Earnings Call Transcript - LNSR Q3 2021

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 Cameron Radinovic of Burns McClellan. Mr. Radinovic, please go ahead.

Cameron Radinovic, Moderator

Thank you, operator. Good morning and welcome to the LENSAR third quarter 2021 financial results conference call. Earlier this morning, the Company issued a press release providing an overview of its financial results for the quarter ended September 30, 2021. 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 for the third quarter before turning the call back over to Nick for closing remarks. 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 performance 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 documents filed with the SEC, which can be accessed on the website. In addition, this call contains time-sensitive information that is accurate only as of the date of this live broadcast, November 8, 2021. 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. At this time, it’s my pleasure to turn the call over to Nick Curtis.

Nick Curtis, CEO

Thank you, Cameron. Good morning to everyone listening. Thank you again for taking the time today to join us on our third quarter 2021 conference call. We’re pleased by the strong results and consistent progress the Company has achieved in the third quarter of this year as we strive to navigate the uncertain times of the COVID-19 pandemic. On the commercial front, we see the markets in which we operate continue to rebound from pandemic-related shutdowns. To be more specific, we’ve returned to our historical performance of growing our business. This growth is in the backdrop of the lingering pandemic, which continues to weigh on the more certain predictability of our results, especially outside the U.S. and Europe, where the stopping and restarting of surgery is taking place. An important indication of this consistent aggregate growth can be seen in our procedure volume through the first three quarters of 2021, which represented a significant 35% growth over the first nine months of 2020, and even more importantly, an impressive 18% growth rate over the same period in 2019. This evidence shows that we are, once again, growing from our pre-pandemic operations after a pause due to the implications and headwinds of the pandemic. In addition to growing our procedure volumes, we’ve also seen an increase in lease placements, which combined to drive 16% revenue growth over the third quarter of 2020. We firmly believe that LENSAR’s current product, including Streamline and IntelliAxis Refractive Capsulorhexis is an evolutionary technology that addresses significant unmet needs in cataract surgery, which we expect will continue to be the most beneficial and useful technology platform in the market and remain a key driver of procedure and revenue growth. As I reported last quarter, our marketing team remains laser-focused and extremely active with LENSAR’s technology featured in six medical congresses and events over the third quarter. I’m pleased to report that the enthusiasm for both our current LENSAR Laser System and anticipation of our next-gen ALLY Adaptive Cataract Treatment System continues to increase as we get closer to our ALLY 510(k) filing. Later this month, LENSAR will participate at the American Academy of Ophthalmology conference, where we will have two abstracts highlighting the superior outcomes when using our technology. We look forward to sharing more specific information, including the data generated for the accepted posters as we get closer to the conference. We continue to make solid progress in the development of our next-generation product, the ALLY Adaptive Cataract Treatment System, and we're completing milestones necessary to complete and file the 510(k) submission in the first quarter of 2022. As a reminder, ALLY has the potential to be the first technology in the market to combine a next-generation femtosecond laser with a world-leading Swiss-made precision phacoemulsification system in a fully integrated Adaptive Cataract Treatment System that contains all of the core feature technologies of the current system. The ALLY Adaptive Cataract Treatment System will fit easily into any operating room or in-office surgical suite and will significantly improve patient flow as the entire procedure can be performed in a single suite without having to move or repractice the patient, in addition to a much faster laser treatment, cutting procedure time by up to two-thirds. Overall, the third quarter has been one of tremendous progress. We believe that LENSAR's ongoing commitment to continuous improvement and providing an advanced superior technology with our surgeon-centric values will enable the Company to continue to grow and succeed in a market with expectations for innovation, translating to higher efficiencies, better outcomes, and enhancing the patient experience. Now, let me turn the call over to Tom to cover our financial highlights for the quarter.

Tom Staab, CFO

Thank you, Nick. Our third quarter 2021 financial results are included in our press release today, but I would like to add a little color to those written remarks. As Nick mentioned, it was a strong quarter for us as we focus the lens on top-line revenue, procedure growth, and cash management, all while making consistent strides towards our upcoming 510(k) filing for ALLY in the first quarter of 2022. Specifically, revenue was $8.3 million in the third quarter of 2021, compared to $7.1 million in the third quarter of 2020, reflecting a 16% increase year-over-year. The increase was primarily driven by increased procedure volume and, to a lesser extent, lease placements. Procedure volume, particularly in the United States, exceeded pre-COVID levels as the Company returned to its history of growth and market share expansion. Analyzing revenue at a deeper level, the United States continues to be a strong performing region for us. We have seen a significant increase in procedure growth in the third quarter of 2021, compared to both, the 2020 and 2019 third quarters, thereby powering worldwide procedure growth in 2021 year-over-year. Also contributing to procedure growth are system placements, as system placement activity has increased recently in the United States. Accordingly, it appears system placements and procedures growth have rebounded to pre-pandemic levels, and we are in growth phase once again. The foundation of our existing business provides a nice launching pad for ALLY, a disruptive and novel combination system that incorporates all the technology features of our existing system. In the third quarter of 2021, there were a total of 30,765 procedures sold compared with 25,078 procedures sold in the third quarter of 2020 and 25,154 procedures sold in the third quarter of 2019, reflecting a 23% and 22% increase from both prior periods, respectively. Procedure levels in the third quarter of 2021 increased in each of our three reported operating regions. That is the United States, EU, and the rest of the world as compared to the third quarter of 2020, but was particularly robust in the United States, showing over a 26% increase from the third quarter of 2020. Our recurring revenue, which we define as all revenue other than Laser Systems sales, totaled approximately 87% of our revenue for the three months ended September 30, 2021, compared to 82% for the three months ended September 30, 2020. At the aggregate level, gross margin for the quarter was $3.9 million or 47% of total revenue, and flat in terms of dollars as compared to the third quarter of 2020, which had a gross margin percentage of 55%. The flat gross margin in dollars and decrease in our gross margin percentage compared to the third quarter of 2020 was largely attributable to two main reasons: lower margins on recent system sales as well as transitioning our manufacturing operations from our current system to ALLY. As we reposition and prepare for ALLY manufacturing, we have incurred charges that have had a negative impact on the cost of revenue and thus gross margin in the third quarter of 2021. These margin hits more than offset the higher volume and higher gross margin percentage on our increased and more lucrative procedure sales. This depression in gross margin may continue for the next few quarters as we continue to transition our manufacturing operations to build an inventory of ALLY systems. Research and development expenses were $3.2 million and $2 million for the quarters ended September 30, 2021 and 2020, respectively. This 59% increase was primarily due to additional costs for the continued development of ALLY in anticipation of our 510(k) filing with the Food and Drug Administration in the first quarter of 2022. Within this increase was approximately $600,000 of raw materials purchased for the eventual production of ALLY units. This inventory is currently being expensed to research and development rather than being capitalized on the balance sheet. Selling, general and administrative expenses for the quarter ended September 30, 2021 were $6.5 million, an increase of $233,000 or 4% compared to $6.3 million in the third quarter of 2020. The increase was primarily due to an increase in sales and marketing expenses as trade shows and travel resumed, along with expenses associated with being a public company. This overall increase was largely offset by $1.8 million less stock-based compensation incurred in the third quarter of 2021. Total stock-based compensation expense recorded for the quarters ended September 30, 2021 and 2020 was $1.6 million and $3.8 million, respectively, and is charged to the cost of revenue, research and spinoff and recapitalization of the Company. Stock-based compensation expense represents a significant expense growth in 2021 and for the next two years, but it is a non-cash expense, and thereby does not affect our cash runway or our ability to fund the filing and launch of ALLY. As of September 30, 2021, we have $11.2 million of unrecognized stock-based compensation expense, almost all of which will be recognized before the end of 2023, and for which approximately $1.5 million will be recognized in the remainder of 2021. Looking forward, we expect to expand our commercial infrastructure to increase market share and broaden infrastructure and geographic coverage in the United States prior to the launch of ALLY in 2022. We are also monitoring our supply chain, which has been impacted by the ongoing pandemic. At this point, we have been able to adjust our operations to meet both our immediate needs and future objectives. However, we are incurring higher costs due to supply chain pressures on sourcing certain materials. The net loss for the quarter ended September 30, 2021, was $6.2 million or $0.65 loss per share, compared to a net loss of $4.8 million or a net loss of $0.64 per share in the third quarter of 2020. Adjusted EBITDA for the third quarter of 2021, which excludes the effects of stock-based compensation expense, was a $3.9 million adjusted loss and compares to an adjusted loss of $408,000 in the third quarter of 2020. When you deduct cash-based research and development expenses from our adjusted EBITDA for the nine months ended September 30, 2021, the result approximates zero. Thus, our commercial operations are cash flow neutral when evaluating our EBITDA operations, without considering normal working capital fluctuations in our balance sheet accounts. Simply put, our adjusted EBITDA or cash used in the first three quarters of 2021 corresponds directly to cash spent on the development of ALLY. As of September 30, 2021, we had cash and cash equivalents of $32.3 million, compared to $40.6 million at December 31, 2020. Cash utilized in the third quarter of 2021 was $2.2 million and $8.3 million for the nine months of 2021. Based on our cash position and operational forecast, we continue to believe that we have sufficient cash to fund our operations through the filing of our 510(k) application and the expected launch of ALLY in 2022. Now, I’d like to turn the call back over to Nick for some closing remarks.

Nick Curtis, CEO

Thank you, Tom. The end of the third quarter marks LENSAR’s first full year as a public company. While no one could have predicted the challenging environment that would weigh on us as we became a public company, I can proudly say that our team has squarely faced each challenge head-on, having found a way to not only persevere but thrive in doing so. Our team has made tremendous progress by continuing to grow our revenue quarter-over-quarter in one of the most uncertain times in our industry while maintaining our commitment to continuous improvement in support of creating superior outcomes for surgeons and patients, and are nearing the doorstep to deliver ALLY, creating great anticipation within the Company, as well as the ophthalmology community. With this team, we believe we have the right plan and are well-positioned for growth in both market expansion and disruption with the current LENSAR laser platform and the near future of our ALLY Adaptive Cataract Treatment System. I have no doubt that ALLY has the potential to establish LENSAR as a leader in the premium, as well as conventional cataract surgery market. ALLY will optimize the entire cataract treatment process for both patients and surgeons having the ability to customize each treatment in a way that improves both procedure and patient flow, while providing a superior outcome that creates an overall experience that other technologies will be hard-pressed to match. We look forward to further updates as we get closer to our filing. I’ll now turn the call back over to the operator, and we look forward to your questions.

Operator, Operator

Your first question comes from Danielle Antalffy of SVB Leerink.

Danielle Antalffy, Analyst

Hey. Good morning, guys. Thanks so much for taking the question. Congrats on a strong quarter.

Nick Curtis, CEO

Hi, Danielle.

Danielle Antalffy, Analyst

Hi. I have a few questions. First, regarding the return to pre-COVID levels, I'm interested in your perspective on the recent discussions around hospital staffing shortages within the healthcare industry. It seems that despite these challenges, you’ve managed to grow and get back to pre-COVID levels. I’d appreciate hearing your thoughts on this as we’re already a month into Q4. I have a few follow-ups as well.

Nick Curtis, CEO

So, Danielle, I think the good news is that cataract patients and cataract surgery don’t go away. During the pandemic, if there are slowdowns and people can’t have surgery, the fact is it just creates a backlog of cataract patients trying to get into the system. And when you exacerbate other things, they don’t go away; they don’t get better either. They continue, and the patient’s vision continues to degenerate. What we have seen is that patients are motivated to try to get back. There are some capacity issues specific to doctors being able to get enough surgery times, particularly in open access facilities. Most of our procedures are performed in outpatient ambulatory surgery centers rather than inpatient hospitals. Although, there are surgeries that are done there as well, most of the surgeries are done in an outpatient ambulatory surgery center. And so, while there are capacity issues in open access and hospital-based, the surgeon-owned facilities provide a little more control over that patient inflow. But there’s no doubt that there are capacity issues and issues we’ve seen as well with practices having enough personnel to support and to be able to continue the throughput. Fortunately, for us, our systems are well-utilized. And with the systems being well-utilized and the benefits that surgeons have been receiving, I think patients are anxious to go ahead and have these types of procedures that we’re able to help with.

Danielle Antalffy, Analyst

Yes. That’s helpful. Okay. Good to hear. And then, just on system utilization, just curious about the trends you are seeing there. It sounds pretty positive. I don’t know if there’s any color you can give beyond what you said in the prepared remarks and just now.

Nick Curtis, CEO

So, two things. One is that because we’re a smaller overall commercial group, we spend a fair portion of our time not trying to convince people that they should be doing femtosecond laser-assisted surgery. Instead, we have a more nuanced technology, and our core feature technologies can be used to really address a big unmet need with higher efficiencies than the competitive systems out there. We spend most of our time with people who have found value in femtosecond laser-assisted surgery. Therefore, when we do get into trials and subsequent conversions, our ramp-up times there are faster from a learning curve perspective. We’re able to get that utilization. As people get more comfortable with managing astigmatism, as routine as cataract surgery, we continue to talk about that and demonstrate results that physicians are achieving with the system that sort of feeds into that growth as well. We see that it becomes an invaluable tool for practices, and they want to perform more procedures with it.

Danielle Antalffy, Analyst

Okay, great. And my last question is about ALLY. It seems like you are on track, which is great to hear. I would love to know what you’re hearing from current LENSAR users, even if it’s just anecdotal. Also, what is the level of interest from surgeons regarding ALLY? Thanks so much.

Nick Curtis, CEO

I would say that I couldn’t be more pleased or more excited with anticipation as we get towards ALLY launch. What we’ve seen is that people who heretofore were not that interested in femtosecond laser-assisted cataract surgery see the utility of ALLY as being so efficient in getting right into the operating room. Certainly, physicians who are really into laser cataract surgery, femtosecond laser cataract surgery, we’ve just seen tremendous enthusiasm; people want to talk about it and having the opportunity to really meet with a lot of different surgeons in various forums is generating a lot of interest. So, we’re really excited about where we’re going here.

Operator, Operator

Your next question comes from the line of Ryan Zimmerman of BTIG.

Ryan Zimmerman, Analyst

Hey. Good morning. Thanks for taking the questions. Congrats on the quarter. I just want to ask a few for me. The pricing trends on the procedure ASPs seem to have held up pretty nicely this quarter. And Nick or Tom, just want to get your perspective on kind of where you think those pricing trends can go over time, whether it’s with the existing system today, or if you think about ALLY in the market?

Nick Curtis, CEO

Hi Ryan, thank you for being on the call and for your questions today. Are you asking about trends in procedure pricing based on volume?

Ryan Zimmerman, Analyst

Yes. I’m referring to the consumable component. I want to understand your perspective on the pricing trends and how that might influence your recurring revenue and procedure numbers over time. Do you think that price will change or remain stable?

Nick Curtis, CEO

Given the environment and the value that we believe we’re delivering here from an efficiency and an outcome perspective, I don’t feel there is pressure to bring prices down as it relates to procedures. The reality is that we provide real value there, and our system, given how we communicate with the preoperative devices, increases the throughput for the surgeon in the present system and the practice. I think people feel that they’re getting a fair value for what’s being delivered. I think, going forward with ALLY that’ll take that and elevate it to another level. Just procedure times alone, as I mentioned, being able to cut procedure times by up to two-thirds and addressing it right in the operating room without having to repractice the patient. I believe the value delivery there and the value proposition increases even more. Therefore, I don’t feel we are going to see pressure in that regard from a pricing perspective. We’re priced fairly, and we’re delivering a good value.

Tom Staab, CFO

I would also like to mention the return to system placements. While this isn't related to pricing, it does involve volume. It takes time for surgeons to be trained on the systems. After the interruption caused by the pandemic, when we weren't placing or selling as many systems, we expect that as we return to normal levels, the procedure volume will begin to rise as we move beyond these learning curves.

Ryan Zimmerman, Analyst

Right. So, Nick, just to that point. I mean, given the value that ALLY will bring, do you think you could take some price potentially, whether it be through systems or consumables, just given how efficient the system is positioned today?

Nick Curtis, CEO

Yes. I do believe that over time, particularly when people see the value that it delivers, number one. And number two, as kind of tag along on what Danielle brought up, how the efficiency relates to the use of personnel. I think that will also play a role in this because people will be able to better utilize the personnel that they have. Since we are right in the operating room and transitioning from one procedure to the next without having to transport the patient or prep that way, I do believe that strengthens the overall value proposition and potentially how and what they would be willing to pay for that.

Tom Staab, CFO

As we transition our manufacturing operations and begin producing ALLY units, you can expect to see some adjustments due to the learning curve associated with changing our manufacturing infrastructure for the new system. There is also a learning curve involved in building the ALLY unit. We have been producing the current system for quite a while, and our manufacturing team is skilled and efficient. They should quickly adapt to ALLY, and I anticipate improved margins as we increase production volumes and move past some pandemic-related cost issues. I expect there might be some margin pressure in the fourth quarter and first quarter of 2022, possibly extending into the second quarter of 2022.

Ryan Zimmerman, Analyst

Okay. I appreciate you taking the questions. Thank you.

Nick Curtis, CEO

Yes. Thanks, Ryan.

Operator, Operator

I’m showing no other questions at this time, sir.

Nick Curtis, CEO

Thank you. Okay. So, I guess, thank you for joining our call today, and I really appreciate everyone’s continued interest in LENSAR. We look forward to updating you as we make further progress and as we get closer to the filing and launch of ALLY.