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spk04: 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 call over to Cameron Radinovic of Burns McLellan. Mr. Radinovic, please go ahead.
spk00: Thank you, Operator. Good morning, and welcome to the Lenzar Fourth Quarter and Full Year 2023 Financial Results Conference Call. Earlier this morning, the company issued a press release providing an overview of its financial results for the quarter and full year ended December 31st, 2023. This press release is available on the investor relations section of the company's website at www.lenzar.com. Joining me on the call today is Nick Curtis, Chief Executive Officer of Lenzar, who will review the company's recent business and operational progress. Following his comments, Tom Staub, Chief Financial Officer of Flensar, will provide an overview of the company's financial highlights before turning the call back over to the operator to facilitate answering any questions you may have. Today's conference call will contain certain forward-looking statements, including those statements regarding future results, unaudited and forward-looking financial information, as well as the company's future performance and or achievements. These statements are subject to known and unknown risks and uncertainties, which may cause the company's 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 the company's documents filed with the Securities and Exchange Commission, which can be accessed on the website. In addition, this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, March 4th, 2024. LENZAR undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this live call. With that, it's my pleasure to turn the call over to Nick Curtis. Nick?
spk02: Thank you, Cam, and good morning to everyone. Thank you for joining us on our fourth quarter 2023 conference call. 2023 was by all measures, a very strong year for our company. I'm confident that the significant momentum built throughout the year will continue in 2024. I'm excited to share with you both our achievements of the past 12 months, as well as some of the numerous reasons we're so excited for the future. As Tom will review in greater detail, fourth quarter revenue grew 18% compared to a year ago, while full year revenue increased 19% in 2023 compared to 2022, also marking our highest annual revenue in the company's history. I can safely say that since launching in the mid-third quarter of 2022, Ally has exceeded our expectations. We placed a total of 44 systems last year, approximately 50% above our initial guidance of 30 placements in the first full year of commercial launch. It is also significant to note half of our 2023 placements were with surgeons and sites new to Lensar, a majority that have converted to Ally from competitive devices. Although Ally is currently only available in the U.S., we grew our total worldwide install base by 13% to approximately 305 systems, comprising both the next generation Ally and our legacy LLS. This significant growth was achieved despite issues in South Korea, whereby an ongoing dispute between third-party payers and healthcare providers has resulted in premium cataract procedures being virtually nonexistent in what was previously a robust market. If you focus on our total revenue growth without South Korea, 2023 revenue increased 26% compared to 2022. Once again, this growth percentage is even more impressive if you consider the fact that we're currently limited to installing allies in the U.S. Accordingly, our U.S. installed base grew over 23%, a strong performance in any event. Importantly, demand for the technology remained strong as we finished 2023 with a backlog of nine systems and a robust pipeline of potential Ally customers that we are diligently working to convert in the year ahead. In addition to this strong growth in our installed base, we continue to report highly encouraging utilization trends with full year procedure volume up 4% over 2022 and fourth quarter procedures increasing nearly 20% compared to the year ago period. Similar to the revenue story, our full year procedure growth becomes even more impressive when you exclude the effect of South Korea, which has essentially been shut down since mid-2022. Backing out South Korea activity for both 22 and 23, our worldwide procedure volumes increased 15% over last year. We continue to demonstrate with our customers the benefits Ally offers, primarily with the significant speed, performance, astigmatism management, and overall ergonomic efficiency compared to legacy technologies. These benefits will drive further adoption of Ally, as well as increased utilization as surgeons' comfort levels continue to grow and they see firsthand the value that our platform can create within their practice. As our installed base and utilization continues to expand, Peer-to-peer referrals will become increasingly credible sources for those that are considering the right time to replace their older competitive devices with Ally. Again, this is not really a matter of if the technology gets replaced, but when is the optimal time to upgrade. To that end, we recently completed four time and motion studies in ASCs with different model workflows and determined that surgeons can save up to eight minutes per case staff can save up to 19 minutes per case by streamlining workflow due to Ally performance and efficiencies and reducing the number of staff interactions with the patient. Ultimately, this can result in patients spending up to 51 minutes less time in a surgical facility using Ally as compared to using a LensX laser and manually marking patients preoperatively. Using average CMS payment schedules, average conversion rates, and market scope data of the average charge per patient for performing astigmatic incisions and managing astigmatism, surgeons and staff can end their day 90 to 120 minutes earlier, saving the ASC up to $12,000 per surgical day and up to $540,000 per year. Alternatively, in very busy centers where time and OR capacity is a consideration, surgeons can choose to treat more patients generating an additional $8,000 of revenue per day or $364,000 per year, while ASCs can garner an additional $11,000 in facility fees and staff costs per day or $497,000 per year. This makes Ally a very compelling value proposition, providing a solid return on investment and alternative to the big company bundles. As you can see, independent data is beginning to emerge in support of our longstanding belief that Ally offers a better device and overall technology solution to optimize the cataract surgical experience for surgeons, staff, and patients. While the growth we've delivered over the last year is exciting on its own, looking at it in the context of the broader sector tells a similarly promising story. In the fourth quarter, our US market share reached 16.9% according to MarketScope. This marks our seventh consecutive quarter of gains in our primary geography. and representing a 2.8% gain in market share since launching Ally in the US. Additionally, there is a significant number of competitive systems currently in use that are based on data technology and approaching end of life. Demographics of an aging population and organic growth in cataract surgeries on average represent 3% plus organic growth per year. The benefits of femtosecond laser-assisted cataract surgery are contributing to a higher annual growth rate. expected to be between 5% and 8%. Visually significant astigmatism, for which Ally is ideally suited, affects 70% to 90% of all cataract patients. This data, combined with the benefits surgeons, staff, and patients recognize with Ally, provide strong support for our expectation that Lensar has the potential to achieve 20% plus year-over-year growth for the foreseeable future. Our growth to date and this anticipated growth are fueled not only by allies' efficiencies and business opportunities as previously outlined, but also the significant clinical contribution allies making for surgeons and their patients. Specifically, we now have four peer review papers demonstrating the superiority of Lensar's proprietary astigmatic guiding technology in tele access that enables surgeons to create astigmatic incisions and guide toric IOL alignment and deliver better outcomes to their patients. The most recent peer-reviewed paper was published this month in the Journal of Cataract and Refractive Surgery, where renowned professors Tim Schultz, MD, and Burkhard Dick, MD, from Ruhr University Eye Hospital in Bochum, Germany, compared their outcomes using LENZAR iris registration technology with the IntelliAXIS refractive capsulorhexis compared to those using another axis of astigmatism alignment tool from Zeiss called the Callisto to align toric intraocular lenses and found that IntelliAxis guided statistically significant improvements in outcomes for their cataract patients. Turning to our outlook for 2024 and beyond, we believe that there are multiple reasons to be optimistic, both specific to Lensar and related to the broader market. First, we've achieved this meaningful growth despite the continued freeze in South Korea. Revenue after Q2 was essentially zero for the following six quarters. We can't speculate as to when the market might reopen, but clearly it's a matter of when and not if it happens. However, the bigger question is when it does, how significant a role will South Korea play in terms of our future growth, particularly once Ally is available? To put it in perspective, South Korea represented less than 1% of our product and service revenue in 2023. This compares to 7.4% and 14.9% of our product and service revenue in fiscal 22 and 21 respectively. Our in-market distributors stated that when the third-party payer issues are resolved, the result will be a market estimated to be roughly 50% the size that it was prior to the shutdown. As a reminder, Ally is currently available for use only in the United States, but we expect this to evolve in the year ahead. We submitted Ally for CE Mark certification in the European Union in September of 2022, and we expect a decision on certification later this year. Our distributors are well equipped and excited to make Ally available to European surgeons quickly once we receive marketing authorization. Enthusiasm for Ally within the international ophthalmic community is significant and extends beyond our distributors to the surgeons they serve. These surgeons are witnessing the results being achieved by their American counterparts and are eager to experience the many advantages of the Ally Adaptive Cataract Treatment System firsthand for the benefit of their practices and more importantly, their patients. We're approaching a perfect storm. Combining an industry that has been ripe for innovation which we're addressing through our world-class technology, the anticipation of an expanded geographic footprint through new regulatory clearances, and improving global market conditions. I believe we're well-positioned to translate these favorable dynamics into significant growth in the years to come. We have a clear set of objectives focused on maximizing the success of Ally, and I'm proud to say that we are well on our way to making our vision a reality. Now let me turn the call over to Tom to cover our financial highlights for the quarter and year. Tom?
spk03: Thank you, Nick. Our fourth quarter and full year 2023 financial results are included in our press release issued earlier this morning, but I'd like to add some color to the information contained in the press release. Total revenue for the quarter was $12.1 million compared to total revenue of $10.2 million in the fourth quarter of 2022. The fourth quarter was a strong quarter for us, with revenue increasing $1.9 million, or 18% from the fourth quarter of 2022. Ally system sales and procedure volume represented the largest contributors to this increase. As Nick mentioned, we significantly exceeded our Ally placement guidance for the year, having placed 44 systems, with the fourth quarter of 2023 representing our highest Ally placements in a quarter with 15. Let me also add a little color on our full year 2023 revenue. We were extremely pleased with our 19% revenue growth for the year based upon two limitations that we faced and will continue to face in 2024. One, we were limited to placing allies in the United States, so all new ally placements in the related revenue growth was directly associated with U.S. operations. And two, our revenue growth was into a strong headwind in South Korea, whereby premium cataract procedures have been virtually nonexistent for the last 18 months due to third-party payer reimbursement issues. If you exclude South Korea from our results, 2023 annual revenue growth was more than 26% over 2022. In the fourth quarter of 2023, we sold 37,414 procedures compared to 31,400 procedures sold in the fourth quarter of 2022. Our procedure volume increased 19% over the fourth quarter of 2022. For the quarters ended December 31st, 2023 and 2022, approximately 73% of our revenue was attributable to recurring sources. As Nick mentioned, procedure growth for the year increased 4% from 2022. Once again, if you exclude South Korea in both years, procedures increased a robust 15% in 2023, which corresponds directly with U.S. procedure growth year over year. Gross margin for the quarter was $5.1 million and represented a gross margin percentage of 43%. Our margins decreased in the latter half of 2023 associated with a higher proportion of total revenue from system sales, which have a significantly lower gross margin than procedure sales, as well as the roll-off of inventory charged to research and development prior to Ally receiving regulatory clearance in the United States. Our gross margin for the full year 2023 was 50% and is consistent with our guidance of gross margins in the low 50s. Going forward, with the heavier system sales in our overall revenue mix and with the full cost of Ally in our cost of sales, we expect our gross margin percentage to be approximately 50% in 2024. As a reminder, Ally inventory costs charged to research and development expenses for the year ended December 31st, 2022 were approximately $3.4 million. When evaluating our aggregate gross margin, it is important to realize that our recurring procedure revenue carries an approximate 80% gross margin as the cost of a procedure sale is limited to the patient interface device, whereby our system sales generate a significantly lower margin. This is important to understand as greater success in placing ally units will drive benefit to our recurring revenue over time, but it compresses our overall gross margin at the time of sale. You can see this phenomenon in the fourth quarter of 2023 when we had 11 system sales, our highest sales volume in a quarter to date, but our gross margin percentage was below 50% that we realized for the entirety of 2023. Total operating expenses for the fourth quarter of 2023 were $8.1 million compared to $9.1 million in the fourth quarter of 2022. This $1 million decrease was largely due to less stock compensation and professional expenses somewhat offset by higher sales and marketing costs. Non-cash stock-based compensation was $0.8 million and $1.7 million in the fourth quarters of 2023 and 2022, respectively. Net loss increased quarter over quarter and was $3.9 million, or a $0.35 loss per share in the fourth quarter of 2023, compared to a $2.5 million loss, or a $0.24 loss per share in the fourth quarter of 2022. The $1.4 million increase in loss was almost entirely related to the change in fair value of our warrants, which was $1.2 million in the fourth quarter of 2023. As of December 31st, 2023, we had cash investments of $24.6 million as compared to $14.7 million on December 31st, 2022. The increase in cash between the two years is the result of $19.1 million of net proceeds received in the financing we completed in May 2023. This financing was designed and is expected to get us to positive cash flow from operations based on our current operating plan. Cash utilized was $0.4 million in the fourth quarter, $0.9 million for the last six months of 2023, and was $9.9 million for the full year. In 2024, we will continue to invest in our commercial organization, and we will work to increase our Ally installed base on a worldwide basis. As we look forward, we expect for the investment in both our commercial organization and installed base to yield positing net operating cash flow quarters within 2025. As Nick mentioned, we also look forward to receiving European clearance of Ally. as well as clearance in some other small operating regions in 2024. If we receive clearance in Europe, we expect placement numbers to increase significantly as Ally would then be cleared in two significant operating regions. Now I'd like to open the call for your questions. Laura?
spk04: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number two. If you're using a speakerphone, please lift your hands up before pressing any keys. One moment, please, for your first question. Our first question comes from the line of Ryan Zimmerman from DTIG. Please go ahead.
spk01: Good morning. Thanks for taking the questions, and congrats on the strong end of the year here. Maybe just to start, we could talk about kind of how you're thinking about going into 2024. You know, you've already alluded to the nine systems that are, you know, in process, but also a strong pipeline. So just help us understand kind of in the context of a growing sales force and, you know, the momentum you have, how you're thinking about adoption in 2024 and any metrics certainly there would be appreciated.
spk02: Thanks, Ryan. Appreciate your question and your call. So as we get into 2024, I'm a little reticent to give too much too soon here. I don't think that as a whole we couldn't be more enthusiastic in terms of the sort of momentum that we're trying, that we're picking up and that we continue to sustain. As I mentioned in the call, you know, timing is really more of the issue versus the, you know, the if. It's more the when. And so that's why I'm a little reticent early because the activity level's never been higher and we've got more significant, larger deals sort of in the works. And the first two meetings that were more, you know, they're national meetings, but there were smaller venue meetings like the Caribbean Eye and the ACoS meeting this year, significant presentations regarding LNZAR, some unexpected by LNZAR in the commentary in there. We knew that some of them would contain some of the content, but some were actually big surprises. And so the interest level there, and these are, as you know, very high-level meetings with surgeons that do significant volume. I expect that the uptake is going to continue and is going to continue to grow. And I expect that the numbers of procedures that we're doing, despite headwinds, macroeconomically for for people here in the U.S. that we're going to continue to see procedure numbers grow and grow within some of the commentary that we made during the call.
spk01: Okay. That's helpful, Nick. And, you know, you guys alluded, you spent a good amount of time, I think, talking about the benefits of Ally, you know, some of the time and economic savings that users are seeing. Just curious kind of how that's playing into adoption. that is kind of opening doors for people as it gets published and, you know, some of the things that you just talked about, maybe podium presentations, kind of what's the plan in terms of utilizing that data in 2024 to further get the word out?
spk02: Yeah, that's a really great question and something that we're obviously, like, really well focused on. You know, people are used to certain ways of buying, and, again, I made some comment to it, in terms of the big company sort of product bundles, if you will, which is like really easy and straightforward for them to understand. It's something that they've done for years and years and years and years. You do X, you get X. You do X, you get a rebate of X, of Y. This is obviously a little more nuanced. But yet it's way more significant than any just straightforward discount here on the product in terms of what the numbers are. And like I said, with four time and motion studies, with multiple time and motion studies now, using different models, each one of them, net-net, results in a substantial savings of time which either equates to a reduction in overhead or the ability to add more cases in that time and drive significant revenue in EBITDA. And so where some of the private equity groups that represent large opportunities for us from total number of procedures and installation base, let's say, are reticent to put capital dollars forward given the current interest rate environment, the reality is that they're very receptive to these, and we've done some of these studies within a couple of these private equity groups, and so these numbers make sense. And so really, it's going to be the continued education of this, more people at the podium, peer to peer as our installed base expands, and then being there at the right time and having set the right relationship with people so that when they're ready to to grasp this and to move forward that they were in a good position to do so with them.
spk01: Yeah, no, that makes sense. I'm going to keep asking a couple more questions if that's okay. I want to ask about international markets. I mean, you know, it's a big focus for you guys this year. I know you've been spending time over in Europe, Nick. You know, what are the markets we should be keeping an eye on that are probably most, that offer the most potential for Lenzar? in 2024 i know you know south korea at one point was a a very decent market for you guys obviously um everyone is aware of kind of what's happened there so curious about that and then you know also if you can just comment on the growth of the sales force that's been a focus i think for the company in 2023 um kind of when you kind of get that the size you want and you know when we see the benefits of that expanded sales force in 2024 and then i have uh maybe one for tom
spk02: Okay, great. Thanks, Ryan. So, speaking to South Korea first, you know, as I mentioned, Our distributor and and others believe that ultimately this market comes back, but it comes back to about 50% of of of what it once was. So, I don't think and as we continue to grow, obviously, those percentages of revenue that were as high as 14.9% for lens are are going to be less significant, particularly if that market comes back to 50% of of what it was. But nonetheless. We're looking to get Ally approved there, and we're looking to ultimately move into South Korea, albeit with lower expectations, that that market recovers to about 50% of what it was, number one. Number two, in terms of looking at markets that are going to be significant for Lanzar, Europe will be significant for Lanzar. And primarily, we've had a phenomenal presence and market share in Germany. And I expect in Germany and Austria and in Switzerland that that's going to be, those are going to be significant for Lenzar. And to the extent that we can get an approval there, as we're hoping in the back half of the year, we're looking forward to moving into those markets very rapidly. I think you'll also see some business for us. later this year in the Southeastern Asia, albeit in a much smaller market, but where we had a decent market penetration into like Hong Kong, Taiwan, and into perhaps the Philippines. Again, smaller, but you should see some presence there from us later this year.
spk01: Okay, great. And then just expectations on when The sales forces at the level you want and when you think productivity from that could pick up.
spk02: Yep, so we brought a new vice president. We brought a vice president of sales in in December and he's been great and it's relieved some of the responsibility for me directly in that regard. And so it's allowing me to leverage and leverage myself a lot a lot better there and he's. doing a really nice job. We're also bringing in some new processes to help us, you know, let's say manage the leads and the interaction between marketing and sales. And so we've got a couple of new practice development as well as in the digital marketing area that generate leads for sales. I think we're starting to see some good activity in that regard, expansion of territories. We've expanded two territories thus far, and you'll see some additional as we get later in the year. We're being very conscious here of making sure that we both manage the growth and the expenses at the same time.
spk01: Yeah, no, it makes sense. And then, Tom, I think you were very clear about, you know, margin, you know, dynamics this quarter, just given the proportion of sales and outright sales, which was really nice to see. Maybe just, you know, you talked about the guidance, 50% gross margins for 2024, but from a pacing perspective, kind of how do you think that plays out through the year, if you have any kind of crystal ball there?
spk03: on the recovery and margins and also you know the uptake of more of the consumable or razor blade portion of the business yeah so i i think what's as nick mentioned the important thing for for us ryan and thanks for your question is that you know we manage uh growth and use of capital which you know are sort of uh um you know opposite ends of the spectrum As things go, we expect probably the margins to be a little higher in the first quarter because as a seasonal business, it's a little harder for us to place as many systems in the first quarter as it is in the subsequent three quarters. But as you go, that's going to level out and be 50%. I think based on the expectations of volume and certainly with the expectation of an EU clearance in the latter half of 2024, then you're going to see us really hitting our recurring revenue in the razor blade piece of our revenue, I would say in the tail end of 25, really going into 26, and you're going to see an increase of our margins. If we continue to be as successful as we are, obviously you're going to have a governor on those margins with system sales. And we have totally changed the paradigm in the United States in regards to placements of systems versus sales of systems. And you've seen that in 2024 or 2023 just with the amount of systems we were able to sell in very, very difficult macro environments. for capital equipment purchases. So we fully expect that to continue. And with these time and motion studies just kicking off and the cross-pollination between positions, we're hopeful that 2024 is a big year for us in regards to system sales, which will put a governor on the margins, and that we move forward in 2025 and really see that recurring revenue to kick in.
spk02: The other thing is, Can I just mention one thing here because it's important. Because it takes an account in the neighborhood of 60 to 90 days from the time that they install to get trained and begin to ramp up in the practice, this is where you start to see towards the, because we did a lot of systems in the last quarter, it won't be until we start to get really into mid-year do you start to see sort of the fruits of those earlier installs. And so it kind of rolls. And so to Tom's comment, the more systems we sell has a drag on gross margins initially, and then 90 days later you start to see those accounts begin to generate higher gross margins, if you will. And this is kind of like rolling. And so I expect in the latter part of the year, you'll start to see those things begin to improve. And then if we sell a bolus of lasers again in the second half, you start to see that it's a little bit rolly, if you will, but starts to trend up.
spk01: Yeah, that makes sense. I appreciate all the color guys and, you know, congrats on all the progress this year. Thanks for taking the questions.
spk02: Thanks, Rob.
spk04: Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Nick Cardiz for final closing comments.
spk02: So I really appreciate everyone taking the time this morning to come in and listen to the Lenzar presentation. fourth quarter and full year results for 2023. We're really excited about the year ahead, and stay tuned with us. Thank you. Appreciate your support.
spk04: Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Speakers, please stay on the line.
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