BIOLASE Inc (BIOL) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the BioLase Technology, Inc. second quarter and six months results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, we will have questions. (Operator Instructions) This conference is being recorded today, Tuesday, August 17, 2010. I would now like to turn the conference over to Mr. Matt Clawson of Allen and Caron. Go ahead, sir.

Thank you very much, Jo. Good morning, everyone, and thanks for joining us today for the BioLase Technology second quarter and six months results conference call. You should have all received a copy by e-mail this morning of the release announcing the Company's results for the second quarter and six months ended June 30, 2010. Before we get into it, I have been asked to make the following statements. The words and phrases, can be, may, affect, may depend, believe, estimate, project, and similar words and phrases are intended to identify forward-looking statements. Forward-looking statements are subject to various known and unknown risks and uncertainties and BioLase cautions you any forward-looking information provided is not a guarantee of future performance. Actual results could differ materially from those anticipated in these forward-looking statements due to a number of factors, some of which are beyond BioLase's control and may be discussed in BioLase's filings with the Securities and Exchange Commission.

All such forward-looking statements are current only as of the date on which statements are made. BioLase does not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which that statement was made, or reflect current unanticipated events. Also, as a quick reminder, the replay of the call will be available on BioLase's website at www.BioLase.com. The Company's 2010 second quarter and six months results can also be found on the Company's quarterly report on Form 10-Q which the Company filed with the Securities and Exchange Commission yesterday. With me on the call today from BioLase is Dave Mulder, the Company's Chairman and Chief Executive Officer and also, the interim Chief Financial Officer. Dave will review some prepared remarks, including an update on the business, operational performance and outlook, then there will be a question-and-answer session at the end of the call followed by a few closing remarks. With that, I'd like to turn the call over to Dave Mulder. Good morning, Dave.

Good morning, Matt, and thank you. We want to welcome all of you to our second quarter and six month results conference call and thank you for participating. Today we'll review the progress we have made at BioLase during the quarter and since our last call, including discussing some of the key strategic initiatives currently underway and make a few comments on an imminent new distribution model in finalization stages right now. I will also summarize the financial results for the quarter and first half of the year, then comment on the economic market factors that are influencing those results. I'll then conclude my opening remarks and open it up for questions. While the new purchasing pattern of our licensing and initial shipments of our new iLase diode laser mostly contribute to the revenue rebound, distribution agreement with Henry Schein impacted revenues in the second quarter as we anticipated. Revenues improved over the first quarter of this year, we made additional progress in working through inventories at Schein and most importantly, we moved forward to develop a longer-term distribution model for the future.

While I would like to say all the elements are complete, they are still being finalized with all parties. We began thinking about this transition over a year ago, as end user sales in the third quarter had not achieved the results we were looking for under our current model and our distribution partner Henry Schein built record levels of inventory under the minimum purchase agreement as we disclosed at that time. We look forward to discussing the new model in greater detail as it is finalized. As we first announced in March, the restructure of our distribution partnership with Henry Schein is continuing to have a meaningful impact on our revenues in the second quarter. First, under the revised agreement of the old model, we began to ship against prepayments for future deliveries of our products during the first and second quarter. Second and more simply, both BioLase and Henry Schein have been selling channel inventory, which as I mentioned earlier, is reducing the level of that inventory. The short term transitional agreement struck on March 9, 2010, with Henry Schein also provided for a 60-day cancellation period.

Obviously, while we were struggling to make the old agreement work, we built in flexibility for greater change going forward. We just reduced that timeframe to 45 days, effectively today. And obviously, we could agree to shorten it even further. And, again, the short term agreement we struck, largely Federico Pignatelli and myself with Schein did preserve some cash flows, decrease pipeline inventories and most importantly for us, allowed us to begin exploring alternative long-term distribution alternatives to build resources and contacts that we would need in order to finalize that new model. During this transition agreement, we have been building up the BioLase sales team. We've been initiating marketing efforts to non-traditional Henry Schein accounts. We've been exploring new relationships with other potential North American distributors and we've been moving forward very positively with Henry Schein to explore a new long-term, potentially nonexclusive relationship allowing for broader distribution and more BioLase control over Waterlase sales.

We believe we are now on the cusp of announcing a new long-term distribution model and look forward to taking advantage of the economic recovery that we believe is beginning to provide some lift in both domestic and international markets end user sales. To support this more aggressive approach to the market, we've removed almost one-third of our lower performing sales reps and since then, have almost doubled their numbers. We took the sales force to as low as 15 during the first quarter and have now rebuilt that organization to 25 sales professionals and we are still planning to add more as we go forward.

During the second quarter, we received initial sales from our newest product, the iLase diode laser for the dental market. This revolutionary new product is the world's first personal laser for dentists or hygienists to perform a full range of minimally invasive soft tissue and hygiene procedures and take advanced portability to a whole new level. This laser is designed to take our weekly shipments from dozens, to hundreds. As we have mentioned in the past, we believe the iLase has the potential to become the most popular personal laser in the world. Right now we have a back log of end user sales that represents approximately 0.5 to -- 0.5 a month to a month of deliveries and distributor orders that will keep iLase production at very high levels through the remainder of the year. A very positive result for the iLase launch has also been an increase in the activity of the ezlase, which is being sold as a total diode solution with all of the iLase soft tissue capabilities, plus 20-minute whitening and pain management. And it is important to note that this increase in business is bringing people to BioLase to discuss Waterlase, which is the world's best soft tissue and that just happens to also be the world's best hard tissue laser. In preparation for the new model, we have also taken a small increase in our inventory balances. On the P&G contract, we have another detailed workshop in Cincinnati scheduled for early next week.

Now, I would like to provide a quick review of the financial results. Let's start with revenues. Total 2010 second quarter and six month sales were $5.9 million and $10.3 million respectively, compared to $14.3 million and $20.9 million in the same periods last year. Sequentially, second quarter sales increased 34% from $4.4 million in the year's first quarter. As I mentioned earlier, the year-over-year reductions were anticipated and were driven and reduced domestic laser purchases by Henry Schein as it reduced its inventories. Under the renegotiated distribution agreement with Henry Schein, the majority of its required minimum laser orders for the first quarter were replaced by prepayments for future deliveries of the Company's products, primarily the iLase. This arrangement delayed the recognition of approximately $6 million in revenue from the first half of 2010, to future periods while maintaining some portion of normal cash flows during the transition.

The sales rebounded from the first quarter of this year due to higher licensing fees and royalty revenues, positive initial sales of iLase, with the balance being non-laser sales on disposables in the US and overseas. Total laser system net revenue for this year's second quarter and six months was $2.7 million and $4.9 million respectively, compared to $11.4 million and $15.2 million in the prior year periods. Non-laser system net revenue, which includes consumable products, advanced training programs, extended service contracts and shipping revenue, were $2.1 million and $4.2 million respectively, compared to $2.5 million and $4.9 million in the second quarter and first six months of last year. License fees and royalty income for 2010 second quarter and first six months increased to $1.1 million and $1.2 million respectively, as compared to $430,000 and $905,000 in the prior year periods. The 2010 periods included the recognition of previously deferred royalties from P&G, the 2009 periods included amortization of the Henry Schein license fee which was fully amortized as of August 31, 2009.

Now, I would like to provide a breakout of sales by region. This year's second quarter domestic sales were $3.5 million or 60% of net revenue compared to $11.2 million or 78% of revenue for the prior year. For the first six months of 2010, domestic sales were $5.8 million or 56% of revenue compared to $15.8 million or 76% of net revenue, for the first six months of last year. International revenues for the 2010 second quarter were $2.4 million or 40% of net revenue, compared to $3.1 million or 22% of net revenue in the second quarter of 2009. For this year's first six months, international revenues were $4.5 million, or 44% of net revenue, compared to $5.1 million, or 24% in the prior year period. Most of the domestic impact reflected the reduction in domestic distributor inventories versus end user sales.

In the China market, we have trained distributors and their staff. They have made contact with many major hospitals, where most of the business is in China, and many have worked lasers into their budgets, and we have many tender offers that are now written and being written for those hospitals now that lasers are in their budget. It is a patient process that continues to move forward there. Our gross profit for the second quarter of 2010 was $1.9 million or 33% of net revenue compared to a gross profit of $8.1 million, or 57% of net revenue for the prior year period, and $270,000, or 6% of net revenue for this year's first quarter. The year-over-year decrease was primarily due to the lower revenue numbers and comparison to fixed and unabsorbed manufacturing costs, and costs of goods sold were partially offset by net increased revenue recognized on deferred royalties as part of the new Procter & Gamble transaction. The 2010 first six months, gross profit was $2.2 million or 21% of net revenue, compared to a gross profit of $9.9 million or 47% of net revenue for the year earlier period.

Operating expenses for 2010 second quarter, was $6.1 million compared to $5.6 million in the prior year's comparable period. This increase is primarily due to the buildout of the sales and marketing team. Most of the cost decrease announced late in the quarter were not in sales and marketing category. For the first six months of 2010, operating expenses were $11.6 million compared to $12.3 million in the prior year period. Throughout the quarter and first half, despite the transitory challenges we experienced with our North American market, we have continued to invest in R&D for diodes with the resulting iLase and also in our flagship Waterlase line. We look forward to talking more about the results of that investment in the coming months. Net loss for the second quarter of 2010 was $4.2 million or $0.17 per share compared to net income of $2.3 million or $0.10 a share in the same period in 2009.

Non-GAAP net loss was $3.7 million or $0.15 loss per share for the second quarter of 2010, compared with non-GAAP income of $3 million or $0.13 per share in the corresponding quarter in 2009. Net loss for the first six months of 2010 was $9.5 million or $0.39, compared to a net loss of $2.3 million or $0.10 in the first six months of 2009. Non-GAAP net loss was $8.5 million or $0.35 a share. And for this year's first six months, compared with non-GAAP net loss of $743,000, $0.03 a share in the similar period in 2009. The recent reduction in overall operational head count, along with additional cost-cutting measures made across the organization, is expected to reduce corporate expenses by approximately $3 million on an annual basis. These changes will better position the Company for future profitability. Approximately $70,000 in these charges related to severance and other non-recurring expenses related to the restructuring which were inferred during the second quarter.

We also incurred certain expenses with corporate governance matters that we anticipate are all behind us now. Turning to the balance sheet as of June 30, 2010, we had cash and cash equivalents of $2.9 million and total assets of $20.3 million. During the quarter, we entered into a $5 million secured debt facility with MidCap Financial and Silicon Bank, of which $3 million was funded on May 27, 2010. I would now like to take a quick moment to welcome our two newest Board members on our Board, Dr. Alex Arrow and Dr. Norman Nemoy. Both of these men bring a wealth of business experience that will help us as we move the Company in a new direction and return the Company to expansion and profitability. Their clinical, Wall Street and strategic experience will give us an important perspective as we embark on the course that we've been developing over the last year and as we take decisive steps to implement that course. In closing, we see many reasons to be positive about the future of the business.

The marketplace seems to be slowly picking up and, in fact, our historic North American partner, Henry Schein, indicated on his quarterly conference call last week that it is seeing dental equipment sales improve and believes the pent-up demand will have a positive impact during the second half of the year and expects its order book to continue to grow. While we are quite optimistic about the outlook of the business, the distribution model that is nearing completion, our rich product and product enhancement pipeline and the ramp of the iLase, we remain fully committed to ongoing vigilance on our cost controls and improving our balance sheet. We would like to thank you for your support and continued interest in the Company. That concludes our formal prepared remarks. We would now like to open up the call to questions.

Thank you, sir. We will now begin the question and answer session. (Operator Instructions) And our first question is from the line of Dalton Chandler with Needham & Company. Go ahead, sir.

Good morning. I just wanted to first ask about the reduction or the cancellation with Schein from 60 to 45 days. What was the thinking behind that?

We've been in some long discussions on what we need to do going forward together, very positive discussions. And we decided that a 60-day window didn't make much sense for either one of us, because if we were going to be doing something completely different, and we are looking at some very different ways of moving forward together, why wait 60 days?

Okay. So, you're now open or you expect to be open to any and all North American distributors?

That is not fully confirmed yet, right now, officially Henry Schein is still our exclusive distribution partner in North America. However, Henry Schein and ourselves have worked together for four years, Henry Schein's inventories have, as we disclosed last year, were building. Ourselves, we didn't get the sales that we would like, and so we've been working on very, very positively on finding the right way to move forward together, and one possibility is that -- one very real possibility that I'm clearly hinting on, is broader distribution.

Okay and I think you mentioned you're now at 25 sales reps. Where do you want that to go?

We have been targeting trying to get that to roughly 40 sales reps. I think as we've disclosed in the past, in the United States there are 420 metropolitan statistical areas. In probably about 80 of those areas, we haven't established our first laser yet. In all of the others, we have a first one and in about 60 of those areas, we have between 5% and 60% penetration. Therefore, we see it as key to have more reps covering more territory.

Okay. And now that we're about halfway through the third quarter, how many iLases are you able to ship in a week?

We have been ramping up very quickly. Right now, this week I believe, we're at about 100 a week right now.

Okay. And do you expect to have that $6 million backlog worked down by the end of this quarter or by the end of the year or what sort of timeframe?

We're working on that together with Henry Schein right now. And how quickly that they would like to take it and how quickly we would like to fulfill it. As we said before, they've built some inventory, and so I think their goal would be primarily to be taking iLase going forward. And so we're currently working out a balance, because the iLase is currently in very high demand around the world with both Henry Schein international distributors and other non-Schein international distributors everywhere. The demand is very high. So, we're currently working on how we would pull that down right now. That's part of our current transition plan because we want it to be healthy for all parties.

Okay. And did you have any of the Diolase 10, any revenue from that in the quarter?

Yes, we did. It's been a slow ramp-up. We started the product into the pain management market. It has had a lot of interest. We have just started at the end of the second quarter, started putting on a few seminars to teach about how to use the laser. And some demand has been building. So, there's like a few hundred thousand in there. And we are currently expanding our base, and going after that, plus we've also added, recently, a new handpiece. So, we are anticipating some ramp-up of that still, yes.

Okay, and just a last question on P&G. You said you're going up for a workshop in Cincinnati. What does that mean?

That means that our team, our engineers and theirs have been working very closely together on developing the final stages of the product and working and getting our manufacturing plans ramped up.

So does -- if you're ramping up manufacturing plans, I assume you -- a launch is imminent?

A launch is -- we're definitely going to be launching something. I believe -- I continue to try to get something done this year yet. But honestly, I think how we're moving, it will -- it remains probably an early 2011 launch.

Okay. Thank you.

My pleasure. Thanks, Dalton.

Thank you, sir. And our next question comes from the line of Austin Hopper with AWH Capital. Go ahead, please.

Good morning. You mentioned Schein having a significant amount of inventory in the -- I guess working that down, question -- first question is, how many units of the various lasers they actually have in inventory?

We've never commented on that. We don't have a clear and total vision on exactly how much they have in inventory.

Okay. And do you know are they -- is Schein actively selling off inventory to third party resellers who are discounting it in the market?

There was one transition that -- transaction that took place during the quarter on the C100 unit. Once that transaction took place, and we learned about it, we've had discussions with Schein and they said they wouldn't be pursuing those kind of transactions any more. But, they did -- they felt they had particularly a few excess units in the C100 territory. They sold them through a third party, and those came back in. And so, we have seen a few of those units out there. We're working right now -- we're trying to work constructively on how to deal with that.

My biggest concern is that this Company who ultimately got hold of them in the US, is marketing them in a way that confuses the general buyers to some extent. To have C100 was a low-cost laser that we introduced. We're happy to have the C100 as a low-cost laser out there. However, I think the Company that got them is stretching and confusing people with some used lasers and some other things they're doing and we're looking at appropriate action there. But I don't envision Schein doing any more of that going forward.

Great, thank you.

Yes.

(Operator Instructions) And our next question comes from Robert Hoffman with Princeton Capital Management. Go ahead, sir.

Good morning. I just signed on about five minutes ago, so you may have answered this question and so I apologize. I'll listen to the replay. But did you talk about the rationale for shortening the time period for cancelling the contract with Schein from 60 to 45?

Yes. As we're getting close to a new imminent model that we would all like to introduce, we might, frankly, we might even shorten it -- mutually shorten it again. We thought that as we're going forward, and we would like to do something different, they would like to do something different. Right now, we have been very -- working very closely together for years. I consider some of the guys at Schein close friends at this point. As well as sometimes adversaries in a negotiation as any good business would have. And we've decided that it would simply be -- why wait 60 days?

In the past, we've talked about a longer or shorter period. We agreed on 60. We decided now it probably makes sense to have that even a little shorter still. We believe it's to the benefit of BioLase. Because if we are doing something different, we would like to do it different swiftly.

Okay, so you think that it wasn't a one-sided agreement? I mean it wasn't a one-sided change?

Oh, no, no, absolutely no. It wasn't a one-sided change, no. The 60 days we came up with was together and the 45 days we came up with was together.

Okay, great, thank you.

Sure, my pleasure.

I'll listen to the replay.

The fourth quarter, just to add to that, the fourth quarter is generally our strongest quarter. So, if there's going to be a change, we would like that -- we would like to ensure that there would be a change relatively quickly.

And gentlemen, there are no further questions at this time. I would now like to turn the call back to Mr. Matt Clawson for several e-mail questions. Go ahead, sir.

Thank you, Jo. Yes, a couple of e-mail questions came in that were not covered. So, Dave, the first one is asking if you could comment on the recent Board moves, and maybe give a little color on what those changes might mean going forward.

Yes, yes, I'd be happy to do that. Federico Pignatelli has been our President for the last few years. He's also served as Chairman of the Board and he's served as an interim CEO. He has had a very long standing, very passionate involvement with the Company and has been a very strong -- and very strong devotion to it. He has been working on almost all of the Henry Schein agreements, either as pointman or along with the CEO for years. He's been working very closely with me on those arrangements. And we've also been working together on several other things that we may have for the future. Right now -- it got into a bit of a situation where it's now time for some serious decisiveness, and so there was, just to cut it very, very short, there was some concerns about the best way to move forward, and the best way to drive the Board structure. It's hard to say one point of view was absolutely right, one point of view is absolutely wrong, but I will say that we have now pulled it together for a tight, decisive structure going forward, and we're very pleased at where we are at that time.

Okay, great. And then the last question that was not addressed was -- someone had asked if you could give any more specifics on what you expect the relationship with Henry Schein to look like going forward? I mean, is it something that you want to be non-exclusive? You want to be semi exclusive? What would that look like if BioLase were to get their way?

I think one thing that we've described in the past, and we felt that under the distribution model that we moved to in 2006, I wasn't here at the time but I've studied it very closely, once we struck that agreement, we saw our diode sales improve and we were very pleased about that. We also saw our consumable sales improve and we're very pleased about that. As a small company reaching out, we have almost 14,000 dentists around the world, reaching them with all the service, with all the parts, with all the tips that they need and everything else, is excellent working with distributors and we're very pleased with that. However, we have seen declines in Waterlase over a number of years, and while we think that this is a more -- this is a sale that requires a lot more direct personal contact with the Company, it requires a luminary base, it requires a very dedicated, highly technical sales force. Our sales force guys are trained in dental, and in many, many things.

We think it is very important to have that base out there. That being said, we also believe that the Waterlase and connections that distributors have out there, along with their own base and other equipment can be very helpful to our business. So therefore, what we've been looking for is we have been looking for the right balance to get those sales generated again in North America with more specific influence of our sales force out there and doing what we need to do to make it happen. But we also are very interested in working with distributors. And my ideal world, the more people that are selling the Waterlase and our other products, the better that is. As a comment on Henry Schein, they have been a close partner, Stan Bergman, the gentleman at the top of the company over at Henry Schein, they have been strong believers in lasers, and improving the dental community through lasers. And so, we have a mutual goal in that, and we're just currently working on the best way to make that happen overall.

Great, thank you. That wraps up the e-mail questions. I'll turn it back to you, Dave, to close.

Again, I want to thank everybody for joining us. We feel very positive about what we have in the pipeline. And as we had that blue curtain with the iLase we have more blue curtains and more products coming in the future. We have been spending on R&D diligently and we have been getting results from that effort. And we also look forward to sorting through the final chapter of our new distribution model. I apologize for teasing everybody about it just a little bit. We are very close. However, I want to make sure that everybody is comfortable with what we're doing before we make any final arrangements. So, again, thank you for joining us, and we look forward to talking again next quarter.

Ladies and gentlemen, this does include the BioLase Technology, Inc. second quarter and six months results conference call. Thank you for your participation. You may now disconnect.