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Operator
Good morning, and thank you for your participation. At this time, our 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 conference over to Lee Roth of Burns McClellan. Mr. Roth, please go ahead.
Lee Roth
Thanks, Joanna. Good morning, and once again, welcome to the LENZAR Fourth Quarter and Full Year 2022 Financial Results Conference Call. Earlier today, we issued a press release providing an overview of our financial results for the quarter and full year ended December 31st, 2022. A copy of 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, will provide an overview of our financial highlights before we turn the call back over to the operator to facilitate answering any questions you might have. Before I turn it over to management, 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 on the company's future performance and or achievements. These statements are subject to unknown and known risks and uncertainties, which may cause our actual results, performance, or achievement to be materially different from any future results or performance expressed or implied on this conference call. 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 Securities and Exchange Commission, which can be accessed on the website. In addition, this call contains time sensitive information, accurate only as of the date of the live broadcast, March 16, 2023. LENZAR 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 LENZAR's Chief Executive Officer, Nick Curtis. Nick?
Joanna
Thank you, Lee, and good morning to everyone listening. Appreciate you joining us on our fourth quarter and full year 2022 conference call. 2022 was a transformational year for Lensar, marked by the successful launch of our next generation system, Ally. On our third quarter conference call, shortly after the launch of Ally in August, I laid out our goal of having 10 Ally systems placed by year end. I'm pleased to say that indeed we placed the 10 systems. But in December alone, we signed contracts for an additional six allies to be installed in the first half of this year. To date, feedback from our initial surgeon customers has been incredibly positive, with some referring to it as a revolution in how flax procedures are performed. The features of Ally that surgeons are most enthusiastic about are the impressive speed and precision of the laser, its small footprint, and unparalleled ergonomics. Faster laser procedures from start to finish that significantly reduce treatment time by up to two-thirds are creating improved patient throughput and translating to more procedures on given surgery days. As you may have seen in our press release today, Dr. James Kotabakash, Chief of Department of Ophthalmology, Cedars-Sinai Medical Center, shared that Ally has been so fast and accurate that it has shortened his surgery day by an hour to an hour and a half. while a different surgeon recently shared with us that he was blown away by Ally's speed and efficiencies, remarking that the procedure was so fast, he had to double check to make sure the procedure was actually completed. Another user stated that Ally takes FLAX to a whole new level. It's important to note that in addition to supporting increased patient throughput and procedures per day, or a shortened surgical day, Ally also appears to be driving increased femtosecond laser assisted cataract surgery use in some instances. As one user noted that Ally's speed and precision have increased his confidence and that as a result he is now converting more than 95% of his patients to laser cataract surgery. This is a surgeon who had used a competitor's first generation laser and prior to Ally had abandoned femtosecond laser assisted cataract surgery altogether. Another perhaps less tangible benefit to the surgery center that I'd like to briefly touch on is how Ally could contribute to improve employee satisfaction in the workplace environment. During the administrator session of the Caribbean Eye Conference last month, the results of a recently conducted survey of top administrators, many of whom manage multiple high volume ambulatory surgery centers, were shared. the study found that the biggest concern, which was ranked number one by 71% of responders, was staff turnover. Looking at the speed and efficiency benefits that Dr. Khodabakash described, surgeons could choose to treat the same number of patients per day, shortening their as well as their surgical staff's workday, likely enhancing employee satisfaction. Alternatively, surgeons can choose to increase the number of procedures performed in a day Both perspectives translate into more revenue and increased profitability for the ASC and the surgeon. Further, several users have remarked about improvements to patient comfort and overall patient experience. Perhaps an even more important contribution to growth than driving better surgeon efficiency is supporting surgeons' ability to deliver improved patient outcomes more consistently when utilizing our advanced technology. It is gratifying to receive this important feedback on both practice efficiency and improved patient outcomes, which we believe will increase surgeon confidence using Ally and ultimately lead to patient conversions to femtosecond laser-assisted cataract surgery and higher utilization within the practice. Furthermore, this feedback supports our strong belief that as we grow the Ally install base and more surgeons learn about the technology through peer-to-peer interaction, Ally will firmly establish itself as an integral value-added tool for ophthalmic surgeons, allowing Lensar to not only grow share of the existing market, but also to potentially catalyze the next phase of market expansion. Importantly, interest from prospective Ally users is extremely high and continues to grow. Earlier this month, we attended the ACOS meeting in Aspen, Colorado, and during a panel-led session titled What Am I Doing Differently in 2023, which featured presentations by leading cataract surgeons. Three of the four surgeons on the panel stated that they already use or will be using Ally and shared why they use Ally to treat their premium cataract patients, which demonstrates a strong peer-to-peer recommendation to all attendees. This is another great example of the increasing groundswell of interest that we've experienced in the first quarter of this year. In addition, I'd like to emphasize this provides further confirmation that our controlled, targeted launch with early technology adopters and higher volume competitive laser key opinion leaders and LENZAR key opinion leaders is the right strategy. Another significant opportunity we have with Ally is to place one or more systems with each practice of private equity-owned groups. Thanks to its small footprint, enhanced ergonomics, significant reduction in procedure time, and opportunity to guide better outcomes, these private equity groups are expressing interest in Ally in their expanding locations as well as replacing their older femtosecond laser technology with Ally. Ally represents a true generational change, and we're continuing to expand our efforts to get the message out to a broader surgeon audience. Additionally, we have increased our hands-on experiences with more demo opportunities during ophthalmic meetings in the US and are creating opportunities for interested surgeons to observe femtosecond laser-assisted cataract surgery in one of our centers of excellence to experience the Ally difference. Our goal is to continue to educate the market on Ally's many benefits over previous generation femtosecond lasers and let them experience the generational change for themselves. While the demand for Ally has remained high, our 2022 rollout was constrained by supply chain challenges. We expect these challenges to abate in 2023, allowing us to make the system more broadly available this year. Consistent with our surgeon-centric culture, we've been completely transparent with our customers as far as installation timing. With that said, it's somewhat gratifying to hear a potential customer say that they want the device as quickly as we can get it to them. Looking at our business performance for the year, we achieved a slight increase in overall worldwide procedure volumes, but more importantly, we've achieved a 3% and an 11% growth in U.S. procedure volumes in Q4 and for the full year in comparison to 2021, respectively. The U.S. represents the largest premium procedure market for Lensar and is fundamental for driving our strategy of market share and penetration with growth in both ally system adoption and over time utilization. According to confirming data from MarketScope, we've continued to expand our footprint in the U.S. market and have continued to take competitive market share. In addition, and importantly, this growth clearly demonstrates that demand for femtosecond laser-assisted cataract surgery procedures in the U.S. remains strong, despite the ongoing economic uncertainty which we all face. This, coupled with the opportunity to replicate the experience I described a moment ago, of the customer who's converting more patients from standard to a premium laser cataract procedure thanks to Ally gives us confidence that we can continue our execution plan to grow our share of the procedure market as we continue our further transition away from legacy technology, increase our overall share of the total US installed base, and continue to broaden Ally's presence in the market. To recap, Lensar has accomplished some very significant milestones in 2022. We oversaw the successful launch of Ally and initiated the transition to the new technology from our Lensar laser system, placed 10 Ally systems in the first four and a half months of a controlled launch, and have created significant demand for Ally through a strategic rollout designed to optimize uptake and build sustainable long-term demand for the system while allowing us to effectively navigate a challenging macro environment. Now let me turn over the call to Tom to cover our financial highlights for the quarter. Tom.
Lee
Thank you, Nick. Our fourth quarter and full year 2022 financial results are included in our press release issued earlier this morning. But I'd like to take this opportunity to expand on some of that information by adding some color to remarks contained in the press release. Revenue was $10.2 million in the fourth quarter of 2022, compared to $11.2 million in the fourth quarter of 2021. Consistent with our third quarter results, and as mentioned on our call last quarter, this decrease was primarily due to the continued softness in procedure volume, as well as the transition away from LLS to Ally manufacturing, which reduced laser inventory availability and constrained our growth. Much of the procedure volume softness was associated with ongoing third-party payer reimbursement challenges in South Korea, and to a more limited extent, the timing of procedure purchases outside of South Korea. This timing fluctuation was offset partially by the growth in the U.S. market, as Nick mentioned in his remarks. The continuing reimbursement issues in South Korea were had an estimated $900,000 detrimental impact on revenue for the fourth quarter. With that said, fourth quarter 2022 revenue was up 32% on a sequential basis as compared to the third quarter of 2022, driven primarily by Ally system installations and procedure growth in the US and Europe. In the fourth quarter of 2022, we sold 31,400 procedures compared to 41,642 procedures sold in the fourth quarter of 2021. Our procedure volume decreased 25% over the fourth quarter of 2021, again, primarily due to the softness in the South Korean market. As Nick mentioned, procedure volume in the United States, our most important market, was up 3% in Q4 2022 as compared to Q4 2021. Gross margin for the quarter was $6.5 million and represented a gross margin percentage of 63%. We increased gross margin $852,000 in the quarter from $5.6 million in the fourth quarter of 2021, despite a decrease of $1 million in revenue quarter over quarter. This increase in gross margin is a function of a higher gross margin percentage on Ally sales versus LLS sales as well as charging inventory items to R&D expense prior to the approval of Ally in June of 2022. Total operating expenses for the fourth quarter of 2022 were $9.1 million compared to $9.5 million in the fourth quarter of 2021. This decrease was largely due to less R&D expenditures somewhat offset by an increase in SG&A expenses. The decrease in R&D expenses of $1.8 million was primarily attributable to significantly lower Ally development expenses following FDA clearance, including no longer charging inventory costs to R&D expense. These expensed inventory items represented $1.1 million in the fourth quarter of 2021. SG&A costs increased due to increased trade show and commercial activity related to the promotion of Ally. Lastly, included in operating expenses was non-cash stock-based compensation of $1.7 million and $1.5 million in the fourth quarters of 2022 and 2021, respectively. Net loss for the quarter decreased quarter over quarter and was $2.5 million, or a 24-cent loss per share compared to $3.9 million, or a $0.41 loss per share in the fourth quarter of 2021. Adjusted EBITDA for the fourth quarter of 2022, which excludes stock-based compensation expense, was a $65,000 loss compared to a $1.6 million loss in the fourth quarter of 2021. The quarter-over-quarter change reflects a significant decrease and represents break-even status in the fourth quarter of 2022 on an adjusted EBITDA measurement perspective. As of December 31st, 2022, we had cash and cash equivalents of $14.7 million as compared to $31.6 million at December 31st, 2021. Cash utilized in the fourth quarter was $4.6 million and $17 million for the full year. Fourth quarter cash burn of approximately $4.6 million is almost exclusively associated with increased accounts receivable and inventory balances associated with the launch of Ally and making Ally more broadly available in 2023. As mentioned earlier, we were effectively operating at breakeven in the fourth quarter as cash was almost entirely dedicated to working capital usage. As we have mentioned, 2022 was a transition year as the company transitioned its manufacturing and sale of its first-generation LLS to Ally, and thus our growth was limited to supply chain challenges and the transition to commercialization of Ally. Due to the transition, our total revenue for 2022 increased $900,000, or approximately 3%, compared to 2021 levels. However, Given the traction and demand we saw in the fourth quarter and continue to see, despite strong competitive and macroeconomic headwinds, we expect to return to 20% plus revenue growth in fiscal 2023 as we enter the first full year of Ally being commercially available in the United States. Additionally, we expect a European launch as well as to submit additional regulatory filings for Ally in the next 12 months. Our recurring revenue for the year was 86%, which represents revenue outside of system sales and provides a recurring revenue foundation of over $30 million going into 2023. Now I'd like to turn the call back over to Joanna to open the lines for questions.
Operator
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch-tone phone. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Ryan Zimmerman at BTIG. Please go ahead.
Ryan Zimmerman
Good morning, Nick and Tom. Thanks for taking the questions, and congrats on all the progress with Ally. Those anecdotes are nice to hear, Nick. Thank you. I just want to start and talk about Ally for a little bit, if I could. you got six systems kind of off the ground in December. And I appreciate the guidance, Tom, on the consumables. But maybe, Nick, you could talk to us kind of about how you're thinking about placements. And I know you're not going to necessarily guide to that number, but you have communicated some of the training numbers, the demo numbers. It would be helpful to kind of understand just the pipeline and kind of your thoughts around you know, ally systems into 23.
Joanna
Great. Thank you, Ryan, for the questions. So as we look into 2023, you know, we ended the year really strong going into 2023 with sort of six backlog agreements, if you will. Those are going to, most of those are going to hit in the second quarter. These were new facilities and requirements in terms of when they would be ready to take delivery of the system, and so we've been scheduling those. From a ramp-up perspective here, the pipeline has been growing pretty substantially given the activities in the first quarter. There's generally in the capital equipment side, because we're selling more of these systems than we are placing these systems, generally right after the first of the year, particularly since we ended the year with such a bang there with the backlog of systems, in the first quarter be a little bit slower from a contract perspective. But we've got the pipeline, which has been growing significantly. And the good thing about the pipeline is that with capital equipment, you're going to get some fallout of systems, but the bigger the pipeline, the more you're going to end up pushing through. So I really like the fact that we've got, I'm talking about into the 150 to 200 accounts in a pipeline right now.
Ryan Zimmerman
That's great, Nick. And then the comments about supply chain and your ability to manufacture Sounds like it's getting better. When do you feel like you move into full launch, if you will, where you're unconstrained, be it by supply chain or just taking your time with KOLs?
Joanna
I think as we get towards the second half of the year, you're going to see that open up significantly. And that's what we're planning on.
Ryan Zimmerman
Okay. Very helpful. And then For Tom, and I'm going to keep going on questions here if that's okay. There's a couple more for me. But, you know, margins were fantastic, Tom, and appreciate you calling out the impact on, you know, the R&D component. But even if I back that out, I mean, you guys jumped almost 600 basis points, it looks like, quarter over quarter. And so help us understand kind of how you think about margins for in 23 with all these kind of, you know, dynamics?
Lee
Yeah, so, you know, I think that, you know, the first statement I would make to you, Ryan, is it's absolutely fabulous that, one, Nick and our commercial team have been able to sell versus place systems, and so we actually realized the gross margin on that sale. Two, the profit or gross margin on each Ally sale is much better than it is with LLS. Now, so I would expect our profit margins to continue to increase. However, to Nick's comment with supply chain, we still are not manufacturing the quantities that we would like to to get the efficiencies on overhead absorption. And we also get purchase discount quantities once supply chain becomes a little less of an impact. So our first 20 systems are a lot more expensive than the next 50, and considerably so. That is kind of obscured by the fact that supply chain caused us to purchase a great deal of our expensive raw materials, laser heads and cameras that we needed for Ally that we have to have because they're generally single source suppliers. And without that, we can't manufacture the Ally. And so a decent chunk of those were expensed to R&D. So it's very, very difficult for me to guide you with exact precision on margins. Yes. But I think that we'll probably return to low 50s for the year, depending on how quickly we can get past some of the supply chain issues and actually put systems in place in the latter half of the year.
Ryan Zimmerman
Okay. Last one for me, I'll hop back in queue. If you look at the pricing of consumables, If I just look at the ASPs on your consumables, Nick, you kind of alluded to this when we've spoken before that you're picking up a little bit of price on the consumable portion. It looks like it was up about 10% or so. Just how you expect that to continue. I mean, it's nice to see. And should we expect, you know, higher pickups in price just because, you know, it was somewhat of a limited impact this fourth quarter? Or is that a fair... level in terms of step up in price on the consumable side?
Joanna
Yeah, great question. Thanks for that, by the way, because that was one of the things I was thinking about as Tom was speaking, is that as more of our marketing initiatives And as we begin to quantify with more site-by-site type study that show the time efficiency and the speed and the ability to add more cases, it obviously helps us build the value proposition for an increased procedure fee sort of across the board from what people are paying today. And so we've been driving that value proposition pretty strong with the current installs. I would expect to see that to continue. And in some cases, it's as high as 35%. And in some cases, if it's a really high volume account, it might be a much smaller 5% to 10%. But you're going to see an increase in the ASP on a per procedure basis. And the other thing is that a lot of it is unencumbered. Now you're sort of having to extract the equipment portion and the service portion out of the overall procedure fee, which is where the traditional placements have been with first generation. And now you're seeing more of a separate capital component where people are paying for the systems and then looking to drive more efficiencies in their pricing of the procedure through increased procedure volumes and taking the equipment portion out of that. And so depending on the mix as we get into more of these private equity deals, Some of the private equity groups have no issue with making a capital purchase and have a way of accounting for that and accelerating their depreciation and they just want to get the lowest per procedure fee and other groups don't mind let's say, paying a higher per procedure fee and financing that component and not wanting to write a check per se. So overall, I think you're going to see a trend up, continue to trend up. I think it'll, as the mix changes between the LLS and Ally, you'll see that creep up at a higher percentage. But, you know, we're trying to manage the, let's say, the business so that we're bringing on more new business and manage the transition because we just don't want to go out and cannibalize the business. We want to continue to show growth.
Lee
Hey, Ryan, this is Tom. One other thing, and I think you already know this, but I want to make sure that we say it on the call for everybody's benefit, which is when I got into the lower 50s, If we're in the lower 50s, you would think that that's a very good thing because obviously we realize a great margin on Ally, but it is much lower than the margin we receive on procedures. So the higher the mix in sales is, the lower our margin is, but what you're going to see is our exponential growth in our revenue, and really three to six months after we place a system, that margin really kicks in for the procedure placement. So I just want to make sure, I think you knew that already, but I wanted to make sure that that was clear. Thank you, Tom.
Ryan Zimmerman
Appreciate you taking all the questions. Sure. Thank you, Rod.
Operator
Thank you. There are no further questions. I will turn the call back over for closing comments.
Joanna
So I really appreciate everybody taking the time this morning to join our call. and even more so your continued interest in Lensar and our expansion of the launch with Ally. We're really excited about the potential of Ally. We look at this as a marathon, not a sprint, and I really look forward to our next update and keeping you apprised of the progress we're making. Thanks again.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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