LENSAR, Inc. (LNSR) Q3 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the LENSAR Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Lee Roth of Burns McClellan. Mr. Roth, you may begin.

Thanks, Julia. Good morning, and once again, welcome to the LENSAR Third Quarter 2022 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, 2022. A copy of 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 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 over to the operator for the Q&A session. Before we begin, 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 known and unknown risks and uncertainties, which may cause the 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 risk factors, please refer to the company's documents filed with the Securities and Exchange Commission, which can be accessed on our website. In addition, this conference call contains time-sensitive information accurate only as of the date of this live broadcast, November 9, 2022. 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?

Thank you, Lee, and good morning to everyone listening. Thank you for joining us on our third quarter 2022 conference call. When we spoke last quarter, I remarked on the progress that LENSAR had made in the first half of 2022. And I'm pleased to say that we continue to build on this progress by meeting several significant objectives during the third quarter. Consistent with the plan we disclosed on our second quarter conference call, we successfully launched the ALLY Adaptive Cataract system in the U.S., placing the first systems in the week of August 15. Furthermore, we've installed multiple ALLY systems in key sites over the balance of the quarter and are well on our way to meeting our previously stated objective of having approximately 10 systems placed by the end of this year. The U.S. market is of the utmost importance for LENSAR to establish acceptance of ALLY and fundamental to our driving strategy for significant growth. The U.S. represents the largest premium surgical procedure market in the world and the only territory where we have a direct-to-market commercial presence. Our plans in the U.S. include continued market expansion and market share gains with ALLY as our primary objective in the near to medium term, using its new technology with superior features compared to aging competitive devices to significantly expand our market presence. In the quarter, our U.S. procedure volumes were up approximately 9% over the third quarter of 2021. This increase was largely due to our existing LENSAR laser systems without the benefit of ALLY units which were only productive in the last month of the quarter and for which we were still -- are still in a controlled and limited launch. We were able to achieve this procedure and market growth through continued market share gains with our first-generation system. In addition, and importantly, this growth is a clear indication that demand for premium cataract surgeries remained strong in the U.S. despite the current uncertainty in the state of the economy. We expect our share of the procedure market to continue to grow as we further transition and broaden the installed base of our ALLY systems. After the U.S. and Europe, where we have also filed for clearance, we're prioritizing other markets based on the size of the premium procedure opportunity, regulatory clearance time lines, pricing and margins as well as the investment required to grow with our distributors. I'm pleased to report that interest in ALLY among U.S. surgeons is significant. We expect this will continue to grow as they learn of other physician's positive early experience with the technology. We've trained several surgeons at each of our active ALLY sites, including some users of competitors' lasers and are actively engaged partnering with the surgeons and staff in all of the initial launch sites. Overall system performance and surgeon feedback has been extremely positive and consistent with our company's surgeon-centric values. We believe we've created a device platform in ALLY that caters to improving efficiencies while moving toward improving outcomes and experience for both surgeons and patients in the cataract procedure. Discussions with the initial group of physicians, including those that are primarily utilized competitive systems, point to ALLY's compact size, significantly decreased procedure times ergonomic efficiencies, adaptability and enhanced preoperative device connectivity as key advantages of the technology as compared to the first-generation devices that currently comprise most of the market. This is the confirmation we hope to hear, and it's really gratifying that these experienced surgeons have had positive initial experiences with ALLY. As part of LENSAR's ongoing commitment to continuous improvement, we're working closely with the sites to optimize the treatment parameters and fine-tuning individual systems to the specific environment with the objective of delivering a superior user experience. You've seen remarks from doctors Parkhurst and Slade in our press release, both high-volume and accomplished surgeons that are enthusiastic in their support of ALLY. As we place more systems, ALLY's praise continues and is consistent among these earlier users, whether they're familiar with LENSAR's technology platform or whether they've historically used competitive femtosecond lasers for cataract surgery. In fact, our most recent feedback is from Dr. Denise Visco, MBA, Incoming President of Cedars Aspens Group and a high-volume premium procedure cataract surgeon. Dr. Visco utilizes the ALLY system in her operating room, performing a sterile femtosecond laser-assisted cataract surgical procedure and thus provides an interesting perspective. She referred to ALLY as revolutionary and stated that it makes surgery far less stressful for her and safer for her patients with the added benefit of less cost per minute in the OR for their ASC. In the post-COVID environment where ASCs are short staffed and costs continue to rise, ALLY is a welcomed addition to overcome these conditions and concerns. Since receiving FDA clearance in June, our marketing team has been developing and executing targeted digital campaigns geared towards higher volume users committed to femtosecond laser-assisted cataract surgical technology and early adopters aimed at building awareness of ALLY. ALLY represents a true generational change, and we will expand our efforts to get the message out to a broader surgeon audience. Additionally, we will allow 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 see it for themselves. In addition to our select and targeted marketing campaigns, we maintained an active presence at the major ophthalmic congresses. We had a very successful American Academy of Ophthalmology, where we held 75 ALLY demo sessions and at the European Society of Cataract and Refractive Surgery, where ALLY was presented and demonstrated for the first time to surgeons outside the U.S. I'm pleased to report the ALLY system was received well at the European Congress with comments very consistent with those reported by U.S. surgeons. Surgeons are grateful to see a next-generation platform that is specifically designed to address the limitations of first-generation femtosecond laser cataract systems as well as appreciative of our continued investment in advancing the technology with relevant, substantive improvements. We received great feedback from our distributors and physicians and very much look forward to launching in the EU and other outside U.S. markets. Looking at our business performance for the quarter. We achieved a 9% growth in U.S. procedure volumes in Q3 over the third quarter of 2021. The strength in our key end market was offset by declines in the rest of the world. In particular, the decrease was driven by the South Korean market, where challenges between ophthalmic surgical practices and third-party payers in cataract procedure reimbursement has significantly impacted procedure volume. We expect that this challenge will continue for the foreseeable future without a clear resolution time frame I can identify at this time. The procedure decline in South Korea resulted in an approximate $725,000 decline in procedure revenue as compared to the third quarter of 2021. Overall, our transition from the Gen 1 laser to the ALLY Adaptive Cataract Treatment System is continuing to progress as planned. Our plan of controlled expansion of our ALLY installations throughout year-end 2022 and our objective of making ALLY more broadly available in 2023 is somewhat constrained by the current supply chain, but we look forward to it becoming less of a factor as we get into 2023. At this point, we don't have the absolute clarity, but believe we should be in a much better position to supply ALLY demand in 2023. Over the last several months, we've achieved each of the milestones we've established. We received FDA clearance for ALLY and quickly gotten into the hands of key opinion leaders and early adopters in the cataract surgery space. In addition to our primary focus on expansion of our market share in the U.S. We submitted our European MDR application to receive CE mark, which is the first step toward a potential commercial launch in the EU. I'm really proud of the entire LENSAR team and what we have accomplished and very enthusiastic about the opportunities ahead. As always, I look forward to sharing details of our progress as we continue moving forward. Now let me turn the call over to Tom to cover our financial highlights for the quarter. Tom?

Thank you, Nick. Our third quarter 2022 financial results are included in our press release issued earlier this morning. It was a relatively quiet quarter from a financial perspective as we were transitioning from our LLS to our ALLY system, but there are a few items that I'd like to point out. Revenue was $7.7 million in the third quarter of 2022 compared to $8.3 million in the third quarter of 2021. As Nick mentioned, this was primarily driven by a 46% reduction of procedures in regions outside of the United States and Europe, entirely associated with a decrease in procedure volume in South Korea. The reimbursement issues in South Korea, as Nick mentioned, had an approximate $725,000 detrimental impact on revenue for the quarter. If procedure volume was consistent in South Korea with that of Q3 2021, revenue for the third quarter of 2022 would have increased approximately $200,000 or an approximate 2.5% increase in total revenue over Q3 2021. Excluding the impact of South Korea, we had anticipated a flat or small increase in Q3 2022 revenue as compared to Q3 2021 due to the transition of sales from our first-generation LLS system to ALLY in the quarter with the impact of the transition being exacerbated by supply chain production delays. In the third quarter of 2022, there were 28,453 procedures sold compared to 30,765 procedures sold in the third quarter of 2021. However, as Nick mentioned, U.S. procedure volume increased approximately 9% and Europe contributed a 3% increase in procedures over the third quarter of 2021, partially offsetting the procedure decline in South Korea. Gross margin for the quarter was $3.9 million, representing 50% compared to $3.9 million and 47% realized in the third quarter of 2021. This is consistent with the gross margin expectations we had discussed in previous results calls of approximately 50%, representing a higher cost of sales associated with the soft launch and early rollout of ALLY including lower production volume as well as higher costs and production inefficiencies associated with the supply chain limitations. We do expect our gross margin percentage to improve as we achieve cost and operating efficiencies through higher production volumes. Total operating expenses for the quarter of 2022 were $8 million compared to $10 million in the third quarter of 2021. The decrease in operating expenses was primarily attributable to significantly lower ALLY development expenses following FDA clearance in the second quarter of 2022 as well as decreased trade show and travel activity due to timing, partially offset by expenses related to the ALLY launch. Included in operating expenses was noncash stock-based compensation of $1.7 million and $1.6 million in the third quarters of 2022 and 2021, respectively as well as inventory costs charged to R&D expense of approximately $900,000 in the third quarter of 2021. Net loss for the quarter was $4 million or a $0.39 loss per share compared to $6.2 million or a $0.65 loss per share in the third quarter of 2021. The reduction of net loss of $2.2 million resulted in a commensurate reduction in loss per share of $0.26. Adjusted EBITDA for the quarter of 2022, which excludes the effect of stock-based compensation, was a $1.6 million loss compared to a $3.9 million loss in the third quarter of 2021. As a reminder, we use adjusted EBITDA to evaluate our cash flow and profit from operations. As of September 30, 2022, we had cash and cash equivalents of $19.3 million as compared to $31.6 million on December 31, 2021. Cash utilized in the quarter was $5.9 million and reflects a onetime payment of $1.2 million associated with the commercial launch of ALLY and $2 million of inventory build in the quarter. We do expect our existing cash to support our operations into 2024. Now I'd like to turn the call back over to Julie, and we will take your questions. Julie?

[Operator Instructions] Your first question comes from Ryan Zimmerman from BTIG.

This is Sam on for Ryan. I was just wondering, can you discuss the ongoing rollout of ALLY? And how demo is converted to sales and placement since the launch? And then I have a follow-up.

So given the supply chain, we haven't really been doing demos per se. I'm actually pleased to report that the initial systems we've had mostly the systems have been sold so we're selling the systems in -- as part of the launch and the limited supply that we've got of systems. So we're not at a point yet in a broader rollout where you would consider more demonstrating of the technology. And in fact, as we get these systems installed, what I mentioned in my comments and my remarks were that we would be setting up these centers of excellence for these early sites and we would be taking interested physicians to those sites so that they could actually observe ALLY in action in surgery and see the performance for themselves.

So just for clarity, Sam, the demos that Nick was talking about are associated with the soft launch and the demo portion actually starts after we've completed that associated with the approximate 10 systems that Nick mentioned.

Yes. And where it might have been a little confusing is where there's demos I was referring to the congresses where we do demonstrations at the various meetings where doctors sign up for times or they walk up and we will demonstrate the system for them. But obviously, nothing like really seeing it in surgery.

Yes. That's really helpful. Then I have a follow-up. What kind of utilization are you seeing in accounts that have purchased the ALLY system? And how does that compare to U.S. procedure growth of 9%?

So there's always a sort of a ramp-up period because I mean, these systems have been in -- we started to put the systems in the field August 15, you go through your training of both the staff to support the physician and the physician training and then begin to do procedures. So there's some ramp-up associated there. But we -- put it this way, the system is so fast, and it does the procedure so efficiently that we're really pleased with the -- how fast the number of procedures are. And I will say that, that probably ramped up faster than what we might have expected for the first few systems, and we sold over 1,000 of those procedures already.

That's really promising to hear. Then I just have 1 more. Can you discuss your expectations for margins as the ALLY launch continues to scale?

So Sam, what we've previously said is looking probably into the rest of 2022 into 2023, margins are probably going to be approximately 50% once we see less of an impact of supply chain challenges, we expect that margin to escalate pretty significantly. We haven't given any future guidance, but certainly getting into the mid and upper 50s is what we would expect in the foreseeable future.

There are no further questions. At this time, I will turn the call back over to Nick for closing remarks.

Thank you. I'd like to take a moment to thank the entire LENSAR team for their commitment to continuous improvement in our organization and overall value proposition as well as our LENSAR partner customers. Without their support, thoughtful input and insights, we would not be thriving as we are. I'd like to thank you all for joining us for the call today and your continued interest in LENSAR. We look forward to updating you as we make further progress in the exciting remainder of 2022.

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