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.

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?

Thank you, Lee, and good morning to everyone listening. 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 ALLY’s 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, it’s 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 1.5, 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 a double check to make sure the procedure was actually completed. Another user stated that ALLY takes flex 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…

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…

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

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

Thank you.

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 for the -- 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?

Great. Thank you, Ryan, for the questions. So as we look into 2023, we ended the year really strong going into 2023 with six backlog agreements, if you will. Those are going to -- most of those are going to hit in the second quarter. These were facility -- new facilities and requirements in terms of when they were would be ready to take delivery of the system. And so we've been scheduling those. From a ramp-up perspective here, the pipeline has been growing pretty substantially given the activities in the first quarter. There's generally in the capital equipment side because we're selling more of these systems than we are placing these systems. Generally, right after the first of the year, particularly since we ended the year with such a bang there with the backlog of systems, in the first quarter be a little bit slower from a contract perspective, but we've got the pipeline which has been growing significantly. And the good thing about the pipeline is that with capital equipment, you're going to get some fallout of systems, but you -- the bigger the pipeline, the more you're going to end-up pushing through. So I really like the fact that we've got -- I'm talking about into the 150 to 200 accounts in a pipeline right now.

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

I think in the -- as we get towards the second half of the year we are going to see that open up significantly. And that's what we're planning on.

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. …

Sure.

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 kind of dynamics.

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, 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. And so 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.

Yes.

But I think that we'll probably return to low 50s for the year, depending on the -- 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.

Okay. Last one for me, I'll hop back in 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 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?

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 study 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, sort of, across the board from what people are paying today. And so, we've been driving that value proposition pretty strong with the current installs. I would expect to see that to 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 -- on a per procedure basis. And the other thing is that, a lot of it is unencumbered. Like, 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. And 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 -- more efficiencies in their pricing of the procedure through increased procedure volumes and taking the equipment portion out of that. And so, 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. And 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 AL,LY, 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 manage the transition because we just don't want to go out and cannibalize the business. We want to continue to show growth.

Hi, Ryan, this is Tom. One other thing, and I think you already know this, but I want to make sure that we say it on the call for everybody's benefit, which is when I guided to the lower 50s, if we're in the lower 50s, you would think that, that's a very good thing because obviously, we realize a great margin on ALLY, but it is much lower than what we -- the margin we receive on procedures. So the -- higher the mix in sales is the better -- the lower our margin is -- but what you're going to see is our exponential growth in our revenue in really three to six months after we place a system that margin really kicks in for the procedure placement. So I just want to make sure -- I think you knew that already, but I wanted to make sure that, that was clear.

Thank you, Tom. Appreciate taking all the questions

Sure.

Thank you, Ryan.

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

So I really appreciate everybody 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're really excited about the potential of ALLY -- we look at this as a marathon, not a sprint, and I really look forward to our next update and keeping you apprised of the progress we're making. Thanks again.

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