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Operator
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 will be recorded. I would now like to turn the call over to Lee Roth. Mr. Roth, please go ahead.
Lee Roth
Thank you, Bridget. Good morning, and once again, welcome to the Lenzar Second Quarter 2021 Financial Results Conference Call. Earlier today, the company issued a press release providing an overview of its financial results for the quarter ended June 30th, 2021. And this press release is available on the investor relations section of our website at www.lenzauer.com. Joining me on the call today is Nick Curtis, Chief Executive Officer of Lenzauer, who will review the company's recent business and operational progress. Following his comments, Tom Staub, our chief financial officer, will provide an overview of the company's financial highlights for the second quarter before turning the call back over to Nick for closing remarks and opening the line for your questions. 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 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 any undue reliance on these forward-looking statements. For additional information, including a detailed discussion of the company's risk factors, please refer to our documents filed with the SEC, 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 5th, 2021. Lenzar undertakes no obligation to revise or otherwise update any forward-looking statements to reflect events or circumstances after the date of this live conference call. With that said, it's now my pleasure to turn the call over to Nick Curtis.
Nick Curtis
Nick? Thank you, Lee, and good morning to everyone listening. Thank you for joining us on our second quarter 2021 conference call. I'm pleased to report that we have completed a very strong first half of 2021 as the markets in which we operate continued their gradual recovery from the COVID-19 pandemic. Evidence of this recovery can be seen in procedure volume in the second quarter, which increased 70% on a worldwide basis. While in the U.S., it was up over 140% as compared to the second quarter of 2020. In addition to increasing procedure volume, We're seeing an uptick in system placements as surgeons are once again beginning to invest in advanced technologies that can bring value to their practices by assisting in managing astigmatism and providing them with tools to manage better patient outcomes and practice efficiencies. In the second quarter, we sold three systems and leased an additional four systems compared to only four systems sold in the second quarter of 2020. Increasing the number of systems shipped and installed is also an indicator of future new procedure volume. While these trends are certainly encouraging, we're fully aware of the fluidity of the situation, particularly in light of the Delta variant and its effect in various regions across the world. Overall, we believe that the optimism displayed when we reported first quarter results in May was well-founded, and we remain enthusiastic about what the future holds for Lensar. Last quarter, I talked about medical congresses beginning to return to in-person venues and specifically mentioned the American Society for Cataract and Refractive Surgery, or ASCRS, which just recently took place at the end of July. Although meeting attendance was significantly below pre-COVID levels, quality content and the energy displayed by the attendees was there. I'm pleased to report that our LENSAR team was excited to showcase the present LENSAR laser system as well as the future. our ally system coming in 2022. The timing of the conference couldn't have been more ideal for us. First, as we announced a few weeks ago, studies utilizing our current generation technology were featured in a dozen different presentations during the meeting. In addition to our robust presence in the scientific program, there was a considerable practice and surge in interest in our current LENSAR laser system to include Streamline 4 and IntelliAXIS. On the exhibit hall floor, we performed multiple demonstrations for potential new partner customers, presently using competitive technologies that we're strongly considering changing based on others' references to Lensar's utility and performance. We came out of the conference with a significant number of new sales prospects for our current generation systems and look forward to further engagement with these potential partner customers in the weeks and months ahead. Equally important, however, was our private room. a virtual operating room featuring appointment-only demonstrations with our next-generation Ally adaptive cataract treatment system. We hosted more than 100 in-person demonstrations of the technology for leading cataract and refractive surgeons and other interested parties. The feedback we received from some of the most prominent surgeons in the field was overwhelmingly positive, providing strong affirmation that Ally addresses the needs in improving surgical workflow efficiencies provides surgeons with the ability to improve outcomes, as well as enhances the patient experience. In addition, we hosted a well-attended event for members of the ophthalmology press, during which they were able to see Ally firsthand. We addressed any questions they had so as to cover Ally in print, digital, and video content. Fundamentally, we had two goals for the ASCRS. To reinforce and demonstrate the premise that the Lensar laser system is the best femtosecond laser for physicians to treat their cataract and refractive cataract patients through unique and industry-leading core feature technologies, and also highlight the fact that these core and unique features will be taken to the next level with Ally. We believe that Ally represents the next great innovation in cataract and refractive surgery. It is a transformative system that integrates functions, including cataract density imaging, for patient tissue specific customized femtofragmentation to optimize the procedure to maximize cataract removal efficiency while significantly reducing the total energy delivered. Second, proprietary astigmatism guidance technology using true iris registration and data electronically transferred from multiple preoperative diagnostic devices. Three, a next generation femtosecond laser that is capable of treating four times faster in the cornea and two times faster in the lens. And number four, integration of a world-class phacoemulsification device in a small, complete, adaptive cataract treatment system that can be placed in any operating room or in-office surgical suite. This will revolutionize the surgeon and patient experience. We continue to make great progress in the development of Ally and are well on our way toward completing the remaining key milestones necessary for the 510 submission. We still plan to submit the 510K application to the FDA in the first quarter of 2022 with a commercial launch later in the year. Overall, we believe that Lensar is optimally positioned to leverage favorable industry trends to support the near-term growth and to truly disrupt the entire cataract treatment and removal industry with the release of Ally. That release and the next chapter of the Lensar story are drawing closer every day. Now, let me turn the call over to Tom. He's going to cover our financial highlights for the quarter. Tom?
Nick
Thank you, Nick. Our second quarter 2021 financial results are included in our press release today, but I'd like to add a little color to those written remarks. In short, it was a strong quarter for us as you look at revenue and procedure growth, gross margin, adjusted EBITDA, and cash utilizations. Specifically, revenue was $7.9 million compared to $5 million in the second quarter of 2020 and reflected a 57% increase quarter over quarter. The increase was primarily driven by increased procedure volume and, to a lesser extent, lease placements. Procedure volume, particularly in the United States, exceeded pre-COVID levels as the company returned to its history of growth and market share expansions. In the second quarter of 2021, there were 30,966 procedures sold compared with 18,265 procedures sold in the second quarter of 2020, reflecting a 70% increase. Procedure growth in the second quarter 2021 increased in each of our three operating regions. That is the United States, EU, and rest of the world. but was particularly robust in the United States showing over 140% increase from the second quarter of 2020. This percentage undoubtedly is impacted by the COVID-19 pandemic, but importantly, US procedure growth was 44% over the second quarter of 2019. Our recurring revenue, which we define as all revenue other than laser system sales, totaled approximately 90 percent of our revenue for the three months ended June 30, 2021, compared to 78 percent for the three months ended June 30, 2020. Gross margin for the quarter was $4.5 million, or 56 percent of total revenue, a significant increase from the $1.9 million and a gross margin percentage of 39 percent in the second quarter of 2020. The increase in our gross margin was attributable to the rate at which procedure revenue grew compared to system sales quarter over quarter. Research and development expenses were $3 million and $1.4 million for the quarters ended June 30, 2021 and 2020 respectively. This 110% increase was primarily due to additional costs for the continued development of Ally as well as increased personnel costs, which included an increase in stock-based compensation expense. Both aspects of the R&D expense increase reflect the continued progress and furtherance towards our planned 510K filing of Ally with the Food and Drug Administration in the first quarter of 2022. Selling, general, and administrative expenses for the quarter ended June 30, 2021, were $5.5 million, an increase of $1.5 million, or 37%, compared to $4 million for the second quarter of 2020. The increase was primarily due to increased personnel costs, which was largely attributable to stock-based compensation, as well as expenses associated with being a standalone public company and returning to normal U.S. operations as pandemic restrictions were eased. Total stock-based compensation expense recorded for the quarters ended June 30, 2021 and 2020 was $1.4 million and $41,000 respectively. With the spinoff and recapitalization of the company, stock-based compensation costs represent a significant expense for us going forward, but it is a non-cash expense and thereby does not affect our cash runway, or our ability to fund the filing and launch of Ally. As of June 30, 2021, we have $12.6 million of unrecognized stock based compensation expense, which will be recognized by the end of 2025, of which approximately $3 million will be recognized in the remainder of 2021. Looking forward, We expect to expand our commercial infrastructure to increase market share and broaden our geographic coverage in the United States prior to our launch of Ally in 2022. However, with the ongoing pandemic, we are judiciously adding infrastructure when it immediately contributes to our business. We are also monitoring our supply chain, which has been impacted by the ongoing pandemic. At this point, we have been able to adjust our operations to meet both our immediate needs and future objectives, but we are incurring higher costs due to supply chain pressures on the sourcing of certain materials for our ongoing business, as well as materials associated with the continued development of Ally. Net loss for the quarter ended June 30, 2021, was $4.4 million, or a loss per share of 47 cents, compared to a net loss of $4.5 million, or a loss per share of $4.20 cents, in the second quarter of 2020. Adjusted EBITDA for the second quarter of 2021, which excludes the effects of stock-based compensation expense, was a $2.3 million adjusted loss and compares to a $3.2 million adjusted loss in the second quarter of 2020. For the third consecutive quarter, if you deduct cash-based R&D expenses from our adjusted EBITDA, The result approximates zero. Thus, our commercial operations are cash flow neutral when evaluating our EBITDA operations without considering normal working capital fluctuations in our balance sheet accounts. Simply said, our adjusted EBITDA, or cash used in the second quarter of 2021, corresponds directly to cash used for the development of allies. As of June 30, 2021, we had cash and cash equivalents of $34.6 million compared to $40.6 million at December 31, 2020. Cash utilized in the second quarter of 2021 was $1.3 million. Based on our cash position and operational forecasts, we believe we have sufficient cash to fund our operations through the filing of our 510 application and the expected launch of Ally in 2022. Now I'd like to turn the call back over to Nick for some closing remarks.
Nick Curtis
Thank you, Tom. We entered the public markets nine months ago into a unique and arduous environment. While we have certainly faced our share of challenges during this time, we have also made significant progress in all facets of our operations. This progress is a testament to the persistence, skill, and commitment of our team, as well as the strength of the technology in the Lensar laser system that we have developed, and importantly, our partnership with the physician networks that utilize our advanced technology. We will continue to position Lensar as the advanced technology leader in the refractive cataract surgery space and look forward to the filing and regulatory clearance of Ally. Our Ally system has the potential to meaningfully and beneficially disrupt the cataract surgery market. Ally represents a revolutionary advancement in cataract treatment. When available, Ally will become an invaluable asset of the surgical practice that significantly improves procedure and patient flow efficiencies, enables the surgeons to provide consistent and better outcomes, and a truly superior patient experience in the process. I'm very appreciative of the reception received from the ophthalmic community at ASCRS. and grateful for the ongoing commitment and energy of our team. We look forward to updating you on the development of Allod as we get closer to filing the 510-K. I will now turn the call back over to Bridget, and we look forward to your questions. Thank you.
Tom
Thank you. Hi, this is Jamie on for Rich.
Jamie
I believe that we were called on. Is that correct?
Nick
Yeah, Jamie, go ahead. Nick and I are ready for your questions. It was hard for us to understand as well.
Jamie
Hey, guys. Congrats on a nice quarter. I guess I wanted to start just quickly on Ally. The press release said, obviously, you're navigating some supply chain challenges. And Tom, to some of your comments here just around the material costs, I'm curious, what is the risk that that does potentially impact or push your 1Q filing timeline? And if If there is any risk at all to that, how long should we potentially be thinking about that being delayed if supply chain challenges persist?
Nick Curtis
That's a great question, Jamie. We've been looking at this very, very closely. We're doing quite a bit to mitigate that risk to the filing. We've been very creative in terms of going out and being able to acquire some of those parts in order to have our four prototypes built out of manufacturing and to be able to do the proper testing that we need to do to get to our FDA filing. And so we're protecting that timeline to the filing in all ways humanly possible, including being willing to pay more for parts that we get in order to be able to get those devices done. And so really I don't see a risk to the filing. If there's any risk ongoing, we're placing orders now based on our – commercial sort of requirements. And so if there's any risk, it would be later on as it relates to how fast we can get the product out after we get the approval. But we're protecting the approval timelines. It's very important.
Jamie
Okay. That's helpful. And, I mean, you talked about just at the recent ASCRS meeting doing the demos, the feedback has been overwhelmingly positive. I'm just curious if you could dive into that a little bit more, especially just around the reception to a phaco-femto combination device and just, you know, your commentary around some new sales prospects from competitive users on the current generation system. But curious what that looked like, you know, from an interest perspective at these demos, new surgeons and competitive surgeons versus existing surgeons.
Nick Curtis
So another insightful question. So over 40% of the surgeons that came and viewed the Ally device were surgeons that were new to Lensar. They were not currently Lensar users or customers. And so that was really encouraging because, you know, and what was happening was it was some word of mouth, you know. fewer demos scheduled than what actually took place, number one. So there was word of mouth and doctors that had scheduled appointments were actually bringing other doctors to their demos. So there was a lot of excitement around that. Interestingly enough, because of the COVID fears, there were a fair number of doctors that at the last minute decided not to come to the meeting. And so we had some cancellations of existing appointments that had been set up as a result of them not attending the meeting at all. And yet we more than doubled that in terms of people actually coming to the demonstrations. And so, like I said, you know, over 40% of the doctors were potential new users. And then, you know, approximately 40% of the physicians were current Lensar users. And then I would classify 10% to 12%, 12% of sort of other, which would be like staff, administration, private equity, you know, practice operators, those type of folks that would be in roles to operate the business end. And then we had some, you know, media and media. Some folks from the in-office surgery suite, you know, that was about 2%. And so we had well over 100 in total. So that was in some of the comments. I mean, you know, I have to temper, you know, sort of, you know, because some of the comments were just like, you know, first off, the room looked amazing and you could see the scale for the product. And when you could see the scale of the product and the flexibility as to how it fits in the room and how seamless it is to switch between the two, we actually shot the laser into a, you know, we had a test eye, and so we did all the scanning in there, and they could see how efficient and fast the system is. And those that have any femtosecond laser experience could see how much faster it is than any of the laser technologies on the market today, including our current system. And so that was really impressive. And with the switchover, people immediately went to wanting to try to figure out what, you know, what the business model was going to be. And of course we couldn't be, you know, super specific other than, you know, we're going to be competitive. And, and so, you know, it was, it was, you know, this is a game changer, you know, kind of a, of a feeling that we, that we got from the doctors. On our current system, It's interesting, and so the reason why it appears that we're getting lots of interest around the current system is that people in our industry are pretty familiar with the fact that from a prioritization perspective on rollout, if you're an early adopter and you want to get in sort of sooner rather than later, that there's always some limitations in the rollout as you begin to build out your commercial product and get it out into the field. And because we've continued to evolve, even our current lens, our system, and they've seen that the other systems, the competitive systems, are substantially the same as they were when they were introduced to the market 10 years ago. You know, there's a growing number of people that are willing to consider changing that technology now with sort of a pathway to get to the ally system when we make it available. So, you know, I apologize for getting kind of wordy there with you, but that was trying to give you some insight. Got it.
Jamie
That's helpful, Nick. And then just I guess my second set of questions is more around the back half outlook. I know you guys don't. provide actual guidance. But could you give us a sense of how we should be thinking about the second half ramp? 2Q obviously came in better than we were thinking. And just, you know, in light of some of the COVID Delta variant causing, you know, or reemerging, let's just say, and potential seasonality, due to summer vacation. Just curious how you're thinking about the back half ramp, particularly from a procedure side, but also just from a capital outlook perspective as well.
Nick Curtis
Yeah. You know, it's interesting because, you know, up until, you know, COVID, it was a fairly predictable sort of a business in that the back half of the year and fourth quarter, just because cataract volumes are better globally and are the highest in the fourth quarter, that typically your third quarter is typically the weakest of the quarters, and then your fourth quarter comes on you know, very strong because of the numbers of surgeries that are being performed. You know, this year is a little bit of a wild card, I think, you know, because now not only do you have the variant, but you also have the summer, sort of the summer months coming in and vacations. And it's interesting that, you know, for instance, in Europe, you know, despite the variant and whatnot, people are on vacation. And they're on vacation in Europe now, you know, in contact with our distributors and with other customers. So I'd say it's a bit of a wild card there in terms of the third quarter. Go ahead, Tom.
Nick
The other thing I'd say, Jamie, is if we had this call on July 1st, right, we would have been extremely optimistic about what the back half looked like. However, you have now the CDC recommending masks, indoors and things have changed pretty radically from a regulatory perspective associated with covid and so you know when we give guidance we want to be confident in that guidance and frankly the external environment is so up in the air to nick's comments that it's very difficult to predict what the latter half is going to look like we were thinking that we were coming out of the pandemic and things were back to normal at least in the united states hopefully that continues. But, you know, the rest of the world operations are certainly being dragged down by the pandemic. And who can predict what's going to happen, whether it be in the United States or the rest of the world?
Nick Curtis
I do want to say that we are putting a lot of emphasis in the United States because that's where we have, you know, direct presence. That's where we have, you know, obviously, you know, we're right on the pulse of what's what's going on here, we still haven't been able to travel to some of these other areas and some of those in-person meetings. I'll have a better feel as we exit the summer because to see whether some of the outside U.S. meetings actually take place, you know, when you think about it, the ESCRS, you know, is being sort of one of those. There's the DOC meeting in Germany being another one of those. If those meetings take place, then it obviously looks a little more optimistic there. If those meetings don't take place, then from an in-person venue perspective, it begins to potentially show. We do have systems, like I said, since we have lots of activity in the U.S. and we've got system placements and sales going there, you know, we remain fairly bullish in terms of the U.S., and that's where we're putting a lot of our efforts.
Jamie
Got it. I guess, you know, maybe any sort of things you've seen in the marketplace just in the last couple of weeks, Tom, to your point, you're saying July 1st was a little bit more of a clear picture of maybe what the second half could look like, but now that things are starting to change, is there any sort of – trends that you call out that you've maybe seen in the last couple of weeks since the beginning of the quarter started that might be able to kind of help give us a sense of how we should be thinking about the cadence?
Nick Curtis
So we've come back, Jamie, we've come back to like the first in-person meetings. And typically, you know, like when you have the in-person meetings and you have a fair number, even though the attendance was significantly down at ASCRS, there still were thousands of people and many of the users that attended the meeting, you know, several thousand people. So typically what we see then is that, you know, your volume drops off in a week, you know, if you're looking at it on a week-by-week basis, and then everybody gets back to work and it starts up again and, And so, you know, everybody's busy and they're scheduling their surgeries. Overall cataract surgery volumes, so when you look at overall cataract surgery volume, forget Lenzar for a moment, overall cataract surgery volumes are down, and almost 60% of the doctors have some capacity issues, you know, being able to schedule surgery time. But the interest level in premium procedures is, for all the obvious reasons, from the patient, you know, having come out wearing masks and fogging glasses and having not maybe spent like they've done, you know, all of those things, reimbursement pressures, as well as overall cataract volumes down, are keeping people pretty motivated to do procedures and to do procedures that fall into our sort of our sweet spot, particularly since we're providing, you know, the more efficiencies and outcome-related things to signetism management and whatnot. So I would say we're seeing it, you know, not unexpectedly. We have a meeting. The volume goes down that week. The meeting, people go back to work. We're busy again.
Nick
The one thing I'll say, Jamie, to Nick's point, you know, it was very volatile. You had the holiday. You had the meeting. We haven't seen any drastic change in procedure volume. However, you know, I am somewhat cautious about continuing our system placement going forward until we have better visibility. Certainly outside the United States, it's been weak, and weak because of the pandemic. Inside the United States, it came back or was coming back I don't know with the Delta variant whether we'll see that continuation of system placements because we just can't predict what's going to happen. Things are certainly tightening up and the restrictions are getting heavier than what they were.
Nick Curtis
I'll be able to give you a much better outlook in terms of that as we get through the next couple of months. you know, through the quarter because of, let's say, all the activity that we've sort of ginned up. So, you know, I'll be able to give you some indication as to, you know, whether some of those things came to a halt or whether they're progressing through and doctors are following through. That to a great degree is going to give us an idea as to the sentiment that's existing out there.
Jamie
Alright, thank you so much. That's helpful. And then just Tom. Lastly, on the gross margin and I'll hop back into similar sort of questioning on how to potentially think about that in the back half. You know, two Q came in better than we expected. Is that kind of the jump off point? Or is there any reason or any reason to believe that might actually step down from the second quarter since it was so strong?
Nick
Well, you know, once again, our gross margin percentage was heavily influenced by the higher procedure revenue versus capital revenue. And I would consider that to continue. I think, you know, the mid-50s of gross margin percentage is probably what I would predict without, you know, any better information in regards to system placements in the latter six months. So I would say that the first half and the second quarter percentages around the mid-50s is what I would expect.
Jamie
OK, great. Thanks so much.
spk02
And there are no further questions at this time for centers. I will now turn it back to Mr. Nick Curtis for closing remarks. Thank you.
Nick Curtis
Once again, thank everyone for attending the call today and your continued interest in Lundar. We really look forward to updating you as we continue to make progress and approach the filing and the launch of Ally. We appreciate your attention today.
spk02
Thank you so much, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.
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