BIOLASE, Inc.
Q4 2017 Earnings Call Transcript

Published: 15 Mar 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the BIOLASE conference call to discuss the company’s results for its Fourth Quarter and Year Ended December 31, 2017. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the call will be opened for questions. [Operator Instructions] For the benefit of those who maybe listening to the conference call replay, this call was held and recorded on March 14, 2017. I would now like to turn the conference over to Mr. Rene Caron of DresnerAllenCaron. Rene, please go ahead.

[Rene Caron:]

Thank you, Tim and good afternoon, everyone and I too would like to welcome you to the BIOLASE conference call to discuss the results for the company’s fourth quarter and year ended December 31, 2017. On the call today is BIOLASE’s President and CEO, Harold Flynn and the Senior Vice President and Chief Financial Officer, John Beaver. After Harold and John complete their opening remarks, we will open the call for your questions. Please be aware 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 only represent the company’s view as of today, March 14, 2017. These risks factors 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 results for its fourth quarter and year ended December 31, 2017. If you do not have a copy of the news release, it is available in the Investors section on the BIOLASE website at www.biolase.com. The company’s financial results for 2017 can be found in the company’s Annual Report on Form 10-K, which BIOLASE plans to file with the Securities and Exchange Commission later today, Wednesday, March 14. With that, I am pleased to turn the call over to BIOLASE President and CEO, Harold Flynn. Harold?

[Harold Flynn:]

Good afternoon, Rene and thank you all for joining us on the call this afternoon. With revenues for the year and fourth quarter of $46.9 million and $12.6 million respectively, the year-over-year revenue trajectory in 2017 was less than we had hoped. However, all things considered, we believe 2017 will be remembered for the foundational improvements we made to our business, which we believe will lead to market improvement in the business during 2018 in the years ahead. The market acceptance and demand for our new Waterlase Express All-Tissue Laser increased significantly. We had meaningful increases in all-tissue laser placements. We are acquiring new customers and penetrating a new, much larger market cohort and we are making progress on the restructuring and rebuilding of BIOLASE, although it’s not yet evident in our financial results. I’d like to walk you through our thinking as we look forward through 2018 when we believe we will deliver far better results than we did in 2017. I would like to start with the news of our financings. We completed a $6 million debt financing last week adding to the $12 million we raised in the fourth quarter. We believe this gives us the capital required to continue transforming BIOLASE into the profitable and successful company we all know it can be. These funds will be used for several accelerating growth initiatives now underway. A key initiative is the targeted expansion in Southern California we announced last month. Southern California is our backyard and is home to nearly 10% of the dental practices in the U.S. We believe prioritizing our local community is important to our legacy and our mission as a company. It is also a tremendous opportunity to demonstrate in a focused comprehensive way the premise of laser dentistry. It’s minimally invasive and largely pain free, it provides the highest level of the patient care and it can be the center piece of a more prosperous dental practice. We were adding local specialists throughout Southern California to offer dentists more support in maximizing the use off dent lasers. We will be conducting a series of educational courses, informational events and community activities here and have already convened the local advisory board of dentistry for veterans to offer their expertise as a resource. We want to be sure that the entire community dentists and their patients alike in first hand see the amazing benefits of the world’s most advanced and versatile laser technology. Ensure that we aim to render needles, drills and scalpels passé in dentistry especially for children. As we transform our Southern California customers’ experiences with our products and educational programs, we will expand these successful targeted efforts to additional markets as well. We understand that at this point the transmission of BIOLASE, our progress and potential is still much greater than our financial results might indicate. Our CFO, John Beaver will get into the financial details in a moment, but allow me to touch on some of the most important items they demonstrate the progress we are making. Our worldwide revenues for the fourth quarter were $12.6 million, up 17% sequentially from the third quarter of 2017, but down 8% or $1.2 million from the fourth quarter of 2016, that’s obviously not the year-over-year trajectory we are looking for, but what revenue numbers don’t show is that our unit volume is increasing. We are selling more all tissue laser systems now, but at a lower price point. This growth is being driven by the early success of the new WaterLase Express which is about half the price of our flagship iPlus laser. But we find it very encouraging that the total WaterLase placements increased by 32% and WaterLase Express placements were up 33% over the third quarter of 2017. Furthermore, our strategy of focusing on obtaining new customers is working. Approximately 80% of our all tissue laser systems sold during the fourth quarter went to new customers in our direct markets. This will ultimately results in better uplift on our higher margin consumable business. Even though the conventional comparisons of performance are to the same period in the prior year, because of the shift in the pricing mix of our expanded product line, we will be increasing sales of lower cost systems, such as our WaterLase Express. We also closely monitor the quarter-to-quarter number of laser placements made as an important indicator as we evaluate our progress. The numbers also don’t show what we have achieved from a new product perspective. We are confident we now have by far the deepest and widest portfolio in the industry. We believe the Express is the most elegant and effective laser tool ever created for the dental market, it’s designed so any dentist can easily learn to use it quickly and efficiently. We see a tremendous upside for the Express and its prevalence is evident by the reception it’s receiving in the marketplace, especially at conferences and tradeshows. We also expect to add one more innovative tool to our portfolio, a new ultrasound imaging platform. As announced in February, we have signed a memorandum of understanding with privately held S-Ray to market and sell its ClearView Scan system. This is truly a groundbreaking ultrasound imaging technology. It will provide accurate diagnostic information that can be used very early in the disease progression with the added bonus of eliminating risks from additional radiation. All of our products are designed for the higher standard of patient care central to the future of rapidly evolving dental industry. Clinicians want to identify and treat active disease much earlier than its typical today. A case in point is near epidemic of gum disease in our country today. Dentists are beginning to realize that treatment needs to begin way before there is pain, loss of teeth and oral systemic issues. Our imaging devices and dental lasers are designed to execute a state-of-the-art diagnose then treat strategy. We have the most modern, most effective, most minimally invasive and conservative solutions across all specialties in the dental marketplace today. What we need to do now is execute. To that end we have been accelerating the rate of change in our sales force, restructuring and rebuilding our entire organization from new leadership to new sales reps to new territory alignment. We are also focusing on a new much larger sales target what we call the early majority market segment of the technology adopted curve as filed by Dr. Jeffrey More. It alone represents approximately one-third of the more than 180,000 dentists in the United States alone for over 60,000 practitioners. Biolase has previously lived in a different market, a smaller group made up of early adopters who tend to focus on a new technology as it’s introduced and evolving. We have expanded into the larger cohort, which requires new sales techniques and pragmatic marketing approaches. We have spent the last several months in this top-down restructuring process and clearly the turmoil has been challenging in the short run, but we all believe we will see the benefits of these changes and all of our efforts last year resulting in higher revenue during 2018. We also continue to upgrade our executive management team. We hired a new Senior Vice President and CFO, John Beaver and we promoted from within with the appointment of Ryan Meardon as Vice President of Sales for the United States. Ryan is a 7-year veteran and was a Regional Director of our best-performing region. We are committed to and remain confident that we will successfully reach our goals of transforming Biolase into a growing and prosperous business that can create significant value for our customers, shareholders and employees. With that, I will turn the call over to John who will review the financials for the 2017 fourth quarter and full year and also comment on our recently announced $6 million line of credit and the raising of $11.4 million of net proceeds from the rights offering that closed in the fourth quarter of 2017. John?

[John Beaver:]

Thank you, Harold. As we have done previously, this afternoon I will focus on revenues, gross margin, operating expenses and liquidity. Unless I indicate otherwise, the comparisons I make will be to the comparable periods in 2016. Net revenue for the 2017 fourth quarter was $12.6 million, an 8% decrease when compared to net revenue of $13.8 million even though the number of WaterLase All-Tissue Laser systems sold in the fourth quarter of 2017 increased by approximately 18%. The 8% year-over-year decrease in revenue for the 2017 fourth quarter was primarily driven by decreases in domestic laser systems’ revenues and domestic imaging revenue, which was partially offset by increased international laser systems revenue, international imaging revenue, worldwide consumables and other revenues and services revenue. The net revenue for the fourth quarter of 2017 represented a $1.8 million or 17% increase over net revenue for the third quarter of 2017. Net revenue for the year ended December 31, 2017 was $46.9 million, a 9% decrease when compared to net revenue of $51.8 million for the prior year. Gross profit as a percentage of revenue for the fourth quarter of 2017 was 29% compared to 39% for the fourth quarter of 2016. Gross profit as a percentage of revenue for the year ended December 31, 2017 was 32% as compared to 39% for the prior year. The declines in gross profit as a percentage of revenue for the quarter and year compared to the comparable periods last year were new to all-tissue laser product mix and promotional products at WaterLase Express, unabsorbed fixed costs due to lower revenue, geographical mix, an increase in imaging revenues, which has lower product distribution margins when compared to laser systems revenue. Gross profit typically fluctuates with product and regional mix, selling prices, product cost and revenue levels. Total operating expenses for the fourth quarter of 2017 were $8.3 million compared to $9.5 million a year ago. Sales and marketing expenses decreased primarily due to decreased sales commissions expense and convention-related expenses. General and administrative expenses declined primarily due to decreased patent and legal expenses and engineering development expenses also decreased primarily due to payroll related consulting and temporary labor expenses and supplies expense. During the fourth quarter of 2017, the company recognized a $0.5 million non-cash pre-tax charge related to the disposal of internally developed software primarily due to the decision we made to delay our previously planned ERP system implementation. Total operating expenses for the year ended December 31, 2017 were $33.2 million compared to $35.3 million. Net loss and net loss per share attributable to common stockholders for the fourth quarter of 2017 was $3.8 million or $0.05 per share compared to a net loss and net loss per share attributable to common stockholders of $4.4 million or $0.07 loss per share. The $0.6 million decrease in net loss in this year’s fourth quarter was primarily due to a $1.2 million reduction in operating expenses, $0.5 million increase in non-operating income net, an increase in income tax benefit was $0.7 million partially offset by a reduction of $1.8 million in gross profit. Net loss for the year ended December 31, 2017, was $16.9 million or $0.23 loss per share compared to a net loss of $15.4 million or $0.25 loss per share. Net loss attributable to common stockholders for the year ended December 31, 2017, which included the deemed dividend on convertible preferred stock of $4 million was $20.8 million or $0.28 loss per share compared to a net loss attributable to common stockholders of $17.6 million or $0.29 loss per share for the year ended December 31, 2016 which included a deemed dividend on convertible preferred stock of $2.2 million. The reconciliation of GAAP net loss to non-GAAP net loss payable at the end of news release provides the details of the company’s non-GAAP disclosures and reconciliation of GAAP net loss and net loss per share to the company’s non-GAAP net loss and net loss per share. The non-GAAP net loss for the fourth quarter of 2017 totaled $3.1 million or a loss of $0.04 per share compared with the non-GAAP net loss of $3.5 million or a loss of $0.05 per share. The non-GAAP net loss for the year ended December 31, 2017, totaled $13.6 million or a loss of $0.18 per share compared to the non-GAAP net loss of $11.2 million or a loss of $0.19 per share. On December 31, 2017, BIOLASE had approximately $22.7 million of working capital. Cash and restricted cash equivalents at the end of 2017 were $11.9 million compared to $9.2 million on December 31, 2016 and $4.7 million as of September 30, 2017. Net accounts receivable totaled $10.1 million at December 31, 2017 as compared to $9.8 million a year ago. Our cash burn in the fourth quarter of 2017 increased to $4.8 million, up 29%, primarily driven by $2.6 million reduction in accounts payable during the quarter which reduced our cash payable to its lowest levels since 2011. Even though our cash burn increased in 2017, we remain focused on wisely investing our cash on products and programs to drive future growth in revenue and profitability. Going forward, we expect to see the impact of the cost reduction measures we implemented in August last year and as always cost containment and prudent cash management continues to be and will remain the top priority. I was very pleased where we are able to close both $11.4 million net rights offering in the fourth quarter along with $6 million working capital facility in the first quarter of 2018. We are very appreciative of the support and confidence of both our investors and lenders as we continue the transformation of the company. With our current liquidity coupled with our borrowing capacity under our new line of credit, I believe we are well positioned to fund the company’s future growth as we progress on the path achieve to positive operating cash flow. Now I would like to turn the call back over Harold for a brief summary before we open the call for questions. Harold?

[Harold Flynn:]

Thank you, John. Before I turn this call over to the operator for questions, I would like to reiterate what I said earlier. We are driving to render the old dentistry standards of needles, drills and scalpels passé in dentistry especially for children. We are not there yet, but we are making continued progress on restructuring of all these and building a high performance culture that we believe will pay off with increased revenue in 2018 and beyond. We are continuing to build out the professional development of our commercial organizations and channels globally. We are also focused on increasing the awareness and education of the market on the advantages of laser dentistry with a special targeted audience in Southern California, with expectations of exporting the best practices to other markets quickly. The market and dentists have increasingly praised our new WaterLase Express, so we know it’s the right product. We now have more tools and technologies to create a much higher standard of care in dentistry. From a new product perspective we are confident we now have by far the deepest, lightest and most cost effective product portfolio in the industry. We will have the imaging tools and laser technologies to diagnose disease and treated earlier before the pain, tooth decay and tooth loss and serious gum issues. That is the future of the evolving dental industry. We believe we are well positioned to take advantage of the market changes to come. Now it’s the time for us to execute and that’s what we intend to do. With that I will turn the call over to the operator for questions. Operator?

[Operator:]

We will now open the call to questions. [Operator Instructions] The first question comes from Lisa Springer of Singular Research. Please proceed with your question.

[Lisa Springer:]

Hi, Harold and John. You mentioned that 80% of the sales were to new customers during the quarter. Were those – majority of those sales, were those WaterLase and could you give us a little bit more color around the mix of those customers, were they clinics, were they individual practices?

[Harold Flynn:]

Certainly. What we were characterizing there was indeed the all-tissue laser placements. So, those were all WaterLase. And so as far as characterizing the actual clinics, we still see predominant mix of single or small group practices that might have one or two offices versus the dental service organization if that’s kind of the nature of your question. We still believe the dental service organizations are a great opportunity for us, but the sales in the fourth quarter did not have material sales to DSOs for the all-tissue lasers.

[Lisa Springer:]

Okay. And then you mentioned that international sales increased year-over-year, what was the extent of the increase and do you market WaterLase’s growth overseas?

[Harold Flynn:]

Yes. The international sales increased 25% in the past quarter in Q4. So, we are quite happy with some of the progress we are making there and WaterLase Express is marketed in the jurisdictions, where you attain registration. In several international markets, it takes a good deal of time to get new products registered and it can vary country by country, but we do market it in the Europe, the CE Mark countries and a number of other places and it’s starting to gain traction there as well.

[Lisa Springer:]

Okay, thank you.

[Harold Flynn:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ed Woo of Ascendiant Capital Markets LLC. Please proceed with your question.

[Ed Woo:]

Yes, thank you for taking my question. I know you guys don’t give guidance, but what are you seeing so far in the first quarter and how does that give you I guess confidence in your outlook for a much improved 2018?

[Harold Flynn:]

I appreciate that, Ed and we are very close to the end of the first quarter, so I really can’t comment on anything with respect to details to how the trajectory is going in the first quarter. I think the confidence that we look at is how we were performing at a number of the tradeshows, the response that we get after some of our educational events as well as the rebuilding of the commercial channel in many respects in the last several months of last year. We are very excited about the profile of our new sales reps as we have been adding them. We have been working with the Gallup organization to do some profile working and actually be able to find people that can come out of the shoot a little bit more effectively than we have in the past. So, we think we are on to a much better formula than we have been in the past with respect to both sales profile of the successful sales rep as well as the training regimen that they need to get up and running sooner. And I think that we will see that as it progresses through 2018 to see those benefits accelerate.

[Ed Woo:]

Great. And then you said you guys are doing this new initiative in Southern California to target a specific market and put a lot of resources into it. Is that going to impact your overall sales and marketing spend and how quickly would you be able to ramp it to other markets if you see that it’s successful or not?

[Harold Flynn:]

Yes. Great question, Ed. What we have done is we have looked at squeezing the balloon, if you will, in our spending. So, our operating expense obviously now that we have a fairly full portfolio that I have spoken about during my comments will redirect some of the spending from research and development, while still maintaining our innovation to some of these sales and marketing efforts. So, basically, we are reallocating a number of our internal investments to accelerate these efforts in our backyard. And so the idea there is that we are close and we can monitor it and we can then quickly export to other markets, those ones that we see as very quickly self-funding for a lack of better way to say it. So, we think that these types of things will scale quite nicely, it’s to make sure that we have fully vetted the processes, we have got all of our approaches dialed in, in our local markets and then be able to do them where there are further distance from headquarters.

[Ed Woo:]

Great. Well, thank you and good luck.

[Harold Flynn:]

Thank you, Ed.

[Operator:]

[Operator Instructions] This concludes today’s question-and-answer session. I would now like to turn the conference back over to Mr. Harold for any closing remarks.

[Harold Flynn:]

Thank you, Tim. And again, thanks to all of you for joining us on the call this afternoon and for your continued support. I hope our discussion today is demonstrated while we are still optimistic about the future of BIOLASE. We still have missionary work to do on creating marketed individual dentist awareness, but we strongly believe that 2018 will be a year of substantial progress in growth toward increasing revenues and sustained profitability. We now have lasers that allow us to provide all dentists and dental clinics even those new to lasers with an easy-to-use laser solution for their patient treatments. We look forward to speaking with you again when we announced our results and discuss our progress for the first quarter of 2018. Have a great afternoon, everyone.

[Operator:]

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.