Earnings Call Transcript - LNSR Q2 2023

Operator, Operator

Good morning and thank you for your participation. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference call will be recorded. I would now like to turn the call over to Mr. Cameron Radinovic of Burns McClellan. Mr. Radinovic, please go ahead.

Cameron Radinovic, Moderator

Thank you. Good morning, and welcome to the LENSAR Second Quarter 2023 Financial Results Conference Call. Earlier this morning, the company issued a press release providing an overview of the financial results for the quarter ended June 30, 2023. This press release is available on the Investor Relations section of the company's website at www.lensar.com. Joining me on the call today is Nick Curtis, Chief Executive Officer of LENSAR, who will review the company's recent business and operational progress. Following his comments, Tom Staab, Chief Financial Officer of LENSAR, will provide an overview of the company's financial highlights before turning the call back over to the operator to facilitate answering any questions you may have. Today's conference call will contain forward-looking statements, including those statements regarding future results, unaudited and forward-looking financial information, as well as the company's future performance and/or achievements. These statements are subject to known and unknown risks and uncertainties, which may cause the company's actual results, performance or achievements to be materially different from any future results or performances expressed or implied in this presentation. You should not place undue reliance on these forward-looking statements. For additional information, including a detailed discussion of the company's risk factors, please refer to the company's documents filed with the Securities and Exchange Commission, which can be accessed on the website. In addition, this conference call contains time-sensitive information that is accurate as of only the date of this live broadcast, August 9, 2023. LENSAR undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this live conference call. It is my pleasure to turn the call over to Nick Curtis. Nick?

Nick Curtis, CEO

Thank you, Cam, and good morning to everyone. Thank you for joining us on our second quarter 2023 conference call. I'm pleased to report that LENSAR had a strong quarter, placing 14 systems in Q2, bringing our total number of ALLY systems installed 2023 year-to-date to 18, well on our way to our goal of having 30 or more systems installed this year. Our second quarter revenue increased nearly 50% over the same quarter in 2022, which can be attributed to both robust system sales and an increase in lease revenue. Partially supporting these increases was the start of multisystem placements into private equity-owned and/or managed ophthalmology groups. We're beginning to see momentum in both areas and hope to see strong demand as additional private practice surgeons, as well as the PE groups realize the technological, financial and operational benefits to ALLY that distinguish it from all other competitive systems, which have older, slower, and outdated technology. As we highlighted in the press release in July, the adoption of ALLY in private equity-owned ophthalmology groups has been steadily increasing as we have completed the installation of multiple ALLY systems in five private equity-owned ophthalmology groups. Each of these groups has the potential to add multiple ALLYs in the future. They will benefit from the system's higher levels of precision, the ability to support improved patient outcomes, and practice-level efficiency at various sites within these commonly owned and/or managed practices. Private equity-owned ophthalmology groups are growing and currently account for about 14% of the total cataract surgery procedures being performed in the United States, making these groups synergistic new partners for LENSAR, where we're gaining traction due to the advantageous financial and outcomes-based value of using the ALLY system. Looking more closely at the U.S. market, which remains our primary area of focus in 2023 and into next year, procedure volumes grew 13% compared to the same period last year. According to recent data published by MarketScope, LENSAR continued to increase market share in the second quarter of 2023, with LENSAR systems utilized in an estimated 15.6% of all FLACS procedures during the second quarter of 2023. This marks an increase from the 15% reported in the first quarter, demonstrating consistent growth and adoption, and most importantly, utilization of our technology in the market. We are particularly pleased with the performance of our ALLY systems among users who have transitioned from or added to our previous generation LLS technology. Procedure volumes and utilization for these users increased by an impressive 15% over the first half of 2022. This level of growth has exceeded our internal expectations and demonstrates the value that ALLY brings to practices in terms of operational efficiencies, yielding better economics for these practices. As a reminder, the U.S. represents the largest premium procedure market in the world and is of significant importance to LENSAR. The feedback we continue to receive from our growing customer base is immensely gratifying, reaffirming the positive impact that ALLY is making in the field of femtosecond laser-assisted cataract surgery and advancing the market for premium cataract surgery procedures overall. Particularly noteworthy are those users who have switched from competitive systems to ALLY. To further highlight this point, 50% of our 2023 ALLY placements are new surgeons who are recognizing the benefits of ALLY and leaving behind the more entrenched legacy competitive systems previously used. We believe ALLY's speed, ergonomics, size, open architecture, and ability to communicate with multiple preoperative devices in managing astigmatism are compelling reasons to switch from older generation technology. ALLY stands out as the state-of-the-art solution, increasing productivity with faster and more efficient procedures, and provides the necessary features to allow surgeons to not only enhance their workflow but also improve patient care and outcomes. From a marketing and sales perspective, we continue to target and nurture nearly 160 leads from high-volume competitive femtosecond laser users who have expressed interest in the ALLY system. These leads are in various stages of our marketing and sales cycle. We’re confident that they are more than enough to deliver on our stated 2023 goal of at least 30 systems by year-end 2023. The capital equipment market and pacing from lead to close to install can be described as lumpy, more seasonal, and a bit unpredictable timing-wise. Adding complexity, PE-owned and/or managed groups can extend the sales cycle timing-wise, but we remain very optimistic that at the end of the day, we will continue to take market share from the older competitive technologies while growing the overall market in femtosecond laser utilization. We are working hard continuing to increase interest and pipeline for ALLY and have a strong belief that we have the right initiatives in place, which are becoming more obvious over time. When you remove South Korea from year-to-date procedure volumes, our worldwide procedure volume has increased 15% year-over-year. We’re hopeful this challenge is resolved in 2023 and that this strong contributing region returns to being a sizable piece of our procedure volume in 2024. Lastly, we ended the quarter in a strong financial position with $25.5 million in cash and cash equivalents. Following the successful completion of our May 2023 financing, we believe that LENSAR is in a strong and advantageous position to drive forward with our plans for ALLY’s continued success by increasing our marketing efforts, expanding our sales and distribution networks, and continuing to build strong relationships with our valued customers, distributors, and other partners. Now let me turn the call over to Tom, who will cover our financial highlights for the quarter. Tom?

Tom Staab, CFO

Thank you, Nick. Our second quarter 2023 financial results are included in our press release issued earlier this morning, but there are a few significant items I'd like to discuss. Revenue was $12 million in the second quarter of 2023 compared to $8 million in the second quarter of 2022, reflecting a 49% increase. As Nick mentioned, the increase was primarily due to increased system sales and increased lease revenue. We had an exceptional quarter for system placements, increasing our installed base by approximately 30 units in the last 12 months. This is especially noteworthy as we were limited to 10 ALLY units in our controlled launch for the latter half of 2022 and had ceased production of our Gen 1 LLS systems. Furthermore, revenue in the second quarter of 2022 from South Korea was approximately $0.5 million, so we increased revenue approximately $4.5 million or 56% for the second quarter of 2023 when you adjust for lost revenue from South Korea associated with third-party payer reimbursement issues. This issue affects LENSAR as well as our competitors that operate in South Korea and has been an ongoing issue since the third quarter of 2022. In addition, due to the timing of ALLY regulatory approval in other regions, we are limited to placing ALLY systems in the United States as our primary volume region, so that inherently limits our revenue and growth until ALLY is cleared for commercial sale in other significant regions. We are looking forward to being able to sell ALLY in the EU in 2024. To that end, we filed to obtain commercial clearance in September 2022. We are also taking steps to obtain clearance in South Korea, Taiwan, and the Philippines with our distributors. With that said, the U.S. market is very important to us and we are extremely pleased with the increase in U.S. procedure volume, which increased approximately 13% when comparing the second quarter of 2023 to 2022. Worldwide procedure volume increased by 6% in the second quarter of 2023 versus 2022, even though procedure volume continued to be negatively impacted by decreased procedure volume from South Korea. In the second quarter of 2023, there were 35,349 procedures sold compared to 33,359 procedures sold in the second quarter of 2022. Gross margin for the quarter was $6.8 million, representing a gross margin of 56% compared to $4.9 million and 61% realized in the second quarter of 2022. Our gross margin for the second quarter and first half of 2023 is trending a little higher than we anticipated as we had projected our gross margin to be in the low-50s. Although, supply chain issues have created higher inventory costs and eroded margins somewhat, we are seeing margin benefits associated with ALLY whereby, one, ALLY system margins are higher than LLS margins, and two, ALLY procedure margins are higher than LLS procedure margins. With these benefits and product sales mix being more heavily weighted to ALLY, we believe that future quarterly gross margins in 2023 will trend between 50% to 55%. Total operating expenses for the second quarter of 2023 were $9.6 million compared to $11.7 million in the second quarter of 2022. The decrease in operating expenses was primarily attributable to significantly lower ALLY development expenses following FDA clearance in the second quarter of 2022, including the inclusion of approximately $1 million of inventory costs charged to R&D that increased R&D costs in the 2022 period. Although we will continue to innovate and invest in ALLY research and development, we do not expect our R&D expenditures to fluctuate significantly from the second quarter of 2023 and expect our 2023 annual investment in R&D to approximate $7 million. Net loss for the quarter was $8.8 million or an $0.81 loss per share, increasing compared to the $6.8 million loss and $0.67 loss per share in the second quarter of 2022. Our GAAP loss for the quarter was significantly impacted by the financing that we completed in May of this year. With this financing, we do and we will in the future mark our warrant liability to future market value each quarter as calculated using the Black Scholes valuation model. This liability will fluctuate quarter-to-quarter based upon the inputs to the Black Scholes model, with the company's stock price generally being a very significant variable in that calculation. Due to the variations in stock price and other input assumptions from the completion of the financing to June 30, 2023, we recorded a $6 million charge in the second quarter associated with a value change in the warrant liability. This non-cash charge significantly impacted our loss per share, thereby adding an approximate $0.55 additional loss per share to our $0.26 loss per share, which would have been the quarterly loss per share without this warrant charge. As of June 30, 2023, we had cash and cash equivalents of $25.5 million compared to $14.7 million on December 31, 2022. Cash generated in the quarter ended June 30, 2023 was $17.5 million and was derived from the $19.1 million of net financing proceeds. We believe this financing, as Nick said, significantly strengthens our balance sheet, provides us more liquidity as well as the ability to expand our commercial operations to enhance ALLY’s initial success in the marketplace. Now, I’d like to turn the call over to the operator, and we look forward to answering your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question is from Ryan Zimmerman from BTIG. Please go ahead with your question.

Ryan Zimmerman, Analyst

Good morning and thanks for taking the questions. Congrats on a really nice quarter here, guys. It seems like the launch is progressing well. Nick, maybe to start on the launch, I want to understand you talked about 160 potential leads. Maybe just talk to us a little bit about the pipeline process, kind of the timelines you expect as that pipeline narrows to contracts out and subsequently, ALLY orders and how you think about just the conversion rate of that dynamic.

Nick Curtis, CEO

Yes. All right. Thanks, Ryan. I appreciate you taking the time on the call today. So we have got some very strong digital marketing initiatives in place and social media initiatives peer-to-peer. We’ve also started to institute visits from interested practices that are qualified leads. That will help condense the sales cycle typical for this type of equipment and the complexity of selling or replacing a competitive device. The lead process takes about seven months on average, from the time that we make the initial contact to the time that there’s a decision and it closes or it doesn’t close. Some of those happen much sooner, while others may lengthen from there. The private equity groups increase the complexity as well, because now it’s not just the surgeon at the site that makes the decision to get the system in place but now it's a business process to navigate as well. So the good news is that there’s lots of opportunity there, and the bad news is that the cycle takes a little longer. On average, it’s a seven-month cycle, and we have strong digital initiatives in place for nurturing these leads to facilitate the sales reps in taking it a step further.

Ryan Zimmerman, Analyst

Okay. And all the disclosures you gave on productivity and the metrics I think are great for investors to understand. I was struck by the comment you made about a 15% increase, I think it was in procedure volume, correct me if I'm wrong, by ALLY users specifically. But if that’s the case, I mean, talking with your ALLY user base today, where do you think that can go over time? Do they have more capacity just off of comparing to the old base?

Nick Curtis, CEO

Yes. So we always thought that ultimately, the volumes on a site for site basis, from LENSAR LLS to LENSAR ALLY would ultimately increase. That’s the only metric that we can compare against right now, because with the previous technology, we don’t have historical perspective. What we do have is the connectivity and speed of the device, and we are measuring flow, efficiency, and time in several of these groups. We’re conducting time studies and finding that the time savings range between 3 and 10 minutes depending on the kind of flow that the practice is using today. We’ve seen more doctors willing to change their flow and move it into the operating room because of the ergonomics and small size, which really increases the throughput. We’ve taken backlogs from four months to two months in one site where we just added a second ALLY. Practices can continue to increase their volume. The best practices can convert over 50% of their total volume to premium cases, and I think we will see that continue to trend that way. Other practices that are high-volume operate at lower rates, while more boutique practices range from 70% to 100%. On average, best practices in terms of how they handle patients are around 50% to 60% on a high-volume basis. So there's significant upside when considering the market overall including torics and multifocals being what, 15% to 17% of the market.

Ryan Zimmerman, Analyst

Right, right. Yes, no question about that. So maybe turning to Tom for a couple of financial questions. I'm going to keep rolling here if that’s okay. Number one, you guys have previously stated, I think you haven't given formal guidance, but you said revenue can grow at least 20%, I believe, for the year. I just want to see kind of where you stand on that. I didn't hear that in your comments, Tom. And then your second question, I heard you on the margins for this year. As the ALLY base steps up and consumables and procedures pick up, just your thoughts on kind of longer-term margin trends? And then the last question, sorry, I'm hitting you with a few, Tom. How are you putting the recent cash infusion to work? Thanks for taking the questions, guys.

Tom Staab, CFO

Yes. Thanks for the questions, Ryan. Your statement at the beginning was right, which was a really great quarter for us. Regarding revenue guidance, Nick’s remarks make it hard to predict when PE practices and doctors will actually pull the trigger, even with technology. We've said that we would place at least 30 systems, and as you've seen year-to-date, we’ve placed 18. That gives you a benchmark going forward. Although we know placements and revenue are trending up, we haven’t given a formal percentage. Now, regarding margin trends, you’re correct. With our razorblade model, procedures garner significantly higher margins than the actual sale or lease of the laser—by more than 2x. Thus, the more successful we are with placements, the more we anticipate a drag on margins. However, I do think going forward that the 50% to 55% margins will continue to increase into the 60%s if we can saturate lasers in the U.S. and, more importantly, outside the U.S. when we get clearance approval.

Ryan Zimmerman, Analyst

Yes. No problem. I threw a lot at you, I apologize. Just how you’re putting the recent cash infusion to work, where do we expect to see increases in spend and how are you utilizing that cash?

Nick Curtis, CEO

So Ryan, I can answer some of that. We are definitely looking to scale up the field organization. We’re looking at several areas of our digital marketing efforts that are working well, including inside sales. I think we will see some expansion in that area, particularly in field service, where we will continue to add sales reps. On the business development side, we are very versatile on the astigmatism management side and the connectivity. So we are bringing on more competitive users and instituting solid astigmatism management programs and patient education at the practice level, which are areas that you’ll see us growing to support the increase in procedures.

Tom Staab, CFO

And Ryan, you’ve been following us for a while. We’ve been talking about financing for some time. With supply chain and the pandemic, we delayed things, but with the $19 million we brought in May, that allows us to invest in the commercial organization, inventory, and ensure a continuous supply. You will see that our inventory balances have gone up significantly by design, which may be exacerbated by supply chain issues as we prepare for demand in the marketplace, especially when we obtain approvals outside the United States. Now that we’re financed, we’ll make those investments we’ve discussed, which might have been slightly delayed or are in process.

Ryan Zimmerman, Analyst

I appreciate the color. Congrats on a really nice quarter, guys.

Nick Curtis, CEO

Thanks, Ryan.

Tom Staab, CFO

Thanks, Ryan.

Operator, Operator

Thank you. There are no further questions at this time. I’ll now hand the call back to Nick for closing remarks.

Nick Curtis, CEO

Thank you. Thank you all for joining our call today and for your continued interest in LENSAR. We are really excited about what we’re doing and look forward to updating you on our progress in the remainder of 2023. Thanks for joining the call today.

Operator, Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may now disconnect.