Earnings Call Transcript - LNSR Q1 2023

Operator, Operator

Good morning, ladies and gentlemen and welcome to the LENSAR Inc. First Quarter 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Monday, May 15, 2023. I would now like to turn the conference over to Lee Roth of Burns McClellan. Please go ahead.

Lee Roth, Presenter

Thanks Pam. Good morning everyone, and once again, welcome to the LENSAR first quarter 2023 financial results conference call. Earlier this morning we issued a press release providing an overview of our financial results for the quarter ended March 31, 2023. This 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, 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 our company's financial highlights before turning the call back over to the operator to facilitate answering any questions you might have. Before we begin, I'd like to remind you that today's call will contain forward-looking statements, including those statements regarding future results, unaudited and forward-looking financial information as well as information on the company's future performance and/or achievements. These statements are subject to unknown and known risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from any future results or performance expressed or implied during this presentation. You should not place any undue reliance on these forward-looking statements. For additional information, including a detailed discussion of the 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 call contains time-sensitive information accurate only as of the date of this live broadcast, Monday, May 15, 2023. LENSAR undertakes no obligation to revise or otherwise update any forward-looking statements to reflect events or circumstances after the date of this live call. With that said, it's now my pleasure to turn the call over to Nick Curtis. Nick?

Nicholas Curtis, CEO

Thank you, Lee and good morning to everyone listening. Thank you for joining us on our first quarter 2023 conference call. I'm proud to say that LENSAR has hit the ground running in 2023, having installed five ALLY systems in the first quarter and four more since April 1st, bringing our total install base to 19. We also have another 13 systems in backlog as of May 12th, 2023. These will install this quarter and the next quarter. Procedure volumes in the US increased nicely when compared with the first quarter of last year, driven in part by the small, but growing number of ALLY users. As we reflect on the first several months of ALLY's commercial availability, it's evident that the ophthalmic community has a great deal of enthusiasm for our new technology, and we've been successful in executing our controlled and targeted launch in the United States. Looking at recent data published by Market Scope, they estimate that 15% of all US femtosecond laser assisted cataract surgical procedures were performed on LENSAR systems in the first quarter of 2023. This represents an increase of 100 basis points over the second quarter of 2022, the time we received FDA clearance for ALLY. This growth clearly demonstrates the adoption of ALLY as an important catalyst, not only for LENSAR, but for the entire industry. Among users of our previous generation, LLS, who have transitioned to ALLY, procedure volumes are up 20% over the first quarter of 2022. This level of growth was ahead of our internal expectations and reinforces practice level operational efficiencies that are fundamental to ALLY's value proposition. Importantly, the US represents the largest premium procedure market in the world and is critical to our continued market share growth as we expand ALLY's reach in 2023 and beyond. Feedback from our surgeon customers continues to be extremely positive, particularly from users who have made the transition from previous generation femtosecond lasers, both ours and those of our competitors. Most of the systems in the field today are based on aging technology and are much slower, less efficient, not nearly as ergonomic and in addition to being less adaptable and technologically capable, their awkward sizing makes them more difficult to integrate into the practice. There are countless other advantages that ALLY brings, and we are pleased with the reception in the early days of its commercial availability. Evident from the backlog of 13 systems, demand for ALLY has been consistently high and continues to grow since launch. We remain affected by the supply chain issues that have impacted the industry as a whole, but we continue to expect these challenges to abate throughout the year. On the marketing front, our dedicated and skilled team has worked diligently to showcase ALLY's advanced capabilities, and we've maintained an active presence at the major Ophthalmic Congresses. This month, we attended the Annual American Society of Cataract and Refractive Surgery meeting in San Diego. In addition to the 10 posters highlighting ALLY's improved productivity and superior outcomes, we completed a record number of demos with non-LENSAR customers. As a prime example of this enthusiasm, the meeting resulted in two signed contracts with new ALLY customers, and we received requests for contracts representing more than 35 additional systems. I'm excited to announce that we have secured our first multi-system agreements with several facilities and are working on additional multi-system contracts, which at this early stage of our launch is a pleasant surprise. We anticipated this level of demand to begin materializing 12 to 18 months following the product launch. The fact that we have secured these multi-system agreements ahead of schedule is a testament to the trust and confidence placed in our company and the effectiveness of our technology platform solutions. It also highlights the industry's recognition of unique advantages and benefits that our systems offer, propelling us to the forefront of the market and a leader in performance. Looking at our business performance for the quarter, there's much more than what meets the eye. Overall procedure volumes were down 19% compared to procedure volumes in the first quarter of 2022. However, this decrease was driven by the South Korean market where challenges between ophthalmic surgical practices and third-party payors have essentially eliminated procedure purchases for the time being. This challenge is expected to continue for the foreseeable future and does not have a clear resolution timeframe. The region accounted for approximately 9,900 procedures and revenue of $1.5 million in the first quarter of 2022. Excluding the first quarter 2022 revenue attributable to South Korea, revenue for the first quarter of 2023 would have increased 5% compared to the first quarter 2022. We also announced the closing of a private placement, which provides $20 million in gross proceeds, which significantly extends our cash runway and which we believe will fund our operations to cash flow breakeven. These proceeds will empower us to make strategic investments in inventory and sales and marketing resources to further enhance the production and distribution of ALLY, ensuring we are maximizing our market penetration and effectively capitalizing on demand that has been shown and continues to grow. Now let me turn the call over to Tom to cover our financial highlights for the quarter. Tom?

Thomas Staab, CFO

Thank you, Nick. Our first quarter 2023 financial results are included in our press release issued earlier this morning, but there are a few items I'd like to discuss in further detail. Revenue was $8.3 million in the first quarter of 2023 compared to $9.3 million in the first quarter of 2022. As Nick mentioned, this decrease was primarily driven by an approximate $1.5 million decrease in revenue generated from South Korea associated with the ongoing cataract reimbursement challenges in that market. The decrease in South Korea procedure volume and related reduction in revenue was somewhat offset by an increase in procedure volume in the United States and Europe, which generally carry a higher gross margin. Procedure volume in the US and Europe increased approximately 13% and 5%, respectively as compared to procedure volume in the first quarter of 2022. In the first quarter of 2023, there were 31,600 procedures sold compared to 38,901 procedures sold in the first quarter of 2022. Again, the decrease in procedure sold is mainly attributable to a decrease in procedure volume in South Korea of approximately 9,900 procedures, not 9000, 900 procedures. Gross margin for the quarter was $4.3 million, representing a gross margin of 52% compared to $4.7 million and 50% realized in the first quarter of 2022. Although revenue decreased associated with a significant reduction in South Korean procedures, our gross margin increased 210 basis points. Our gross margin for the first quarter of 2023 is consistent with the gross margin expectations we have discussed in previous calls, approximately 50%. Supply chain issues that have created higher inventory costs and inefficiencies in ALLY production seem to be easing as we are now seeing greater availability of raw materials. Accordingly, we expect to see more fluid and efficient ALLY manufacturing in the remainder of 2023. Total operating expenses for the first quarter of 2023 were $8.7 million compared to $11.4 million in the first 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 $2.4 million of inventory costs charged to research and development in the first quarter of 2022. Although we continue to innovate and invest in ALLY and research and development, we do not expect our R&D expenditures to fluctuate significantly from the first quarter of 2023 and expect our 2023 annual investment in research and development to approximate $7 million. Net loss for the quarter was $4.3 million or $0.40 loss per share and decreased as compared to the $6.7 million loss and $0.67 loss per share in the first quarter of 2022. As of March 31, 2023, we had cash and cash equivalents of $8 million as compared to $14.7 million on December 31, 2022. Cash utilized in the quarter was $6.7 million and the first quarter is expected to represent the largest consumption of cash within 2023, as the company generally utilizes the largest amount of cash in the first quarter of each year. We are pleased to have completed a significant private placement financing, bringing in gross proceeds of $20 million, and we estimate net proceeds of $19.1 million after deducting transaction costs. As Nick said with these proceeds, we will invest more extensively in the ALLY launch and our commercial organization to capitalize on the early success of ALLY and to continue to increase our market share in the premium cataract surgery market.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. First question comes from Ryan Zimmerman at BTIG. Please go ahead.

Unidentified Analyst, Analyst

Hi, Nick, Pam. This is Izzy on for Ryan. Thanks for taking the questions.

Nicholas Curtis, CEO

Hi, Izzy.

Unidentified Analyst, Analyst

So, in terms of the ALLY launch, what are you observing regarding productivity improvements and what insights have you gained from the early install base?

Nicholas Curtis, CEO

Yeah. That's a really good question. What we've seen in terms of productivity improvements is that when you look at quotes from people like Jim Khodabakhsh from Beverly Hills and Kerry Solomon over in South Carolina, they've been able to save somewhere between an hour and a half and two hours on their overall surgical day, which, as you know, for surgery time and doctor surgery time in the OR is the costliest of time. This is translating to a really nice return on investment because they can add, depending on the center, three to four cases over the course of the day or more. They help work through the backlog or, quite frankly, they can reduce overhead and finish their day early with the number of cases and leave. Also, I think it's encouraging that when comparing LLS, which we know already from a market scope perspective in the US produces 74% on average more cases than competitive devices to see an additional 20% growth on the procedure volume in those early LLS convert to ALLY users. Those are pretty significant productivity numbers there. And it's early. I think the other thing that's worth noting is several accounts that are adding a second device, which speaks to the productivity increases and ability to offset other costs that they have.

Unidentified Analyst, Analyst

Great. That's really helpful. Thank you, all. Do customers prefer to acquire ALLY systems through leases or just outright sales? And if it is leases, what do you guys see in terms of utilization over the life of the lease? Do you get more cases as a result?

Nicholas Curtis, CEO

That's a good question. We've primarily been working hard on not just a placement model where the laser gets placed and there's simply a per procedure fee. There's always a per procedure fee, but we've been pretty good at moving towards operating leases, and at this point in the launch, several customers are opting for outright purchase rather than an operating lease. It really depends on the practice and their accounting practices, including access to Section 179. There's a variety of factors that dictate whether a practice moves towards an operating lease or a capital purchase. We have a much higher percentage of these systems in the early days with ALLY that have either been purchased outright or are using an operating lease separating it from the per procedure fee. In terms of increasing the number of procedures, some of these accounts are new to LENSAR, so we don't have an operating history. They're telling us that through the increased productivity, they’re able to schedule more patients. We've seen significant productivity improvements with the new device ALLY, not only because it's much faster but also because it can communicate with a couple of other new devices we have added. This capability is resulting in additional cases that I believe we will see over time.

Unidentified Analyst, Analyst

Got it. That's great to hear. Given the strong demand you guys are seeing in the order pipeline, do you still expect the 20% revenue growth that's the right way to think about 2023?

Nicholas Curtis, CEO

So we're contemplating this in terms of guidance. Recognizing the downturn in the South Korean market, we anticipate at least 20% revenue growth in 2023, which actually represents a net growth rate that is substantially more than that. We're not providing any forward guidance at this time, but I would say that that's a reasonably good number.

Unidentified Analyst, Analyst

Got it. And in terms of margins, they came in better than we were expecting this quarter. What can you attribute this to? Are you servicing and providing systems better for the increased demand? I know that there were some supply issues last year.

Nicholas Curtis, CEO

Tom, do you want to comment on that?

Thomas Staab, CFO

Sure, Nick. A couple of things are happening here. We needed to purchase a decent amount of inventory, which impacted margins. We're coming out from the supply chain limitations and difficulties that significantly reduced production capacity for ALLY. So we guided around the low fifties for margin going forward, taking into account those conflicting factors. I think once we fully come out of the supply chain challenges, you can expect those gross margins to increase much higher.

Unidentified Analyst, Analyst

Got it. Thank you. Last one for me. How do you guys think about your cash runway given the $20 million private placements now complete?

Nicholas Curtis, CEO

I see it as exciting. Given the demand for the systems and the backlog, I believe this gives us a running start moving forward. I'm excited.

Thomas Staab, CFO

This financing was crucial for us to build our commercial organization and launch stock, and with this funding, we will have the opportunity to reach more physicians and promote the significant benefits of ALLY.

Nicholas Curtis, CEO

The commercial infrastructure is also really important. LENSAR is known for monitoring uptime percentages of our systems. Training and transitioning users to ALLY efficiently is critical for productivity, which is beneficial for both the customer and LENSAR. We're the only company that utilizes remote diagnostics to monitor the systems, allowing us to address challenges effectively and maintain the asset, ensuring customers are able to perform surgeries as planned. This funding will support our efforts to increase sales and marketing activities.

Unidentified Analyst, Analyst

Got it. Thank you for taking the questions.

Nicholas Curtis, CEO

Thank you.

Operator, Operator

Thank you. The next question comes from Chris Bolster at Propel Advisory. Please go ahead.

Chris Bolster, Analyst

Yes. Thank you. Congratulations on what sounds like a great quarter on the sales front. The private placement obviously lowers liquidity risk and allows you to do some investment in sales. But dilution is obviously a concern given the size. Can you provide a little bit of color on the terms? And why you chose to do it now given where the stock is and did you look at any alternatives, like receivables factoring or other approaches to get through a few more quarters?

Nicholas Curtis, CEO

That's a good question and fair enough. Obviously, management owns a fair amount of stock, so the question around dilution is valid. The environment today is not easy for fundraising, particularly in microcap stocks. Given the situation, we ran a thorough process examining various alternatives. One of our largest shareholders stepped forward with a proposal that was more favorable compared to an outright underwriting that would involve substantial discounts to an already depressed stock. Given the timing, we believed this was the best opportunity to accept the dilution, finance the company significantly, and once the market begins to recognize the value of ALLY, we expect that will significantly outweigh any dilution effects.

Operator, Operator

Thank you. That concludes today's question-and-answer session. I'll now turn the call back over to Nick Curtis for closing comments.

Nicholas Curtis, CEO

I'd like to thank everybody for joining our call today and obviously, your continued interest in LENSAR. We look forward to updating you as we make further progress in the exciting remainder of 2023. Stay tuned.

Operator, Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and we ask that you please disconnect your lines.