BIOLASE Inc (BIOL) 2020 Q3 法說會逐字稿

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

Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's financial results for its third quarter ended September 30, 2020. On the call today from BIOLASE are Todd Norbe, President and Chief Executive Officer; and John Beaver, Executive Vice President, Chief Financial Officer and Chief Operating Officer.

Management will review the company's operating performance of the third 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 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, November 12, 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 the presentation, please refer to the news release issued earlier today announcing the company's 2020 third quarter results. If you do not have a copy of the news release, it is available in the Investor Relations section of BIOLASE website at www.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.

Tables we've provided in today's news release offer additional financial information, so we encourage you to review them. The tables include the reconciliation of unaudited GAAP net loss and net loss per share to non-GAAP, adjusted EBITDA loss and adjusted EBITDA loss per share as well as the details of the company's non-GAAP disclosures.

With that said, I'll now turn the call over to BIOLASE's President and Chief Executive Officer, Todd Norbe. Todd?

Thanks, Todd, and thank you, everyone, for joining us this afternoon. We appreciate your interest and continued support of BIOLASE. Let me start with an update on our operations and the status of dental offices as it relates to COVID-19 pandemic. As we have stressed throughout this pandemic, our foremost concern continues to be the health and safety of the BIOLASE community, including our employees, customers, their patients and our partners.

We continue to take every precaution to ensure their well-being during this time. Over 95% of dental offices across the country are now reopened, and dental procedure levels are currently at 70% to 80% of their pre-COVID-19 levels. So a marked improvement compared to when we last spoke in August, following our Q2 results. We want to applaud dentists throughout the country as they respond to the pandemic with a sense of urgency, implementing the recommended Center for Disease Control and American Dental Association guidelines, ensuring that they can take care of the patients in a very safe environment.

Our Epic Hygiene dental laser meets the CDC guidelines to minimize the risk of COVID-19 transmission, which recommends against using ultrasonic scalers to prevent the transmission of COVID-19. We believe this is a distinct differentiator because traditional ultrasonic scalers create visible water spray containing particulate drops of water, saliva, blood, microorganisms and other debris that can serve as a conduit to spread infection and pathogens such as COVID-19.

As dental professionals look for ways to comply with the CDC and ADA guidelines, they can rely on our Epic Hygiene laser for laser bacterial reduction therapy. This new indication allows hygienists to perform gentler, highly effective treatments for bacterial reduction and managed periodontal disease without using water.

The new BIOLASE laser system, which the FDA cleared in March, was designed by dental hygienist specifically, and is the only hygiene device cleared to manage nonsurgical periodontitis through LBR effectively. The Epic Hygiene laser is a significant factor in the increased traction we are seeing with DSOs like DCA, Aspen and Virginia Group. Also, our all-tissue Waterlase dental lasers already create 98% less aerosol than traditional hand pieces, meeting ADA's recommendation of reduced aerosol production to limit the spread of COVID-19.

With a clinically proven product portfolio that reduces the potential risk of infection pathogens, BIOLASE has a significant growth opportunity as dental professionals seek safer technologies to treat their patients. We believe safer treatment technologies, such as ours, have led to the U.S. procedures already returning to pre-COVID levels.

In addition to safety, which is always top priority, key several markets and indicators represent significant growth drivers and gives us increased optimism that BIOLASE and its product portfolio are well positioned for growth. First, when we look at the DSO organizational market, DSOs. There are approximately 1,300 DSOs in the U.S., representing 16% of total U.S. dental market. We are in active trials with Heartland, the largest DSO in the U.S.; ClearChoice, the eighth largest DSO in the U.S.; Aspen, the second largest DSO in the U.S.

We also have initiatives with DentalOne and Dental Care Alliance, otherwise known as DCA. We recently announced a significant collaboration with DCA, one of the largest DSOs in the U.S. with more than 320 affiliated practices in 20 states. This collaboration includes expanding our laser adoption, which includes our hands-on training programs into targeted geographies in the next few quarters. We expect this collaboration to lead to a rollout across all DCA offices by the end of 2021.

Second growth opportunity is in perio. There are approximately 5,000 periodontists in the U.S. Last quarter, the Journal of Periodontology made available online the most -- or much anticipated landmark study performed by the McGuire Institute on the clinical efficacy of patient-reported outcomes of Waterlase-assisted treatment of periodontitis. The McGuire 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 Best Evidence Consensus standards.

The study found that our Waterlase repair perio protocol had shorter procedure times than open flaps procedures, as well as less bruising, swelling and postoperative 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.

We are equally excited about the release of another study this month from Harvard, which we published in the Journal of International Perio, highlighting our Waterlase technology treating peri-implantitis, which is failing implants. Additional studies where Waterlase was -- has successfully treated perio disease will be forthcoming from Colombia and UCLA.

With 65 million Americans suffering from perio disease, these studies and findings are significant in determining the best course of treatment for these patients. Studies continue to suggest that perio health is essential to overall health and specifically as it relates to susceptibility of infection, including COVID-19.

Putting this opportunity in dollars, if an additional 20% of periodontists adopted our laser, that would generate $50 million in system revenue, which again does not include follow-up consumables revenue.

The third that we're looking at, and have been focused on, is the endodontic market. There are approximately 5,000 endodontists in the United States. Waterlase solves a major pain point for endodontists, addressing the challenge of fully irrigating and cleaning the complete endodontic network of an infected tooth. Top thought leadership is quickly establishing Waterlase as a new standard of care in this area.

This quarter, we saw the highest percentage of Waterlase systems sales to endodontists in our company's history. If an additional 10% of endodontists adopt our lasers, that would equal an additional $20 million in system sales and again, would drive follow-up consumable sales. This, in concert, with top endodontic thought leadership has established the Waterlase endodontic academy that provides virtual training, specifically for endodontists to help further drive adoption.

Fourth is the hygiene market. There are approximately 200,000 hygienists in the United States. With the Epic Hygiene laser I mentioned earlier, BIOLASE allows hygienists to perform gentler, highly effective treatments for bacterial reduction in managing periodontal disease. This new BIOLASE laser system is the only FDA-approved preventative perio treatment protocol and has a return on investment of only 3 months. If our market penetration in the hygiene market increases by only 5%, that would equal to an additional $70 million in system sales, which, again, does not include consumable sales that would follow.

These opportunities highlight our path to growth in the years to come. The current all-tissue laser market penetration in the U.S. dental market is only 7%. Every 1% increase in adoption of laser technology in the U.S. equals over $50 million in revenue opportunity for BIOLASE.

As we work to expand adoption, we continue to offer our Waterlase mentoring experience, or WME. This program puts training first by allowing general dentists to have first-hand experience with our technology and applications through the use of experienced mentors in a group learning environment. The WME experience shares with participants the power of incorporating this technology within their practice with a practical approach of hands-on training that is applied when they returned back to their own office. All this with a mentor to support them along the adoption journey.

We initiated 3 WME during the third quarter of 2020 and expect to increase these throughout the fourth quarter and into 2021. One of our key initiatives is to expand the WME program to more cities next year with the help of increased marketing efforts to raise awareness. We expanded our test marketing this past quarter in Phoenix and South Carolina, which resulted in an increase in interested participants, including 10 dentists in Arizona.

We also are in the final stages of launching a co-marketing program with the BMW performance driving in 2021. Under that program, any dentist who attends a WME event in 2021 will enter to win a BMW lease for a year. And any dentist who buys a Waterlase system after attending at WME will be invited to attend a customer appreciation event at the BMW performance driving school. We are excited about this opportunity in partnership and promoting these 2 iconic brands side by side.

Given the challenging time all dentists have faced since the beginning of pandemic, we have launched a new financing program last quarter called BPP, or BIOLASE Partnership Program, to help dentists get back on their feet. This program allows the dentist to use our laser technology, generate revenue and not make a single payment until 2021. It also provides an in-office training that eliminates the need for travel in today's environment.

While COVID-19 certainly presents uncertainty, we continue to be very excited about the market opportunity in front of us. We believe our laser safety benefits puts us in a perfect position to advance dentistry and treat patients in the safest possible way.

We have created a healthier operating company with the many positive changes we have made over the last 1.5 years to improve our cost structure and build our talent bench. These positive changes already started to show in our margins due to improved COGS, price discipline and OpEx controls. We now have the commercial infrastructure in place to capitalize on the growth opportunities in front of us. While this growth won't happen overnight and COVID-19's uncertainty is still unknown, we are confident in our business plan and continued progress as we're making towards achieving our goal of returning to growth.

I am proud of the BIOLASE workforce as they have rallied without question to deliver the technology, products and services that our customers need and the value in these unusual times. We remain committed to offering solutions for dental professionals looking to treat their patients in the safest possible way.

With that said, now I'll turn the call over to John for a review of our third quarter financial results in more detail. John?

Thanks, Todd, and thank you all again for joining us this afternoon. Now let me review the numbers. While the COVID-19 disruption continued to impact our business during the quarter as total worldwide revenue decreased 24% year-over-year to $6.5 million, we did see a significant sequential improvement driven by the reopening of dental offices across the United States and the return of dental procedure levels to 70% to 80% of their pre-COVID-19 levels.

Sequentially, our third quarter revenue more than doubled. U.S. laser revenue for the third quarter of 2020 increased 16% year-over-year to $2.7 million compared to $2.3 million in the third quarter a year ago. U.S. consumables and other revenue for the third quarter of 2020, which consists of revenue from consumable products, such as disposable tips, increased 25% from the third quarter of 2019.

Internationally, revenue for the third quarter of 2020 declined 52% to $1.8 million compared to $3.7 million in the third quarter of 2019. This decline in revenue was primarily attributable to the COVID-19 economic shutdown. We believe the dental offices in the U.S. have generally been quicker to return to prior patient volume than the rest of the world, resulting in better comparative revenue results in the U.S.

Gross margin for the third quarter of 2020 was 35% compared to 34% in the year ago quarter. The higher gross margin reflects higher average U.S. selling prices for our lasers and a higher percentage of overall U.S. sales compared to total company sales, where gross margins are higher, partially offset by a decline in revenues relative to our fixed cost.

Total operating expenses for the third quarter of 2020 decreased 24% to $5.9 million compared to $7.9 million in the third quarter a year ago. The continued reduction in operating expenses year-over-year represents the benefits of the cost rationalization efforts that we implemented throughout 2019 and '20.

Sales and marketing expenses declined $0.8 million or 24% year-over-year in the third quarter due to reduced compensation-related expenses due to lower sales and reduced travel and travel-related expenses and reduced trade show related expenses.

General and administrative expenses decreased $0.9 million or 28% sequentially year-over-year in the third quarter. This year-over-year decrease was primarily due to a reduction of our allowance for doubtful account accruals, along with lower payroll and benefit cost.

Engineering and development expenses decreased $0.2 million or 15% year-over-year in the third quarter. Operating loss for the third quarter of 2020 was $3.7 million compared to an operating loss of $4.9 million in the third quarter of 2019, an improvement of 25% year-over-year.

Net income for the third quarter of 2020 was $12,000 or less than $0.01 per share compared to a net loss of $5.5 million or $0.25 loss per share for the prior year's third quarter. This improvement was primarily due to the noncash revaluation of our warrants issued in the third quarter as part of our rights offering.

As a reminder, our earnings release includes a reconciliation between unaudited GAAP, net loss and adjusted EBITDA. We believe adjusted EBITDA provides a useful measure of the company's operating results by excluding depreciation, amortization expense, stock comp expense, change in allowance for doubtful accounts and expenses related to the disposal of internally developed software, the cost of our patent litigation settlement a year ago, along with the excluded impact of the warrant revaluation I just mentioned.

The adjusted EBITDA loss for the third quarter of 2020 was $2.5 million, which excludes these items, a 10% improvement over the third quarter a year ago. Our basic and diluted share count at the end of the third quarter of 2020 was 81.3 million shares compared to 21.9 million shares in the year ago quarter.

Now turning to the balance sheet. Cash, cash equivalents and restricted cash totaled $19.2 million as of September 30, 2020, and includes the proceeds of the rights offering completed in July, which was oversubscribed and resulted in gross proceeds of the company of $18 million before deducting fees and expenses related to the rights offering. As a reminder, the $18 million does not include proceeds that may be received by the company from the future exercise of warrants that were included in the rights offering.

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, as always, prudent cash management strategies. We believe our current liquidity position and our cost containment efforts provide us with sufficient capital to execute our growth strategy in this environment effectively.

Having said that, the COVID-19 -- with COVID-19, there remain too many unknowns. And when we can achieve this growth now depends on how quickly the U.S. and international markets return to some level of normalcy.

While we're all dealing with the current impact of COVID-19, I want to reiterate, we are confident that our actions to strengthen BIOLASE are working. Our long-term prospects for growth are significant as dentists and patients worldwide look for solutions that allow them to provide and receive denial treatment in the safest and best way possible.

This concludes our prepared remarks. I'll turn the call back over to the operator to open the call for questions. Thanks.

(Operator Instructions) And we will take our first question. This will come from Kyle Bauser with Colliers Securities.

Great. Todd and John, thanks for all the updates here. So nice sequential growth, and it looks like the business is back to above pre-COVID levels in the U.S. at least. So I think you said overall procedure volumes in the U.S. are down 20% to 30%, but your U.S. business is up nearly 20%. So obviously, the nice benefit as it relates to reducing aerosolization has been key.

How about internationally? What are the procedure volumes at there? And how does it relate to your OUS business? Is the reduction in aerosolization internationally maybe not as big as a concern over there? Or how should we think about that business?

Yes, Kyle, this is Todd. So rest of world, really hard to get a good finger on what's happening across all the different geographies. But I would tell you that the level of shutdown that we're seeing in dental offices in rest of world does not mirror what we're seeing in the U.S. So I think it's really around practices being back in business in the U.S. and as I mentioned, probably 95% plus are now operational, even though volumes, to your point, are down 20% year-over-year.

If I had to guess, I would say, rest of world, if you had to lump it all together, is probably half of that based off of the intel that we have from our international team.

Got it. That's helpful. And John, you mentioned in the prepared remarks, we've obviously seen a nice reduction in overhead here, and appreciate the commitment to get into EBITDA breakeven. And it's a tough environment to kind of forecast here because I know COVID is still here. But I'll ask it anyway, is there any sense as to your new time line on maybe getting there and hitting that breakeven point?

Yes. So Kyle, we're not going to forecast, especially in this environment. As I said a couple of quarters ago, now is not the time to start giving guidance, right? But we do see a path to get to EBITDA positive as early as fourth quarter next year. And so when we look at our liquidity position, cash position, projected revenues, we think we have sufficient liquidity to get there, to that point. And so that's our target. Of course, a lot depends on how the COVID-19 situation shakes out, not only in the U.S., but the rest of the world over the next 3 to 12 months.

Sure. Got it. And just a couple more here. Any open territories or goals for adding new reps?

So as I think we mentioned last time, we had 1 open territory. We're close to filling that 1 open territory. Right now, we're going to look to stay with the current footprint of sales that we have as things open up and we have probably more confidence on what's happening in 2021 around COVID, and we'll evaluate adding additional head count if we can get the return on investment we're looking for.

Okay. Got it, got it...

Kyle, the one thing I would add there also is, at least in my 3 years with the company, this is the first time that we've had a earnings call that we haven't had any rep changeover from the prior earnings call. So in other words, all 22 reps that we have were here this -- when we talked a quarter ago, which is a good sign, I think. And what we've talked about in the past that we're hiring the right people. And I realize that some of that has to do with the overall market condition in the dental space, but we're really happy with the team we have now.

No, excellent. It's good to hear. And maybe just lastly, regarding the BIOLASE partnership program, which is pretty nice, I think for new users because they don't have to make any payments until next year. How is this program going? Are most of the new placements taking advantage of it?

Yes. Almost all of the Waterlase purchases are coming through and utilizing, in the U.S., right, where it's available, the BPP program. And just as a reminder, Kyle, even though dentists don't make payments until next year, through our relationship with a financing company that is doing this for us, we get paid immediately. So it's not a working capital issue for us.

And we can take our next question. This will come from Bruce Jackson with The Benchmark Group.

So we had the McGuire study data come out with a 6-month follow-up earlier this year. I was hoping we could get an update on when we might expect the 12-month data to come out. And then if you could help us with the potential significance of the 12-month data and the radiographic data.

Yes. So Bruce, that's being worked on right now to start gathering that information. Whenever I give a date on clinical stuff, it tends to always get pushed out. But I would imagine by probably latter part Q1 into Q2, we should have something there on that. And why is that significant? Because seeing is really believing. We know that the study was powerful in showing how it's minimally invasive, positive pros and really impactful information. But at 12 months, I think that will be the further confirmation around how effective the technology is.

I'll just give you comparison. So we're doing a lot in the endodontic space right now. And when an endodontist cleans out a root canal and all the ancillary canals that are part of that, we visualize it in that two structure. They take a radiograph and immediately, they can see the impact of the technology. When you're obviously trying to grow back bone and so forth, that's a little bit of a delayed reaction. But we expect, obviously, to see really positive results, as I mentioned, end of Q1, sometime Q2.

Okay. Great. And then my other question is about the DSOs. Just tell us a little bit about is there anything that they need to see in order to become bigger customers of yours? And when might -- how do you anticipate that business developing over the course of 2021?

Yes. As I mentioned, we have multiple trials and Phase II trials in place. And part of our strategy from day 1 has been -- and our belief, based off of what we've seen parallel in other areas where when organized dentistry, specifically DSOs corporate dentistry, get involved with the technology that obviously accelerates the adoption curve.

But to your point, and what they want to see, they want to see that they can generate incremental dollars in revenue and the return on investment is there. We validated that in many cases. What also helps with them and you think about the DSO, many of them want to expand the ability for their GPs to become more super GPs and do multiple procedures. Our technology allows them to do that. And somewhat, this kills it in a way that allows a general practitioner to get unbelievable results. And having the specialty community support and endorse the technology at the endodontic community side, specialty side as well as the perio community side, adds additional horsepower behind this adoption curve. So we expect that to really play some -- really pay some really nice dividends for us as we roll into 2021.

(Operator Instructions) We will take our next question. This will come from Anthony Vendetti with the Maxim Group.

I just wanted to talk a little bit. I may have missed some of it because I have a bunch of calls going on at the same time, but did you give an update on Heartland and ClearChoice?

I didn't provide anything specifically, Anthony. Yes, we're in Phase II with Heartland. And if you recall, the first phase was 4 of their top clinicians. And all 4 of those units were purchased based off of the return on investment that we needed to show. The Phase II is really, what I would call, more of another test of the average dentist within Heartland, can they also replicate that type of return on investment. So that's going on currently.

And with ClearChoice, we have, what I would call probably a first of its kind trial with them that allows them to hopefully market this technology and patient-reported outcomes. If you're familiar with their model, literally providing full restorative techniques on a full day basis with a whole team around that. And the early read from the 4 practitioners that are involved here is very positive. So we're very optimistic that this could be a very good win for the BIOLASE company here. And also, if you probably see their ads on TV, the goal would be to incorporate, hopefully, our message in those ads as well.

Yes. No, that would be great. Just in terms of -- I know Waterlase is your primary workhorse product, can do 80 different things. With the Epic system, I mean, we're -- is that going to be just you think an ancillary product? Or could that be a growth driver due to the significantly lower or no aerosol situation with that versus the current standard of care? I mean how do you -- how is that playing out now? And do you expect that to be a driver in '21?

We're seeing that as a driver in 2020, and we expect it to be a driver in 2021. We're seeing adoption here on the DSO side, small, midsized DSOs adopting it and incorporating it within their protocols for the reason you mentioned. It literally eliminates aerosolization when you compare it to an ultrasonic scaler. So hygienists are typically the most concerned around COVID-19. And this also provides an opportunity to really get after what I would call the first swim lane where periodontal disease starts. And if it's not addressed early on, then it gets more severe, and that requires, obviously, more surgery that most patients would prefer not to be involved with.

So the preventative side of it, at the hygiene appointment, is really powerful. But we're also, Anthony, not only selling the Epic Hygiene diode unit, but we're also selling the EPIC X, a combination of both, and that's including the hygienist as well as the general practitioner in that sales bundle.

And our next question will come from Edward Woo with the Ascendiant Capital.

Yes. Congratulations on the quarter. My question is more on the fourth quarter. Typically, the fourth quarter has been seasonal for you guys in terms of everybody trying to use up their budgets. Do you think we should see that again this year? And also, is there any differences in the domestic market versus international in Europe, particularly as we're seeing some lockdowns currently going on in Europe?

Yes. So Ed, I'll answer that. We do expect to see some uptick in the fourth quarter, as you said, as dentists want to purchase capital, take the depreciation write-off at year-end. What we don't know and what's unclear to us is how is that impacted by COVID. I think depending on how dentists feel about the winter time, that may tamper some of that. We just don't know. And so it's hard for us to predict, who have never been through this before. In terms of international versus U.S., we are seeing more international offices close than certainly U.S.

(Operator Instructions) And we will take our next question. This will come from [Jamil Martin], private investor.

Quick question for you guys. As a private investor who happens to have a lot of shares in the company, is there a path that you guys are looking at? There's a lot of concern over the reverse split. Is there -- is that any concern for you guys right now? I know you guys said you wanted to get there organically to the NASDAQ requirement. But as investors, it's a concern for us.

Well, we -- yes, there are many ways, right, to get NASDAQ compliance organically, that's one. Reverse split is another. We're evaluating all options. As you know, a reverse split doesn't change the market cap of the company and the value of the company is still the same. It's just a little bit different math to get there.

Okay. And also, there's concerns about the actual price being manipulated by shorts and all that. Is there something that you guys are looking to help private investors out with this if this is indeed happening?

Well, it's interesting. One of the advantages of a reverse split would be to reduce the amount of short that is going on because the price would be higher. And so that would be an advantage in one way to maybe tap down that a little bit. Plus another advantage of a reverse split and getting the price higher is having a price over $1 or over $5, would certainly open up our stock to more institutional investors as well. So there is some of those benefits.

And at this time, I would like to turn the call back over to Todd Kehrli.

Thank you, operator. On the Investor Relations front, BIOLASE management will be attending The Benchmark Company Discovery One on One Virtual Investor Conference next week on November 18. If you're participating in this conference, please schedule a visit with us. We would enjoy the opportunity to talk with you more. In the meantime, we look forward to updating you again on our continued progress when we report our fourth quarter results. Thanks again, everyone, for joining our call today. This concludes our call. Have a great day.

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