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. Spin-Off OnOctober 1, 2020 , PDL completed a spin-off ofLENSAR, Inc. , its medical device business segment ("Spin-Off"). The Spin-Off was in the form of a dividend involving the distribution of substantially all outstanding shares ofLENSAR common stock owned by PDL to holders of PDL common stock. The Spin-Off created a separate, independent, publicly traded global 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. In connection with the Spin-Off, our stock began trading under the symbol "LNSR" on theNasdaq Stock Market LLC ("Nasdaq"). Our financial statements prior toOctober 1, 2020 were prepared on a stand-alone basis and were derived from PDL's consolidated financial statements and accounting records. Our financial statements reflect, in conformity with accounting principles generally accepted inthe United States , our financial position, results of operations, and cash flows as the business was historically operated as part of PDL prior to the Spin-Off. The condensed statements of operations include direct expenses for cost of revenue; research and development; selling, general and administrative expenses; and amortization, as well as allocated expenses for certain corporate support functions that were provided by PDL, such as administration and organizational oversight, including employee benefits, finance and accounting, treasury and risk management, professional and legal services, among others. These expenses were allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a proportional basis of our expenses and expenses of PDL. Our management and PDL's management considered the basis on which the expenses have been allocated to be a reasonable reflection of utilization of services provided to or to the benefit received by us during the periods presented. These allocations may not be reflective of the expenses that would have been incurred had we operated as a separate, unaffiliated entity apart from PDL. Actual costs that would have been incurred if we had been a stand-alone, public company would depend on multiple factors, including the chosen organizational structure and strategic decisions made in various areas, including information technology and infrastructure. 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. InJuly 2020 , we entered into a contribution and exchange agreement with PDL, whereby we issued to PDL a total of 2.8 million shares of our common stock in exchange for the extinguishment of the$32.6 million outstanding, including accrued interest, we owed to PDL under the term loan facility we entered into with PDL inMay 2017 and amended inJuly 2020 , or the Credit Agreement. InJuly 2020 , we issued to PDL a total of 3.4 million shares of our common stock in exchange for the extinguishment of all 30,000 shares of our Series A Preferred Stock, including any accrued and unpaid dividends thereon. We currently do not have any shares of Series A Preferred Stock outstanding. OnSeptember 10, 2020 , we amended and restated our certificate of incorporation to effect a one-for-nine reverse stock split of our common stock. All issued and outstanding shares of common stock, other common stock share numbers, equity awards and per share amounts contained in the financial statements have been retroactively adjusted to give effect to the reverse stock split for all periods presented. 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. 20 --------------------------------------------------------------------------------
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 theU.S. Food and Drug Administration , or FDA, by the end of the first quarter of 2022 and, subject to FDA clearance, we expect to begin commercialization of ALLY by the end of 2022. If ALLY is cleared by the FDA, we believe its lower cost of goods and combined functions 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 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 ofJune 30, 2021 , consisted of approximately 35 commercial professionals, including regional sales managers, clinical applications and outcomes specialists, field service, technical and customer support personnel. We currently manufacture our LENSAR Laser System 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 ensure timely delivery. Our revenue increased from$5.0 million for the three months endedJune 30, 2020 to$7.9 million for the three months endedJune 30, 2021 , representing an increase of 57.0%, primarily due to increased procedure volume. Our net losses were$4.4 million and$4.5 million for the three months endedJune 30, 2021 and 2020, respectively. Additionally, our installed base of LENSAR Laser Systems has increased from approximately 225 as ofDecember 31, 2020 to approximately 235 as ofJune 30, 2021 . Our revenue increased from$11.0 million for the six months endedJune 30, 2020 to$15.0 million for the six months endedJune 30, 2021 , representing an increase of 36.6%, primarily due to sales of the LENSAR Laser System and increased procedure volume. Our net losses were$9.5 million and$8.2 million for the six months endedJune 30, 2021 and 2020, respectively.
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;
21
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• 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;
• 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. OnMarch 11, 2020 , theWorld Health Organization declared a global pandemic, as the outbreak of a novel strain of coronavirus spread throughout the world. The outbreak of COVID-19 has significantly disrupted our business operations and adversely impacted our business, as non-essential medical procedures, including cataract surgeries, were suspended or significantly decreased in many geographic areas in which we operate for approximately three months. Actions taken to mitigate coronavirus have had, and are expected to continue to have, an adverse impact on the geographical areas in which we operate, and we are making adjustments intended to assist in protecting the safety of our employees and communities while continuing our business activities where possible and legally permitted. To date, implementation of these measures has not required material expenditures, but the temporary suspension of non-essential medical services significantly impacted our revenues and cash flows in 2020 as well as increasing our inventories, and the pandemic continues to disrupt our commercial operations. During the second quarter of 2020, we made lease concessions to several customers related to the effects of the COVID-19 pandemic, which adversely impacted revenue recognized during the period. In return for these concessions, the related contracts were extended by the same number of months waived. Although procedure volume has returned to pre-pandemic levels inthe United States andEurope , the COVID-19 pandemic continues to negatively influence our ability to grow system placements at historical levels. We have also experienced some supply chain disruptions and unavailability of various component parts needed for our LENSAR Laser System and the development of our ALLY laser system as a result of COVID-19, including increasing lead times required for the ordering of component parts to ensure timely delivery. To date, we have maintained sufficient inventory to mitigate adverse impact from such disruptions and unavailability; 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.
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 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 theLENSAR Laser 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 ourLENSAR laser systems. For the three and six months endedJune 30, 2021 , approximately 90% of 22 -------------------------------------------------------------------------------- our revenue was attributable to recurring sources, compared to 78% and 90% for the three and six months endedJune 30, 2020 , respectively. For the three months endedJune 30, 2020 , recurring revenue was significantly impacted by suspensions of non-essential medical services due to COVID-19.
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 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 inthe United States . We expect our selling, general and administrative expenses to continue to increase in association with our planned growth. Additionally, if we receive regulatory clearance for ALLY, we anticipate additional increases in selling, general and administrative expenses as we prepare for and launch ALLY. We also expect to incur additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and those of theSEC , as well as increased expenses for director and officer insurance, investor relations and professional services.
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. InJuly 2020 , we entered into a contribution and exchange agreement with PDL, whereby we issued to PDL a total of 2.8 million shares of our common stock in exchange for the extinguishment of the$32.6 million , including accrued interest, we owed to PDL under the Credit Agreement. InJuly 2020 , we issued to PDL a total of 3.4 million shares of our common stock in exchange for the extinguishment of all 30,000 shares of our Series A Preferred Stock, including any accrued and unpaid dividends thereon. We currently do not have any shares of Series A Preferred Stock outstanding. Seasonality 23
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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.
Results of Operations
Comparison of the Three and Six Months Ended
Three Months Ended Change Six Months Ended Change
June 30, from Prior June 30, from Prior
(Dollars in thousands) 2021 2020 Year (%) 2021 2020 Year (%)
Revenue
Product $ 6,056 $ 3,993 51.7 % $ 11,214 $ 8,096 38.5 %
Lease 1,140 470 142.6 % 2,251 1,446 55.7 %
Service 726 584 24.3 % 1,500 1,411 6.3 %
Total revenue $ 7,922 $ 5,047 57.0 % $ 14,965 $ 10,953 36.6 %
Cost of revenue (exclusive of
amortization)
Product $ 2,366 $ 2,262 4.6 % $ 4,456 $ 3,468 28.5 %
Lease 268 280 (4.3 )% 519 696 (25.4 )%
Service 830 559 48.5 % 1,638 1,275 28.5 %
Total cost of revenue $ 3,464 $ 3,101 11.7 % $ 6,613 $ 5,439 21.6 %
Revenue
Three Months Ended
Total revenue for the three months ended
Product revenue for the three months ended
Service revenue for the three months ended
Geographically, the increase in product and service revenue combined was primarily attributable to increased net revenues in theU.S. as procedure volume exceeded pre-COVID levels. OurU.S. sales represented 58.1% and 35.5% of product and service revenue for the three months endedJune 30, 2021 and 2020, respectively.
Lease revenue for the three months ended
Six Months Ended
Total revenue for the six months ended
Product revenue for the six months endedJune 30, 2021 increased by$3.1 million , or 38.5%, compared to the six months endedJune 30, 2020 . The increase was primarily attributable to increased procedure volume, and to a more limited extent, sales of the LENSAR Laser System.
Service revenue for the six months ended
Geographically, the increase in product and service revenue combined was primarily attributable to increased net revenues in theU.S. as procedure volume exceeded pre-COVID levels. OurU.S. sales represented 58.0% and 46.7% of product and service revenue for the six months endedJune 30, 2021 and 2020, respectively.
Lease revenue for the six months ended
24
--------------------------------------------------------------------------------Cost of Revenue
Three Months Ended
Total cost of revenue for the three months ended
Cost of product revenue for the three months endedJune 30, 2021 was consistent with the three months endedJune 30, 2020 at approximately$2.4 million . Increased procedure volume between the periods offset the lower cost of product revenue attributable to the number of sales of LENSAR Laser Systems, which have a lower gross margin than procedure licenses.
Cost of service revenue for the three months ended
Cost of lease revenue for the three months ended
Six Months Ended
Total cost of revenue for the six months ended
Cost of product revenue for the six months endedJune 30, 2021 increased by$1.0 million , or 28.5%, compared to the six months endedJune 30, 2020 . The increase was primarily attributable to the number of sales of LENSAR Laser Systems, which have a lower gross margin than procedure licenses, and increased procedure volume between the periods.
Cost of service revenue for the six months ended
Cost of lease revenue for the six months endedJune 30, 2021 decreased by$0.2 million compared to the six months endedJune 30, 2020 . This decrease was primarily attributable to a decrease in rental depreciation as LENSAR Laser Systems reached the end of their depreciable life but were still active under lease arrangements in the field.
Operating Expenses
Three Months Ended
Selling, General and Administrative. Selling, general and administrative expenses for the three months endedJune 30, 2021 were$5.5 million , an increase of$1.5 million , or 36.6%, compared to$4.0 million for the three months endedJune 30, 2020 . The increase was due to increases in personnel expense of$0.7 million , primarily due to stock-based compensation expense, as well as expenses associated with being a public company and returning to normal operations as COVID-19 restrictions were eased. Selling, general and administrative expenses for the three months endedJune 30, 2020 include$1.2 million of expenses allocated from PDL for corporate support functions. As we get closer to submitting the application for 510(k) clearance of ALLY to theU.S. Food and Drug Administration , currently expected by the end of the first quarter of 2022, and the projected commercial launch of ALLY in the latter half of 2022, we expect selling, general and administrative expense to increase from current levels. Research and Development. Research and development expenses for the three months endedJune 30, 2021 were$3.0 million , an increase of$1.6 million , or 109.6%, compared to$1.4 million for the three months endedJune 30, 2020 . The increase was primarily attributable to increased expenses of$1.3 million for the development of ALLY largely associated with increased consulting and supply expenses and increased personnel expenses, including stock-based compensation expense.
Amortization of Intangible Assets. Amortization of intangible assets was
Six Months Ended
Selling, General and Administrative. Selling, general and administrative expenses for the six months endedJune 30, 2021 were$11.6 million , an increase of$2.7 million , or 31.0%, compared to$8.8 million for the six months endedJune 30, 2020 . The increase was due to an increases in personnel expense of$2.1 million , primarily due to stock-based compensation expense, and in administrative expenses associated with being a standalone public company. Selling, general and administrative expenses for the six months endedJune 30, 2020 include$2.8 million of expenses allocated from PDL for corporate support functions. As we get closer to submitting the application for 510(k) clearance of ALLY to theU.S. Food and Drug Administration , currently expected by the end of the first quarter of 2022, and the projected commercial launch of ALLY in the latter half of 2022, we expect selling, general and administrative expense to increase from current levels. 25 -------------------------------------------------------------------------------- Research and Development. Research and development expenses for the six months endedJune 30, 2021 were$5.8 million , an increase of$2.7 million , or 91.4%, compared to$3.0 million for the six months endedJune 30, 2020 . The increase was primarily attributable to increased expenses of$1.9 million for the development of ALLY largely associated with increased consulting and supply expenses and increased personnel expenses, including stock-based compensation expense. Amortization of Intangible Assets. Amortization of intangible assets was$0.6 million for the six months endedJune 30, 2021 , consistent with the six months endedJune 30, 2020 . Other Income (Expense)
Three Months Ended
Interest expense decreased by$0.7 million , or 100.0%, to$0 for the three months endedJune 30, 2021 from$0.7 million for the three months endedJune 30, 2020 . The decrease was attributable to a recapitalization of the Company in the third quarter of 2020, resulting in the elimination of interest expense related to our Series A Preferred Stock and on the outstanding note from PDL.
Six Months Ended
Interest expense decreased by$1.3 million , or 100.0%, to$0 for the six months endedJune 30, 2021 from$1.3 million for the six months endedJune 30, 2020 . The decrease was attributable to a recapitalization of the Company in the third quarter of 2020, resulting in the elimination of interest expense related to our Series A Preferred Stock and on the outstanding note from PDL.
Non-GAAP Financial Measures
We prepare and analyze operating and financial data and non-GAAP measures to assess the performance of our business, make strategic and offering decisions and build our financial projections. The key non-GAAP measures we use, EBITDA and Adjusted EBITDA, are reconciled to net loss below for the three and six months endedJune 30, 2021 and 2020. Three Months Ended Six Months Ended June 30, June 30, (Dollars in thousands) 2021 2020 2021 2020 Net loss$ (4,362 ) $ (4,497 ) $ (9,544 ) $ (8,183 ) Add: Interest expense - 671 - 1,275 Less: Interest income (13 ) (17 ) (31 ) (34 ) Add: Depreciation expense 342 331 670 808 Add: Amortization expense 309 314 622 631 EBITDA (3,724 ) (3,198 ) (8,283 ) (5,503 ) Add: Stock-based compensation expense 1,430 41 3,750 126 Adjusted EBITDA$ (2,294 ) $ (3,157 ) $ (4,533 ) $ (5,377 ) 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. 26 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
For the six months endedJune 30, 2021 and 2020, we had net losses of$9.5 million and$8.2 million , respectively, and as ofJune 30, 2021 , we had an accumulated deficit of$67.5 million . We expect to continue to incur losses and operating cash outflows for the foreseeable future as we continue to build our commercial infrastructure, pursue development and FDA clearance of our proprietary, next generation integrated cataract treatment system, known as ALLY, and invest in research and development. In 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, the COVID-19 pandemic has negatively affected our capital requirements and more operating capital may be needed to fund our operations in the future. InMay 2017 , we entered into a credit agreement with PDL whereby, we had drawn the full amount of$32.6 million under the Credit Agreement prior to the contribution and exchange agreement we entered into with PDL inJuly 2020 . Under the contribution and exchange agreement with PDL, we issued to PDL a total of 2.8 million shares of our common stock in exchange for the extinguishment of the$32.6 million outstanding, including accrued interest, we owed to PDL under the Credit Agreement. We issued 30,000 shares of Series A Preferred Stock to PDL inMay 2017 . The Series A Preferred Stock had an aggregate liquidation preference of$30.0 million , plus all accrued and unpaid dividends, whether or not declared. InJuly 2020 , we exchanged all 30,000 shares of our Series A Preferred Stock, including any accrued and unpaid dividends thereon, for a total of 3.4 million shares of our common stock. We currently do not have any shares of Series A Preferred Stock outstanding.
In
OnAugust 24, 2020 , we received a capital contribution of$29.0 million from PDL, and we issued 0.7 million shares of common stock to PDL in exchange for$8.3 million . The remaining$20.7 million was in the form of a cash contribution.
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 ofJune 30, 2021 , we expect our cash and cash equivalents, together with cash generated from the sale and lease of our products, to be sufficient to operate our business through the anticipated clearance and launch of ALLY, which is projected to occur in the latter half of 2022. As we get closer to the planned commercial launch of ALLY anticipated to be later in 2022, we expect selling, general and administrative expenses to increase from current levels. Clearance of ALLY and its subsequent anticipated 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 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 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. 27 -------------------------------------------------------------------------------- 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 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. We currently have an effective shelf registration statement on Form S-3 (No. 333-255136) filed with theSEC onApril 8, 2021 (the "Form S-3") 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. As of the date of this Quarterly Report on Form 10-Q, we have not sold any securities pursuant to the registration statement. Cash Flows
The following table summarizes, for the periods indicated, selected items in our condensed statements of cash flows:
Six Months Ended
June 30,
(Dollars in thousands) 2021 2020
Net cash used in operating activities $ (6,081 ) $ (11,739 )
Net cash used in investing activities (134 ) (235 )
Net cash provided by financing activities 170 12,074
Net decrease in cash, cash equivalents and restricted cash
100
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2021 was
$6.1 million , consisting primarily of a net loss of $9.5 million and a decrease
in net operating assets of $2.0 million , partially offset by non-cash charges of
$5.4 million . The decrease in net operating assets was primarily due to changes
in accounts receivable, inventories and accrued liabilities. Non-cash charges
primarily consisted of depreciation, amortization, and stock-based compensation.
Net cash used in operating activities for the six months ended June 30, 2020 was
$11.7 million , consisting primarily of a net loss of $8.2 million and a decrease
in net operating assets of $5.3 million , partially offset by non-cash charges of
$1.8 million . The decrease in net operating assets was primarily due to changes
in inventories. Non-cash charges primarily consisted of depreciation and
amortization.
Investing Activities
Net cash used in investing activities for the six months endedJune 30, 2021 was$0.1 million , which consisted primarily of capital expenditures for property and equipment.
Net cash used in investing activities for the six months ended
Financing Activities Net cash provided by financing activities for the six months endedJune 30, 2021 was$0.2 million , primarily due to proceeds from the sale of common stock under the employee stock purchase plan. Net cash provided by financing activities for the six months endedJune 30, 2020 was$12.1 million , primarily due to the proceeds of$10.4 million from the note with PDL and$1.8 million of capital contribution from PDL, partially offset by$0.1 million distributions to PDL. 28 --------------------------------------------------------------------------------
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 2020, we granted restricted stock awards to directors and employees to maintain proportionate ownership after the Spin-Off. During the six months endedJune 30, 2021 , we granted stock options directors and employees. We intend to grant stock options as part of our overall compensation package to employees. AtJune 30, 2021 , there was approximately$9.9 million and$2.7 million of total unrecognized compensation expense related to restricted stock awards and stock options, respectively, which is expected to be recognized over a weighted-average period of 1.3 years and 2.9 years, respectively. Total unrecognized stock-based compensation expense is expected to be amortized as follows: (Dollars in thousands) Amount Remainder of 2021$ 2,989 2022 5,586 2023 3,475 2024 445 2025 76 Thereafter -
Total unrecognized stock-based compensation expense
The amounts included in this table are based on restricted stock awards and stock options outstanding atJune 30, 2021 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
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