LNSR - NASDAQ

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. [Operator Instructions] 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.

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, who 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?

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 over the next -- over this quarter and the next quarter. Procedure volumes in the US increase 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. To this point, 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. In fact, among users of our previous generation, LLS, who have transitioned to ALLY, procedure volumes are up 20% over the first quarter 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. As you can tell from the data I just mentioned, 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's 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 continue 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. Again, 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. Additionally, 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 initially anticipated this level of demand to begin materializing 12 to 18 months following the product launch. The fact that we have been able to secure 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. We expect that this challenge will continue for this foreseeable future and do 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've increased 5% compared to the first quarter 2022. Today 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 with 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?

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 31st, 2023, we had cash and cash equivalents of $8 million as compared to $14.7 million in December 31st, 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. As mentioned in our press release and our Form K associated with the transaction, 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. Now I'd like to turn the call back over to Pam, and we look forward to your questions.

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

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

Hi, Izzy.

So -- hi. So in terms of the ALLY launch, what are you seeing in productivity improvements and what insights have you guys gained from the -- in early install base?

Yeah. That's a really good question. So what we've seen in terms of productivity improvements are, 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. So 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, help them work through the backlog or quite frankly, they can reduce overhead and they finish their day early with the number of cases and they 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, is worth noting is seeing several accounts that have added or are adding a second device, speaks to the productivity increases and the ability to offset other costs that they have.

Great. That's really helpful. Thank you, all. And 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?

That's a good question. So we've been -- primarily, we've been working hard to -- particularly as a small company that's invested heavily in this technology. We've 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 as well as other customers moving right to the purchase rather than an operating lease. And it really depends on the practice, their accounting practices, whether they have access to section 179. There's a variety of different things that would dictate whether a practice moves towards an operating lease or whether they would move towards a capital purchase. But in any event, we have a much higher percentage of these systems in the early days with ALLY that have either been purchased outright, or purchased over time, or are using an operating lease and separating that from the per procedure fee. In terms of increasing the number of procedures, some of these accounts are new accounts to LENSAR, and so we don't have an operating history. They're telling us that through the increased productivity and the savings of, again, an hour to two hours a day in surgery, that it's resulting in their ability to schedule more patients. And I think one of the biggest productivity things that we've seen is, is that the new device ALLY, not only is it much faster, but we also communicate with a couple of other devices that are new that we've added on. And so the ability to communicate with the IOLMaster 700, let's say from

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

So we're contemplating this in terms of guidance. Part of that 20% growth in 2023 or the comment that it would be at least 20% growth in 2023, recognizing that there's a -- this down pole out of the South Korea market. And we're only selling the system. The system's primarily sold in the United States right now. So when you look at the business, which was about 50% of the US, a little more than 50% in the US and 50% globally, there's a drag from South Korea, which we've said is going to continue and will have at least that 20% growth, which actually represents a net growth rate of actually substantially more than the 20%. And particularly when you look at the number of systems that we've got to get out there. So we're not providing any forward guidance like at this time. But I would say that -- that's a pretty good number.

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

Tom, do you want to comment to that?

Sure, Nick. So Izzy, thanks for the question. It's a good one. A couple things going on there. We're -- we had to purchase a decent amount of inventory and expensive to R&D as we mentioned before. So that has an impact on margin. And we are just coming out -- as both Nick and I said in our prepared remarks, we're just coming out of some of the supply chain limitations and difficulties that we've occurred that significantly reduce the amount of ALLY systems we can produce as well as causing the raw materials and wages to go up associated with the production of ALLY. So we guided in the low fifties or around 50 because of those two conflicting factors, supply chain driving costs up and driving inefficiencies up versus charging some of the raw materials in the early systems that we were able to manufacture for ALLY where a piece of the system had already been expensed. So going forward, what I think is I would still look around the 50 to low fifties for margin going forward in 2023, and then as we totally come out of the supply chain malaise and some of those limitations, I think you can expect those gross margins to continue to increase its quantity scope up much higher.

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

I look at it as exciting. I think that given where we are right now in the demand for the systems, the backlog that we've got, the number of prospects that we've got that are filling the pipeline, I think this gives us a really run -- a running start here, as we go forward. I'm excited.

And maybe I can add something to Lizzie -- Izzy that, the -- as Nick and I have said in conference calls before because of COVID, supply chain issues, we really put a governor on building some of the commercial organization. So this was a really important financing for the company to allow us not only to build launch stock, which we've been doing already, and you can see our inventory balance is going up, but more importantly, investing in the commercial organization to get more of the message out there, reach physicians and really tout the significant benefits of ALLY. And Nick and the commercial team have done a herculean job thus far because there's been sort of a governor on things. And so hopefully with this money coming in, we'll be able to put -- invest in the -- in ALLY launch, like we have always said we were going to, but have really not done much of that to date.

Izzy, I do want to -- thanks Tom, that that was helpful. I want to make one other comment. So the commercial infrastructure is also really important. I mean, one of the things that LENSAR is known for, and because we're focused on this product is that we maintain and we monitor this like every month, the uptime percentages of our system, number one. And number two, of getting folks trained and transitioned over to ALLY from both the physician perspective as well as the supporting staff perspective, is incredibly important. And as we all know, there's a transition time here, that can take up to three months until -- so to the extent that, that we can make the practices feel good about the system and get them trained sooner rather than later, the sooner they become productive, which is good for them and good for LENSAR and the service organization, which is incredibly important so that we protect the asset here and the customer is able to do surgery when they want to do surgery, and we're able to record the revenue of those cases. We're the only company that utilizes a remote diagnostic. And so in many cases, we're able to look into the system from a remote diagnostic perspective, if someone is having a challenge with the system, and not only can we diagnose it, but many times we can push the fix through. And so these are all important sort of, let's say, technological advantages that we have that these proceeds will help us in building of this infrastructure to help support the increased sales and marketing activity. And thus, be able to move more of these systems.

Got it. Thank you for taking the questions.

Thank you.

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

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?

So that's a good question and fair enough. Obviously, management owns a fair amount of stock as well. So the question around dilution, I think is a fair question. The environment today is not an easy environment for fundraising, particularly in microcap stocks. And as you're probably well aware and some of the alternative financing, certainly the SVB collapse made other types of financing much more potentially onerous even though they were less dilutive. And I'd say that we ran a pretty good process all over, looking at what the various alternatives might be. The fact is, is that one of the largest shareholders stepped forward and partnered with us and put a proposal on the table that was much less costly of a -- of an alternative, if you will, to be able to put on the table versus an outright underwriting where there'd be substantial discounts involved to an already depressed stock. And we felt like, given the timing, this was probably the best opportunity to bite the bullet, take the dilution, substantially finance the company, and believe that given the opportunities that we have with ALLY, that when the rest of the market begins to understand it and the market turns that will more than make up for that. There's inherent value to the company a lot more than what the value is showing today.

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.