Nov 8, 2021
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 call will be recorded.
I would now like to turn the call over to Cameron Radinovic of Burns McClellan. Mr.
Radinovic, please go ahead.
Cameron Radinovic
Thank you, operator. Good morning and welcome to the LENSAR third quarter 2021 financial results conference call.
Earlier this morning, the Company issued a press release providing an overview of its financial results for the quarter ended September 30, 2021. This press release is available on the Investor Relations section of the Company’s website at www.lensar.com.
Joining me on the call today is Nick Curtis, Chief Executive Officer of LENSAR, who will review the Company’s recent business and operational progress. Following his comments, Tom Staab, Chief Financial Officer of LENSAR, will provide an overview of the Company’s financial highlights for the third quarter before turning the call back over to Nick for closing remarks.
Today’s conference call will contain 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 the documents filed with the SEC, which can be accessed on the website.
In addition, this call contains time-sensitive information that is accurate only as of the date of this live broadcast, November 8, 2021. LENSAR undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this live conference call.
At this time, it’s my pleasure to turn the call over to Nick Curtis.
Nick Curtis
Thank you, Cameron. Good morning to everyone listening.
Thank you again for taking the time today to join us on our third quarter 2021 conference call. We’re pleased by the strong results and consistent progress the Company has achieved in the third quarter of this year, as we strive to navigate the uncertain times of the COVID-19 pandemic.
On the commercial front, we see the markets in which we operate continue to rebound from pandemic-related shutdowns. And to be more specific, we’ve returned to our historical performance of growing our business.
This growth is in the backdrop of the lingering pandemic, which continues to weigh on the more certain predictability of our results, especially outside the U.S. and Europe, where the stopping and restarting of surgery is taking place.
An important indication of this consistent aggregate growth overall can be seen in our procedure volume through the first three quarters of 2021, which represented a significant 35% growth over the first nine months of 2020, and even more importantly, an impressive 18% growth rate over the same period in 2019, evidence that we are, once again growing from our pre-pandemic operations, after a pause, due to all the implications and headwinds of the pandemic. In addition to growing our procedure volumes, we’ve also seen an increase in lease placements, which combined to drive 16% revenue growth over the third quarter 2020.
We firmly believe that LENSAR’s current product, including Streamline and IntelliAxis Refractive Capsulorhexis is an evolutionary technology that addresses significant unmet needs in cataract surgery, which we expect will continue to be the most beneficial and useful technology platform in the market and remain a key driver of procedure and revenue growth. As I reported last quarter, our marketing team remains laser-focused and extremely active with LENSAR’s technology featured in six medical congresses and events over the third quarter.
I’m pleased to report that the enthusiasm for both, our current LENSAR Laser System and anticipation of our next gen ALLY Adaptive Cataract Treatment System continue to increase as we get closer to our ALLY 510(k) filing. Later this month, LENSAR will participate at the American Academy of Ophthalmology conference, where we will have two abstracts, highlighting the superior outcomes when using our technology.
We look forward to sharing more specific information, to include the data generated for the accepted posters as we get closer to the conference. We continue to make solid progress in the development of our next generation product, the ALLY Adaptive Cataract Treatment System, and we’re completing milestones necessary to complete and file the 510(k) submission in the first quarter of 2022.
As a reminder, ALLY has the potential to be the first technology in the market to combine a next generation femtosecond laser with a world-leading Swiss-made precision phacoemulsification system in a fully integrated Adaptive Cataract Treatment System containing all of the core feature technologies of the current system. The ALLY Adaptive Cataract Treatment System will fit easily into any operating room or in office surgical suite and will significantly improve patient flow as the entire procedure can be performed in a single suite without having to move, or reprep the patient, in addition to a much faster laser treatment, cutting procedure time by up to two thirds.
Overall, the third quarter has been one of tremendous progress. We believe that LENSAR’s ongoing commitment to continuous improvement and providing an advancing superior technology with our surgeon-centric values will enable the Company to continue to grow and succeed in a market with expectations for innovation, translating to higher efficiencies, better outcomes, and enhancing the patient experience.
Now, let me turn the call over to Tom to cover our financial highlights for the quarter. Tom?
Tom Staab
Thank you, Nick. Our third quarter 2021 financial results are included in our press release today, but I would like to add a little color to those written remarks.
As Nick mentioned, it was a strong quarter for us as you focus the lens on top-line revenue, procedure growth and cash management, all while making consistent strides towards our upcoming 510(k) filing for ALLY in the first quarter of 2022. Specifically, revenue was $8.3 million in the third quarter of 2021, compared to $7.1 million in the third quarter of 2020 and reflected a 16% increase year-over-year.
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 expansion, analyzing revenue at a deeper level, the United States continues to be a strong performing region for us.
We have seen a significant increase in procedure growth in the third quarter of 2021, as compared to both, the 2020 and 2019 third quarters, thereby powering worldwide procedure growth in 2021, year-over-year. Also contributing to procedure growth are system placements, as system placement activity has increased recently in the United States.
Accordingly, it appears system placements and procedures growth have rebounded the pre-pandemic levels, and we are in growth phase once again. The foundation of our existing business provides a nice launching pad for ALLY, a disruptive and novel combination system that incorporates all the technology features of our existing system.
In the third quarter of 2021, there were a total of 30,765 procedures sold compared with 25,078 procedures sold in the third quarter of 2020, and 25,154 procedures sold in the third quarter of 2019, reflecting a 23% and 22% increase from both prior periods, respectively. Procedure levels in the third quarter of 2021 increased in each of our three reported operating regions.
That is the United States, EU and rest of world as compared to the third quarter of 2020, but was particularly robust in the United States, showing over a 26% increase from the third quarter of 2020. Our recurring revenue, which we define as all revenue other than Laser Systems sales totaled approximately 87% of our revenue for the three months ended September 30, 2021, compared to 82% for the three months ended September 30, 2020.
At the aggregate level, gross margin for the quarter was $3.9 million or 47% of total revenue, and flat in terms of dollars as compared to the third quarter of 2020, which had a gross margin percentage of 55%. The flat gross margin in dollars and decrease in our gross margin percentage as compared to the third quarter of 2020 was largely attributable to two main reasons: lower margins on recent system sales; as well as transitioning our manufacturing operations from our current system to ALLY.
As we reposition and prepare for ALLY manufacturing, we have incurred charges which have had a negative impact on cost of revenue and thus gross margin in the third quarter of 2021. These margin hits more than offset the higher volume and higher gross margin percentage on our increased and more lucrative procedure sales.
This depression in gross margin may continue for the next few quarters as we continue to transition our manufacturing operations to build an inventory of ALLY systems. Research and development expenses were $3.2 million and $2 million for the quarters ended September 30, 2021 and 2020, respectively.
This 59% increase was primarily due to additional costs for the continued development of ALLY in anticipation of our 510(k) filing with the Food and Drug Administration in the first quarter of 2022. Within this increase was approximately $600,000 of raw materials purchased for the eventual production of ALLY units.
This inventory is currently being expensed to research and development rather than being capitalized on the balance sheet. Selling, general and administrative expenses for the quarter ended September 30, 2021 were $6.5 million, an increase of $233,000 or 4% compared to $6.3 million to the third quarter of 2020.
The increase was primarily due to an increase in sales and marketing expenses as trade shows and travel resumed, along with expenses associated with being a public company. This overall increase was largely offset by $1.8 million less stock-based compensation incurred in the third quarter of 2021.
Total stock-based compensation expense recorded for the quarters ended September 30, 2021 and 2020 was $1.6 million and $3.8 million respectively and is charged the cost of revenue, research and spinoff and recapitalization of the Company. Stock-based compensation expense represents a significant expense growth in 2021 and for the next two years, 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 September 30, 2021, we have $11.2 million of unrecognized stock-based compensation expense, almost all of which will be recognized before the end of 2023, and for which approximately $1.5 million will be recognized in the remainder of 2021. Looking forward, we expect to expand our commercial infrastructure to increase market share and broaden infrastructure and geographic coverage in the United States, prior to the launch of ALLY in 2022.
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 sourcing certain materials. Net loss for the quarter ended September 3, 2021 was $6.2 million or $0.65 loss per share, compared to a net loss of $4.8 million or a net loss of $0.64 per share in the third quarter of 2020.
Adjusted EBITDA for the third quarter of 2021, which excludes the effects of stock-based compensation expense was a $3.9 million adjusted loss and compares to $408,000 adjusted loss in the third quarter of 2020. When you deduct cash-based research and development expenses from our adjusted EBITDA for the nine months ended September 30, 2021, 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 first three quarters of 2021 corresponds directly to cash spent on the development of ALLY.
As of September 30, 2021, we had cash and cash equivalents of $32.3 million, compared to $40.6 million at December 31, 2020. Cash utilized in the third quarter of 2021 was $2.2 million and $8.3 million for the nine months of 2021.
Based on our cash position and operational forecast, we continue to believe that we have sufficient cash to fund our operations through the filing of our 510(k) application and the expected launch of ALLY in 2021. Now, I’d like to turn the call back over to Nick for some closing remarks.
Nick Curtis
Thank you, Tom. The end of the third quarter marks LENSAR’s first full year as a public company.
While no one could have predicted the challenging environment that would have weighed us as we became a public company, I can proudly say that our team has squarely faced each challenge head-on, having found a way to not only persevere, but thrive in doing so. Our team has made tremendous progress by continuing to grow our revenue quarter-over-quarter in one of the most uncertain times in our industry, while maintaining our commitment to continuous improvement with in support of creating superior outcomes for surgeons and patients and are nearing the doorstep to deliver ALLY, creating great anticipation within the Company, as well as the opthalmo community.
With this team, we believe we have the right plan and are well positioned for growth in both market expansion and disruption with the current LENSAR laser platform, and the near future our ALLY Adaptive Cataract Treatment System. I have no doubt that ALLY has the potential to establish LENSAR as a leader in the premium, as well as conventional cataract surgery market, ALLY will optimize the entire cataract treatment process for both patients and surgeons having the ability to customize each treatment in a way that improves both, procedure and patient flow, while providing a superior outcome creates an overall experience that other technologies will be hard-pressed to match.
We look forward to further updates as we get closer to our filing. I’ll now turn the call back over to the operator, and we look forward to your questions.
Operator
[Operator Instructions] Your first question comes from the line of Danielle Antalffy of SVB Leerink.
Danielle Antalffy
Hey. Good morning, guys.
Thanks so much for taking the question. Congrats on a strong quarter.
Nick Curtis
Hi, Danielle.
Danielle Antalffy
Hi. So, I just a few questions from me, first on the dynamic of returning to pre-COVID levels.
I was just curious, obviously this has been an earnings season where we’ve heard a lot of companies talk about hospital staffing shortages, and not just within the hospital, but across the healthcare industry, healthcare worker shortages. So, just curious what you’re seeing there.
It seems like you’ve been able to grow and return to pre-COVID levels despite that. Would love to hear some commentary around that and what you’re seeing as we head into -- or we’re already a month into Q4?
And then, I have a few follow-ups.
Nick Curtis
So, Danielle, I think the good news is that it for us is that cataract patients and cataract surgery, it doesn’t go away. So, during the pandemic if there’s slowdowns and people can’t have surgery, the fact is it just creates a backlog of cataract patients that are trying to get into the system.
And when you exacerbate other things like, since they’re -- they don’t go away, they don’t get better either. They continue, the patient’s vision continues to degenerate.
And so, what we have seen is that patients are motivated to try to get back. There are some capacity issues specific to doctors being able to get enough surgery times, particularly in like the open access facilities.
Most of our procedures are performed in outpatient ambulatory surgery centers rather than inpatient hospital. Although, there are surgeries that are done there as well, but most of the surgeries are done in an outpatient ambulatory surgery center.
And so, while there are capacity issues in open access and hospital-based, the surgeon owned facilities, you have a little more control over that patient in-flow. But, there’s no doubt that there are capacity issues and issues we’ve seen as well with practices having enough personnel to support and to be able to continue the throughput.
Fortunately, for us, our systems are well-utilized. And with the systems being well-utilized and with the benefits of surgeons have been receiving -- I think patients are anxious to go ahead and have these types of procedures that we’re able to help with.
Danielle Antalffy
Yes. That’s helpful.
Okay. Good to hear.
And then, just on system utilization, just curious about the trends you are seeing there. It sounds pretty positive.
I don’t know if there’s any color you can give beyond what you said in the prepared remarks and just now.
Nick Curtis
So, two things. One is that because we’re a smaller overall commercial group, we spend a fair portion of our time not trying to convince people that they should be doing femtosecond laser assisted surgery, but because we have a more nuanced technology and our core feature technologies can be used to really address a big unmet need with higher efficiencies than the competitive systems out there, we spend most of our time with people who have found value in femtosecond laser assisted surgery.
And so therefore, when we do get into trials and subsequent conversions, our ramp-up times there are faster from a learning curve perspective. And so, we’re able to get that utilization.
I think that as people get more comfortable with managing astigmatism, as routine to cataract surgery, and as we continue to talk about that and demonstrate results that physicians are getting with the system that sort of feeds into that growth as well. And we see that it becomes an invaluable tool to the practices and they want to do more procedures with it.
Danielle Antalffy
Okay, great. And last question for me on ALLY, it sounds like you guys are on track, which is great.
Would love to hear if you’re -- I know this is anecdotal, but what you’re hearing from current LENSAR users? And what’s the level of interest you’re hearing from surgeons for ALLY?
Thanks so much.
Nick Curtis
So, I would say that I couldn’t be more pleased or more excited with anticipation as we get towards ALLY launch. I think that what we’ve seen is that people that heretofore are not that interested, maybe in femtosecond laser assisted cataract surgery, see the utility with ALLY is being so efficient in getting right into the operating room.
And certainly, physicians that are really into laser cataract surgery, femtosecond laser cataract surgery, we’ve just seen tremendous enthusiasm in people, they want to talk about it and having the opportunity to really meet with a lot of different surgeons in a lot of different forums and presenting their people are very interested. So, we’re really excited about where we’re going here.
Operator
Your next question comes from the line of Ryan Zimmerman of BTIG.
Ryan Zimmerman
Hey. Good morning.
Thanks for taking the questions. Congrats on the quarter.
I just want to ask a few for me. The pricing trends on the procedure ASPs seem to have held up pretty nicely this quarter.
And Nick or Tom, just want to get your perspective on kind of where you think those pricing trends can go over time, whether it’s with the existing system today, or if you think about ALLY in the market?
Nick Curtis
You mean -- hi Ryan, first of all. Thanks for getting on the call and your questions today.
Are you -- do you mean trends in procedure pricing based on volume…?
Ryan Zimmerman
Yes. I’m referring, Nick, to the consumable component.
So, kind of how you think about that price -- and just so I think about your recurring revenue and the procedure numbers, as we’ve tracked kind of that blended ASP. I just wanted to get your thoughts about where that could go potentially over time, or if you expect it to hold steady?
Nick Curtis
So, given the environment and given the value that is -- that we believe we’re delivering here from an efficiency and an outcome perspective, I don’t really feel like there is pressure to bring prices down as it relates to procedures. I mean, the reality is, is that we provide a real value there and our system, given how we communicate with the preoperative devices and we’re able to increase the throughput for the surgeon in the present system and the practice.
I think, people feel that they’re getting a fair value for what’s being delivered. I think, going forward with ALLY that’ll take that and bring it into like a whole another level.
I mean, just procedure times alone, as I mentioned, being able to cut procedure times up to two-thirds and addressing it right in the operating room and not having to reprep the patient and whatnot. I feel like, the value delivery there, the value proposition increases even more.
So, I don’t feel like we’re going to see pressure in that regard from a pricing perspective. We’re priced fairly, and we’re delivering a good value.
Tom Staab
And the other thing I would say, Ryan, is with the return back to system placements, and this is not pricing, but actually volume, it takes a little while for the systems to -- for the surgeons to be trained on systems. But, as we had a hiatus with the pandemic, and we weren’t placing as many systems or selling as many systems, now that we’re getting back to current levels, we would expect the procedure volume to start to increase as we get past these learning curves.
Ryan Zimmerman
Right. So, Nick, just to that point.
I mean, given the value that ALLY will bring, do you think you could take some price potentially, whether it be through systems or a consumable, just given how efficient the system is obstructed [ph] today?
Nick Curtis
Yes. I do believe that over time, particularly when people see the value that it delivers, number one.
And number two, like how it’s kind of tag along on something, Danielle, brought up, how the efficiency relates to the use of personnel. I think, that will also play a role in this because people will be able to, in essence, better utilize the personnel that they have.
And because we’re right in the operating room and you’re switching from one procedure to the next, without having to transport the patient or prep that way. So, I do believe that it strengthens the overall value proposition and potentially how and what they’d be willing to pay for that.
Ryan Zimmerman
Okay. Got it.
And then, just one last for me. Tom, on the margin, I appreciate you calling out some of the dynamics around ALLY kind of impacting the margin this quarter.
How do you think about that recovery and how long that could or could not last potentially into 2022, just on the margin side?
Tom Staab
Well, I think that as we transition our manufacturing operations and start building ALLY units, you are probably going to see that, because there’s a learning curve associated with -- well there’s just changing the infrastructure for our manufacturing for the new system. And then, there’s a learning curve with building the ALLY unit.
We’ve been manufacturing the current system for quite some time. And so, our manufacturing folks I mean it’s an art for them at a science and they do it very quickly.
They should get up to speed on ALLY but, we would expect much better margins on ALLY as we increase the volumes and hopefully we get past some of the pandemic cost concerns, but I would say that you’re probably looking a certainly the fourth quarter and first quarter of 2022, and maybe into the second quarter of 2022, that we’ll have a little bit of pressure on margins.
Ryan Zimmerman
Okay. I appreciate you to taking the questions.
Thank you.
Nick Curtis
Yes. Thanks Ryan.
Operator
I’m showing no other questions at this time, sir.
Nick Curtis
Thank you. Okay.
So, I guess, thank you for joining our call today, and I really appreciate everyone’s continued interest in LENSAR. We look forward to updating you as we make further progress, and as we get closer to the filing and launch of ALLY.