Q2 2022 LENSAR Inc Earnings Call

Good morning, and thank you for your participation.

This time, all participants are in a listen only mode.

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 Lee Roth of Burns Mcclellan Mr. Roth. Please go ahead.

Thanks, Michele good morning, and once again welcome to the lens of our second quarter 2022 financial results Conference call.

Earlier. This morning, we issued a press release, providing an overview of lenders financial results for the quarter ended June 32022.

This release is available in Investor Relations section of the company's website at Www Dot lens, our dot com.

Joining me on the call today is Nick Curtis Chief Executive Officer of lens, or who will review the company's recent business and operational progress. Following his remarks, we saw.

Bob CFO lens I will provide an overview of the company's financial highlights before we turn the call back 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 about the company's future performance <unk> achievements. These statements are subject to known and unknown 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 in this presentation.

You should not put undue reliance on these forward looking statements.

For additional information, including a detailed discussion of the Companys risk factors. Please refer to our documents filed with Securities and Exchange Commission, which can be accessed on our website.

In addition, this call contains time sensitive information accurate only as of the date of this live broadcast August eight 2022.

<unk> 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.

With that said it is now my pleasure to turn the call over to <unk>, Chief Executive Officer, Nick Curtis.

Ladies and gentlemen, please standby.

Operator.

Yeah.

Ladies and gentlemen, my apologies for the difficulties.

Speakers. Please proceed.

Okay.

Mr. Curtis. Please go ahead Sir.

Thank you Lee and good morning to everyone listening. Thank you for joining us on our second quarter 2022 conference call.

<unk> continued to make significant progress since we reported our Q1 results and we had a very exciting second quarter.

We successfully grew our business and our market share in the United States, Despite a challenging macroeconomic and industry landscape.

More importantly, we completed an important step to position <unk> for sustainable long term growth and success.

In June we reached a pivotal milestone and received FDA clearance of our ally adaptive cataract treatment system as.

As we shared before interest in ally has been high since we initiated our pre clearance marketing initiatives and has continued to grow ever sets over.

Over the last several months members of our team and I have attended multiple industry conferences and the level of enthusiasm toward ally for members of the community has been gratifying.

Now that we have clearance our targeted mostly digital marketing will include various campaigns to initially include higher volume believers in Femtosecond laser cataract surgery and other early adopters with aging competitive technologies.

Well as to provide exposure and information to all cataracts physicians.

The many benefits of ally.

In addition, we planned extensive use of social media and peer to peer interaction with the initial lengths our ally users to share their early experience.

Our clinical plans include time, and optimization studies inefficiency and patient flow as well as alloy cataract density imaging and customization of fragmentation energy settings that will complement their current choices and fake way most vacation technique as well as their FICO devices to.

To date, we have doubled the technology over 200 times, the interested parties, including existing ones are system users.

Users of competitive devices, and various private equity groups acquiring ophthalmic afcs and surgeon practices.

A second laser assisted cataract surgery market is at an important inflection point as demand for premium procedures and better outcomes is continuing to grow while surgeons efficiency and capacity is limited by the aging systems currently in the market.

In addition, lower reimbursement for standard cataract surgery, private equity investment and the growth of the head office surgical suites creates an environment in which we believe we can set a new standard of performance with ally. Our goal is to lead the next step in the evolution of the industry driving tangible improvements for both surgeons and pay.

<unk> and a new phase of growth for the market.

Given the incredible excitement around allies advanced Femtosecond laser capabilities, we're doing everything possible to get the technology into the hands of surgeon partners sharing this vision as expeditiously as possible.

As discussed.

We are effectively navigating the supply chain challenges currently facing the entire industry and are on track to place. The first commercial system. This quarter with approximately 10 systems expected to be placed in the U S by year end.

In terms of our rest of world strategy for Allied we plan to file for the CE Mark in Europe , very soon as well as pursue regulatory clearances in other key markets in the near future.

Ally clearance in the U S is just the beginning of a series of commercial filings that will ultimately bring the significant advancements in refractive laser cataract surgery to physicians and their patients in key global markets that account for approximately 90% of premium procedures worldwide.

Looking at our business performance for the quarter, we achieved 15% growth in the U S procedure volumes in Q2 over the second quarter of 2021.

The strength in our key end market was partially offset by softness in the rest of the world is physician reimbursement discussions global economies and system availability limited our growth near term in markets outside the United States.

In addition, our product capital system sale revenues declined year over year as we shifted our manufacturing operations to focus exclusively on the production of alloy systems.

Despite the challenging environment, we persevered and remained on our planned filing and clearance timing for ally where.

We're excited to get the first alloy systems and surgeon's hands as part of our controlled launch and make the ally system more broadly available to all our fallback surgeons in 2023.

The continued growth and progress in the U S market is important because the market represents overall the second highest number of cataract surgeries performed globally, but the highest number of premium refractive cataract surgeries performed annually.

The U S provides us a solid foundation to launch Allied and will be our primary focus in the next 12 months with our direct sales and marketing presence.

We hope to continue to expand market share through the acceptance of alloy in the U S and use this positive acceptance to bring the ally system to global markets thereafter.

Looking back at the first half of the year I'm incredibly proud of what our team has accomplished but I'm, even more excited about the future because I believe ally as a generational advancement and refractive cataract surgery with the potential to fundamentally change the way cataract surgeries performed and looked at in our industry.

Clearance was just the latest step in the lens of our journey and I look forward to continuing down this exciting path.

Now, let me turn the call over to Tom to cover our financial highlights for the quarter.

Thank you Nick our second quarter 2022 financial results are included in our press release issued earlier this morning.

It was a relatively quiet quarter from a financial perspective, but there are a few items that I'd like to specifically point out.

Revenue was $8 million in the second quarter of 2022 compared to $7 9 million in the second quarter of 2021.

This slight increase was driven by increased U S procedure volumes offset by a decline in product revenue as Nick mentioned in his remarks.

In the second quarter of 2022, there were 33359 procedure sold compared to 30966 procedures in the second quarter of 2021.

Our procedure volume increased 8% in aggregate over the second quarter of 2021.

More importantly, as Nick mentioned, we saw 15% growth rate over the second quarter of 2021, and a 9% growth rate over the first quarter of 2022 in the in the United States.

As mentioned on previous results calls 2022 is a transition year for the company.

We have transitioned our manufacturing operations from our LLS systems to ally.

Transition of our operations to focus on ally is important for two reasons first we had limited LLS units in inventory to place in 2022 and supply chain challenges and the expected clearance of ally made it financially and operationally prudent to transition our manufacturing operations to ally.

Accordingly, you see a lack of system sales and corresponding higher gross margin in the second quarter of 2022 as compared to 2021.

Secondly, gross margin is expected to be volatile in 2022.

This volatility is the result of one product mix changes due to fewer LLS units available for placement in 2022.

Raw materials to raw materials direct labor and overhead for ally being charged to R&D expense until May 2022, when it became probable that ally would be cleared and the associated timing a bit clearance became imminent.

Three supply chain challenges have and will make the manufacturer of the first 15% to 25 Allied units less efficient and thereby result in a higher cost of sales for these earlier systems.

Looking forward supply chain continues to present challenges for US. However, we are confident that we can deliver in place approximately 10 ally units in 2022.

And that supply chain challenges have not.

Not expected to negatively influence our ability to source our recurring revenue streams.

Gross margin for the quarter was $4 $9 million.

Representing a gross margin of 61% and represents an approximate $400000 increase compared to the $4 5 million and 56% realized in the second quarter of 2021.

The increase in gross margin was primarily related to product mix as we had no LLS system sales in the quarter.

As a reminder system sales have lower margins than those margins, we realized on procedures.

Going forward as we place ally systems, we expect our gross margin percentage to be approximately 50%.

Total operating expenses for the second quarter of 2022 were $11 7 million compared to $8 8 million in the second quarter of 2021.

The increase in operating expenses was largely due to increases in both R&D and SG&A expenses in preparation for the ally launch.

Included in operating expenses was noncash stock based compensation of $1 6 million and $1 4 million in the second quarters of 2022 and 2021, respectively.

And inventory costs charged to R&D expense of approximately $1 million in both second quarters.

Net loss for the quarter was $6 8 million or 67 loss per share compared to $4 4 million or <unk> 47 loss per share in the second quarter of 2021.

Adjusted EBITDA for the second quarter of 2022, which excludes the effects of stock based compensation expense was $4 $3 million loss compared to a $2 $3 million loss in the second quarter of 2021.

As a reminder, we use adjusted EBITDA to evaluate our cash flow and profit from operations.

When you deduct R&D expense from our adjusted EBITDA for the six months, our cash flow operations are at breakeven.

As of June 32022, we had cash and cash equivalents of $25 2 million as compared to $31 6 million at December 31 2021.

Cash utilized in the quarter was $3 8 million and was $6 $4 million for the six months period of 2022.

We continue to believe that we are well positioned financially to support the launch and commercialization of ally, which will commence this quarter and expect our cash to support operations into 2024.

Our cash used for the second quarter and six months ended June 32020 to reflect a $1 $2 million contingent payment associated with the clearance of ally.

In addition, we expect the second and final contingent payment of a $1 $2 million associated with the commercial launch of ally in the third quarter of 2022.

Now I'd like to turn the call back over to Michelle and we look forward to your questions.

Thank you Sir.

Ladies and gentlemen, we will now begin the question and answer session.

If you would like to ask a question. Please press star followed by the number one on your telephone keypad.

If you would like to withdraw your question. Please press the star followed by the number too.

Please standby one moment for your first question.

Sure.

Your first question comes from Ryan Zimmerman of BPI. Please go ahead.

Good morning, Thanks for taking my questions can you hear me okay.

Hi, Rod.

Good morning, Thank you and congrats on all the progress guys couple of questions for me to get started.

Just Nick I'd Love type data perspective about the launch of ally in the back half of this year.

<unk> all of the forward commentary you guys had been given us to help us think about the model.

What do you expect to learn Nick off these first 10 systems and how does that inform your view for 2003.

Yes.

Great question. So a couple of things are going to be a really key for us.

So there is there is there is a huge interest in alloy and so.

I think targeting the right systems for us in terms of the initial placements as I mentioned social media in peer to peer are going to be really important in terms of setting the stage for us in 2023 number one.

Number two from a pure performance perspective.

These are the first systems that are coming off of production.

So a limited launch even without the supply chain challenges as the right and prudent thing to do regardless.

So really getting a good gauge.

How well the systems are performing and their reliability here in the coming months as is really key for us because we wanted to deliver what we say, we're going to deliver and what we feel.

We need to deliver as an organization so keating.

Our infrastructure up our training.

Correctly the performance of the systems in the field.

Performing well.

All those things are.

Critical for us that that'll sort of set the stage for us as we move into 2023, so that as we get.

More system availability.

We've got ready and willing market to accept them and we feel good about from an organizational perspective that work that we are ready to rollout.

On a larger scale.

I appreciate that.

A couple of other smaller housekeeping questions and then I have another question as well, but just in terms of the pacing of the systems. It sounds like the bulk of the 10 systems are going to be placed in the fourth quarter.

And just appreciate any comments Tom you have on pacing as we think about the model just in the near term.

Yes.

I want to comment what make one comment here and then.

And then Tom Kinder could take over the second half of the question one of the things that we're doing here.

Right.

Looking at the looking at the fourth quarter is that as you know most systems in the United States, leading up to this point over the last several years had been placed systems not sold systems and one of the things that we're doing here in this back half of the year with the launch in and the fact that we are.

Also have limitation in the number of systems that we're able to to source parts in it.

Build is it we're selling the systems and so we're going to.

<unk> system bottle.

Where we have gross margins in the system, even despite the fact that we have.

We're paying more for parts now and we've got some inefficiencies in manufacturing and building and so we feel really good about the business model, where we're shifting from a pure per procedure model to a solar system, where we are able to sell the system.

And recognize revenue on that.

On a quicker basis in the second half of the year.

Better utilize our cash and it also allows us to establish <unk> as the market leader with the second Gen technology, a sort of a paradigm shift in terms of how these systems are placed and sold.

So thanks for your question.

Think you are right.

It's August eight and we haven't since the first ally system out for commercial purposes, yet so obviously we're missing.

One and a half or a half a quarter.

For Allied sales. The good news is is that we are confident that we're going to place at least 10 systems in 2022.

And I think the best way to think about it as probably rattled ratably over the last four months of the year.

And obviously not only are we confident about getting the <unk> systems from a supply chain perspective, but we've identified the accounts that we want to place those and now it's just a function of contracting with those accounts and getting them trained and installing them with sharing as you know takes a little bit of time.

No that's very helpful. Nick <unk> and Tom I appreciate that Mike.

My third question kind of dovetails to that because if you look at your leasing revenue I mean, it's grown 25% on average over the past four quarters or so.

And so how do we think about kind of.

Should we expect that to.

Slowly phase down in terms of its growth as you're selling more outright alloy systems I'm just curious Scott.

Again these are more I think modeling related questions, but I think it's.

Probably speaks to just the change in the business model that you are alluding to Nick.

So.

Interesting interesting question because.

The revenue may appear different we'll recognize revenue sooner than we had recognized revenue in the past I don't necessarily expect it is going to go down many of these systems will be a combination of a downpayment Ed.

Financed system and so we will be showing the the equipment portion.

Of the of the system, that's going to pay off the system.

And Youll see a more disciplined in terms of the procedure pricing, what our actual procedure pricing will be will be.

Is it more strict let's say tiers related to the volume that the <unk> are performing.

So.

The other thing is is that we're trying to maintain the right kind of mix, we're looking to replace the competitive devices in the marketplace at the same time, we certainly can't Penalise.

Customers that have been loyal to lens are.

Consistently over the last eight or 10 years.

And neglect that phase out and we do have some demand which has not been modeled.

By Us before.

Some lower volume surgeons that want to get into Femtosecond lasers, where we could take some of these rental units out and put those back out on rentals.

In new accounts.

So lets okay got it.

The other thing I would think about Ryan is obviously, we're heavily focused on the United States, because thats, where we have a direct model and Thats, where ally is approved so going forward starting in August .

The United States is going to be a very heavy focus it's always been a heavy focus because of the direct nature of our business, but the leasing model was utilized predominantly for our existing LLS systems as we evolve to ally.

Actually when you look beyond the first 10 systems, it's going to be more of a sales model. So I think the lease revenue is going to kind of level off because that was predominantly associated with the existing LLS units and as we move to a full.

Launch in 2023, I think youre going to see EBIT sales as Nick commented would be more predominant.

Okay.

Very helpful I'll hop back in queue I can.

Some more questions, but I'll.

I'll, let others that they're on.

Yes.

Okay, great. Thanks, Matthew.

At this time there are no other questions I will turn the conference back to Mr. Nick Curtis for closing remarks.

Well I really appreciate everyone joining the call today I'd like to thank you and also for your continued interest in <unk>.

We look forward to updating you as we continue to make progress.

The exciting remainder of 2022.

Thank you.

Ladies and gentlemen. This concludes your conference call for this morning, we would like to thank you all for participating and ask that you. Please disconnect your lines.

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