we don't have yet a definite strategy on how we are going to market. There is a possibility of being direct or partnering. We are also looking at applications from a technology point of view for pain management; that is a market that relates to the Diode technology, and that specific market, we are planning to be direct.

So we are being quite careful and strategic in how we are approaching the medical market. But again, there is no distraction, no deviation, from developing the dental market and having the dental market as the priority for the BIOLASE.

But did we see multibillion-dollar opportunities in ophthalmology, in orthopedics, cosmetic and pain management? As a whole, yes, we do, and we want to pursue them.

Okay, fair enough. And I think in your prepared remarks -- forgive me if I misheard this -- there was some mention about -- the guidance, there was some impact from iLase vis-a-vis the Henry Schein agreement. I know there were some shipments that were done last quarter. For your overall guidance in the impact from Henry Schein, is this something still in the pipeline or how should we look at that?

Well, there is a little history here to be given. When a year ago I became the CEO of the Company, there was a strong interest from Schein in the iLase product. And they advanced us $6 million -- already had a prepaid of $3 million. So they gave us another $6 million.

Against this $6 million, I decided to give them the right to be the only one to sell the iLase in North America. Against that, there was an agreement for Schein to launch a substantial marketing campaign surrounding the product. That did not happen. And also what happened is that they cut down the $9 million orders for iLase to only $6 million, and they directed $3 million, as they had the right to do so, mainly in purchasing iPluses. This was a product that we launched at the end of January.

We have now fully paid Schein, so that $9 million prepaid was substantially paid in Q4 of last year, Q1, Q2 and a little remaining portion in Q3. So it is fully paid now and we are over our obligations towards Schein vis-a-vis the $9 million prepaid.

But clearly, we are very unsatisfied with what they have done with the iLase and how they approached the marketing surrounding the iLase product. So we are now free to revisit our marketing approach regarding the iLase product. And it has been affecting our overall 2011 business considerably, because I had -- in the $60 million, $65 million guidance, we had $10 million to $12 million in iLase alone. And at the end, the number, because of everything I described, has been more in the $3.5 million instead of the $10 million to $12 million.

So the shortfall -- the major shortfall in guidance comes from, I would say, a mismanagement in marketing the product. The product is an excellent product. It is an extraordinary laser product. It is 5-watt diode that is wireless and very versatile. It's a one of a kind.

So we are restructuring now the way we will market and distribute the product away from Schein. We will also introduce substantial innovations as 2012 begins in this product.

So, essentially what you're saying is the delta in the original guidance to what you are expected to exit the year pretty much can be explained with the iLase sales -- or iLase contribution from Henry Schein. Did I paraphrase that correctly?

Correctly. The great majority comes from that and from some revenues lost in a delay in approvals for digital imaging. But the lion's share was the iLase issue.

Fair enough. One last question for Frederick. Frederick, forgive me if I missed this. What are the average selling days for Waterlase here, and how long does it take to place a unit? And did you mention -- did you talk about the domestic pricing of the iPlus?

No, we didn't address that in the earnings call, and that is not something that is typically disclosed in the 10-Q or the 10-K. So I would prefer not to speak about the ASPs of the machine.

The lead times for placing a unit vary. It really just depends on, for example, a salesperson's pipeline and what kind of dentists they are targeting. Sometimes, the install is very quick. We might get a warm call, a warm referral from somebody that is interested in an iPlus, and a salesman goes out there and walks them through the process, and then maybe as an over-the-shoulder demonstration, where they might show the potential customer the clinical benefits. And they might buy right on the spot there. And then others might take a little bit of time. But once the actual order is signed, we are shipping within 48 hours now.

Great. Thanks for taking my questions, guys.

George Santana, Ascendiant Capital Markets.

Thank you for taking my question. Good morning. Following up, since we are just talking about Henry Schein, how much were sales to Henry Schein in the third quarter?

Quite limited. Henry Schein buys consumables on a regular basis, because they have vast installed bases of several thousand lasers. But equipment-wise has been very limited.

So was this just marginally over the $900,000 that they were obligated, or what was left of the prepaid?

Yes, exactly. What was left to the prepaid of the $9 million.

Okay. So did I hear it correctly -- they had an exclusive on the iLase for this period, and now it is over, it has ended?

They had an exclusive for North America which ended when we fulfilled the obligations on the prepaid for the iLase. And then at the last minute, they switched the last $3 million from iLase to other projects. So we were free at that point to go through other distributors.

But clearly, because of the amount of iLase that they purchased, around 2000 -- close to 2000, no other distributor would jump in, because of the amount of iLases that were in the hands of Schein.

And BIOLASE has an agreement with Schein to launch a major marketing campaign surrounding the iLase that did not happen in any shape or form. It is actually barely listed as a product in their website. You have to make a real effort to find it.

So clearly it was a very big disappointment for us to see that. And so now we are taking corrective actions to relaunch the product, and also innovate the product in early 2012 and surround this product with a different marketing strategy.

What would you say in terms of the inventory of iLase that is in the channel now, because of all of the sales to Schein? How much have they worked through or are they completely done in terms of sales?

We don't know. They are very late in giving us the sell-through. We constantly request that from them. There is an obligation on their part but I cannot give you an answer on that, but I am quite confident that they are selling and have been selling. So the number of iLase in their channel is not a clear number for us. We will try to put our arms around that. But again, we will have a new iLase early next year, so the fact is that will be a better product, the newer product, with three different versions.

Okay. I am sure you are looking forward to the day when you don't have to discuss Henry Schein anymore. But good to get past this.

On a different note, can you talk about the working capital management as you expand internationally? And also, what should we expect in terms of cash flow, or at least the non-GAAP net loss?

Well, we expect Q4 to be cash-generating and we expect to be profitable. That is as much as I can say.

Obviously, we have paid off our bank debt. We have paid back $9 million of prepaid to Schein in product. We have paid down substantially accounts payable. We have invested in inventory. And we feel very comfortable now with our position. So from this point on, we believe that we can build on cash.

Okay. So cash flow positive. And that's after the trade items, or is that just an EBITDA -- you're talking about your non-GAAP net loss line?

George, I know sometimes we speak in little bit different languages. So what are you really driving at here?

In other words, when you say your cash flow you expect will go positive with the fourth quarter, how are you defining that cash flow?

In what we are defining here, we expect to be cash flow positive from operations. So we expect on a cash flow basis to actually generate cash from operations.

Okay. So this is after the changes in working capital, as you would see it on the cash flow statement?

Yes.

Okay. Perfect, perfect. Thank you for that. All right. I will jump back in the queue. Thank you so much.

Ethan Roth, WJB Capital.

Thanks for taking my question here and congrats on a terrific quarter. First question here, I was just hoping you could give me any general trend that you are seeing with the capital spending equipment environment. I know that Q4 implies a very nice step-up for you sequentially in sales. But I'm wondering if you are seeing any reluctance from dentists to make large investments, or maybe if you are seeing the selling cycles taking a little bit longer.

No, actually, we see the cycles to be shortening as dentists become more acquainted with the iPlus. There is a lot of enthusiasm around the iPlus. Being a new product, it clearly needs some time to get known in the dental community.

And again, this product is a breakthrough product because we have perfected the technology to allow for a level of speed of the Waterlase that is equal, and sometimes even faster for certain procedures, than the conventional dental drill. So this is the very first time that the Waterlase technology speed-wise is as fast as the conventional dental drill.

In the past, when we launched the first laser, the Millennium, at the end of 1998, the speed compared to the conventional dental drill was 50%. With the MD, that grew to 75%. Now, we are at 100%. So clearly, we have been always observing great clinical advantages using the Waterlase technology, but there was a speed issue that was keeping dentists on the sidelines and from jumping into buying the Waterlase technology.

With the iPlus, there are no more barriers, but clearly it is a new product. We have been capacity constrained until now. So the momentum is building up, and we like what we see. And we believe that the iPlus is going to be really the best laser product ever in the history of the Company, and will really have a very strong chance to change dentistry forever. The adoption of the Waterlase technology has a very strong future, and the iPlus is the first product to really break this barrier of entry.

Okay, great. Maybe I could just follow up on something you said there. And you mentioned that it takes time to kind of educate dentists or get up to speed with these technologies, and we can definitely appreciate that.

I know you are reinstituting the Laser Symposium after a couple of years off. Maybe you can just talk about how the Company's marketing programs have evolved over the last year since you took over, and then what else you are doing specifically to drive some of this awareness among dentists and what we can expect over the next year. Thanks.

Well, the process is quite simple. You have to place the iPlus in the hands of the opinion leaders. You have to have them publish studies and reports on how the iPlus works and the procedures done, how they can be performed, the precision to speed, the intuitive screen that helps to actually educate the dentist in what he is doing as he is doing at. All of the presets that make the iPlus a very easy laser compared to the past ones used.

So it takes a little time to have all this understanding of what BIOLASE has perfected to filter through the market. And then again, it is very important to understand that doctors sell to doctors. We can have very smart and successful reps to close the deal. The fact is that doctors listen to other doctors, so that is what we are doing now. We are focusing on having doctors that are called luminaries or doctors that are very interested in adopting new technologies in using, testing, the iPlus and then the momentum builds up that way.

Clearly, the WCLI that we will hold in early spring of next year will be a strong element in pushing even further the Waterlase technology as it is advanced today. But there is a lot that we are doing about education. Education is fundamental, and clearly marketing/advertising is also a fundamental element. With doctors they have to know, and patients they have to know, that there is an alternative, a real alternative to conventional dentistry available today.

Okay, great. Thanks for taking my question and congrats again on a terrific quarter.

Thank you.

Chris Sassouni, Eagle Asset Management.

Thank you for taking my call. Could you just provide a little bit more color on the supply chain issues. If, in fact, you're able to turn around an order within 48 hours, have you essentially solved the supply chain issues such that for all practical purposes, that really shouldn't now affect subsequent quarters unless you have just an extraordinary off-the-charts demand for the products?

Well, Chris, we have resolved the supply chain, but if suddenly the demand will jump to levels that we are not expecting, clearly we would have some difficulties to satisfy the demand. But we are planning and we are keeping it cushioned. That why inventory has gone up because we want to keep that cushion reasonably to satisfy greater demand.

But yes, we are in good shape now, Chris, and we are very proud of that. Because when I became the CEO of this company a year ago, there was definitely a lot of -- the supply chain was definitely quite disorganized and we have it now very much under control. So we feel very comfortable.

Okay. So related to the inventory that you have -- because I remember talking about the inventories being used both for the sale units to dentists, as well as providing demo units to the sales reps, because nothing sells the unit better than having the doctor be able to use the iPlus for a while and then decide that he has to have it. So at this point, do you have enough inventory to supply additional demo units to the sales reps in what appears to be a pretty important fourth quarter? Meaning that usually it is, A, because it is towards the end of the year, but, B, also because of the tax credits and the New York Dental Association Meeting.

Chris, you touched upon a very important issue. That is exactly what we did in Q3. We produced enough units to give one demo unit to all our reps, and to have enough units also for dental shows and so on. So, yes, we have taken care of that in Q3 in preparation of Q4 ramp-up in sales.

Perfect. Okay. Then the next question is regarding the New York Dental Association meeting and your expectations there. And also whether -- and I know that the Company has had some fits and starts along the way -- but whether you expect to get any bump in Q4, A, because of the New York Dental Association meeting, and, B, because of the tax credits that are still in place for Q4.

Again, we gave the guidance, we stand by the guidance. We clearly are putting a lot of effort in having a very good New York Dental meeting. There are actually in a few days two meetings happening, obviously minor meetings compared to New York. And we are putting attention to all dental meetings.

But clearly, the economic environment, it is a challenging one. And we are talking about capital equipment. But we haven't seen dentists being worried about the overall climate as of now. So it is definitely a factor, though, that financing has been more challenging. As we know, we are in a credit crunch overall, so that is a factor. But the interest rates, they are lower and that is a positive. And again, dentists, more and more, we can see they are shifting towards becoming high-tech. And so that bodes very well for the Waterlase technology and also for digital imaging.

Okay. Final question is what percent of dental schools right now have at least a dental laser or are familiar with dental lasers, and therefore are training the next generation of dentists on the lasers?

I will have Bill Brown answer this question. Bill Brown is way more informed than me about this project because it is part of what he follows. So, Bill?

There are currently 55 dental schools, and approximately half of them have dental lasers at this time.

Okay. And are they allowing -- those schools that have them, are they pretty much training all of the students or do they relegate those units primarily to the graduate dental students?

The primary laser courses -- the hands-on type laser courses are focused on the seniors, because there is so much very specific coursework they have to do in the first few years. But the more progressive schools are actually getting the lasers, especially the smaller lasers, into the clinic and allowing the students to use them earlier and earlier and earlier.

It is our goal to actually get into a position where a student would get an iLase along with his drill and all of his other components when he starts the program. And we are in discussions with several schools about that very concept.

Also tell about the international -- what we are doing internationally regarding dental schools.

Internationally, they are much more progressive with their laser courses. There are specific laser courses for not only undergraduate exposure and lasers in all of their dental clinics. And we are talking about Vienna University and (inaudible) is two examples. Four or five schools in Turkey. Students are encouraged to publish papers on lasers, and we now have at least six schools that provide master degrees in laser dentistry.

Thank you very much.

Greg Garner, Singular Research.

First of all, thank you for taking my call here. Just a follow-up from that last question regarding the supply chain. It seems to have been certainly an issue for the last several quarters.

Does this mean -- your answer there, I just want to make sure I understand it -- does this mean that the supply chain is adequately moved out such that BIOLASE can handle $16 million to $18 million in revenue per quarter without any supply-chain issues? Or is this just really set up for the fourth quarter, and we're not really quite at that level of ongoing revenues per quarter?

If we gave the guidance, obviously if we gave it, we gave it because we believe that we can manufacture at that level, and plus we had a cushion, and that will remain. Clearly, we want to grow revenues, so we will grow -- as we grow revenues, we will grow inventory of critical mass of parts with long leads. So we are in good shape.

I mean, I see there is a lot of concern and a lot of questions surrounding this issue of supply chain. And I would like to say once and for all, we are in good shape now. We have done a tremendous job also about restructuring the inefficiencies surrounding the supply chain.

I have said when I became the CEO a year ago that 2011 was going to be a transitional year and that 2012 on was going to be the real BIOLASE. And again, I reiterate that; 2011 has been for many issues a transitional year. One of these issues was production capacity related to supply chain. Another one is the fact that, in essence, 2011 we were driven essentially by one product; we were a one-product Company. The iPlus is the one that had been driving the growth.

As we go into 2012, we will be a multi-product Company. So like I said, the transition has occurred and I am very satisfied with the end results. And I think we have a very strong foundation for a very good and strong and promising 2012 and moving on.

Okay, thank you for that explanation. So in the third quarter, with the supply constraint causing you to serve some of the international demand versus the US demand, is there any sense for what kind of US demand that you didn't have the ability to serve? In other words, what kind of revenues had to be delayed because of the supply-chain issue in Q3, the last quarter of supply-chain issues?

Obviously, we are not going to give a number. But clearly, because we have been capacity constrained in Q3, we had to satisfy international demands, we had to satisfy our internal demand to provide demo iPluses to all of our reps, plus have more demo units for dental shows and so on.

So we had to dedicate a substantial amount of these units to be demo units to prepare for Q4 and have a normalized amount of units for education purposes. And so that has been also a factor.

Again, I understand the concern of investors looking at a performance of the quarter. But I am not here, we are not here, to build a company to be a one-quarter company. We are building a company to be a strong company for many quarters, for many years to come.

So we are taking the decisions that are appropriate to build the real business, and we don't really look at what a specific quarter Wall Street wants to be. That if we feel, management feels, that we have to invest in a specific area, and the international markets can be providing the tools to our sales reps to perform, we will do that.

That is how we are managing BIOLASE. We are not managing BIOLASE on a three-month's point of view. We are managing BIOLASE to build a strong company, with a strong foundation, to be a real company.

I appreciate the comment. And I think it is a great idea to have the salespeople have the equipment there at hand. I think it is really critical for future sales. And I agree with your long-term outlook on things.

Just to switch to the imaging equipment. The primary reason for less dentist-based sales -- seems like you were less than satisfied with the revenues -- was primarily because approvals were not received. And these are approvals for different countries, is that right? I just want to get a sense for the timing of those approvals. Is that where you think they would occur, by the end of this calendar year, so that you are in better shape to grow -- or meet the positive reception there?

Well, again, different countries, they have different regulations. And when you are talking about imaging, you are talking about radiation, even though it is 90% less than the conventional film radiation.

So for instance, Canada has different regulations. Toronto area, that is more or less 50% of all Canadian market, has stricter regulations than Quebec and Western Canada. So we are adding some changes to be made to the equipment, for instance, to be approved for that specific market.

But we are making great progress across the board in approvals of our imaging process. So I am very confident that 2012, that business -- that segment of the business will grow very substantially.

Okay, thank you. Just finally, in the other areas -- the new applications in pain management in orthopedics, in the glaucoma area, not the longer-term ophthalmology areas, but in the markets you can begin to address in 2012 -- is there any difference in your marketing plan, or do you think you might need to partner with somebody in order to adequately address these markets, being that they are new markets for BIOLASE?

Yes, again, we are not here to disclose every step that we are taking, but clearly -- clearly for competitive reasons -- that we are talking to some major companies. For instance, we are working on a home product that is a line of laser toothbrushes. We are talking to the number one company in the world; it is Procter and Gamble. Actually, we are not talking to them; we are working with them.

So we are talking to important companies in ophthalmology. We are talking to important companies in orthopedics. We are looking at the cosmetic market, and we will determine if -- to do it in partnership or to do it directly. Podiatry is another very interesting market. We have -- that's over a $1 billion opportunity just there.

And, Bill, maybe you want to explain what the opportunity is in podiatry and what we could do eventually in marketing such products if -- doing it directly or maybe with a partner.

The podiatry market has seen a big upturn in the treatment of nail fungus. And there are several lasers that have been through the FDA. They are at very, very high prices and the results are somewhat insufficient.

And we have -- our Diode Laser product line is a perfect wavelength -- it is a fungicidal wavelength. And in preliminary clinical work, our results with our laser at a much lower price point are very encouraging. Plus the fact that the podiatrist can use our laser in pain therapy for treating things like plantar fasciitis, turf toe and a lot of things -- a few sprained ankles -- things that they really don't have good results using other technologies. So we have an IRB and we are in a final phase of our clinical work related to an FDA approval for podiatry for our Diode product line.

And it is remarkable to say that -- what -- 20%, 25% of the US population has some form of nail fungus disease.

Yes. And one of the problems when they try to treat it with drugs is the side effects of the drugs are just very, very substantial, primarily to liver and kidney damage. And sometimes they have to stop the treatment because of the changes to their liver function. So it is not a perfect solution at this time.

Would you like to elaborate on dry eyes and glaucoma?

To make just a few comments on dry eye and glaucoma, we are probably further along than you guys are thinking about. We have FDA approval for using our Waterlase MD in glaucoma and ocular plastics. And we have lasers being used on a daily basis now in the areas of glaucoma, dry eye and ocular plastics building toward white papers and product launches in 2012.

These are all markets in the multibillion dollars, just the three market opportunities that Bill described -- glaucoma, dry eyes and nail fungus -- each one of them is in excess of a $1 billion opportunity.

Austin Hopper, AWH Capital

Thanks for taking my questions. I was hoping you could comment on the current sticker price of the iLase, what it is today and kind of what it was when you launched it?

I am sorry, could you repeat the question?

Yes, could you comment on what the sticker price is for the iLase that you have talked about so much on the call? What is the sticker price currently and what was it when you launched it?

The price, it is $3495, to be precise. And when we launched it, it was $4995. But the price was really determined by Schein, who was the leading marketing hub for this product. So they are the ones that decided the price. They are the ones also who did not really market properly, in our opinion, the product. And so we are unfortunately living with the consequences of their decisions.

It can be purchased today through our BIOLASE store -- that is BIOLASEstore.com -- at the price that I mentioned, $3495.

Okay, great. Can you comment -- you have given guidance specifically on BIOLASE imaging for 2012 in the past. Obviously, you have hit some regulatory or approval issues. Can you comment on what the guidance is for 2012 at this point for BIOLASE imaging?

I think that the number is around the $10 million realistically -- it is good number. And if we are successful, I think we could be a $15 million -- in the $15 million range.

Okay. In the past, I think you have provided kind of $20 million, $25 million guidance for that division for 2012. So I guess you're talking about a lower number at this point.

Well, again, I like to beat numbers and I like to be conservative more than expected.

Great. Okay, so you like to be conservative in the guidance that you provide -- I guess that is what you are saying.

I wanted to ask about the visibility of your business. For Q2 of this year, you guided to $14 million to $15 million. Obviously, you missed that by about $2.4 million or 16.7%. In Q3, you guided to $14 million to $15 million. Obviously, you missed that by about 10% or $1.4 million.

And if you go back to the guidance that you provided on your August 10 call, the implied Q4 guidance at that time was about $25 million. And I guess now you are talking about more like $16 million to $18 million, so kind of an $8 million miss on Q4.

And it seems like you are primarily choosing to blame Henry Schein, and I guess what you say, their mismanagement of marketing for your iLase product. I guess my question for you is when did you understand that they weren't marketing the product appropriately and that you would suffer such an enormous shortfall in your Q4 revenues?

Well, that happened, I would say, in Q2, when they shifted the last $3 million into iPluses. And we had conversations with Schein in Q1, and they told us they were preparing a marketing campaign. We haven't seen it.

So the bottom line is that I stand by my position that was, in our belief, mismanaged on their side. I don't understand why Schein, that is a reputable company, would buy -- invest millions of dollars in a product and not sustain it marketing-wise.

So clearly, we are a small company, and we can get affected by these kinds of headwinds. But again, we will be completely free of any issue as we go into 2012, as we are free now. The fact is that when you go back to the history of last year, Schein was instrumental in helping the Company with a prepaid of $6 million, so we gave them certain rights with iLase. And then I don't know what has changed internally, but the fact is -- within Schein -- but the fact is we are definitely disappointed with their approach for marketing overall on our products, and so basically we are taking the appropriate measures to be independent and talking to other distributors.

Lenny Brecken, Brecken Capital

Thanks, guys, for staying over and taking questions. I wanted to just touch on the prior question. Given the history of giving guidance at the beginning of the quarter and then falling short, although providing very strong year-over-year growth, I wanted to ask what visibility you have in the fourth quarter. It appears that the tightness of the range implies some more confidence in hitting that range. I want to give you the opportunity to actually address that.

We have a good visibility. We see a lot of interest from dentists. We have a good funnel of solid leads. We have, like I said, several shows in Q4. And so that is opportunity for BIOLASE to put ourselves in front of a great number of dentists.

We feel comfortable about the guidance. And again, what it is important is to understand that the guidance is net of any equipment purchased from Schein. So we are considering zero in that number in equipment purchases from Schein. If Schein will decide to buy equipment -- and there is the possibility that Schein International could potentially buy equipment; in fact, there is interest on their side to do so -- then it could be a better number. But we are not going to count on it, because we have learned our lesson. And so we like to give numbers that are net of Schein at this point.

Okay. And just one other thing. You had outlined several products -- maybe three, four products -- that are coming out in 2012, could contribute 5% to 10% of sales. I think the consensus now is $65 million to $70 million. I know it is early to comment on that. But if you just run the math, the new products could contribute to the entire growth and iPlus doesn't even have to grow.

Can you comment on that conceptually? And then what does appear to be pretty conservative numbers, why the lack of insider buying by management other than one director?

You are asking questions that are a little hard for me to answer. But they are things in the works of BIOLASE that management has knowledge of. And so basically, it could be that there is in the works a potential acquisition of two technologies, so management is restricted.

I would have been personally very happy to buy stock at the level that the market price is at. But I am restricted, as Fred is and other management -- as the rest of the management is restricted. So that is to answer the last part of your question.

Regarding the new products, we will have new products in the dental field that will be launched in Chicago. They will not compete with current products. So we will have new products -- that is important. So we are again very dedicated to the dental laser market. We see again a multibillion-dollar opportunity in the dental field. So we are not getting distracted at all, if that is the preoccupation of some of the investors and analysts.

And then we will also introduce the products that are dedicated to the medical field. So we will be more diversified product-wise; we will become a multi-product company from a one-product company in 2001, essentially. And we will also be way more diversified geographically, because we are becoming literally a global company.

Is the product diversification -- you don't even need iPlus to grow next year its seems like to meet the consensus. Is that what has changed? Is that what has given you the confidence that you are finally beyond the quarter-to-quarter constraints, that we are finally going to see this Company outperform relative to the expectations? In 2012, I mean.

Lenny, I have to excuse myself. I didn't really understand your question. Can you please rephrase it?

What I mean is, is this giving the management the confidence that you are finally past the quarter-to-quarter issues that withheld the Company from exceeding expectations? The fact that you are having so many more products, you're geographically diversified, that it will give us the confidence as investors that you are finally beyond quarter-to-quarter constrained and you can finally show on a quarter-to-quarter basis a lot more visibility and a lot more ability of the Company to exceed expectations, is that what's giving you the confidence that we are finally in that mode as we enter 2012.

Okay. My answer is going to be very short. Yes. You are correct, we are in that mode, and we feel that we have done a terrific job in the past 12 years in restructuring the Company, making it solid, create a solid foundation here in United States, build a solid infrastructure, and continue building a solid infrastructure internationally. So we have invested heavily in building the foundation for a very strong, solid 2012 by becoming a global company, by diversifying with our product line and by putting in order our house from the financial point of view.

Here's for 2012 being the year of underpromising and overdelivering. Best of luck.

That is my goal, is to underpromise and overdeliver.

Thank you.

Robert Hoffman, Princeton Opportunity Partners.

I'll make it brief. Thanks for clarifying your comments about Schein and your forecasting. Just wanted -- a quick question on Korea. That has historically been your strongest international market, and you either have received or are about to receive iPlus approval. Can you just update us on that? Thanks.

We are very close. I prefer not to answer to this question, but we are very close. The Korean market is a very important market for us because we have over 1000 lasers sold in that marketplace. They are 16,000 dental offices and 25,000 dentists in Korea. Korea, it is very high-tech prone, and so they adopt very rapidly new technologies. And it is not by chance that of all countries around the world, including the United States, we have the highest penetration in dental offices than any other place; we have a 6% market penetration with our laser products in Korea.

So Korea approval will be important because of our installed base, because of our brand recognition. So I am happy that you actually picked out on asking about Korea. Is -- really seems like very attentive on what BIOLASE does.

I just want to make that -- so the international sales growth that you just got did not include Korea, or to a very small extent, correct?

It did include somewhat, because we started delivering to Korea in Q3 under the expectation of an approval. Again, there is a very promising market for us, and we want to recognize that momentum that we had in the past. And so we are paying a substantial amount of attention to the Korean market.

Great. Thanks.

Sure.

Emerson Whitley, Harvest Capital

Thanks for taking my question. I just had a quick question for you. On the Q4 guidance, in regards to the net of equipment sales to Henry Schein, given that the iLase is set for a new product introduction in early 2012, how much risk of returns are there in that revenue number?

None. They paid, they own it, it is theirs. They can do whatever they want. We have no obligation of anything.

But the $180,000 of customer deposits that is still on the balance sheet, is that related to Henry Schein or is that something else?

That is a normal deferral of revenues; nothing to do with anything else.

Okay. Thank you very much.

I show no further questions at this time. Please continue.

Thank you for participating in the Q3 conference call. I really enjoyed the level of questions from the analysts, the investors. It makes me understand that there is a true interest in the Company, that there is a substantial amount of people. We had a record number today of attendees on the conference call, so very good interest.

Thank you for standing by. Thank you for following the Company and believing in the Company. And we will talk in three months regarding Q4. Thank you so much.

Ladies and gentlemen, that concludes our call for today. Thank you very much for your participation. You may now disconnect.