LNSR - LENSAR Inc. (LNSR) CEO Nicholas Curtis on Q2 2022 Results - Earnings Call Transcript
LENSAR, Inc. (LNSR)
Q2 2022 Earnings Conference Call
August 08, 2022, 08:30 AM ET
Company Participants
Lee Roth - Burns McClellan
Nicholas Curtis - Chief Executive Officer
Thomas Staab - Chief Financial Officer
Conference Call Participants
Ryan Zimmerman - BTIG
Presentation
Operator
Good morning and thank you for your participation. At this time, all participants are in a listen-only mode. Later, we will conduct 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.
Lee Roth
Thanks, Michelle. Good morning, and once again welcome to the LENSAR second quarter 2022 financial results conference call.
Earlier this morning, we issued a press release providing an overview of LENSAR’s financial results for the quarter ended June 30, 2022. 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 remarks, Tom Staab, CFO of LENSAR, 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 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 and/or 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 place 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 our website.
In addition, this call contains time-sensitive information accurate only as of the date of this live broadcast, August 8th, 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?
Nicholas Curtis
Operator
Ladies and gentlemen, please stand by.
Lee Roth
Operator?
Ladies and gentlemen, my apologies for the difficulties. The speakers, please proceed.[Technical Difficulty]
Operator
Mr. Curtis, please go ahead, sir.
Nicholas Curtis
Thank you, Lee, and good morning to everyone listening. Thank you for joining us on our second quarter 2022 conference call. LENSAR 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 that positions LENSAR 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 we shared before, interest in ALLY has been high since we initiated our preclearance marketing initiatives and has continued to grow ever since.
Over the last several months, members of our team and I have attended multiple industry conferences, and the level of enthusiasm toward ALLY from members of the ophthalmic community has been gratifying.
Now that we have clearance are 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, as well as to provide exposure and information to all cataract physicians on the many benefits of ALLY.
In addition, we plan extensive use of social media and peer-to-peer interaction with the initial LENSAR ALLY users to share their early experience. Our clinical plans include time and optimization studies in efficiency and patient flow, as well as ALLY cataract density imaging and customization of fragmentation and energy settings that will complement their current choices in femto multification technique as well as their face devices.
To date, we have demoed the technology over 200 times to interested parties, including existing LENSAR system users, users of competitive devices and various private equity groups acquiring ophthalmic ASCs and surgeon practices.
The femtosecond 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 in-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 patients and a new phase of growth for the market.
Given the incredible excitement around ALLY's advanced femtosecond laser capabilities, we are 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 ALLY, 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 these 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 as 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 ALLY systems.
Despite the challenging environment, we persevered and remained on our planned filing and clearance timing for ALLY. We're excited to get the first ALLY Systems in surgeons' hands as part of our controlled launch and make the ALLY system more broadly available to all ophthalmic 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 ALLY 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 ALLY 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, as I believe ALLY is a generational advancement in refractive cataract surgery with the potential to fundamentally change the way cataract surgery is performed and looked at in our industry. FDA clearance was just the latest step in the LENSAR journey, and I look forward to continuing down with exciting path.
Now let me turn the call over to Tom to cover our financial highlights for the quarter. Tom?
Thomas Staab
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 33,359 procedures sold compared to 30,966 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 a 15% growth rate over the second quarter of 2021 and a 9% growth rate over the first quarter of 2022 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. The 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 as 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 -- two, 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 of that clearance became imminent; and three, supply chain challenges have and will make the manufacturer of the first 15 to 25 ALLY 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 and place approximately 10 ALLY units in 2022, and that supply chain challenges have not and are 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 $400,000 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 realize 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 quarter 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 $0.67 loss per share compared to $4.4 million or $0.47 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 30, 2022, 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 month 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 use for the second quarter and six months ended June 30, 2022, reflect a $1.2 million contingent payment associated with the clearance of ALLY. In addition, we expect the second and final contingent payment of $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.
Question-and-Answer Session
Operator
Thank you sir. [Operator Instructions] Your first question comes from Ryan Zimmerman of BTIG. Please go ahead.
Ryan Zimmerman
Good morning. Thanks for taking the questions. Can you hear me okay?
Nicholas Curtis
Yes. Hi, Ryan.
Ryan Zimmerman
Good morning. Thank you. Congrats on all the progress guys. A couple of questions from me to get started. Maybe just, Nick, I'd love to get your perspective about the launch of ALLY in the back half of this year. Appreciate all the forward commentary you guys have been giving us to help us think about the models. What do you expect to learn, Nick, off these first 10 systems? And how does that inform your view for 2023?
Nicholas Curtis
Great question. So a couple of things are going to be really key for us. So there's a huge interest in ALLY. And so I think targeting the right systems for us in terms of these initial placements. As I mentioned, social media and 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, we -- these are the first systems that are coming off of production. And so a limited launch, even without the supply chain challenges, is the right and prudent thing to do regardless.
And so really getting a good gauge on how well the systems are performing and the reliability here in the coming months is really key for us, because we want to deliver what we say we're going to deliver and what we feel we need to deliver as an organization. So getting our infrastructure up, our training correctly, the performance of the systems in the field performing well, all those things are critical for us.
That will sort of set the stage for us as we move into 2023, so that as we get more system availability, we've got a ready and willing market to accept them, and we feel good about, from an organizational perspective, that we're ready to roll out on a larger scale.
Ryan Zimmerman
Appreciate that. And a couple of other smaller housekeeping questions, and 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.
Nicholas Curtis
I want to comment one -- make one comment here, and then Tom can take over the second half of the question. One of the things that we're doing here, Ryan, in terms of 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 have 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 and the fact that we also have a limitation in the number of systems that we're able to source parts and build, is that we're selling the systems.
And so we're going to a sole system model where we have gross margins in the system, even despite the fact that 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 procedure model to a sold 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. It better utilizes our cash, and it also allows us to establish as the market leader with the second-gen technology sort of a paradigm shift in terms of how these systems are placed and sold.
Ryan Zimmerman
Okay.
Thomas Staab
So thanks for your question, Ryan. I think you're right. We -- it's August 8 and we haven't sent the first ALLY system out for commercial purposes yet. So obviously, we're missing 1.5 or half a quarter for ALLY sales. The good news 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 is probably ratably over the four -- last four months of the year. And obviously, not only are we confident about getting the 10 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, which, as you know, takes a little bit of time.
Ryan Zimmerman
No, that's very helpful, Nick and Tom, I appreciate that. And my third question kind of dovetails to that, because if you look at your leasing revenue, I mean, it's grown 25% and 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 ALLY systems? I'm just curious, kind of, again, these are more, I think, modeling-related questions, but I think it probably speaks to just the change in the business model that you're alluding to, Nick.
Nicholas Curtis
So 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's going to go down. Many of these systems will be a combination of a down payment and a finance system.
And so we'll be showing the equipment portion of the system that's going to pay off the system. And you'll see a more discipline in terms of the procedure pricing, what our actual procedure pricing will be, will be in more strict, let's say, tiers related to the volume that the surgeons 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 penalize customers that have been loyal to LENSAR consistently over the last eight or ten years and neglect that phase out.
And we do have some demand, which has not been modeled by us for some lower volume surgeons that want to get into femtosecond lasers where we can take some of these rental units out and put those back out on rentals in new accounts. So let's…
Ryan Zimmerman
Okay. Got it. Sure.
Thomas Staab
The other thing I would think about, Ryan is obviously, we're heavily focused on the United States because that's where we have a direct model and that's 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, especially 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 you're going to see the sales, as Nick commented, be more predominant.
Ryan Zimmerman
Okay. Very helpful. I’ll hop back in queue. I could ask more questions, but I’ll let others ask a few.
Thomas Staab
Okay. Great, thanks Ryan.
Operator
At this time, there are no other questions. I'll turn the conference back to Mr. Nick Curtis for our closing remarks.
Nicholas Curtis
I really appreciate everyone joining the call today. I'd like to thank you and also for your continued interest in LENSAR. We look forward to updating you as we continue to make progress and for the exciting remainder of 2022. Thank you.
Operator
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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LENSAR, Inc. (LNSR) CEO Nicholas Curtis on Q2 2022 Results - Earnings Call Transcript