BIOLASE Inc (BIOL) 2020 Q2 法說會逐字稿

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

Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's financial results for their second quarter ended June 30, 2020. On the call today from BIOLASE are Todd Norbe, President and Chief Executive Officer; and John Beaver, Executive Vice President and Chief Financial Officer. Management will review the company's operating performance for the second quarter before opening the call for questions. Before we begin, I'd like to remind everyone that a number of forward-looking statements, which are 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 they are subject to a variety of risks and uncertainties that could cause actual -- 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, August 13, 2020.

These risks are discussed in the company's filings with the Securities and Exchange Commission. A replay of this conference call will be available on the BIOLASE website shortly after the completion of today's call. When listening to this call, please refer to the news release issued earlier today announcing the company's 2020 second quarter financial results. If you do not have a copy of the news release, it is available in the Investors Section of the BIOLASE website at biolase.com. BIOLASE's financial results can also be found in the company's quarterly report on Form 10-Q, which will be filed with the SEC. The tables we've provided in today's news release offer additional financial information, so we encourage you to review them. The tables included provide a reconciliation of unaudited GAAP net loss and net loss per share to non-GAAP adjusted EBITDA loss and adjusted EBITDA loss per share as well as the details of the company's non-GAAP disclosures.

With that said, I'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. First, I want to again express our heartfelt concern to those who have been affected either directly or indirectly by the ongoing COVID-19 pandemic. Our foremost concern continues to be the health and safety of BIOLASE community, including our employees, customers, their patients and our partners. We continue to take every precaution to ensure their well-being during this very difficult time.

Since we last talked to you in May, our team has continued to adjust how we operate the business to maximize our opportunities in a manner that is both safe for our employees and our customers. We are now several months into the situation, while it limits our ability to visit our customers and potential customers, we remain focused on strengthening our opportunities during this unprecedented period until we can resume normal business practices.

Before I discuss our second quarter operating results, I believe it's important to highlight the successful registered direct offering we completed in June and our oversubscribed rights offering in July. I believe this is a strong level of interest reflected in a validation of our business plan. In addition, the higher-than-expected level of investor participation ensures that we have the necessary resources to execute our growth strategy, which, if you recall, was beginning to generate desired results just prior to COVID-19 pandemic. This is also a vote of investor confidence in the capabilities of the current team to execute and deliver meaningful results.

Now let's talk about some of the accomplishments during the quarter. During the second quarter, we announced our Epic Hygiene dental laser, which meets guidelines to minimize the risk of COVID-19 transmission, set by the Center for Disease Control and Prevention, or CDC, which recommends against using ultrasonic scalers to prevent the transmission of COVID-19. Specifically, traditional ultrasonic scalers create a visible water spray that contain particle droplets of water, saliva, blood and microorganisms and other debris that can serve as a conduit to spread infectious pathogens such as COVID-19. As dental professionals start opening their practices in all 50 states, which rely on our Epic Hygiene laser for laser bacterial reduction therapy, for those who are not familiar with this new indication, it allows hygienist to perform gentler, highly effective treatments for bacterial reduction and managing periodontal disease without using water. The new BIOLASE laser system which was cleared by the FDA in March, was designed by dental hygienists, specifically for dental hygienists and is the only hygiene device cleared to effectively manage nonsurgical periodontitis through laser bacterial reduction. Our all-tissue Waterlase dental lasers also create 98% less aerosols than traditional dental handpieces, meeting the American Dental Association's recommendation of reduced aerosol production to limit the spread of COVID-19. Now with Epic Hygiene, we are able to offer another product that meets the unique needs of dentists and patients during these challenging times. While there remains too many COVID-19 variables to predict when the dental market will return to normal levels, we are confident that our Waterlase and Epic Hygiene products will be coveted by dentists as they align their mission of advancing dentistry to treat patients in the safest possible way.

As we discussed on our Q1 call in May, the shutdown, which began in mid-March, has had a significant negative impact on our operations. During this time, most dental offices in the U.S. and globally, suspended procedures, except for certain emergency procedures and remained close most of May. The impact -- this impacted dental production by as much as 70%, and as a result, we sold very few lasers in April and May and only a handful in June. Despite dental offices being closed for most of the quarter, our sales team continue to be very active, reaching our targeted audiences with Zoom webinars. Starting in March, we launched our webinar series and have hosted over 30 webinars to date with over 11,000 registered participants and over 3,000 requesting follow-up on our technology.

Furthermore, at the same time, we've reduced our operational footprint and moved our corporate facility, reducing our annual lease cost by over $0.5 million. I want to reaffirm that BIOLASE remains well positioned for the opportunity ahead, as general practitioners and DSOs are eagerly looking for ways to provide safe services and keep as much revenue in-house as possible. Our optimism is reflective of several growth drivers, including the following: first, we believe our product portfolio will be even more important to GPs and DSOs, as they look for safer ways to recoup revenue that they lost during the pandemic. Dentists can certainly differentiate their practice in this environment by using our lasers to ensure a safer patient experience and provide significant benefits and positive outcomes they get with our lasers. Second, the most anticipated landmark study performed by the McGuire Institute on clinical efficacy as well as patient-reported outcomes of water-assisted treatment of periodontitis was electronically published in the Journal of Periodontology in July. We expect this to be in print, come November. 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's best evidence consensus standards. The study found that the Waterlase repair protocol at shorter procedure times than open flap surgeries as well as less bruising, swelling and post-operative bleeding, demonstrating that repair is as effective as open flat procedures, but with significantly better patient-reported outcomes.

We believe this study will establish new protocols for perio surgery and drive further adoption of Waterlase in our target markets. With 65 million Americans suffering from this perio disease today, the findings from this study are significant in determining the best course of treatment for these patients. Studies continue to suggest that periodontal health is essential for overall health as it relates to susceptibility of infection, including COVID-19. Third, there is ongoing studies on treatment concerning perio disease from Columbia, Harvard and UCLA, which we expect to be published later this year. Given the challenging times that all dentists have faced since the mandatory shutdown in mid-March, we launched a new financing program during the quarter called BPP or BIOLASE Partnership Program to help dentists get back on their feet. This program allows the dentist to use our technology, generate revenue and make a single -- and not make a single payment until 2021. It also provides in-office training that eliminates the need to travel.

In addition to the BPP program, we continue to offer our Waterlase Mentoring Experience or WME. This program puts training first by allowing dentists to have first-hand experience with our technology and applications through the use of experienced mentors in a group learning environment, showing them the power of technology firsthand, while allowing them to use the Waterlase technology post training in their office prior to purchasing. We initiated 4 WME programs during the first quarter of 2020 prior to COVID-19 shutdown, and we expect to increase fees through 2020. One of our key initiatives is to expand the WME program to more cities during the year. If you recall, this program was born out of our DSO trial with Heartland. With the DSO segment coming back online, we now have a Phase II trial scheduled with Heartland. Also a recent webinar with Clear Choice has explained the benefits of Waterlase and has turned into an additional DSO trial. We're excited about this segment, and it's potential to accelerate market's adoption curve.

Now as an update to our direct sales team, we have almost all of the territories back up and running, along with our service teams. So we look forward to the revenue lift collectively this will generate once U.S. businesses returned to some level of normalcy. While COVID-19 presents uncertainty, we continue to be very excited about the market opportunity in front of us and glad to see that all 50 states are allowing for all dental services to be performed. We believe the safety benefits of our lasers put us in a perfect position to advance dentistry and treat patients in the safest possible way. We have created a healthier operating company, with many positive changes we have made over the past 1.5 years to improve our cost structure and build our talent bench. We, at BIOLASE, remain committed to offering solutions for dental professionals looking to treat their patients in the safest possible way.

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

Thanks, Todd, and thank you all again for joining us this afternoon. Now let me review the numbers. As anticipated, the continuing COVID-19 disruption impacted our business as total revenue for the second quarter of 2020 was $2.9 million, a decrease of 66% when compared to $8.6 million in the second quarter a year ago. U.S. laser revenue for the second quarter of 2020 decreased 72% over year to $0.8 million compared to $2.9 million in the second quarter a year ago. U.S. consumables and other revenue for the second quarter of 2020, which consists of revenue from consumable products such as disposable tips, decreased 68% compared to the second quarter of 2019.

Internationally, revenue for the second quarter of 2020 declined 73% to $0.7 million compared to $2.7 million in the second quarter of 2019. Again, the decline in revenue was attributable to the COVID-19 economic shutdown.

Gross margin for the second quarter of 2020 was 32% compared to 39% in the year ago quarter. The lower gross margin reflects the impact of the decline in revenue relative to our fixed cost. Total operating expenses for the second quarter of 2020 were $4.9 million compared to $6.7 million in both the first quarter of 2020 and the second quarter a year ago. The continued reduction in operating expenses, both sequentially and year-over-year represents the benefits of the cost rationalization efforts that we have been implementing throughout 2019 and into 2020, along with reduced business activity during the second quarter of 2020. Sales and marketing expenses declined $0.6 million or 23% sequentially and $1.2 million or 36% year-over-year in the second quarter due to reduced compensation-related expenses due to lower sales as well as reduced travel and travel-related expenses and reduced trade show related expenses. General and administrative expenses decreased $0.9 million or 29% sequentially and $0.4 million or 15% year-over-year in the second quarter. The year-over-year decrease was primarily due to a decrease in payroll and benefit cost.

Engineering and development expenses decreased $0.3 million or 30% sequentially and $0.4 million or 39% year-over-year in the second quarter. Operating loss for the second quarter of 2020 was $4 million compared to an operating loss of $3.3 million in the second quarter of 2019, an increase of 19% year-over-year. Net loss for the second quarter of 2020 was $4.7 million or $0.12 loss per share compared to a net loss of $3.9 million or $0.18 loss per share for the prior year second quarter. As a reminder, our earnings release includes 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 and amortization expense, stock comp expense, change in allowance for doubtful accounts and expenses related to the disposal of internally developed software and the cost of our patent litigation settlement last year. The adjusted EBITDA loss for the second quarter of 2020 was $2.9 million, which excludes these items. It was essentially the same as last year's second quarter despite the significant revenue reduction. Our basic and diluted share count at the end of the second quarter of 2020 was 37.9 million shares compared to 21.6 million shares in the year ago quarter.

Now turning to the balance sheet. Cash, cash equivalents and restricted cash totaled $5.7 million as of June 30, 2020, and includes the proceeds of the registered direct offering of our common stock we completed in June. Following the close of the quarter, we also completed our announced rights offering, which was oversubscribed and resulted in gross proceeds to the company of $18 million before deducting fees and expenses related to the rights offering. The $18 million does not include proceeds that may be received by the company from the future exercise of warrants included in these units. While we have taken action to strengthen our balance sheet, the current situation is still challenging, and we remain focused on liquidity, cost containment and prudent cash management strategies.

In closing, I want to reiterate, we are confident that our actions to strengthen BIOLASE prior to the coronavirus pandemic were working. We have filled nearly all of our open U.S. sales territories, which in normal economic environment would have led to year-over-year revenue improvement for the first half of 2020. We believe our current liquidity position and our cost containment efforts provide us with sufficient liquidity and capital to effectively execute on our growth strategy in this environment.

Having said that, with COVID-19, there remain too many unknowns, and when we can't achieve this growth, now depends on how quickly the U.S. and international markets returned to some level of normalcy. This concludes our prepared remarks. I'll turn it back over to the operator to open the call for questions. Thank you.

(Operator Instructions) Our first question comes from Kyle Bauser with Colliers Securities.

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

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

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

Yes. I think it really depends, Kyle, on the marketplace you're in. So we've got a program in place right now in Texas, and the answer is absolutely yes, where we've seen a shift from traditional aerosol-producing products like a Cavitron unit to loop using our diode in the laser bacterial reduction's phase, and we're looking to probably scale up that in other markets where, specifically, hygienists have freedom to operate because they don't necessarily have freedom to operate in every state. But at least probably in 2/3 of the states, in the meaningful states in reference to size and population base.

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

Yes. Heartland primarily is a domestic-based. I mean, I think that's where we want to win here. As you know, the first trial went extremely well with 100% acquisition of the technology and return on investment, literally anywhere from 3 to 7 months for a complete return on the cost of the unit. So then COVID hit, and then we had a little bit of a pause as a lot of their offices, obviously, if not most of their offices shut down. So we're rebooting that now. So the goal here is to validate that with another set of practitioners within the Heartland Group. So we're really optimistic that, that will go positively well as the first one did. And we're seeing additional traction from them as well on the hygiene diode side. So it's not just a Waterlase today, it's also the diode in reference to reducing aerosolization as well.

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

Yes. Thank you, Kyle, and I'll answer that. Yes. The reason that we haven't given guidance during this period and I won't hear either is because we just don't know what the impact of COVID-19 will have into the third and fourth quarters of the year on the dental industry. And any setbacks in terms of our fight against the pandemic would certainly impact us as well. I will tell you that we believe the cost rationalization efforts that we underwent last year and this year sets us up well. I will tell you that when I joined the company 3 years ago, everybody told me that we had to have revenue of about $75 million to get to EBITDA breakeven. Under our current cost structure that number is closer to $40 million now. So that kind of, I think, tells you how much heavy lifting we've done on the cost side. Having said that, cash burn will be all dependent on that revenue number. I think you can pretty much depend on the cost side being in control.

But having said that, with the July rights offering raise being oversubscribed. In addition to that, the shelf registration that we took down in June, I'm highly confident that unless we have just a complete shutdown of all industry because of COVID, that we're well positioned to have enough cash to get to that EBITDA breakeven towards the end of next year.

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

First, a general market question. Dentist offices are now mostly open. Can you comment a little bit on their level of confidence. So are they spending on new equipment? Are they looking at the dental lasers based on the infection control benefits? And if they don't go for the benefits, is the BPP program getting them over the hump to a purchase decision?

Yes. So Bruce, let me start with the BPP. I think it's obviously making the transaction a lot easier because they're not thinking about putting any cash out at this stage, as they're obviously recouping their patient base coming back in and getting revenue back online. I would tell you that patient volumes have been pretty robust. And I think some of that's due to pent-up demand being closed as long as they were. Technology depends on the persona of the customer and reference to why they're buying. Some are looking to, obviously, reinvent themselves and finding other ways to compete now with other dental offices and pull in more patients as patients look at better alternatives and minimally invasive care. So I think there's a segment that is buying due to that. And then there's a segment also too, that really has taken the COVID to heart and want to create a very safe environment plus better patient outcomes by using a technology and they get both with either our diode or our Waterlase system. And we recently conducted 2 WMEs, 1 in Atlanta and 1 in Chicago and that was the feedback that we received from the participating dentists at those events.

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

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

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

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

(Operator Instructions) Our next question comes from Ed Woo with Ascendiant Capital.

My question is in terms of, have you seen any big differences in geographies? I know you mentioned that some of the salespeople are having a little bit more traction in certain areas. Is that the same as you are seeing in terms of revenues?

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

Great. What about -- are you seeing any big differences between Europe and the U.S. or even in Canada?

Yes. Canada is coming back strong now. We're working with another DSO up there, which we started at the tail end of last year. It's the largest DSO in Canada, and there's a call with them this Friday. So they're back to about 90% levels based off of the information they provided to us 2 days ago. So that's really positive. Rest of world, I think depending on pockets, it's coming back a little slower than we would probably like or anybody would like but I would say U.S. is probably leading that recovery effort. Canada would follow suit and then different pockets within the rest of world.

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

So Ed, we believe that the current cost structure, and when I talk about the cost structure in this context, I'm talking about the infrastructure, headcount and so forth, and we can support that revenue in the $40 million to $50 million range. So as it ramps back up, for sure, the current cost structure is supportive of that. Obviously, variable costs will go up, but the operating cost, we think we're in the right place right now.

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

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

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