Mar 10, 2021
Operator
Good afternoon and good morning. And welcome to the LENSAR Fourth Quarter 2020 Financial Results Conference Call.
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 is being recorded. I would now like to turn the call over to Mr.
Lee Roth of Burns McClellan. Mr.
Roth please go ahead.
Lee Roth
Thanks Cristal. Good morning and once again welcome to the LENSAR fourth quarter and full year 2020 financial results conference call.
Earlier today we issued a press release providing an overview of LENSAR’s financial results for the fourth quarter and full year ended December 31, 2020. This release is available in the IR section of the company's website at lensar.com.
Joining me today on the call are Nick Curtis, Chief Executive Officer of LENSAR, who will review the company's recent business and operational progress. Following his comments, Tom Staab.
our CFO, will provide an overview of the company's financial highlights for the fourth 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 our actual results, performance or achievements to be materially different from any future results or performances expressed or implied in this presentation. You should not place undue reliance on the forward-looking statements.
For additional information, including a detailed discussion of the company's risk factors, please refer to our documents filed with the U.S. 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, March 10, 2021. LENSAR 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 LENSAR’s Chief Executive Officer, Nick Curtis. Nick?
Nick Curtis
Thank you, Lee. And good morning to everyone listening.
Thank you for joining us on our fourth quarter and full year 2020 conference call. This past year presented a series of unprecedented challenges, not only for LENSAR, but for the ophthalmic industry.
On a macro level, the COVID-19 pandemic temporarily halted elective procedures including cataract surgeries throughout the world. This worldwide slowdown certainly had an impact on two areas of our business, capital system sales, as well as procedure revenue from new and existing laser sights.
Despite the challenges faced, I'm pleased to say that we finished 2020, a much stronger company than we were entering the year. First, in October, we completed the spin off from our former parent PDL BioPharma and became an independent publicly traded company.
Second, we leveraged our technology leadership to grow our installed base roughly 10%, ending the year with approximately 225 systems installed worldwide, while maintaining our industry-leading laser system utilization. According to recent Market Scope analysis, each LENSAR laser system performed on average of 430 procedures in 2020, compared to an average of 232 procedures performed on competing systems.
All in, we grew our market share from 13% in 2019, to 16% in 2020. Perhaps most importantly, we continue to advancing the development of our next-generation system, ALLY, which has the potential to significantly disrupt the cataract surgery market and enable LENSAR to not only grow market share, but to usher in a new standard in the treatment of cataracts in ophthalmic surgery.
As I noted, the headwinds faced throughout the industry as a result of COVID-19 were significant. The most severe impact on LENSAR was felt in the second quarter, during which worldwide procedure volumes using our equipment declined by just over 30%, compared to the second quarter of 2019.
In Q3, practices reopened and procedure volumes rebounded, declining by less than half of a percent year-over-year. This trend continued in the fourth quarter with worldwide procedure volumes down less than 5% compared to Q4 of 2019.
Importantly, procedures in the U.S. and Europe, primarily Germany, our two major markets, were 20,872 in the fourth quarter, up from 17,732 in those regions in the fourth quarter of 2019.
For the full year 2020 worldwide procedure volume sold were 97,071, down roughly 10% compared to 108,030 in 2019. But this full year comparison does not fully demonstrate the momentum we saw in the second half of the year.
While the reopening of ophthalmic practices and resumption of procedures is highly encouraging, ophthalmologists are being pragmatic in approaching the visits and treatment of patients with a new set of protocols to minimize potential exposure to COVID to both patients and staff. In many cases, patients are asked to wait outside in their cars distancing in the waiting rooms, disinfecting exam rooms and equipment between each patient and utilizing telemedicine visits when appropriate.
This results in doctors either working longer hours, or to see and treat fewer patients per day than prior to the pandemic. While the length of the cataract surgical procedure itself hasn't changed, the measures taken between patients have increased, making the efficiency of the procedure itself and patient interaction in the process more important than ever.
This is really where LENSAR’s technology has the potential to become the clear choice for ophthalmic surgeons moving forward. We believe our current generation system was streamlined for tele access remains the most advanced and beneficial system available to ophthalmic surgeons today.
During a time when maximizing patient safety must be balanced with optimizing patient throughput and operational efficiencies at the practice level, we believe we're enabling physicians to best achieve this balance. Seamless communication and integration with most major preop diagnostic platforms to include iris registration in surgeon tables guiding astigmatism management, cataract density imaging, and tissue specific custom treatments, LENSAR’s technology brings unrivalled precision and reproducibility to the surgical suite at a time when such value-added characteristics are more important than ever.
As I mentioned earlier, our distinct value proposition for physicians and unique ability to optimize patient outcomes helped propel LENSAR to 16% global femtosecond laser assisted cataract surgeries market share in 2020, based on recent Market Scope data up from 13% in 2019. The fact that we are able to grow our business and our market share in such a challenging environment is a testament to not only the strength of our offering, but the quality of our commercial team.
While our commercial footprint is relatively small compared with most of our much larger competitors, we're investing strategically in its growth, leveraging near term market opportunities, and to optimize the launch of ALLY. With the anticipated launch of ALLY next year, we expect our technology leadership, service, support and the level of value we offer physicians will continue to increase.
As a reminder, ALLY is a fully integrated system comprising of next-generation femtosecond laser with a high-performance phacoemulsification device and a unique, compact workstation. This integration of femto and phaco into a single, complete cataract treatment system will enable surgeons to offer the benefits of LENSAR laser to a much broader base of conventional cataract patients, as well as those patients electing premium procedures including management of astigmatism, and cataract removal in a single procedure in the same operating room, or in-office surgical suite using a single device.
By eliminating the need to move a patient from one room to another and prep that patient twice, we're addressing one of the major workflow-related challenges faced by surgeons today. The logistical and financial efficiencies that we believe ALLY will create are expected to enable a rapid scale up of potentially opening up FLACS and its many benefits to a larger group of ophthalmic cataract surgeons.
I'm pleased to say that interest among physicians in this technology, not just those considered early adopters is significant. Further strengthening our belief that ALLY could represent a paradigm shift in the way that cataract surgeries are performed in a post-COVID environment.
I'm pleased to say that interest among physicians in this technology, not just those considered early adopters is significant. Further strengthening our belief that ALLY could represent a paradigm shift in the way the cataract surgeries are performed in a post-COVID environment.
I'm pleased to report with confidence that as of today, our development timeline for ALLY has not changed. We remain on track to file the 510(k) application in the first quarter of 2022 when watching ALLY later that year.
Before I hand the call over to Tom to discuss the financial results, I would just like to thank the entire LENSAR team. What we have been able to accomplish through the pandemic is a true testament to their dedication and hard work.
In addition, I want to take a moment to thank all of the facilities, practices and our surgeon partners for their commitment to patient quality of care, and for placing their trust in LENSAR. While we expect to continue navigating the challenging effects of COVID-19 in the coming quarters, I believe that we're well-positioned to maintain a reputation as an innovator and technology leader, continue to grow and to capture further market share in the premium cataract space, as well as prepare for the filing and launch of ALLY in 2022.
Now, let me turn the call over to Tom who will discuss our financial position. Tom?
Tom Staab
Thank you, Nick. Our fourth quarter and full year 2020 financial results are included in our press release this morning.
But I'd like to take this opportunity to add a little color to those written remarks. Revenue was $8.3 million in the fourth quarter of 2020, compared to $8.5 million in the fourth quarter of 2019.
This 2.1% quarter-over-quarter decrease was primarily attributable to a decline in elective surgical procedures associated with the continued impact of the pandemic, particularly the lack of a complete rebound in global procedure volume in our operating regions outside the United States and Europe. In the fourth quarter of 2020, there were 30,503 procedures performed using LENSAR Systems, compared to 32,007 procedures in the fourth quarter of 2019.
Importantly, as Nick pointed out, procedure volume in the United States and Europe in the fourth quarter of 2020 exceeded fourth quarter 2019 procedure volume. But these increases were offset by larger decrease in procedure volume in our remaining operating regions.
Although it appears the aggregate procedure volume had returned to near 2019 levels at the end of 2020, the pandemic continues to depress our laser system sales or what we refer to as nonrecurring revenue in our razor-razorblade business model. Thus, the pandemic continues to have a negative influence on our total revenues and cash flows, but we have, and we'll continue to navigate this unprecedented operating environment carefully and focus our financial resources on achieving our ALLY development timelines and building a strong commercial foundation for an ALLY launch in 2022.
Recurring revenue where all revenue outside of laser system sales for the fourth quarter of 2020 and 2019 was 80% and 81% respectively. For the full year 2020 and 2019, recurring revenue was 85% and 79% respectively.
Gross margin for the quarter was $4.7 million, representing 56% compared to $4.7 million, representing 55% of revenue in the fourth quarter of 2019. Total operating expenses for the fourth quarter of 2020 were $11.5 million, compared to $6.6 million in the fourth quarter of 2019.
As you evaluate the increase between the quarters, you should note that that $4.9 million increase in 2020 was largely attributable to non-cash stock-compensation expense associated with our spinoff and recapitalization for which there was a $4.4 million increase. Accordingly, 89% of this total increase in operating expenses was directly due to an increase in stock-compensation expense.
This phenomenon was true for the full year as well with the 2020 increase in operating expenses of $6.6 million, actually less than the increase in stock-compensation expense of $7.7 million. As mentioned in the press release, total stock-based compensation in the fourth quarter of 2020 and 2019 was $5.1 million and a $0.5 million respectively.
Total stock-based compensation in the full year 2020 and 2019 was $9 million and $0.9 million respectively. These stock-compensation totals are allocated between cost of revenue, SG&A expense, and R&D expense.
In our statement of operations with SG&A expense being allocated approximately 85% of the total stock-based compensation expense. Specifically, selling, general and administrative expenses totaled $8.7 million during the three months ended December 31, 2020, compared to $4.9 million in the fourth quarter of 2019.
The increase was primarily attributable to increased personnel costs, which were largely because of stock-based compensation expense I just described. This increase in personnel expense was partially offset by decrease in trade show and travel expenses as a result of travel restrictions in live meeting cancellations related to the COVID-19 pandemic.
R&D expense was $2.5 million during the three months ended December 31, 2020, compared to $1.4 million in the fourth quarter of 2019. The increase in R&D expense for the quarter was related to additional costs for the continued development of ALLY in anticipation of our 510(k) filing with the FDA by March 31, 2022.
Net loss for the quarter was $6.8 million, compared to $2.5 million in the fourth quarter of 2019. The increase in net loss was primarily attributable to the aforementioned increases in R&D and SG&A expenses, particularly non-cash stock-based compensation expense.
Adjusted EBITDA for the fourth quarter of 2020 which excludes the effects of stock-based compensation expense was $1.1 million loss, compared to a $0.5 million loss in the fourth quarter of 2019. The quarter-over-quarter increase in adjusted EBITDA loss was attributable to an increase in R&D expenses.
Interestingly, if you deduct cash base R&D expenses from our adjusted EBITDA, the result is approximately zero for the fourth quarter of 2020. Thus, our commercial operations were cash flow neutral.
Simply said, our cash used for the fourth quarter 2020 corresponds directly to cash used in the development of ALLY. As of December 31, 2020, we had cash and cash equivalents of $40.6 million as compared to $42.7 million at September 30, 2020 when we were spun off from PDL.
Based on our current cash position and operational forecasts, we believe we have sufficient capital to fund our operations through the filing of our 510(k) application and the launch of ALLY next year. As mentioned previously in my adjusted EBITDA remarks, cash used in the fourth quarter of $2.1 million with equal to cash spin in the quarter in R&D for ALLY.
Now I'd like to turn the call back over to Nick for some closing remarks.
Nick Curtis
Thank you, Tom. Although our industry has experienced an unprecedented challenge, we're committed in our mission to bringing the highest standard of care, the best technology, including advanced applications to our surgeons and their patients using our system and with even greater resolve, continuing to progress to launch ALLY in 2022.
ALLY has the potential to significantly disrupt the current cataract market with the opportunity to become the new standard of care for cataract removal procedures. With the projected increase in cataract surgery over the next five years, our strong balance sheet and our resilient operations we believe the company is well positioned for the future.
We remain confident in our growth strategy, our team's ability to execute that strategy and a well-prepared for continued growth and success as we lead the transformation of cataract surgery. I will now turn the call back over to the operator and we look forward to your questions.
Operator
[Operator Instructions] Our first question comes from the line of Richard Newitter with SVB Leerink.
Richard Newitter
Hi, good morning. Thanks for taking the questions.
Nick Curtis
Good morning, Rich.
Tom Staab
Hi, Rich.
Richard Newitter
Hi. How are you?
I was hoping to maybe just start with – congrats on the – a bit of a rebound here further in the fourth quarter. And I was hoping you could comment a little bit on how you're thinking about the outlook for 2021.
We're thinking about a growth off of 2019 levels and in 2019 we delivered about $30 million or a little over $30 million in sales. Is it reasonable to think that 2021 will be at or likely above that level?
And then also if you can help us think of the cadence and pacing of revenue through the year?
Nick Curtis
So Rich, we think it's going to be – that we will see an increase in our total revenue from that. We'll see a rebound in an increase in our total revenue from the 2019 levels.
And we'll see growth this year. We think it's going to be a little bit choppy here that the next quarter or two as the vaccines get distributed, and as COVID begins to kind of look at that in the rear-view mirror.
But we have a pretty optimistic outlook for LENSAR as we move through 2021 and get to the end of the year. So, we do expect some growth certainly from 2019 levels.
Richard Newitter
Okay. And then just, because we don't have a ton of history to go and look back on things like [ph] seasonality, last year your 4Q to 1Q drop off was probably more pronounced in general, just because of the COVID situation.
How should we think of the 4Q to 1Q trends that this time around, presume it's going to be meaningfully less of a step down than last year? But can you calibrate us at all for that maybe at least a quarter and what to expect there?
Nick Curtis
Yes, there is – sorry, I should have addressed that at the beginning. There is some seasonality associated with this.
We've seen harsh winter in some cases, and given some of the protocols in place with doctors trying to distance patients and have patients waiting in cars and calling them in and whatnot. There is some seasonality involved.
Through the seasonality involved in cataract surgery, anyways, generally speaking the second and third quarters are not the same as the first and the fourth quarters in terms of cataract surgery volumes. Now, obviously with COVID, we're seeing some different things here and there, I mean, cataract patients aren't going away.
So, the fact is that as these practices return, and as COVID starts to move into the rear mirror, maybe some of the seasonality starts to smooth out and you see more patients coming in. There's certainly our backlog of patients that haven't been able to get surgery here in the winter and with the pandemic.
So – but typically see some seasonality there where first, second quarters would be a little less than what you'd see in the third, and certainly the fourth quarters, our fourth quarter would be the strongest.
Richard Newitter
Okay. Helpful color.
Nick, thank you. Maybe just a few more here, one on just the FLACS market and your current system, and then a couple on ALLY?
Your system is operating. I think you said an average of 430 cases.
That's about double what your competitors [indiscernible] competitive systems that are operating at significant. I guess, can you maybe explain a little bit of why you guys are seeing such an above market, the utilization trend and how sustainable is this?
And where can this utilization number go?
Nick Curtis
So, I'll answer the second part of it first. I believe it's very sustainable and primarily it's because of some of the differentiating features that our system really affords the practices.
We're driven towards efficiency and we're driven toward – up towards outcomes. And those two things are like inherent in our DNA.
And so, when you look at things such as the Iris registration and the communication with the pre-op diagnostic devices, where we can feed the information into the LENSAR, through the cloud electronically and have the system automatically adjust. Doctors feel confident that a, they're getting good data into the system.
The system is helping them to achieve higher efficiency and better outcomes. And thus, it leads to more confidence in terms of presenting to patients and throughput as they finished – as they do the procedure.
So, we expect it is sustainable. And that as the volumes continue to rebound, we'll see those volumes come back to the 2019 levels and beyond.
And as a result of that, I think that's one of the reasons why we've been able to continue to grow our footprint and take market share from the other companies, because and grow at a higher rate. And it's because our system has more utility.
Richard Newitter
Got it. Maybe switching gears to ALLY, you reiterated your confidence and kind of approval of timelines and that you're on track for your previously stated launch timeline.
I guess one just, can you give us anything more about what gives you that visibility or confidence there? And then two, what should we what should we be thinking about in these quarters leading up to the launch?
Thanks for the color on R&D there. It sounds like that stepped up a little bit in the fourth quarter all related to ALLY.
Is that something that will continue to increase as we move through 2021 into launch, or is that the 4Q run rate on R&D and the way to think about it?
Nick Curtis
We’ll some increase in our SG&A expense, as we as we move towards launch. We're starting to make some selective investments in adding to our commercial presence and if you will sales force and support functions around that in preparation for launch.
R&D will be stepping up, we’ll be building systems, starting to build some systems this year as we get manufacturing in place and we get more comfortable with ALLY. And so, you will see some select investment in these areas as we move towards the launch.
In terms of why we feel confident about timelines, we're working very well with development partner early in terms of on the R&D side, in the integration of the device into the LENSAR device. The R&D team is super focused, and we're starting to integrate manufacturing and other departments into that.
And we've got some very specific goals in terms of what we need to have done by the end of this year in order to be ready for filing in the first quarter next year. And so, we're just like everybody is just very focused on that.
And where this differs from where LENSAR? If you go back and look at all the companies in femtosecond lasers is that, we developed a certain core competency, and a team that's been in place here for quite a while.
And so, with that core competency and the team that's been in place, this is not like – it's like we weren't starting at ground zero here in terms of with a product like ALLY. And so, we're moving in a very focused and instep direction there and staying on target.
Richard Newitter
Got it.
Tom Staab
And Rich a little more, more color on R&D. We said we were going to file by the first quarter of 2022.
So, it's reasonable to expect, R&D expenses to go up 20%, 30% from 2020 levels, just because we're at the – we're getting to the tail end of what we need to do. And from an SG&A perspective, we guided in the remarks that that's going to go up, that we're broadening our commercial foundation to kind of prepare for what we think is going to be a hugely successful ALLY launch in 2022.
But we have to be careful because we're still seeing impact of the pandemic in, I know Nick, we're still seeing conferences cancel, we're seeing a lot more virtual stuff. And so, we have to be very careful as to, adding the right increases to our infrastructure at the right time.
Richard Newitter
Got it. Thanks for that.
And maybe just one last one here, and then I’m jump back in the queue. So, as we think of ALLY launching out into the future, are there any revenue mix considerations, right now you are at 80% recurring revenue, I guess just when ALLY comes in is the selling model going to change?
Should we think of capital reverse occurring to kind of transition a little bit more in favor of capital for a period of time? Any color you can give as we kind of refine our models into the future after the ALLY launch, that would be helpful.
Thank you.
Nick Curtis
Yes, that's a good question. With any of these, if you look historically when these types, when new technologies are introduced into a market that is hungry for new technology, which certainly ophthalmology is, you tend to see capital purchases more in the beginning of the launch.
I would expect there'll be more capital purchases in the first two years post-launch just because that's the way these things trend. That said, because we're broadening the appeal of the technology into all of the cataract procedures, I also think that you'll see even higher utilization once the systems get installed and people get used to them in their operating rooms and sort of the efficiencies and flows there, particularly as we start working through some backlog of patients here in the coming years.
But you'll definitely see a higher mix of capital sales, especially in the first couple of years post-launch.
Richard Newitter
Great.
Nick Curtis
From a business model perspective, we're still, highly focused on a razor-blade model. And what you'll see are more we'll start to utilize some third-party financing so that we can have a better use of cash.
We've internally financed deals up until this time, but since we see – as we move into the take away, most occasions side of things, where – and we start to broaden into the broader cataract market, it's a better use of cash for us rather than to self-finance to prudently use a third-party financing as sort of a white label if you will. So, it's a LENSAR program to the customers.
So, it's seamless. And we finance these three to five years on a three- to five-year basis.
Richard Newitter
Great. Thank you very much for taking the questions.
Nick Curtis
Thank you, Rich.
Operator
We have no further questions. I will now turn the call back to management for closing remarks.
Nick Curtis
I'd really like to thank everyone for joining our call today and for your continued interest in LENSAR. And we really look forward to updating you as we make further progress and approach the filing and launch of ALLY.
Thank you.
Operator
This concludes today’s conference call. You may now disconnect.
Presenters, please hold the line.