LENSAR, INC. 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. 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 systems incorporate 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 includes the LENSAR Laser System with Streamline IV and IntelliAxis (both our first generation and ALLY Systems) and its associated consumable components. The consumable portion of the system consists of a disposable patient interface device kit, or PID kit, and the system also requires 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 a valid license. We sell licenses individually and also 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 have launched our proprietary next generation ALLY™ Adaptive Cataract Treatment System, or ALLY System. The ALLY System, which has received clearance from theU.S. Food and Drug Administration , or FDA, enables cataract surgeons to complete the femtosecond-laser-assisted cataract surgery, or FLACS, procedure seamlessly in a single, sterile environment. This clearance is the first stage of a planned, two step commercial release strategy. We are coordinating a controlled and targeted initial launch of the ALLY System throughout the remainder of 2022. The ALLY System is expected to be made widely available toU.S. cataract surgeons in 2023. Our ability to place systems in 2022 has been limited by supply chain constraints that have delayed the delivery of certain ALLY System raw materials and the completion and testing of ALLY Systems for use as launch-stock inventory. As the second stage of the commercial release strategy, we plan to seek an additional 510(k) clearance for the phacoemulsification features of the ALLY System in a subsequent 510(k) submission subject to a third party's phacoemulsification device receiving clearance and serving as the predicate device. As this device will be considered the predicate device for purposes of evaluating the ALLY System's phacoemulsification functionality, we are unable to submit our second 510(k) submission seeking clearance of the phacoemulsification features within the ALLY System until the predicate device receives FDA clearance. Accordingly, we have delivered the ALLY System to surgeons in the initial launch with the phacoemulsification features remaining disabled and/or removed and expect this to continue. We believe the ALLY System's enhanced efficiencies and potential for combined functions in the future will help drive broader penetration for us into the overall cataract surgery market and could create a paradigm shift in the treatment of cataracts and management of astigmatism in cataract surgery. We believe 2022 is a transition year for the Company, as we have transitioned from manufacturing and selling our LENSAR Laser System and are focusing on our ALLY System. InSeptember 2022 , we submitted the ALLY System for certification in theEuropean Union , or EU, and intend to submit additional marketing or certification applications outsidethe United States in an effort to commercialize the ALLY System in additional countries and operating regions. Our growth, market presence and ability to sell the ALLY System will depend on whether the ALLY System receives regulatory clearance in that region, among other factors. In addition, based on inventory of our LENSAR Laser System, our future revenue and cash flows will depend on, among other factors, our installed base of systems and the timing of and applicable clearances for our ALLY System. We have built and are continuing to grow our commercial organization, which includes a direct sales force inthe United States and distributors inGermany ,China ,South Korea and other targeted international markets. We believe there is significant opportunity for us to expand our presence in these countries and other markets and regions. Inthe United States , we sell our products through a direct sales organization that, as ofSeptember 30, 2022 , consisted of approximately 45 commercial professionals, including regional sales managers, clinical applications and outcomes specialists, field service, marketing, technical and customer support personnel. We manufacture our 17 -------------------------------------------------------------------------------- systems at a facility inOrlando, Florida . We purchase custom and off-the-shelf components from a number of suppliers, including some single-source suppliers. We purchase the majority of our components and major assemblies through purchase orders with limited long-term supply agreements and generally do not maintain large volumes of finished goods. We strive to maintain enough inventory of our various component parts to avoid the impact of potential disruptions in the supply chain; however, availability of these components can be outside of our control, especially with the impact of the COVID-19 pandemic on the global supply chain of certain products, including increasing lead times required for the ordering of component parts to meet targeted production goals, unpredictability with respect to suppliers' ability to fulfill orders in the requested quantities within the agreed timeframe and the ability to find alternative component parts. Our revenue decreased from$8.3 million for the three months endedSeptember 30, 2021 to$7.7 million for the three months endedSeptember 30, 2022 , representing a decrease of 6%, primarily due to decreased systems sales and decreased procedure volume. Our net losses were$4.0 million and$6.2 million for the three months endedSeptember 30, 2022 and 2021, respectively. The decrease in net loss is primarily due to decreased research and development costs for the ALLY System. Our installed base of LENSAR Laser Systems is approximately 260 as ofSeptember 30, 2022 . Our revenue increased from$23.2 million for the nine months endedSeptember 30, 2021 to$25.1 million for the nine months endedSeptember 30, 2022 , representing an increase of 8%, primarily due to increased procedure volume. Our net losses were$17.4 million and$15.7 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in net loss is primarily due to pre-production inventory for the ALLY System, which was recorded as research and development expenses throughApril 30, 2022 , when future commercialization of our ALLY System was considered probable and the future economic benefit was expected to be realized.
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:
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our laser system development and commercialization efforts;
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clinical studies;
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uncertainty of regulatory actions and marketing approvals or certifications;
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reliance on a network of international distributors and a network of suppliers;
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levels of coverage and reimbursement by government or other third-party payors for procedures using our products;
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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;
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enforcement of patent and proprietary rights;
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the need for future capital;
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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;
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clearance or certification by regulatory agencies, including the FDA, or notified bodies for our ALLY System;
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supply chain shortages, labor market shifts and price increases resulting from the COVID-19 pandemic and related macroeconomic factors; and
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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 and obtain further regulatory
clearance or certification of our ALLY System, the number of laser systems we
manufacture, sell, and lease on an annual basis, the availability of capital and
direction from regulatory agencies or notified bodies, 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.
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On March 11, 2020 , the World Health Organization declared a global pandemic, as
the outbreak of a novel strain of coronavirus spread throughout the world.
Actions taken to mitigate coronavirus have had, and are expected to continue to
have, an impact on the geographical areas in which we operate, and we are
continually making adjustments intended to assist in protecting the safety of
our employees and communities and maintaining appropriate inventories and
component parts to continue our business activities where possible and legally
permitted. In response, we have increased safety stock of certain critical
components and are continuously evaluating our supply chain to identify
potential gaps and take steps intended to ensure business continuity.
Although procedure volume in 2021 and the first three quarters of 2022 has
returned to pre-pandemic levels, the COVID-19 pandemic continues to influence
our operations, particularly as it relates to building inventory for the ALLY
System. We have experienced some supply chain disruptions and unavailability of
various component parts needed for our systems, including increasing lead times
required for the ordering of component parts to meet targeted production goals
and unpredictability with respect to our suppliers' ability to fulfill orders in
the requested quantities, within the agreed timeframe as well as an increase of
costs associated with certain raw materials and component parts. To date, we
have maintained sufficient inventory to mitigate significant adverse impact from
such disruptions and unavailability in the near-term and to meet the expected
needs of our initial launch of the ALLY System; however, we are continuing to
monitor developments with respect to the outbreak and its potential impact on
our operations and to our employees, distributors, partners, suppliers, and
regulators. The lingering impacts of COVID-19 into 2022 have impeded global
supply chains, resulted in longer lead times and delays in procuring component
parts and raw materials, and resulted in inflationary cost increases in certain
raw materials, labor and transportation. In particular, a global semiconductor
supply shortage resulting from the COVID-19 pandemic is having wide-ranging
effects across multiple industries, and we are seeing more significant
disruptions in the supply of, timing of delivery of and fluctuations in pricing
for various component parts needed for our products, including the integrated
circuits used in our systems. These broad-based inflationary impacts have
negatively impacted the Company's financial condition, results of operations and
cash flows since 2020 and these supply chain constraints may result in future
impacts to our business. We expect these inflationary impacts to continue for
the foreseeable future. A high rate of inflation in the future may have an
adverse effect on our ability to maintain and increase our gross margin or
decrease our operating expenses as a percentage of our revenues if our selling
prices of our products do not increase as much or more than our increase in
costs.
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 PIDs and procedure licenses to our surgeon customers and to our distributors outsidethe United States . A PID and procedure license, which may also be referred to as an application license, is required to perform each procedure using our laser system. A procedure license represents a one-time right to utilize the system surgical application in connection with a surgery procedure. Service revenue is derived from the sale of extended warranties for our laser systems that provide additional maintenance and service beyond our standard limited warranty. In some situations, we lease our laser systems to surgeons, primarily through non-cancellable leases with a fixed lease payment. We consider all components of our revenue to be recurring source revenue, with the exception of sales of our systems. For the three and nine months endedSeptember 30, 2022 , approximately 88% and 92% of our revenue, respectively, was attributable to recurring sources, compared to 87% and 89% for the three and nine months endedSeptember 30, 2021 , respectively. Cost of Revenue
Total cost of revenue comprises cost of product revenue, cost of lease revenue and cost of service revenue.
Cost of product revenue primarily consists of the raw materials used in the manufacture of our products, plant overhead, personnel costs, such as 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 our standard limited warranty as well as 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 fees, marketing, insurance, travel and other expenses.
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We are continuing to grow our sales efforts in the United States . We expect our
selling, general and administrative expenses to continue to increase in
association with our planned growth. Additionally, we anticipate additional
increases in selling, general and administrative expenses as we launch the ALLY
System.
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 system, the ALLY System, which is designed to combine our existing femtosecond laser technology with a phacoemulsification system into an integrated cataract treatment system. The Company recognized pre-launch inventory costs as research and development expenses throughApril 30, 2022 , when future commercialization of our ALLY System was considered probable and the future economic benefit was expected to be realized.
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. 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 first or third quarter being the slowest. We believe these seasonal variations are consistent across our industry.
Results of Operations
Comparison of the Three and Nine Months Ended
Three Months Ended Change Nine Months Ended Change
September 30, from Prior September 30, from Prior
(Dollars in
thousands) 2022 2021 Year (%) 2022 2021 Year (%)
Revenue
Product $ 5,486 $ 6,084 (10 )% $ 18,188 $ 17,298 5 %
Lease 1,472 1,285 15 % 4,286 3,536 21 %
Service 790 903 (13 )% 2,652 2,403 10 %
Total revenue $ 7,748 $ 8,272 (6 )% $ 25,126 $ 23,237 8 %
Cost of revenue
(exclusive of
amortization)
Product $ 2,189 $ 2,915 (25 )% $ 6,648 $ 7,371 (10 )%
Lease 488 448 9 % 1,446 967 50 %
Service 1,182 1,058 12 % 3,559 2,696 32 %
Total cost of revenue $ 3,859 $ 4,421 (13 )% $ 11,653 $ 11,034 6 %
Revenue
Three Months Ended
Total revenue for the three months ended
Product revenue for the three months endedSeptember 30, 2022 decreased by$0.6 million , or 10%, compared to the three months endedSeptember 30, 2021 . The decrease was primarily attributable to decreased procedure volume outside of theU.S. andEurope , which resulted in a decrease of$0.5 million , during the three months endedSeptember 30, 2022 . The decrease in these procedures was driven by ongoing cataract procedure reimbursement challenges between ophthalmic surgical practices and third-party payors inSouth Korea . We anticipate these challenges will continue for the near term. However, procedure volume increased inthe United States andEurope during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . 20 -------------------------------------------------------------------------------- Service revenue for the three months endedSeptember 30, 2022 decreased by$0.1 million , or 13%, compared to the three months endedSeptember 30, 2021 . OurU.S. sales represented 70% and 50% of product and service revenue for the three months endedSeptember 30, 2022 and 2021, respectively.
Lease revenue for the three months ended
Nine Months Ended
Total revenue for the nine months ended
Product revenue for the nine months endedSeptember 30, 2022 increased by$0.9 million , or 5%, compared to the nine months endedSeptember 30, 2021 . The increase was primarily attributable to increased procedure volume, which resulted in an increase of$1.4 million , offset by a decrease in system sales of$0.5 million as we completed placement of the last new LENSAR Laser Systems in inventory as part of our operational transition to the ALLY System's commercial launch and commenced sales of the ALLY System in the third quarter of 2022. Service revenue for the nine months endedSeptember 30, 2022 increased by$0.2 million , or 10%, compared to the nine months endedSeptember 30, 2021 primarily due to the increased number of systems installed. The increase in product and service revenue combined was primarily attributable to increased net revenues in most of our operating regions as procedure volume was higher than during the equivalent period in 2021. OurU.S. sales represented 60% and 55% of product and service revenue for the nine months endedSeptember 30, 2022 and 2021, respectively.
Lease revenue for the nine months ended
Cost of Revenue
Three Months Ended
Total cost of revenue for the three months ended
Cost of product revenue for the three months endedSeptember 30, 2022 decreased by$0.7 million , or 25%, compared to the three months endedSeptember 30, 2021 . The lower cost of product revenue was attributable to the decreased number of system sales in the 2022 period, which have a lower gross margin than procedure licenses, and decreased procedure volume between the periods. We expect cost of product revenue to fluctuate in future periods as supply chain challenges have resulted in higher costs of ALLY System inventory and availability of systems; however, these increases are partially offset by ALLY System raw materials and production costs throughApril 2022 being charged to research and development expenses rather than inventory. Cost of service revenue for the three months endedSeptember 30, 2022 decreased by$0.1 million , or 12%, compared to the three months endedSeptember 30, 2021 primarily due to higher service costs. Cost of lease revenue for the three months endedSeptember 30, 2022 increased by$40,000 , or 9%, compared to the three months endedSeptember 30, 2021 . Cost of lease revenue increased primarily due to depreciation of newly leased systems.
Nine Months Ended
Total cost of revenue for the nine months ended
Cost of product revenue for the nine months endedSeptember 30, 2022 decreased by$0.7 million , or 10%, compared to the nine months endedSeptember 30, 2021 . The lower cost of product revenue was attributable to the decreased number of sales of LENSAR Laser Systems in the 2022 period, which have a lower gross margin than procedure licenses, offset by increased procedure volume between the periods. We expect cost of product revenue to fluctuate in future periods as supply chain challenges have resulted in higher costs of ALLY System inventory and have limited, and created inefficiencies with, ALLY System production. We expect these higher costs to offset with ALLY System raw materials and production being expensed to research and development expenses rather than into inventory throughApril 2022 . 21 -------------------------------------------------------------------------------- Cost of service revenue for the nine months endedSeptember 30, 2022 increased by$0.9 million , or 32%, compared to the nine months endedSeptember 30, 2021 primarily due to higher service costs. Cost of lease revenue for the nine months endedSeptember 30, 2022 increased by$0.5 million , or 50%, compared to the nine months endedSeptember 30, 2021 . Cost of lease revenue increased primarily due to depreciation of newly leased systems.
Operating Expenses
Three Months Ended
Selling, General and Administrative. Selling, general and administrative expenses for the three months endedSeptember 30, 2022 were$6.1 million , a decrease of$0.4 million , or 6%, compared to$6.5 million for the three months endedSeptember 30, 2021 . The decrease was due primarily to decreases in sales and marketing expenses of$0.5 million , due to timing of trade show and travel activity. We expect selling, general and administrative expense to increase from current levels as we continue to launch the ALLY System. Research and Development. Research and development expenses for the three months endedSeptember 30, 2022 were$1.6 million , a decrease of$1.6 million , or 50%, compared to$3.2 million for the three months endedSeptember 30, 2021 . The decrease was primarily attributable to significantly lower costs for the development of the ALLY System in the three months endedSeptember 30, 2022 , including$0.9 million of ALLY System inventory costs that was expensed to research and development in the three months endedSeptember 30, 2021 . Following our receipt of 510(k) clearance for the ALLY System from the FDA inJune 2022 , all ALLY System inventory costs were capitalized to inventory. Amortization of Intangible Assets. Amortization of intangible assets was$0.3 million for the three months endedSeptember 30, 2022 , consistent with the three months endedSeptember 30, 2021 .
Nine Months Ended
Selling, General and Administrative. Selling, general and administrative expenses for the nine months endedSeptember 30, 2022 were$20.0 million , an increase of$1.9 million , or 10%, compared to$18.1 million for the nine months endedSeptember 30, 2021 . The increase was due to increases in sales and marketing expenses of$0.8 million , which was primarily the result of increased trade show and travel activity and$0.8 million of increased professional fees. We expect selling, general and administrative expense to increase from current levels as we continue the commercial launch of the ALLY System. Research and Development. Research and development expenses for the nine months endedSeptember 30, 2022 were$10.2 million , an increase of$1.3 million , or 14%, compared to$8.9 million for the nine months endedSeptember 30, 2021 . The increase was primarily attributable to increased expenses for the continued development of the ALLY System, as well as inventory costs for the manufacture of ALLY Systems, which amounted to approximately$3.4 million and$2.6 million during the nine months endedSeptember 30, 2022 and 2021, respectively. Amortization of Intangible Assets. Amortization of intangible assets was$0.9 million for the nine months endedSeptember 30, 2022 , consistent with the nine months endedSeptember 30, 2021 .
Non-GAAP Financial Measures
We prepare and analyze operating and financial data and non-GAAP measures to assess the performance of our business, make strategic and offering decisions and build our financial projections. The key non-GAAP measures we use, EBITDA and Adjusted EBITDA, are reconciled to net loss below for the three and nine months endedSeptember 30, 2022 and 2021. Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands) 2022 2021 2022 2021 Net loss$ (3,991 ) $ (6,155 ) $ (17,424 ) $ (15,699 ) Less: Interest income (92 ) (10 ) (140 ) (41 ) Add: Depreciation expense 571 393 1,681 1,063 Add: Amortization expense 276 309 872 931 EBITDA (3,236 ) (5,463 ) (15,011 ) (13,746 ) Add: Stock-based compensation expense 1,672 1,573 4,916 5,323 Adjusted EBITDA$ (1,564 ) $ (3,890 ) $ (10,095 ) $ (8,423 ) 22
-------------------------------------------------------------------------------- EBITDA is defined as net loss before interest expense, interest income, income tax expense, 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 nine months endedSeptember 30, 2022 and 2021, we had net losses of$17.4 million and$15.7 million , respectively, and as ofSeptember 30, 2022 , we had an accumulated deficit of$95.0 million . We expect to continue to incur losses and operating cash outflows for the foreseeable future as we continue to build our commercial and clinical infrastructure and pursue further regulatory clearances of our ALLY System.
As discussed above, the ongoing COVID-19 pandemic has negatively affected our capital requirements and more operating capital may be needed to fund our operations in the future.
Our primary sources of liquidity are our cash and cash equivalents, cash from the sale and lease of our systems and the sale of our consumables. As discussed above, the ongoing COVID-19 pandemic has negatively affected our capital requirements and more operating capital may be needed to fund our operations in the future. As ofSeptember 30, 2022 , we expect our current cash and cash equivalents, together with cash generated from the future sale and lease of our products, to be sufficient to operate our business into 2024. We expect selling, general and administrative expenses to increase from current levels due to the continued commercial launch of the ALLY System, particularly if supply chain constraints begin to ease. The successful commercialization of the ALLY System depends in part on the Company's ability to produce the ALLY System in sufficient quantities and within requested timing to satisfy customer demand. Ongoing supply chain disruptions and unavailability of various parts needed to manufacture the ALLY System may have an adverse impact on the Company's ability to meet customer demand for the ALLY System. Our liquidity needs will be largely determined by the success of our operations regarding the successful commercialization of our products and the progression, additional regulatory clearances or certifications and launch of the ALLY System in additional jurisdictions in the future. Such success will depend in part on the availability of the necessary component parts for the ALLY System. We believe 2022 is a transition year for the Company, as we have transitioned from manufacturing and selling our LENSAR Laser System and are focusing on our ALLY System. InSeptember 2022 , we submitted the ALLY System for certification in the EU and intend to submit additional marketing or certification applications outsidethe United States in an effort to commercialize the ALLY System in additional countries and operating regions. Our growth, market presence and ability to sell the ALLY System in a particular region will depend on whether the ALLY System receives regulatory clearance in that region, among other factors. In addition, based on inventory of our LENSAR Laser System, our future revenue and cash flows will depend on, among other factors, our installed base of systems and the timing of and applicable clearances for our ALLY System. We expect 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 2024. 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. 23 -------------------------------------------------------------------------------- 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. 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, development, and launch of the ALLY System, our next 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 and supply chain issues on our business; and the timing, scope and magnitude of our commercial and development activities. Our material contractual obligations and commercial commitments atSeptember 30, 2022 primarily consist of$3.0 million in operating lease payments for our facility lease and$7.5 million in minimum purchase obligations for inventory components for the manufacture and supply of certain components within the next 24 months. Our contractual obligations have increased due to supply chain issues that have necessitated us to enter into longer-term and more expensive per unit contracts to build and source inventory to satisfy the expected commercial demand for the ALLY System, if approved by regulatory authorities or certified by notified bodies in the applicable regions.LENSAR expects to meet these requirements through cash and cash equivalents and cash provided by operations. Some of these amounts are based on management's estimates and assumptions about these obligations, including their duration, timing, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the obligations we will actually pay in future periods may vary from those described. Furthermore, the Company acquired certain intellectual property, which would result in additional royalty payments at a rate of 3% of certain revenue upon the phacoemulsification features being cleared for commercialization and operational in the ALLY system. We currently have an effective shelf registration statement on Form S-3 (No. 333-255136) filed with theSEC onApril 8, 2021 (the "Registration Statement") under which we may offer from time to time in one or more offerings any combination of common and preferred stock, debt securities, depositary shares, warrants, purchase contracts and units of up to$100.0 million in the aggregate. We also simultaneously entered into a sales agreement withSVB Leerink LLC , as sales agent, providing for the offering, issuance and sale by us of up to an aggregate$35.0 million of our common stock from time to time in "at-the-market" ("ATM") offerings under the Registration Statement. Any sales by us pursuant to the Registration Statement, including any sales pursuant to the ATM offering, will be subject to any limits imposed under applicable law, including General Instructions I.B.1 and I.B.6 of Form S-3. During the three months endedSeptember 30, 2022 , we sold 2,000 shares of our common stock, pursuant to ATM offerings, at a weighted average gross sales price of$6.46 per share. Proceeds from the sale were offset by offering costs and commissions associated with the transactions. Cash Flows
The following table summarizes, for the periods indicated, selected items in our condensed statements of cash flows:
Nine Months Ended
September 30,
(Dollars in thousands) 2022 2021
Net cash used in operating activities $ (10,098 ) $ (8,230 )
Net cash used in investing activities (58 ) (198 )
Net cash (used in) provided by financing activities (2,188 ) 170
Net decrease in cash and cash equivalents $ (12,344 ) $ (8,258 )
Operating Activities
Net cash used in operating activities for the nine months ended September 30,
2022 was $10.1 million , consisting primarily of a net loss of $17.4 million and
a decrease in net operating assets of $0.7 million , partially offset by non-cash
charges of $8.0 million . The decrease in net operating assets was primarily due
to changes in inventories offset by changes in accounts receivable and accounts
payable. Non-cash charges primarily consisted of depreciation, amortization, and
stock-based compensation.
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Net cash used in operating activities for the nine months ended September 30,
2021 was $8.2 million , consisting primarily of a net loss of $15.7 million and a
decrease in net operating assets of $0.7 million , partially offset by non-cash
charges of $8.1 million . The decrease in net operating assets was primarily due
to changes in accounts receivable, inventories and accrued liabilities offset by
changes in prepaid and other current assets. Non-cash charges primarily
consisted of depreciation, amortization, and stock-based compensation.
Investing Activities
Net cash used in investing activities for the nine months endedSeptember 30, 2022 was$0.1 million , which consisted primarily of capital expenditures for property and equipment. Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$0.2 million , which consisted primarily of capital expenditures for property and equipment. Financing Activities Net cash used in financing activities for the nine months endedSeptember 30, 2022 was$2.2 million , primarily due to the payment of$2.4 million in contingent consideration due to regulatory approval of the ALLY System offset from proceeds from the sale of common stock under the employee stock purchase plan. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was$0.2 million , primarily due to proceeds from the sale of common stock under the employee stock purchase plan.
Stock-Based Incentive Plan
The 2020 Incentive Award Plan provides for the grant of stock options, restricted stock, restricted stock unit awards and other stock-based awards to recipients. During 2021, we granted stock options to directors, employees, and non-employees. During the nine months endedSeptember 30, 2022 , we granted stock options and restricted stock units to employees and non-employees. We intend to grant stock options and restricted stock units as part of our overall compensation package to directors and employees. AtSeptember 30, 2022 , there was approximately$4.0 million ,$0.4 million , and$3.2 million of total unrecognized compensation expense related to restricted stock awards, restricted stock units and stock options, respectively, which is expected to be recognized over a weighted-average period of 0.9 years, 2.5 years and 2.7 years, respectively. Total unrecognized stock-based compensation expense is expected to be amortized as follows: (Dollars in thousands) Amount 2022$ 1,649 2023 4,231 2024 994 2025 639 2026 24 Thereafter -
Total unrecognized stock-based compensation expense
The amounts included in this table are based on restricted stock awards, restricted stock units, and stock options outstanding atSeptember 30, 2022 and assumes the requisite service period is fulfilled for all awards outstanding. Actual stock-based compensation expense in future periods may vary from those reflected in the table.
Off Balance Sheet Arrangements
As of
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity withU.S. Generally Accepted Accounting Principles, or GAAP, and the discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The impact of accounting estimates and judgments on our financial condition and results of operations due to COVID-19 has introduced additional uncertainties. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates and such differences may be material. 25 -------------------------------------------------------------------------------- There have been no significant and material changes in our critical accounting estimates during the three months endedSeptember 30, 2022 , as compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Annual Report.
Recently Issued Accounting Standards
See Note 2, Summary of Significant Accounting Policies, to our unaudited
condensed financial statements included in this Quarterly Report for a
discussion of recently adopted accounting pronouncements and recently issued
accounting pronouncements not yet adopted as of
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