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Operator
Good morning, ladies and gentlemen, and welcome to the Lansdale Inc. First Quarter 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Monday, May 15, 2023. I would now like to turn the conference over to Lee Ross of Burns McClellan. Please go ahead.
Lee Ross
Thanks, Pam. Good morning, everyone. And once again, welcome to the Lenzar first quarter 2023 financial results conference call. Earlier this morning, we issued a press release providing an overview of our financial results for the quarter ended March 31st, 2023. This release is available in the investor relations section of the company's website at www.lenzar.com. Joining me on today's call is Nick Curtis, Chief Executive Officer, who will review the company's recent business and operational progress. Following his remarks, Tom Staub, Chief Financial Officer of Lensar, 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. Before we begin, I'd like to remind you that today's call will contain forward-looking statements, including those 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 known and unknown 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 during this presentation. You should not place any undue reliance on these forward-looking statements. For additional information, including a detailed discussion of the 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 call contains time-sensitive information, accurate only as of the date of this live broadcast, Monday, May 15, 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 Nick Curtis.
Pam
Nick? Thank you, Lee, and good morning to everyone listening. Thank you for joining us on our first quarter 2023 conference call. I'm proud to say that Lensar has hit the ground running in 2023, having installed five Ally systems in the first quarter and four more since April 1st, bringing our total installed base to 19. We also have another 13 systems in backlog as of May 12th, 2023. These will install over this quarter and the next quarter. Procedure volumes in the U.S. increased nicely when compared with the first quarter of last year, driven in part by the small but growing number of Ally users. As we reflect on the first several months of Ally's commercial availability, it's evident that the ophthalmic community has a great deal of enthusiasm for our new technology, and we've been successful in executing our controlled and targeted launch in the United States. To this point, looking at recent data published by MarketScope, They estimate that 15% of all US femtosecond laser assisted cataract surgical procedures were performed on Lensar systems in the first quarter of 2023. This represents an increase of 100 basis points over the second quarter of 2022, the time we received FDA clearance for Ally. This growth clearly demonstrates the adoption of Ally as an important catalyst, not only for Lensar, but for the entire industry. In fact, Among users of our previous generation, LLS, who have transitioned to Ally, procedure volumes are up 20% over the first quarter 2022. This level of growth was ahead of our internal expectations and reinforces practice-level operational efficiencies that are fundamental to Ally's value proposition. Importantly, the U.S. represents the largest premium procedure market in the world and is critical to our continued market share growth as we expand Ally's reach in 2023 and beyond. As you can tell from the data I just mentioned, feedback from our surging customers continues to be extremely positive, particularly from users who have made the transition from previous generation femtosecond lasers, both ours and those of our competitors. Most of the systems in the field today are based on aging technology and are much slower, less efficient, not nearly as ergonomic, And in addition to being less adaptable and technologically capable, their awkward sizing makes them more difficult to integrate into the practice. There are countless other advantages that Ally brings, and we are pleased with the reception in the early days of its commercial availability. Evident from the backlog of 13 systems, demand for Ally has been consistently high and continues to grow since launch. We remain affected by the supply chain issues that have impacted the industry as a whole, but we continue to expect these challenges to continue to abate throughout the year. On the marketing front, our dedicated and skilled team has worked diligently to showcase Ally's advanced capabilities, and we've maintained an active presence at the major ophthalmic congresses. This month, we attended the annual American Society of Counteract and Refractive Surgery meeting in San Diego. In addition to the 10 posters highlighting Ally's improved productivity and superior outcomes, we completed a record number of demos with non-Lensar customers. Again, as a prime example of this enthusiasm, the meeting resulted in two signed contracts with new Ally customers, and we received requests for contracts representing more than 35 additional systems. Additionally, I'm excited to announce that we have secured our first multi-system agreements with several facilities and are working on additional multi-system contracts, which at this early stage of our launch is a pleasant surprise. We initially anticipated this level of demand to begin materializing 12 to 18 months following the product launch. The fact that we have been able to secure these multi-system agreements ahead of schedule is a testament to the trust and confidence placed in our company and the effectiveness of our technology platform solutions. It also highlights the industry's recognition of the unique advantages and benefits that our systems offer, propelling us to the forefront of the market and a leader in performance. Looking at our business performance for the quarter, there's much more than what meets the eye. Overall procedure volumes were down 19% compared to procedure volumes in the first quarter of 2022. However, this decrease was driven by the South Korean market where challenges between ophthalmic surgical practices and third-party payers have essentially eliminated procedure purchases for the time being. We expect that this challenge will continue for the foreseeable future and do not have a clear resolution timeframe. The region accounted for approximately 9,900 procedures and revenue of $1.5 million in the first quarter of 2022. Excluding the first quarter 2022 revenue attributable to South Korea, Revenue for the first quarter of 2023 would have increased 5% compared to the first quarter 2022. Today, we also announced the closing of a private placement, which provides $20 million in gross proceeds, which significantly extends our cash runway and which we believe will fund our operations to cash flow breakeven. These proceeds will empower us to make strategic investments in inventory, and sales and marketing resources to further enhance the production and distribution of Ally, ensuring we are maximizing our market penetration with and effectively capitalizing on demand that has been shown and continues to grow. Now let me turn the call over to Tom to cover our financial highlights for the quarter. Tom?
Nick
Thank you, Nick. Our first quarter 2023 financial results are included in our press release issued earlier this morning. but there are a few items I'd like to discuss in further detail. Revenue was $8.3 million in the first quarter of 2023 compared to $9.3 million in the first quarter of 2022. As Nick mentioned, this decrease was primarily driven by an approximate $1.5 million decrease in revenue generated from South Korea associated with the ongoing cataract reimbursement challenges in that market. The decrease in South Korea procedure volume and related reduction in revenue was somewhat offset by an increase in procedure volume in the United States and Europe, which generally carry a higher gross margin. Procedure volume in the U.S. and Europe increased approximately 13% and 5%, respectively, as compared to procedure volume in the first quarter of 2022. In the first quarter of 2023, there were 31,600 procedures sold. compared to 38,901 procedures sold in the first quarter of 2022. Again, the decrease in procedures sold is mainly attributable to a decrease of procedure volume in South Korea of approximately 9,900 procedures. Not 9,900 procedures. Gross margin for the quarter was $4.3 million, representing a gross margin of 52%, compared to 4.7 million and 50% realized in the first quarter of 2022. Although revenue decreased associated with a significant reduction in South Korean procedures, our gross margin increased 210 basis points. Our gross margin for the first quarter of 2023 is consistent with the gross margin expectations we have discussed in previous calls of approximately 50%. Supply chain issues that have created higher inventory costs and inefficiencies in allied production seem to be easing as we are now seeing greater availability of raw materials. Accordingly, we expect to see more fluid and efficient Ally manufacturing in the remainder of 2023. Total operating expenses for the first quarter of 2023 were $8.7 million, compared to $11.4 million in the first quarter of 2022. The decrease in operating expenses was primarily attributable to significantly lower Ally development expenses following FDA clearance in the second quarter of 2022, including the inclusion of approximately $2.4 million of inventory costs charged to research and development in the first quarter of 2022. Although we continue to innovate and invest in Ally in research and development, we do not expect our R&D expenditures to fluctuate significantly from the first quarter of 2023 and expect our 2023 annual investment in research and development to approximate $7 million. Net loss for the quarter was $4.3 million or 40 cents loss per share and decreased as compared to the $6.7 million loss and 67 loss per share in the first quarter of 2022. As of March 31st, 2023, we had cash and cash equivalents of $8 million as compared to $14.7 million in December 31st, 2022. Cash utilized in the quarter was $6.7 million and the first quarter is expected to represent the largest consumption of cash within 2023, as the company generally utilizes the largest amount of cash in the first quarter of each year. As mentioned in our press release and our Form K associated with the transaction, we are pleased to have completed a significant private placement financing, bringing in gross proceeds of $20 million, and we estimate net proceeds of $19.1 million after deducting transaction costs. As Nick said, with these proceeds, we will invest more extensively in the Ally launch and our commercial organization to capitalize on the early success of Ally and to continue to increase our market share in the premium cataract surgery market. Now I'd like to turn the call back over to Pam, and we look forward to your questions.
Operator
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift your hands up before pressing any keys. First question comes from Ryan Zimmerman at BTIG. Please go ahead.
Ryan Zimmerman
Hi, Nick. This is Izzy on for Ryan. Thanks for taking the questions.
Pam
Hi, Izzy.
Ryan Zimmerman
Hi. So in terms of the Ally launch, what are you seeing in productivity improvements? And what insights have you guys gained from the early install base?
Pam
Yeah, that's a really good question. So what we've seen in terms of productivity improvements are is that when you look at quotes from people like Jim Kotabakash from Beverly Hills and Kerry Solomon over in South Carolina, Dave Kuntz, they've been able to save somewhere between an hour and a half and two hours on their on their overall surgical day. Dave Kuntz, Which, as you know, for surgery time and Dr surgery time in the lr is is the costliest of time, so this is translating to a really nice return on investment because they can add. depending on the center three to four cases over the course of the day or more helps them work through the backlog or quite frankly they can reduce overhead and they finish their day early with with the number of cases and they leave also I think it's encouraging that when comparing LLS which which we know already from a market scope perspective in the US produces 74% on average more cases than competitive devices to see an additional 20% growth on the procedure volume in those early LLS convert to Ally users. Those are pretty significant productivity numbers there. And it's early. I think the other thing that is worth noting is seeing several accounts that have added or are adding a second device speaks to the productivity increases and the ability to offset other costs that they have.
Ryan Zimmerman
Great. That's really helpful. Thank you. And do customers prefer to acquire Ally systems through leases or just outright sales? And if it is leases, What do you guys see in terms of utilization over the life of the lease? Do you get more cases as a result?
Pam
That's a good question. So we've been primarily, you know, we've been working hard to particularly, you know, as a small company that's invested heavily in this technology, we've been working hard on not just a placement model where the laser gets placed and there's simply a per procedure fee. There's always a per procedure fee. But we've been pretty good at moving towards operating leases and at this point in the launch, as well as other customers moving right to the purchase rather than an operating lease. And it really depends on the practice, their accounting practices, whether they have access to Section 179. There's a variety of different things that would dictate whether a practice moves towards an operating lease or whether they would move towards a capital purchase. But in any event, we have a much higher percentage of these systems in the early days with Ally that have either been purchased outright are purchased over time or are using an operating lease and separating that from the per procedure fee. In terms of increasing the number of procedures, some of these accounts are new accounts to LENZAR, and so we don't have an operating history. They're telling us that through the increased productivity and the savings of, again, an hour to two hours a day in surgery, that it's resulting in their ability to schedule more patients. And I think one of the biggest productivity things that we've seen is that the new device, Ally, not only is it much faster, but we also communicate with a couple of other devices that are new that we've added on. And so the ability to communicate with the IOL Master 700, let's say from from ZEISS and the ability to route the data from Iowa Well Master through their veracity to LENZAR, for instance, in the case of South Carolina and from our count here in Sarasota, has been pretty significant. And so those are resulting in, in addition to the time savings of the laser itself, additional cases that I think we're going to see over time. Obviously, conversion percentages of these practices, of all the practices, has a lot to do with their ability to do more cases because, you know, they get a certain number of patients into the practice. And as they get more confidence with the results that they're getting and they see they're getting result improvements, it helps the staff. The staff is more confident. The doctors feel more confident. And therefore, you know, the patients can feel that. and then the patients are more willing to convert. Obviously, there's some macroeconomics here that we're working with in terms of consumer sentiment and whatnot in the marketplace, but we haven't seen that that directly affect any of this in a negative fashion.
Ryan Zimmerman
Got it. That's great to hear. And so given the strong demand you guys are seeing and the order of pipelines, Do you still expect the 20% revenue growth the right way to think about 2023?
Pam
You know, so we're contemplating this, you know, in terms of guidance. You know, part of that 20% growth in 2023 or the comment that it would be at least 20% growth in 2023, recognizing that there's this downpour out of the South Korea market, and we're only selling the system... you know, the system's primarily sold in the United States right now. So when you look at the business, which was about 50% of the, you know, U.S., a little more than 50% in the U.S., and 50% globally, there's a drag from South Korea, which we've said is going to continue. And, you know, we'll have at least that 20% growth, which actually represents a net growth rate of actually substantially more than the 20%. and particularly when you look at the number of systems that we've got to get out there. So we're not providing any forward guidance like at this time, but I would say that, you know, that's a pretty good number.
Ryan Zimmerman
Got it. And in terms of margins, they came in better than we were expecting this quarter. So what can you attribute this to? Are you servicing... and providing systems better for the increased demand. I know that there were some supply issues going on last year.
Pam
Tom, do you want to comment to that?
Nick
Sure, Nick. So, Izzy, thanks for the question. It's a good one. A couple things going on there. We had to purchase a decent amount of inventory and expense it to R&D, as we mentioned before, so that has an impact on margin. and we're just coming out as both nick and i said in our prepared remarks we're just coming out of some of the supply chain limitations and difficulties that we've occurred that significantly uh reduced the amount of ally systems we can produce as well as causing um the raw materials uh and and wages to to go up associated with the production of ally so we guided in the low 50s or around 50 because of those two conflicting factors, supply chain driving costs up and driving inefficiencies up versus charging some of the raw materials in the early systems that we were able to manufacture for Ally where a piece of the system had already been expensed. So going forward, what I think is I would still look around the 50 to low 50s for margin going forward in 23. And then as we totally come out of the supply chain malaise and some of those limitations, I think you can expect those gross margins to continue to increase as quantities go up much higher.
Ryan Zimmerman
Got it. Thank you. And then last one for me. How do you guys think about your cash runway given the $20 million private placement is now complete?
Pam
I look at it as exciting. I think that given where we are right now and the demand for the systems, the backlog that we've got, the number of prospects that we've got that are filling the pipeline, I think this gives us a really running start here as we go forward. I'm excited.
Nick
Maybe I can add something too, Lizzie. As Nick and I have said in conference calls before, because of COVID supply chain issues, we really put a governor on building some of the commercial organization. So this was a really important financing for the company to allow us not only to build launch stock, which we've been doing already, and you can see our inventory balance is going up, but more importantly, investing in the commercial organization to you know, get more of the message out there, reach physicians, and really tout the significant benefits of Ally. And, you know, Nick and the commercial team have done a Herculean job thus far because there's been sort of a governor on things. And so, you know, hopefully with this money coming in, you know, we'll be able to invest in Ally launch like we have always said we were going to, but have really not done much of that to date.
Pam
Thanks, Tom. That was helpful. I want to make one other comment. The commercial infrastructure is also really important. One of the things that Lensar is known for, and because we're focused on this product, is that we maintain and we monitor this every month, the uptime percentages of our system, number one. And number two, getting folks trained and transitioned over to ally from both the physician perspective as well as the supporting staff perspective is is incredibly important and as we all know there's a transition time here that can take up to three months until so to the extent that that we can make the practices feel good about the system and get them trained sooner rather than later the sooner they become productive, which is good for them and good for Lensar, and the service organization, which is incredibly important so that we protect the asset here and the customer is able to do surgery when they want to do surgery and we're able to record the revenue of those cases. We're the only company that utilizes a remote diagnostic. And so in many cases, we're able to look into the system from a remote diagnostic perspective if someone is having a challenge with the system. And not only can we diagnose it, but many times we can push the fix through. And so these are all important sort of, let's say, technological advantages that we have that these proceeds will help us in building of this infrastructure to help support the increased sales and marketing activity and thus, you know, be able to move more of these systems.
Ryan Zimmerman
Got it. Thank you for taking the question.
Pam
Thank you.
Operator
Thank you. The next question comes from Chris Bolster at Propel Advisory. Please go ahead.
Chris Bolster
Yes, thank you. Congratulations on what sounds like a great quarter on the sales front. The private placement obviously lowers liquidity risk and allows you to do some investment in sales, but dilution is obviously a concern given the size. Can you provide a little bit of color on the terms and why you chose to do it now given where the stock is and did you look at any alternatives like receivables factoring or other approaches to get through a few more quarters?
Pam
That's a good question and fair enough. Obviously, management owns a fair amount of stock as well. The question around dilution I think is a fair question. The environment today is not an easy environment for fundraising, particularly in micro-cap stocks, as you're probably well aware, and some of the alternative financing. Certainly the SVB collapse made other types of financing much more potentially onerous even though they were less dilutive. And I'd say that we ran a pretty good process all over looking at what the various alternatives might be. The fact is that one of the largest shareholders stepped forward and partnered with us and put a proposal on the table that was much less costly of an alternative, if you will, to be able to put on the table versus an outright underwriting where there'd be substantial discounts involved to an already depressed stock. And we felt like given the timing This was probably the best opportunity to bite the bullet, take the dilution, substantially finance the company, and believe that given the opportunities that we have with Ally, that when the rest of the market begins to understand it and the market turns, that we'll more than make up for that. There's inherent value to the company, a lot more than what the value is showing today.
Operator
Thank you. That concludes today's question and answer session. I will now turn the call back over to Nick Curtis for closing comments.
Pam
I'd like to thank everybody for joining our call today and obviously your continued interest in LNZAR. We look forward to updating you as we make further progress in the exciting remainder of 2023. Stay tuned.
Operator
Ladies and gentlemen, this concludes the conference call for today. We thank you for participating, and we ask that you please disconnect your lines.
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