BIOLASE, Inc. (NASDAQ:BIOL) Q2 2022 Earnings Conference Call August 11, 2022 4:30 PM ET
Company Participants
Todd Kehrli – EVC Group
John Beaver – President, CEO & Director
Jennifer Bright – CFO
Conference Call Participants
Kyle Bauser – Lake Street Capital Markets
Anthony Vendetti – Maxim Group
Ed Woo – Ascendiant Capital Markets
Operator
Good day, and welcome to the BIOLASE Second Quarter 2022 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Todd Kehrli of the EVC Group. Please go ahead.
Todd Kehrli
Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE’s financial results for its second quarter ended June 30, 2022. On the call today from BIOLASE are John Beaver, President and Chief Executive Officer; and Jennifer Bright, Chief Financial Officer. John will review the company’s operating performance for the quarter and then turn the call over to Jennifer to review the financials in more detail 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 and subsequent Q&A session, including forward-looking statements regarding the company’s strategic initiatives and anticipated financial performance. These forward-looking statements are statements as defined under the Private Securities Litigation Reform Act of 1995 and are based on BIOLASE’s current expectations and assumptions and are subject to a variety of risks and uncertainties that could cause the company’s actual results to differ materially from the statements made.
Such forward-looking statements only represent the company’s view as of today, August 11, 2022. These risks are discussed in the Risk Factors section of the company’s most recent Form 10-K filed with the Securities and Exchange Commission. A replay of this conference call will be available on the company’s 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 2022 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 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 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 more information regarding the company’s non-GAAP disclosures.
With that said, I’ll now turn the call over to BIOLASE’s President and Chief Executive Officer, John Beaver. John?
John Beaver
Thanks, Todd, and thank you, everyone, for joining us this afternoon. We appreciate your continued interest in BIOLASE. I’m pleased to report the continued execution of our growth strategy enabled us to deliver one of our best second quarters ever for laser and laser-related sales. In fact, our second best second quarter since 2013, driven by increasing demand for our industry-leading lasers, our total revenue increased 34% year-over-year and our consumable sales surpassed $3 million for the first time ever in a single quarter. Our strong performance reflects positive momentum on several fronts, including continued progress with the Waterlase exclusive trial program. As our success rate, the percentage of dentists who purchased after the trial improved over 55% in the second quarter and over 50% year-to-date in 2022.
Additionally, our specialist academies for endodontists, periodontists, pediatric dentists and dental hygienist continued to generate increased adoption of our laser technology in the U.S. in the second quarter with 80% of our U.S. Waterlase sales coming from new customers and over 50% of U.S. Waterlase sales coming from dental specialists in the quarter. And last but definitely not least, we had 16 territory managers exceed their sales quotas in the second quarter, up from last quarter. We are extremely proud of our sales force and an incredible job they are doing. I’m also very pleased to report that we currently have no open territories, and we’ve had no sales turnover during this year.
The rise in demand for our industry-leading dental lasers is being driven by our intensified focus on education and training that is building increased awareness over the benefits our lasers provide to both dentists and their patients. As these efforts continue to pay off, we held 150 educational training events in the second quarter, a 50% increase from last year’s second quarter and the combination of our best-in-class dental lasers backed by peer-reviewed papers is complementing our increased education and training efforts.
As a result, dental practitioners are coming to BIOLASE as they look to upgrade their dental practices and improve their patient outcomes. We expect this positive trend to continue as we continue to successfully execute on the well-developed road map of strategies and investments we’ve put in place that we believe will drive continued growth in 2022 and beyond. BIOLASE currently has an approximately 60% worldwide share of the all-tissue laser dental market, represented by our Waterlase brand. However, this still represents less than 10% of the overall U.S. dental market and less than 3% of the dental markets outside the U.S.
As we target the remaining 90-plus percent of U.S. dentists not yet used in all tissue laser, we believe that the continued solid execution of our growth strategy will enable us to accelerate market adoption. Many of you have heard me say this before, but bears repeating because of the significant potential impact on our revenue. We believe each 1% increase in adoption of our all-tissue laser technology in the U.S. will equal approximately $50 million in additional revenue for BIOLASE, assuming we keep our same 60% historical market share.
This doesn’t include potentially increased adoption outside the U.S. where historically, approximately 40% of our revenue has been generated or the consumable revenue that is generated from the procedures done with our laser systems. We have a 3-pronged strategy, which we began implementing in 2021 and has created the growth momentum we are experiencing today.
The first prong of our growth strategy is to get dental specialists on board. In 2021, BIOLASE form Specialist academies to expand awareness of the benefits of dental lasers and dental specialist communities.
Specifically, we launched specialist academies for periodontics, endodontists, pediatric dentists and dental hygienist to drive further adoption of our lasers and superior outcomes for patients. The opportunity that exists for BIOLASE within each of these specialist communities is very meaningful, lead by key opinion leaders, or KOLs, in each of these specialties, BIOLASE is increasing education training to drive expanded awareness and adoption.
Now that we have launched specialist academies, we believe it is the right time to launch our Waterlase Academy that will give both specialists and general practitioners opportunities for continued education and training pathways in many dental procedures. During the second quarter, we saw continued strength in sales to specialists with over 50% of our U.S. Waterlase sales coming from those specialists.
Our focus on increasing education and training for these dental specialists is translating to higher demand for our products as they look for safer, more advanced alternatives to improve patient outcomes and improve their practices. One of my favorite examples of a specialist use case for our lasers is in endodontics. Endos performed over 15 million root canals per year in the U.S. The traditional way of treating root canal skills about 50% of the bacteria in the root canal. Use our laser and endo can get rid of 99-plus percent of bacteria. This is very important to both patients and endos as the risk of infection has substantially reduced use that laser. By our calculation, securing EMA a small percentage of each of these dental specialist markets we are targeting could generate over $150 million in additional revenue for BIOLASE from laser sales plus higher margin revenue associated with the follow-on consumables.
The second prong of our growth strategy is focused on the significant opportunity we have with the approximately 150,000 general practitioner dentists. If an additional 5% of GPs adopted our laser, would generate $225 million in laser revenue, not including consumables. The Waterlase exclusive trial program puts BIOLASE laser in a GP’s office for 45 days, supported by mentor and includes 2 days of in-person training, all at no cost to the dentist.
At the end of the 45 days, the GP has the option to buy a laser or not. With increasing success, we held over 30 of these programs in 2021 and 24 of these programs so far this year, averaging 5 GPs participating in each. As I mentioned earlier, we saw Waterlase exclusive trial program success rate increased from just under 50% in the first quarter to over 55% in the second quarter. Our goal for the full year 2022 is to host approximately 40 of these programs.
It’s a win-win for GPs because a big part of the Waterlase exclusive trial program is teaching these GPs, additional procedures they can do in-house with our laser. So they can keep more procedures and revenues in out and achieve superior patient outcomes. If they do just 2 additional procedures a week, they will generate a 200% return on their investment in our laser. That, along with the better patient experiences motivating dentists incorporate Waterlase technology into their practices. The more training and education we do through our Waterlase exclusive trial program that more successful we believe we’ll have in driving laser adoption.
The third prong of our growth strategy is getting the corporate dentists and universities to adopt our lasers. We currently have ongoing trials with 4 of the 5 largest DSOs in the U.S. Today, most dentists are employed by the DSO right at deal school. Our goal is for them to learn about and begin using our lasers while employed the DSO and then make our lasers an essential part of their practices moving forward, becoming new dental laser and consumable customers when they go out on their own. After the last few quarters — over the last few quarters, we made solid inroads with some of these DSOs. These relationships are important, and we believe that the large DSOs can lead to far greater revenue for BIOLASE in the future.
In addition, we continue to develop stronger relationships with key dental schools across the country. For example, last quarter, we sold 5 Waterlase units post graduate programs, and we expect this number to increase during the balance of 2022. The progress we are making in the dental schools by selling, not donating equipment further validates my belief that our technology will be the gold standard of dentistry in the future. To further advance our growth strategy, we’re always evaluating additional opportunities to strengthen our products and marketing efforts. For example, the CEO on the GO program was created to give direct feedback from Dentists, including on how we can continue to innovate our market-leading dilator technology.
To date, the program has allowed me to visit over 100 dentists and their respective teams. During one of those visits, I watch a Dentist use of Waterlase iPlus to remove 19 veneers in one setting in less than 30 minutes. The dentist told me that without the laser, this would have been an all-day affair, resulted in much more patient discomfort. I am always amazed at the benefits our Waterlase technology provides in real-life settings in the value of these in-person visits.
I plan to visit over 50 more U.S.-based dentists in the second half of the year and plan to visit many of our international customers starting next year. During the quarter, we also signed a new lease in Foothill Ranch to expand our training and education operations and establish our first ever model dental office. This new space is conveniently located next to our corporate headquarters and will expand our ability to drive revenue and laser adoption by training practitioners in a hands-on dental environment.
This is a novel opportunity to educate and train as well as produce marketing materials, create content, perform studies and test new equipment. I’m also very happy to report that during the quarter, we strengthened our management team with the promotion of 2 key team members; Steve Sandor, our new Chief Operating Officer; and Jennifer Bright, our new Chief Financial Officer. Both Steve and Jennifer have been integral in the planning and execution of our long-term strategy for growth, and I’m excited to further leverage our robust experiences, we continue to execute on our growth plan.
We also strengthened our Board of Directors during the quarter with additional seasoned health care executive with the election of Dr. Kenneth Yell. Dr. Yell brings health plan and dental insurance expertise to the Board. Dr. Yell, along with other currently recently elected Board members, Dr. Kathleen Laughlin, Dr. Carol Gomez, Summer Hayes and Dr. Martha Summerman, continue to provide insight and support the implementation of the company’s business plan, which has demonstrated significant growth over the past 1.5 years.
So in summary, we have a very large opportunity in front of us and a well-developed road map for growth as we leverage our industry-leading product offerings. Our 3-pronged growth plan is generating positive results as evidenced by our sales team’s great performance this quarter, which has given us continued confidence in our ability to drive sustainable and profitable revenue growth in 2022 and beyond.
With that, I’ll turn the call over to Jen to provide further details regarding our second quarter financial results.
Jennifer Bright
Thank you, John. Good afternoon, everyone. I’m going to provide more context around some of the numbers as well as highlight some of the operational improvements we achieved during the second quarter. Our strong second quarter performance demonstrates our continued business momentum. This increased traction reflects higher demand for our industry-leading dental lasers and is directly related to our increased education and training initiatives. For the second quarter, we delivered net revenue of $12.2 million, representing 34% growth year-over-year and 20% growth sequentially. Some additional second quarter highlights include U.S. laser system sales increased 70% year-over-year. U.S. consumables sales increased 42% year-over-year, driven by increased procedures using BIOLASE lasers.
International laser system sales increased 2% year-over-year. International consumable sales increased 3% year-over-year. We continued momentum with new customer adoption in the second quarter with 80% of our U.S. Waterlase coming from new customers and over 50% of U.S. Waterlase sales coming from dental specialists.
Lastly, as John mentioned, the success rate of our Waterlase exclusive trial program increased significantly to over 55% in the second quarter, highlighting the success of this program. These are all positive indicators of the increased demand we are experiencing for industry-leading dental lasers in the U.S. and abroad.
Second quarter gross margin was 42% versus 44% a year ago. The slightly lower gross margin reflects some of the impact of recent supply chain issues, the addition of our lower-margin Edge Pro, which is our first OEM product beginning at the start of 2022 and an employee retention credit under the CARES Act received during the 3 months ended June 30, 2021, that did not occur in 2022.
On the expense line, total operating expenses were $10.2 million for the quarter, up $2.9 million from the year ago quarter. This increase was due to compensation expense since all territories were filled in 2022. Commissions and bonus incentives for achieving sales targets and increase in travel-related expenses, the significant cost of this year’s annual meeting and reverse split shareholder vote to allow us to maintain our NASDAQ listing status and from an employee retention credit under the Cares Act received during 2021 that did not occur in 2022.
GAAP net loss for the quarter was $5.6 million compared to a net loss of $700,000 in the second quarter of 2021. In the year ago quarter, BIOLASE had a $3 million gain on debt forgiveness from its PPP loan, which positively impacted net income. GAAP net loss per share for the quarter was $0.91 compared to $0.12 for the second quarter of 2021 as adjusted for the reverse stock split. Our adjusted EBITDA loss for the second quarter was $4.1 million compared to an adjusted EBITDA loss of $2.7 million for the second quarter of 2021. Adjusted EBITDA loss per share for the quarter was $0.67, compared to $0.44 for the second quarter of 2021 and adjusted for the reverse stock split.
Let’s now turn to the balance sheet. We finished the quarter with cash and cash equivalents of approximately $20 million. On June 30, 2022, we raised gross proceeds of $6.5 million through the sale of common stock and prefunded warrants in a registered direct offering priced at the market and a concurrent private placement. Following the offering, we were able to enter into a favorable amendment to our senior secured term loan with SWK funding. The amendment extends the interest-only period of our loan by 2 quarters to November 2023 and reduces the minimum consolidated unencumbered liquid assets requirement.
We used a portion of the proceeds from the June 2022 offering and private placement to prepay $1 million of the outstanding loan balance, which was $13.3 million as of the end of the quarter. This prepayment and amendments will result in lower interest expense, which also increases the company’s liquidity. We believe our strong balance sheet provides us with the resources to execute our growth strategy for several years without having to access the capital market. And moving on to guidance. The third quarter of the year is seasonally historically our second weakest quarter. However, with the continuing strong demand for our dental lasers and strong consumable sales, we are currently forecasting revenue for the third quarter ending September 30, 2022, , which would represent growth of over 10% year-over-year. For the full year, we expect net revenue to increase at least 15% from 2021.
In summary, we had another strong quarter with significant revenue growth and solid sales execution. And we are confident that our actions to strengthen BIOLASE are working. Furthermore, the combination of our performance and the capital resources we have in place give us flexibility to execute the multiyear growth strategies that John outlined.
With that, I’ll turn the call back to the operator to open the call for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions]. We do have our first questioner, Kyle Bauser from Lake Street Capital Markets.
Kyle Bauser
Congrats on the updates here. Great quarter. Maybe John, I think you mentioned there’s no open territories right now, which is great. Can you kind of give us an update on what the latest headcount is there? And maybe I’ll just ask all my questions right now to kind of jumping through calls here. So a number of territories. And then secondly, has the McGuire study made a splash out there? Maybe an update on how the sales force is leveraging that and if you’re getting any traction with the DSOs? And then lastly, I would love to hear, John, an update on how your travels. I think the CEO and the goal travels have gone and kind of what you’ve learned?
John Beaver
Thank you, Kyle. So we have 27 territory manager positions in the U.S. As I said before, they were all filled. I went back as far as I could look, Kyle, and this is the first time, certainly since I’ve been here, which is almost 5 years that we’ve had no open territories and for this nobody else could recall when we ever were in this position. So I’d say a real testament, I think that the sales team is engaged they are seeing business coming to them in a lot of respects. They are working hard to get the message out. It’s also, I think, a testament to some of the changes and improvements we’ve made in our education and training. And that is, as I’ve said before in other calls, that process was broken a few years ago, and we really had that I think, as a best-in-class making their job while not easy, a little bit easier.
You talked about the McGuire study. We are planning to have the second part of the McGuire study issued in the fourth quarter that should be published probably in the first quarter of 2023. And it will come out pretty much as we expected it to, which will be just a continuation of the first part of the McGuire study. This is just a follow-up for those cases.
And what I will tell you is that for periodontist and what we call super GPs were doing periodontal work, that study has been important to them that rely on case studies, peer-reviewed papers and things of that like. So it certainly has created an opportunity for us to have more meaningful conversations with that community. So it certainly has been a plus for us.
And the last question was the CEO on the go. The marketing team did a great job in branding that. To me, it was just me getting out and doing right along with the territory managers and spending time with customers, and it is absolutely the favorite part of my job. Of the 27 territory managers, I believe I have now visited spent a day with 17, so I still have 10 left, and they’re all scheduled for the balance of the year. And I would say it’s a combination of things that really are benefits from that initiative. One is I get to spend a full day with those territory managers and here, here a lot of ideas that probably wouldn’t hear if it direct to me and spend a day in the car with them.
And a lot of those ideas we put into play because I will tell you that they know certainly more about the customers and how to sell than I ever will. And so getting those ideas communicated is important. Second thing is, I’ve learned from what customers are doing or what they’re not doing and have brought that back and have tailored our marketing message a little bit, tailored our WETP, the Waterlase Exclusive Trial Program, [indiscernible] a little bit, and so that’s helped as well.
The other thing that has really, I think, been kind of an added benefit of the CEO on the GO program is surprisingly, I think, had been able to get many doctor testimonials happy customers that want everybody to know why they’re using the laser and that they are using laser, and that’s been really great for our marketing campaign on social media.
Operator
Our next question comes from Anthony Vendetti from Maxim.
Anthony Vendetti
John, I was just wondering with all the inflationary pressures and supply chain headwinds, have you thought about or are you pushing through any pricing increases or plans to do that? And if you have been considering that, do you think there’ll be pushback or is that expected in this environment?
John Beaver
Yes. So great question, Anthony. And one day that we discussed, I would say, almost daily. We have had and have implemented price increases in our consumables business, and that has gone well, no complaints from customers really no pushback. And so that was implemented earlier this year. We — internationally, we were ready to implement a price increase on our lasers, and we held back because of the general macroeconomic trend or status kind of in the international markets, we sell in U.S. dollar. And so as you know, the U.S. dollar has strengthened considerably since the start of the year, making our products even more expensive to many countries that are still fighting COVID hurting with recessionary pressures. So we’ve actually delayed that price increase until likely — no earlier than the fourth quarter and probably likely in the first quarter of next year.
So that leaves the U.S. lasers. And our prices have gone up on an ASP, average sales price basis as we’ve been bundling more features, education, training and really, I would say, in large part, it just say increased discipline by our territory managers and pricing. One of the advantages that we have and not having any sales territory manager turnover this year is we have a much more experienced sales force than we’ve ever had. And so they’re able to hold pricing and have those conversations better with customers and be more disciplined in that.
Having said all that, we do see inflationary pressures on both our income and raw materials, travel, for training or sales events. — and also our own employee base. We’ve had to keep up with the market as well. So I do see increased U.S. laser prices coming up. It’s always a matter of timing. I don’t want to do anything that’s going to slow down this adoption that we’re seeing. But there’s a happy median there. So I think we’ll be able to thread that needle.
Anthony Vendetti
Yes. No, that’s a lot of great color. And yes, I’m sure you’re balancing that on a daily basis. So would you attribute maybe Jen can comment on this. So would you attribute the entire slightly lower gross margin to the OEM product, the Endo product or is it a combination of some of the increased supply chain costs that you haven’t been able to completely offset with price? Just trying to understand that dynamic.
Jennifer Bright
Yes. Really, all of the above that we mentioned, those 3 components were all pretty flat contributors to the slight decrease.
Anthony Vendetti
Okay. And maybe more of a go forward on that then, is that new gross margin or the gross margin this quarter, is that more reflective of what we should be thinking about the rest of this year or go forward? Or should we start to see as you’re able to implement a little bit more on the price increases, should we see that slowly start to tick back up?
John Beaver
Yes, it will tick back up and let me call out a few things that we’re doing that are coming on the horizon. So we’re getting better at filling up some of the WETPs in terms of just more dentists. So our training cost, which actually goes into cost of goods sold, will be going down on a per headcount basis. So we’re getting smarter there. In addition, I mentioned the mall donors that we’re open. We’re also opening up a training center here that investment will allow us to hold trainings at a cheaper cost per person than we had.
Also, going back and this probably sounds like a broken record from any manufacturer pre-COVID everybody was — every manufacturer was just in time, right, from a supply chain standpoint. And as we all found out during a COVID crisis, that doesn’t always work. And so what we are doing is investing CapEx into bringing some manufacturing in-house and supplementing some supply chains that we are getting with our own. And I think that will have positive benefits over the next few quarters as we bring some of that capacity out.
Anthony Vendetti
Okay. Great. No, that’s helpful. And then just last Lastly, two other quick questions. One is any talks with other universities to adopt lasers as part of the curriculum? Obviously, getting your dentists in early helps with the process makes the selling process, I’m sure a lot easier. And then just any update that you can on — if there is an update on the DSOs?
John Beaver
Sure. So on the university side, I don’t know if you call it what I potently said during the prepared remarks, we are selling to universities now not giving away lasers. And there’s a big distinction there because when you’re selling a laser to university, that means you have buy-in and they’re actually serious about incorporating that laser into what they’re teaching. And so the team here has done a great job in seeking out those universities that are interested. And I think it’s also a testament that dental lasers are becoming the gold standard of care. And as more people realize that more universities want to compete to give that educational experience to their students and residences. I will say that for the balance of the year, we have a handful of universities that we’re working on. But once again, we want to be strategic with it. We don’t want to just go out and give everybody a laser because we’ve proven in the past that doesn’t work.
From a DSO standpoint, we continue to work with the large DSOs, small DSOs. We have a number of trials in place. I wish I could say more about that. Many of the DSOs as part of us working with them, they don’t want us to disclose a lot of the trials and so forth. But I am cautiously optimistic that we’ll have some news over the next 6 months. That will be very interesting.
Operator
[Operator Instructions]. Our next question comes from Ed Woo with Ascendiant Capital.
Ed Woo
Yes. Congratulations on the quarter. Obviously, your U.S. business is doing very well. Are there things you can learn adopt and implement in international to be able to get it to perform just as well?
John Beaver
Yes. So Ed, I think what we are learning is that some of the things that we are doing in the U.S. may not be applicable directly to the international markets. And I think our view here is evolving. But being that we sell in 80 countries, every country is different. And the things that work here may not work in Japan and may not work in Germany, for instance. So we’re not where we need to be internationally. That is going to be certainly a point of emphasis going into 2023. If you think about kind of what our results have been, we felt like we had a great opportunity in the U.S. where COVID was less of an issue than international. So really a lot of our attention and investment have been on the U.S. in 2022. I think as we turn toward 2023, I’m hopeful that some of the things we’ve learned over the last year or 2 in the U.S. will be applicable but we’ll get more and more attention to international. I just felt like we had to fix U.S. first. And I feel like we’re a long ways down that road.
Operator
Sir, there appears to be no further questions in the queue. Do you have any closing comments you’d like to finish with?
John Beaver
I do. Thank you, operator. I want to thank everyone for being on today’s call. Also, I want to thank the BIOLASE team — the whole team for their continued commitment and dedication. Each of them has worked tirelessly to make our customers successful in delivering elevated standard of care and safety through laser dentistry. Jennifer and I look forward to reviewing our third quarter results with you in November. And in the meantime, we will be participating in several investor events, including the Lake Street Big 6 Investor Conference coming up on September 14 in New York. If you are participating in this event, please contact Todd Kehrli at tkehrli@evcgroup.com to help facilitate a meeting with us. Thank you, operator, and thank you, everyone, for your interest in BIOLASE. This concludes our call. Have a great day.
Operator
Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
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