Stock BIOLASE (BIOL): Bad news at all levels – Sell

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To note:

I covered BIOLASE Inc. (NASDAQ: BIOL) previously, so investors should consider this as an update to my previous articles on the society. In January, I called the company a speculative buy.

On Friday, shares of dental laser systems supplier BIOLASE Inc. or “Biolase” sold off after the company reported fourth quarter results in line with preliminary numbers and provided a less than stellar outlook.

Excel table

Company press releases

While the first quarter and full year 2022 forecasts were roughly in line with current consensus expectations, market participants were apparently disappointed with the projected revenue growth of just 10% after an increase in sales of 72% last year with total revenue eclipsing pre-COVID levels.

Worse still, management failed to reaffirm previously stated expectations to achieve adjusted EBITDA profitability by the fourth quarter. Based on statements made during the conference call, the company is now aiming to achieve profitability.”by the end of 2023“.

This is in fact the second consecutive time that Biolase has delayed its profitability targets.

On the call, management pointed to new uncertainties related to recent geopolitical events and continued supply chain disruptions as reasons for the rather cautious approach to forecasting.

Adding insult to injury, management also confirmed its intention to proceed with a stock split to regain compliance with Nasdaq’s continuous listing requirements.

Unrestricted cash decreased an additional $3.4 million sequentially to $30.0 million. Cash usage for the year was $17.4 million.

With limited growth expected for 2022 and the company’s decision not to raise prices for customers despite continued cost inflation, margins and cash flow will likely be under pressure.

Given these issues, I would estimate cash usage at up to $20 million for the year, which casts doubt on the company’s stated belief of having “sufficient financial resources to execute its short and long-term growth strategies”.

Please note that Biolase is subject to a minimum liquidity covenant of $1.5 million under its secured credit agreement with SWK Funding LLC (“SWK”). Worse still, the company will have to comply with minimum required EBITDA levels in the event unencumbered liquid assets fall below $7.5 million:

Minimum EBITDA levels

Company’s SEC filing

As evidenced by the “Key financial indicators” table provided above, the company’s EBITDA in recent quarters is far from reaching the levels required by the proviso.

Assuming no additional capital is raised, I strongly expect this covenant to come into effect in the first half of 2023, thereby requiring the company to proactively change the terms of the credit agreement, likely at expense of an interest rate increase and a significant change fee. .

Conclusion

Disappointing growth, combined with anticipated pressure on margins, should result in another year of substantial cash usage for Biolase.

With profitability expectations delayed by another year and the likely need to raise additional capital in 2023, I am lowering my rating on the stock to “sell”.

Investors should consider selling their existing positions ahead of the next reverse stock split which is due to be completed by May 23.

About Jason Norton

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