BIOLASE, Inc.
Q2 2020 Earnings Call Transcript

Published: 14 Aug 2020

[Operator:]

Good day, and welcome to the BIOLASE 2020 Second Quarter Financial Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Todd Kehrli, 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 second quarter ended June 30, 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 second 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, August 13, 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 second quarter financial results. If you do not have a copy of the news release, it is available in the Investors section of the BIOLASE website at biolase.com. BIOLASE's 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 included provide a 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 thank you everyone for joining us this afternoon. We appreciate your interest and continued support of BIOLASE. First, I want to again express our heartfelt concern to those who have been affected either directly or indirectly by the ongoing COVID-19 pandemic. Our foremost concern continues to be the health and safety of BIOLASE community, including our employees, customers and their patients and our partners. We continue to take every precaution to ensure their well-being during this very difficult time. Since we last talked to you in May, our team has continued to adjust how we operate the business to maximize our opportunities in a manner that is both safe for our employees and our customers. We are now several months into this situation while it limits our ability to visit our customers and potential customers. We've remained focused on strengthening our opportunities during this unprecedented period until we can resume normal business practices. Before I discuss our second quarter operating results. I believe it's important to highlight the successful registered direct offering we completed in June and our oversubscribed rights offering in July. I believe this is a strong level of interest reflected in a validation of our business plan. In addition, the higher than expected level of investor participation ensures that we have the necessary resources to execute our growth strategy, which, if you recall was beginning to generate desired results just prior to COVID-19 pandemic. This is also a vote of investor confidence in the capabilities of the current team to execute and deliver meaningful results. Now let's talk about some of the accomplishments during the quarter. During the second quarter, we announced our Epic Hygiene dental laser, which meets guidelines to minimize the risk of COVID-19 transmission set by the Centre for Disease Control and Prevention, or CDC, which recommends against using ultrasonic scalers to prevent the transmission of COVID-19. Specifically, traditional ultrasonic scalers create a visible water spray that contain particles droplets of water, saliva, blood, and microorganisms and other debris that can serve as a conduit to spread infectious pathogens such as COVID-19. As dental professionals start opening their practices in all 50 states, which rely on our Epic Hygiene laser for laser bacterial reduction therapy. For those who are not familiar with this new indication, it allows hygienists to perform gentler, highly effective treatments for bacterial reduction in managing periodontal disease without using water. The new BIOLASE laser system, which was cleared by the FDA in March, was designed by dental hygienists specifically for dental hygienists, and is the only hygiene device cleared to effectively manage non-surgical periodontitis through laser bacterial reduction. While, All-Tissue Waterlase Dental Lasers also create 98% less aerosols in traditional dental handpieces, meeting the American Dental Association's recommendation of reduced aerosol production to limit the spread of COVID-19. Now with Epic Hygiene, we are able to offer another product that meets the unique needs of dentists and patients during these challenging times. While there remains too many COVID-19 variables to predict when the dental market will return to normal levels, we are confident that our Waterlase and Epic Hygiene products will be coveted by dentist as they align their mission of advancing dentistry to treat patients in the safest possible way. As we discussed on our Q1 call in May, the shutdown which began in mid-March has had a significant negative impact on our operations. During this time most dental offices in the US and globally suspended procedures except for certain emergency procedures and remain closed most of May. This impacted dental production by as much as 70% and as a result, we sold very few lasers in April and May and only a handful in June. Despite dental offices being closed for most of the quarter, our sales team continued to be very active reaching our targeted audiences with Zoom webinars. Starting in March, we launched our webinar series, and have hosted over 30 webinars to date, with over 11,000 registered participants and over 3000 requesting follow up on our technology. Furthermore, at the same time, we reduced our operational footprint and moved our corporate facility reducing our annual lease costs by over a $0.5million. I want to reaffirm that BIOLASE remains well positioned for the opportunity ahead as general practitioners and DSOs are eagerly looking for ways to provide safe services and keep as much revenue in house as possible. Our optimism is reflective of several growth drivers including the following. First, we believe our product portfolio will be even more important to GPs and DSOs as they look for safer ways to recoup revenue that they lost during the pandemic. Dentist can certainly differentiate their practice in this environment by using our lasers to ensure a safer patient experience and provide significant benefits and positive outcomes they get with our lasers. Second, the most anticipated landmark study performed by the McGuire Institute on clinical efficacy, as well as patient reported outcomes of water assisted treatment of periodontitis was electronically published in the Journal of Periodontology in July. We expect this to be in print come November. And McGuire's study unequivocally confirms that patient reported outcomes were significantly better after laser procedures. This was a first of a kind study designed to meet the stringent American Association of Periodontology's best evidence consensus standards. The study found that the Waterlase repair protocol at shorter procedure times than open flap surgeries, as well as less bruising, swelling and post-operative bleeding, demonstrating that repair is as effective as open flap procedures, but with significantly better patient reported outcomes. We believe this study will establish new protocols for perio surgery and drive further adoption of Waterlase in our target markets. With 65 million Americans suffering from this perio disease today, the findings from this study are significant in determining the best course of treatment for these patients. Studies continue to suggest that periodontal health is essential for overall health as it relates to susceptibility of infection, including COVID-19. Third, there is ongoing studies on treatment concerning perio disease from Columbia, Harvard, and UCLA, which we expect to be published later this year. Given the challenging times that all dentists have faced since the mandatory shutdown in mid-March, we launched a new financing program during the quarter called BPP or the BIOLASE Partnership Program to help dentists get back on their feet. This program allows the dentist to use our technology, generate revenue and make a single - and not make a single payment until 2021. It also provides in office training that eliminates the need to travel. In addition to the BPP program, we continue to offer our Waterlase Mentoring Experience or WME. This program puts training first by allowing dentist to have firsthand experience with our technology and applications through the use of experienced mentors in a group learning environment, showing them the power of technology firsthand, while allowing them to use the Waterlase technology post training in their office prior to purchasing. We initiated four WME programs during the first quarter of 2020 prior to COVID-19 shutdown, and we expect to increase these through 2020. One of our key initiatives is to expand the WME program to more cities during the year. If you recall, this program was born out of our DSO trial with Heartland. With the DSO segment coming back online, we now have a Phase II trial scheduled with Heartland. Also a recent webinar with ClearChoice has explained the benefits of Waterlase and has turned into an additional DSO trial. We're excited about this segment and its potential to accelerate markets adoption curve. Now, as an update to our direct sales team, we have almost all of the territories back up and running along with our service teams. So we look forward to the revenue lift collectively this will generate once US businesses return to some level of normalcy. While COVID-19 presents uncertainty, we continue to be very excited about the market opportunity in front of us and glad to see that all 50 states are allowing for all dental services to be performed. We believe that safety benefits of our lasers put us in a perfect position to advance dentistry and treat patients in the safest possible way. We have created a healthier operating company with many positive changes we have made over the past year and a half to improve our cost structure and build our talent bench. We at BIOLASE remain committed to offering solutions for dental professionals looking to treat their patients in the safest possible way. With that said, I'll now turn the call over to John for the review of our second quarter financial results in more detail. Thank you.

[John Beaver:]

Thanks Todd. And thank you all again for joining us this afternoon. Now, let me review the numbers. As anticipated the continuing COVID-19 disruption impacted our business as total revenue for the second quarter of 2020 was 2.9 million, a decrease of 66% when compared to 8.6 million in the second quarter a year ago. US laser revenue for the second quarter of 2020 decreased 72% year-over-year to 0.8 million compared to 2.9 million in the second quarter a year ago. US consumables and other revenue for the second quarter of 2020, which consists of revenue from consumable products, such as disposable tips decreased 68% compared to the second quarter of 2019. Internationally, revenue for the second quarter of 2020 declines 73% to 0.7 million compared to 2.7 million in the second quarter of 2019. Again, the decline in revenue was attributable to the COVID-19 economic shutdown. Gross Margin for the second quarter of 2020 was 32% compared to 39% in the year ago quarter. The lower gross margin reflects the impact of the decline in revenue relative to our fixed cost. Total operating expenses for the second quarter of 2020 were 4.9 million compared to 6.7 million in both the first quarter of 2020 and the second quarter a year ago. And continued reduction in operating expenses both sequentially and year-over-year represents the benefits of the cost rationalization efforts that we have been implementing throughout 2019 and into 2020, along with reduced business activity during the second quarter of 2020. Sales and marketing expenses declined 0.6 million or 23% sequentially, and 1.2 million or 36% year-over-year in the second quarter due to reduce compensation related expenses due to lower sales as well as reduced travel and travel related expenses and reduced tradeshow related expenses. General and administrative expenses decreased 0.9 million or 29% sequentially, and 0.4 million or 15% year-over-year in the second quarter. The year-over-year decrease was primarily due to decrease in payroll and benefit cost. Engineering development expenses decrease 0.3 million or 30% sequentially and 0.4 million or 39% year-over-year in the second quarter. Operating loss for the second quarter of 2020 was $4 million, compared to an operating loss of 3.3 million in the second quarter of 2019, an increase of 19% year-over-year. Net loss for the second quarter of 2020 was 4.7 million or a $0.12 loss per share compared to net loss of 3.9 million or $0.18 loss per share for the prior year second quarter. As a reminder, our earnings release includes 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 comp expense, change in allowance for doubtful accounts and expenses related to disposal of the internally developed software and the cost of our patent litigation settlement last year. The adjusted EBITDA loss for the second quarter of 2020 was 2.9 million, which excludes these items was essentially the same as last year's second quarter despite the significant revenue reduction. Our basic and diluted share count at the end of the second quarter of 2020 is 37.9 million shares compared to 21.6 million shares in the year ago quarter. Now turning to the balance sheet, cash, cash equivalents and restricted cash totaled 5.7 million as of June 30, 2020 and includes the proceeds of the registered direct offering of our common stock we completed in June. Following the close of the quarter, we also completed their announced rights offering, which was oversubscribed and resulted in gross proceeds to the company of $18 million before deducting fees and expenses related to the rights offering. The 18 million does not include proceeds that may be received by the company for the future exercise of warrants included in these units. While we've taken action to strengthen our balance sheet, the current situation is still challenging and we remain focused on liquidity, cost containment and improving cash management strategies. In closing, I want to reiterate we are confident our actions to strengthen BIOLASE prior to the coronavirus pandemic we're working. We filled nearly all of our open US sales territories, which in normal economic environment would have led to year-over-year revenue improvement for the first half of 2020. We believe our current liquidity position and our cost containment efforts provide us with sufficient liquidity and capital to effectively execute on our growth strategy in this environment. Having said that, with COVID-19 there remain too many unknowns. And when we can achieve this growth now depends on how quickly the US and international markets returned to some level of normalcy. This concludes our prepared remarks. I'll turn it back over to the operator to open the call for question. Thank you.

[Operator:]

Thank you. And ladies and gentlemen, at this time we will open the floor for questions. [Operator Instructions] And our first question comes from Kyle Bauser with Colliers Securities.

[Kyle Bauser:]

Hi, Todd and John, thanks for the updates today. First off, congratulations on the very impressive McGuire study results. Clearly, patients prefer Waterlase to traditional methods when fixing gum disease and the clinical outcomes are arguably better with Waterlase at the very least, outcomes are just as good. But can you talk about how you plan to leverage this data? And maybe it's too early to tell, but have you already seen some tailwinds from this?

[Todd Norbe:]

Thanks Kyle. This is Todd. I'll address that. We're just getting the campaign off the ground here. As I mentioned, the McGuire study was published in the Journal of Periodontology, but only in the electronic version, which gets a certain level of exposure, but when it hits print, later this fall, we'll see a lot more activity around this. But we're also doing is putting together a full-blown campaign here targeting the perio specialty with multiple touch points and reach activities to make sure that the message has surround sound for that audience and we expect that's going to provide some really nice dividends for us.

[Kyle Bauser:]

Got it and kind of sticking on the topic of tailwind here. You talked a little bit about how Waterlase has a nice benefit over traditional tools when it comes to minimizing water usage and aerosol effects amid COVID-19 here. Has this helped adoption in practices following the new guidelines?

[Todd Norbe:]

I think it really depends Kyle, on the marketplace you're in. So we've got a program in place right now in Texas. And the answer is absolutely yes. Where we've seen a shift from traditional aerosol producing products like a Cavitron unit to using our diode in the laser bacterial reductions phase. And we're looking to probably scale up that in other markets where specifically, Hygienists have freedom to operate because they don't necessarily have freedom to operate in every state. But at least it's probably in two thirds of the states and the meaningful states in reference to size and population base.

[Kyle Bauser:]

Sure, sure. Okay. That's helpful. And Heartland Dental has been a big champion of Waterlase. To the extent you can share, can you talk about what the installed base of lasers is within this clients and perhaps how you see this relationship evolving, particularly as it relates to international sales? Correct me if I'm wrong, I believe they have a pretty large presence in OUS markets.

[Todd Norbe:]

Yeah. Heartland primarily is domestic based. I mean, I think that's where we want to win here. As you know the first trial went extremely well with 100% acquisition of the technology and return on investment, literally anywhere from three to seven months for a complete return on the cost of the unit. So and COVID head and then we had a little bit of a pause as a lot of their offices, I would assume, if not most of their offices shut down. So we're rebooting that now. So the goal here is to validate that with another set of practitioners within the Heartland Group, so we're really optimistic that that'll go positively well, as the first one did and we're seeing additional traction from them as well on the Hygiene diode side. So it's not just the Waterlase today, it's also the diode in reference to reducing aerosols as well.

[Kyle Bauser:]

Okay, got it and maybe just one more here, if I may. So following the equity raises, I think pro forma cash balance is about 21.5 million. Can you talk a little bit about how we should be thinking about the burn over the next couple of quarters? Overhead as has come down considerably and we've seen some very nice progress here. Do you think the cash balance should be sufficient to get you to EBITDA breakeven? Thank you.

[John Beaver:]

Yeah. Thank you, Kyle and I'll answer that. Yeah, the reason that we haven't given guidance during this period and I won't here either, is because we just don't know what the impact of COVID-19 will have in the third and fourth quarters of the year on the dental industry. And any setbacks in terms of our fight against the pandemic would certainly impact us as well. I will tell you that we believe the cost rationalization efforts that we underwent last year and this year sets us up well. I will tell you that when I joined the company three years ago, everybody told me that we had to have revenue of about 75 million to get the EBITDA breakeven. Under our current cost structure, that number is closer to 40 million now. So that kind of, I think, tells you how much heavy lifting we've done on the cost side. Having said that, cash burn will be all dependent on that revenue number, I think you can pretty much depend on the cost side being in control. But having said that, with the July rights offering raise been oversubscribed, in addition that the shelf registration that we took down in June, I'm highly confident that unless we have just a complete shutdown of all industry because of COVID that we're well positioned to have enough cash to get to that EBITDA breakeven toward the end of next year.

[Kyle Bauser:]

Okay, got it. Great, progress here and thanks for all the updates.

[Todd Norbe:]

Thank you, Kyle.

[Operator:]

And our next question comes from Bruce Jackson with Benchmark Company.

[Bruce Jackson:]

Hi, thank you for taking my questions. First a general market question, dentists' offices are now mostly open, can you comment a little bit on their level of confidence? So are they spending on new equipment? Are they looking at the dental issues based on the infection control benefits and if they don't feel for the benefits is the BPP program getting them over the hump to a purchase decision?

[Todd Norbe:]

Yeah. So Bruce, let me start with the BPP. I think it's obviously making the transaction a lot easier because they're not thinking about putting any cash out at this stage. As they're obviously, recouping their patient base coming back in and getting revenue back online. I would tell you that patient volumes have been pretty robust. And I think some of that's due to pent up demand being closed as long as they were. Technology depends on the persona of the customer and reference to why they're buying. Some are looking to obviously reinvent themselves and finding other ways to compete now with other dental offices and pull in more patients, as patients look at better alternatives in minimally invasive care. So I think there's a segment that is buying due to that. And then there's a segment also to that really has taken the COVID to heart and want to create a very safe environment, plus better patient outcomes by using the technology and they get both with either our diode or our Waterlase system. And we recently conducted two WMEs one in Atlanta and one in Chicago and that was the feedback that we received from the participating dentists at those events.

[Bruce Jackson:]

Okay, that's very helpful. And then with the McGuire study, one of the interesting findings was that there's a productivity advantage. Is that something that the DSO customers are interested in and/or responding to?

[Todd Norbe:]

Yeah, so the DSO is always interested in productivity, but probably more so the return on investment on procedures that their GPs can do without necessarily passing on to the specialist. So the beauty of the McGuire study is that it showed using our technology in a minimally invasive way without using a scalpel and drawing a flap and then having to use sutures which most GPs prefer not to do. The ability to use this technology go into the sulcus subjectively with our laser tip and really get a very similar, if not superior result from a patient reported outcome standpoint. And that's really it. The attractiveness here for the DSO is because now that's all incremental dollars that they keep in house or that they can generate, that normally they couldn't because they didn't have the technology slash tool to be able to deliver that to their patients.

[Bruce Jackson:]

Okay, great. And then last question for me. With the sales territories and the sales staffing, do we have everyone back out in the field and have you filled all of the open territories?

[Todd Norbe:]

Yeah. So we - as I mentioned, we've got the team back online or some folks that we furloughed through our cost initiatives as well as our service tech, so everybody's back. And it depends on the marketplace, some are more receptive to seeing reps and service reps, some markets are a little more challenged in that. And we have right now I believe one open territory across our field selling team.

[Bruce Jackson:]

All right, thank you for taking my questions.

[Todd Norbe:]

Thanks Bruce.

[John Beaver:]

Thank you, Bruce.

[Operator:]

[Operator Instructions] Our next question comes from Ed Woo with Ascendiant Capital.

[Ed Woo:]

Yeah, thank you for taking my question. My question is in terms of - have you seen any big differences in geographies? I know you mentioned that some of the sales people are having a little bit more traction in certain areas. Is that the same as you're seeing in terms of revenues?

[Todd Norbe:]

Yeah, I think they would be the related Ed, on reference to where there's better access, there's better opportunity in the closure. Surprisingly, Chicago, where we had a WME and we had I would say, a fairly solid booked room with social distancing. And the same thing in Atlanta and it was in the outskirts of Atlanta, it was in downtown Atlanta. So those were very positive. And there wasn't a resistance from dentists coming together to learn and be educated around the technology.

[Ed Woo:]

Right, what about are you seeing any big differences between Europe and the US or even in Canada?

[Todd Norbe:]

Yeah. Canada's coming back strong now. We're working with another DSO up there, which we started the tail end of last year. It's the largest DSO in Canada and there's a call with them this Friday. So they're back to about 90% level. So based off of the information they provided us two days ago, so that's really positive. Rest of world, I think, depending on pockets, it's coming back a little slower than we would probably like or anybody would like. But I would say US is probably leading that recovery effort, Canada would follow suit and then different pockets within the rest of the world.

[Ed Woo:]

Great, but then moving on to - in terms of the cost cuts and your new - lower cost structure - low breakeven, how much can you leverage that if revenue grows back and you maintain your cost structure as is or will you have to ramp it back up if revenue recovers?

[John Beaver:]

So as we believe that the current cost structure and we're not talking about the cost structure in this context, I'm talking about the infrastructure, headcount, so forth, and we can support that revenue in the $40 million, $50 million range. So as it ramps back up, for sure the current cost structure is supportive of that. Obviously, variable costs will go up, but the operating costs, we think we're in the right place right now.

[Ed Woo:]

Great, well, thanks for answering my questions. And I wish you guys' good luck. Thank you.

[John Beaver:]

Thanks Ed.

[Operator:]

At this time, there are no further questions. I'll now turn it back to the company for closing remarks.

[Todd Norbe:]

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

[Operator:]

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may now disconnect your phone lines.