BIOLASE Inc (BIOL) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the BIOLASE 2012 Third Quarter Results Conference Call. (Operator Instructions). Today's conference is being recorded November 5, 2012.

I would now like to turn the conference over to [Lisa Wilson], Investor Relations for BIOLASE. Please, go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining the BIOLASE third quarter 2012 financial conference call.

Today's call will include remarks from Federico Pignatelli, Chairman and Chief Executive Officer, and Fred Furry, Chief Operating Officer and Chief Financial Officer, followed by a question and answer period.

When listening to this call, please, refer to the press release issued earlier today announcing the Company's results for the third quarter and nine months ended September 30, 2012. If you do not have a copy of this release, it is available on the BIOLASE Website at BIOLASE.com.

Before we get started, please be aware that a number of forward-looking statements will be made during this presentation. Forward-looking statements are any facts that are not historical facts and can be identified by words and phrases including can be, may affect, may depend, believe, estimate, project and similar words and phrases. These forward-looking statements are based on BIOLASE's current expectations and are subject to a variety of known and unknown risks and uncertainties that could cause the Company's actual results to differ materially from the statements contained in this presentation. These risk factors are discussed in the Company's filings with the SEC. BIOLASE cautions you that any forward-looking information provided is not a guarantee of future performance.

Any forward-looking statements represent the Company's views only as of today and should not be relied upon as representing our views as of any subsequent date. For the benefit of those who may be listening to the replay, this call was held and recorded on November 5, 2012.

A replay of the call will be available on the BIOLASE Website shortly after its completion.

The Company's 2012 third quarter and nine months results can also be found on the Company's quarterly report on Form 10-Q, which the Company will file with the Securities and Exchange Commission.

With that, I'd like to turn the call over to Federico Pignatelli. Federico, please, go ahead.

Thank you, Lisa, and good afternoon, everyone. The third quarter of 2012 was marked by strong growth, progress, and execution. We are within our stated range of revenue guidance, including nearly 13% increase in revenues from our core WaterLase product quarter over quarter.

Notably, we met our guidance without any meaningful revenue from the EPIC 10, for which we received a CE mark just two days before the quarter closed and notice that we have received FDA clearance only during Q4.

We also achieved improved margins and reduced our general and administrative expenses, enabling us to report non-GAAP net income for the quarter.

I will discuss our business and key growth drivers in greater detail. But, first, I would like Fred Furry, our CFO and COO, to review the financials for the third quarter of 2012. After that, Fred and I will be glad to answer your questions.

Good afternoon.

For the quarter ended September 30, 2012, we reported net revenue of $13.8 million versus $13.1 million for the third quarter of 2011. The 5.5% increase in net revenue was primarily driven by higher sales of our core, all-tissue WaterLase systems. Note, however, that the 2011 third quarter revenue includes $900,000 of sales to Schein to satisfy one-time, prepaid purchase orders. Excluding this amount, net revenue for the 2012 third quarter represents a 13.4% increase over non-GAAP adjusted net revenue of $12.2 million for the prior-year quarter.

Looking specifically at our core WaterLase product line, unit sales increased by 29.9% in the third quarter of 2012 as compared to the prior-year quarter, primarily due to increased sales of iPlus systems, as well as pre-owned MD Turbo systems. Revenues from the sale of WaterLase systems during the 2012 third quarter totaled $9.3 million. This is an increase of $1.1 million, or 12.7%, as compared to $8.2 million in the third quarter ended September 30, 2011. The 2011 third quarter revenue from the sale of WaterLase systems includes approximately $200,000 in sales to Schein to satisfy one-time, prepaid purchase orders. Excluding this amount, revenue from the sale of WaterLase systems for the third quarter of 2012 increased by $1.2 million, or 15.2%, over non-GAAP adjusted net revenue for the prior-year quarter.

WaterLase system sales comprised approximately 67.2% of net revenues for the third quarter of 2012, compared to 62.9% for the prior-year quarter. The majority of these WaterLase revenues in both quarters were from the sales of the Company's flagship WaterLase iPlus, all-tissue laser system.

Diode laser system sales comprised approximately 6.5% of net revenues for the third quarter of 2012, compared to 16.6% for the prior-year quarter. Diode sales were impacted in the third quarter of 2012 pending regulatory clearance of the new EPIC 10 diode laser system. BIOLASE received the CE mark for the EPIC 10 in the final days of September 2012 and received notice of its regulatory clearance from the FDA on October 1, 2012. As a result, the Company expects that diode laser system sales will increase significantly beginning with the fourth quarter of 2012.

Imaging revenues totaled approximately $675,000, or 4.9% of net revenue, during the third quarter of 2012 as compared to $100,000, or 0.7% of net revenue, for the prior-year period, an increase of 575%.

Gross profit as a percentage of net revenue was 45.6% as compared to 40.7% for the prior-year period. This year-over-year increase for the third quarter was primarily due to higher sales of WaterLase systems, increased license fees and royalty revenue, and decreased cost of revenues as service and warranty expenses continued to decline as manufacturing processes and quality continue to improve.

Operating expenses in this year's third quarter were $6.7 million, or 48.4% of net sales, as compared to $6.3 million, or 47.9% of net sales, in the third quarter of 2011. The increase in sales and marketing expense and engineering and development costs as we continued to invest in our new product development were offset in part by lower general and administrative expenses in the 2012 quarter. These increased costs reflect the Company's continued investment in growing its core business.

As a result, the net loss for the third quarter of 2012 was $548,000, or a loss of $0.02 per share, compared to a net loss of $953,000, or a loss of $0.03 per share, for the third quarter of 2011. After removing interest expense of $98,000, noncash depreciation and amortization expense of $126,000 and noncash, stock-based, other equity instruments and other noncash compensation expense of $420,000, the quarter resulted in non-GAAP net income of $96,000, or $0.00 per share, compared with a non-GAAP net loss of $397,000, or a loss of $0.01 per share, for the third quarter of 2011.

Turning to the nine months result, on a GAAP basis, net revenue was $38.3 million for the nine months ended September 30, 2012, compared to $35.7 million for the prior-year period. Please, note, however, that the 2012 nine months GAAP net revenue reflects a $1.1 million reduction related to the repurchase of WaterLase MD Turbo laser systems from Schein, which we completed in the second quarter of 2012. Further, the 2011 nine months revenue includes $5.9 million in sales to Schein to satisfy one-time, prepaid purchase orders. Excluding these amounts, the non-GAAP adjusted net revenue for the nine months ended September 30, 2012 of $39.4 million represents a 32.2% increase over non-GAAP adjusted net revenue of $29.8 million for the prior-year period.

The number of WaterLase systems sold for the nine months ended September 30, 2012 increased by 35.1% as compared to the prior-year period, primarily due to increased sales of the WaterLase iPlus systems and pre-owned MD Turbo laser systems.

Gross revenues from the sale of WaterLase systems, excluding the $1.1 million inventory repurchase from Schein during the second quarter, increased $5.2 million, or 25.9%, to $25.4 million for the nine months ended September 30, 2012 as compared to $20.2 million in the prior-year period. The 2011 nine month revenue from the sale of WaterLase systems includes $2.3 million in sales to Schein to satisfy one-time, prepaid purchase orders. Excluding this amount, net revenue from the sale of WaterLase systems for the nine months ended September 30, 2012 increased by $7.5 million, or 42%, over non-GAAP adjusted net revenue for the prior-year period.

WaterLase system sales comprised approximately 63.5% of gross revenues for the nine months ended September 30, 2012, compared to 56.6% for the prior-year period. The majority of these WaterLase revenues were from the sale of the Company's flagship WaterLase iPlus all-tissue laser system.

Gross profit as a percentage of net revenue was 46% as compared to 44.2% for the prior-year, nine-month period. The year-over-year increase was primarily due to increased sales of WaterLase systems, coupled with lower cost of revenues, reflecting lower service and warranty expenses due to ongoing improvements in manufacturing processes and quality, offset by reduced diode system sales and reduced license fees and royalty revenue.

Operating expenses totaled $21.3 million for the nine months ended September 30, 2012, or 55.7% of net sales, as compared to $17.8 million, or 50% of net sales, in the prior-year period. The increase was primarily due to increased sales commissions; advertising and convention costs within sales and marketing; increases in bank fees and our allowance for doubtful accounts within general and administrative expenses; increased supplies expenditures for new product development within engineering and development; and increase payroll and consulting costs across all departments but, primarily, within sales and marketing and engineering and development, as we continued to invest in our core business.

The net loss for the nine months ended September 30, 2012 was $4.1 million, or a loss of $0.13 per share, compared with a net loss of $2.5 million, or a loss of $0.08 per share, in the prior-year period. After removing interest expense of $140,000, noncash depreciation, and amortization expenses of $375,000 and noncash, stock-based, other equity instruments, and other noncash compensation expense of $1.5 million, the non-GAAP net loss for the nine months ended September 30, 2012 was $2.1 million, or a loss of $0.07 per share, compared to a non-GAAP net loss of $175,000, or a loss of $0.01 per share, for the nine months ended September 30, 2011.

Turning to the balance sheet, as of September 30, 2012, we had approximately $6.2 million in working capital. Cash, cash equivalents, and restricted cash totaled approximately $1.3 million, compared to $1.7 million at June 30, 2012 and $3.3 million at December 31, 2011. Accounts receivable totaled $10.3 million, compared to $9.6 million at June 30, 2012 and $8.9 million at December 31, 2011. Stockholders' equity was $10.3 million at September 30, 2012. In addition, the Company had two revolving lines of credit totaling $8 million with $5.1 million of available borrowing, which is in excess of the $2.2 million outstanding at September 30, 2012.

Moving on to financial guidance, we expect net revenue for the fourth quarter of 2012 of approximately $16.5 million to $17.5 million, which reflects growth of 26% to 34% as compared to the same period last year. The Company also expects to generate non-GAAP net income and be cash flow positive in the fourth quarter of 2012.

Due to the timing of obtaining regulatory clearance for our EPIC 10 soft-tissue diode laser, we expect non-GAAP adjusted gross revenue of $55 million to $58 million for 2012, which excludes the $1.1 million reduction in net revenue resulting from the inventory repurchase from Schein during the 2012 second quarter. Therefore, our GAAP revenue guidance, which includes the $1.1 million reduction in net revenue from the inventory repurchase from Schein during the 2012 second quarter, is, effectively, $53.9 million to $56.9 million for fiscal 2012.

With that, I'll turn the call back to Federico.

The third quarter 2012 was a very active one for BIOLASE, and I'm very proud of the accomplishments made across the organization. Our efforts enabled BIOLASE to achieve a significant sales milestone in August when we sold our 20,000th laser worldwide, more than any other company in this industry. We look forward to attaining even greater milestones with our current family of WaterLase all-tissue lasers, which include our revolutionary iPlus and our newly released EPIC 10 diode soft-tissue laser.

To ensure we have the right team in place to drive sales growth, we expanded our direct, outside sales force and established our inside sales organization during the 2012 third quarter. Our inside sales representatives and lead generators work in partnership with our direct outside sales team to sell our lines of lasers and imaging products, win new customers, leverage the Company's existing installed customer base, and drive new dentists to our sales seminars. We are very pleased with the progress our inside sales team has made thus far, as we added more talent to the group already in the fourth quarter.

Needless to say, our entire sales team, which is currently comprised of 37 outside direct sales reps and 10 inside sales reps and lead generators, is very excited with the release of our new EPIC diode laser, as well as the 3Shape TRIOS, and I will discuss both products shortly.

We are investing heavily in the training and education of our sales team because a well-trained, effective sales team is critical to driving increased adoption of our products. Since opening our new corporate technology and training center in July, we have held several best practices seminars to train our expanded sales force on our core laser and newly introduced imaging products. We are already seeing the results.

We are also using the new facility to hold training courses for our customers. In fact, many doctors and hygienists attended a certified training course for new owners at our facility just in this past quarter. Our selling efforts should also benefit from our recent partnership with the world renown laser dentistry expert, Professor, Dr. Norbert Gutknecht of the Aachen Center for Laser Dentistry in Germany, which is the world's largest laser clinic and which is designed to promote laser dentistry worldwide through clinical laser education, training, and research. Professor, Dr. Gutknecht will direct courses and oversee research that is critical for the broader acceptance of high-tech laser dentistry.

A key goal of the partnership is devising a global training plan under which trainers teaching our systems will do so in a consistent, uniform manner.

We substantially strengthened our product offerings during the third quarter through an agreement with 3Shape to distribute their TRIOS oral imaging systems in the US and Canada. The TRIOS provides faster impression taking, greatly improved accuracy, with much better clinical results as compared to other currently available products. We believe that all impression taking will soon be digital and that TRIOS is the most advanced 3D system in the world with significant competitive advantage.

Our ability to distribute 3Shape TRIOS allows BIOLASE not only better-served doctors -- to better serve doctors and oral surgeons doing complex dentistry but to also open a new market for BIOLASE to partner with dental labs. By adding the TRIOS digital solution to our lines of advanced laser products and digital imaging products, we can offer dental professionals a one-stop shop for a totally integrated group of devices in dental engineering services. This total technology solution will enable us to drive new revenue growth in all aspects of the dental market.

We launched the TRIOS at the ADA meeting in San Francisco a few weeks ago, and the initial reception has been very positive. We expect to see an impact from TRIOS revenues starting late in the fourth quarter of 2011, as we will receive product from the manufacturer, and look forward to the contribution that we will have in 2013.

We believe high-value, technology-based products are the future of dentistry. With the addition of the TRIOS intraoral scanner, BIOLASE now offers a full, totally integrated suite of innovative products and devices.

Our total technology solution begins with our NewTom or BIOLASE DaVinci 3D cone beam imaging technology, which provide dentists with superior diagnostic capability, enables the early identification of problems, and facilitates the development of proper treatment programs for their patients.

Diagnosis is then followed by laser treatment using either our revolutionary all-tissue WaterLase or our recently released soft-tissue EPIC 10 diode laser, depending on the indication. These state-of-the-art laser products offer improved treatment and much greater clinical benefits than traditional methods.

The TRIOS intraoral scanner is then used to take a digital impression, if, for example, a crown is required. The digital impression can then be sent to a dental lab or used with a chair-side milling machine. We will continue to look for strategic distribution opportunities to further leverage our experienced direct sales force and service engineers.

That said, we believe increasing adoption of our core WaterLase products, along with revenues from our newly released and highly anticipated EPIC 10 will be the Company's primary growth drivers for the foreseeable future.

In addition to our direct sales efforts, we have begun implementing several consumer-based initiatives that we believe will enhance this demand in 2013 by driving patients to laser dentists and creating more pull from the marketplace.

We are very pleased to have received FDA clearance and the CE mark for our EPIC 10 diode soft-tissue laser. The EPIC 10 is an exceptional diode laser platform and offers cleaner cutting and improved patient comfort. It comes preprogrammed with 15 commonly performed soft-tissue procedures, including pain therapy.

Innovations include evolution of ComfortPulse, our proprietary technology that allows dentists to precisely control the level of laser energy that penetrates the target tissue. ComfortPulse keeps patients more comfortable by avoiding the pain-inducing heat buildup at the surgical site, which is typical of diode laser and can cause excessive tissue damage. ComfortPulse can shorten laser pulses to as little as a ten-millionth of a second with longer periods and off time, which results in less pain and greater patient comfort.

There has been tremendous interest in the EPIC 10 already, and we have generated a healthy backlog, both domestically and internationally since receiving CE mark approval and regulatory clearance from the FDA. As a result, we expect the EPIC 10 will be a strong contributor to revenue in the fourth quarter of 2012 and beyond.

To quickly touch on engineering and development, we strengthened our intellectual property estate in the third quarter with a new patent covering the use of laser endodontics. This new patent moves us closer to our goal of developing a protected process using infrared or near-infrared lasers, which is our WaterLase system and diode soft-tissue lasers, for root canal sterilization, which should attract more general practitioners and endodontists that have not yet adopted laser endodontic (technical difficulties).

While focused primarily on sales execution to drive revenue growth, we remain committed to innovation to further our core laser technologies and protect our market-leading position in laser dentistry.

In addition to our recent FDA clearance for the EPIC, we currently have two additional 510(k) submissions filed and under review with the FDA and three key submissions related to our core technologies currently planned to be filed in Q4 2012. Several of these submissions include multiple indications and/or specialties. For example, one submission currently under review with the FDA includes 82 indications for over 15 different specialties. We elect to include multiple specialties and indications on one submission from time to time in an attempt to facilitate the FDA clearance process that has become more burdensome.

We are extremely satisfied with what we have accomplished over the past 24 months since the whole, new management team and board of directors has been put in place. Notwithstanding the many issues we have faced both internally and with the current global economy, we have successfully launched several new products, including our revolutionary WaterLase iPlus, the mid-priced WaterLase MDX line of lasers, and our newly released EPIC 10 diode soft-tissue laser.

We have leveraged our direct sales force to establish also an imaging division, which now offers the TRIOS intraoral scanner, as well as several top-of-the-line, CBCT cone beams.

We continue to grow our core business, despite ongoing global economic weakness and generated non-GAAP net income for the 2012 third quarter. We look forward to continued growth going forward, including, as Fred mentioned, generating non-GAAP net income and achieving positive cash flow in the fourth quarter of this year.

With that, we will now open the call for questions.

(Operator Instructions). [Bill Schroeder], GBP Capital.

Just a couple. First, I wanted to talk a little bit about Benco Dental. I know you guys had announced, I think, a couple years ago a sizeable order from them and that they'd be carrying your dental laser product line. And then, maybe subsequently, you had mentioned Benco serving as a distributor for BIOLASE products. Can you comment on the status of the relationship that you have with Benco today? And does Benco hold BIOLASE products in its inventory, actively selling these products? Are they trying to sell them back to BIOLASE?

It's a very good relationship, the one that we have with Benco, very positive. No, they are not trying to sell anything back to BIOLASE. They've been selling. They've been very actively selling. They are concentrating in a big manner in soft-tissue lasers because they are clearly well equipped to do that, while we are the one that is well equipped to sell the big lasers, the ones that are more of a challenge to sell because of the training that the doctor has to receive and dedication that he has to receive and so on. It's a harder sale.

Benco is very excited about our FDA approval of the EPIC. And they are very involved in selling the EPIC 10.

And just so I'm clear then, currently, do they hold BIOLASE products in their inventory?

Very little.

Very little?

Yes.

Okay. A next question I had was on the lower service and warranties. Could you discuss maybe the improvement that you saw there on expenses?

Well, now that we're entering our third year with the iPlus in production, we've seen efficiencies within the manufacturing process, the supply chain process, and as well as the service of those units. The WaterLase iPlus, even though it was the same basic WaterLase technology, was a whole new platform as compared to our previous WaterLase product. And so it took a little bit of time to get that dialed in in those three areas. And that's what we're starting to see now.

You're just making some adjustments based on experience?

Well, yes, of course. As you introduce any new product, you're going to have your alpha build. You learn things from that. And then you move on to your beta build. And then, along the way, you have different tooling that you need to get. You have some vendors that work very well for you, others that don't work at all. We had an issue almost -- a little over two years ago about some vendors not being able to supply products at the end of the quarter, and those aren't our vendors anymore.

So, over time, we dial in these processes, and we're really starting to see the effects of that now.

Okay.

In the past one month --

One last question for you, Fred, on the Comerica Bank facility. Can you walk us through the math on how you get to borrowing capacity or what the eligible accounts receivable formula is?

Yes, if you have a spare half hour. But it's a very standard bank loan. The loan is actually available as an exhibit to our financial statements. You can go through there and see the different steps we have to take. But it's, effectively, an asset-based line of credit -- two lines of credit. One is (inaudible) agreement. One is domestic based. And those are based on percentages of allowable AR and inventory, primarily. So the simplest way is -- it's a function of our AR and inventory based on certain parameters that are set in the agreement that are available through exhibits to our financial statement. I mean, it's not something that's really out of the ordinary. It's a very typical (inaudible) and domestic revolver.

It's kind of a moving target based on those accounts?

Well, of course. It's asset-based. So, as your AR and inventory go up, your borrowing capacity goes up, and, as they go down, the borrowing capacity goes down. So there are times in the quarter where our borrowing capacity will be less than other times. But that's the whole reason we have the line of credit is that, at certain times of the quarter, we have lower cash reserves than other times. And so it's been a great facility to have. We're very happy with the efforts and partnership with Comerica. And it's been a great asset to have for the Company.

Great. And, Fred, lastly, what were the international revenues for the quarter?

International for the quarter -- well, let's just say that they were fairly in line with prior quarters because this information will be available -- the reason I'm hesitating is it's not publicly available yet. And it will be coming out with our 10-Q in a couple days. So I don't want to get into too much detail. But, as you know from reading our financial statements, we list that information every quarter, so it will be available in a few days. But it's fairly consistent with prior quarters as a percentage of total revenue.

Thank you.

Adding to what Fred has said regarding our production efficiencies and our suppliers, you have to realize that, when the new management stepped in 24 months ago, the Company was in very bad shape in that (technical difficulties). And we did incredible improvements on all. And, going forward, we will benefit greatly from this improvement.

Chris Sassouni, Eagle Asset Management.

Federico, I just want you to go over again with us the advantages of the EPIC. I mean, clearly, there are a number of competitors out there that have soft-tissue dental lasers. And, while that has its pros and cons, it's clear that the market is adopting soft-tissue dental lasers perhaps a bit faster than the hard-tissue dental lasers. But notwithstanding that, tell us again what the EPIC can do both in terms of the model that's coming out and, then, the platform that it represents and what it can do in the future if you need to scale up power or other features in the platform that you have.

Well, first of all, I would like to say that it is important that the EPIC is a platform so is upgradable to higher powers and other features. And that will create economy of scale for BIOLASE. So it is very important that it is considered as a platform.

Now, regarding the clinical advantages, I'm going to -- as you know, I'm more of a businessman than a clinician. And I have in front of me Bill Brown that, with more detail than I can provide, will answer your question.

It's really very simple. The EPIC has the first ability for soft tissue for laser whitening and for temporary pain therapy. No diode laser has ever been available that gave you the choice of those three indications with custom delivery systems. It's backwards compatible with all of the delivery devices that we have sold with our thousands of ezlase and iLase. And the short pulse -- the ten-microsecond pulse gives us the ability to have the most comfortable cutting of any diode laser that's ever been developed.

Okay. So it can do the ablation of the soft tissue, gingival contouring, and frenectomies, and so forth. And, then, at the same time, you can apply it for laser tooth whitening. And then, finally, there's -- you're saying that there's some sort of setting where, if you shine the laser on the tooth itself, it desensitizes the tooth?

No. For pain therapy -- for things like TMJ there's very few response things that work for it. So, for TMJ, for oral-maxillofacial pain and trismus and things like procedures like that, it's totally approved for oral-maxillofacial pain. It can also be used by chiropractors, et cetera, for neck and shoulder and temporary relief of pain in other body parts.

Okay. And then the price point at this point?

The price is $5,950.

Okay. Great. All right.

A second thing --

By the way, it's way below what other competitors. For instance, the Sirona diode sells for well over $1,000 per watt, and we are selling at, essentially, $600 per watt.

Okay. All right.

Next question. Federico, could you just talk a little bit about all of your efforts to expand distribution outside the US? And what is the current number of distributors and/or countries in which you have distribution capabilities? And, as you look out over the next year, how many more countries and/or distributors could you add?

Well, I personally have made a substantial effort in spending time in Europe. And we just signed up (inaudible) that is, I would say, the largest distributor of imaging systems in France with a turnover of around $650 million. And they are now very strong believers that the next wave is going to be lasers in dentistry. And so they decided to start the division dedicated to laser dentistry. And so they signed up our product line, and we'll be launched officially at the end of the month of November. And they really have placed a nice order with us for all-tissue lasers and soft-tissue lasers. And we are now looking at other markets.

Europe is more of a complex marketplace, as you well know, than the United States that is more uniform. Every country has its differences. We have distribution in Germany. We have currently distribution in England that we are reviewing. We have distribution in Spain. We are not satisfied about the distribution in Italy, so I've been spending time in reviewing how to approach that. In other selected countries in Europe -- essentially, every country in Europe, you have to study carefully how to approach distribution. Overall, internationally, next year, we will be at around 60.

60 countries?

International distributors.

Oh. 60 international distributors. Wow. Okay. All right.

Last question, and this is for Bill, I think, and that is -- with the upcoming New York Dental Association meeting -- so there's sort of two things that I would expect could come out of the New York Dental Association meeting. One is the fact that it's, obviously, a showcase for products. You have a large number of new products. So, if you could just talk about some of the new products that you'll be featuring at New York Dental and, also, whether the -- I think it's Section 279 tax credit is in place and what the amount is for this year and how that's likely to stimulate demand at the New York Dental Association meeting.

You're correct. As we did at the American Dental Association meeting in October, we will be featuring the launch of the EPIC and the 3Shape at the greater New York, starting the Sunday after Thanksgiving. But it will also be the first time that we've had the NewTom cone beam system available on the east coast for the New York customers. So we're very excited. So we'll be featuring the NewTom cone beam, the 3Shape, as well as the official launch of the EPIC to these guys.

179 is a very strong driver in Q4 every year, but it has a special impact this year, where, if the laws don't change, that it will drop down from $125,000 to only $25,000 in 2013. So it is a -- the uncertainty regarding 179 has doctors considering moving their purchasing decisions up to 2012.

Okay. Those are all my questions. Thank you very much.

(Operator Instructions). [Robert Hoffman, Benson Opportunity Partners].

I don't think you answered this. I was trying to do two things at the same time. In your release, you say you've begun implementing several consumer-based initiatives that will enhance demand in 2013 by driving patients to laser dentists and creating more pull from the marketplace. Can you flesh that out a bit?

Thank you for asking this question. I really care about this issue. If you -- I'll bring you an example. Intuitive Surgical came out public at $18, then went down around $6 and was very similar to BIOLASE in a way. They had -- they were losing money. They were growing in revenues. The medical community was very well aware of this new phenomenon of robotic surgery. And what really drove the demand in the Intuitive Surgical DaVinci product line was the patients' demand. At a certain point, patients through a campaign -- they got aware of this new technology, and they started demanding it. And it's not just by chance that we have on our board at BIOLASE one of the best and most renown surgeons of DaVinci system, Dr. Norman Nemoy.

And I asked to Dr. Nemoy when it is that you decided to spend $2.6 million to buy the first system. He owns now two. And he said -- Federico, when I lost my fifth patient, notwithstanding I would tell the patient that it was always my hand performing surgery and the robot was only replicating my hand, I would lose patients because they wanted the best possible treatment, and they believed that robotic would provide that. So, when I lost my fifth patient, I called up Intuitive Surgical and purchased my first system. And now I have two.

So that is exactly what we need to make happen at BIOLASE. The WaterLase technology and the BIOLASE brand is known by over 90% of the dental community, of dentists. But only a very small percentage of the patients know of the advantages or they know of the WaterLase technology. So we want to make the patients that are the end users aware of the great advantages of the WaterLase technology, so they can demand it to the doctors. And the doctors then will be, in a way, stimulated, if not forced, to become a high-tech dentist.

And, again, it is very interesting to see what has happened to Intuitive Surgical going up 100 times in value from $6 to $600 in just a few years once that phenomenon happened. And, today, it's a $21 billion company. And they're only selling to hospitals. We are selling to dental offices in the United States, and [there are] 140,000. We are selling worldwide 1.2 million and growing. So the market is incredibly bigger. And, also, our system -- the top system that we are selling, the laser system, is in the [50s], now in the millions. So you can understand the importance of a consumer-driven demand.

Maybe you didn't hear my question. I was -- I agree with all that you said, and I've owned Intuitive Surgical back in the day and suffered the volatility back then. And you look back and you say -- well, that was nothing. But I think there are some big differences between deciding where you're going to go for your prostatectomy and whether or not you continue to go to your regular dentist, which most people do.

But my real question is -- what are those initiatives, not whether they're smart. I think they are smart. That's why I'm focusing on the question. What are those initiatives that you're -- ?

They're all social media based. As you know, the internet allows instant communication today. And a lot of people are very interested in the best oral care. Mothers are the ones deciding. Wives are the ones deciding which dentist is going to become the family dentist. Let's not forget that the WaterLase technology is approved for use on kids, and there are 80 million kids in this country.

The fact that, in the vast majority of the cases, there is no need of a needle for using a WaterLase and there is also no cross contamination, and I cannot talk more about that issue because, when you go to a dentist, a conventional dentist, the bur that goes into your mouth has been in the mouths of many other patients before. And there is no proof whatsoever that that bur is sterile at the level that it should be. And, also, there are independent studies that say that it doesn't matter how many -- it doesn't matter what you do. You will never have a truly sterile bur. 20% of the dental burs and 60% of the endo files still contain bacteria and viruses, even if sterilized as per protocol.

So not only we are talking about better dentistry, no-pain dentistry, but we're also talking about safe dentistry. And, by having the public understand that, we want to drive the consumer in demanding it.

And, by the way, it's very interesting what you said about a prospective surgery on a prostate is the fear factor, because it can be deadly, that private patients do demand the best technology. The same thing is in dentistry. If you know that you can get cross contaminated or that you can receive an injection, you have that fear factor playing into it. So we believe that, also in oral care, it can be a very substantial pull from the consumer.

Wyatt Carr, Monarch Bank.

My question -- the first one is on WaterLase. In the quarter -- and this is still your core product. I believe, if I'm not mistaken, it was 63% of revenues.

Yes.

And your units were up, but the profits were not up as much. And some of that was because some of these were MDs that you were selling and, then, iPluses. But could you kind of walk me through? You've got a lot of different WaterLase products now. I mean, you've got the 300, 400, iPlus, MD Turbo, MD. Can you kind of break out where the sales of WaterLase were in the quarter?

Well, let me answer to this question. We don't want to go too much into details of how much we sold of this product or that product. What I can tell you is very simple. We bought back $1.1 million of a product that we have discontinued. That is the MD Turbo. So we obviously concentrated in selling that product that sells, basically, around the $20,000 and plus. And so you see the number of WaterLase going up, but the price has been lower. That's the difference that you see there. That is a healthy difference, simply because we're getting rid of a product and of the profit, by the way, that we purchased from our old distributor, Henry Schein.

Right. Okay.

I'd like to add a little bit there. Your other -- part two of your question -- so, at the top level, thinking in terms -- we have -- in the WaterLase line, we have a wide range now. The top level is the revolutionary iPlus. In the middle, you have the MDX 450, and then, below that, you have the MDX 300, which is very similar to the MD Turbo in output and what it can do.

And then, like Federico mentioned, we have the certified pre-owned, or used, MD Turbos that we repurchased from Henry Schein that had been a big hit in the marketplace in addition to MD Turbos that we take in and trade much like a car dealership would when returning customers buy a higher level iPlus.

So we've seen a lot of good reactions from the market where we offer the iPlus, the highest level, the fastest cutting speed, the most presets, the most ability. And then, also, we have the certified pre-owned model for those people that can't quite afford it or don't necessarily need all that speed or all those presets, but they love the entry point.

And we really like having all those new users joining us at a low cost. And we look at everybody that buys a used MD Turbo is going to be looking for a future BIOLASE product and as well as consumables and service contracts and warranties and everything else. So we're very happy with that.

This is very important to understand. Every time we sell a piece of equipment, it's not just the sale of the equipment itself. It's everything that is going to become a recurring revenue over time.

Okay. Great.

And, if the Schein transaction, which was -- it has been kind of a cloud or a confusion. You're out of that as of the fourth quarter. All of the accounting issues and everything will be completed. Is that correct? And can you kind of give me an idea of what things will look like post the Schein transaction?

Well, I'm very happy that you brought this question. Yes. It was way more than a cloud. And we got rid of it with this quarter, Q3. So, for the first time, we're going to have comparisons of Q4 versus Q4 with real numbers that will reflect the improvements of the new BIOLASE.

Unfortunately, even Q4 will be somewhat affected by some remaining inventory of iLase and iPluses in the hands of Schein. Schein is not a company that excels in selling capital equipment. We do. We know how to sell capital equipment. They know how to sell consumables. And they sell a lot of our consumables. So they're making very good money in selling our consumables. So they don't really care much about the remaining inventory that they have in these two products, the iLase and the iPlus.

So they have lowered the prices, competing with us, to just get rid, most likely, by Q4 of all their inventory. So that can have some effect and will have some effect in Q4. So the cloud is still there until yearend. But, before, it was a very dark cloud. Now, it is a light cloud.

Okay.

The interesting thing is that, by their effort in putting this product out on the market, obviously, we will have an after-sales revenue stream. So BIOLASE will benefit -- it doesn't matter what -- going into 2013.

Great. And my last question comes along the lines of the consumer initiatives. And one of those in the past that has been brought up is the Procter & Gamble -- the toothbrush. And I believe Fred got a question at the (inaudible) conference, and maybe you can address that now, since you're --

You want me to address this question after Fred already did? Sure.

No. Fred couldn't address it, so --

Okay. Well, we have a very active relationship with Procter & Gamble. It's a very active project.

But, at the same time, we're very limited in what we can say or not say.

We believe that it is a very promising technology and product. And we believe that Procter & Gamble is a phenomenal partner. And we believe that we -- we don't believe -- we are positive on the fact that, at a certain point, this technology will find its place in the market and will be a very important place in the market because it is truly the first high-tech toothbrush ever existed. Any other toothbrush was simply an engine. Eventually, in the toothbrush, instead of doing it by hand, it was an engine rotating the brush. So there is really no technology in that or minimal technology.

So we're very proud to own the patent of this wonderful technology. It will be the first BIOLASE consumer product with, obviously, a very substantial, recurring amount of revenues.

But, again, let's not just stop to that, if I may. I would like to bring to the attention of the fact that we have 510(k)s for podiatry nail fungus that is $1.5 billion market. And that is a huge upside potential that could occur in 2013 if we get approval as we expect.

For orthopedic, for small bone with the iPlus for ten different procedures, the market is over $5 billion. And we have a 510(k) there too; so another huge upside.

In ophthalmology, we have dry eye that is almost a $2 billion market, glaucoma that is almost a $3 billion market, oculoplasty, that is over $3 billion market opportunity.

And (inaudible) down the road -- two to three years down the road is a $5 billion market and plus.

So there is so much more to WaterLase technology and our diode technology than just dentistry. And we have made the strategic moves to broaden the use, the scope of use of WaterLase without getting distracted by our core business that is the dental business. And, as you can see, we've been able to turn a non-GAAP profit while we've been making all these investments with huge upside potential in the future.

Another thing that I would like to add is that BIOLASE, in our opinion, has been really misplaced in the category of capital equipment, while we're not really a capital equipment, per se, company. Yes, we sell equipment. But we have intellectual property -- a huge amount of intellectual property.

What we have done at BIOLASE is that we have invented and perfected a new surgical device to cut human and animal tissue with the minimal damage, in the most biological way. So we are the best surgical system today biologically compared to any other surgical system out there.

So I, frankly, believe that BIOLASE should be viewed as a biomedical company, not as a medical technology company. We don't sell dental chairs, pacemakers, dental burs, or just normal equipment. We have invented a technology that acts at a molecular level, but we also manufacture the product.

So, really, it is -- I get upset when I see BIOLASE being compared to companies that, in reality, are pure capital equipment companies in the space of dentistry. We are much more than that. And I hope that you investors can start looking at BIOLASE in a different way.

Great. Well, thank you very much.

Thank you. I'm showing now further questions in the queue at this time. I'd like to turn the conference back to management for any final remarks.

Well, we are very happy, obviously, to have been able to turn profitable on a non-GAAP basis ahead of our expectations of Q4. Clearly, we would have done much better if we would have received the EPIC CE mark approval and FDA approval a couple of months or three months ahead of time.

Unfortunately, we are production capacity limited at this moment, as, with any new product, you have that issue for a while. And so the lost time in approval does not necessarily mean that we could have just made up the revenues of the EPIC -- lost revenues of the EPIC in Q3 in Q4. So that's why we lowered the guidance by a couple million dollars.

But, in 2013, the production of the EPIC will go up substantially on a quarterly basis, and we believe that it's going to be -- that it will be, as it already has shown to be, a very successful product in high demand.

With that, I thank you for being at this Q3 conference and being patient always of BIOLASE and believers in BIOLASE and WaterLase technology and all other technologies that BIOLASE is involved in and in our efforts in expanding into the medical field as well.

And we will be talking in three months or a little more for Q4. Thank you very much.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.