BIOLASE, Inc.
Q1 2020 Earnings Call Transcript

Published: 10 May 2020

[Operator:]

Good day, and welcome to the BIOLASE 2020 First Quarter Financial Results Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Todd Kehrli of The EVC Group.

[Todd Kehrli:]

Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's financial results for the first quarter ended March 31, 2020.On the call today from BIOLASE are Todd Norbe, President and Chief Executive Officer; and John Beaver, Executive Vice President and Chief Financial Officer. Management will review the company's operating performance for the first quarter before opening the call for questions. Before we begin, I'd like to remind everyone that a number of forward-looking statements, which are any statements that are not historical facts, will be discussed during this presentation, including forward-looking statements regarding the company's strategic initiatives and financial performance. These forward-looking statements are based on BIOLASE's current expectations and are subject to a variety of risks and uncertainties that could cause the company's actual results to differ materially from the statements contained in this presentation. Such forward-looking statements only represent the company's view as of today, May 7, 2020. These risks are discussed in the company's filings with the Securities and Exchange Commission.A replay of this conference call will be available on the BIOLASE website shortly after the completion of today's call. When listening to this call, please refer to the news release issued earlier today announcing the company's 2020 first quarter results. If you do not have a copy of the news release, it is available in the Investors section of the BIOLASE website at www.biolase.com.BIOLASE financial results can also be found in the company's quarterly report on Form 10-Q, which will be filed with the SEC. The tables we've provided in today's news release offer additional financial information, so we encourage you to review them. The tables include the reconciliation of unaudited GAAP net loss and net loss per share to non-GAAP adjusted EBITDA loss and adjusted EBITDA loss per share as well as the details of the company's non-GAAP disclosures.With that said, I'm pleased to turn the call over to BIOLASE's President and Chief Executive Officer, Todd Norbe. Todd?

[Todd Norbe:]

Thanks, Todd, and thanks, everyone, for joining us this afternoon. We appreciate your interest and continued support of BIOLASE. I want to again acknowledge the impact of coronavirus and express our heartfelt concern to those that have been affected directly or indirectly. The safety of our employees, customers, their patients and our partners is foremost concerned, and we continue to take every precaution to ensure their well-being during this very difficult time.While we hope the impact of the virus is mitigated as soon as possible, too many unknowns remain, so it is difficult to predict when commercial activities and more specifically, the dental market will return to normal levels. It is an unprecedented time for most. And it has had a significant negative impact on our first quarter operations.Most dental offices in the U.S. and globally closed in March and remained close except for some emergency procedures impacting dental production by 80%. As such, we sold very few lasers in March, which is historically our strongest month of the first quarter. However, the team quickly pivoted to online Zoom webinars to reach our target audiences. Starting in March, we launched our webinar series, hosting over 15 webinars to date with over 11,000 registered participants, over 1,300 requesting follow-up and over 700 interested in our WME trial program. We have another 7 webinars planned over the next few weeks with similar, if not, greater participation expected. While this challenging environment has impacted our ability to sell lasers, we have not allowed it to diminish our ability to raise awareness of the benefits of our products.Post survey data from these webinars is helpful to build a healthy sales funnel once our sales team can interact with these prospects on site. I want to reaffirm that BIOLASE is still well positioned for the opportunity ahead because general practitioners and DSOs or large group practices are still eagerly looking for ways to expand their services and keep as much revenue in-house as possible. And we believe this will even be more important for GPs and DSOs as they look to expand for ways to recoup the revenue they were losing during the pandemic. Furthermore, our technology is a better fit to meet new ADA guidelines in the reduction of aerosols within a dental office.In addition to pivoting our commercial efforts, we took action to reduce our cost structure in this downturn. The entire organization has been temporarily impacted through a furlough or salary reduction. John will discuss this more in his prepared remarks.The much-awaited landmark study performed by McGuire Institute on the clinical efficacy as well as patient-reported outcomes of the Waterlase-assisted treatment of periodontitis versus traditional open flat gum surgery is now expected to be released any day.As previously mentioned, this study will deliver the appropriate information for both the specialists and general practitioner, not to mention the 65 million Americans who suffer from peri disease, we believe this study will establish new protocols for perio surgery and drive further adoption of all tissue lasers in our target markets. We are equally excited about additional studies on treating perio disease expected to be released this year from Columbia, Harvard, and UCLA. As we closely monitor the industry getting back to work, our actions to support these offices, at least share some of these plans for 2020 as we roll forward.First step is acknowledging that many offices have lost revenue from the mandatory shutdown due to COVID-19. We understand this. We have launched a financing program titled BPP, which is the BIOLASE Partnership Program to help offices get back on their feet. This program will allow dentists to use our technology, generate revenue and not make a single payment until 2021. It will also provide in-office training component that eliminates the need for those dentists to travel.The BPP program will also help us further penetrate the DSO market, which continues to be a focus for us. With the ADA's recommendation of aerosol reduction, many DSOs will look to incorporate more manual scaling with the use of diode lasers for treatment. The recent FDA clearance for laser bacterial reduction therapy is timely for us. In 2020, we also plan to expand our Phase II Waterlase trial which was delayed due to COVID-19 with additional Heartland dentists. Based on our success, Phase I pilot program with Heartland, we now have other DSO pilots planned across North America. Clear Choice is just one additional example.In addition to our focus on the DSO market, we continue to develop our Waterlase Mentoring Experience or WME. This program puts training first by allowing dentists to have firsthand experience with our technology and applications to the use of experienced mentors in a group learning environment, showing them the power of technology firsthand while allowing them to use our Waterlase technology post training in their office prior to purchase. Our recent webinar series confirmed the popularity and demand for this program. A key initiative is to expand this WME program to select cities during the year. We initiated 4 WME programs in the first quarter, prior to COVID-19 shutdown and expect to increase these through 2020 once things return to normal. Based on our early success, we believe that WME could generate up to half of our U.S. equipment sales by 2021.Even in this current environment, from home environment, we continue to drain and ramp up our new sales reps. I am pleased to report that prior to the pandemic, we had filled all our open territories, and we look forward to the revenue lift these new sales reps will produce once U.S. business returns to some level of normalcy. In this time of global crisis, it is vital that we come together to support the fight against COVID-19, leveraging every tool available, and that is what we're doing.So while most dental office continue to be closed for the most part, we have joined the fight against COVID-19 by partnering with MEK-ICS, an intensive care unit manufacturer to supply ICU-grade portable ventilators through BIOLASE's FDA registered facility in California. MEK ventilator received the FDA approval for emergency use during this COVID-19 pandemic, and BIOLASE received authorization to manufacture and supply its ventilator under the FDA Emergency Use Authorization. And an exemption to the State of California is to operate, manufacture and market this product is critical because of the need of this product. We will leverage BIOLASE years of experience in manufacturing and distributing FDA-cleared medical equipment to help supply ventilators and support during the COVID-19 crisis. To date, we have received $14 million in ventilator orders, and we are hopeful that MEK will be able to deliver a portion of these orders in the next month. As you can imagine, with large players like GM now in this market, the component supply chain is under pressure.While it impossible to know how the rest of 2020 will play out given current circumstances, we continue to be very excited about the market opportunity in front of us and are glad to see some states are now opening up, allowing for all dental services to be performed. We believe that many positive changes we have made over the past year and past 1.5 years to improve our cost structure and build our talent bench have created a healthier operating company. And once U.S. and international businesses return to some level of normalcy, we are confident that BIOLASE is positioned for long-term sustainable and profitable revenue growth.With that said, I'll now turn it over to John to review our first quarter financial results in more detail. John?

[John Beaver:]

Thanks, Todd, and thank you all again for joining us this afternoon. Now let me review the numbers. Total worldwide revenue for the first quarter of 2020 was $4.7 million, a decrease of 54% when compared to $10.3 million in the first quarter a year ago. U.S. laser revenue for the first quarter of 2020 decreased 62% year-over-year to $1 million compared to $2.6 million in the first quarter a year ago. U.S. consumables and other revenue for the first quarter of 2020, which consists of revenues from consumable products, such as disposable tips, decreased 28% compared to the first quarter of last year. Internationally, laser revenue for the first quarter of 2020 declined 68% and to $1.1 million compared to $3.4 million in the first quarter of 2019, and consumables and other revenue decreased 28% year-over-year. In all cases, the decline in revenue was primarily attributable to the COVID-19 economic shutdown.Gross margin for the first quarter of 2020 was 28% compared to 34% in the year ago quarter. The lower gross margin reflects the impact of the decline in revenues relative to our fixed cost. Total operating expenses for the first quarter of 2020 were $6.7 million compared to $7.5 million in the fourth quarter and $7.9 million in the first quarter a year ago. The continued reduction in operating expenses, both sequentially and year-over-year represent the benefits of the cost rationalization efforts that we've been implementing throughout 2019 and the early part of 2020. Sales and marketing expenses declined $1 million or 28% sequentially and $1.2 million or 30% year-over-year in the first quarter due to reduced compensation-related expenses, mainly due to lower sales volume.General and administrative expenses increased $0.4 million or 14% sequentially and $0.6 million or 26% year-over-year in the first quarter. This increase was due to a $1 million reserve for allowance for doubtful accounts we booked during the first quarter of 2020 as we assessed the potential impact of COVID-19 on the collectability of our accounts receivable. Engineering and development expenses decreased $0.1 million or 10% sequentially and $0.4 million or 30% year-over-year in the first quarter. Operating loss for the first quarter of 2020 was $5.4 million compared to an operating loss of $4.4 million in the first quarter of 2019, an increase of 23% year-over-year.Net loss for the first quarter of 2020 was $6 million or $0.19 loss per share compared to a net loss of $4.9 million or $0.23 loss per share for the prior year's first quarter. As a reminder, our earnings release includes a reconciliation between unaudited GAAP net loss and adjusted EBITDA. We believe adjusted EBITDA provides a useful measure of the company's operating results by excluding depreciation and amortization expense, stock compensation expense and change in allowance for doubtful accounts. The adjusted EBITDA loss for the first quarter of 2020, which excludes these items, increased 11% year-over-year to $3.6 million or $0.11 per share. Our basic and diluted share count at the end of the first quarter of 2020 was 31.5 million shares compared to 21.1 million shares in the year ago quarter.Now turning to the balance sheet. Cash, cash equivalents and restricted cash totaled $1.8 million as of March 31, 2020. As we face the challenges posed by COVID-19, we are focused on liquidity, cost containment and prudent cash management. As such, we reduced the compensation of senior executives and other salaried employees and also furloughed about 2/3 of our U.S. workforce in April. We also applied for and received a $3 million loan from the Paycheck Protection Program, or PPP.The PPP was established to help small businesses with under 500 employees. We have approximately 150 employees, and the PPP helps us keep as many people employed as possible despite the significant loss of business we have experienced due to the COVID-19 economic shutdown. These employees are vital to our future success. As we outlined earlier, we worked hard to get the current team in place to ensure we can execute our longer-term growth plan. Given the current economic situation, it was unlikely that we could access the public equity markets to raise cash to help make up for the significant loss of revenue we experienced during the first quarter of 2020 and likely to continue into the second quarter of 2020.In closing, I want to reiterate that prior to the coronavirus pandemic, we were confident that our actions to strengthen BIOLASE were working. We have filled all of our open U.S. sales territories, which in a normal economic environment would have led to year-over-year revenue improvement for the last 3 quarters of 2020. However, there remain too many unknowns, and when we can achieve this now depends on how quickly the U.S. and international markets return to some level of normalcy.This concludes our prepared remarks. I'll turn the call back over to the operator to open the call for questions.

[Operator:]

[Operator Instructions]. We'll take our first question from Bruce Jackson of The Benchmark Company.

[Bruce Jackson:]

With regard to the ventilator business, congratulations on getting the additional orders. Are you still receiving new orders for ventilators? And then, what kind of gross margins should we expect relative to the rest of the business for those sales?

[Todd Norbe:]

Yes. So Bruce, I'll take that question. This is Todd. So we're expecting more orders to come through. The gating issue right now truly is components. And specifically around some sensor components coming out of Honeywell. Seems like that's the challenge for many of the ventilator manufacturers. So we're hopeful that will clear up here, so we'll be able to ship some units this month. In reference to margins, it's going to be accretive to what we do now as an organization.

[Bruce Jackson:]

Okay. Great. And then just in terms of the general dental market and the reopening of that market, what are you seeing right now out in the field? And can you give us a little bit of color on how quickly the states are opening up? And just what's going on?

[Todd Norbe:]

Yes, that tracks typically through the ADA. They have a heat map, obviously, in a map of the U.S. There is north of 20 states now that are open up for all dental services. And we expect that to continue and probably speed up here in the next couple of weeks. Every state is a little bit different in reference to how they're handling that start up. One of the gating issues continue to be for many offices opening up and under new ADA guidelines in reference to PPE, making sure that they can access enough PPE to support the new guidelines. So I would expect that we'll continue to see positive momentum there. And again, every office is handling this differently in reference to how they accept folks walking into that office. As I mentioned, Bruce, we were very successful in reaching a lot of these offices now electronically through Zoom and doing Zoom Lunch and Learns and so forth. I would expect that, that will continue here in the short term as offices get more comfortable in having somebody physically walk into that office.

[Operator:]

We will take our next question from Kyle Bauser of Dougherty & Company.

[Kyle Bauser:]

So great, you've been able to pivot here and utilize the facility to supply ventilators. Maybe just following up on the prepared remarks and previous question, just about how you'll be able to supply them, I think, in the short term. So it sounds like you're waiting on some components. But can you talk about kind of the status of being able to tweak the operations to be able to produce and validate ventilators, maybe timing of that? And then any sort of line of sight you might have on being able to supply some of the commitment to the $14 million from existing inventory that MEK has on hand?

[Todd Norbe:]

Yes. So I think that's what we're trying to sort through right now, Kyle. Currently, we're dependent on MEK to get units for the current orders that we have just because they don't have right now a capacity issue. It's a component issue. So for us, the manufacturer right now in Irvine is not providing an advantage to them. I think longer term, we're going to look at that as being a manufacturer state side for them. Once things settle down a little bit here. And also depending on what we believe that future demand curve looks like. So we should, hopefully, have a better decision or acknowledgment from MEK this week in reference to their ability to get us and ship up some units this month. That was the plan. And we're hopeful that they will follow through on that commitment.

[Kyle Bauser:]

Got it. And so the nice step-up in commitments from $10 million to $14 million now within a month. Just kind of curious where some of these orders are coming from, what hospital systems, distributors? Just, I guess, any sort of color as to the sources of these would be great.

[Todd Norbe:]

Yes. As I mentioned, I believe, previously, we are fortunate to have two individuals who, in their past career and life were in the ventilator space. So through their contacts, they were able to, and relationships, connect with distributors who supply U.S. hospitals and specialized in ventilators. So that's primarily where these orders are coming from today. We would anticipate being -- once we start shipping these units into facilities and the distributors get to experience this unit that additional orders would be forthcoming as well.

[Kyle Bauser:]

Okay. And nice update, you're able to secure some money from the PPP program and that you're taking initiatives to cut overhead. Just in modeling, I mean, how should we think about preserving cash or the burn rate kind of over the coming months? I know it's hard to forecast what sales will be, but any sort of color around how we should think about that burn rate would be great.

[Todd Norbe:]

John, do you want to take that?

[John Beaver:]

Yes. I will. So Kyle, you're right, it is difficult to forecast, right? Because the gating item around all of this is I can, obviously, control our costs, I can't necessarily control the revenue side. And not knowing when dentists in various states and the rest of the world, where 40% of our revenue is derived from, when they're going to be, a, coming back to work, open up their business for nonemergency procedures, and how quickly they'll be able to or want to invest in capital equipment. Those are the great unknowns for us. I would expect second quarter, obviously, from a revenue standpoint, would be difficult. We reported the first quarter revenue, and you can see that was about half of what it was a year ago period, in large part because COVID-19 hit in March, which, as you know, the last month of the quarter is where we generate the vast majority of our revenue.So as we look into the second quarter, June is obviously a big month for us, and it just depends on where the dental industry is in terms of getting back to work. We cut our cash burn significantly with the furlough and the salary reductions that we mentioned. We are now beginning to bring back a skeleton crew to -- we're seeing some order uplift on the consumables and the spare parts areas. So we had some back orders, so we decided to move forward and bring back some people next week. But it's still, I would characterize it as a skeleton crew. And we're just trying to manage the timing of bringing back the workforce against the demand for additional laser cells. So I know I didn't specifically answer your question, but those are the variables that.. a fact that...

[Kyle Bauser:]

Got it. That's helpful. And then maybe just lastly here on the McGuire study. So excited to, obviously, see that come out. Is it under peer review? Have there been revisions and resubmissions? And maybe just kind of remind us what we're looking for there. I think it's just kind of a noninferiority, if you will, with general standard of care tools. But I guess, just sort of a sense of what to look for when that comes out.

[Todd Norbe:]

Yes. So Kyle, I think the publication, the manuscript is approved, green light, ready to go. Due to, obviously, the world-changing here with COVID-19, we would have expected this to be released already in electronic version. I think that has created delays throughout the entire industry on everything. So to answer your question, ready to go. The manuscript is written and approved by JLP. It will show up electronically first and then in writing. And the communication around that is the same communication as we've been highlighting for the last year or so. It will show that in a minimally invasive way, using our laser you can get as good, if not better outcomes than using your traditional scalpel and sutures and traditional perio treatment, which most patients would prefer not to go under and deal with the overall recovery time. And the other piece of this study will be the PROs, the patient-reported outcomes due to that because there's less pain and swelling and so forth that comes along with it. And on top of that, the time to treat is substantially less as well.So nothing but positive in reference to the laser treatment. And I think this study will affirm what we've been saying all along as an organization that this is a better way to get treated. It also opens up the opportunity for the GP now to get after perio disease and also peri-implantitis sooner for these patients, because they haven't had a means to do that in the past. And our technology somewhat deskills it in a way that a GP can get a very predictable outcome here and doing moderate cases in the office and then passing on the more severe cases to the specialists. So those swim lanes are being built out now as an organization. And we're excited about treating patients earlier and more effectively.

[Operator:]

We'll take our next question from Ed Woo of Ascendiant Capital.

[Ed Woo:]

My question was, do you see any differences in geographic areas that didn't have as strict of a lockdown, either domestically in the U.S. or internationally?

[Todd Norbe:]

Ed, I don't think we are seeing anything pop there from Pareto on that specifically, at least at this point in time.

[Ed Woo:]

Great. And do you have any ideas of whether international will pick up earlier or later? Or you think it's going to be the same time as the U.S.?

[Todd Norbe:]

I don't have a point of view there. I think it also depends on what portion of rest of world we're talking about here. I think certain markets will recover faster based off of guidelines and being on the early end of COVID-19. So from a time line standpoint, I think we're seeing demand in certain countries now start to pick up, specifically Japan is one example. And we'll also be mentioning more around Japan in the next couple of weeks as well.

[Operator:]

This concludes today's question-and-answer portion. The company will now take over for closing remarks.

[Todd Kehrli:]

Thank you, operator, and thank you, everyone, for your interest in BIOLASE. This concludes our call, and have a great day.