Earnings Call Transcript - LNSR Q4 2022

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 conference over to Lee Roth of Burns McClellan. Mr. Roth, please go ahead.

Lee Roth, Moderator

Thanks, Joanna. Good morning, and once again, welcome to the LENSAR Fourth Quarter and Full Year 2022 Financial Results Conference Call. Earlier today we issued a press release providing an overview of our financial results for the quarter and full year ended December 31, 2022. A copy of 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, who will provide an overview of our company's financial highlights before we turn the call back over to the operator to facilitate answering any questions you might have. Before I turn it over to management, I'd like to remind you that today's conference call will contain forward-looking statements, including 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 on this conference call. You should not place any undue reliance on these forward-looking statements. For additional information, including a detailed discussion of the company’s risk factors, please refer to our 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, March 16, 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 LENSAR's Chief Executive Officer, Nick Curtis. Nick?

Nick Curtis, CEO

Thank you, Lee, and good morning to everyone listening. I appreciate you joining us on our fourth quarter and full year 2022 conference call. 2022 was a transformational year for LENSAR, marked by the successful launch of our next-generation system ALLY. On our third quarter conference call, shortly after the launch of ALLY in August, I laid out our goal of having 10 ALLY systems placed by year-end. I'm pleased to say that indeed, we placed the 10 systems. But in December alone, we signed contracts for an additional six ALLYs to be installed in the first half of this year. To date, feedback from our initial surgeon customers has been incredibly positive with some referring to it as a revolution in how flat procedures are performed. The features of ALLY that surgeons are most enthusiastic about are the impressive speed and precision of the laser, its small footprint, and unparalleled ergonomics. Faster laser procedures from start to finish that significantly reduced treatment time by up to two-thirds are creating improved patient throughput and translating to more procedures on given surgery days. As you may have seen in our press release today, Dr. James Khodabakhsh, Chief of Department of Ophthalmology, Cedars Sinai Medical Center, shared that ALLY has been so fast and accurate that it has shortened its surgery day by an hour to an hour and a half, while a different surgeon recently shared with us that he was blown away by ALLY's speed and efficiencies, remarking that the procedure was so fast, he had to double-check to ensure the procedure was actually completed. Another user stated that ALLY takes flexibility to a whole new level. It's important to note that in addition to supporting increased patient throughput and procedures per day or a shortened surgical day, ALLY also appears to be driving increased femtosecond laser-assisted cataract surgery use in some instances. As one user noted, ALLY's speed and precision have increased his confidence and that as a result, he is now converting more than 95% of his patients to laser cataract surgery. This is a surgeon who had used a competitor's first-generation laser and prior to ALLY, had abandoned femtosecond laser-assisted cataract surgery altogether. Another perhaps less tangible benefit to the surgery center that I'd like to briefly touch on is how ALLY could contribute to improved employee satisfaction in the workplace environment. During the administrator session of the Caribbean Eye Conference last month, the results of a recently conducted survey of top administrators, many of whom manage multiple high-volume ambulatory surgery centers, were shared. The study found that the biggest concern, which was ranked number one by 71% of responders, was staff turnover. Looking at the speed and efficiency benefits that Dr. Prakash described, surgeons could choose to treat the same number of patients per day, shortening their and their surgical staff's workday, likely enhancing employee satisfaction. Alternatively, surgeons can choose to increase the number of procedures performed in a day. Both prospects are expected to translate into more revenue and increased profitability for the ASC and the surgeon. Further, several users have remarked upon improvements to patient comfort and overall patient experience. Perhaps an even more important contribution to growth than driving better surgeon efficiency is supporting surgeons' ability to deliver improved patient outcomes more consistently when utilizing our advanced technology. It is gratifying to receive this important feedback on both practice efficiency and improved patient outcomes, which we believe will increase surgeon confidence using ALLY and ultimately lead to patient conversions to femtosecond laser-assisted cataract surgery and higher utilization within the practice. Furthermore, this feedback supports our strong belief that as we grow the ALLY installed base and more surgeons learn about the technology through peer-to-peer interaction, ALLY will firmly establish itself as an integral value-added tool for ophthalmic surgeons, allowing LENSAR to not only grow share of the existing market but also to potentially catalyze the next phase of market expansion. Importantly, interest from prospective ALLY users is extremely high and continues to grow. Earlier this month, we attended the AECOS meeting in Aspen, Colorado. And during a panel-led session titled, 'What Am I Doing Differently in 2023,' which featured presentations by leading cataract surgeons, three of the four surgeons on the panel stated that they already use or will be using ALLY and shared why they use ALLY to treat their premium cataract patients, which demonstrates a strong peer-to-peer recommendation to all attendees. This is another great example of the increasing groundswell of interest that we've experienced in the first quarter of this year. In addition, I'd like to emphasize this provides further confirmation that our controlled targeted launch with early technology adopters and higher volume competitive laser key opinion leaders and LENSAR key opinion leaders is the right strategy. Another significant opportunity we have with ALLY is to place one or more systems with each practice of private equity-owned groups. Thanks to its small footprint, enhanced economics, significant reduction in procedure time, and opportunity to guide better outcomes, these private equity groups are expressing interest in ALLY in their expanding locations as well as replacing their older femtosecond laser technology with ALLY. ALLY represents a true generational change, and we're continuing to expand our efforts to get the message out to a broader surgeon audience. Additionally, we have increased our hands-on experiences with more demo opportunities during ophthalmic meetings in the US and are creating opportunities for interested surgeons to observe femtosecond laser-assisted cataract surgery in one of our centers of excellence to experience the ALLY difference. Our goal is to continue to educate the market on ALLY's many benefits over previous generation femtosecond lasers and let them experience the generational change for themselves. While the demand for ALLY has remained high, our 2022 rollout was constrained by supply chain challenges. We expect these challenges to abate in 2023, allowing us to make the system more broadly available this year. Consistent with our surgeon-centric culture, we've been completely transparent with our customers regarding installation timing. With that said, it's somewhat gratifying to hear our potential customers say that they want the device as quickly as we can get it to them. Looking at our business performance for the year, we achieved a slight increase in overall worldwide procedure volumes, but more importantly, we've achieved a 3% and 11% growth in US procedure volumes in Q4 and for the full year in comparison to 2021, respectively. The US represents the largest premium procedure market for LENSAR and is fundamental for driving our strategy of market share and penetration with growth in both ALLY system adoption and over time utilization. According to confirming data for market scope, we continue to expand our footprint in the US market and have continued to take competitive market share. In addition, and importantly, this growth clearly demonstrates that demand for femtosecond laser-assisted cataract surgery procedures in the US remained strong despite the ongoing economic uncertainty which we all face. This, coupled with the opportunity to replicate the experience I described a moment ago of the customer who's converting more patients from standard to a premium laser cataract procedure, thanks to ALLY, gives us confidence that we can continue our execution plan to grow our share of the procedure market as we continue to make further transition away from legacy technology, increase our overall share of the total US installed base, and broaden Ally's presence in the market. To recap, LENSAR has accomplished some very significant milestones in 2022. We oversaw the successful launch of ALLY, initiated the transition to the new technology from our LENSAR laser system, placed 10 ALLY systems in the first four and a half months of a controlled launch, and have created significant demand for ALLY through a strategic rollout designed to optimize uptake and build sustainable long-term demand for the system while allowing us to effectively navigate a challenging macro environment. Now, let me turn over the call to Tom to cover our financial highlights for the quarter.

Tom Staab, CFO

Thank you, Nick. Our fourth quarter and full year 2022 financial results are included in our press release issued earlier this morning. But I'd like to take this opportunity to expand on some of that information by adding some color to remarks contained in the press release. Revenue was $10.2 million in the fourth quarter of 2022 and compared to $11.2 million in the fourth quarter of 2021. Consistent with our third quarter results, and as mentioned on our call last quarter, this decrease was primarily due to the continued softness in procedure volume as well as the transition away from LLS to ALLY manufacturing, which reduced laser inventory availability and constrained our growth. Much of the procedure volume softness was associated with ongoing third-party payer reimbursement challenges in South Korea, and to a more limited extent, the timing of procedure purchases outside of South Korea. This timing fluctuation was offset partially by the growth in the US market, as Nick mentioned in his remarks. The continuing reimbursement issues in South Korea had an estimated $900,000 detrimental impact on revenue for the fourth quarter. With that said, fourth quarter 2022 revenue was up 32% on a sequential basis as compared to the third quarter of 2022, driven primarily by ALLY system installations and procedure growth in the US and Europe. In the fourth quarter of 2022, we sold 31,400 procedures compared to 41,642 procedures sold in the fourth quarter of 2021. Our procedure volume decreased 25% over the fourth quarter of 2021, again, primarily due to the softness in the South Korean market. As Nick mentioned, procedure volume in the United States, our most important market, was up 3% in Q4 2022 as compared to Q4 2021. Gross margin for the quarter was $6.5 million and represented a gross margin percentage of 63%. We increased gross margin by $852,000 in the quarter from $5.6 million in the fourth quarter of 2021, despite a decrease of $1 million in revenue quarter-over-quarter. This increase in gross margin is a function of a higher gross margin percentage on ALLY sales versus LLS sales, as well as charging inventory items to R&D expense prior to the approval of ALLY in June of 2022. Total operating expenses for the fourth quarter of 2022 were $9.1 million compared to $9.5 million in the fourth quarter of 2021. This decrease was largely due to lower R&D expenditures, somewhat offset by an increase in SG&A expenses. The decrease in R&D expenses of $1.8 million was primarily attributable to significantly lower ALLY development expenses following FDA clearance, including no longer charging inventory costs to R&D expense. These expensed inventory items represented $1.1 million in the fourth quarter of 2021. SG&A costs increased due to increased trade show and commercial activity related to the promotion of ALLY. Lastly, included in operating expenses was non-cash stock-based compensation of $1.7 million and $1.5 million in the fourth quarter of 2022 and 2021, respectively. Net loss for the quarter decreased quarter-over-quarter and was $2.5 million or a $0.24 loss per share compared to $3.9 million or a $0.41 loss per share in the fourth quarter of 2021. Adjusted EBITDA for the fourth quarter of 2022, which excludes stock-based compensation expense, was a $65,000 loss compared to a $1.6 million loss in the fourth quarter of 2021. The quarter-over-quarter change reflects a significant decrease and represents breakeven status in the fourth quarter of 2022 from an adjusted EBITDA measurement perspective. As of December 31, 2022, we had cash and cash equivalents of $14.7 million compared to $31.6 million at December 31, 2021. Cash utilized in the fourth quarter was $4.6 million and $17 million for the full year. Fourth quarter cash burn of approximately $4.6 million is almost exclusively associated with increased accounts receivable and inventory balances associated with the launch of ALLY and making ALLY more broadly available in 2023. As mentioned earlier, we were effectively operating at breakeven in the fourth quarter as cash was almost entirely dedicated to working capital usage. As we have mentioned, 2022 was a transition year as the company transitioned its manufacturing and sale of its first generation LLS to ALLY. As such, our growth was limited due to supply chain challenges in the transition to commercialization of ALLY. Due to the transition, our total revenue for 2022 increased $900,000 or approximately 3% compared to 2021 levels. However, given the traction and demand we saw in the fourth quarter and continue to see, despite strong competitive and macroeconomic headwinds, we expect to return to 20% plus revenue growth in fiscal 2023 as we enter the first full year of ALLY being commercially available in the United States. Additionally, we expect the European launch as well as to submit additional regulatory filings for ALLY in the next 12 months. Our recurring revenue for the year was 86%, which represents revenue outside of system sales and provides a recurring revenue foundation of over $30 million going into 2023.

Operator, Operator

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

Ryan Zimmerman, Analyst

Good morning, Nick and Tom. Thanks for taking the questions, and congrats on all the progress with ALLY. Those anecdotes are nice to hear, Nick.

Nick Curtis, CEO

Thank you.

Ryan Zimmerman, Analyst

I just want to start and talk about ALLY for a little bit, if I could. You got six systems kind of off the ground in December. And I appreciate the guidance, Tom, on the consumables. But maybe, Nick, you could talk to us about how you're thinking about placements. And I know you're not going to necessarily guide to that number, but you have communicated some of the trading numbers, the demo numbers. It'd be helpful to understand just the pipeline and your thoughts around ALLY systems into 2023?

Nick Curtis, CEO

Thank you, Ryan, for the questions. As we look into 2023, we closed the year strongly with six backlog agreements. Most of these are expected to be fulfilled in the second quarter. These agreements involve new facilities and their readiness to take delivery of the system, and we have been scheduling accordingly. From our ramp-up perspective, the pipeline has been expanding significantly due to activities in the first quarter. In the capital equipment sector, we are selling more systems than we are placing. Typically, after the start of the year, particularly after a strong year-end with a backlog of systems, the first quarter can be a bit slower in terms of contracts, but our pipeline is growing significantly. The positive aspect of having a larger pipeline is that while there will be some cancellations in system placements, a bigger pipeline means more systems will ultimately be delivered. I am pleased to report that we currently have 150 to 200 accounts in our pipeline.

Ryan Zimmerman, Analyst

That's great, Nick. And then, the comments about supply chain and your ability to manufacture sound like it's getting better. When do you feel like you'll move into a full launch, if you will, where you're unconstrained be it by supply chain or just taking your time with KOLs?

Nick Curtis, CEO

I believe that as we approach the second half of the year, we will see significant progress. That's what we are working towards.

Ryan Zimmerman, Analyst

Okay, very helpful. And then, for Tom, I'm going to keep going on questions here, if that's okay, just a couple more for me.

Tom Staab, CFO

Sure.

Ryan Zimmerman, Analyst

But margins were fantastic, Tom. And I appreciate you calling out the impact on the R&D component. But even if I back that out, I mean, you guys jumped almost 600 basis points, it looks like, quarter-over-quarter. And so help us understand kind of how you think about margins in 2023 with all these dynamics.

Tom Staab, CFO

Yeah. So I think that the first statement I would make to you, Ryan, is it's absolutely fabulous that one, Nick and our commercial team have been able to sell versus place systems. And so we actually realized the gross margin on that sale. Two, the profit or gross margin on each ALLY sale is much better than it is with LLS. Now, so I would expect our profit margins to continue to increase. However, to Nick's comment, with supply chain, we still are not manufacturing the quantities that we would like to get the efficiencies on overhead absorption. And we also get purchase discount quantities once supply chain becomes a little less of an impact. So our first 20 systems are a lot more expensive than the next 50 and considerably so. That is kind of obscured by the fact that supply chain caused us to purchase a great deal of our expensive raw materials, laser heads, and cameras that we needed for ALLY that we have to have because they're generally single-source suppliers. And without that, we can't manufacture the ALLY. A decent chunk of those were expensed to R&D. So it's very, very difficult for me to guide you with exact precision on margins.

Ryan Zimmerman, Analyst

Yes.

Tom Staab, CFO

But I think that we'll probably return to the low 50s for the year, depending on how quickly we can get past some of the supply chain issues and actually put systems in place in the latter half of the year.

Ryan Zimmerman, Analyst

Okay. Last one for me, I'll hop back in the queue. And if you look at the pricing of consumables, if I just look at the ASPs on your consumables. Nick, you kind of alluded to this when we've spoken before, that you're picking up a little bit of price on the consumable portion. But it looks like it was up about 10% or so. Just how do you expect that to continue? I mean, it's nice to see. And should we expect higher pickups in price just because it was somewhat of a limited impact this fourth quarter, or is that a fair level in terms of step up in price on the consumables side?

Nick Curtis, CEO

Yes. Great question. Thanks for that, by the way, because that was one of the things I was thinking about as Tom was speaking, is that as more of our marketing initiatives and as we begin to quantify with more site-by-site type studies that show the time efficiency and the speed and the ability to add more cases, it obviously helps us build the value proposition for an increased procedure fee across the board from what people are paying today. So, we've been driving that value proposition pretty strongly with the current installs. I would expect to see that continue. And in some cases, it's as high as 35%. And in some cases, if it's a really high-volume account, it might be a much smaller 5% to 10%. But you're going to see an increase in the ASP from a per procedure basis. The other thing is that a lot of it is unencumbered. Now you're sort of having to extract the equipment portion and the service portion out of the overall procedure fee, which is where the traditional placements have been with first generation. Now, you're seeing more of a separate capital component, where people are paying for the systems and then looking to drive more efficiencies through increased volume, taking the equipment portion out of that. Depending on the mix as we get into more of these private equity deals, some of the private equity groups have no issue with making the capital purchase and have a way of accounting for that and accelerating their depreciation, and they just want to get the lowest per procedure fee. Other groups don't mind, let's say, paying a higher per procedure fee and financing that component and not wanting to write a check per se. So, overall, I think you're going to see it trend up, continue to trend up. I think it will, as the mix changes between the LLS and ALLY, you'll see that creep up at a higher percentage. But we're trying to manage the, let's say, the business so that we're bringing on more new business and managing the transition because we just don't want to go out and cannibalize the business. We want to continue to show growth.

Tom Staab, CFO

Hi Ryan, this is Tom. I want to emphasize something important for everyone's understanding. When I mentioned guiding to the lower 50s, if we reach that range, it should be seen positively since we achieve a significantly better margin on ALLY than on procedures. However, a greater mix of sales in ALLY results in lower margins. The positive side is that you'll observe exponential revenue growth within three to six months after we install a system, as the margins for procedure placements will increase significantly. I just wanted to clarify that point, even though I believe you were already aware of it.

Ryan Zimmerman, Analyst

Thank you, Tom. Appreciate you taking all the questions.

Tom Staab, CFO

Sure.

Nick Curtis, CEO

Thank you, Ryan.

Operator, Operator

Thank you. There are no further questions. I will turn the call back over for closing comments.

Nick Curtis, CEO

I really appreciate everyone taking the time this morning to join our call and, even more so, your continued interest in LENSAR and our expansion of the launch with ALLY. We are very excited about the potential of ALLY. We view this as a marathon, not a sprint, and I look forward to our next update and keeping you informed about the progress we are making. Thanks again.

Operator, Operator

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