BIOLASE, Inc.
Q4 2019 Earnings Call Transcript

Published: 27 Mar 2020

[Operator:]

Good day and welcome to the BIOLASE 2019 Fourth Quarter and Year End 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. 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 Fourth Quarter Ended December 31, 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 fourth quarter and full year before opening the call for questions.Before we begin, I'd like to remind everyone that a number of forward-looking statements, which are 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, March 266, 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'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 fourth 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 adjusted EBITDA and adjusted EBITDA loss per share, as well as the details of the company's non-GAAP financial 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. First of all, I want to acknowledge of coronavirus and express our heart felt concern to those of who have been impacted. The safety of our employees, customers, partners and patients is paramount as we are taking every precaution to ensure that wellbeing during this difficult period.While we hope the impact of virus is controlled very soon, it is difficult to estimate at this time when our commercial activities and more specifically the dental market to return to normal levels. The coronavirus pandemic and the actions taken in response are unprecedented. It's impossible to know how and when its affects on our business will come through.However, we do know that the dental office closures that have occurred in much of the world have significantly impacted our first quarter 2020 sales. Lastly, we implemented a temporary closure of our building in Irvine which houses our manufacturing operations due to the executive order from the governor of California. At this time, we do not know the duration of this order and how this closure will ultimately impact the company. 2019 marks my first full year as CEO of BIOLASE. And I'd like to start the call with a bit of recap. When I joined the company a little over year and half ago, I believe it was not a question of if but when laser dentistry would become the standard-of-care. I still feel the same today. There is no doubt that laser dentistry would become the standard-of-care and there is no doubt that BIOLASE will be industry leader in advancing laser dentistry through the Waterlase and Epic technologies.Furthermore, BIOLASE is well positioned within a market with general practitioners and DSOs, which are large groups eager when they look through ways to expand their services keeping all revenues in house. With this positive market dynamics, BIOLASE needed to change its go-to-market, restructuring the organization to focus investment on the customer and shift from an R&D centric culture. A culture that was activity happy but had a clear, but did not have a clear focus on the desired results. There is also perception that this business will continue to be funded.Despite the fact the company had never made money. A lot of heavy lifting and change management by the team had occurred over the last year. To create a culture centered around cost and results minded discipline. We are now about half way through our journey of positively changing trajectory of BIOLASE. Over the past year and half we have made many positive changes that improved our cost structure, build our talent bench to create a healthy operating company. Let me share with you some of the actions we took in 2019.First off, senior management is now under the same roof for the first in the company history both CEO and CFO are based at the company's headquarters. Second, we brought in new management and board members who have significant industry experience and proven success in growing businesses within a dental space. We hired the right talent to create positive change and have implemented business systems to guide what we do and measures how well we execute across all functions.Majority of our commercial team is new and we believe complementing their skills will be leadership we now in place will allow us to focus on growing sales and doing so profitability. We have rationalized our cost structure. In 2019, reduced non sales headcount by approximately 25%. We reduced R&D spent to less than 10% of revenue. And before Covid-19, we were on a path to deliver growth margins to be above 50% and we hope to return to that path soon. As a benchmark of this progress and improved operational efficiencies, we have also outsourced consumable this year and focused on designing for manufacturability to reduce assembly time on our Epic laser by 75%.On the revenue side, we create a guideline around pricing discipline and payment terms improving collection and margins. This is yet another example of something that was far into the BIOLASE culture. In building our commercial engine, we hired new experienced sales leadership that is now represents 75% of the team. Along with turning over 60% of our field selling team to a new assessment process. We also made great stride in building a strong commercial culture where marketing and sales are in full collaboration through processes that have build to drive leads through inside sales to field sales.Previously, these functions were not aligned. Today, they are with a comp structure that drives its positive collaboration. Many other processes are also underway like our growth war room, implementing salesforce CRM, our learning management system and many others. We still have much to do in the spirit of continuous improvement.In 2019, we walked away from unprofitable business in the company's legacy imaging business is just one example of that. While similar actions contribute to short-term revenue disruption this year, it was the right thing to do for the health of the business and to achieve our long-term growth and profitability goals. When I joined BIOLASE's revenue was $46 million and the company was operating with $15 million EBITDA loss. Not only was this unacceptable, it was not sustainable. We successfully paired this back by 30% in 2019 to $10 million while exiting additional top line revenue.So what is the plan for 2020? As I've noted, we made significant changes to business in 2019 to improve margins, lower costs, and improved sales. Let me review some of the other exciting initiatives that we expect to accelerate our progress when our US and international businesses return to some level of normalcy. One of our initiatives is to continue to penetrate the DSO market. In 2019, we did a Phase one Waterlase trial at Heartland, the largest DSO group in the US. Phase 1 was a success with four of our partners more progressive clinicians adopting our technology. Each clinician saw a complete return on investment within a period of five to seven months based on the incremental revenue generated from laser treatments. Mainly around procedures like perio -- peri-implantitis and soft tissue management.The goal was for Heartland to validate our technology and expand in-house procedures. We achieved that. In 2020, we plan to expand this to Phase 2 trial adding additional Heartland dentists to see if they can replicate similar results. Based on the success at Heartland, we now have other DSO pilots planned across North America. Also Heartland and others are now trialing our new release Epic Hygiene Laser which received FDA clearance in December. As mentioned, drivers are in place to increase the adoption of technology and we believe the sophistication and growth of the DSO segment has one of these key drivers. You don't have to look far to see what happens with Epic. It was the DSO like move in that segment that drove that new standard-of-care and corrected vision that we know today.Not only does the DSO segment represented significant growth opportunity for BIOLASE for years to come, but it also spawn what we now call the Waterlase Mentoring Experience or WME. This new sales approach puts training first and that's a group of progressive dentists and shows that the power of technology for first hand while allowing them to use the Waterlase technology post training in their office. We are also still learning and refining here but early success and results show 55% close ratio and an improved BIOLASE overall experience.We are seeing our referrals increase by creating this rewarding experience. We get four WME programs in the first quarter expecting to increase this through 2020. Based on early success, we believe that WME could generate up to half of our US equipment sales by 2021. Another milestone in 2020 we will be publishing the landmark study performed by McGuire Institute on the clinical efficacy of Waterlase assisted treatment of periodontitis versus traditional open flap gum surgery. The study also track the patient reported outcomes are pros for each procedure. I know we've discussed this previously but due to its important are worth repeating. The McGuire study is an important study for BIOLASE. Certainly an important study for the industry, validating minimally invasive perio treatment without the need for extensive surgery or extended patient recovery time.This will benefit both the specials and general practitioners allowing for improved patient care and treating perio disease. The full study will be published in the Journal of Periodontology in the next few weeks and will show up first electronically. As we've noted before, we believe the study will establish new protocol for perio surgery and drive further adoption of tissue laser in our target markets.We are also equally excited about the additional studies on treating perio disease expected to be released in 2020 from Columbia, Harvard and UCLA. We believe we have the best technology to advance dentistry and now are complementing this with a commercial infrastructure to support and expand the reach of our great devices.Over the past year, we've been building the business processes that we believe are necessary to successfully align BIOLASE's innovative technology with an approach that can achieve commercial success. While we continue to make significant progress, we have much more work to do to reach our ultimate goal. While our strategic decision in 2019 to rebuild the substantial portion of the sales team, had a short-term impact on our revenue. We believe it had to be done to successfully recruit right minded sales team members for our success.During 2019, out of 32 salesforce territories about third were open for the majority of the year. Today, I am pleased to report that we have now sales all but two territories and look forward to the revenue lift this will produce once US business returned to some level of normalcy. We believe we have been successful in recruiting new sales talent that is more aligned as this transition from an R&D centric company to a more disciplined customer centric, commercial organization driving best practices. While it's too early to mention success, this new sales talent is already changing the BIOLASE's culture, the energy and enthusiasm throughout the company is high and we are excited to have this new talent on board as part of the team.Before the coronavirus epidemic hit, we were confident that the prudent cost reduction initiatives we've implemented along with while we still have plan will put us on track to significantly reduce our EBITDA loss again in 2020, however, given current uncertainties it is impossible to know how the rest of 2020 will play out.In closing, we remain excited about our progress to date, our direction, our cost initiatives and our growth prospects. Once US and international business returns in some level of normally, we've made some important strategic decisions in 2019 will benefit our future and before Covid-19 pandemic hit, we are beginning to see some really positive results from these decisions. We are confident that these decisions along although not easy will ultimately build a healthier business going forward and position BIOLASE for long-term sustainable and profitable revenue growth.With that said, I'll turn the call over John for review of our fourth quarter and full year financials in more detail. John?

[John Beaver:]

Thanks, Todd and thank you all again for joining this afternoon. Now let me review some of the numbers. Total worldwide revenue for the fourth quarter of 2019 was $10.2 million, an increase of 18% sequentially over Q3 results so this represented $2.8 million decrease compared to $13 million in the fourth quarter a year ago. Revenue from the US for the fourth quarter of 2019 increased 18% sequentially. On a year-over-year basis US revenue was down 34%. This reflects the strategic decisions we made to realign its significant portion of our US salesforce. The decline in revenue is primarily attributable to these open territories. As Todd noted, we're changing the culture of the company and increasing transparency and accountability throughout the organization.And have been actively recruiting new direct sales team members who put our new customer centric disciplined, commercial culture. Internationally, total revenue for the fourth quarter of 2019 increased 17% sequentially. On a year-over-year basis international revenue was up 3%. Gross margin for the fourth quarter of 2019 was 43% compared to 34% in the third quarter and 43% in the year ago quarter. We achieved this improvement compared to a year ago quarter despite lower revenue.Total operating expenses for the fourth quarter of 2019 were $7.5 million compared to $7.9 million in the third quarter and $12.1 million for the fourth quarter of 2018. The continued reduction in operating expenses both sequentially and year-over-year represent the benefits of the cost rationalization efforts that we have been implementing throughout 2019. Sales and marketing expenses declined $200,000 or 6% sequentially and $1.4 million or 27% year-over-year in the fourth quarter due to reduce compensation related expenses due to the open sales territories that we talked about.General and administrative expenses decreased $600,000 or 18% sequentially and $400,000 or 14% year-over-year in the fourth quarter. Engineering and development expenses increase $26,000 or 2% sequentially and $200,000 or 14% year-over-year in the fourth quarter.Operating loss for the fourth quarter of 2019 was $3 million compared to an operating loss of $4.9 million in the third quarter of 2019 and $6.5 million in the fourth quarter of 2018. Net loss for the fourth quarter of 2019 was $3.6 million or $0.13 loss per share, compared to net loss of $5.5 million or $0.25 loss per share in the third quarter of 2019 and a loss of $6.9 million or $0.33 loss per share for the prior year's fourth quarter.As a reminder, our earnings release includes reconciliation between unaudited GAAP net loss and adjusted EBITDA. We believe adjusted EBITDA provides useful measure to the company's operating results by excluding depreciation and amortization expense, non-cash stock comp expense, changing allowance for doubtful accounts and expenses related to the disposal internally developed software and the cost of patent litigation settlements. The adjusted EBITDA loss for the fourth quarter of 2019 which excludes these items decreased 39% year-over-year to $1.6 million or $0.05 per share.Our basic and diluted share counted into the fourth quarter of 2019 was 28.1 million shares compared to 20.7 million shares for the year ago quarter.Now let's turn to 2019 full year results. Total worldwide revenues for the full year 2019 were $37.8 million, down 18% compared to $46.2 million in 2018. Excluding revenue from our non-core imaging business, which we exited during 2019, revenue for the full year 2019 decreased 16% compared to a year ago period. Revenue from the company's core US laser related products for the full year 2019 decreased 28% year-over-year.Internationally, total revenue for the full year 2019 was $14.9 million, down 14% compared to the prior year. The main reason for this decrease was the impact of our transition to a new Chinese distributor. Gross margin for the full year 2019 was 38%, up from 37% for the full year 2019 despite lower revenue. The increase in gross margin reflects a reduction over all manufacturing expenses.Total operating expenses for the full year 2019 were $29.9 million, a decrease of 21% compared to $37.8 million for the full 2018. Sales and marketing expenses for the full year 2019 decreased by $3.7 million primarily due the open sales territories in the US discussed earlier.General and administrative expenses decreased by $1 million and engineering and development expenses decreased by $0.4 million.Net loss for the full year 2019 was $17.9 million or $0.77 loss per share compared to a net loss of $21.5 million or $1.05 loss per share for the prior year. The decrease in net loss was primarily due to decrease operating expenses. The adjusted EBITDA loss for the full year 2019 decreased 29% year-over-year to $10.4 million or $0.44 per share when compared to an adjusted EBITDA loss of $14.5 million or $0.74 per share to the prior year.Turning to the balance sheet. Cash and cash equivalents and restricted cash total $6.1 million at the end of 2019. As we face the challenges posed by Covid-19, we are focused on liquidity, cost containment and prudent cash management.Now moving on to guidance. In Q1, we expect the coronavirus to have a negative impact on revenue as dental procedures are down as many dental offices and clinics are closed worldwide. This situation remains very fluid so we don't know when they plan to reopen or we do not know what the demand for our products will be once the dental offices and clinics do reopen. This will impact consumable revenue as well as laser sales. In addition, laser sales will be down as most dental shows and workshops have been cancelled for now. For example, IDM, the biggest dental show in Asia which happens every two years has currently been postponed for two months. We are closely monitoring the situation as it unfolds.Last I want to add that prior to the coronavirus pandemic; we felt very strongly that having filled almost all of our US sales territories would lead to year-over-year revenue improvement for the last three quarters of 2020. However, whether we can achieve this depends on how quickly both US and international business returned to some level of normalcy.This concludes our prepared remarks. And I'll turn back over to the operator to open the call for questions.

[Operator:]

[Operator Instructions]We'll take our first question from Kyle Bauser of Dougherty and Company.

[KyleBauser:]

Hi, Todd and John. Thanks for taking the questions here. Glad to hear that almost all the territories are now filled, unfortunately it was right when Covid-19 situation started to flare up. So given the recommendation by CMS to pause elective and dental procedures, are you potentially exploring the option to consolidate those last couple of territories into 31 or just kind of pausing things or would 31 territories just kind of spread things too thin?

[ToddNorbe:]

I'll answer that Kyle. This is Todd and thanks for the question. I think we are looking at things pretty fluid here to understand what the next steps are in reference to field selling and filling those territories. We may have to look at providing more geographic sizing in territory with the current headcount that we have, but that decision has not been made yet. Currently we have two open positions as was mentioned.

[JohnBeaver:]

And, Kyle, I would add to that. This is John. We actually had all positions open up until two weeks ago, which was certainly our goal by the end of the first quarter and we had two people back out of the last minute given the Covid-19 situation.

[KyleBauser:]

Okay. Got it. And I know you mentioned you said some John of the clinics, dental clinics have closed. So are there are still some out there that are operating? I mean surely there are some emergency dental procedures that could move forward right now. Is that right? And which procedures would warrant that?

[JohnBeaver:]

So there are dental procedures being performed. We're actually getting information and requests from our customers to support them on that with the disposable tips orders and service calls. A lot of this revolves around endodontics and we had say some late-breaking news yesterday in that we got very comfortable working with the ADA and our clinicians to be able to believe that we are a central business under the state of California requirements. And so we have begun very skeletal shift, keeping social distancing for some of our workforce. They've gone back into the plant now and begun shipping some essential materials that are required as of today.

[KyleBauser:]

Interesting, okay. That's helpful. And then you speak there, you spoke a little bit about it, Todd, the McGuire study. Do you have any visibility on when we could see data readout here? And you also mention the studies that included Columbia Harvard UCLA. Wondering if you could just provide a little bit more color on that?

[ToddNorbe:]

Sure, Kyle. It's ironic I actually had confirmation today via email from the McGuire Group that the manuscript was approved for Journal of Periodontology and that it would show electronically as I mentioned in my statement. So I would expect that we would see that in the next three to four weeks depending on what happens here was obviously the pandemic and what they do in reference to publications. But on top of that and on the heels of that we also have another very compelling study that's coming out of Harvard, which is going to have histology behind it and this is around perio treatment of disease implants. And it's showing unbelievable results as well. And then Colombia as well as UCLA will have something very similar.So I think what this does is really almost validates what we've known and what lasers do with soft tissue and healing and being able to bring an implant back to life and getting regeneration as well as getting better attachment regeneration in the pocket as well. We've been doing this for quite some time but now we have really high caliber really extensive landmark studies that are going to further validate this. And, Kyle, I think it helps really with a segment of the population who've been on the sidelines waiting for this type of information to move forward in a better treatment of care and when that's minimally invasive and also provides a lot better in a patient reported outcomes from healing standpoint.

[KyleBauser:]

Right. Now that's great we'll certainly keep an eye out for those. And then just lastly, we're hearing about some really nice conversion rates in the field as it relates to that mentoring experience program. Can you just remind me how many mentors you plan to have out there on a quarterly basis maybe since things are on hold by year-end now going forward on a quarterly basis.

[JohnBeaver:]

Yes. So, Kyle, let me run through that for you and let me give you historical perspective as well. We had two WME events in Q2 of last year. We follow that up with seven in Q4. We had another seven planned in Q1 of this year but we had to cancel the last three because of the pandemic and so four were finishing up kind of as we entered into March. We've extended those given the situation. We had 10 planned in Q2 but we postponed the first four of that. So right now we have six planned in Q2 but obviously that's a very fluid situation given the current status and then our plan for the back half of the year in Q3 and Q4 are to have 10 of these WME events programs in each quarter.

[Operator:]

Our next question from Bruce Jackson with Benchmark.

[BruceJackson:]

Hi. Thanks for taking my questions and congratulations on all the progress you made during 2019. You guys did a lot. So looking at the marketplace right now ABA came out on March 18th with some guidelines and what was essential, non-essential and certainly anything having to do with pain or infection management comes under essential, which I think would favor some of the procedures that you do. So can give us a rough idea of for the offices that are still operative? Can you give us a sense of how many there might be out there or just generally who's still doing procedures out there right now?

[ToddNorbe:]

So, Bruce, I think you probably find the majority of those procedures being done by the specialty group. So the endodontist, periodontists, oral surgeons, it also finds some what we call super GPS that are doing more surgery and higher-end procedures. And you're absolutely correct our technology and lasers are perfect for what they are doing and the ones that are using it as a standard of care around perio treatment also around the root canal process and cleaning the root canal out from an irrigation standpoint.So you are going to continue to see demand for at least our consumables in a short term and that's a reason John mentioned that we opened up limited shipping out of our facility for making sure that we can get tips out to the customers that need them.

[BruceJackson:]

And then on that point do you have -- what's your inventory situation like? So you're got some manufacturing going, are you even now under this current set of conditions you're working with, are you set up to adequately meet the customer needs.

[JohnBeaver:]

So, Bruce, we have to be clear we don't have manufacturing going on right now just shipping from inventory and we will determine when to bring manufacturing back based on the situation as it unfolds. We have inventory both at our German facility and at our Irvine facility. We think we have enough to cover the certainly decreased level of needs over the next couple of weeks. And then we'll play it by year going forward. That's about all I can tell you there.

[BruceJackson:]

Okay. Fair enough. And then do you have, in the conversations you've been having with the dentist offices and the other specialists, do you get a sense of what has to happen for, sure them to come back online? Are there any things that they need to, what are things that they need to see before they decide that they're going to reopen?

[ToddNorbe:]

I think one would be as you know that a lot of the officers are listening to the ADA guidance as well as any type of state requirements that are being put up on them. So I think that would be step one and once they have that cleared I think they're eager to get back with their staff and there's going to be pent-up demand because people that need these services these things don't go away. And I think you have ability from many dental offices, Bruce, to increase the level of services that they can provide because they are not working five, six days a week most are working four days. So they can add an additional work day or two to hopefully catch up with the demand that's out there with patients meeting there for work.

[BruceJackson:]

Okay and then with some your salesforce, so now you've been able to fill most of the open territories. Tell us a little bit about what you're doing to kind of help retain the people that you've managed to hire and are there any activities that a salesperson can do right now even though the market may be somewhat disrupted.

[ToddNorbe:]

Yes. I think good question there, Bruce. So we're keeping team really busy for a few things. One is how do they hone their current skills and reference to the clinical knowledge and so forth that one thing that's active right now. The team has pivoted fairly rapidly here. We've scheduled eight webinars for our end customers within four weeks. We conducted one yesterday, it was sold out with 500 hundred dentists attending and it was all around how to treat a disease implant. So that's obviously indication that there's a huge demand for what we do here. But on the tail end of that what does the sales rep have to do, well, typically there's the next action around that webinar where they just want to learn more or virtually being able to have a lunch and learned through zoom.So those are all the things that the team is currently active with and working on. There's a creative ways now to reach customers to change the paradigm a little bit. But we have which is actually opportunistic we have dentists that have time on their hands now that because of this pause can get educated. You can learn about this technology. So we're taking every advantage of that as we possibly can.

[BruceJackson:]

That's great and then is there any continuing a medical education credits associated with any of these programs?

[ToddNorbe:]

Absolutely, that's we are certified. So depending on the duration of the educational program and depend on how many CE credits they also obtain.

[BruceJackson:]

Okay. Great. And then last question for me on the newer studies with the Columbia Harvard and UCLA. Any idea when those might reach publication?

[ToddNorbe:]

Yes. We expect probably they're all going to hit in 2020. We didn't talk a lot about those. We spoke primarily about local hire but those have been active and in the works for at least a year or so depending on the study. So it should all hit in 2020 based off of what we're seeing because they're really close to manuscript level.

[Operator:]

Our next question from Ed Woo with Ascendiant Capital.

[EdWoo:]

Yes. Thank you for taking my question. My question is more on the customer base, the dentists; I know you mentioned that they have a little bit more time. Is that really different from the US or Europe or are they pretty much in the same boat? And have you heard about them whether they're struggling financially at all?

[ToddNorbe:]

Yes. So first question, Ed, in reference to time on their hands to listen to new technologies or be educated. The webinar we did actually wasn't just in US. We had, I think the number was close to 30% international participants on that webinar. So I think the answer is yes. There is a very similar situation and again it depends on the country. Financially, I think you're dealing with dental offices that are small businesses and they've got x number of employees that they have to cover and we heard everything from the dentist saying I'm not going to take a paycheck here and I'm going to keep my folks employed. We're going to furlough or let go of our team until we can get back and operational. So it varies and I think it also varies by state depending on what the situation is.End of Q&A

[Operator:]

Thank you. At this time, I would like to turn it back over 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:]

This concludes today's call. Thank you for your participation. You may now disconnect.