BIOLASE, Inc.
Q3 2019 Earnings Call Transcript

Published: 7 Nov 2019

[Operator:]

Good day everyone, and welcome to the BIOLASE 2019 Third Quarter Financial Results Conference Call. Today's call is being recorded.At this time, I would like to turn the conference over to Todd Kehrli of the EVC Group. Please go ahead, sir.

[Todd Kehrli:]

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's Financial Results for the 2019 Third Quarter Ended September 30, 2019. 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 third quarter before opening the call for question.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 made 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 are only representative of the company's view as of today, November 6, 2019. 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's Web site 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 2019 third quarter result. If you do not have a copy of the news release, it is available on the Investors section of the BIOLASE Web site at www.biolase.com. BIOLASE's financial results also can be found on the company's quarterly report on Form 10-K, 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 net loss and net loss per share, as well as the details of the company's other non-GAAP disclosures.With that, I'm pleased to turn the call over to BIOLASE's President and Chief Executive Officer, Todd Norbe.

[Todd Norbe:]

Thanks, Todd, and thanks everyone for joining us this afternoon. We appreciate your interest and continued support of BIOLASE. Before we review our Q3 operating results, I want to spend a few moments discussing our recent financing developments. Two weeks ago, we raised $8.5 million through a public offering of common stock in a concurrent private placement of convertible preferred shares with existing shareholders, which further validates our business plan and trajectory. Last week, we also secured a new line of credit giving us access to an additional $3 million should we need that, and does it arise. These are significant developments for BIOLASE, and this significantly improves our working capital and strengthens our balance sheet and positions us for success as we continue to execute on our plan to drive to sustainable, profitable, revenue growth.This past month, we hosted our Advancing Dentistry Symposium, in San Diego. I'm pleased to report, it was a very successfully two-day event attended by over 200 dental professionals, and had a similar goal of which was to learn the latest trends and innovations in dentistry from leading industry experts. Attendees recognize that dental treatment is changing, and as a dental professional they need to know how to utilize the latest tools and integrate them into their practice seamlessly. The keynote speaker at the symposium was Dr. Gordon Christensen, a world-renowned dental educator, influencer, and founder of Clinicians Report. This presentation was titled, What Clinical Techniques & Technologies Do You Really Need and Why? He highlighted our Waterlase technology and its benefits.Other presenters also included Dr. Russ Morrow, from Heartland Dental, who discussed how dentists should be integrating Waterlase in their practice due to improved patient care and overall return on investment. Additionally, Dr. Don Clem previewed the first "Landmark Study" by the McGuire Institute on the clinical efficacy of Waterlase-assisted treatment of periodontitis versus traditional open flap gum surgery. The study also tracked the patents' reported outcomes or pros for each procedure. The McGuire study is an important study for BIOLASE, validating minimally invasive perio treatment without the need for extensive surgery or extending patient recovery time. This will benefit both the specialists and general practitioner, allowing for improved patient care in treating perio disease.We anticipate the six-month interim data will be available by the end of 2019. And we expect that the full study will be published in a scientific journal during the first-half of 2020. As we've noted before, we believe this study will establish new protocols for perio surgery and drive further adoption of our All-Tissue Lasers in our target markets. We are equally excited about the additional studies that treat perio disease from Columbia, Harvard, UCLA, and will be released some time next year. During the two-day symposium, we interacted with hundreds of general practitioners and specialists who can benefit from the use of Waterlase technology.A key topic of interest was BIOLASE's recent announcement of our Waterlase dental lasers received regulatory clearance in the U.S. and Canada for crown and veneer removal. This indication enables dentists to remove crowns and veneers in less than five minutes using our technology. As the only laser company with this clearance, BIOLASE can provide patients ongoing crown and veneer removal in a minimally invasive way that encompasses all the benefits dental lasers bring to the variety of procedures, including spending less time in the dental chair. This indication aligns directly of BIOLASE's mission of advancing dentistry, and there is not doubt that crown and veneer removal offers more pleasant experience for both the dentist and the patient.We believe we have the best technology to advance dentistry, and our focus now is on building the commercial infrastructure to support and expand the reach of this great device. Over the past year, we have been building the business processes that are necessary to successfully align BIOLASE's innovative technology with an approach that can achieve commercial success. A key learning from our Heartland pilot and model market initiative includes developments of our Waterlase Mentoring Experience, or WME. This program allowed dentists to have firsthand experience with our technology and applications through the use of experienced mentors in a group learning environment where individual case sharing is encouraged. We have started to expand this program to select cities this quarter, and will continue this initiative in 2020.While we continue to make significant progress, as we have much more work to do to reach our ultimate goal, our strategic decision in Q1 to rebuild a substantial portion of our sales team continues to have a short-term impact on our revenue. We continue to actively recruit new sales talent that is more aligned with our transition from an R&D-centric company to a more disciplined, customer-centric commercial organization driving best practices. Since we initiated this change, we have hired seven new reps and managers. While it's too early to measure that success, this new talent is already changing the BIOLASE culture. The energy and enthusiasm throughout the company is high, and we are excited to have them onboard. We are making good progress with this initiative. We are actively hiring to reduce the number of open territories, and expect to fill the remaining open positions by the end of the first quarter of 2020.Another strategic initiative we began implementing last quarter is the adherence of pricing in extended terms discipline when dealing with our international distributors to improve DSOs and improve margins. While this contributed to our short-term revenue disruption, it was the right thing to do for the business. In closing, we remain excited about the direction and growth prospects. We made some important strategic decisions over the last two quarters. We are beginning to see some positive results from those decisions, and we are confident these decisions, although not easy, will ultimately build healthier business for the future position BIOLASE for long-term growth in the future. At the same time, the prudent cost reduction initiatives we continue to implement have put us on track to reaffirm our goal of achieving adjusted EBITDA positive in the fourth quarter of this year.With that said, I'll now turn the call over to John to review our third 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. Total revenue for the third quarter of 2019 was 8.6 million, consistent with our Q2 results. Again, this is a result of some of the strategic decisions made around our commercial organization. This represents a $2.3 million decrease compared to $10.9 million in the third quarter a year ago. Revenue from the U.S. for the third quarter of 2019 decreased $2 million year-over-year. As Todd discussed, the decline in the U.S. revenues is due to the strategic decisions we made to realign a significant portion of our U.S. sales force.We're changing the culture of the company and increasing transparency and accountability throughout the organization. We've been actively recruiting new direct sales team members who fit our new customer-centric, disciplined commercial organization culture. The decline in revenue was due to these open territories. Internationally revenue for the third quarter of 2019 was 3.7 million, down 300,000 compared to the prior year's third quarter. The decreased international revenue is primarily due to our efforts to promote better terms and pricing discipline, which resulted in over 400,000 in orders held back during the quarter.Gross margin for the third quarter of 2019 was 34%, compared to 36% in the year ago quarter. The decrease in gross margin reflects lower sales. When compared to the second quarter of 2019, gross margin was about 5% lower entirely due to geographic mix as we had a higher percentage of international sales and product mix as a result of higher percentage of express units during the quarter. On a relative basis, overall margins continue to expand on a year-over-year basis. Furthermore, international margin saw improvement year-over-year in the quarter.Total operating expenses for the third quarter of 2019 were $7.9 million, compared to $8.5 million for the third quarter of 2018 at 7% reduction. Sales and marketing expenses declined $1 million or 22% year-over-year in the third quarter, due to reduced compensation related expenses, due to open sales territories and lower revenue, and almost reduced direct to patient marketing expenses that we incurred last year. General and administrative expenses increased 500,000 or 20% year-over-year due to an increase of $1 million in bad debt expense. Engineering and development expenses decreased 12% year-over-year in the third quarter. Operating loss for the third quarter of 2019 was $4.8 million, compared to an operating loss of $4.5 million in the third quarter of 2018.Net loss for the third quarter of 2019 was $5.5 million or $0.25 loss per share compared to a net loss of $4.7 million or $0.23 loss per share for the prior year's third quarter. As a reminder, our earnings release includes the reconciliation between unaudited GAAP and adjusted EBITDA. We believe adjusted EBITDA provides a useful measure to companies' operating results by excluding depreciation, amortization expense, stock comp expense, and change in allowance for doubtful accounts. The adjusted EBITDA loss for the third quarter of 2019, which excludes these items, decreased 27% year-over-year to $2.7 million or $0.12 per share when compared with an adjusted EBITDA loss of $3.7 million or $0.18 per share during the third quarter of 2018. Our basic and diluted share count at the end of the third quarter of 2019 was 21.9 million shares, compared to 20.6 million shares in the year-ago quarter.Now, turning to the balance sheet, cash, cash equivalents, and restricted cash totaled $2.4 million as of September 30, 2019. We remain focused on wisely investing our cash in programs to drive future growth. As Todd mentioned, after the quarter end we successfully raised $4.1 million in net proceeds through an equity offering, and approximately $4 million from a concurrent private placement, resulting in total net proceeds of $8.1 million. This week, the underwriters exercised their over-allotment option in full and BIOLASE received another $600,000 before transaction cost. In addition, last week we announced a new revolving line of credit with Pacific Mercantile Bank which gives the company access to another $3 million should the need arise.The recent equity raise and line of credit provides BIOLASE with sufficient working capital and a significantly improved balance sheet from which to drive growth and deliver profitability. We want to thank our investors and lenders for their confidence and support.This concludes our prepared remarks. I'll turn the call back to the operator to open the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And first, we will go to Kyle Bauser with Dougherty. Your line is open.

[Kyle Bauser:]

Hi, Todd, and John, thanks for taking the questions. Maybe I'll start off with progress on filling the open territories. Can you talk a little bit more about how you're finding potential candidates and kind of what you're looking for that's different than before?

[Todd Norbe:]

Yes, Kyle, so I'll take that, and John maybe can give you more specifics on the number of open territories that we currently have in place. We did a lot of work to understand what we looked at as best of best and what works with the DNA in some of our sales team that generate over $1 million per territory, and looked for that through an organization called The Brooks Group and build a profile, an interviewing guide around that so that we can definitely provide a better opportunity on the front end to make sure we're getting the right folks in front of us to interview. And then also the other process we've put in place is our training program to make sure that clinically they can meet the needs of the organization as well in the field. So there's a two-step process, obviously the assessment side on the front end, making sure it meets the needs of the organization. And then once we do hire them there's still this evaluation process during training to make sure that they can get to speed clinically to be beneficial for our customers.

[John Beaver:]

And Kyle, let me go into some specifics about the open territories. We had 10 open territories in Q2, and 10 open territories in Q3. Not the same open territories, right, but the same number. Since the end of Q3, we have hired and have on-boarded two sales reps, so now have eight open territories. We hope to add another three -- hire another three to fill those open territories by the end of the year, and so that would cut the gap from 10 at the start of the quarter to five open territories at the end of the year. And then would hope to fill the remaining open territories in Q1 next year.

[Kyle Bauser:]

Got it, and throughout 2020, probably keep it at 33 territories, have you kind of settled on that number?

[John Beaver:]

Yes, that's kind of where we are right now. We'll go through a budget process in the next couple of months and present that to the Board, but right now I'd say that's a pretty good forecast there. And then, knowing that no matter what we do we'll always have some open territories. I would seriously doubt we'll have 33 fully filled territories for 365 days next year, I mean, that will be our goal, but you always have some transition there as well.

[Kyle Bauser:]

Sure. Right, okay. Thanks. And you guys mentioned last month had a nice update regarding the crown and veneer removal indication. On a high level, can you perhaps kind of quantify this opportunity for us, and do you think that many counts were using Waterlase on their own kind of off-label for this crown and veneer removal?

[Todd Norbe:]

I would tell you, Kyle, that the dental population is fairly creative when they have technology, especially early adopters. So I would say it's probably fair to say that a portion of them may have been using this to remove crown and veneers prior to our approval, but we wanted to make sure that the settings were appropriate, based of off our testing through FDA, so that all potential new users as well as current users would feel we're very comfortable and doing this in the right clinical way, and not impact the patient in anyway when they're using this technology. So, answer to your question, I think, probably the answer is yes. The great part is it opens up for the rest of the industry to do this in a very minimally invasive way, and this creates a great experience for not only the patient, but can save the practitioner almost 30 minutes, if it's a removal of the crown.

[Kyle Bauser:]

Okay, understood. And then just lastly, can you remind me -- I know you've been exploring a plan move in 2020 to somewhere that's more cost effective, any updates on this front? Thank you.

[Todd Norbe:]

Yes. So Kyle, we continue to explore options, our lease expires in April of 2020. We have about 56,000 square feet here in the building that we're in today. We believe that we can get that down by about half. Offsetting that is rate increases from when we signed this lease, but net-net, I do expect that absent any one-time moving costs we will save money in at lease expense next year.

[Kyle Bauser:]

Okay, got it. Hey, thanks so much for the updates.

[Todd Norbe:]

Thank you, Kyle.

[Operator:]

And next we will go to Bruce Jackson from The Benchmark Company. Your line is open.

[Bruce Jackson:]

Hi, thank you for taking my question. I wanted to know if you could just kind of talk about the McGuire Study for a couple of minutes, and talk about it in practical terms for dental service organization, and tell us what kind of data is it going to provide them in order to have them adopt the Waterlase technology?

[John Beaver:]

Yes. So, Bruce, there's not a lot that we are willing probably to disclose right now, just because we want to make sure that this gets in a peer-review journal; same reason why at the American Academy of Perio, this past weekend, we just shared the study without sharing the results, but in a nutshell, what you're really comparing here is traditional periodontal surgery, meaning that you have a scalpel, slap back to gum tissue to broad and clean that area out, and these are severe cases, these are not cases that can be treated otherwise. I mean, that was one of the keys with this study. And you're comparing, you know, that procedure which is a traditional procedure, without a laser to a procedure, where you take the laser in a very minimally-invasive way with laser energy with our peri-oral care protocol to go in, subjectively without that much abuse to the surrounding tissue because our laser and our laser tip is small enough that literally go in between if you can visualize it to structure in the gum, to go in there and treat that in a minimally-invasive way to clean that entire area out in what was really compared and this is a double-blind study around, you know, what were the results, one procedure versus the other, and then ultimately, what was the patient reaction to that as we talked about patient reported outcomes. And I think what you're going to find here, and based off the conversations we had at AAP, we're going to find that we're on track on what we believe the positive results that we expected, because when we look at laser therapy and lasers, around soft tissue, and specifically around Waterlase, and our wavelength, it really provides a really unique ability not only to broad and clean that area, and also disinfect it, but it really supports and helps rejuvenate the surrounding tissue. So I know that's probably is not full detail as we'd like, but that's probably as much as we can share at this point.

[Bruce Jackson:]

Okay, I mean, that's helpful. Then, one other question on the model market program, you've had some success there, and have you thought about perhaps extending that to some other markets?

[Todd Norbe:]

Yes, Bruce. You're right. We have had success there, and one of the key things that we found in second quarter was the introduction of a Waterlase Mentoring Experience. We did two of those in the model marketing Q2 very successful. This is where -- from -- based on some of the learnings that we had from what we did with Heartland we gave the dentists a very -- strategically-focused dentist in terms of who we want to go after. We gave the dentists a laser for 45 days, provided them training, also provided them a local mentor, appears there to help them out, and also biweekly webinars, and we were successful in turning that program into a cell in a little bit over 60% of the cases.So, we spent Q3 planning to roll that out to the rest of the country, and in Q4, we started that rollout. Our goal is ultimately is to have up to 10 of these events or Waterlase Mentoring Experience in different cities every quarter. And so, when I got quite 10 in the fourth quarter, but we hope to have 10 in the first quarter. And so, that's an example of something we've learned in the model market experience, if you will, that we're now we're focusing those efforts that we had in the model market really rolling this out throughout the country, and we're really excited about it. We think that maybe up to half of our laser sales in the U.S. could come from these type of programs going forward.

[Bruce Jackson:]

Right, that's it for me. Thank you for taking my questions.

[Todd Norbe:]

Thank you.

[John Beaver:]

Thanks, Bruce.

[Operator:]

Next we'll go to Ed Woo from Ascendiant Capital. Your line is open.

[Ed Woo:]

Yes, thank you for taking my question. My question is on international I know the last couple of quarters, you had some issues in China, and also with international pricing and promotion. When do you think that that's going to stabilize?

[Todd Norbe:]

So and I think, on the pricing and promotion, you're right, we've continued to hold the line there. And I think as we mentioned in the last call, we did not think of one quarter putting our -- drawing the line in the sand was going to necessarily solve this problem overnight. We continue to be very, I would say, aggressive and turning away ad terms, both in payment terms and pricing. And so, hence I think if we had kind of done business as usual, as we have historically, our international revenue would have been about the same as it was a year ago. The 400,000 and back orders that I mentioned was really all due to us walking away, at least at September 30 from that business, knowing that and believing that will come back and in Q4. So I think that will smooth itself out over the next quarter or so. And so, would not see that as being really a big issue going into 2020.China is a separate issue, and we changed distributors in China. In Q2 of this year, we're working through that transition. It has not been smooth, I'll tell you that, but we were confident that we'll be able to transition to the new distributor completely in 2020. And so, if I was to guess, I would say we probably have another six months of a of a China situation, if you will, before we get that fully solved.

[Ed Woo:]

Great. And then, going back to the model market initiatives that [indiscernible] the mentorship programs, do you see you guys are significantly increasing investments in them, or is it kind of more incremental, given the markets that you already have done in Dallas versus -- and then LA?

[Todd Norbe:]

I see as -- I'm pulling back from direct investments in the model market. That's what we did really in Q3 and Q2. Our investment in the model market was all around the Waterlase Mentoring Experience. And then, we used Q3 to plan to roll that out. So I see -- I don't have any specific initiatives in the model markets in Q4 per se. We do have a Waterlase Mentoring Experience here in LA Orange County, but it's just another large city that we're planning on having these initiatives around. So longwinded way of saying it, I think from a model market standpoint, we're pulling back on investment there and really investing in the WME throughout the country. And so, I would hope to hit pretty much every big city major metropolitan area at least once in 2020 with this program.

[Ed Woo:]

Great. And my last question is, you know, you mentioned that, you hope to have all your open territories filled by the first quarter of next year, how quickly will these new sales people reach maturity, will it be a couple of quarters, or will it be four quarters?

[Todd Norbe:]

Yes, Ed. I think historically in the dental space, it depends on what you define as productivity, but it's typically six to nine months. As you recall, we also hired someone to be focused around training, because we really never had someone focused purely on sales training, in a way I would tell you it would be a more of a perpetual training process on a weekly basis. So, with that question, I'd say, with the right hires and what we're doing on the front-end to get the right people in the door, which are pre-screen based off certain DNA and attributes we're looking for, we would expect productivity probably at the six-month mark. And then, there's also what I call, "Tollgates," along the way in reference to their ability to conduct certain parts of the sales process as well. We didn't mention it, but the other thing that we put in place under this new leader as well, who also runs our inside sales department, we've put in place a bullpen of individuals who we look at that have the ability to also move outside in sales force as well, and they learn inside first, and then we could deploy them at a later point in time. So that process started about two-and-a-half months ago.

[Ed Woo:]

Great. Well, thank you for answering my questions and good luck. Thank you.

[Todd Norbe:]

Thank you, Ed.

[John Beaver:]

Thank you, Ed.

[Operator:]

[Operator Instructions] Next, we'll go to Lisa Springer from Singular Research. Your line is open.

[Lisa Springer:]

Thank you. Hi, Todd and John.

[John Beaver:]

Hi, Lisa.

[Lisa Springer:]

In terms of the model market, I was curious if the sales restructuring affected the performance of sales performance in the model markets in the third quarter, or did you actually see revenue growth in those markets during the third quarter?

[John Beaver:]

Yes. So Lisa, we did not see revenue growth in the model markets and the third quarter. They were down slightly. The sales changeover fortunately in LA Orange County and Southern California, San Diego, and Dallas was really not affected. We still have the same group that we've had for a while there. So we're very fortunate with that. Also think that group was a large part of the reason that the WME was successful in Q2, but we did not have a program like that in Q3, as we were looking at planning for Q4 nationwide.

[Lisa Springer:]

Okay. And the crown and veneer removal clearance, I'm curious, would the dentists tell us how many of those procedures are part of the practice, is that something they do on a mini day or how important is that to the practice?

[John Beaver:]

Yes. Lisa, it really depends on the practice, and every practice is a little different. So I would tell you that highly cosmetic veneer case offices that are doing a full remake, it's a big portion of their revenue. So we have some customers in LA and New York and so forth, that literally buy the technology now just for that procedure alone, and then are starting to do obviously soft tissue management as well, it goes hand-in-hand there.On the other side, I mean when you start to look at your average GP, and you look at an older population, potentially crowns have to be replaced, a lot of these crowns too are a lot harder material today than they were in the past, so very difficult to remove and really difficult to cut off with a diamond or [indiscernible]. So if you speak to any dentist that has gone through that procedure, they'll tell you, it's one of the worst procedures that they potentially could do, because the assistant can't do it. They have to proceed and do it themselves, and it's very difficult to cut those off. And then you can imagine that patient sitting in the chair along that process. So it depends, I guess is the answer. At a certain level, the technology is highly regarded and really makes their life and the patient's easier. Another situation it's an adjunct to other procedures that they use our technology for.

[Lisa Springer:]

Okay. Thank you.

[Operator:]

And with no further questions at this time, I'd like to turn it back to the company for any closing remarks.

[Todd Norbe:]

Thank you, Operator. On the Investor Relations front, BIOLASE will be participating in two upcoming investor conferences before the end of the year. We will be participating in Benchmark's Annual Discovery one-on-one conference in New York City on December 4, and the LD Micro Main Event in Los Angeles on December 11th and 12th. We hope to see some of you there. Thank you everyone for your interest in BIOLASE. This concludes our call. Have a great day.

[Operator:]

And that does conclude our call for today. Thank you for your participation. You may now disconnect.