The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this Quarterly Report, as well as the audited financial statements and the related notes thereto, and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" included in the Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see the "Risk Factor Summary" and "Risk Factors" sections for a discussion of the uncertainties, risks and assumptions associated with these statements.
Spin-Off
On
Our financial statements prior to
The cash flows related to payables due to PDL for certain historical cross
charge cost allocations were reflected in our condensed statements of cash flows
as operating activities. The cash flows, prior to our recapitalization, related
to the note payable due to PDL and our Series A Preferred Stock were reflected
in our condensed statements of cash flows as financing activities since these
balances represent amounts financed by PDL. Transactions with PDL that were not
historically settled in cash or were not expected to be settled in cash have
been included in the condensed balance sheets as a component of equity and are
reflected in our condensed statements of cash flows as financing activities. In
In connection with the Spin-Off, we entered into several agreements with PDL that govern the future relationship between us and PDL and impose certain obligations on us following the Spin-Off and which may cause us to incur new costs, including a Separation and Distribution Agreement, a Transition Services Agreement and a Tax Matters Agreement.
As an independent public company, we perform the functions described above using our own resources or purchased services. For an interim period, however, some of these functions were provided by PDL under the transition service agreements with PDL as described above in connection with the Spin-Off.
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Overview
We are a commercial-stage medical device company focused on designing, developing and marketing an advanced femtosecond laser system for the treatment of cataracts and the management of pre-existing or surgically induced corneal astigmatism. Our LENSAR Laser System incorporates a range of proprietary technologies designed to assist the surgeon in obtaining better visual outcomes, efficiency and reproducibility by providing advanced imaging, simplified procedure planning, efficient design and precision. We believe the cumulative effect of these technologies results in a laser system that can be quickly and efficiently integrated into a surgeon's existing practice, is easy to use and provides surgeons the ability to deliver improved visual outcomes.
Our current product portfolio consists of the LENSAR Laser System with Streamline IV and IntelliAxis and its associated consumable components. The consumable portion of the system consists of a disposable patient interface device, or PID, kit and a procedure license. Each procedure on each system requires the use of a PID kit. The PID kit includes a suction ring, vacuum filter and fluidic connection that are designed to facilitate placement of the laser while minimizing a patient's discomfort, intraocular pressure and trauma to the retina and maintaining corneal integrity. The procedure license is downloaded onto the system as required or as purchased by the customer. The system will not perform a procedure without an active license. We offer licenses in a subscription package with minimum monthly obligations and the ability to increase procedure numbers as the practice grows to address occasional increases in demand. We believe this structure allows the surgeon to implement a budget while also providing us with a predictable revenue stream.
We are focused on continuous innovation and are currently developing our
proprietary, next generation integrated cataract treatment system, ALLY. ALLY is
designed to combine our existing femtosecond laser technology with enhanced
capabilities and a phacoemulsification system into a single unit and allow
surgeons to perform each of the critical steps in a cataract procedure in a
single operating room using this device. We expect this combination product will
be a meaningful advancement and will provide significant administrative and
financial benefit to a surgeon's practice at a cost less than the cost of our
current system. We anticipate submitting an application for 510(k) clearance to
the
We have built and are continuing to grow our commercial organization, which
includes a direct sales force in
Our revenue increased from
Factors to Consider
We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. We are subject to risks common to medical device companies, including risks inherent in:
• our laser system development and commercialization efforts; • clinical trials; • uncertainty of regulatory actions and marketing approvals; • reliance on a network of international distributors and a network of suppliers; • levels of coverage and reimbursement by government or other third-party payors for procedures using our products; 21
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• patients' willingness and ability to pay for procedures with significant costs not covered by or reimbursable through government or other third-party payors; • enforcement of patent and proprietary rights; • the need for future capital; • the ongoing impact of the COVID-19 pandemic and all safety requirements and suggestions regarding patient treatment as required or suggested by health care authorities; and • competition associated with our products.
We cannot provide assurance that we will generate significant revenues or achieve and sustain profitability in the future. In addition, we can provide no assurance that we will have sufficient funding to meet our future capital requirements.
Our revenues and operating expenses are also difficult to predict and depend on several factors, including the level of ongoing research and development requirements necessary to complete development of our ALLY laser system, the number of laser systems we manufacture, sell, and lease on an annual basis, the availability of capital and direction from regulatory agencies, which are difficult to predict. We may be able to control the timing and level of research and development and selling, general and administrative expenses, but many of these expenditures will occur irrespective of our actions due to contractually committed activities and payments.
On
As a result of these and other factors, our historical results are not necessarily indicative of future performance, and any interim results we present are not indicative of the results that may be expected for the full fiscal year.
Components of Our Results of Operations
Revenue
Total revenue comprises product revenue, service revenue and lease revenue. We
derive product revenue from the sale of our laser systems and sales of our PID
and procedure licenses to our surgeon customers and to our distributors outside
Cost of Revenue
Total cost of revenue comprises cost of product revenue, cost of lease revenue and cost of service revenue.
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Cost of product revenue primarily consists of the raw materials used in the manufacture of our products, plant and equipment overhead, salaries and wages, including stock-based compensation and benefits, packaging costs, depreciation expense, freight and other related costs, which include shipping, inspection and excess and obsolete inventory charges. Cost of service revenue primarily consists of costs associated with providing maintenance services under the extended warranty contracts. Cost of lease revenue primarily consists of depreciation expense associated with leased equipment and shipping costs associated with delivery of these systems.
Selling, General and Administrative Expense
Our selling, general and administrative expenses consist primarily of personnel costs, such as salaries and wages, including stock-based compensation and benefits, professional and legal fees, marketing, insurance, travel and other expenses.
We are continuing to grow our sales efforts of the LENSAR Laser System in
Research and Development Expense
Our research and development expenses consist primarily of engineering, product development, clinical studies to develop and support our products, personnel costs, such as salaries and wages, including stock-based compensation and benefits, regulatory expenses, and other costs associated with products and technologies that are in development. Currently, our research and development expense primarily consists of costs associated with the continued development of our next-generation laser system, ALLY, which is designed to combine our existing femtosecond laser technology with a phacoemulsification system into an integrated cataract treatment system.
As we continue to advance the development of ALLY, we expect our research and development expenditures to increase from current levels, as we anticipate that the planned development of ALLY will consume significant capital resources.
Amortization of Intangible Assets
Intangible assets with finite useful lives consist primarily of acquired trademarks, acquired technology, and customer relationships. Acquired trademarks and acquired technology are amortized on a straight-line basis over their estimated useful lives of 15 to 20 years. Customer relationships are amortized on a straight-line basis or a double declining basis over their estimated useful lives up to 20 years, based on the method that better represents the economic benefits to be obtained.
Interest Expense
Prior to the Spin-Off, interest expense primarily consisted of interest expense
associated with the Series A Preferred Stock and a note payable to PDL. The
Series A Preferred Stock was classified as a liability on our balance sheet and
related dividends were recorded as interest expense using the effective interest
method. In
Seasonality
We have historically experienced seasonal variations in the sales and leases of our products, with our fourth quarter typically being the strongest and the third quarter being the slowest. We believe these seasonal variations are consistent across our industry.
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Results of Operations
Comparison of the Three Months Ended
Three Months Ended Change March 31, from Prior (Dollars in thousands) 2021 2020 Year (%) Revenue Product$ 5,158 $ 4,103 25.7 % Lease 1,111 976 13.8 % Service 774 827 (6.4 )% Total revenue$ 7,043 $ 5,906 19.3 %
Cost of revenue (exclusive of amortization)
Product$ 2,090 $ 1,206 73.3 % Lease 251 416 (39.7 )% Service 808 716 12.8 % Total cost of revenue$ 3,149 $ 2,338 34.7 % Revenue
Total revenue for the three months ended
Product revenue for the three months ended
Service revenue was consistent at
Geographically, the increase in product and service revenue combined was
primarily attributable to increased net revenues in the
Lease revenue for the three months ended
Cost of Revenue
Total cost of revenue for the three months ended
Cost of product revenue for the three months ended
Cost of service revenue for the three months ended
Cost of lease revenue for the three months ended
Operating Expenses
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended
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for corporate support functions. As we get closer to submitting the application
for 510(k) clearance of ALLY to the
Research and Development. Research and development expenses for the three months
ended
Amortization of Intangible Assets. Amortization of intangible assets was
Other Income (Expense)
Interest expense decreased by
Non-GAAP Financial Measures
We prepare and analyze operating and financial data and non-GAAP measures to
assess the performance of our business, make strategic and offering decisions
and build our financial projections. The key non-GAAP measures we use, EBITDA
and Adjusted EBITDA, are reconciled to net loss below for the three months ended
Three Months Ended March 31, (Dollars in thousands) 2021 2020 Net loss$ (5,182 ) $ (3,686 ) Add: Interest expense - 604 Less: Interest income (18 ) (17 ) Add: Depreciation expense 328 477 Add: Amortization expense 313 317 EBITDA (4,559 ) (2,305 ) Add: Stock-based compensation expense 2,320 85 Adjusted EBITDA$ (2,239 ) $ (2,220 )
EBITDA is defined as net loss before interest expense, income tax expense, interest income, depreciation and amortization expenses. EBITDA is a non-GAAP financial measure. EBITDA is included in this filing because we believe that EBITDA provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of actual results on a comparable basis with historical results. Adjusted EBITDA is also a non-GAAP financial measure. We believe Adjusted EBITDA, which excludes stock-based compensation expense, provides meaningful supplemental information for investors when evaluating our results and comparing us to peer companies as stock-based compensation expense is a significant non-cash charge due to the recapitalization of the Company. We use these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. However, there are a number of limitations related to the use of non-GAAP measures and their nearest GAAP equivalents. For example, other companies may calculate non-GAAP measures differently, or may use other measures to calculate their financial performance and, therefore, any non-GAAP measures we use may not be directly comparable to similarly titled measures of other companies.
Liquidity and Capital Resources
Overview
For the three months ended
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addition, as a stand-alone public company, we will incur significant legal, accounting and other expenses that we did not incur as a subsidiary of PDL.
As discussed above, we also expect the ongoing COVID-19 pandemic will negatively affect our capital requirements and more operating capital may be needed to fund our operations.
In
We issued 30,000 shares of Series A Preferred Stock to PDL in
In
On
On
Historically, as our former parent, PDL provided us cash management and other
treasury services. Following the Spin-Off, PDL no longer provides such services,
and our primary sources of liquidity are our cash on hand, cash from the sale
and lease of our systems and the sale of our consumables. We may raise
additional capital from equity or debt financings or from other sources. As of
As we get closer to the commercial launch of ALLY later in 2022, we expect selling, general and administrative expenses to increase from current levels. Clearance of ALLY and its subsequent launch in 2022 is contingent on the regulatory review and discretion of the FDA and is not entirely within our control.
Our liquidity needs will be largely determined by the success of our operations regarding the successful commercialization of our existing products and the progression, anticipated clearance and launch of ALLY in the future. We will need to raise additional capital through equity or debt financings, borrowings under credit facilities or from other sources to continue our operations beyond 2022. We may issue securities, including common stock, preferred stock, warrants, and/or debt securities through private placement transactions or registered public offerings in the future. If we issue equity securities to raise additional capital, our existing stockholders may experience dilution, and the new equity securities may have rights, preferences and privileges senior to those of our existing stockholders. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. In addition, if we raise additional capital through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products, potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.
Our ability to raise additional funds will depend, among other factors, on financial, economic and market conditions, many of which are outside of our control and we may be unable to raise financing when needed, or on terms favorable to us. If the necessary funds are not available from these sources, we may have to delay, reduce or suspend the scope of our sales and marketing efforts, research and development activities, or other components of our operations. Any of these events could adversely affect our ability to achieve our business and financial goals or to achieve or maintain profitability and could have a material adverse effect on our business, financial condition and results of operations. Additionally, the extent and duration of the impact the COVID-19 pandemic may have on our stock price and on those of other companies in our industry is highly uncertain and may make us look less attractive to investors and, as a result, there may be a less active trading market for our common stock, our stock price may be more volatile, and our ability to raise capital could be impaired, which could in the future negatively affect our liquidity and financial position.
We expect our revenue and expenses to increase in connection with our on-going activities, particularly as we continue to execute on our growth strategy, including expansion of our sales and customer support teams. We also expect to incur additional costs as a stand-alone public company. The primary factors determining our cash needs are the funding of operations, which we expect to continue to expand as the business grows, and enhancing our product offerings through the research and development of ALLY, our next
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generation integrated cataract treatment system. Our future liquidity needs, and ability to address those needs, will largely be determined by the success of our commercial efforts and those of our distributors; the ongoing impact of COVID-19 on our business; the timing, scope and magnitude of our commercial and development activities; and the timing of regulatory clearance of ALLY.
Cash Flows
The following table summarizes, for the periods indicated, selected items in our condensed statements of cash flows:
Three Months Ended March 31, (Dollars in thousands) 2021 2020 Net cash used in operating activities$ (4,619 ) $ (6,364 ) Net cash used in investing activities (114 ) (93 ) Net cash provided by financing activities - 4,384
Net decrease in cash, cash equivalents and restricted cash
Operating Activities
Net cash used in operating activities for the three months ended
Net cash used in operating activities for the three months ended
Investing Activities
Net cash used in investing activities for the three months ended
Net cash used in investing activities for the three months ended
Financing Activities
Net cash provided by financing activities for the three months ended
Net cash provided by financing activities for the three months ended
Stock-Based Incentive Plan
On
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three months ended
AtMarch 31, 2021 , there was approximately$11.0 million and$1.4 million of total unrecognized compensation expense related to restricted stock awards and stock options, respectively, which is expected to be recognized over a weighted-average period of 1.3 years and 3.4 years, respectively. Total unrecognized stock-based compensation expense is expected to be amortized as follows: (Dollars in thousands) Amount Remainder of 2021$ 3,835 2022 5,089 2023 3,250 2024 205 2025 28 Thereafter - Total unrecognized stock-based compensation expense 12,407
The amounts included in this table are based on restricted stock awards and
stock options outstanding at
Off Balance Sheet Arrangements
As of
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