EX-99.1 5 d945311dex991.htm EX-99.1 EX-99.1
Table of Contents

Exhibit 99.1

PDL BioPharma, Inc.

932 Southwood

Boulevard

Incline Village, Nevada 89451

, 2020

Dear PDL Stockholder:

I am pleased to report that the previously announced separation from PDL BioPharma, Inc. (“PDL”) of its majority-owned subsidiary, LENSAR, Inc. (“LENSAR”) and the distribution of all of the outstanding shares of common stock of LENSAR held by PDL on a pro rata basis to holders of PDL common stock (together, the “Spin-Off”) , is expected to become effective on October 1, 2020 and that LENSAR will become a stand-alone company on that date. LENSAR is 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.

LENSAR has applied to list its common stock on the the Nasdaq Capital Market under the symbol “LNSR.”

Recognizing the difference between our share price and our higher book value, we previously announced that we would seek to increase stockholder value by distributing the value of the individual assets within PDL to our stockholders. We believe that the Spin-Off of LENSAR will enhance value for current PDL stockholders by allowing the markets to more efficiently value LENSAR and its assets separately from PDL.

Holders of record of PDL common stock as of 5:00 p.m., Eastern Time, on September 22, 2020, which will be the record date, will receive 0.075879 shares of LENSAR common stock for every one share of PDL common stock held by such holders. No action is required on your part to receive your LENSAR stock. You will not be required to pay anything for the new shares or to surrender any shares of PDL stock.

Fractional shares of LENSAR’s common stock will not be distributed. Fractional shares of LENSAR’s common stock that would otherwise be distributed to PDL stockholders will be aggregated and sold in the public market by the transfer agent. The aggregate net proceeds of these sales will be distributed ratably as cash payments to the stockholders who would otherwise have received fractional interests. In due course you will be provided with information to enable you to compute your tax basis in both the PDL and the LENSAR stock.

The enclosed information statement describes the distribution of shares of LENSAR stock and contains important information about LENSAR, including financial statements. I suggest that you read it carefully. If you have any questions regarding the distribution, please contact PDL’s transfer agent, Computershare Trust Company, N.A. at (877) 424-4271.

I believe the Spin-Off is a positive event for the owners of our stock. We remain committed to working on your behalf to provide a meaningful return for our stockholders.

Sincerely,

Elizabeth O’Farrell

Chairperson of the Board


Table of Contents

Information included herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

PRELIMINARY INFORMATION STATEMENT

SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 2020

LENSAR, Inc.

Common Stock

(par value $0.01)

 

 

PDL BioPharma, Inc. (“PDL”) is furnishing this information statement (the “information statement”) to its stockholders in connection with the planned distribution by PDL to its stockholders of all of the outstanding shares of common stock held by PDL of its direct, majority-owned subsidiary, LENSAR, Inc. (“LENSAR,” the “company,” “we,” “us” or “our”).

PDL will distribute all of the outstanding shares of common stock of LENSAR held by PDL on a pro rata basis to holders of PDL common stock, which we refer to as the “Distribution.” We refer to the separation of LENSAR from PDL as the “Separation,” and the Separation and Distribution together as the “Spin-Off.” Holders of PDL common stock as of 5:00 p.m., Eastern Time, on September 22, 2020, which will be the Record Date for the Distribution, will be entitled to receive 0.075879 shares of LENSAR common stock for every one share of PDL common stock held by such holders. The Distribution will be made in book-entry form. Immediately after the Distribution is completed, LENSAR will be an independent, publicly traded company. Fractional shares of our common stock will not be distributed. Fractional shares of our common stock that would otherwise be distributed to PDL stockholders will be aggregated and sold in the public market by the transfer agent. The aggregate net proceeds of these sales will be distributed ratably as cash payments to the stockholders who would otherwise have received fractional interests.

No action will be required of you to receive shares of LENSAR common stock, which means that:

 

   

PDL is not asking you for a proxy, and you should not send a proxy;

 

   

you will not be required to pay for the shares of LENSAR common stock that you receive in the Distribution; and

 

   

you do not need to surrender or exchange any of your PDL common stock in order to receive shares of LENSAR common stock, or take any other action in connection with the Spin-Off.

There is currently no trading market for LENSAR common stock. However, we expect that a limited market, commonly known as a “when-issued” trading market, for our common stock will develop shortly prior to the Record Date for the Distribution, and we expect that “regular-way” trading of our common stock will begin the first trading day after the completion of the Distribution. We have applied to list our common stock on the Nasdaq Capital Market under the symbol “LNSR.”

We are an “emerging growth company” and a “smaller reporting company” as defined under U.S. federal securities laws, and as such, may elect to comply with certain reduced public company reporting requirements for this and future filings.

Stockholders of PDL with inquiries related to the Distribution should contact PDL’s transfer agent, Computershare Trust Company, N.A. at (877) 424-4271.

 

 

WE ARE NOT ASKING YOU FOR A PROXY

AND YOU ARE REQUESTED NOT TO SEND US A PROXY

In reviewing this information statement, you should carefully consider the matters described under “Risk Factors” beginning on page 25 for a discussion of certain factors that should be considered by recipients of our common stock.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

 

 

The date of this information statement is                     , 2020.


Table of Contents

TABLE OF CONTENTS

 

INFORMATION STATEMENT SUMMARY

     1  

SUMMARY HISTORICAL FINANCIAL DATA

     15  

QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

     19  

RISK FACTORS

     25  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     74  

THE SPIN-OFF

     75  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION

     80  

DIVIDEND POLICY

     87  

UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS

     88  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     95  

BUSINESS

     113  

MANAGEMENT

     140  

DIRECTOR COMPENSATION

     146  

EXECUTIVE COMPENSATION

     148  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     163  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     165  

DESCRIPTION OF LENSAR CAPITAL STOCK

     170  

RECENT SALES OF UNREGISTERED SECURITIES

     173  

INDEMNIFICATION AND LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS

     174  

WHERE YOU CAN FIND MORE INFORMATION

     175  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

i


Table of Contents

INFORMATION STATEMENT SUMMARY

The following is a summary of some of the information contained in this information statement. This summary is included for convenience only and should not be considered complete. This summary is qualified in its entirety by the more detailed information contained elsewhere in this information statement, which should be read in its entirety.

All references in this information statement to “PDL” refer to PDL BioPharma, Inc., a Delaware corporation; all references in this information statement to “LENSAR,” “the company,” “we,” “us,” or “our” refer to LENSAR, Inc., a Delaware corporation. Where appropriate in context, the foregoing terms also include subsidiaries. Throughout this information statement, we refer to the shares of PDL common stock, $0.01 par value per share, as PDL common stock or as PDL shares, and the shares of LENSAR common stock, par value $0.01 per share, that will be distributed in the Distribution as LENSAR common stock, as our common stock or as LENSAR shares.

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. Surgeons have used our laser system to perform more than 430,000 cataract procedures, including 108,030 during the year ended December 31, 2019 and 41,490 during the six months ended June 30, 2020. As we continue to innovate, we are designing a next-generation, integrated workstation, ALLY, which combines an enhanced femtosecond laser with a phacoemulsification system in a compact, mobile workstation that is designed to allow surgeons to perform a femtosecond laser assisted cataract procedure in a single operating room using a single device. We expect this combination product could be a considerable 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 of ALLY to the U.S. Food and Drug Administration, or FDA, by the end of the first quarter of 2022 and to begin commercialization of ALLY in 2022.

A cataract occurs when the normally clear lens of the eye becomes cloudy or opaque, causing a decrease in vision. The majority of patients suffering from cataracts also present with visually significant astigmatism, which is an imperfection in the symmetry of the cornea that results in decreased visual acuity. In 2019, Market Scope estimated that approximately 70% to 90% of cataract patients present with addressable astigmatism prior to cataract surgery. Currently, the only way to treat cataracts is to surgically remove the natural lens of the eye. The principal steps in the procedure include a corneal incision, called an anterior capsulotomy; cataract phacoemulsification including the fragmentation, aspiration and removal of the cataract; and implantation of an artificial intraocular lens, or IOL. IOLs contain corrective power to replace the optical power of the natural lens. A variety of IOLs exist, including a standard monofocal IOL, or premium IOLs, such as multifocal, accommodating or toric IOLs.

Traditional cataract surgeries are performed by a surgeon using a metal or diamond blade to perform the anterior capsulotomy to enter the eye, and a bent needle to perform the anterior capsulotomy to provide the surgeon access to the nucleus of the cataract for fragmentation and subsequent removal. More recently, laser systems have been developed to assist surgeons in performing or facilitating these aspects of the cataract



 

1


Table of Contents

procedure, including assessing and fragmenting the cataract. In either case, cataract fragmentation and removal is achieved using a process called phacoemulsification. Currently, Medicare and most commercial third-party payors only cover the cost of traditional cataract surgery and the placement of a monofocal IOL, which may not produce the targeted visual outcome. To achieve their targeted visual outcome, patients may elect to have an advanced procedure that involves use of a laser system and implantation of a premium IOL, in which case the patient is responsible for the cost differential between the amount reimbursed by a third-party payor and the cost of the advanced procedure. However, based on management estimates derived from the 2019 Cataract Surgical Equipment Report, even when patients pay for and receive an advanced procedure that involves implantation of a premium IOL, approximately 43% still do not achieve the targeted visual outcome, typically characterized as a result within 0.5 diopters.

We believe the inability to achieve the targeted visual outcome is largely due to a failure to appropriately address corneal astigmatism even when using competing laser systems. We believe this lack of precision can be attributed to several limitations of competing laser devices, including imaging systems that require manual inputs, inaccuracies that result from reliance on manually transposing data and marking the eye for treatment, and the inability to use iris registration to integrate with preoperative devices. These devices also lack a cataract density imaging system, which allows the surgeon to customize the fragmentation and energy settings based on each individual patient’s cataract.

We developed our LENSAR Laser System to provide an alternative laser cataract treatment tool that allows the surgeon to better address astigmatism and improve visual outcomes. Our system incorporates a range of proprietary technology features that are designed to provide surgeons the following key benefits:

 

   

Advanced imaging. Our Augmented Reality imaging and processing technology collects a broad spectrum of biometric data and then reconstructs and presents a precise, three-dimensional model of each individual patient’s eye that is used to develop and implement the surgeon’s procedure plan.

 

   

Simplified procedures. Our system is designed to automate and perform various critical steps in the cataract procedure with the goal of providing surgeons with the confidence to perform these advanced procedures that include implantation of a premium IOL. For example, our IntelliAxis IV technology allows for the precise placement of arcuate corneal incisions, as well as the proprietary refractive capsulorhexis, or IntelliAxis Refractive Capsulorhexis, that creates tabs on the exact axis of astigmatism 180 degrees apart to help produce proper toric IOL placement. These tabs can even be visualized by the surgeon postoperatively to help further ensure proper placement without rotation, which can diminish the effectiveness of the toric IOL.

 

   

Efficient design. We designed the ergonomics of the system and its wireless capabilities to enable the system to integrate seamlessly into a surgeon’s existing surgical environment.

 

   

Precision and reproducibility. The system has multiple features specifically designed to enable precise placement and centration of the IOL in patients in a consistent and reproducible manner that is not possible in manual cataract surgery or using competing laser systems.

We believe the cumulative effect of these technologies is an advanced laser system that can be quickly integrated into a surgeon’s existing practice, is easy to use and provides surgeons the ability to deliver improved outcomes when addressing astigmatism in connection with cataract removal. In a retrospective study published in the Journal of Cataract Refractive Surgery, or the Arcuate Keratotomy Study, of 189 eyes that underwent arcuate keratotomy with our laser system 95.8% demonstrated post-operative refractive astigmatism of 0.5 diopters or less and 90% of eyes had a post-operative uncorrected distance visual acuity, or UDVA, of 20/30 or better.

We are focused on continuous innovation and are currently developing our proprietary, next-generation, integrated workstation, ALLY. ALLY is designed to combine our existing femtosecond laser technology with



 

2


Table of Contents

enhanced capabilities and a phacoemulsification system into a single unit and allow surgeons to perform a femtosecond laser assisted cataract procedure in a single operating room using this device. We anticipate submitting an application for 510(k) clearance to the FDA by the end of the first quarter of 2022 and to begin commercialization of ALLY in 2022. If ALLY is cleared by the FDA, we believe its lower operating costs 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 in the United States and distributors in Germany, China, South Korea and other targeted international geographies. We believe there is significant opportunity for us to expand our presence in these countries and other markets and regions. In the United States, we sell our products through a direct sales organization that, as of December 31, 2019, consisted of 30 commercial team professionals, including regional sales managers, clinical applications and outcomes specialists, field service, technology and customer support personnel.

We have experienced considerable growth since we began commercializing our products in the United States in 2012. Our revenue increased from $24.4 million for the year ended December 31, 2018 to $30.5 million for the year ended December 31, 2019, representing annual revenue growth of 25%. Our revenue for the six months ended June 30, 2020 was $11.0 million, compared to revenue of $14.0 million for the six months ended June 30, 2019, representing a decline of 22%, primarily on account of the impact of COVID-19. Our net losses were $6.4 million, $8.2 million, $12.6 million and $14.7 million for the six months ended June 30, 2019 and 2020 and the years ended December 31, 2018 and December 31, 2019, respectively. Additionally, our installed base of LENSAR Laser Systems had increased from 207 as of December 31, 2019 to 211 as of June 30, 2020.

Our Strengths

We attribute our current and anticipated future success to the following factors:

 

   

an established large and growing market for cataract surgery;

 

   

a disruptive technology platform providing improved visual outcomes;

 

   

demonstrated and growing commercial success;

 

   

improved visual outcomes that drive more advanced, patient-pay procedures;

 

   

a focus on innovation to facilitate surgeon adoption;

 

   

innovative intellectual property protected by a comprehensive patent portfolio; and

 

   

a proven management team and board of directors.

While we believe these factors will contribute to further growth and success, we cannot assure you that the market for cataract surgery will continue to grow as we anticipate or that new disruptive technologies will not be introduced to displace our laser systems. Moreover, we must maintain and grow market acceptance for our laser system and convince physicians and patients that the out of pocket costs associated with procedures that use our laser systems will produce their targeted results. If we are unable to accomplish those goals, our business could suffer.

Market Overview

Current Cataract Treatment Alternatives

Currently, the only way to treat cataracts is to surgically remove the natural lens of the eye. The standard cataract surgical procedure is typically performed in a hospital or in an outpatient ambulatory surgery center, or



 

3


Table of Contents

ASC. The patient receives drops topically, or an injection to numb the eye during the procedure and is usually released from the facility on the same day. The principal steps in the procedure include a corneal incision called an anterior capsulotomy, cataract fragmentation and removal of the cataract, and implantation of an IOL. IOLs contain corrective power to replace the optical power from the natural lens, and can also be used to correct the pre-existing visual errors in the natural lens removed in cataract surgery. Without an IOL, patients would need very thick eyeglasses or special contact lenses to see at all after cataract surgery. A variety of IOLs with different features exist. Some of the basic types include:

 

   

Monofocal IOLs. This type of lens has a single focus strength primarily used for distance vision. Most patients receiving this type of lens will typically require the use of reading glasses for near vision. More contemporary uses of these lenses are to correct one eye for distance and use a different power to correct one eye for reading. This is referred to as monovision and is not suitable for a large part of the population due to many patients being unable to adapt to the vision imbalance.

 

   

Accommodating IOLs. Similar to monofocal IOLs, these lenses have a single focus strength; however, they are designed to respond to eye muscle movements and shift focus from near to far. There are accommodating IOLs in development that have an optical fluid or multi-piece designs that are designed to move and shift focus but work on different principles.

 

   

Extended depth-of-focus or Multifocal IOLs. These IOLs are similar to glasses with bifocal or progressive trifocal lenses. Different areas of the lens have different focusing strengths that allow for near, far and medium vision.

 

   

Astigmatism correction, or toric IOLs. Toric IOLs are designed to correct astigmatism, as well as near or far vision. Some IOL technology may blend these features and include the toric or astigmatism-correcting aspect with the multi-focality or accommodating.

Traditional cataract surgeries are performed by a surgeon using a metal or diamond blade to create the incision necessary to perform the procedure. More recently, special laser systems have been developed to assist surgeons in performing or facilitating the various aspects of the cataract procedures.

The Transition to Advanced Refractive Cataract Procedures

Currently, Medicare and most commercial third-party payors only cover the cost of treating the medical condition of the cataract, which can be accomplished with traditional cataract surgery and the placement of a monofocal IOL. Standard or traditional cataract surgery does not specifically address the outcomes associated with astigmatism and presbyopia, which may be addressed in an advanced refractive procedure involving laser-assisted cataract removal and implantation of a premium IOL. However, since the advantages of these advanced refractive cataract procedures are not deemed medically necessary, patients undergoing an advanced refractive cataract procedure are paying a significant portion of the cost of the surgery out of pocket. As a result, they have heightened expectations for their visual outcomes, normally targeting vision correction within 0.5 diopters of their predicted refractive outcome, sometimes referred to as best uncorrected visual acuity. However, based on management’s calculations derived from the 2019 Cataract Surgical Equipment Report, even when patients pay for and receive an advanced procedure that involves implantation of a premium IOL, approximately 43% still do not achieve the targeted visual outcome, typically characterized as a result within 0.5 diopters. We believe this is largely attributable to an inability to appropriately address and manage the correction of the patient’s pre-existing astigmatism. We believe the failure to manage the astigmatism in such a large percentage of patients is due to the lack of useful technology in surgery. For example, research indicates that for each 1 degree that a toric IOL is off-axis, its ability to reduce astigmatism is decreased by approximately 3.3%. To that end, very small errors in the measurements, calculations and treatments used in the cataract procedure can significantly decrease its



 

4


Table of Contents

effectiveness in achieving the targeted visual outcome. We believe this lack of precision can be attributed to one or more of the following limitations of procedures performed with competing laser systems:

 

   

imaging that requires manual inputs;

 

   

inaccuracies that appear when managing astigmatism;

 

   

an inability to integrate with preoperative devices to guide surgical treatment; and

 

   

a deficient cataract density imaging system.

As a result, we believe a significant opportunity exists for a laser system that can improve surgeon precision and assist in achieving targeted visual outcomes in patients with astigmatism.

Market Opportunity

The global market for the treatment of cataracts is characterized by large patient populations with increases driven by the aging population and the availability of new technologies, such as laser-assisted systems and an influx of new, innovative IOLs, which can improve visual outcomes post-operatively. Cataract surgery is one of the highest volume surgical procedures in the world, and according to the American Academy of Ophthalmology, the most common procedure performed by an ophthalmic surgeon. According to the 2019 Cataract Surgical Equipment Market Report, global estimated cataract/refractive lens exchange surgical procedures are expected to grow from 29 million in 2019 to 34 million in 2024. In the United States, cataract surgery is expected to increase from almost 4.3 million procedures in 2019 to approximately 5.0 million in 2024. By contrast, worldwide laser-assisted cataract surgery is expected to grow from an estimated 815,000 procedures in 2019 to an estimated one million procedures in 2024. In 2019, Market Scope estimated that approximately 70% to 90% of cataract patients present with a treatable astigmatism prior to cataract surgery.

Care for cataract patients in the United States is administered by many of the approximately 20,000 ophthalmologists who diagnose the disease and provide medical management according to Market Scope. There are approximately 8,400 ophthalmic surgeons in the United States focused on performing cataract procedures.

Our Solution

We developed our LENSAR Laser System to provide an alternative laser cataract treatment that allows the surgeon to better address astigmatism and improve visual outcomes.

Benefits of the LENSAR Laser System

Our system incorporates a range of proprietary technology features that are designed to provide surgeons the following key benefits:

 

   

Advanced imaging. Our proprietary Augmented Reality imaging and processing technology collects a broad spectrum of biometric data while taking a series of scans from multiple positions and different angles to capture the radius of corneal curvature, corneal thickness, anterior chamber depth, anterior and posterior lens apex and lens thickness, as well as various anterior segment measurements and location.

 

   

Simplified procedures. Our system is designed to automate and perform various critical steps in the cataract procedure with the goal of providing surgeons with the confidence to perform advanced refractive procedures. Additionally, the system’s technology, including cataract density imaging, has the ability to detect and compensate for lens tilt, and to identify and treat tissue specific densities in the patients’ natural lens. These capabilities combine to enable the system to provide precise laser delivery;



 

5


Table of Contents
 

to produce easy to remove, free-floating capsulotomies; and to perform efficient lens fragmentation, while reducing the laser and phacoemulsification energy required to remove the cataract. The IntelliAxis IV technology allows for the precise placement of arcuate corneal incisions, as well as the proprietary refractive capsulorhexis that creates tabs on the exact axis of astigmatism 180 degrees apart to help produce proper toric IOL placement. These tabs can also be visualized by the surgeon postoperatively to help further ensure proper placement without rotation, which can diminish the effectiveness of the toric IOL. With these automated features, we believe surgeons can feel confident their treatment and execution will lead to better and more predictable outcomes.

 

   

Efficient design. We designed the ergonomics of the system to integrate seamlessly into a surgeon’s existing surgical environment and to enable preferred patient positioning during treatment. In addition, the system has wireless capabilities that allow it to collect and transmit data quickly between itself and multiple pre-operative diagnostic devices, such as corneal topographers, for the surgeons use while examining their patients in the office. The system also includes expanded remote diagnostics that allows us to view and check various software and hardware performance metrics, which helps us increase system reliability and encourages surgeon confidence.

 

   

Precision and reproducibility. The system has multiple features specifically designed to enhance a surgeon’s operating precision. The cloud-based or thumb-drive communication with pre-operative diagnostics, use of iris registration, and integrated surgeon’s tables enhance procedure planning and treatments by storing surgeon specific treatment algorithms and eliminating the need to manually mark the eye with an ink pen. Additionally, our system has automated surface identification and utilizes Augmented Reality and wave tracing capability to accurately and efficiently provide the choice to the surgeon to automatically center the capsulotomy on the pupil center or the patient’s optical axis.

Despite these benefits, many surgeons continue to rely on traditional cataract surgery procedures for a variety of reasons, including comfort with the process and the established reimbursement. Moreover, the use of our laser system requires a capital investment by the surgeon that may not be needed for traditional cataract surgery. In order to maintain and grow our market share, we must establish the ability to deliver improved visual outcomes relative to traditional cataract surgery and provide economic data that demonstrate the safety, efficacy and cost-effectiveness of our laser systems. We will also need to convince surgeons of the ease of use, reliability, precision and reproducibility afforded by our laser systems.

Improved Outcomes

We believe the cumulative effect of these technologies is an advanced laser system that can be quickly integrated into a surgeon’s existing practice, is easy to use and provides surgeons the ability to deliver improved outcomes when addressing astigmatism in connection with cataract removal. Several recent studies support the ability to achieve targeted visual outcomes using our laser system. Key findings in these studies include:

 

   

In a 2019 retrospective study presented at the 2019 Annual Meeting of the American Society of Cataract and Refractive Surgery, or the 2019 Annual ASCRS Meeting, of 60 eyes that underwent treatment with our laser system, we observed a reduction in mean corneal astigmatism from a mean of 2.11 diopters preoperatively to a mean of 0.15 diopters postoperatively, and 98% of eyes achieved postoperative astigmatism of 0.5 diopters or less.

 

   

In a retrospective study from the same year presented at the American Academy of Ophthalmology 2019 Meeting, or AAO 2019 Meeting, of 54 eyes that underwent treatment with our laser system, we observed a reduction in mean corneal astigmatism from a mean of 1.01 diopters preoperatively to a mean of 0.11 diopters postoperatively, and 95% of eyes achieved postoperative astigmatism of 0.5 diopters or less.



 

6


Table of Contents
   

In another retrospective study presented at the AAO 2019 Meeting, of 115 eyes that underwent treatment with our laser system and implantation of a toric IOL, we observed a reduction in mean corneal astigmatism from 1.55 diopters preoperatively to 0.47 diopters postoperatively.

 

   

In the Arcuate Keratotomy Study of 189 eyes that underwent arcuate keratotomy with our laser system, 95.8% demonstrated post-operative refractive astigmatism of 0.5 diopters or less and 90% of eyes had a post-operative uncorrected distance visual acuity, or UDVA, of 20/30 or better.

Our Next-Generation, Integrated Workstation—ALLY

We are designing our second generation system, ALLY, to dramatically advance the ability of surgeons to perform advanced refractive cataract procedures and improve visual outcomes by combining an enhanced version of our laser technology with a phacoemulsification system in a single, compact, mobile workstation. We anticipate submitting an application for 510(k) clearance of ALLY to the FDA by the end of the first quarter of 2022 and beginning commercialization of ALLY in 2022.

We are designing ALLY to seamlessly integrate an enhanced version of our femtosecond laser technology and an advanced phacoemulsification system into one unit that can allow the surgeon to switch seamlessly and quickly between femtosecond laser and phacoemulsification without movement of machines or patients. Importantly, this compact, integrated workstation will be configured with the ergonomics to be used in an operating room or an in-office surgical suite, a trend in current ophthalmology practices. The footprint is significantly smaller than current laser systems and only slightly larger than stand-alone phacoemulsification systems.

We believe several converging marketplace factors will encourage adoption of ALLY, if cleared by the FDA. These include:

 

   

the advent of many new types of advanced IOLs with complex optics, developed to correct near and distance vision with astigmatism, and the ability of ALLY to assist surgeons in optimizing the accurate positioning using any of these lenses to correct astigmatism for better visual outcomes;

 

   

the recent 15% reduction in surgeon reimbursement and continued pressure to lower reimbursement in standard cataract surgery cases coupled with the ability to provide better patient visual outcomes, which we believe will motivate surgeons and patients to seek refractive outcome-based patient-pay procedures;

 

   

the availability of a compact, dual function system with a lower cost of goods that can be placed in the operating room, which we believe will encourage surgeons that currently rely solely on phacoemulsification to adopt and integrate laser-assisted procedures into their practice;

 

   

given the recent COVID 19 pandemic, increased awareness of efficiencies associated with faster patient throughput, less movement from having to use two rooms to complete an advanced cataract procedure, fewer touches of the patient to treat and to complete the advanced cataract procedure, and placing the system in the ASC OR or in-office surgical suite; and

 

   

lower technology acquisition cost and broad base procedure applications across all cataract procedures improve economics for the ASC, and the surgeon.

Our Strategy

Our goal is for our LENSAR Laser System to become the leading solution for the treatment of cataracts and management of astigmatism in cataract surgery. Key elements of our strategy include:

 

   

continue to build our commercial infrastructure in order to further penetrate the cataract surgery market;



 

7


Table of Contents
   

increase awareness of the benefits of our LENSAR Laser System;

 

   

invest in research and development to drive innovation; and

 

   

seek and capitalize on opportunities to enhance our product offering through strategic alliances and acquisitions

Risks Related to Our Business and the Spin-Off

Ownership of LENSAR common stock is subject to a number of risks, including risks relating to the Spin-Off. The following list of risk factors is not exhaustive. Please read the information in the section captioned “Risk Factors” for a more thorough description of these and other risks.

Risks Related to Our Business

 

   

We expect to incur operating losses for the foreseeable future and we cannot assure you that we will be able to generate sufficient revenue to achieve or sustain profitability.

 

   

We principally derive our revenue from the sale or lease of our LENSAR Laser System and the associated procedure licenses and sale of consumables used in each procedure involving our LENSAR Laser System, and the commercial success of our LENSAR Laser System will largely depend upon our ability to maintain and grow significant market acceptance for it.

 

   

Our long-term growth depends in part on our ability to enhance our LENSAR Laser System.

 

   

Patients may not be willing to pay for the price difference between a standard cataract procedure and an advanced cataract procedure in which a laser system such as ours is used, an increment which is typically not covered by Medicare, private insurance or other third-party payors.

 

   

COVID-19 and actions taken to control the spread of COVID-19 have had an adverse impact on our business, and we expect them to continue to do so.

 

   

If we are not able to effectively grow our U.S. sales and marketing organization, or maintain or grow an effective network of international distributors, our business prospects, results of operations and financial condition could be adversely affected.

 

   

Our products and operations are subject to extensive government regulation and oversight both in the United States and abroad, and our failure to comply with applicable requirements could harm our business.

 

   

We may not receive, or may be delayed in receiving, the necessary clearances or approvals for our future products, including ALLY, or modifications to our current products, and failure to timely obtain necessary clearances or approvals for our future products or modifications to our current products would adversely affect our ability to grow our business.

 

   

If we are unable to adequately protect our intellectual property rights, or if we are accused of infringing on the intellectual property rights of others, our competitive position could be harmed or we could be required to incur significant expenses to enforce or defend our rights.

Risks Related to the Spin-Off

 

   

The Spin-Off may not be completed on the terms or timeline currently contemplated, if at all.

 

   

The Spin-Off requires significant time and attention of our management and may distract our employees which could have an adverse effect on us.

 

   

Our ability to meet our capital needs may be harmed by the loss of financial support from PDL.



 

8


Table of Contents

Relationship with PDL

From October 2013 to May 2017, PDL provided us debt financing under various credit agreements. We became a direct subsidiary of PDL as of May 11, 2017 when PDL acquired all of our outstanding equity in exchange for cancellation of PDL’s claims as a secured creditor in Chapter 11 bankruptcy proceedings. At that time, PDL also expanded the debtor-in-possession financing to a broader, secured, first priority $8.6 million term loan facility, or the Credit Agreement, to support our operations post-bankruptcy. The Credit Agreement was amended in April 2019 to increase the size of the term loan facility by an additional $17.0 million dollars, and it was further amended in April 2020 to increase the size of the term loan facility by an additional $7.0 million dollars. In July 2020, we issued PDL a total of 6,221,069 shares of our common stock in exchange for all amounts outstanding under the Credit Agreement and all then-outstanding shares of our mandatorily redeemable, par value $0.01 per share, preferred stock, or the Series A Preferred Stock, including any accrued and unpaid dividends thereon. In July 2020, we issued an additional 740,740 shares of our common stock to PDL in exchange for $8.0 million. In August 2020, we received cash of $29.0 million from PDL. We issued 746,767 shares of common stock to PDL in exchange for $8.3 million. The remaining $20.7 million was a cash contribution from PDL. After giving effect to the Spin-Off, we will be an independent, publicly traded company and PDL will not have continuing stock ownership in us. For more information on our relationship with PDL, see “Certain Relationships and Related Party Transactions.”

Additionally, in August 2020, we distributed 100% of our ownership interest in our wholly owned subsidiary, PDL Investment Holdings, LLC, or PDLIH, to PDL. PDLIH does not and did not hold any assets relating to our business.

Before the Spin-Off, we will enter into a Separation and Distribution Agreement and several other agreements with PDL and its subsidiaries related to the Spin-Off. In addition, PDL provides us with certain support functions, including information technology, and accounting and other financial and administrative functions. Some of these services will continue to be provided on an interim basis after the Spin-Off pursuant to the terms of a Transition Services Agreement, or the Transition Services Agreement, which is filed as an exhibit to the registration statement on Form 10 of which this information statement forms a part. For a description of the Separation and Distribution Agreement, Transition Services Agreement and other agreements we have entered or intend to enter into with PDL in connection with the Spin-Off, see “Certain Relationships and Related Party Transactions—Agreements between PDL and LENSAR Relating to the Spin-Off.” These agreements will govern the relationship between PDL and us after the completion of the Spin-Off.

Reasons for the Spin-Off

In September 2019, PDL management recommended to its board of directors that it undertake a strategic review of PDL. Upon completion of that review in December 2019, PDL’s board of directors determined to pursue a process to unlock value within PDL either by sale of PDL or monetization of its assets. Over the subsequent months, PDL’s board of directors and management analyzed, together with outside financial and legal advisors, how to best capture value and provide the best return to stockholders. As part of that process, on September 9, 2020, PDL’s board of directors approved a plan to spin LENSAR off from PDL as a publicly traded company.

PDL’s board of directors believes that spinning us off from PDL will provide us with financial, operational and managerial benefits, including, but not limited to, the following:

 

   

Strategic Focus. We and PDL are distinct, complex enterprises with different opportunities, challenges, strategies and means of doing business. We believe the Spin-Off will allow us to continue to implement corporate strategies that are designed for our ophthalmology business.

 

   

Focused Management. Separating us from PDL will allow our management to continue to allocate and focus resources on the implementation of product development and commercialization strategies that are key to our continued growth.



 

9


Table of Contents
   

Improved Management Incentive Tools. Offering equity of our publicly traded company as compensation tied directly to our performance will assist in attracting and retaining qualified employees, officers and directors.

 

   

Direct Access to Capital and Tailored Capital Structure. As a stand-alone company, we can better attract investors with the opportunity to invest solely in our surgical treatments for cataracts, which will enhance our ability to directly access the equity and debt capital markets to fund our growth strategy and to establish a capital structure tailored to our business needs.

 

   

Ability to Use Equity as Consideration for Acquisitions. The Spin-Off will provide us with enhanced flexibility to use our stock as consideration in pursuing certain financial and strategic objectives, including mergers and acquisitions involving other companies or businesses engaged in ophthalmology. We believe that we will be able to more easily facilitate future strategic transactions with businesses in ophthalmology through the use of our stand-alone stock as consideration.

PDL’s board of directors also considered a number of potentially negative factors in evaluating the Spin-Off, including, in the case of both companies, increased operating costs, disruptions to the businesses as a result of planning for the Spin-Off and the Spin-Off itself, the risk of being unable to achieve expected benefits from the Spin-Off, the risk of being unable to successfully complete operational transfers, the risk that the Spin-Off might not be completed, the initial costs of the Spin-Off and the risk that the common stock of one or both companies may come under initial selling pressure if investors are not interested in holding an investment in one or both businesses following the Spin-Off. Notwithstanding these potentially negative factors, however, PDL’s board of directors determined that the Spin-Off was the best alternative to enhance stockholder value taking into account the factors discussed above. For more information, see the sections entitled “Risk Factors” and “The Spin-Off” included elsewhere in this information statement.

Corporate Information

We were incorporated in the State of Delaware on August 20, 2004 and are a direct, majority-owned subsidiary of PDL. After giving effect to the Spin-Off, we will be an independent, publicly traded company. Our principal executive office is located at 2800 Discovery Drive, Orlando, FL 32826, and our telephone number is (888) 536-7271. Our website is www.lensar.com. Information contained on, or connected to, our website or PDL’s website does not and will not constitute part of this information statement or the registration statement on Form 10 of which this information statement is a part.

Implications of being an Emerging Growth Company and a Smaller Reporting Company

We qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:

 

   

not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002;

 

   

an exemption from compliance with the requirements of the Public Company Accounting Oversight Board regarding the communication of critical audit matters in the auditor’s report on the financial statements;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and



 

10


Table of Contents
   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We will remain an emerging growth company until the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion; (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of the Spin-Off.

We have elected to take advantage of certain of the reduced disclosure obligations in this information statement and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide may be different than the information you receive from other public companies in which you hold stock.

Emerging growth companies can also take advantage of the extended transition period for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies and as a result, may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. We have elected to take advantage of this extended transition period and, as a result, our operating results and financial statements may not be comparable to the operating results and financial statements of companies who have adopted the new or revised accounting standards.

As a result of these elections, we do not know if some investors will find our common stock less attractive. The result may be a less active trading market for our common stock, and the price of our common stock may become more volatile.

We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.



 

11


Table of Contents

SUMMARY OF THE SPIN-OFF

 

Distributing company

PDL BioPharma, Inc., a Delaware corporation. After the Distribution, PDL will not own, directly or beneficially, any shares of our capital stock and will continue to own and operate its other businesses.

 

Distributed company

LENSAR, Inc., a Delaware corporation and currently a direct, majority-owned subsidiary of PDL.

 

Primary purpose of the Spin-Off

The PDL board of directors believes that separating us from PDL will (i) allow us to continue to implement corporate strategies and initiatives based on our company’s specific business characteristics; (ii) facilitate focus of our management; (iii) enhance our ability to attract, retain, and properly incentivize key employees with equity-based compensation tied directly to our performance of the applicable company; (iv) provide us with direct and more efficient access to equity and debt capital markets; and (v) allow us to use our own public equity as acquisition currency, to make acquisitions.

 

Record Date

The Record Date for the Distribution is 5:00 p.m., Eastern Time, on September 22, 2020.

 

Distribution ratio

Each holder of PDL common stock as of the Record Date will receive a distribution of 0.075879 shares of our common stock for every one share of PDL common stock held on the Record Date. We expect that approximately 8.7 million shares of our common stock will be distributed in the Spin-Off, based on the number of shares of PDL common stock we expect to be outstanding on the Record Date.

 

Securities to be distributed

PDL will be distributing all of the shares of our common stock currently held by PDL, representing approximately 81.5% of our total issued and outstanding common stock. PDL stockholders will not be required to pay for the shares of our common stock to be received by them in the Distribution, or to surrender or exchange shares of PDL common stock in order to receive our common stock, or to take any other action in connection with the Distribution.

 

Fractional shares

Fractional shares of our common stock will not be distributed. Fractional shares of our common stock that would otherwise be distributed to PDL stockholders will be aggregated and sold in the public market by the transfer agent. The aggregate net proceeds of these sales will be distributed ratably as cash payments to the stockholders, who would otherwise have received fractional interests.

 

Treatment of stock-based awards

In connection with the Distribution, we currently expect that, subject to approval by the PDL board of directors, PDL’s outstanding equity-based compensation awards will generally be treated as follows: Each outstanding PDL stock option to purchase shares of PDL common stock on the Distribution Date will remain a stock



 

12


Table of Contents
 

option to purchase shares of PDL common stock, subject to the terms of the original stock option, but the exercise price and the number of shares subject to the stock option will be adjusted using a formula designed to generally preserve the intrinsic value and fair value of the original stock option immediately prior to the Distribution Date. Each adjusted PDL stock option will continue to vest on its existing terms and conditions.

 

Distribution date

The Distribution date is October 1, 2020.

 

The Spin-Off

On the Distribution date, PDL will release all of the shares of our common stock to the transfer agent to distribute to PDL stockholders as of the Record Date. The distribution of shares will be made in book-entry form. It is expected that it will take the transfer agent up to ten days to electronically issue shares of our common stock to you or your bank or brokerage firm on your behalf by way of direct registration in book-entry form. However, your ability to trade the shares of our common stock received in the Distribution will not be affected during this time. You will not be required to make any payment, surrender or exchange your shares of PDL common stock or take any other action to receive your shares of our common stock.

 

Trading market and symbol

There is not currently a public market for our common stock. We have applied to list our common stock on the Nasdaq Capital Market under the ticker symbol “LNSR.” We anticipate that, shortly prior to the Record Date for the Distribution, trading of our common stock will begin on a “when-issued” basis and will continue up to and including the Distribution date. On the first trading day following the Distribution date, when-issued trading in respect of our common stock will end and regular-way trading will begin. See “The Spin-Off—Manner of Effecting the Spin-Off.”

 

Dividend Policy

Holders of shares of our common stock are entitled to receive dividends when, or if, declared by our board of directors out of funds legally available for that purpose. We currently do not anticipate paying any cash dividends in the foreseeable future. See “Dividend Policy.”

 

Tax consequences to PDL stockholders

The Distribution is intended to be treated as part of a liquidating distribution by PDL. In accordance with such treatment, in the case of a U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences of the Distribution”), an amount equal to the fair market value of our common stock (together with any other property distributed as part of the liquidating distribution) received by you will be treated as received in exchange for your shares of PDL common stock and will first be applied against and reduce your basis in such shares of PDL common stock, but not below zero. Any remaining amount in excess of your basis in such shares of PDL common stock will be treated as capital gain. For a more detailed discussion, see



 

13


Table of Contents
 

“Material U.S. Federal Income Tax Consequences of the Distribution.” You should consult your tax advisor as to the particular tax consequences of the Distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

Relationship with PDL after the Spin-Off

Following the Distribution, we will be a public company and PDL will have no continuing stock ownership interest in us. We will enter into the Separation and Distribution Agreement and other agreements with PDL related to the Spin-Off. These agreements will govern the relationship between PDL and us after the completion of the Spin-Off. The Separation and Distribution Agreement will set forth our agreement with PDL regarding the principal transactions necessary to separate us from PDL, as well as other agreements that govern certain aspects of our relationship with PDL after the completion of the Spin-Off. We will enter into the Transition Services Agreement with PDL pursuant to which PDL will provide to us certain functions on an interim basis following the Distribution. Further, we will enter into a Tax Matters Agreement (the “Tax Matters Agreement”) with PDL that will govern the respective rights, responsibilities and obligations of PDL and us after the Spin-Off with respect to taxes, tax attributes, the preparation and filing of tax returns, the control of tax audits and other tax proceedings and assistance and cooperation in respect of tax matters. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements between PDL and LENSAR Relating to the Spin-Off” and describe some of the risks of these arrangements under “Risk Factors—Risks Related to the Spin-Off.”

 

Transfer Agent and Registrar

Computershare Trust Company, N.A. will be the transfer agent and registrar for the shares of our common stock.

 

Risk factors

You should carefully consider the matters discussed under the section entitled “Risk Factors” in this information statement.

Unless otherwise indicated, all figures in this information statement reflect a one-for-nine reverse stock split of our common stock, which became effective as of September 10, 2020.



 

14


Table of Contents

SUMMARY HISTORICAL FINANCIAL DATA

The following table sets forth our summary historical financial information for the periods indicated below. The statements of operations data for the years ended December 31, 2019 and 2018 and the balance sheet data as of December 31, 2019 is derived from our audited financial statements which are included elsewhere in this information statement. The statements of operations data for the six months ended June 30, 2020 and 2019 and the balance sheet data as of June 30, 2020 is derived from our unaudited condensed interim financial statements which are included elsewhere in this information statement. The unaudited condensed interim financial statements were prepared on a basis consistent with our audited financial statements and include, in management’s opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. These financial statements exclude the assets, liabilities, revenue and expenses directly attributable to our wholly owned subsidiary, PDLIH, which was distributed to PDL in August 2020.

Our historical financial statements include certain expenses of PDL that were allocated to us for certain corporate functions, such as administration and organizational oversight, including employee benefits, finance and accounting, treasury and risk management, and professional and legal services, among others. 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, or future costs we will incur as an independent, publicly traded company. In addition, our historical financial statements do not reflect changes that we expect to experience in the future as a result of the Spin-Off, including changes in our cost structure, personnel needs, tax structure, financing and business operations. Consequently, the historical financial information included here may not necessarily reflect our financial position and results of operations or what our financial position and results of operations would have been had we been an independent, publicly traded company during the periods presented.

The pro forma statement of operations data for the year ended December 31, 2019 and the six months ended June 30, 2020 and the pro forma balance sheet data as of June 30, 2020 have been derived from the unaudited condensed pro forma financial statements included elsewhere in the information statement. The unaudited pro forma statements of operations have been prepared to give effect to the Spin-Off and related transactions as if they had occurred or had become effective as of January 1, 2019. The unaudited pro forma balance sheet has been prepared to give effect to the Spin-Off and related transactions as though the Spin-Off and related transactions had occurred on June 30, 2020.

The unaudited pro forma financial information is not necessarily indicative of our results of operations or financial condition had the distribution and our anticipated post-separation capital structure been completed on the dates assumed. It may not reflect the results of operations or financial condition that would have resulted had we been operating as an independent, publicly traded company during such period.



 

15


Table of Contents

The summary historical and unaudited pro forma financial information should be read in conjunction with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Unaudited Condensed Pro Forma Financial Information” and the financial statements and corresponding notes included elsewhere in this information statement. The historical and pro forma financial information are not necessarily indicative of the results to be expected in the future and our operating results, actual and pro forma, for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020.

 

                            Pro Forma(1)     Pro Forma(1)  
    Year ended
December 31,
    Six Months Ended
June 30,
    Year ended
December 31,
    Six Months Ended
June 30,
 
($ in thousands, except share and per
share data)
  2019     2018     2020     2019     2019     2020  

Total revenue

  $ 30,528     $ 24,388     $ 10,953     $ 14,000     $ 30,528     $ 10,953  

Total cost of revenue

    17,299       13,640       5,439       8,711       17,908       5,541  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

    17,147       16,143       8,820       8,314       26,758       10,269  

Research and development expenses

    7,569       2,784       3,005       1,828       8,692       3,192  

Amortization of intangible assets

    1,227       1,137       631       593       1,227       631  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (12,714     (9,316     (6,942     (5,446     (24,057     (8,680

Interest expense

    (2,001     (3,321     (1,275     (953            

Other income, net

    58       64       34       28       58       34  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (14,657     (12,573     (8,183     (6,371     (23,999     (8,646

Income tax expense

          20                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (14,657   $ (12,593   $ (8,183   $ (6,371   $ (23,999   $ (8,646
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative dividends in excess of interest expense on Series A Preferred Stock

          (1,451                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (14,657     (14,044   $ (8,183   $ (6,371   $ (23,999   $ (8,646
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

  $ (13.70     (13.13   $ (7.65   $ (5.95   $ (2.62   $ (0.91
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted(2)

    1,070,000       1,070,000       1,070,000       1,070,000       9,143,990       9,509,403  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
(in thousands)    2019     2018     2020     2019  

Non-GAAP financial measure(3)

        

EBITDA(4)

   $ (8,848   $ (4,726   $ (5,503   $ (3,358
  

 

 

   

 

 

   

 

 

   

 

 

 


 

16


Table of Contents
     As of     Pro Forma(1)  
($ in thousands)    December 31,
2019
    June 30,
2020
    as of
June 30, 2020
 

Total current assets

   $ 17,183     $ 20,844     $ 57,844  

Total assets

   $ 34,536     $ 38,021     $ 75,021  

Total liabilities

   $ 65,089     $ 74,296     $ 6,482  

Total stockholders’ equity (deficit)

   $ (30,553   $ (36,275   $ 68,539  

 

(1)

Gives pro forma effect to the Pro Forma Transactions (as defined herein), including the impact of (i) the Recapitalization Transactions (as described in the notes to the unaudited condensed pro forma financial statements included in this information statement), (ii) the contribution of $37.0 million in cash from PDL to us in exchange for an additional number of shares of our common stock, (iii) the new grants under the 2020 Plan (as defined herein) and (iv) the Spin-Off. See the section of this information statement titled “Unaudited Condensed Pro Forma Financial Statements” for pro forma adjustments reflected and related methodologies applied in deriving LENSAR’s unaudited pro forma statements of operations and balance sheet.

(2)

See Note 15 to our audited financial statements and Note 17 to our unaudited condensed interim financial statements included elsewhere in this information statement for an explanation of the calculations of our historical net loss per share attributable to common stockholders, basic and diluted.

(3)

See the definition in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measure.”

(4)

We calculate EBITDA, for a particular period, as net income before interest expense, income tax expense, interest income, depreciation and amortization of intangible assets.

EBITDA is being presented in addition to, and not as a substitute or superior to, measures of financial performance prepared in accordance with GAAP. We believe that presenting EBITDA provides useful supplemental information to investors about us that is useful in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in financial and operational-decision making. In addition, this measure is frequently used by analysts, investors and other interested parties to evaluate and assess performance. This measure has certain limitations in that it does not include the impact of certain expenses that are reflected in our statement of operations that are necessary to run our business. Other companies, including other companies in our industry, may not use such measures or may calculate the measures differently than as presented in this information statement, limiting their usefulness as comparative measures.

The non-GAAP information in this information statement should be read in conjunction with, and not as substitutes for, or in isolation from, our audited financial statements and accompanying notes included elsewhere in this information statement.



 

17


Table of Contents

The following table reconciles EBITDA to the most directly comparable GAAP financial performance measure, which is net loss:

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
     2019      2018      2020      2019  

(in thousands)

           

Net loss

   $ (14,657    $ (12,593    $ (8,183    $ (6,371

Income tax expense

     —          20        —          —    

Interest income(a)

     (58      (64      (34      (28

Interest expense

     2,001        3,321        1,275        953  

Depreciation

     2,639        3,453        808        1,495  

Amortization of intangible assets

     1,227        1,137        631        593  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ (8,848    $ (4,726    $ (5,503    $ (3,358
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Presented as “Other income, net” in our audited annual and unaudited condensed interim statements and corresponding notes included elsewhere in this information statement.



 

18


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

Set forth below are commonly asked questions and answers about the Spin-Off and the transactions contemplated thereby. You should read the section entitled “The Spin-Off” elsewhere in this information statement for a more detailed description of the matters described below.

 

Q:

Why am I receiving this document?

 

A:

PDL is delivering this document to you because you were a holder of PDL common stock on the Record Date for the distribution of shares of our common stock. Accordingly, you are entitled to receive 0.075879 shares of our common stock for every one share of PDL common stock that you held on the Record Date.

No action is required for you to participate in the Distribution.

 

Q:

What is LENSAR?

 

A:

We are currently a direct, majority-owned subsidiary of PDL whose shares will be distributed to PDL stockholders if the Spin-Off is completed. 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. Upon completion of the Spin-Off, we will be a public company and will own and operate the femtosecond laser assisted cataract surgery business that was formerly part of PDL.

 

Q:

What is the Spin-Off?

 

A:

The Spin-Off is the transaction of separating us from PDL, creating two separate, publicly traded companies, which will be accomplished by distributing our common stock held by PDL pro rata to holders of PDL common stock. If all conditions to the effectiveness of the Spin-Off are met (or waived by the PDL board of directors in its sole discretion), then, on the Distribution date, all of the outstanding shares of our common stock held by PDL will be distributed to the holders of PDL common stock as of the Record Date. A holder of PDL common stock as of the Record Date for the Distribution will be entitled to receive 0.075879 shares of our common stock for every one share of PDL common stock held by such holder. Following the Spin-Off, PDL will no longer hold any of our outstanding capital stock and we will be an independent, publicly traded company with separate management and a separate board of directors. We have applied to list our common stock on the Nasdaq Capital Market under the symbol “LNSR.”

 

Q:

How does my ownership in PDL change as a result of the Distribution?

 

A:

The number of shares of PDL common stock that you own will not change as a direct result of the Distribution.

 

Q:

Why is the Spin-Off structured as a distribution?

 

A:

PDL believes that a distribution of shares of our common stock to the PDL stockholders is a way to separate the femtosecond laser assisted cataract surgery business from its other businesses in a manner that is intended to enhance long-term value for PDL stockholders.

 

Q:

What are the material U.S. federal income tax consequences to me of the Distribution?

 

A:

The Distribution is intended to be treated as part of a liquidating distribution by PDL. In accordance with such treatment, in the case of a U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences of the Distribution”), an amount equal to the fair market value of our common stock (together with any



 

19


Table of Contents
  other property distributed as part of the liquidating distribution) received by you will be treated as received in exchange for your shares of PDL common stock and will first be applied against and reduce your basis in such shares of PDL common stock, but not below zero. Any remaining amount in excess of your basis in such shares of PDL common stock will be treated as capital gain. For a more detailed discussion, see “Material U.S. Federal Income Tax Consequences of the Distribution.” You should consult your tax advisor as to the particular tax consequences of the Distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

Q:

How will the Distribution affect my tax basis and holding period in shares of PDL common stock?

 

A:

Your tax basis in shares of PDL common stock held at the time of the Distribution will be reduced (but not below zero) to the extent of the fair market value of our shares distributed to you by PDL in the Distribution. Your holding period for such shares of PDL common stock will not be affected by the Distribution. See “Material U.S. Federal Income Tax Consequences of the Distribution.” You should consult your tax advisor as to the particular tax consequences of the Distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

Q:

What will my tax basis and holding period be for LENSAR common stock that I receive in the Distribution?

 

A:

Your tax basis in our common stock received in the Distribution generally will equal the fair market value of such shares on the Distribution date. Your holding period for such shares will begin the day after the Distribution date. See “Material U.S. Federal Income Tax Consequences of the Distribution.” You should consult your tax advisor as to the particular tax consequences of the Distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

Q:

What will I receive in the Spin-Off?

 

A:

A holder of PDL common stock as of the Record Date established for the Distribution will be entitled to receive 0.075879 shares of our common stock for every one share of PDL common stock held by such holder. The person in whose name the shares of PDL common stock are registered at the close of business on the Record Date is the person to whom shares of our common stock will be issued in the Distribution. For a more detailed description, see “The Spin-Off.”

 

Q:

What is being distributed in the Spin-Off?

 

A:

Approximately 8.7 million shares of our common stock will be distributed in the Spin-Off, based on the number of shares of PDL common stock we expect to be outstanding as of the Record Date. The shares of our common stock to be distributed by PDL constitute all of the issued and outstanding shares of our common stock held by PDL immediately prior to the Distribution, representing approximately 81.5% of our total issued and outstanding common stock. For more information on the shares being distributed in the Spin-Off, see “Description of LENSAR Capital Stock—Common Stock.”

 

Q:

Will I receive physical certificates representing shares of LENSAR common stock following the Distribution?

 

A:

No. In the Distribution, stockholders will not receive any physical certificates representing shares of our common stock. Instead, PDL, with the assistance of Computershare Trust Company, N.A., our transfer agent, will electronically distribute shares of our common stock either to you by way of direct registration in book-entry form or on your behalf in street name through your bank or brokerage firm. We expect that it will take the transfer agent, acting on behalf of PDL, up to ten days after the Distribution date to fully



 

20


Table of Contents
  distribute the shares of our common stock to PDL stockholders. Computershare Trust Company, N.A. will mail you a book-entry account statement that reflects your shares of our common stock, or your bank or brokerage firm will credit your account for the shares.

 

Q:

How will fractional shares be treated in the Distribution?

 

A:

We will not distribute fractional shares of our common stock. Fractional shares of our common stock that would otherwise be distributed to PDL stockholders will be aggregated and sold in the public market by the transfer agent. The aggregate net proceeds of these sales will be distributed ratably as cash payments to the stockholders who would otherwise have received fractional interests. See “The Spin-Off—Manner of Effecting the Spin-Off” for an explanation of how the cash payments will be determined and “Material U.S. Federal Income Tax Consequences of the Distribution” for a discussion of the tax consequences of receiving cash in lieu of fractional shares.

 

Q:

What if I want to sell my PDL common stock or my LENSAR common stock?

 

A:

Neither PDL nor LENSAR makes any recommendations on the purchase, retention or sale of shares of PDL common stock or the shares of LENSAR common stock to be distributed. You should consult with your financial advisors, such as your stockbroker, bank or tax advisor.

If you sell your PDL common stock prior to the Record Date or sell your entitlement to receive shares of LENSAR common stock in the Distribution on or prior to the Distribution date, you will not receive any shares of LENSAR common stock in the Distribution. If you decide to sell any shares of PDL common stock after the Record Date, but before the Distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your PDL common stock, the LENSAR common stock you will be entitled to receive in the Distribution, or both.

 

Q:

On what date did the PDL Board of Directors approve the Spin-Off and declare the Distribution?

 

A:

The PDL board of directors approved the Spin-Off and declared the Distribution on September 9, 2020.

 

Q:

What is the Record Date for the Distribution?

 

A:

Record ownership will be determined as of 5:00 p.m., Eastern Time, on September 22, 2020, which we refer to as the Record Date.

 

Q:

When will the Spin-Off be completed?

 

A:

The date for the Distribution, which is the date on which PDL will distribute shares of our common stock, is expected to be October 1, 2020. The Spin-Off will be completed pursuant to the terms of the Separation and Distribution Agreement between us and PDL. We expect that it will take the transfer agent, acting on behalf of PDL, up to ten days after the Distribution date to fully distribute shares of our common stock to PDL stockholders, which will be accomplished by directly issuing shares in book-entry form or by crediting your account at your bank or brokerage firm. However, your ability to trade our common stock received in the Distribution will not be affected during this time. It is also possible that factors outside of our control, or a decision by PDL to terminate the Separation and Distribution Agreement pursuant to its terms, could require us to complete the Spin-Off at a later time or not at all. See “The Spin-Off.”

 

Q:

What do I have to do to participate in the Distribution?

 

A:

Nothing. No action will be required of PDL stockholders to receive shares of LENSAR common stock, which means that (i) PDL is not asking you for a proxy, and you should not send a proxy; (ii) you will not



 

21


Table of Contents
  be required to pay for the shares of LENSAR common stock that you receive in the Distribution; and (iii) you do not need to surrender or exchange any shares of PDL common stock in order to receive shares of LENSAR common stock, or take any other action in connection with the Spin-Off.

 

Q:

Can PDL decide not to complete the Spin-Off?

 

A:

Yes. PDL’s board of directors reserves the right, in its sole discretion, to amend, modify or abandon the Spin-Off and related transactions at any time prior to the Distribution date. In addition, the Spin-Off is subject to the satisfaction or waiver of certain conditions. See “The Spin-Off—Conditions to the Spin-Off.” If PDL’s board of directors amends, modifies or abandons the Spin-Off, PDL intends to promptly issue a press release and file a Current Report on Form 8-K to report such event.

 

Q:

Is the completion of the Spin-Off subject to any conditions?

 

A:

The Spin-Off is subject to a number of conditions set forth in the Separation and Distribution Agreement, including, among others: (i) approval of the Transactions (as defined in the Separation and Distribution Agreement), including the Spin-Off, and declaration of the Distribution by PDL’s board of directors; (ii) the SEC declaring effective the registration statement on Form 10 of which this information statement forms a part; (iii) us mailing the information statement to the holders of record of PDL common stock at the close of business on the record date; (iv) all other actions and filings necessary and appropriate under applicable federal or state securities laws and state blue sky laws; (v) the approval of our common stock for listing, subject to official notice of issuance; (vi) the execution and delivery of the ancillary agreements; (vii) the receipt of any material governmental authorizations necessary to consummate the Transactions; and (viii) the effectiveness of our amended and restated certificate of incorporation and amended and restated bylaws. Other than the conditions relating to the effectiveness of the registration statement and our mailing of the information statement, PDL’s board of directors may waive any of these conditions, in its sole discretion, prior to the Distribution date. To the extent that the PDL board of directors determines that any modifications by PDL, including any waivers of any conditions to the Spin-Off, materially change the terms of the Distribution, PDL will notify PDL stockholders in a manner reasonably calculated to inform them about the modifications as may be required by law, such as by publishing a press release, filing a current report on Form 8-K or circulating a supplement to this information statement. For a more detailed description, see “The Spin-Off—Conditions to the Spin-Off.”

 

Q:

Will LENSAR have a relationship with PDL following the Spin-Off?

 

A:

In connection with the Spin-Off, we will enter into the Separation and Distribution Agreement and other agreements with PDL that will govern the relationship between PDL and us after the completion of the Spin-Off. The Separation and Distribution Agreement will set forth our agreement with PDL regarding the principal transactions necessary to separate us from PDL and will provide that on the Distribution date, PDL will distribute to its stockholders 0.075879 shares of our common stock for every one share of PDL common stock held by PDL stockholders as of the Record Date. It will also provide, among other things: (i) that each party shall use commercially reasonable efforts to remove the other party and its subsidiaries and affiliates as guarantor or obligor of any of the first party’s obligations or liabilities; (ii) for the settlement or extinguishment of certain liabilities and other obligations between us and our subsidiaries, or the LENSAR Entities, and PDL and its subsidiaries and affiliates (other than us and our subsidiaries), or the PDL Entities; (iii) provisions pursuant to which each of LENSAR and PDL will release and indemnify and hold harmless the other against any claims that arise out of or relate to (x) the management of the releasing party’s respective business and affairs prior to the Distribution date, (y) the releasing party’s breach of the Separation and Distribution Agreement, or with respect to all information contained in this registration statement or the information statement (other than information regarding any PDL entity provided by any PDL entity in writing to us expressly for inclusion in the registration statement or this information statement), any untrue statement or



 

22


Table of Contents
  alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

We will also enter into the Transition Services Agreement with PDL pursuant to which PDL will provide to us certain support functions, primarily with respect to accounting and other financial functions following the Spin-Off.

Prior to consummation of the Spin-Off, we will also enter into the Tax Matters Agreement and other ancillary agreements with PDL.

For a more detailed discussion of each of the agreements we will enter into with PDL in connection with the Spin-Off, see “Certain Relationships and Related Party Transactions—Agreements between PDL and LENSAR Relating to the Spin-Off.”

 

Q:

How will PDL equity compensation awards be affected as a result of the Spin-Off?

 

A:

In connection with the Distribution, we currently expect that, subject to approval by the PDL board of directors, PDL’s outstanding equity-based compensation awards will generally be treated as follows:

Each outstanding PDL stock option to purchase shares of PDL common stock on the Distribution Date will remain a stock option to purchase shares of PDL common stock, subject to the terms of the original stock option, but the exercise price and the number of shares subject to the stock option will be adjusted using a formula designed to generally preserve the intrinsic value and fair value of the original stock option immediately prior to the Distribution Date. Each adjusted PDL stock option will continue to vest on its existing terms and conditions. For additional information, see “The Spin-Off—Treatment of PDL Equity Awards.”

 

Q:

Will the LENSAR common stock be listed on a stock exchange?

 

A:

Yes. Although there is currently not a public market for our common stock, we have applied to list our common stock on the Nasdaq Capital Market under the symbol “LNSR.” We anticipate that trading of our common stock will commence on a “when-issued” basis shortly prior to the Record Date for the Distribution. “When-issued trading” refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. When-issued trades generally settle within two trading days after the Distribution date. On the first trading day following the Distribution date, when-issued trading with respect to our common stock will end and “regular-way” trading will begin. “Regular-way trading” refers to normal trading transactions, which are settled by delivery of the securities against payment on the second business day after the transaction.

 

Q:

Will the Distribution affect the trading price of my PDL common stock?

 

A:

Yes, the trading price of PDL common stock is expected to change as a result of the Distribution because it will no longer reflect the value of our business. Moreover, the trading price of PDL common stock may fluctuate significantly depending upon a number of factors, some of which may be beyond PDL’s control. PDL’s board of directors believes that the Spin-Off offers its stockholders the greatest long-term value. That said, we cannot provide you with any guarantees as to the price at which the PDL common stock will trade following the Distribution. We also cannot assure you that following the Spin-Off the aggregate value of our common stock and PDL common stock will ever exceed the pre-Spin-Off value of PDL common stock.

 

Q:

What will happen to the listing of PDL common stock?

 

A:

It is expected that, after the Distribution of our common stock, PDL common stock will continue to be traded on the Nasdaq Stock Market under the symbol “PDLI.” The number of shares of PDL common stock you own will not change as a result of the Distribution alone.



 

23


Table of Contents
Q:

What are the anti-takeover effects of the Spin-Off?

 

A:

Some provisions of our amended and restated certificate of incorporation, our amended and restated bylaws and the Delaware General Corporation Law as amended, or the DGCL, may have the effect of making it more difficult for another company to acquire control of us in a transaction not approved by our board of directors. For example, our amended and restated certificate of incorporation and amended and restated bylaws provide for a classified board, that directors can only be removed for cause, plurality voting in the election of directors, require advance notice for stockholder proposals and nominations, place limitations on convening stockholder meetings, authorize our board of directors to issue one or more series of preferred stock, allow our board of directors to fill all vacancies on the board of directors, permit our board of directors to amend the amended and restated bylaws without stockholder consent and require a 66-2/3% vote of stockholders, voting together as a single class, to amend our amended and restated bylaws and certain provisions of our amended and restated certificate of incorporation. See “Risk Factors—Risks Related to Owning Our Common Stock—Certain provisions in our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment and, therefore, may depress the trading price of our common stock” for more information.

 

Q:

Do I have dissenters’ rights or appraisal rights in connection with the Spin-Off?

 

A:

No. Holders of PDL common stock are not entitled to dissenters’ rights or appraisal rights in connection with the Distribution.

 

Q:

Who is the transfer agent for LENSAR shares?

 

A:

Computershare Trust Company, N.A.

 

Q:

Are there any risks in connection with the Spin-Off that I should consider?

 

A:

Yes. There are certain risks associated with the Spin-Off. These risk factors are discussed in the section titled “Risk Factors.”

 

Q:

Where can I get more information?

 

A:

If you have any questions relating to the mechanics of the Distribution, you should contact the transfer agent at:

Computershare Trust Company, N.A.

P.O. Box 30170

College Station, TX 77842

Tel: 877-422-4271

Before the Spin-Off, if you have any questions relating to the Distribution, you should contact PDL at:

932 Southwood Boulevard

Incline Village, NV 89451

Attention: Investor Relations

Tel: 775-832-8500

After the Spin-Off, if you have any questions relating to LENSAR, you should contact us at:

2800 Discovery Drive

Orlando, FL 32826

Attention: Investor Relations

Tel: 888-536-7271



 

24


Table of Contents

RISK FACTORS

You should consider carefully the risks and uncertainties described below, together with all of the other information in this information statement, including our financial statements and related notes, in evaluating our common stock. If any of the following risks are realized, our business, financial condition, results of operations and prospects, as well as the price of our common stock could be materially and adversely affected.

Risks Related to Our Business

We expect to incur operating losses for the foreseeable future and we cannot assure you that we will be able to generate sufficient revenue to achieve or sustain profitability.

For the years ended December 31, 2018 and 2019, we had net losses of $12.6 million and $14.7 million, respectively, and for the six months ended June 30, 2019 and 2020, we had net losses of $6.4 million and $8.2 million, respectively. As of June 30, 2020, we had an accumulated deficit of $46.4 million. We expect to continue to incur losses for the foreseeable future as we continue to build our commercial and clinical infrastructure, pursue development and FDA clearance of our proprietary, next-generation, integrated workstation, known as ALLY, and invest in research and development. In addition, as a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We cannot assure you that we will ever generate sufficient revenue from our operations to achieve profitability, and even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. Our failure to achieve or maintain profitability could negatively affect the value of our securities and our ability to raise capital and continue operations.

We principally derive our revenue from the sale or lease and use of our LENSAR Laser System, the associated procedure licenses and consumables used in each procedure and the commercial success of our LENSAR Laser System will largely depend upon our ability to maintain and grow significant market acceptance for it.

We principally derive our revenue from the sale or lease of our LENSAR Laser System and the associated procedure licenses and consumables used in each procedure involving our LENSAR Laser System, and expect that this will account for all of our revenue in the foreseeable future. Accordingly, our ability to increase revenue is highly dependent on our ability to market and sell or lease our LENSAR Laser System and market the associated consumables.

Our ability to maintain our market share, execute our growth strategy, achieve commercial success and become profitable will depend upon the adoption and continued acceptance of our LENSAR Laser System by surgeons, hospital outpatient surgical facilities, in-office surgical suites and ambulatory surgery centers, or ASCs. Our system is currently used in advanced cataract procedures for which surgeon reimbursement continues to decline and patients pay a significant portion of the cost of the procedure. We cannot predict the extent to which patients will continue to seek out these types of procedures. Further, we cannot predict if cataract surgeons will continue to use our LENSAR Laser System or how quickly cataract surgeons will accept any planned or future products we introduce and, if accepted, how frequently any such products will be used. Our current products may not maintain, and ALLY or other planned or future products we may develop or market may never gain, broad market acceptance among cataract surgeons and the medical community for the procedures in which they are designed to be used. Our ability to maintain and increase market acceptance of our products depends on a number of factors, including:

 

   

our ability to provide visual outcomes and economic data that show the safety, efficacy and cost effectiveness, including other patient benefits from, the use of our LENSAR Laser System or other future products;

 

   

acceptance by cataract surgeons and others in the medical community of our LENSAR Laser System;

 

25


Table of Contents
   

the potential and perceived advantages and disadvantages of our LENSAR Laser System as compared to competing products;

 

   

the willingness of patients to pay out-of-pocket for procedures in which our LENSAR Laser System or other future products is used but for which limited reimbursement by third-party payors, including government authorities, is available;

 

   

the effectiveness of our sales and marketing efforts, and of those of our international distributors;

 

   

the prevalence and severity of any complications associated with using our LENSAR Laser System;

 

   

the ease of use, reliability and convenience of our LENSAR Laser System relative to competing products;

 

   

competitive response and negative selling efforts from providers of competing products;

 

   

quality of outcomes for patients in procedures in which surgeons use our LENSAR Laser System;

 

   

the results of clinical trials and post-market clinical studies relating to the use of our LENSAR Laser System;

 

   

the technical leadership of our research and development teams;

 

   

the absence of third party blocking intellectual property;

 

   

our ability to introduce our products to the market with speed and on time with our projected timelines;

 

   

pricing pressure, including from larger, well-capitalized and product-diverse competitors, corporate-owned ASCs, group purchasing organizations, and government payors; and

 

   

the availability of coverage and adequate reimbursement for procedures using our LENSAR Laser System or other future products from third-party payors, including government authorities.

Failure to maintain or increase market acceptance would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition and results of operations.

Our long-term growth depends in part on our ability to enhance our LENSAR Laser System.

We are currently focused on developing ALLY. ALLY will take considerable time and resources to develop, and we may not be able to complete development, obtain FDA clearance to market and ultimately commercialize ALLY on a timely basis, or at all. Moreover, we are developing ALLY as a dual-function device that can perform both phacoemulsification and laser-assisted surgery, and if approved, its commercial success will depend significantly on physicians’ perception of the benefits of such a device and the extent to which government and other third-party payors cover and reimburse surgeons and other health care providers for procedures using ALLY. We are relying on a third party to develop and manufacture the phacoemulsification component of ALLY, and do not currently possess the internal resources or know-how to do so. Any adverse developments with that third-party supplier could in turn negatively impact our development of ALLY.

While we have engaged in market research to evaluate the interest in a dual-function device, the results of that research are based on a small population of cataract surgeons and may not be indicative of actual market interest. In addition, the success of ALLY or any other new product offering or product enhancements we pursue will depend on several factors, including our ability to:

 

   

properly identify and anticipate cataract surgeon and patient needs;

 

   

develop and introduce new products and product enhancements in a timely manner;

 

   

our ability to exclude competition based on our intellectual property rights;

 

   

avoid infringing upon the intellectual property rights of third-parties;

 

26


Table of Contents
   

demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials;

 

   

obtain the necessary regulatory clearances or approvals for expanded indications, new products or product modifications;

 

   

be fully FDA-compliant with manufacturing and marketing of new devices or modified products;

 

   

provide adequate training to potential users of these products;

 

   

receive adequate coverage and reimbursement for procedures performed with ALLY or any other products we may develop in the future; and

 

   

develop an effective and dedicated sales and marketing team.

If we are not successful in expanding our product offering, our ability to increase our revenue may be impaired, which could have a material adverse effect on our business, financial condition and results of operations.

COVID-19 and actions taken to control the spread of COVID-19 have had an adverse impact on our business, and we expect them to continue to do so.

The outbreak of a novel coronavirus, or COVID-19, has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. COVID-19 and actions taken to control the spread of COVID-19 have significantly impacted our business, and we expect them to continue to do so. For example, many jurisdictions have imposed, or in the future may impose, “shelter-in-place” orders, quarantines or similar orders or restrictions to control the spread of COVID-19 by restricting non-essential activities, including the suspension of elective surgeries and various business operations. These types of orders and restrictions have resulted in a significant decrease in the number of and demand for non-essential or elective medical procedures, including cataract surgeries, since the outbreak of the pandemic. Additionally, we have implemented remote working arrangements where possible for our employees and restricted business-related travel. The respective commercial teams of certain of the third parties that act as our distributors in international markets have chosen or have been forced to take similar action, and those or other distributors may choose or be forced to take similar action in the future. Neither we, nor our distributors have significant experience operating with the majority of our respective work forces working from home, and this may disrupt standard operations for us or them, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our respective abilities to conduct business in the ordinary course. In addition, this may increase our cybersecurity risk, create data accessibility concerns and make us more susceptible to communication disruptions, any of which could adversely impact our business operations or delay necessary interactions with local and federal regulators, ethics committees, manufacturing sites, research or clinical trial sites and other important agencies and contractors. While the implementation of these measures has not required material expenditures to date, the suspension of non-essential medical services has significantly impacted our revenues and cash flows and has significantly impacted our ability to operate our commercial operations. Furthermore, these developments, including their long-term impact on our suppliers, may adversely affect our development of ALLY or, if such conditions persist, the commercial success of ALLY. For example, the COVID-19 pandemic has resulted in, and may continue to result in, historically high unemployment rates, which typically result in lower rates of private health insurance. Even if procedures in which our LENSAR Laser Systems are used are covered or reimbursable by third-party payors, patients may not have adequate insurance coverage or other discretionary income to pay for a procedure in which one of our LENSAR Laser Systems is used, which would in turn adversely impact our future revenue and results of operations.

The continued spread of COVID-19 has also led to extreme disruption and volatility in the global capital markets, which increases the cost of, and adversely impacts access to, capital and increases economic uncertainty. While we expect COVID-19 to continue to negatively impact our business, operations and revenue

 

27


Table of Contents

growth, given the rapid and evolving nature of the virus and the uncertainty about its impact on society and the global economy, we cannot predict with certainty the extent to which it will affect our operations, particularly if these impacts persist or worsen over an extended period of time. Furthermore, any similar pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or in which we sell or lease our LENSAR Laser Systems may adversely affect our business.

In addition to the COVID-19 disruptions adversely impacting our business and financial results, they may also have the effect of heightening many of the other risks described in “Risk Factors,” including risks relating to changes in consumer demand; our ability to maintain and grow significant market acceptance; our ability to enhance our LENSAR Laser System; our ability to grow our marketing team; patients’ and surgeons’ willingness and ability to pay for an advanced cataract procedure over a standard cataract procedure; our future capital needs; disruption in the long-term supply and manufacturing of our products by suppliers; increased credit risks associated with our customers; and regulatory restrictions.

Patients may not be willing to pay for the price difference between a standard cataract procedure and an advanced cataract procedure in which a laser system such as ours is used, an increment which is typically not covered by Medicare, private insurance or other third-party payors.

Payment for a standard cataract procedure is typically covered by Medicare, private insurance or other third-party payors. However, a cataract patient seeking a greater and more versatile visual outcome may desire an advanced cataract procedure involving a laser system such as ours. The patient is typically responsible for the additional costs associated with the use of these premium technologies in the physician’s practice, hospital outpatient surgical facilities, in-office surgical suites and ambulatory surgery centers. Due to this additional cost, patients may not elect to have such a procedure and our business may not grow as anticipated. Our future success depends in part upon patients achieving better visual outcomes from procedures using our LENSAR Laser System, or procedures involving similar laser systems that meets their expectations. If patients are not adequately satisfied with the results of such procedures, they or their surgeons may be less willing to recommend these procedures to other patients.

Additionally, weak or uncertain economic conditions, such as those that have resulted from the COVID-19 pandemic, may cause individuals to be less willing to pay for advanced cataract procedures. Although we anticipate use of ALLY in certain aspects of the standard cataract procedure will be covered by or reimbursable through government or other third-party payors, our current LENSAR Laser System procedures are not covered by or reimbursable through government or other third-party payors. A decline in economic conditions in the United States or in international markets could result in a decline in demand for the procedures in which our LENSAR Laser System is used and could have a material adverse effect on our business, financial condition and results of operations.

If we are not able to effectively grow our U.S. sales and marketing organization, or maintain or grow an effective network of international distributors, our business prospects, results of operations and financial condition could be adversely affected.

In order to generate future sales growth within the United States, we will need to expand the size and geographic scope of our U.S. direct sales organization. Accordingly, our future success will depend largely on our ability to train, retain and motivate skilled regional sales managers and direct sales representatives with significant technical knowledge of our LENSAR Laser System. Because of the competition for their services, we may not be able to retain such representatives on favorable or commercially reasonable terms, if at all. If we are unable to grow our global sales and marketing organization within the United States, we may not be able to increase our revenue, which would adversely affect our business, financial condition and results of operations.

Additionally, we rely exclusively on a network of independent distributors to generate sales and leases of our LENSAR Laser System as well as purchases of our consumables and licensed applications outside of the

 

28


Table of Contents

United States. For the year ended December 31, 2019, two customers accounted for 26% and 11% of our revenue. For the year ended December 31, 2018, two customers accounted for 12% each of our revenue. As of December 31, 2019 and 2018 one customer accounted for 25% and 15% of our accounts receivable, net, respectively. This customer concentration exposes us to a material adverse effect if either of these significant distributors were to significantly reduce purchases for any reason or favor competitors or new market participants. If a dispute arises with a distributor or if a distributor is terminated by us or goes out of business, it may take time to locate an alternative distributor, to seek appropriate regulatory approvals and to train new personnel to market our LENSAR Laser System, and our ability to sell those systems in the region formerly serviced by such terminated distributor could be harmed. In addition, our international distributors may be unable to successfully market and sell our products and may not devote sufficient time and resources to support the marketing, sales, education and training efforts that we believe are necessary to enable the products to develop, achieve or sustain market acceptance. Any of these factors could reduce our revenues from affected markets, increase our costs in those markets or damage our reputation. In addition, if an independent distributor were to depart and be retained by one of our competitors, we may be unable to prevent that distributor from helping competitors solicit business from our existing customers, which could further adversely affect us. As a result of our reliance on third-party distributors, we may be subject to disruptions and increased costs due to factors beyond our control, including labor strikes, third-party error and other issues. If the services of any of these third-party distributors become unsatisfactory, we may experience delays in meeting our customers’ demands and we may be unable to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver products in a timely manner may damage our reputation and could cause us to lose potential customers.

Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.

Subject to the duration and extent of the impact of the ongoing COVID-19 pandemic, we expect our revenues 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 our second generation laser 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 timing, scope and magnitude of our commercial and development activities; and the timing of regulatory clearance of ALLY. We also expect the impact of the ongoing COVID-19 pandemic will negatively affect our capital requirements and the availability of funds to finance those requirements outside of cash provided by PDL.

As of September 14, 2020, we expect our cash, together with cash generated from the sale of our products, to be sufficient to operate our business for at least the next 12 months. However, if these amounts are insufficient to satisfy our liquidity requirements, we may seek additional funds from public and private stock offerings, borrowings under credit facilities or other sources which we may not be able to maintain or obtain on acceptable or commercially reasonable terms, if at all. Our capital requirements will depend on many factors, including, but not limited to:

 

   

the revenue generated by the sale, lease or use of our LENSAR Laser Systems;

 

   

the costs associated with expanding our sales and marketing efforts;

 

   

the expenses we incur in procuring, manufacturing and selling our LENSAR Laser Systems;

 

   

the costs of researching, developing and commercializing ALLY or other new products or technologies;

 

   

the scope, rate of progress and cost of our clinical studies that we are currently conducting or may conduct in the future;

 

29


Table of Contents
   

the cost and timing of obtaining and maintaining regulatory approval or clearance of our products and planned or future products;

 

   

costs associated with any product recall that may occur;

 

   

the costs associated with complying with state, federal and international laws and regulations;

 

   

the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;

 

   

the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights;

 

   

the cost of enforcing or defending against non-competition claims;

 

   

the number and timing of acquisitions and other strategic transactions;

 

   

the costs associated with increased capital expenditures; and

 

   

anticipated and unanticipated general and administrative expenses, including expenses related to operating as a public company and insurance expenses.

Such capital may not be available on favorable terms, or at all. Furthermore, 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. If we cannot raise capital on acceptable terms, we may not be able to develop or enhance our products, execute our business plan, take advantage of future opportunities or respond to competitive pressures, changes in our supplier relationships or unanticipated customer requirements. 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.

If the supply or manufacture of our LENSAR Laser System or other products is materially disrupted, it may adversely affect our ability to manufacture products and could negatively affect our operating results.

We manufacture both our LENSAR Laser System and provide the electronic license applications at our corporate headquarters in Orlando, Florida. This is also the location where we currently conduct substantially all of our research and development activities, customer and technical support, and management and administrative functions. If our facility suffers a crippling event, or a force majeure event such as an earthquake, fire, flood or temporary shutdown due to a pandemic, epidemic or infectious disease, this could materially impact our ability to operate.

We purchase custom and off-the-shelf components from a number of suppliers and subject them to stringent quality specifications and processes. Some of the components necessary for the assembly of our LENSAR Laser System and associated consumables are currently provided by single-sourced suppliers (the only approved supply source for us among other sources). We are also relying on a third party to develop and manufacture the phacoemulsification component of ALLY. If one or more of our suppliers cease to provide us with sufficient quantities of materials in a timely manner or on terms acceptable to us, we would have to seek alternative sources of supply. Because of factors such as the proprietary nature of our products, our quality control standards and regulatory requirements, we may experience delay in engaging additional or replacement suppliers for certain components. Despite our efforts to maintain an adequate supply of inventory, the long-term loss of these suppliers, or their long-term inability to provide us with an adequate supply of components or products, could

 

30


Table of Contents

potentially cause delay in the manufacture of our products, thereby impairing our ability to meet the demand of our customers and causing significant harm to our business. If it becomes necessary to identify and qualify a suitable second source to replace one of our key suppliers, that replacement supplier would not have access to our previous supplier’s proprietary processes and would therefore be required to develop its own, which could also result in delay. Any disruption of this nature or increased expense could harm our commercialization efforts and could have a material adverse effect on our business, financial condition and results of operations.

We and some of our suppliers and contract facilities are required to comply with regulatory requirements of the U.S. Food and Drug Administration, or FDA. In particular, the FDA’s Quality System Regulation, or QSR, which includes FDA’s current Good Manufacturing Practice requirements, or cGMPs, covers the procedures and documentation of the design, testing, production, control, quality assurance, inspection, complaint handling, recordkeeping, management review, labeling, packaging, sterilization, storage and shipping of our device products. The FDA audits compliance with these regulatory requirements through periodic announced and unannounced inspections of manufacturing and other facilities. If our manufacturing facilities or those of any of our suppliers or contract facilities are found to be in violation of applicable laws and regulations, the FDA could take enforcement action. Additionally, in the event we must obtain a replacement supplier or contract facility, it may be difficult for us to identify and qualify a supplier or contract facility that complies with QSR and cGMPs, which would adversely impact our operations.

We compete and may compete in the future against other companies, some of which have longer operating histories, more established products or greater resources than we do.

Our industry is global, highly competitive and subject to rapid and profound technological, market and product-related changes. We face significant competition from large multinational medical device companies, as well as smaller, emerging players focused on product innovation.

Our primary competitors in providing surgical solutions for cataract patients are Alcon Inc.; Bausch + Lomb, a division of Bausch Health Companies Inc.; Johnson & Johnson; Carl Zeiss AG; and Zeimer. These competitors are focused on bringing new technologies to market and acquiring products and technologies that directly compete with our products or have potential product advantages that could render our products obsolete or noncompetitive.

Many of our current and potential competitors are large publicly traded companies or divisions of publicly-traded companies and have several competitive advantages, including:

 

   

greater financial and human resources for product development and sales and marketing;

 

   

significantly greater name recognition;

 

   

longer operating histories; and

 

   

more established sales and marketing programs and distribution networks.

In addition, many of our competitors have their own intraocular lens, or IOLs, while we do not, which could put us at a competitive disadvantage. If we are unable to compete effectively in this environment, it could adversely affect our business.

To successfully market, sell and lease our products in markets outside of the United States, we must address many international business risks with which we have limited experience.

We have historically sold and leased a significant portion of our LENSAR Laser Systems outside of the United States through a network of independent distributors and intend to increase our international presence in

 

31


Table of Contents

Germany, China and South Korea, as well as other international markets. Our international business operations are subject to a number of risks, including:

 

   

difficulties in staffing and managing our international operations;

 

   

increased competition as a result of more products and procedures receiving regulatory approval or otherwise free to market in international markets;

 

   

longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

   

reduced or varied protection for intellectual property rights in some countries;

 

   

export restrictions, trade regulations, and foreign tax laws;

 

   

fluctuations in currency exchange rates;

 

   

foreign certification and regulatory clearance or approval requirements;

 

   

difficulties in developing effective marketing campaigns in unfamiliar foreign countries;

 

   

customs clearance and shipping delays;

 

   

political, social, and economic instability abroad, terrorist attacks, and security concerns in general;

 

   

preference for locally produced products;

 

   

potentially adverse tax consequences, including the complexities of foreign value-added tax systems, tax inefficiencies related to our corporate structure, and restrictions on the repatriation of earnings;

 

   

the burdens of complying with a wide variety of foreign laws and different legal standards; and

 

   

increased financial accounting and reporting burdens and complexities.

If one or more of these risks are realized, this could have a material adverse effect on our business, financial condition and results of operations.

We are exposed to the credit risk of some of our customers, which could result in material losses.

Customers may lease our LENSAR Laser System or finance the laser through the product utilization, and we believe there has been an increase in demand for these types of customer leasing in recent years. We may experience loss from a customer’s failure to make payments according to the contractual lease terms or some other material decrease in the practice revenues and surgical procedure volume. Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, economic pressures or uncertainty, or other customer-specific factors. In addition, our credit risk may be highly concentrated, as we rely exclusively on a network of independent distributors to generate sales outside of the United States. Further, ongoing consolidation among distributors, retailers and healthcare provider organizations could increase the concentration of credit risk. The factors affecting our customers’ ability to make timely payments according to the contractual lease terms are out of our control, and as a result, exposes us to additional risks that may materially and adversely affect our business and results of operations. The occurrence of any such factors affecting our customers may cause delays in payments or, in some cases, defaults on payment obligations, which could result in material losses.

Although we have programs in place that are designed to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing credit risks relating to these lease financing arrangements. If the level of credit losses we experience in the future exceed our expectations, such losses could have a material adverse effect on our business, financial condition and results of operations or adversely affect our ability to sell such assets as part of our monetization strategy.

 

32


Table of Contents

We may be unable to accurately forecast customer demand and our inventory levels.

We generally do not maintain large volumes of finished goods and anticipating demand for our products may be challenging as cataract surgeon demand and adoption rates can be unpredictable. In addition, as use of our LENSAR Laser System is adopted by more cataract surgeons, we anticipate greater fluctuations in demand for our products, which makes demand forecasting more difficult. Our forecasts are based on management’s judgment and assumptions, each of which may introduce error into our estimates. if we underestimate customer demand or if insufficient manufacturing capacity is available, we would miss revenue opportunities and potentially lose market share and damage our customer relationships. Conversely, if we overestimate customer demand, our excess or obsolete inventory may increase significantly, which would reduce our gross margin and adversely affect our financial results.

Failure to secure adequate coverage or reimbursement by government or other third-party payors for procedures using ALLY or our other future products, or changes in current coverage or reimbursement, could materially impact our revenue and future growth.

Adequate coverage and reimbursement from third-party payors, including government programs such as Medicare and Medicaid, private insurance plans and managed care programs, for procedures using ALLY or other products we may develop in the future, if approved, is central to the acceptance and adoption of these products. Hospitals, healthcare facilities, physicians and other healthcare providers that may purchase and use ALLY generally rely on third-party payors to pay for all or part of the costs and fees associated with the procedures using ALLY. If third-party payors reduce their levels of payment, if our costs of production increase faster than increases in reimbursement levels or if third-party payors deny reimbursement for procedures using ALLY, ALLY may not be adopted or accepted by hospitals, healthcare facilities, physicians or other healthcare providers and the prices paid for a procedure using ALLY may decline, which could have a material adverse effect on our business, financial condition or results of operations.

Physicians are reimbursed separately for their professional time and effort to perform a cataract procedure that is covered by third-party payors. Such party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes routine updates to payments to physicians, hospitals and ambulatory surgery centers for procedures during which ALLY would be used. These updates could directly impact the demand for our future products. For example, the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, provided for a 0.5% annual increase in payment rates under the Medicare Physician Fee Schedule, or PFS, through 2019, but no annual update from 2020 through 2025. MACRA also introduced a Quality Payment Program for Medicare physicians, nurses and other “eligible clinicians” (as defined in MACRA) that adjusts overall reimbursement under the PFS based on certain performance categories. While MACRA applies only to Medicare reimbursement, Medicaid and private payors often follow Medicare payment limitations in setting their own reimbursement rates, and any reduction in Medicare reimbursement may result in a similar reduction in payments from private payors, which may result in reduced demand for ALLY or any other products we may develop in the future. However, there is no uniform policy of coverage and reimbursement among payors in the United States. Therefore, coverage and reimbursement for procedures can differ significantly from payor to payor. Many private payors require extensive documentation of a multi-step diagnosis before authorizing procedures using our products. Some private payors may apply their own coverage policies and criteria inconsistently, and physicians and other healthcare providers may not be able to receive approval and reimbursement for certain procedures using ALLY consistently. Any perception by physicians and other healthcare providers that the reimbursement for procedures using ALLY or other future products is inadequate to compensate them for the work required, including diagnosis, documentation, obtaining third-party payor approval for the procedure and other burdens on their office staff or that they may not be reimbursed at all for the procedures using ALLY or other future products, may negatively affect the adoption and use of ALLY or other future products and technologies, and the prices paid for such products may decline.

 

33


Table of Contents

The healthcare industry in the United States has experienced a trend toward cost containment as government and private insurers seek to control healthcare costs. Third-party payors are imposing lower payment rates and negotiating reduced contract rates with hospitals, other healthcare facilities, surgeons and other healthcare providers and being increasingly selective about the products, technologies and procedures they chose to cover and provide reimbursement for. Third-party payors may adopt policies in the future restricting access to products and technologies like ours or the procedures performed using such products. Therefore, we cannot be certain that any procedures performed with ALLY or other future products will be covered and reimbursed. There can be no guarantee that should we introduce new products and technologies, third-party payors will provide adequate coverage and reimbursement for those products or the procedures in which they are used. If third-party payors do not provide adequate coverage or reimbursement for such products, then our sales may be limited to circumstances where our products and procedures using our products are being largely or entirely self-paid by patients, as is currently the case with procedures using our current LENSAR Laser System.

Additionally, market acceptance of our products and technologies in foreign markets may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance. We may not obtain additional international coverage and reimbursement approvals in a timely manner, if at all. Our failure to receive such approvals would negatively impact future market acceptance of ALLY or any of other products we may develop in the future in the international markets in which those approvals are sought.

We provide a limited warranty for our products.

We provide a limited warranty that our products are free of material defects and conform to specifications, and offer to repair, replace or refund the purchase price of defective products. As a result, we bear the risk of potential warranty claims on our products. In the event that we attempt to recover some or all of the expenses associated with a warranty claim against us from our suppliers or vendors, we may not be successful in claiming recovery under any warranty or indemnity provided to us by such suppliers or vendors and any recovery from such vendor or supplier may not be adequate. In addition, warranty claims brought by our customers related to third-party components may arise after our ability to bring corresponding warranty claims against such suppliers expires, which could result in costs to us.

Product liability suits brought against us could cause us to incur substantial liabilities, limit the selling or leasing of our existing products and interfere with commercialization of any products that we may develop.

If our product offerings are defectively designed or manufactured, contain defective materials, or are used or deployed improperly, or if someone alleges any of the foregoing, whether or not such claims are meritorious, we may become subject to substantial and costly litigation. Any product liability claims brought against us, with or without merit, could divert management’s attention from our business, be expensive to defend, result in sizable damage awards against us, damage our reputation, increase our product liability insurance rates, prevent us from securing continuing coverage, or prevent or interfere with commercialization of our products. In addition, we may not have sufficient insurance coverage for all future claims. Product liability claims brought against us in excess of our insurance coverage would likely be paid out of cash reserves, harming our financial condition and results of operations.

Our insurance policies are expensive and protect us only from some business risks, which leaves us exposed to significant uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. Although we carry product liability insurance in the United States, we can give no assurance that such coverage will be available or adequate to satisfy any claims. Product liability insurance is expensive, subject to significant deductibles and exclusions, and may not be available on acceptable terms, if at all. If we are unable to obtain or maintain

 

34


Table of Contents

insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations. Defending a suit, regardless of its merit or eventual outcome, could be costly, could divert management’s attention from our business and might result in adverse publicity, which could result in reduced acceptance of our products in the market, product recalls or market withdrawals.

We do not carry specific hazardous waste insurance coverage, and our insurance policies generally exclude coverage for damages and fines arising from hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.

We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would negatively affect our business, financial condition and results of operations.

Our financial results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly and annual results of operations may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter or period should not be relied upon as an indication of future performance. Our quarterly and annual financial results may fluctuate as a result of a variety of factors, many of which are outside our control and, as a result, may not fully reflect the underlying performance of our business. For example, we have historically experienced seasonal variations in the selling or leasing of our products and procedures involving our products, with our fourth quarter typically being the strongest and the third quarter being the slowest. We believe these seasonal changes are consistent across our industry. Other factors that may cause fluctuations in our quarterly and annual results include:

 

   

fluctuations in the demand for the more advanced, patient-pay procedures in which our LENSAR Laser System is used;

 

   

adoption of our LENSAR Laser Systems;

 

   

our ability to establish and maintain an effective and dedicated sales organization in the United States and network of independent distributors outside the United States;

 

   

pricing pressure applicable to our products competitor pricing;

 

   

results of clinical research and trials on our products or competitive products;

 

   

the mix of sales and leases of our LENSAR Laser Systems;

 

   

timing of delivery of LENSAR Laser Systems, new product offerings, acquisitions, licenses or other significant events by us or our competitors;

 

   

decisions by surgeons, hospitals and ASCs to defer acquisitions of LENSAR Laser Systems in anticipation of the introduction of new products or product enhancements by us or our competitors;

 

   

sampling by and additional training requirements for cataract surgeons upon the commercialization of a new product by us or one of our competitors;

 

35


Table of Contents
   

regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;

 

   

interruption in the manufacturing or distribution of our LENSAR Laser System;

 

   

delays in, or failure of, component and raw material deliveries by our suppliers;

 

   

the ability of our suppliers to timely provide us with an adequate supply of components;

 

   

the effect of competing technological, industry and market developments; and

 

   

changes in our ability to obtain regulatory clearance or approval for our LENSAR Laser System.

As a result, you should not rely on our results in any past period as an indication of future results and you should anticipate that fluctuations in our quarterly and annual operating results may continue and could generate volatility in the price of our common stock. Quarterly comparisons of our financial results should not be relied upon as an indication of our future performance.

If we fail to manage our anticipated growth effectively, or are unable to increase or maintain our manufacturing capacity, we may not be able to meet customer demand for our products and our business could suffer.

We have experienced significant period-to-period growth in our business, and we must continue to grow in order to meet our business and financial objectives. However, continued growth may create numerous challenges, including:

 

   

new and increased responsibilities for our management team;

 

   

increased pressure on our operating, financial and reporting systems;

 

   

increased pressure to anticipate and satisfy market demand;

 

   

additional manufacturing capacity requirements;

 

   

strain on our ability to source a larger supply of components that meet our required specifications on a timely basis;

 

   

management of an increasing number of relationships with our customers, suppliers and other third parties;

 

   

entry into new international territories with unfamiliar regulations and business approaches; and

 

   

the need to hire, train and manage additional qualified personnel.

Although we believe we have adequate capacity to meet our current business plans, there are uncertainties inherent in expanding our manufacturing capabilities, and we may not be able to sufficiently increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facility or launch new products. Also, we may not manufacture the right product mix to meet customer demand as we introduce new products. As a result, we may experience difficulties in meeting customer demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. If we fail to manage any of the above challenges effectively, our business may be harmed.

If we choose to acquire new and complementary businesses, products or technologies, we may be unable to complete these acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner.

Our success depends, in part, on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures and advances in technologies. Accordingly,

 

36


Table of Contents

although we have no current commitments with respect to any acquisition or investment, we may in the future pursue the acquisition of, or joint ventures relating to, complementary businesses, products or technologies instead of developing them ourselves. We do not know if we will be able to successfully complete any future acquisitions or joint ventures, or whether we will be able to successfully integrate any acquired business, product or technology or retain any key employees related thereto. Integrating any business, product or technology we acquire could be expensive and time-consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any acquired businesses, products or technologies effectively, our business will be adversely affected. In addition, any amortization or charges resulting from the costs of acquisitions could increase our expenses.

Our future growth depends on our ability to retain members of our senior management and other key employees. If we are unable to retain or recruit qualified personnel for growth, our business results could suffer.

We have benefited substantially from the leadership and performance of our senior management as well as certain key employees. Our success will depend on our ability to retain our current management and key employees, and to attract and retain qualified personnel in the future. Competition for senior management and key employees in our industry is intense, and we cannot guarantee that we will be able to retain our personnel or attract new, qualified personnel. The loss of services of certain members of our senior management or key employees could prevent or delay the implementation and completion of our strategic objectives, or divert management’s attention to seeking qualified replacements. Each member of senior management as well as our key employees may terminate employment without notice and without cause or good reason. The members of our senior management are not subject to non-competition agreements. Accordingly, the adverse effect resulting from the loss of certain members of senior management could be compounded by our inability to prevent them from competing with us.

In addition to competing for market share for our products, we also compete against our competitors for personnel, including qualified sales representatives that are necessary to grow our business. Universities and research institutions also compete with us for scientific and clinical personnel that are important to our R&D efforts. We also rely on consultants and advisors in our research, operations, clinical and commercial efforts to implement our business strategies. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. Our strategic plan requires us to continue growing our sales, marketing, clinical and operational infrastructure in order to generate, and meet, the demand for our products. If we fail to retain or attract these key personnel, we could fail to take advantage of the market for our products, adversely affecting our business, financial condition and results of operation.

Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt our operations and adversely affect our business and operating results.

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage sales and marketing data, accounting and financial functions, inventory management, product development tasks, clinical data, customer service and technical support functions. Our information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, power losses, computer system or data network failures, security breaches, data corruption and cyber-based attacks, including malicious software programs or other attacks, which have been attempted against us in the past. In addition, a variety of our software systems are cloud-based data management applications, hosted by third-party service providers whose security and information technology systems are subject to similar risks.

The failure to protect either our or our service providers’ information technology infrastructure could disrupt our entire operation or result in decreased sales and leases of our products, increased overhead costs, product

 

37


Table of Contents

shortages, loss or misuse of proprietary or confidential information, intellectual property or sensitive or personal information, all of which could have a material adverse effect on our business, financial condition and results of operations.

Failure to comply with data privacy and security laws could have a material adverse effect on our business.

Our business processes personal data, including some data related to health. When conducting clinical trials, we face risks associated with collecting trial participants’ data, especially health data, in a manner consistent with applicable laws and regulations. We also face risks inherent in handling large volumes of data and in protecting the security of such data. We could be subject to attacks on our systems by outside parties or fraudulent or inappropriate behavior by our service providers or employees. Third parties may also gain access to users’ accounts using stolen or inferred credentials, computer malware, viruses, spamming, phishing attacks or other means, and may use such access to obtain users’ personal data or prevent use of their accounts. Data breaches could result in a violation of applicable U.S. and international privacy, data protection and other laws, and subject us to individual or consumer class action litigation and governmental investigations and proceedings by federal, state and local regulatory entities in the United States and by international regulatory entities, resulting in exposure to material civil or criminal liability, or both. Further, our general liability insurance and corporate risk program may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed.

We may be subject to state, federal and foreign laws relating to data privacy and security in the conduct of our business, including state breach notification laws, the Health Insurance Portability and Accountability Act, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, the European Union, or EU’s, General Data Protection Regulation, or GDPR, and the California Consumer Privacy Act, or CCPA. These laws affect how we collect and use data of our employees, consultants, customers and other parties. Additionally, we are subject to laws and regulations regarding cross-border transfers of personal data, including laws relating to transfer of personal data outside of the EEA. We rely on transfer mechanisms permitted under these laws, including EU Standard Contract Clauses. If we cannot rely on existing mechanisms for transferring personal data from the EEA, the United Kingdom, or UK, or other jurisdictions, we could be prevented from transferring personal data of users or employees in those regions. This could adversely affect the manner in which we provide our services and thus materially affect our operations and financial results.

Furthermore, these laws impose substantial requirements that require the expenditure of significant funds and employee time to comply, and additional states and countries are enacting new data privacy and security laws, which will require future expansion of our compliance efforts. We also rely on third parties to host or otherwise process some of this data. In some instances, these third parties have experienced immaterial failures to protect data privacy. Any failure by a third party to prevent security breaches could have adverse consequences for us. We will need to expend additional resources and make significant investments to comply with data privacy and security laws. Our failure to comply with these laws or prevent security breaches of such data could result in significant liability under applicable laws, cause disruption to our business, harm our reputation and have a material adverse effect on our business.

We cannot be certain that our net operating loss tax carryforwards or other tax attributes will be available to offset future taxable income.

For periods since PDL acquired us, a consolidated Federal tax return, and when permitted, consolidated state tax returns, are filed with PDL. Within our financial statements we record and present our income tax provision and disclosures on a “separate return” basis, as if we were a taxpayer separate from PDL. As of December 31, 2019, on a “separate return” basis we had approximately $158.3 million, $131.7 million and $0 of net operating loss, or NOL, carryforwards for federal, state and foreign purposes, respectively, available to offset future taxable income. The federal NOL carryforwards incurred prior to 2018 begin to expire in 2024. The state NOL carryforwards will begin to expire in 2023. As of December 31, 2019, on a “separate return” basis we had

 

38


Table of Contents

federal and state research and development, or R&D, credit carryforwards of approximately $2.2 million and $0, respectively. Federal credits begin to expire in 2025. We continue to provide a full valuation allowance against these tax attributes because we believe that uncertainty exists with respect to their future realization. To the extent available, we intend to use these tax attributes to offset future taxable income associated with our operations. There can be no assurance we will generate sufficient taxable income in the carryforward period to utilize any NOL and R&D credit carryforwards before they expire.

We expect that a portion of these tax attributes that we report on a “separate return” basis will not be available to us upon the Spin-Off as a portion of the tax attributes generated by us in the past have been utilized by PDL in its consolidated tax return and because of other limitations. Such limitations on our tax attributes could include change of ownership limitations set out under the U.S. Internal Revenue Code of 1986, as amended, or the Code, Section 382 and Section 383, and other net operating loss limitations under Code Section 1502, which may apply to us following our separation from the PDL tax return group. The amounts of tax attributes currently attributable to us on PDL’s consolidated U.S. federal income tax return and various state returns, as filed, are $70.6 million and $57.5 million, respectively, as of December 31, 2019. As such, we expect that a portion of these carryforwards could be limited at the time the Spin-Off is executed.

Furthermore, in future periods we expect to record adjustments to certain deferred tax assets reflecting the impact of separation related activities. Our results of operations could be materially affected in future periods as a result of any such adjustments.

Our business is subject to the risk of natural disasters, adverse weather events and other catastrophic events, and to interruption by manmade problems such as terrorism.

Our business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors and similar events. The third-party systems and operations on which we rely are subject to similar risks. For example, a significant natural disaster, such as an earthquake, fire or flood, could have an adverse effect on our business, financial condition and operating results, and our insurance coverage may be insufficient to compensate us for losses that may occur. Acts of terrorism could also cause disruptions in our businesses, consumer demand or the economy as a whole. We may not have sufficient protection or recovery plans in some circumstances, such as if a natural disaster affects locations that store a significant amount of our inventory vehicles. Any such damage or interruptions could negatively affect our ability to run our business, which could have an adverse effect on our business, financial condition, and operating results.

Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business and harm our reputation and ability to provide our products on a timely basis.

Reliable shipping is essential to our operations. We rely on providers of transport services for reliable and secure point-to-point transport of our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any of our products, it would be costly to replace such products in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters or other service interruptions affecting delivery services we use would adversely affect our ability to deliver our products (or any other products we commercialize in the future) on a timely basis.

Intangible assets on our books may lead to significant impairment charges.

We carry a significant amount of intangible assets on our balance sheet, partially due to the value of the LENSAR brand name, but also intangible assets associated with our technologies, acquired research and

 

39


Table of Contents

development, currently marketed products, and marketing know-how. As a result, we may incur significant impairment charges if the fair value of the intangible assets would be less than their carrying value on our balance sheet at any point in time.

We regularly review our long-lived intangible and tangible assets, including identifiable intangible assets, for impairment. Intangible assets with an indefinite useful life (such as the LENSAR brand name), acquired research projects not ready for use, and acquired development projects not yet ready for use are subject to impairment review. We review other long-lived assets for impairment when there is an indication that an impairment may have occurred.

Risks Related to Government Regulation

Our products and operations are subject to extensive government regulation and oversight both in the United States and abroad, and our failure to comply with applicable requirements could harm our business.

Our products are regulated as medical devices. We and our products are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. The FDA and foreign regulatory agencies regulate, among other things, with respect to medical devices: design, development and manufacturing; testing, labeling, content and language of instructions for use and storage; clinical trials; product safety; establishment registration and device listing; marketing, sales and distribution; pre-market clearance and approval; record keeping procedures; advertising and promotion; recalls and field safety corrective actions; post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; post-market approval studies; and product import and export.

The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. The FDA enforces these regulatory requirements through, among other means, periodic unannounced inspections. We do not know whether we will be found compliant in connection with any future FDA inspections. Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as: warning letters; fines; injunctions; civil penalties; termination of distribution; recalls or seizures of products; delays in the introduction of products into the market; total or partial suspension of production; refusal to grant future clearances or approvals; withdrawals or suspensions of current approvals, resulting in prohibitions on sales of our products; and in the most serious cases, criminal penalties.

We may not receive, or may be delayed in receiving, the necessary clearances or approvals for our future products, including ALLY, or modifications to our current products, and failure to timely obtain necessary clearances or approvals for our future products or modifications to our current products would adversely affect our ability to grow our business.

In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or the FDCA, or approval of a pre-market approval application, or PMA, from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved PMA and later down-classified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the process of obtaining PMA approval, the FDA must determine that a

 

40


Table of Contents

proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. To date, our products have received marketing authorization pursuant to the 510(k) clearance process. We also have one device in development that we plan to submit for clearance through the 510(k) process.

Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device.

In the United States, we have obtained clearance of our LENSAR Laser System through the 510(k) clearance process. Any modification to these systems that has not been previously cleared may require us to submit a new 510(k) premarket notification and obtain clearance, or submit a PMA and obtain FDA approval prior to implementing the change. Specifically, any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have made modifications to 510(k)-cleared products in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k) clearances or PMA approvals were not required. We may make modifications or add additional features in the future that we believe do not require a new 510(k) clearance or approval of a PMA. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMA applications for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which could adversely affect our ability to grow our business.

The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

 

   

our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that our products are safe or effective for their intended uses;

 

   

the disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our clinical trials or the interpretation of data from pre-clinical studies or clinical trials;

 

   

serious and unexpected adverse device effects experienced by participants in our clinical trials;

 

   

the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;

 

   

our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;

 

   

the manufacturing process or facilities we use may not meet applicable requirements; and

 

41


Table of Contents
   

the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval.

In order to sell our products in member countries of the EEA our products must comply with the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC) and the Active Implantable Medical Devices Directive (Council Directive 90/385/EEC). Compliance with these requirements is a prerequisite to be able to affix the Conformité Européene mark, or CE Mark, to our products, without which they cannot be sold or marketed in the EEA. To demonstrate compliance with the essential requirements we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low-risk medical devices (Class I non-sterile, non-measuring devices), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the EU Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization accredited by a member state of the EEA to conduct conformity assessments, or a Notified Body. Depending on the relevant conformity assessment procedure, the Notified Body would typically audit and examine the technical file and the quality system for the manufacture, design and final inspection of our devices. The Notified Body issues a certificate of conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements. This certificate entitles the manufacturer to affix the CE Mark to its medical devices after having prepared and signed a related EC Declaration of Conformity.

As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable evidence. If we fail to remain in compliance with applicable European laws and directives, we would be unable to continue to affix the CE Mark to our products, which would prevent us from selling them within the EEA.

Failure to comply with post-marketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and might require us to recall or withdraw a product from the market.

We are subject to ongoing and pervasive regulatory requirements governing, among other things, the manufacture, marketing, advertising, medical device reporting, sale, promotion, import, export, registration, and listing of devices. The regulations to which we are subject are complex and have become more stringent over time. Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. Even after we have obtained the proper regulatory approval to market a device, we have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities, which may include any of the following sanctions:

 

   

untitled letters or warning letters;

 

   

fines, injunctions, consent decrees and civil penalties;

 

   

recalls, termination of distribution, administrative detention, or seizure of our products;

 

   

customer notifications or repair, replacement or refunds;

 

   

operating restrictions or partial suspension or total shutdown of production;

 

   

delays in or refusal to grant our requests for future clearances or approvals or foreign regulatory approvals of new products, new intended uses, or modifications to existing products;

 

42


Table of Contents
   

withdrawals or suspensions of our current 510(k) clearances, resulting in prohibitions on sales of our products;

 

   

FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and

 

   

criminal prosecution.

Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and results of operations.

In addition, the FDA may change its clearance policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay clearance or approval of our future products under development or impact our ability to modify our currently cleared products on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain new clearances or approvals, increase the costs of compliance or restrict our ability to maintain our clearances of our current products. For example, the FDA recently announced forthcoming steps that the FDA intends to take to modernize the premarket notification pathway under Section 510(k) of the FDCA. For more information, see “—Legislative or regulatory reforms in the United States or the EU may make it more difficult and costly for us to obtain regulatory clearances or approvals for our products or to manufacture, market or distribute our products after clearance or approval is obtained.

Our products must be manufactured in accordance with federal and state regulations, and we or any of our suppliers could be forced to recall products or terminate production if we fail to comply with these regulations.

The methods used in, and the facilities used for, the manufacture of our products must comply with the FDA’s QSR, which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may include the facilities of subcontractors. Our products are also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing.

Our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with our products or manufacturing processes could result in, among other things: warning letters or untitled letters; fines, injunctions or civil penalties; suspension or withdrawal of approvals; seizures or recalls of our products; total or partial suspension of production or distribution; administrative or judicially imposed sanctions; the FDA’s refusal to grant pending or future clearances or approvals for our products; clinical holds; refusal to permit the import or export of our products; and criminal prosecution of us or our employees.

Any of these actions could significantly and negatively affect supply of our products. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose customers and experience reduced sales and increased costs.

The misuse or off-label use of our LENSAR Laser System may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.

Our LENSAR Laser System is an ophthalmic surgical laser indicated for, among other things, the creation of anterior capsulotomies, use in patients undergoing surgery requiring laser-assisted fragmentation of the

 

43


Table of Contents

cataractous lens, and for creating cuts/incisions in the cornea. We train our marketing personnel and direct sales force to not promote our devices for uses outside of the FDA-approved indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using our devices off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use our devices off-label. Furthermore, the use of our devices for indications other than those approved by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.

If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.

In addition, physicians may misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our devices are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance.

Our products may cause or contribute to adverse medical events or be subject to failures or malfunctions that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.

We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance or approval, seizure of our products or delay in clearance or approval of future products.

The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future.

Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new clearances or approvals for the device before we may

 

44


Table of Contents

market or distribute the corrected device. Seeking such clearances or approvals may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.

Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary withdrawals or corrections for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.

If we do not obtain and maintain international regulatory registrations, clearances or approvals for our products, we will be unable to market and sell our products outside of the United States.

Sales of our products outside of the United States are subject to foreign regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the United States. While the regulations of some countries may not impose barriers to marketing and selling our products or only require notification, others require that we obtain the clearance or approval of a specified regulatory body. Complying with foreign regulatory requirements, including obtaining registrations, clearances or approvals, can be expensive and time-consuming, and we may not receive regulatory clearances or approvals in each country in which we plan to market our products or we may be unable to do so on a timely basis. The time required to obtain registrations, clearances or approvals, if required by other countries, may be longer than that required for FDA clearance or approval, and requirements for such registrations, clearances or approvals may significantly differ from FDA requirements. If we modify our products, we may need to apply for additional regulatory clearances or approvals before we are permitted to sell the modified product. In addition, we may not continue to meet the quality and safety standards required to maintain the authorizations that we have received. If we are unable to maintain our authorizations in a particular country, we will no longer be able to sell the applicable product in that country.

Regulatory clearance or approval by the FDA does not ensure registration, clearance or approval by regulatory authorities in other countries, and registration, clearance or approval by one or more foreign regulatory authorities does not ensure registration, clearance or approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining registration or regulatory clearance or approval in one country may have a negative effect on the regulatory process in others.

The clinical trial process is lengthy and expensive with uncertain outcomes. Results of earlier studies may not be predictive of future clinical trial results, or the safety or efficacy profile for such products.

Clinical testing is difficult to design and implement, can take many years, can be expensive and carries uncertain outcomes. We intend to conduct additional clinical trials and to generate clinical data that will help us demonstrate the benefits of our system compared to manual cataract surgery conducted without a laser system, or with competing laser systems.

The results of preclinical studies and clinical trials of our products conducted to date and ongoing or future studies and trials of our current, planned or future products may not be predictive of the results of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Our interpretation of data and results from our clinical trials do not ensure that we will achieve similar results in future clinical trials. In addition, preclinical and clinical data are often susceptible to various interpretations and analyses, and many companies that have believed their products performed satisfactorily in preclinical studies and earlier clinical

 

45


Table of Contents

trials have nonetheless failed to replicate results in later clinical trials. Products in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through nonclinical studies and earlier clinical trials. Failure can occur at any stage of clinical testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical testing in addition to those we have planned.

The initiation and completion of any of clinical studies may be prevented, delayed, or halted for numerous reasons. We may experience delays in our ongoing clinical trials for a number of reasons, which could adversely affect the costs, timing or successful completion of our clinical trials, including related to the following:

 

   

we may be required to submit an IDE application to FDA, which must become effective prior to commencing certain human clinical trials of medical devices, and FDA may reject our IDE application and notify us that we may not begin clinical trials;

 

   

regulators and other comparable foreign regulatory authorities may disagree as to the design or implementation of our clinical trials;

 

   

regulators, Institutional Review Boards, or IRBs, or other reviewing bodies may not authorize us or our investigators to commence a clinical trial, or to conduct or continue a clinical trial at a prospective or specific trial site;

 

   

we may not reach agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

   

clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

 

   

the number of subjects or patients required for clinical trials may be larger than we anticipate, enrollment in these clinical trials may be insufficient or slower than we anticipate, and the number of clinical trials being conducted at any given time may be high and result in fewer available patients for any given clinical trial, or patients may drop out of these clinical trials at a higher rate than we anticipate;

 

   

our third-party contractors, including those manufacturing products or conducting clinical trials on our behalf, may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

   

we might have to suspend or terminate clinical trials for various reasons, including a finding that the subjects are being exposed to unacceptable health risks;

 

   

we may have to amend clinical trial protocols or conduct additional studies to reflect changes in regulatory requirements or guidance, which we may be required to submit to an IRB, regulatory authorities, or both, for re-examination;

 

   

regulators, IRBs, or other parties may require or recommend that we or our investigators suspend or terminate clinical research for various reasons, including safety signals or noncompliance with regulatory requirements;

 

   

the cost of clinical trials may be greater than we anticipate;

 

   

clinical sites may not adhere to the clinical protocol or may drop out of a clinical trial;

 

   

we may be unable to recruit a sufficient number of clinical trial sites;

 

   

regulators, IRBs, or other reviewing bodies may fail to approve or subsequently find fault with our manufacturing processes or facilities of third-party manufacturers with which we enter into agreement for clinical and commercial supplies, the supply of devices or other materials necessary to conduct clinical trials may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply;

 

46


Table of Contents
   

approval policies or regulations of FDA or applicable foreign regulatory agencies may change in a manner rendering our clinical data insufficient for approval; and

 

   

our current or future products may have undesirable side effects or other unexpected characteristics.

Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting or completing our planned and ongoing clinical trials. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

Patient enrollment in clinical trials and completion of patient follow-up depend on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, patient compliance, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product being studied in relation to other available therapies, including any new treatments that may be approved for the indications we are investigating. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and efficacy of a product candidate, or they may be persuaded to participate in contemporaneous clinical trials of a competitor’s product candidate. In addition, patients participating in our clinical trials may drop out before completion of the trial or experience adverse medical events unrelated to our products. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may delay commencement or completion of the clinical trial, cause an increase in the costs of the clinical trial and delays, or result in the failure of the clinical trial.

Clinical trials must be conducted in accordance with the laws and regulations of the FDA and other applicable regulatory authorities’ legal requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and IRBs at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of our devices produced under cGMP, requirements and other regulations. Furthermore, we rely on CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance. We depend on our collaborators and on medical institutions and CROs to conduct our clinical trials in compliance with good clinical practice, or GCP, requirements. To the extent our collaborators or the CROs fail to enroll participants for our clinical trials, fail to conduct the study to GCP standards or are delayed for a significant time in the execution of trials, including achieving full enrollment, we may be affected by increased costs, program delays or both. In addition, clinical trials that are conducted in countries outside the United States may subject us to further delays and expenses as a result of increased shipment costs, additional regulatory requirements and the engagement of non-U.S. CROs, as well as expose us to risks associated with clinical investigators who are unknown to the FDA, and different standards of diagnosis, screening and medical care.

Even if our future products are cleared or approved in the United States, commercialization of our products in foreign countries would require clearance or approval by regulatory authorities in those countries. Clearance or approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. Any of these occurrences could have an adverse effect on our business, financial condition and results of operations.

Legislative or regulatory reforms in the United States or the EU may make it more difficult and costly for us to obtain regulatory clearances or approvals for our products or to manufacture, market or distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices. The FDA may change its clearance and

 

47


Table of Contents

approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to modify our currently cleared products on a timely basis. For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the premarket notification pathway under Section 510(k) of the Federal Food, Drug, and Cosmetic Act. Among other things, the FDA announced that it plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals include plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. In May 2019, the FDA solicited public feedback on these proposals. These proposals have not yet been finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances, or otherwise create competition that may negatively affect our business.

More recently, in September 2019, the FDA finalized guidance describing an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA intends to develop and maintain a list device types appropriate for the “safety and performance based” pathway and will continue to develop product-specific guidance documents that identify the performance criteria for each such device type, as well as the testing methods recommended in the guidance documents, where feasible. The FDA may establish performance criteria for classes of devices for which we or our competitors seek or currently have received clearance, and it is unclear the extent to which such performance standards, if established, could impact our ability to obtain new 510(k) clearances or otherwise create competition that may negatively affect our business.

In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to obtain approval for, manufacture, market or distribute our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require: additional testing prior to obtaining clearance or approval; changes to manufacturing methods; recall, replacement or discontinuance of our products; or additional record keeping. The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory clearance or approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, FDA’s ability to engage in routine oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these executive actions will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose restrictions on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.

 

48


Table of Contents

In the EU, in April 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the EU Medical Devices Directive and the Active Implantable Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the EEA Member States, the regulations would be directly applicable, i.e., without the need for adoption of EEA member State laws implementing them, in all EEA Member States and are intended to eliminate current differences in the regulation of medical devices among EEA Member States. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting innovation. The Medical Devices Regulation was meant to become applicable three years after publication (in May 2020). However, on April 23, 2020, to take the pressure off EEA national authorities, notified bodies, manufacturers and other actors so they can focus fully on urgent priorities related to the COVID 19 pandemic, the European Council and Parliament adopted Regulation 2020/561, postponing the date of application of the Medical Devices Regulation by one year (to May 2021). Once applicable, the Medical Devices Regulation will among other things:

 

   

strengthen the rules on placing devices on the market and reinforce surveillance once they are available;

 

   

establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;

 

   

improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;

 

   

set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and

 

   

strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts before they are placed on the market.

Once applicable, the Medical Devices Regulation may impose increased compliance obligations for us to access the EU market. These modifications may have an effect on the way we conduct our business in the EEA.

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, cleared or approved or commercialized in a timely manner or at all, which could negatively impact our business.

The ability of the FDA to review and clear or approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for new medical devices or modifications to cleared or approved medical devices to be reviewed and cleared or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.

Separately, in response to the global pandemic of COVID-19, on March 10, 2020 the FDA announced its intention to postpone most foreign inspections of manufacturing facilities, and subsequently, on March 18, 2020, the FDA announced its intention to temporarily postpone routine surveillance inspections of domestic manufacturing facilities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if

 

49


Table of Contents

global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

Enacted and future healthcare legislation may increase the difficulty and cost for us to commercialize ALLY or other products we may develop in the future and may affect the prices we may set.

In the United States, the European Union and other jurisdictions, there have been and continue to be a number of legislative initiatives and judicial challenges to contain healthcare costs. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, was passed, which substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacted the United States medical device industry. Among other things, the ACA established a 2.3% excise tax on sales of medical devices with respect to any entity that manufactures or imports specified medical devices offered for sale in the United States, which, through a series of legislative amendments, was suspended, effective January 1, 2016, and subsequently repealed altogether on December 20, 2019. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, as well as other efforts to challenge, repeal or replace the ACA that may impact our business or financial condition.

Moreover, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011, among other things, included reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2029 unless additional Congressional action is taken. These reductions will be suspended from May 1, 2020 through December 31, 2020 due to the COVID-19 pandemic. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action in the United States, the European Union or any other jurisdiction. If we or any third parties we may engage are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or such third parties are not able to maintain regulatory compliance, we may not be able to achieve or sustain profitability or successfully market ALLY or any other products we may develop and obtain clearance for in the future.

We may be subject to certain federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback, self-referral, false claims and fraud laws, and any violations by us of such laws could result in fines or other penalties.

Although none of the procedures using our products are currently covered by any state or federal government healthcare programs or other third-party payors, applicable agencies and regulators may interpret that our commercial, research and other financial relationships with healthcare providers and institutions are nonetheless subject to various federal and state laws intended to prevent healthcare fraud and abuse, including the following:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts and free or reduced price items and services. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

50


Table of Contents
   

the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government, and which may apply to entities that provide coding and billing advice to customers. The federal False Claims Act has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed or for services that are not medically necessary. In addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. The federal False Claims Act also includes a whistleblower provision that allows individuals to bring actions on behalf of the federal government and share a portion of the recovery of successful claims;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, as amended, also created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

   

the Physician Payments Sunshine Act and its implementing regulations, which require certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the government information related to certain payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other healthcare providers starting in 2022, and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members; and

 

   

analogous state and foreign laws and regulations, including state anti-kickback and false claims laws, which apply to items and services reimbursed by any third-party payor, including private insurers and self-pay patients; state laws that require device manufacturers to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws and regulations that require manufacturers to track gifts and other remuneration and items of value provided to healthcare professionals and entities.

If our operations are found to be in violation of any of the laws described above or any other governmental laws and regulations that may apply to us, we may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, such as Medicare and Medicaid or similar programs in other countries or jurisdictions, disgorgement, individual imprisonment, contractual damages, reputational harm, diminished profits and the curtailment or restructuring of our operations. Further, defending against any such actions can be costly, time-consuming and may require significant personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.

We are subject to anti-corruption, anti-bribery and similar laws and any violations by us of such laws could result in fines or other penalties.

A majority of our revenue is derived from operations outside of the United States and is subject to requirements under the U.S. Treasury Department’s Office of Foreign Assets Control, anti-corruption, anti-bribery and similar laws, such as the Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act 2010, and other anti-corruption, anti-bribery and anti-money laundering laws in countries in which we conduct activities. The FCPA prohibits, among other things, improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business. Recently, the U.S. Department of Justice has increased its enforcement activities with respect to the FCPA.

 

51


Table of Contents

While we have safeguards in place to discourage improper payments or offers of payments by our employees, consultants, sales agents or distributors, these safeguards may be ineffective. Any violations of the FCPA and similar laws may result in severe criminal or civil sanctions, or other liabilities or proceedings against us, and would likely harm our reputation, business, financial condition and result of operations.

Our employees, independent contractors, principal investigators, consultants, vendors, distributors and contract research organizations may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk that our employees, independent contractors, principal investigators, consultants, vendors, distributors and contractor research organizations, or CROs, may engage in fraudulent or other illegal activity. While we have policies and procedures in place prohibiting such activity, misconduct by these parties could include among other infractions or violations intentional, reckless or negligent conduct or unauthorized activity that violates: (i) FDA regulations, including those laws that require the reporting of true, complete and accurate information to the FDA; (ii) manufacturing standards; (iii) federal and state healthcare fraud and abuse laws and regulations; (iv) laws that require the true, complete and accurate reporting of financial information or data; or (v) other commercial or regulatory laws or requirements. Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Risks Related to Intellectual Property Matters

Our success will depend on our ability to obtain, maintain and protect our intellectual property rights.

Our commercial success will depend in part on our success in obtaining and maintaining issued patents, trademarks and other intellectual property rights in the United States and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies we have acquired in the marketplace and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

Our intellectual property coverage includes protection provided by patents licensed through third parties, including patents that relate to combining a femtosecond laser and phacoemulsification system into a single device. Our licensors may not successfully prosecute the intellectual property applications, including patent applications, that we have licensed, may fail to maintain these patents, or may determine not to pursue litigation, or assist us in the pursuit of litigation against other companies that are infringing this intellectual property, or may pursue such litigation less aggressively than we would. If, in the future, we no longer have rights to one or more of these licensed patents or other licensed intellectual property, our intellectual property coverage may be compromised, which, in turn, could affect our ability to sell our products, or to protect our products and defend them against competitors. Without protection for the intellectual property we license, other companies might be able to offer similar products for sale, which could adversely affect our competitive business position and harm our business prospects.

 

52


Table of Contents

We rely on a combination of contractual provisions, confidentiality procedures and patent, copyright, trademark, trade secret and other intellectual property laws to protect the proprietary aspects of our products, brands, technologies and data. These legal measures afford only limited protection, and competitors or others may gain access to or use our intellectual property and proprietary information. Our success will depend, in part, on preserving our trade secrets, maintaining the security of our data and know-how and obtaining and maintaining other intellectual property rights. We may not be able to obtain or maintain intellectual property or other proprietary rights necessary to our business or in a form that provides us with a competitive advantage.

In addition, despite our efforts to enter into confidentiality agreements with our employees, consultants, clients and other vendors who have access to such information, our trade secrets, data and know-how could be subject to unauthorized use, misappropriation, or disclosure to unauthorized parties, and could otherwise become known or be independently discovered by third parties. Our intellectual property, including trademarks, could be challenged, invalidated, infringed, and circumvented by third parties, and our trademarks could also be diluted, declared generic or found to be infringing on other marks. If any of the foregoing occurs, we could be forced to re-brand our products, resulting in loss of brand recognition and requiring us to devote resources to advertising and marketing new brands, and suffer other competitive harm. Third parties may also adopt trademarks similar to ours, which could harm our brand identity and lead to market confusion.

Failure to obtain and maintain intellectual property rights necessary to our business and failure to protect, monitor and control the use of our intellectual property rights could negatively impact our ability to compete and cause us to incur significant expenses. The intellectual property laws and other statutory and contractual arrangements in the United States and other jurisdictions may not provide sufficient protection in the future to prevent the infringement, use, violation or misappropriation of our trademarks, data, technology and other intellectual property and services, and may not provide an adequate remedy if our intellectual property rights are infringed, misappropriated or otherwise violated.

We rely, in part, on our ability to obtain, maintain, expand, enforce, and defend the scope of our intellectual property portfolio or other proprietary rights, including the amount and timing of any payments we may be required to make in connection with the licensing, filing, defense and enforcement of any patents or other intellectual property rights. The process of applying for and obtaining a patent is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost, in a timely manner, or in all jurisdictions where protection may be commercially advantageous, or we may not be able to protect our proprietary rights at all. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary.

We own numerous issued patents and pending patent applications. As of June 16, 2020, we held 29 U.S. patents, 26 pending U.S. patent applications, 69 issued foreign patents, 30 pending foreign patent applications and one pending Patent Cooperation Treaty application, and we also exclusively licensed two U.S. patents, four pending U.S. patent applications and one pending Patent Cooperation Treaty application. The patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and therefore, the scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty.

Though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented. Proceedings challenging our patents could result in either loss of the patent, or denial or the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own may not provide any protection against competitors. Furthermore, an adverse decision may result in a third party receiving a patent right sought by us, which in turn could affect our ability to commercialize our products.

 

53


Table of Contents

Competitors could purchase our products and attempt to replicate or reverse engineer some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our patents, or develop and obtain patent protection for more effective technologies, designs or methods. We may be unable to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, suppliers, vendors, former employees and current employees. Further, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, including the protection of surgical and medical methods, and we may encounter significant problems in protecting our proprietary rights in these countries.

In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering our products are invalidated or found unenforceable, or if a court found that valid, enforceable patents held by third parties covered one or more of our products, our competitive position could be harmed or we could be required to incur significant expenses to enforce or defend our rights.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

   

any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our products;

 

   

any of our pending patent applications will issue as patents;

 

   

we will be able to successfully commercialize our products on a substantial scale, if approved, before our relevant patents we may have expire;

 

   

we were the first to make the inventions covered by each of our patents and pending patent applications;

 

   

we were the first to file patent applications for these inventions;

 

   

others will not develop similar or alternative technologies that do not infringe our patents;

 

   

any of our patents will be found to ultimately be valid and enforceable;

 

   

any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

   

we will develop additional proprietary technologies or products that are separately patentable; or

 

   

our commercial activities or products will not infringe upon the patents of others.

Even if we are able to obtain patent protection, such patent protection may be of insufficient scope to achieve our business objectives. Issued patents may be challenged, narrowed, invalidated or circumvented. Decisions by courts and governmental patent agencies may introduce uncertainty in the enforceability or scope of patents owned by or licensed to us. Furthermore, the issuance of a patent does not give us the right to practice the patented invention. Third parties may have blocking patents that could prevent us from marketing our own products and practicing our own technology. Alternatively, third parties may seek approval to market their own products similar to or otherwise competitive with our products. In these circumstances, we may need to defend or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or agency with jurisdiction may find our patents invalid, unenforceable or not infringed; competitors may then be able to market products and use manufacturing and analytical processes that are substantially similar to ours. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.

 

54


Table of Contents

Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The U.S. Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Even if a lapse is cured, reviving the patent or application, there is a risk that the revival can be challenged by third parties in proceeding and litigation, and that the revival can be overruled. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our products, we may not be able to stop a competitor from marketing products that are the same as or similar to our products, which would have a material adverse effect on our business.

Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future products.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switched the United States from a “first-to-invent” system to a “first-to-file” system, allow third-party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO administered post grant proceedings. Under a first-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective in 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition and results of operations.

In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws and regulations or changes to patent laws and regulations that might be enacted into law by U.S. and foreign legislative bodies and patent offices. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future.

 

55


Table of Contents

If we cannot license and maintain rights to use third-party technology on reasonable terms, we may not be able to successfully commercialize our products. Our licensed or acquired technology may lose value or utility or over time.

We have licensed technology from third parties and may choose or need to do so in the future, including to develop or commercialize new products or services. We may also need to negotiate licenses to patents or patent applications before or after introducing a commercial product, and we may not be able to obtain necessary licenses to such patents or patent applications. If we are unable to enter into the necessary licenses on acceptable terms or at all, if any necessary licenses are subsequently terminated, if the licensors fail to abide by the terms of the licenses or fail to prevent infringement by third parties, or if the licensed patents or other rights are found to be invalid or unenforceable, our business may suffer. In addition, any technology licensed or acquired by us may lose value or utility, including as a result of a change of in the industry, in our business objectives, others’ technology, our dispute with the licensor, and other circumstances outside our control. In return for the use of a third party’s technology, we may agree to pay the licensor royalties based on sales of our products or services. If we are unable to negotiate reasonable royalties or if we have to pay royalties on technology that becomes less useful for us or ceases to provide value to us, our profit margin will be reduced and we may suffer losses.

We may become a party to intellectual property litigation or administrative proceedings that could be costly and could interfere with our ability to sell and market our products.

The medical device industry has been characterized by extensive litigation regarding patents, trademarks, trade secrets, and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. It is possible that U.S. and foreign patents and pending patent applications or trademarks controlled by third parties may be alleged to cover our products, or that we may be accused of misappropriating third parties’ trade secrets. Additionally, our products include components that we purchase from vendors, and may include design components that are outside of our direct control. Our competitors, many of which have substantially greater resources and have made substantial investments in patent portfolios, trade secrets, trademarks, and competing technologies, may have applied for or obtained, or may in the future apply for or obtain, patents or trademarks that will prevent, limit or otherwise interfere with our ability to make, use, sell or export our products or to use our technologies or product names. Moreover, in recent years, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” have purchased patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters, notices or “invitations to license,” or may be the subject of claims that our products and business operations infringe or violate the intellectual property rights of others. The defense of these matters can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses or make substantial payments. Vendors from whom we purchase hardware or software may not indemnify us in the event that such hardware or software is accused of infringing a third-party’s patent or trademark or of misappropriating a third-party’s trade secret.

Since patent applications are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our products. Because of the confidential nature of patent applications, we do not know at any given time what patent applications are pending that may later issue as a patent and be asserted by a third party against us. Competitors may also contest our patents, if issued, by showing the patent examiner that the invention was not original, was not novel, or was invalid or unenforceable for other reasons. In litigation or administrative proceedings, a competitor could claim that our patents, if issued, are not valid for a number of reasons. If a court agrees, we would lose our rights to those challenged patents or have the scope of those rights narrowed.

In addition, we may in the future be subject to claims by our former employees or consultants asserting an ownership right in our patents, patent applications or other intellectual property, as a result of the work they performed on our behalf. Although we generally require all of our employees and consultants and any other

 

56


Table of Contents

partners or collaborators who have access to our proprietary know-how, information or technology to assign or grant similar rights to their inventions to us, we cannot be certain that we have executed such agreements with all parties who may have contributed to our intellectual property, nor can we be certain that our agreements with such parties will be upheld in the face of a potential challenge, that such agreements will adequately protect us, or that they will not be breached, for which we may not have an adequate remedy.

Any lawsuits relating to intellectual property rights could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

 

   

stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property;

 

   

lose the opportunity to license our intellectual property to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights against others; incur significant legal expenses;

 

   

pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing;

 

   

pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing;

 

   

redesign those products or technologies that contain the allegedly infringing intellectual property, which could be costly and disruptive, and may be infeasible; and

 

   

attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all, or from third parties who may attempt to license rights that they do not have.

Any litigation or claim against us, even those without merit and even those where we prevail, may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. If we are found to infringe the intellectual property rights of third parties, we could be required to pay substantial damages, including the third party’s lost profits, the disgorgement of our profits, or substantial royalties (all of which may be increased, including three times the awarded damages, if we are found to willfully infringe third-party patents or trademarks or to have misappropriated trade secrets) and could be prevented from selling our products unless we obtain a license or are able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all, and there can be no assurance that we would be able to redesign our products in a way that would not infringe the intellectual property rights of others. Although patent, trademark, trade secret, and other intellectual property disputes in the medical device area are often settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. If we do not obtain necessary licenses, we may not be able to redesign our products to avoid infringement. We could encounter delays in product introductions while we attempt to develop alternative methods or products, and these alternative methods or products may be less competitive, which could adversely affect our competitive business position. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may have to withdraw existing products from the market or may be unable to commercialize one or more of our products.

In addition, we generally indemnify our customers with respect to infringement by our products of the proprietary rights of third parties. However, third parties may assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.

 

57


Table of Contents

Similarly, interference or derivation proceedings provoked by third parties or brought by the USPTO may be necessary to determine priority with respect to our patents, patent applications, trademarks or trademark applications. We may also become involved in other proceedings, such as reexamination, inter parties review, post grant review, derivation or opposition proceedings before the USPTO or other jurisdictional body relating to our intellectual property rights or the intellectual property rights of others. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing our products or using product names, which would have a significant adverse impact on our business, financial condition and results of operations.

Additionally, we may file lawsuits or initiate other proceedings to protect or enforce our patents or other intellectual property rights, which could be expensive, time consuming and unsuccessful. Competitors may infringe our issued patents or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property. In addition, in a patent or other intellectual property infringement proceeding, a court may decide that a patent or other intellectual property of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims or other intellectual property narrowly or refuse to stop the other party from using the technology at issue on the grounds that our patents or other intellectual property do not cover the technology in question. Furthermore, even if our patents or other intellectual property are found to be valid and infringed, a court may refuse to grant injunctive relief against the infringer and instead grant us monetary damages or ongoing royalties. Such monetary compensation may be insufficient to adequately offset the damage to our business caused by the infringer’s competition in the market. An adverse result in any litigation proceeding could put one or more of our patents or other intellectual property at risk of being invalidated or interpreted narrowly, which could adversely affect our competitive business position, financial condition and results of operations.

If we are unable to protect the confidentiality of our other proprietary information, our business and competitive position may be harmed.

In addition to patent protection, we also rely on protection of trade secrets, know-how and other proprietary information that is not patentable or that we elect not to patent. However, trade secrets can be difficult to protect and some courts are less willing or unwilling to protect trade secrets. To maintain the confidentiality of our trade secrets and proprietary information, we rely heavily on confidentiality provisions that we have in contracts with our employees, consultants, collaborators and others upon the commencement of their relationship with us. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by such third parties, despite the existence generally of these confidentiality restrictions. These contracts may not provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event the unwanted use is outside the scope of the provisions of the contracts or in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. There can be no assurance that such third parties will not breach their agreements with us, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors. Despite the protections we do place on our intellectual property or other proprietary rights, monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property or other proprietary rights will be adequate. In addition, the laws of many foreign countries will not protect our intellectual property or other proprietary rights to the same extent as the laws of the United States. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could affect our ability to expand to international markets or require costly efforts to protect our technology. To the extent our intellectual property or other proprietary information protection is incomplete, we are exposed to a greater risk of direct competition. A third party could, without authorization, copy or otherwise obtain and use our products or technology, or develop similar technology. Our competitors could purchase our products and

 

58


Table of Contents

attempt to replicate some or all of the competitive advantages we derive from our development efforts or design around our protected technology. Our failure to secure, protect and enforce our intellectual property rights could substantially harm the value of our products, brand and business. The theft or unauthorized use or publication of our trade secrets and other confidential business information could reduce the differentiation of our products and harm our business, the value of our investment in development or business acquisitions could be reduced and third parties might make claims against us related to losses of their confidential or proprietary information. Any of the foregoing could materially and adversely affect our business, financial condition and results of operations.

Further, it is possible that others will independently develop the same or similar technology or products or otherwise obtain access to our unpatented technology, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade secret rights and related confidentiality and nondisclosure provisions. If we fail to obtain or maintain trade secret protection, or if our competitors obtain our trade secrets or independently develop technology or products similar to ours or competing technologies or products, our competitive market position could be materially and adversely affected.

We also seek to preserve the integrity and confidentiality of our data and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached and detecting the disclosure or misappropriation of confidential information and enforcing a claim that a party illegally disclosed or misappropriated confidential information is difficult, expensive and time-consuming, and the outcome is unpredictable. Further, we may not be able to obtain adequate remedies for any breach.

We may not be able to protect our intellectual property rights throughout the world.

A company may attempt to commercialize competing products utilizing our proprietary design, trademarks or tradenames in foreign countries where we do not have any patents or patent applications and where legal recourse may be limited. This may have a significant commercial impact on our foreign business operations.

Filing, prosecuting and defending patents or trademarks on our current and future products in all countries throughout the world would be prohibitively expensive. The requirements for patentability and trademarking may differ in certain countries, particularly developing countries. The laws of some foreign countries do not protect intellectual property rights including the protection of surgical and medical methods, to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from utilizing our inventions and trademarks in all countries outside the United States. Competitors may use our technologies or trademarks in jurisdictions where we have not obtained patent or trademark protection to develop or market their own products and further, may export otherwise infringing products to territories where we have patent and trademark protection, but enforcement on infringing activities is inadequate. These products or trademarks may compete with our products or trademarks, and our patents, trademarks or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trademarks and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents and trademarks or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent and trademarks rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents and trademarks in those jurisdictions, as well as elsewhere at risk of being invalidated or interpreted narrowly and our patent or trademark applications at risk, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Certain countries in Europe and certain

 

59


Table of Contents

developing countries, including India and China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we may have limited remedies if our patents are infringed or if we are compelled to grant a license to our patents to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license. Finally, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws.

We may be subject to claims that we or our employees have misappropriated the intellectual property of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors.

Many of our employees and consultants were previously employed at or engaged by other medical device or other biotechnology companies, including our competitors or potential competitors. Some of these employees, consultants and contractors, may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees and consultants do not use the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, misappropriated the intellectual property or disclosed the alleged trade secrets or other proprietary information, of these former employers or competitors.

Additionally, we may be subject to claims from third parties challenging our ownership interest in intellectual property we regard as our own, based on claims that our employees or consultants have breached an obligation to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against any other claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or features that are important or essential to our products could have a material adverse effect on our business, financial condition and results of operations, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could have an adverse effect on our business, financial condition and results of operations.

The failure of third parties to meet their contractual, regulatory, and other obligations could adversely affect our business.

We rely on suppliers, vendors, outsourcing partners, consultants, alliance partners and other third parties to research, develop, manufacture and commercialize our products and manage certain parts of our business. Using these third parties poses a number of risks, such as:

 

   

they may not perform to our standards or legal requirements;

 

   

they may not produce reliable results;

 

   

they may not perform in a timely manner;

 

   

they may not maintain confidentiality of our proprietary information;

 

60


Table of Contents
   

disputes may arise with respect to ownership of rights to technology developed with our partners, and those dispute may be resolved against us; and

 

   

disagreements could cause delays in, or termination of, the research, development or commercialization of our products or result in litigation or arbitration.

Moreover, some third parties are located in markets subject to political and social risk, corruption, infrastructure problems and natural disasters, in addition to country-specific privacy and data security risk given current legal and regulatory environments. Failure of third parties to meet their contractual, regulatory, and other obligations may materially affect our business.

We are jointly developing certain technologies with Oertli Instrumente AG, or Oertli, and our agreement with Oertli may restrict our freedom to practice and may not protect us against potential competition with respect to jointly-developed intellectual property.

We have entered into a development agreement with Oertli pursuant to which we are collaborating in the development of a key component in our ALLY system. Under this agreement, intellectual property invented individually by either party is owned exclusively by such party and intellectual property jointly developed by us and Oertli will be jointly and severally owned by us and Oertli, and by the terms of our agreement, we and Oertli are entitled to practice such jointly owned intellectual property in our respective sole discretion. Our agreement with Oertli does not restrict how individually or jointly developed intellectual property may be used, exploited, or enforced. With respect to jointly developed intellectual property, both parties will be subject to default rules under the laws of various countries pertaining to joint ownership. Some countries require the consent of all joint owners to exploit, license or assign jointly owned patents, and if either party is unable to obtain that consent from the other party, the party requesting consent may be unable to exploit the invention or to license or assign its rights under these patents and patent applications in those countries. Additionally, in the United States, the other party may be required to be joined as a party to any claim or action a party may wish to bring to enforce these patent rights, which may limit its ability to pursue third party infringement claims. In some countries, Oertli will have a right to develop and commercialize products and technology invented during the course of our agreement, and to license to third parties the right to do so. This may lead to the development and commercialization of products and technology by others that are based on technology similar to our ALLY system platform, which may impair our competitive position in the marketplace and have an adverse impact on our business. If we cannot obtain distribution rights for such jointly-owned intellectual property or Oertli-owned intellectual property, our future product development and commercialization plans and competitive position in our industry may be adversely affected, which may have a material adverse impact on our business, financial condition and results of operation.

If our trademarks and tradenames are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected.

We rely on trademarks, service marks, tradenames and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in proceedings before the USPTO and comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources towards advertising and marketing new brands. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. Certain of our current or future trademarks may become so well known by the public that their use

 

61


Table of Contents

becomes generic and they lose trademark protection. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business, financial condition and results of operations may be adversely affected.

Risks Related to the Spin-Off

The Spin-Off may not be completed on the terms or timeline currently contemplated, if at all.

We are actively engaged in planning for the Spin-Off. Unanticipated developments could delay or negatively affect the Spin-Off, including delays related to the filing and effectiveness of appropriate filings with the SEC, acceptance of our common stock for listing by the Nasdaq Capital Market, completing further due diligence as appropriate, and changes in market conditions, among other things. PDL’s board of directors may also, in its absolute and sole discretion, decide at any time prior to the consummation of the Distribution not to proceed with the Spin-Off or change the terms of the Spin-Off, including the establishment of the record date and Distribution date or waiving certain conditions to the Spin-Off under the Separation and Distribution Agreement, such as the requirement that our common stock be accepted for listing on Nasdaq Capital Market, subject to official notice of issuance. Therefore, the Spin-Off may not be completed on the terms or in accordance with the timeline currently contemplated, if at all. Any delays in the anticipated completion of the Spin-Off may also increase the expenses we or PDL incur in connection with the transaction.

The Spin-Off require significant time and attention of our management and may distract our employees which could have an adverse effect on us.

Execution of the Spin-Off will require significant time and attention from management, which may distract management from the operation of our business and the execution of our other initiatives. Employees may also be distracted because of uncertainty about their future roles with us or PDL, as applicable, pending the completion of the Distribution. Any such difficulties could have a material and adverse effect on our business, financial condition and results of operations.

Our ability to meet our capital needs may be harmed by the loss of financial support from PDL.

The loss of financial support from PDL could harm our ability to meet our capital needs. After the Spin-Off, we expect to obtain any funds needed in excess of our cash on hand and the amounts generated by our operating activities through the equity and debt capital markets or bank financing, and not from PDL. However, given the smaller relative size of us after the Spin-Off as compared to PDL, we may incur higher debt servicing and other costs than we would have otherwise incurred as a part of PDL. Further, there can be no assurances that we will be able to obtain capital market financing or additional credit on favorable terms, or at all, in the future. If we are unable to generate sufficient cash from operations or obtain adequate additional financing on commercially reasonable terms, on a timely basis or at all, our ability to invest in our business or fund our business strategy may be limited and may materially and adversely affect our ability to compete effectively in our markets.

We may be unable to achieve some or all of the benefits that we expect to achieve as an independent, publicly traded company.

By separating from PDL, we may be more susceptible to securities market fluctuations and other adverse events than we would have otherwise encountered as part of PDL. In addition, we may not be able to achieve some or all of the benefits that we expect to achieve as an independent, publicly traded company in the time in which we expect to do so, if at all. For example, the process of operating as a newly independent, public company may distract our management team from focusing on our business and strategic priorities. If we do not realize the anticipated benefits from the Spin-Off for any reason, our business may be adversely affected.

 

62


Table of Contents

We may have difficulty operating as an independent, publicly traded company.

As an independent, publicly traded company, we believe that our business will benefit from, among other things, providing direct access to equity capital and a tailored capital structure, allowing us to better focus our financial and operational resources on our specific business, allowing our management to design and implement corporate strategies and policies that are based primarily on the business characteristics and strategic decisions of our business, allowing us to more effectively respond to industry dynamics and allowing the creation of effective incentives for our management and employees that are more closely tied to our business performance. However, we may not be able to achieve some or all of the benefits that we believe we can achieve as an independent company in the time we currently expect, if at all. Because our business has previously operated as part of the larger PDL organization, we may not be able to successfully implement the changes necessary to operate independently and may incur additional costs that could adversely affect our business.

We may incur material costs, including information technology costs, and expenses as a result of our Spin-Off from PDL, which could adversely affect our profitability.

As a result of our Spin-Off from PDL, we may incur costs and expenses greater than those we currently incur. These increased costs and expenses may arise from various factors, including financial reporting, accounting and audit services, insurance, costs associated with information technology systems, complying with federal securities laws (including compliance with the Sarbanes-Oxley Act) and legal and human resources-related functions. Although PDL will continue to provide certain of these services to us under the Transition Services Agreement, this arrangement may not capture all the benefits our business has enjoyed as a result of being integrated with PDL. In addition, such services are for a limited period of time, and we will be required to establish the necessary infrastructure and systems to supply these services on an ongoing basis. We cannot assure you that these costs will not be material to our business.

The combined post-Distribution value of our common stock and PDL common stock following completion of the Distribution may not equal or exceed the pre-Distribution value of PDL common stock.

After the Distribution, we expect that our common stock will be listed and traded on the Nasdaq Capital Market under the symbol “LNSR.” PDL common stock will continue to be listed and traded on the Nasdaq Global Select Market. The combined trading price of our common stock and PDL common stock after the Distribution, as adjusted for any changes in our capitalization or in the capitalization of PDL, could be lower than the trading price of PDL common stock prior to the Distribution. The prices at which our common stock and PDL common stock trade may fluctuate significantly, depending upon a number of factors, many of which may be beyond our and PDL’s control. These changes may not meet some stockholders’ investment strategies or requirements, which could cause investors to sell their shares of our common stock or PDL common stock. Excessive selling could cause the relative market price of our common stock or PDL common stock to decrease following completion of the Distribution.

Our historical financial information may not be representative of the results we would have achieved as a stand-alone public company during the periods presented and may not be a reliable indicator of our future results.

The historical financial data that we have included in this information statement may not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an independent entity during the periods presented or those that we will achieve in the future. The costs and expenses reflected in our historical financial data include an allocation for certain corporate functions historically provided by PDL, including shared services and infrastructure provided by PDL to us, such as costs of information technology, accounting, tax and legal services, and other corporate and infrastructure services that may be different from the comparable expenses that we would have incurred had we operated as a stand-alone company. Our historical financial data does not reflect changes that will occur in our cost structure and operations as a result of our

 

63


Table of Contents

transition to becoming a stand-alone public company, including changes in our employee base, potential increased costs associated with reduced economies of scale and increased costs associated with SEC reporting and requirements. Accordingly, the historical financial data presented in this information statement should not be assumed to be indicative of what our financial condition or results of operations actually would have been as an independent, publicly traded company or to be a reliable indicator of what our financial condition or results of operations actually could be in the future.

Similarly, our unaudited pro forma financial information in this information statement is presented for illustrative purposes only. Accordingly, such unaudited pro forma financial information may not be indicative of our future operating or financial performance and our actual financial condition and results of operations may vary materially from our unaudited pro forma statement of operations and balance sheet contained elsewhere in this information statement.

If the Spin-Off is completed, our operational and financial profile will change and we will be a smaller, less diversified company than PDL was prior to the Distribution and we may not enjoy the same benefits that we did as part of PDL.

If the Spin-Off is completed, we will be a smaller, less diversified company focused on the design, development and commercialization of advanced technology for the treatment of cataracts and management of astigmatism, which represents a narrower business focus than PDL currently has. By separating from PDL, we may become more susceptible to market fluctuations and other adverse events than we would have been if we were still a part of the current PDL organizational structure, which could materially and adversely affect our business, financial condition and results of operations. As part of PDL, we have been able to enjoy certain benefits from PDL’s operating diversity and more readily available capital to fund investments, as well as opportunities to pursue integrated strategies with PDL’s other businesses. As an independent, publicly traded company, we will not have similar diversity, available capital or integration opportunities and may not have similar access to equity and debt capital markets. In addition, we currently share economies of scope and scale with PDL with respect to certain costs and supplier relationships, and take advantage of PDL’s size and purchasing power in procuring certain products and services, such as insurance and healthcare benefits, and technology, such as computer software licenses. After the Spin-Off, as a separate, independent entity, we may be unable to obtain these products, services and technologies at prices or on terms as favorable to us as those we obtained prior to the Spin-Off.

Following the Spin-Off, we will rely on PDL’s performance under various agreements and we and PDL will continue to be dependent on each other for certain support services for each respective business.

We expect to enter into or have entered into various agreements with PDL in connection with the Spin-Off, including the Separation and Distribution Agreement, Transition Services Agreement and Tax Matters Agreement. These agreements will govern our relationship with PDL subsequent to the Spin-Off. If PDL were to fail to fulfill its obligations under these agreements, we could suffer operational difficulties or significant losses. For example, as part of PDL’s previously announced process to unlock value within PDL either by sale of PDL or monetization of its assets, PDL’s stockholders approved the liquidation and dissolution of PDL, and PDL has announced that it is currently targeting the end of 2020 to file a certificate of dissolution with the Secretary of State of the State of Delaware, although it acknowledges that such filing may be delayed given the uncertainties related to the COVID-19 pandemic. Pursuant to Delaware law, PDL’s corporate existence would continue for a period of at least three years for certain limited purposes after any such filing of a certificate of dissolution, which we expect would include fulfillment of its obligations under these agreements, but we cannot assure we will receive the expected benefit from these agreements.

If we are required to indemnify PDL for certain liabilities and related losses arising in connection with any of these agreements, or if PDL is required to indemnify us for certain liabilities and related losses arising in connection with any of these agreements and PDL does not fulfill its obligations to us, we may be subject to substantial liabilities, which could have a material adverse effect on our business, financial condition and results of operations.

 

64


Table of Contents

Additionally, although PDL will be contractually obligated to provide us with certain services during the term of the Transition Services Agreement, we cannot assure you that these services will be performed as efficiently or proficiently as they were prior to the Spin-Off. The Transition Services Agreement also contains provisions that may be more favorable than terms and provisions we might have obtained in arm’s length negotiations with unaffiliated third parties. When PDL ceases to provide services pursuant to the Transition Services Agreement, our costs of procuring those services from third parties may increase. In addition, we may not be able to replace these services in a timely manner or enter into appropriate third-party agreements on terms and conditions, including cost, comparable to those under the Transition Services Agreement. To the extent that we require additional support from PDL not addressed in the Transition Services Agreement, we would need to negotiate the terms of receiving such support in future agreements. See “Certain Relationships and Related Party Transactions—Agreements between PDL and LENSAR Relating to the Spin-Off.”

Our ability to operate our business may suffer if we do not, quickly and effectively, establish our own financial, administrative, accounting and other support functions in order to operate as a separate, stand-alone company, and we cannot assure you that the support services PDL has agreed to provide us will be sufficient for our needs.

Historically, we have relied on financial, administrative, accounting, tax and other resources of PDL to support the operation of our business. In conjunction with our Spin-Off from PDL, we will need to expand our financial, administrative, accounting, tax and other support systems or contract with third parties to replace certain systems that were previously provided by PDL. We will also need to maintain our own credit and banking relationships and perform our own financial and operational functions. We cannot assure you that we will be able to successfully put in place the financial, operational and managerial resources necessary to operate as a public company or that we will be able to be profitable doing so. Any failure or significant downtime in our financial or administrative systems could affect our results or prevent us from performing other administrative services and financial reporting on a timely basis and could have a material adverse effect on our business, financial condition and results of operations.

We will be subject to continuing contingent liabilities of PDL following the Spin-Off.

After the Spin-Off, there will be several significant areas where the liabilities of PDL may become our obligations. For example, under the Code and the related rules and regulations, each corporation that was a member of the PDL consolidated U.S. federal income tax reporting group during any taxable period or portion of any taxable period ending on or before the effective time of the Distribution is jointly and severally liable for the U.S. federal income tax liability of the entire PDL consolidated tax reporting group for that taxable period. In addition, in connection with the Spin-Off, we intend to enter into the Tax Matters Agreement with PDL that will allocate the responsibility for taxes between PDL and us. Pursuant to this allocation, we may be responsible for taxes that we would not have otherwise incurred, or that we would have incurred but in different amounts or at different times, on a standalone basis outside of the PDL consolidated group, and the amount of such taxes could be significant. See “Certain Relationships and Related Party Transactions—Agreements between PDL and LENSAR Relating to the Spin-Off” included elsewhere in this information statement for more detail. However, if PDL is unable to pay any prior period taxes for which it is responsible, we could be required to pay the entire amount of such taxes.

We have overlapping board membership with PDL, which may lead to conflicting interests, and one of our directors continues to own a substantial amount of PDL common stock and equity awards covering PDL common stock.

As a result of the Spin-Off, some of our board members will also serve as board members of PDL. Neither we nor PDL will have any ownership interest in the other; however, our directors who are members of the PDL board of directors have fiduciary duties to PDL stockholders, as well as fiduciary duties to our stockholders. Therefore, such persons may have conflicts of interest or the appearance of conflicts of interest with respect to matters involving or affecting more than one of the companies to which they owe fiduciary duties. In addition, a

 

65


Table of Contents

number of our directors and officers will continue to own PDL common stock, as well as, in some cases, equity awards covering PDL common stock. The direct interests of our directors and officers in common stock of PDL could create, or appear to create, potential conflicts of interest with respect to matters involving both PDL and us that could have different implications for PDL than they do for us.

As a result of the foregoing, there may be the potential for a conflict of interest when we or PDL consider acquisitions and other corporate opportunities. In addition, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between PDL and us regarding the terms of the agreements governing the internal reorganization, the Spin-Off and the relationship thereafter between the companies, including with respect to the indemnification of certain matters. From time to time, we may enter into transactions with PDL, its subsidiaries and other affiliates. There can be no assurance that the terms of any such transactions will be as favorable to us, PDL or any of our or their subsidiaries or affiliates as would be the case where there is no overlapping officer or director or ownership of both companies. See “Certain Relationships and Related Party Transactions—Policies and Procedures for Related Party Transactions” below for a discussion of certain procedures we will institute to address any such potential conflicts that may arise.

Potential indemnification obligations to PDL pursuant to the Separation and Distribution Agreement could materially and adversely affect us.

Among other things, the Separation and Distribution Agreement provides for indemnification obligations designed to make us financially responsible for substantially all of the liabilities that may exist relating to our business activities, whether incurred prior to or after the Spin-Off. If we are required to indemnify PDL under the circumstances set forth in the Separation and Distribution Agreement, we may be subject to substantial liabilities.

The Spin-Off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements.

The Spin-Off is subject to review under various state and federal fraudulent conveyance laws. Fraudulent conveyance laws generally provide that an entity engages in a constructive fraudulent conveyance when (i) the entity transfers assets and does not receive fair consideration or reasonably equivalent value in return; and (ii) the entity: (a) is insolvent at the time of the transfer or is rendered insolvent by the transfer; (b) has unreasonably small capital with which to carry on its business; or (c) intends to incur or believes it will incur debts beyond its ability to repay its debts as they mature. An unpaid creditor or an entity acting on behalf of a creditor (including without limitation a trustee or debtor-in-possession in a bankruptcy by us or PDL or any of our respective subsidiaries) may bring an action alleging that the Distribution or any of the related transactions constituted a constructive fraudulent conveyance. If a court accepts these allegations, it could impose a number of remedies, including without limitation, voiding our claims against PDL, requiring our stockholders to return to PDL some or all of the shares of our common stock issued in the Distribution, or providing PDL with a claim for money damages against us in an amount equal to the difference between the consideration received by PDL and our fair market value at the time of the Spin-Off.

The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction’s law is applied. Generally, an entity would be considered insolvent if (i) the present fair saleable value of its assets is less than the amount of its liabilities (including contingent liabilities); (ii) the present fair saleable value of its assets is less than its probable liabilities on its debts as such debts become absolute and matured; (iii) it cannot pay its debts and other liabilities (including contingent liabilities and other commitments) as they mature; or (iv) it has unreasonably small capital for the business in which it is engaged. We cannot assure you what standard a court would apply to determine insolvency or that a court would determine that we, PDL or any of our respective subsidiaries were solvent at the time of or after giving effect to the Distribution.

The Spin-Off of our common stock is also subject to review under state corporate distribution statutes. Under the DGCL, a corporation may only pay dividends to its stockholders either (i) out of its surplus (net assets

 

66


Table of Contents

minus capital) or (ii) if there is no such surplus, out of its net profits for the fiscal year in which the dividend is declared or the preceding fiscal year. Although PDL intends to make the distribution of our common stock entirely from surplus, we cannot assure you that a court will not later determine that some or all of the Spin-Off to PDL stockholders was unlawful.

The Distribution will not qualify for tax-free treatment.

The Distribution will not qualify for tax-free treatment, but rather is intended to be treated as part of a liquidating distribution by PDL. In accordance with such treatment, if you are a U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences of the Distribution”), an amount equal to the fair market value of our common stock (together with any other property distributed as part of the liquidating distribution) received by you will be treated as received in exchange for your shares of PDL common stock and will first be applied against and reduce your basis in such shares of PDL common stock, but not below zero. Any remaining amount in excess of your basis in such shares of PDL common stock will be treated as capital gain. As cash will be paid in the Distribution only in lieu of fractional shares, you may need alternative sources from which to pay your resulting U.S. federal income tax liability.

Although PDL will ascribe a value to our common stock distributed in the Distribution, this valuation is not binding on the Internal Revenue Services, or IRS, or any other tax authority. These taxing authorities could ascribe a higher valuation to our distributed common stock, particularly if, following the Distribution, our common stock trades at prices significantly above the value ascribed to those shares by PDL. Such a higher valuation may affect the tax consequences of the Distribution to holders of PDL common stock.

Notwithstanding PDL’s position that the Distribution will be treated as part of a series of distributions in complete liquidation of PDL, it is possible that the IRS or a court could determine that the Distribution is a current distribution. In addition, if PDL’s liquidation is abandoned or revoked, the Distribution would be treated as a current distribution. A current distribution would be treated as a dividend for U.S. federal income tax purposes to the extent of PDL’s current and accumulated earnings and profits. Under this treatment, amounts not treated as dividends for U.S. federal income tax purposes would constitute a return of capital and first be applied against and reduce a holder’s adjusted tax basis in its PDL common stock, but not below zero. Any excess would be treated as capital gain.

For a more detailed discussion, see “Material U.S. Federal Income Tax Consequences of the Distribution.” You should consult your tax advisor as to the particular tax consequences of the Distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

Risks Related to Owning Our Common Stock

An active, liquid and orderly market for our common stock may not develop or be sustained, and the trading price of our common stock is likely to be volatile.

Prior to the Spin-Off, there has been no public market for shares of our common stock. It is anticipated that shortly prior to the record date for the distribution of our common stock, trading of shares of our common stock would begin on a “when-issued” basis and such trading would continue up to and including the Distribution date. However, an active trading market for our common stock may not develop or be sustained, which could depress the market price of our common stock and could affect your ability to sell your shares. The trading price of our common stock following the Distribution is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this information statement, these factors include:

 

   

a shift in our investor base;

 

   

actual or anticipated fluctuations in our quarterly financial condition and operating performance;

 

67


Table of Contents
   

the operating and stock price performance of similar companies;

 

   

introduction of new products by us or our competitors;

 

   

success or failure of our business strategy;

 

   

our ability to obtain financing as needed;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

the overall performance of the equity markets;

 

   

the number of shares of our common stock publicly owned and available for trading;

 

   

threatened or actual litigation or governmental investigations;

 

   

changes in laws or regulations affecting our business, including tax legislation;

 

   

announcements by us or our competitors of significant acquisitions or dispositions;

 

   

any major change in our board of directors or management;

 

   

changes in earnings estimates by securities analysts or our ability to meet earnings guidance;

 

   

publication of research reports about us or our industry or changes in recommendations or withdrawal of research coverage by securities analysts;

 

   

large volumes of sales of our shares of common stock by existing stockholders;

 

   

investor perception of us and our industry; and

 

   

general political and economic conditions, and other external factors, including the global impact of the COVID-19 pandemic.

In addition, the stock market in general, and the market for medical device companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations could be even more pronounced in the trading market for our stock shortly following the Distribution. This could limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources, and could have a material adverse effect on our business, financial condition and results of operations.

Your percentage of ownership in us may be diluted in the future.

As with any publicly traded company, your percentage ownership in us may be diluted in the future because of equity issuances for acquisitions, financing transactions or otherwise, including equity awards that we expect will be granted to our directors, officers and employees.

The large number of shares eligible for public sale could depress the market price of our common stock.

The shares of our common stock that PDL will distribute to its stockholders in the Distribution generally may be sold immediately in the public market. PDL stockholders could sell our common stock received in the Distribution if we do not fit their investment objectives, such as minimum market capitalization requirements or specific business sector focus. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after the Distribution, and the perception that these sales could occur may also depress the market price of our common stock. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

 

68


Table of Contents

We also may issue our shares of common stock from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares that we may issue may in turn be significant. In addition, we may also grant registration rights covering those shares in connection with any such acquisitions and investments.

We are an “emerging growth company” and a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to us will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” In particular, while we are an “emerging growth company” (1) we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, (2) we will be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements, (3) we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (4) we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved.

In addition, we are eligible to delay the adoption of new or revised accounting standards applicable to public companies until those standards apply to private companies, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of this election, our financial statements may not be comparable to the financial statements of other public companies.

We also currently intend to take advantage of the reduced disclosure requirements regarding executive compensation. If we remain an “emerging growth company” after 2020, we may take advantage of other exemptions, including the exemptions from the advisory vote requirements and executive compensation disclosures under the Dodd-Frank Wall Street Reform and Customer Protection Act, and the exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act. We may remain an “emerging growth company” until as late as December 31, 2025 (the fiscal year-end following the fifth anniversary of the completion of the Spin-Off), though we may cease to be an “emerging growth company” earlier under certain circumstances, including (1) if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of any June 30, in which case we would cease to be an “emerging growth company” as of the following December 31, (2) if our gross revenue exceeds $1.07 billion in any fiscal year or (3) if we issue more than $1.0 billion in nonconvertible notes in any three-year period.

We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting and will be subject to other requirements that will be burdensome and costly.

We have historically operated our business as part of a larger public company. Following consummation of the Spin-Off, we will be required to file with the SEC annual, quarterly and current reports that are specified in

 

69


Table of Contents

Section 13 of the Exchange Act. We will also be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. In addition, we will become subject to other reporting and corporate governance requirements, including the requirements of the Nasdaq Capital Market, and certain provisions of the Sarbanes-Oxley Act and the regulations promulgated thereunder, which will impose significant compliance obligations upon us. As a public company, we will be required to:

 

   

prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and the listing rules of the Nasdaq Stock Market;

 

   

create or expand the roles and duties of our board of directors and committees of the board of directors;

 

   

institute more comprehensive financial reporting and disclosure compliance functions;

 

   

supplement our internal accounting and auditing function, including hiring additional staff with expertise in accounting and financial reporting for a public company;

 

   

establish formal closing procedures at the end of our accounting periods;

 

   

develop our investor relations function;

 

   

establish new internal policies, including those relating to disclosure controls and procedures; and

 

   

involve and retain to a greater degree outside counsel and accountants in the activities listed above.

We expect to devote significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act, including costs associated with auditing and legal fees and accounting and administrative staff. In addition, Section 404(a) under the Sarbanes-Oxley Act requires that we assess the effectiveness of our controls over financial reporting. Our future compliance with the annual internal control report requirement will depend on the effectiveness of our financial reporting and data systems and controls across our operating subsidiaries. We cannot be certain that these measures will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation or operation, could harm our operating results, cause us to fail to meet our financial reporting obligations, or cause us to suffer adverse regulatory consequences or violate applicable stock exchange listing rules. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.

For as long as we are an “emerging growth company” under the JOBS Act, we will not be required to comply with Section 404(b) of the Sarbanes-Oxley Act, which would require our independent auditors to issue an opinion on their audit of our internal control over financial reporting, until the later of the year following our first annual report required to be filed with the SEC and the date we are no longer an “emerging growth company.” If, once we are no longer an “emerging growth company,” our independent registered public accounting firm cannot provide an unqualified attestation report on the effectiveness of our internal control over financial reporting, investor confidence and, in turn, the market price of our common stock, could decline.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon consummation of the Spin-Off, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual

 

70


Table of Contents

acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

We may issue preferred stock with terms that could dilute the voting power or reduce the value of our common stock.

While we have no specific plan to issue preferred stock, our amended and restated certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more series of preferred stock having such designation, powers, privileges, preferences, including preferences over our common stock respecting dividends and distributions, terms of redemption and relative participation, optional, or other rights, if any, of the shares of each such series of preferred stock and any qualifications, limitations or restrictions thereof, as our board of directors may determine. The terms of one or more series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock. For a more detailed description, see “Description of LENSAR Capital Stock—Preferred Stock.”

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, the trading price for our stock would likely be negatively affected. If securities or industry analysts were to initiate coverage, if one or more of the analysts who cover us were to downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts were to cease coverage of us or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.

We do not anticipate paying cash dividends in the foreseeable future. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

Certain provisions in our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment and, therefore, may depress the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors, including, among other things:

 

   

a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

   

the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

71


Table of Contents
   

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

   

limitations on the removal of directors;

 

   

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

   

the requirement that a special meeting of stockholders may be called only by the chairperson of our board of directors, the chief executive officer, the president (in absence of a chief executive officer) or our board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

   

the approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors is required to adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;

 

   

the ability of our board of directors, by majority vote, to amend the amended and restated bylaws, which may allow our board of directors to take additional actions to prevent a hostile acquisition and inhibit the ability of an acquirer from amending the amended and restated bylaws to facilitate a hostile acquisition; and

 

   

advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

We believe that these provisions should protect our stockholders from coercive or harmful takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with adequate time to assess any acquisition proposal, and are not intended to make us immune from takeovers. These provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a transaction involving a change in control that is in the best interest of our stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.

We are also subject to certain anti-takeover provisions under the DGCL. Under the DGCL, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, our board of directors has approved the transaction.

Our amended and restated certificate of incorporation designates certain courts as the sole and exclusive forums for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees or our stockholders; (iii) any action asserting a claim arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or amended and restated bylaws; or (iv) any action asserting a claim governed by the internal affairs doctrine. Additionally, our amended and restated certificate of incorporation provides that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers, employees or agents and arising under the Securities Act. Our amended and restated certificate of incorporation further provides that any person or entity

 

72


Table of Contents

purchasing or acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions described above. This forum selection provision in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. This exclusive forum provision will not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.

 

73


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements in this information statement under the captions “Information Statement Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “The Spin-Off,” “Business” and in other sections of this information statement that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. Any estimates and forward-looking statements contained in this information statement speak only as of the date of this information statement and are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” You should specifically consider the numerous risks outlined under “Risk Factors.”

The forward-looking statements made in this information statement relate only to events as of the date on which the statements are made. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this information statement to conform our prior statements to actual results or revised expectations.

 

74


Table of Contents

THE SPIN-OFF

General

The board of directors of PDL, our parent company, has authorized the announcement of a plan to spin off our company as an independent, publicly traded company, to be accomplished by means of a pro rata distribution of all of our common stock held by PDL, representing approximately 81.5% of our total issued and outstanding common stock, to PDL’s stockholders as of the Record Date. Following the Spin-Off, PDL will no longer own any equity interest in us, and we will operate as an independent, publicly traded company. We have applied to list our common stock on the Nasdaq Capital Market under the symbol “LNSR.”

We were incorporated as a Delaware corporation on August 20, 2004. We currently have one class of authorized common stock. As of the date of this information statement, approximately 81.5% of the outstanding shares of our common stock are beneficially owned by PDL, with the remainder being beneficially owned by certain of our directors, executive officers and other employees All shares of our common stock currently outstanding are fully paid and non-assessable, not subject to redemption and without preemptive or other rights to subscribe for or purchase any proportionate part of any new or additional issues of stock or securities. We expect approximately 8.7 million shares of our common stock will be distributed in the Spin-Off based on the number of shares of PDL common stock we expect to be outstanding on the Record Date. We will not have any shares of preferred stock outstanding immediately following the Spin-Off.

On October 1, 2020, the Distribution date, each stockholder holding shares of PDL common stock that were outstanding as of 5:00 p.m., Eastern Time, on September 22, 2020, the Record Date, will be entitled to receive, in respect of one share of PDL common stock, 0.075879 shares of our common stock, as described below. Immediately following the Distribution, PDL’s stockholders will own 81.5% of our outstanding common stock, and PDL will not hold any of our outstanding capital stock. You will not be required to make any payment, surrender or exchange your common stock of PDL or take any other action to receive your shares of our common stock.

Holders of PDL common stock will continue to hold their shares in PDL. We do not require and are not seeking a vote of PDL’s stockholders in connection with the Spin-Off, and PDL’s stockholders will not have any dissenters’ rights or appraisal rights in connection with the Spin-Off.

Before the Distribution, we will enter into the Separation and Distribution Agreement and other agreements with PDL to effect the Distribution and provide a framework for our relationship with PDL after the Distribution. These agreements will govern the relationship between PDL and us up to and subsequent to the completion of the Distribution. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements between PDL and LENSAR Relating to the Spin-Off” and describe some of the risks of these arrangements under “Risk Factors—Risks Related to the Separation and Distribution.”

The distribution of shares of our common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. In addition, PDL has the right not to complete the Spin-Off if, at any time prior to the Distribution, its board of directors determines, in its sole discretion, that the Spin-Off is not in the best interests of PDL or its stockholders, or that it is not advisable for us to separate from PDL. For a more detailed description of these conditions, see “—Conditions to the Spin-Off” below.

Reasons for the Spin-Off

In September 2019, PDL management recommended to its board of directors that it undertake a strategic review of PDL. Upon completion of that review in December 2019, PDL’s board of directors determined to pursue a process to unlock value within PDL either by sale of PDL or monetization of its assets. Over the subsequent months, PDL’s board of directors and management analyzed, together with outside financial and

 

75


Table of Contents

legal advisors, how to best capture value and provide the best return to stockholders. As part of that process, on September 9, 2020, PDL’s board of directors approved a plan to spin us off from PDL as a publicly traded company.

PDL’s board of directors believes that spinning us off from PDL will provide us with financial, operational and managerial benefits, including, but not limited to, the following:

 

   

Strategic Focus. We and PDL are distinct, complex enterprises with different opportunities, challenges, strategies and means of doing business. We believe the Spin-Off will allow us to continue to implement corporate strategies that are designed for our ophthalmology business.

 

   

Focused Management. Separating us from PDL will allow our management to continue to allocate and focus resources on the implementation of product development and commercialization strategies that are key to our continued growth.

 

   

Improved Management Incentive Tools. Offering equity of our publicly traded company as compensation tied directly to our performance will assist in attracting and retaining qualified employees, officers and directors.

 

   

Direct Access to Capital and Tailored Capital Structure. As a stand-alone company, we can better attract investors with the opportunity to invest solely in our surgical treatments for cataracts, which will enhance our ability to directly access the equity and debt capital markets to fund our growth strategy and to establish a capital structure tailored to our business needs.

 

   

Ability to Use Equity as Consideration for Acquisitions. The Spin-Off will provide us with enhanced flexibility to use our stock as consideration in pursuing certain financial and strategic objectives, including mergers and acquisitions involving other companies or businesses engaged in ophthalmology. We believe that we will be able to more easily facilitate future strategic transactions with businesses in ophthalmology through the use of our stand-alone stock as acquisition currency.

PDL’s board of directors also considered a number of potentially risk factors in evaluating the Spin-Off, including, in the case of both companies, increased operating costs, disruptions to the businesses as a result of planning for the Spin-Off and the Spin-Off itself, the risk of being unable to achieve expected benefits from the Spin-Off, the risk of being unable to successfully complete operational transfers, the risk that the Spin-Off might not be completed, the initial costs of the Spin-Off and the risk that the common stock of one or both companies may come under initial selling pressure if investors are not interested in holding an investment in one or both businesses following the Spin-Off. Notwithstanding these potentially negative factors, however, the board of directors of PDL determined that the Spin-Off was the best alternative to enhance stockholder value taking into account the factors discussed above. For more information, see the sections entitled “Risk Factors” and “The Spin-Off” included elsewhere in this information statement.

Manner of Effecting the Spin-Off

The Distribution will be effective as of 5:00 p.m., Eastern Time, on October 1, 2020, the Distribution date. As a result of the Spin-Off, on the Distribution date, each PDL stockholder will receive 0.075879 shares of our common stock for every one share of PDL common stock owned by such holder and outstanding as of the Record Date. In order to receive shares of our common stock in the Spin-Off, a PDL stockholder must be a stockholder at 5:00 p.m., Eastern Time, on September 22, 2020. The Distribution will be pro rata to stockholders holding shares of PDL common stock that are outstanding as of the Record Date.

PDL STOCKHOLDERS WILL NOT BE REQUIRED TO PAY FOR SHARES OF OUR COMMON STOCK RECEIVED IN THE DISTRIBUTION, OR TO SURRENDER OR EXCHANGE SHARES OF PDL COMMON STOCK IN ORDER TO RECEIVE OUR COMMON STOCK, OR TO TAKE ANY OTHER ACTION IN CONNECTION WITH THE DISTRIBUTION. NO VOTE OF PDL STOCKHOLDERS IS REQUIRED OR SOUGHT IN CONNECTION WITH THE DISTRIBUTION, AND PDL STOCKHOLDERS HAVE NO DISSENTERS’ RIGHTS OR APPRAISAL RIGHTS IN CONNECTION WITH THE DISTRIBUTION.

 

76


Table of Contents

See “Material U.S. Federal Income Tax Consequences of the Distribution” for an explanation of the material U.S. federal income tax consequences of the Distribution.

Fractional shares of our common stock will not be issued to PDL stockholders as part of the Distribution or credited to book-entry accounts. In lieu of receiving fractional shares, each holder of PDL common stock who would otherwise be entitled to receive a fractional share of our common stock will receive cash for the fractional interest. Each stockholder should have a maximum of less than one fractional share pursuant to this transaction. The transfer agent will, as soon as practicable after the Distribution date, aggregate fractional shares of our common stock into whole shares and sell them in the open market at the prevailing market prices and distribute the aggregate proceeds, net of brokerage fees, ratably to PDL stockholders otherwise entitled to fractional interests in our common stock. The amount of such payments will depend on the prices at which the aggregated fractional shares are sold by the transfer agent in the open market shortly after the Distribution date. None of PDL, us or the transfer agent will guarantee any minimum sale price for the fractional shares of our common stock. Neither we nor PDL will pay any interest on the proceeds from the sale of fractional shares.

If you own shares of PDL common stock as of the close of business on the Record Date, the shares of our common stock that you are entitled to receive will be issued electronically, as of the Distribution date, to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. Registration in book-entry form refers to a method of recording share ownership when no physical share certificates are issued to stockholders, as is the case in the Distribution. If you sell shares of PDL common stock in the market up to and including the Distribution date, however, you may be selling your right to receive shares of our common stock in the Distribution.

Commencing on or shortly after the Distribution date, if you hold physical share certificates that represent your shares of PDL common stock and you are the registered holder of the PDL shares represented by those certificates, the transfer agent will mail to you an account statement that indicates the number of shares of our common stock that have been registered in book-entry form in your name. See “—Results of the Separation; Listing of LENSAR Common Stock and Trading of PDL Common Stock.”

Most PDL stockholders hold their shares of PDL common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the shares in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your shares of PDL common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of our common stock that you are entitled to receive in the Distribution. If you have any questions concerning the mechanics of having shares held in “street name,” we encourage you to contact your bank or brokerage firm at any time following the approval of the Spin-Off.

Assuming approximately 114.1 million shares of PDL common stock are outstanding as of the Record Date, the number of shares of our common stock to be distributed will be approximately 8.7 million, and the number of shares of our common stock which will be outstanding immediately following the Spin-Off will be approximately 10.6 million. The Spin-Off will not affect the number of outstanding shares of PDL common stock or any rights of PDL’s stockholders.

Conditions to the Spin-Off

The Distribution is subject to the satisfaction or waiver of a number of conditions, including the following:

 

   

the PDL board of directors shall have approved the Spin-Off, including the declaration of the Distribution and other related transactions, which approval may be given or withheld at its sole and absolute discretion;

 

   

the SEC has declared effective the registration statement, with no stop order in effect with respect thereto, and with no proceedings for such purpose pending or threatened by the SEC;

 

77


Table of Contents
   

we shall have mailed this information statement (and such other information concerning us, our business, operations and management, the Distribution and such other matters as we and PDL shall determine and as may otherwise be required by law) to the holders of record of PDL common stock at the close of business on the record date for the Distribution;

 

   

all other actions and filings necessary or appropriate under applicable federal or state securities laws and state blue sky laws in connection with the Transactions shall have been taken;

 

   

our common stock shall have been accepted for listing on the Nasdaq Capital Market, subject to official notice of issuance;

 

   

the ancillary agreements shall have been executed and delivered by each of PDL and us, as applicable, and no party to any of the ancillary agreements will be in material breach of any such agreement;

 

   

any material governmental authorizations necessary to consummate the Spin-Off and other related transactions, or any portion thereof, shall have been obtained and be in full force and effect;

 

   

our amended and restated certificate of incorporation and amended and restated bylaws, each in substantially the form filed as exhibits to the registration statement, are in effect;

 

   

no preliminary or permanent injunction or other order, decree, or ruling issued by a governmental authority, and no statute (as interpreted through orders or rules of any governmental authority duly authorized to effectuate the statute), rule, regulation or executive order promulgated or enacted by any governmental authority shall be in effect preventing the consummation of, or materially limiting the benefits of, the Spin-Off and related transactions; and

 

   

no other event or development shall have occurred or failed to occur that, in the judgment of the PDL board of directors, in its sole discretion, prevents the consummation of the Spin-Off and related transactions or any portion thereof or makes the consummation of the same inadvisable.

Other than the conditions relating to the effectiveness of the registration statement and our mailing of the information statement, PDL’s board of directors may waive any of these conditions, in its sole discretion, prior to the Distribution date. A waiver by PDL’s Board of Directors of one or more of these conditions in connection with the Distribution may adversely impact our business, the trading price of our common stock, or the ability of our stockholders to sell their shares after the Distribution. For example, consummating the Distribution despite an injunction or decree as described above could result in time-consuming and costly proceedings that would adversely affect our business and result in expenditure of our resources. Consummating the Distribution without having our common stock accepted for listing on the Nasdaq Capital Market or another national stock exchange could result in a less liquid market for our stock and adversely affect the stock price or a holder’s ability to sell our stock.

PDL only intends to notify PDL stockholders of any modifications to the terms of the Spin-Off or Distribution that, in the judgment of its board of directors, are material. For example, the PDL board of directors might consider material such matters as significant changes to the Distribution ratio, significant changes to the assets to be contributed or the liabilities to be assumed following the Spin-Off. To the extent that the PDL board of directors determines that any modifications by PDL, including any waivers of any conditions to the Distribution, materially change the terms of the Distribution, PDL will notify PDL stockholders in a manner reasonably calculated to inform them about the modification as may be required by law, such as by publishing a press release, filing a current report on Form 8-K or circulating a supplement to this information statement.

The fulfillment of the foregoing conditions will not create any obligation on PDL’s part to effect the Spin-Off. Except as described in the foregoing conditions, we are not aware of any material federal or state regulatory requirements that must be complied with or any material approvals that must be obtained. PDL has the right not to complete the Spin-Off if, at any time prior to the Distribution, the board of directors of PDL determines, in its sole discretion, that the Spin-Off is not in the best interests of PDL or its stockholders, or that it is not advisable for us to separate from PDL.

 

78


Table of Contents

Results of the Spin-Off; Listing of LENSAR Common Stock and Trading of PDL Common Stock

There is not currently a public market for our common stock. We have applied to list LENSAR’s common stock on the Nasdaq Capital Market under the symbol “LNSR.” We expect that a “when-issued” market in LENSAR common stock could develop shortly prior to the Record Date, and we will announce the when-issued trading symbol of LENSAR when and if it becomes available. “When-issued trading” refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The when-issued trading market will be a market for the LENSAR common stock that will be distributed to PDL stockholders on the Distribution date. If you own shares of PDL common stock at the close of business on the Record Date, you will be entitled to shares of LENSAR common stock distributed pursuant to the Spin-Off. You may trade this entitlement to shares of LENSAR common stock, without the shares of PDL common stock you own, on the when-issued market. On the first trading day following the Distribution date, we expect that when-issued trading with respect to LENSAR common stock will end and regular-way trading will begin.

It is also anticipated that, shortly prior to the Record Date and continuing up to and including the Distribution date, there will be two markets for PDL common stock: a “regular-way” market and an “ex-distribution” market. Shares of PDL common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock distributed pursuant to the Distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the Distribution. Therefore, if you sell shares of PDL common stock in the regular-way market up to and including the Distribution date, you will be selling your right to receive shares of our common stock in the Distribution. However, if you own PDL common stock at the close of business on the Record Date and sell those shares on the ex-distribution market up to and including the Distribution date, you will still receive the shares of our common stock that you would otherwise be entitled to receive pursuant to the Distribution. If, for any reason, the Distribution does not occur, “when-issued” and “ex-distribution” trades will be cancelled and, therefore, will not be settled.

We cannot assure you as to the price at which our common stock will trade before, on or after the Distribution date and, depending upon a number of factors, some of which may be beyond our control, the price at which our common stock trades may fluctuate significantly. In addition, the combined trading prices of our common stock and PDL common stock held by stockholders after the Distribution may be less than, equal to or greater than the pre-Spin-Off trading price of PDL common stock prior to the Distribution.

The shares of our common stock distributed to PDL stockholders will be freely transferable, except for shares received by people who may have a special relationship or affiliation with us or shares subject to contractual restrictions. People who may be considered our affiliates after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with us and may include certain of our officers, directors and significant stockholders. Persons who are our affiliates will be permitted to sell their shares only pursuant to an effective registration statement under the Securities Act, or an exemption from the registration requirements of the Securities Act.

Reasons for Furnishing the Information Statement

This information statement is being furnished solely to provide information to PDL stockholders who will receive shares of our common stock in the Distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any of our securities or any securities of PDL, nor is it to be construed as a solicitation of proxies in respect of the proposed Distribution or any other matter. We believe that the information contained in this information statement is accurate as of the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and neither we nor PDL undertakes any obligation to update the information except in the normal course of our respective public disclosure obligations and practices.

 

79


Table of Contents

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION

The following discussion is a summary of the material U.S. federal income tax consequences of the Distribution to U.S. Holders and Non-U.S. Holders (each as defined below) and a summary of the material U.S. federal income tax consequences of the ownership and disposition of LENSAR common stock for U.S. Holders and Non-U.S. Holders, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the Code, U.S. Treasury regulations promulgated thereunder, or Treasury Regulations, judicial decisions, and published rulings and administrative pronouncements of the IRS, in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a U.S. Holder or Non-U.S. Holder of PDL common stock or LENSAR common stock. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below.

This discussion is limited to U.S. Holders and Non-U.S. Holders that hold PDL common stock and will hold LENSAR common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income or the alternative minimum tax. In addition, it does not address consequences relevant to holders subject to special rules, including, without limitation:

 

   

U.S. expatriates and former citizens or long-term residents of the United States;

 

   

U.S. Holders whose functional currency is not the U.S. dollar;

 

   

persons who hold PDL common stock or will hold LENSAR common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;

 

   

banks, insurance companies, and other financial institutions;

 

   

real estate investment trusts or regulated investment companies;

 

   

brokers, dealers or traders in securities;

 

   

“controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax;

 

   

S corporations, partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);

 

   

tax-exempt organizations or governmental organizations;

 

   

persons deemed to sell PDL common stock or LENSAR common stock under the constructive sale provisions of the Code;

 

   

persons who hold or receive PDL common stock or will receive LENSAR common stock pursuant to the exercise of any employee stock option or otherwise as compensation;

 

   

tax-qualified retirement plans;

 

   

“qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds; and

 

   

persons subject to special tax accounting rules as a result of any item of gross income with respect to PDL common stock and LENSAR common stock being taken into account in an applicable financial statement.

 

80


Table of Contents

If an entity treated as a partnership for U.S. federal income tax purposes holds PDL common stock or LENSAR common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding PDL common stock or LENSAR common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.

THIS DISCUSSION IS FOR INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE DISTRIBUTION AND THE OWNERSHIP AND DISPOSITION OF LENSAR COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.

Definitions of U.S. Holder and Non-U.S. Holder

For purposes of this discussion, a “U.S. Holder” is a beneficial owner of PDL common stock or LENSAR common stock that, for U.S. federal income tax purposes, is or is treated as:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

   

a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.

For purposes of this discussion, a “Non-U.S. Holder” is any beneficial owner of PDL common stock or LENSAR common stock that is neither a U.S. Holder nor an entity treated as a partnership for U.S. federal income tax purposes.

U.S. Federal Income Tax Treatment of the Distribution

The Distribution is intended to be treated as part of a series of distributions in complete liquidation of PDL, and this discussion assumes this treatment will be respected. In accordance with such treatment, each PDL stockholder will be treated as receiving an amount equal to the fair market value of the LENSAR common stock received by such holder (including any fractional shares deemed received by the holder, as described below), determined as of the date of the Distribution. We refer to such amount as the “Distribution Amount.” Each PDL stockholder will be treated as receiving such Distribution Amount, together with any other property distributed to such holder as part of the liquidating distribution, in exchange for its PDL common stock. If a PDL stockholder holds different blocks of shares of PDL common stock (generally, shares of PDL common stock purchased or acquired on different dates or at different prices), the Distribution Amount must be allocated among the several blocks of shares in the proportion that the number of shares in a particular block bears to the total number of shares owned by the holder.

The Distribution will also be a taxable transaction for PDL in which PDL will recognize gain or loss based on the difference between the fair market value of the LENSAR common stock as of the date of the Distribution and PDL’s tax basis in such stock.

Although PDL will ascribe a value to the LENSAR common stock distributed in the Distribution, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher

 

81


Table of Contents

valuation to the distributed LENSAR common stock, particularly if, following the Distribution, the LENSAR common stock trades at prices significantly above the value ascribed to those shares by PDL. Such a higher valuation may affect the Distribution Amount and thus the tax consequences of the Distribution to holders of PDL common stock.

Any cash received by a holder of PDL common stock in lieu of a fractional share of LENSAR common stock will be treated as if such fractional share had been (i) received by the holder as part of the Distribution and then (ii) sold by such holder, via the transfer agent, for the amount of cash received. As described below, the basis of the fractional share deemed received by a holder of PDL common stock generally will equal the fair market value of such share on the date of the Distribution, and the amount paid in lieu of a fractional share will be net of the transfer agent’s brokerage fees.

The tax consequences of the Distribution will be affected by a number of facts that are yet to be determined, including the fair market value of LENSAR common stock on the date of the Distribution. PDL will provide its stockholders with tax information on an IRS Form 1099-DIV, informing them of the amount and character of distributions made during the taxable year, including the Distribution.

Notwithstanding PDL’s position that the Distribution will be treated as part of a series of distributions in complete liquidation of PDL, it is possible that the IRS or a court could determine that the Distribution is a current distribution. In addition, if PDL’s liquidation is abandoned or revoked, the Distribution would be treated as a current distribution. A current distribution would be treated as a dividend for U.S. federal income tax purposes to the extent of PDL’s current and accumulated earnings and profits. Under this treatment, amounts not treated as dividends for U.S. federal income tax purposes would constitute a return of capital and first be applied against and reduce a holder’s adjusted tax basis in its PDL common stock, but not below zero. Any excess would be treated as capital gain. Please consult your tax advisor with respect to the proper characterization of the Distribution.

Tax Basis and Holding Period of LENSAR Common Stock Received by Holders of PDL Common Stock

A PDL stockholder’s tax basis in LENSAR common stock received in the Distribution generally will equal the fair market value of such stock on the date of the Distribution, and the holding period for such shares will begin the day after the date of the Distribution.

U.S. Federal Income Tax Consequences of the Distribution and of the Ownership and Disposition of LENSAR Common Stock to U.S. Holders

Treatment of the Distribution

The Distribution Amount will be treated as received by a U.S. Holder (together with any other property distributed to the U.S. Holder as part of the liquidating distribution) in exchange for the U.S. Holder’s PDL common stock. The Distribution Amount allocable to a block of shares of PDL common stock owned by the U.S. Holder will reduce the U.S. Holder’s tax basis in such shares, but not below zero. Any excess Distribution Amount allocable to such shares will be treated as capital gain. Such gain generally will be taxable as long-term capital gain if the shares have been held for more than one year. Any tax basis remaining in a share of PDL common stock following the final liquidating distribution by PDL will be treated as a capital loss. The deductibility of capital losses is subject to limitations.

Distributions on LENSAR Common Stock

As described in the section entitled “Dividend Policy,” we do not anticipate declaring or paying cash dividends to holders of LENSAR common stock in the foreseeable future. However, if we do make distributions of cash or property on our common stock, such distributions will constitute dividends for U.S. federal income tax

 

82


Table of Contents

purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Dividends received by certain non-corporate U.S. Holders (including individuals) may be taxed at preferential rates applicable to qualified dividend income, provided certain holding period requirements are met. Corporate U.S. Holders that meet certain holding period and other requirements may be eligible for a dividends-received deduction for a portion of the dividend received. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a U.S. Holder’s adjusted tax basis in its LENSAR common stock, but not below zero. Any excess will be treated as capital gain. Such gain generally will be taxable as long-term capital gain if the shares have been held for more than one year.

Sale or Other Taxable Disposition of LENSAR Common Stock

Upon a subsequent sale or other taxable disposition of a share of LENSAR common stock, a U.S. Holder will recognize taxable gain or loss equal to the difference between the amount realized on the disposition of the share and the U.S. Holder’s tax basis in the share. The gain or loss will be capital gain or loss. A non-corporate U.S. Holder, including an individual, who has held the share for more than one year generally will be eligible for reduced tax rates for such long-term capital gains. The deductibility of capital losses is subject to limitations.

U.S. Federal Income Tax Consequences of the Distribution and of the Ownership and Disposition of LENSAR Common Stock to Non-U.S. Holders

Treatment of the Distribution

The Distribution Amount will be treated as received by a Non-U.S. Holder (together with any other property distributed to the Non-U.S. Holder as part of the liquidating distribution) in exchange for the Non-U.S. Holder’s PDL common stock. The Distribution Amount allocable to a block of shares of PDL common stock owned by the Non-U.S. Holder will reduce the Non-U.S. Holder’s tax basis in such shares, but not below zero. Any excess Distribution Amount allocable to such shares will be treated as capital gain and will be treated as described below under “—Sale or Other Taxable Disposition.”

Distributions on LENSAR Common Stock

As described in the section entitled “Dividend Policy,” we do not anticipate declaring or paying cash dividends to holders of LENSAR common stock in the foreseeable future. However, if we do make distributions of cash or property on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its LENSAR common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below under “—Sale or Other Taxable Disposition.”

Subject to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder of LENSAR common stock will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E, as applicable (or other applicable documentation), certifying qualification for the lower treaty rate). A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S.

 

83


Table of Contents

Holder maintains a permanent establishment in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.

Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.

Sale or Other Taxable Disposition

A Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the Distribution or the sale or other taxable disposition of LENSAR common stock (including with respect to any cash received in lieu of a fractional share of LENSAR common stock) unless:

 

   

the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable);

 

   

the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met;

 

   

in the case of the Distribution, PDL common stock constitutes a U.S. real property interest, or USRPI, by reason of PDL’s status as a U.S. real property holding corporation, or USRPHC, for U.S. federal income tax purposes; or

 

   

in the case of a sale or other taxable disposition of LENSAR common stock, LENSAR common stock constitutes a USRPI by reason of LENSAR’s status as a USRPHC for U.S. federal income tax purposes.

Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.

Gain described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty), which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.

With respect to the third and fourth bullet points above, each of PDL and LENSAR believes it is currently not, and does not anticipate becoming, a USRPHC. Because the determination of whether PDL or LENSAR, as applicable, is a USRPHC depends, however, on the fair market value of such company’s USRPIs relative to the fair market value of its non-U.S. real property interests and its other business assets, there can be no assurance PDL or LENSAR currently is not a USRPHC or will not become one in the future. Even if PDL or LENSAR is or were to become a USRPHC, gain arising from the sale or other taxable disposition by a Non-U.S. Holder of PDL common stock or LENSAR common stock, as applicable, will not be subject to U.S. federal income tax if such stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and such Non-U.S. Holder owned, actually and constructively, 5% or less of such stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period, or if another exception from these rules under the Code applies.

 

84


Table of Contents

Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.

Information Reporting and Backup Withholding

U.S. Holders

A U.S. Holder may be subject to information reporting and backup withholding when such holder receives the Distribution, receives cash in lieu of a fractional share of LENSAR common stock in the Distribution or receives payments on shares of LENSAR common stock or proceeds from the sale or other taxable disposition of such shares. Certain U.S. Holders are exempt from backup withholding, including corporations and certain tax-exempt organizations. A U.S. Holder will be subject to backup withholding if such holder is not otherwise exempt and:

 

   

the holder fails to furnish the holder’s taxpayer identification number, which for an individual is ordinarily his or her social security number;

 

   

the holder furnishes an incorrect taxpayer identification number;

 

   

the applicable withholding agent is notified by the IRS that the holder previously failed to properly report payments of interest or dividends; or

 

   

the holder fails to certify under penalties of perjury that the holder has furnished a correct taxpayer identification number and that the IRS has not notified the holder that the holder is subject to backup withholding.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS. U.S. Holders should consult their tax advisors regarding their qualification for an exemption from backup withholding and the procedures for obtaining such an exemption.

Non-U.S. Holders

The payments of dividends on LENSAR common stock will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a United States person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, as applicable, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any distributions on LENSAR common stock paid to the Non-U.S. Holder, regardless of whether such distributions constitute dividends or any tax was actually withheld. In addition, the Distribution and proceeds from the sale or other taxable disposition of LENSAR common stock (including with respect to any cash received in lieu of a fractional share of LENSAR common stock) within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting, if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a United States person, or the holder otherwise establishes an exemption. Proceeds from the Distribution or a sale or other taxable disposition of LENSAR common stock (including with respect to any cash received in lieu of a fractional share of LENSAR common stock) conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.

Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

 

85


Table of Contents

Additional Withholding Tax on Payments Made to Foreign Accounts

Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or FATCA) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on LENSAR common stock, or (subject to the proposed Treasury Regulations discussed below) the Distribution or gross proceeds from the sale or other disposition of LENSAR common stock (including with respect to any cash received in lieu of a fractional share of LENSAR common stock), in each case paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.

Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on stock. While withholding under FATCA would have applied also to payments of gross proceeds from the sale or other disposition of stock on or after January 1, 2019, proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds entirely. Taxpayers generally may rely on these proposed Treasury Regulations until final Treasury Regulations are issued.

Holders should consult their tax advisors regarding the potential application of withholding under FATCA to the Distribution and the ownership and disposition of LENSAR common stock.

 

86


Table of Contents

DIVIDEND POLICY

We currently do not anticipate paying any cash dividends in the foreseeable future. Instead, we anticipate that all of our earnings will be used to provide working capital, to support our operations and to finance the growth and development of our business. Any future determination to declare cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, if we were to enter into a credit facility in the future, we anticipate that the terms of such facility could limit or prohibit our ability to pay dividends.

 

87


Table of Contents

UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS

The following unaudited condensed pro forma financial statements consist of the unaudited pro forma balance sheet as of June 30, 2020 and the unaudited pro forma statements of operations for the six months ended June 30, 2020 and for the year ended December 31, 2019. These unaudited condensed pro forma financial statements were derived from our historical audited annual financial statements and unaudited condensed interim financial statements included elsewhere in this information statement.

The unaudited pro forma statements of operations have been prepared to give effect to the Spin-Off and the related Pro Forma Transactions (as defined below) as if the Pro Forma Transactions had occurred or had become effective as of January 1, 2019. The unaudited pro forma balance sheet has been prepared to give effect to the Pro Forma Transactions as though the Pro Forma Transactions had occurred on June 30, 2020.

In management’s opinion, the unaudited condensed pro forma financial statements reflect certain adjustments that are necessary to present fairly our unaudited pro forma results of operations and unaudited pro forma balance sheet as of and for the periods indicated. The pro forma adjustments give effect to events that are (i) directly attributable to the Spin-Off, (ii) factually supportable and, (iii) with respect to the statements of operations, expected to have a continuing impact on us.

The unaudited condensed pro forma financial statements have been adjusted to give effect to the following (the “Pro Forma Transactions”):

 

   

the effect of our post-separation capital structure, including the impact of the Recapitalization Transactions (as described in the accompanying notes to the unaudited condensed pro forma financial statements) and the contributions of $37.0 million in cash from PDL to us in exchange for an additional number of shares of our common stock;

 

   

the impact of the new grants under the LENSAR, Inc. 2020 Incentive Award Plan (“the 2020 Plan”) in connection with the Spin-Off; and

 

   

the impact of the separation and distribution agreement, the transition services agreement and other agreements among us and PDL and the provisions contained therein.

The unaudited condensed pro forma financial statements have been prepared based on available information, assumptions, and estimates that management believes are reasonable. The unaudited condensed pro forma financial statements are for illustrative and informational purposes only, and are not intended to represent what our financial position and results of operations would have been had we operated as an independent, stand-alone company during the periods presented or if the Pro Forma Transactions had occurred as of the dates indicated. The unaudited condensed pro forma financial statements also should not be considered indicative of our future financial position or future results of operations as an independent, publicly traded company.

The unaudited condensed pro forma financial statements reported below should be read in conjunction with our historical audited financial statements, unaudited interim condensed financial statements, and the accompanying notes in the “Index to Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement.

The unaudited condensed pro forma financial information is subject to change based on the finalization of the terms of the Spin-Off and related agreements. If the actual facts are different than these assumptions, then the unaudited condensed pro forma financial information will be different, and those changes could be material.

 

88


Table of Contents

LENSAR, Inc.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2020

(In thousands, except share and per share amounts)

 

     Historical
As reported
    Pro Forma
Adjustments
   

Notes

   Pro Forma  

Revenue

         

Product

   $ 8,096     $ —          $ 8,096  

Lease

     1,446       —            1,446  

Service

     1,411       —            1,411  
  

 

 

   

 

 

      

 

 

 

Total revenues

     10,953       —            10,953  
  

 

 

   

 

 

      

 

 

 

Cost of revenue (exclusive of amortization)

         

Product

     3,468       66     (E)      3,534  

Lease

     696       —            696  

Service

     1,275       36     (E)      1,311  
  

 

 

   

 

 

      

 

 

 

Total cost of revenue

     5,439       102          5,541  
  

 

 

   

 

 

      

 

 

 

Operating expenses

         

Selling, general and administrative expenses

     8,820       1,449     (A),(E)      10,269  

Research and development expenses

     3,005       187     (E)      3,192  

Amortization of intangible assets

     631       —            631  
  

 

 

   

 

 

      

 

 

 

Operating loss

     (6,942     (1,738        (8,680
  

 

 

   

 

 

      

 

 

 

Other income (expense)

         

Interest expense

     (1,275     1,275     (D)      —    

Other income, net

     34       —            34  
  

 

 

   

 

 

      

 

 

 

Loss before income taxes

     (8,183     (463        (8,646

Income tax expense

     —         —            —    
  

 

 

   

 

 

      

 

 

 

Net loss

   $ (8,183   $ (463      $ (8,646
  

 

 

   

 

 

      

 

 

 

Cumulative dividends in excess of interest expense on mandatorily redeemable preferred stock

     —         —            —    
  

 

 

   

 

 

      

 

 

 

Net loss attributable to common stockholders

   $ (8,183   $ (463      $ (8,646
  

 

 

   

 

 

      

 

 

 

Net loss per share attributable to common stockholders

         

Basic and diluted

   $ (7.65        $ (0.91

Weighted-average number of shares used in calculation of loss per share:

         

Basic and diluted

     1,070,000       8,439,403     (B)      9,509,403  

See accompanying Notes to Unaudited Condensed Pro Forma Financial Statements

 

89


Table of Contents

LENSAR, Inc.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2019

(In thousands, except share and per share amounts)

 

     Historical
As reported
    Pro Forma
Adjustments
   

Notes

   Pro Forma  

Revenue

         

Product

   $ 23,254     $ —          $ 23,254  

Lease

     4,181       —            4,181  

Service

     3,093       —            3,093  
  

 

 

   

 

 

      

 

 

 

Total revenues

     30,528       —            30,528  
  

 

 

   

 

 

      

 

 

 

Cost of revenue (exclusive of amortization)

         

Product

     12,030       395     (E)      12,425  

Lease

     2,264       —            2,264  

Service

     3,005       214     (E)      3,219  
  

 

 

   

 

 

      

 

 

 

Total cost of revenue

     17,299       609          17,908  
  

 

 

   

 

 

      

 

 

 

Operating expenses

         

Selling, general and administrative expenses

     17,147       9,611     (A),(E)      26,758  

Research and development expenses

     7,569       1,123     (E)      8,692  

Amortization of intangible assets

     1,227       —            1,227  
  

 

 

   

 

 

      

 

 

 

Operating loss

     (12,714     (11,343        (24,057
  

 

 

   

 

 

      

 

 

 

Other income (expense)

         

Interest expense

     (2,001     2,001     (D)      —    

Other income, net

     58       —            58  
  

 

 

   

 

 

      

 

 

 

Loss before income taxes

     (14,657     (9,342        (23,999

Income tax expense

     —         —            —    
  

 

 

   

 

 

      

 

 

 

Net loss

   $ (14,657   $ (9,342      $ (23,999
  

 

 

   

 

 

      

 

 

 

Cumulative dividends in excess of interest expense on mandatorily redeemable preferred stock

     —         —            —    
  

 

 

   

 

 

      

 

 

 

Net loss attributable to common stockholders

   $ (14,657   $ (9,342      $ (23,999
  

 

 

   

 

 

      

 

 

 

Net loss per share attributable to common stockholders

         

Basic and diluted

   $ (13.70        $ (2.62

Weighted-average number of shares used in calculation of loss per share:

         

Basic and diluted

     1,070,000       8,073,990     (B)      9,143,990  

See accompanying Notes to Unaudited Condensed Pro Forma Financial Statements

 

90


Table of Contents

LENSAR, Inc.

UNAUDITED PRO FORMA BALANCE SHEET

AS OF JUNE 30, 2020

(In thousands, except share and per share amounts)

 

     Historical
As reported
    Pro Forma
Adjustments
   

Notes

   Pro Forma  

Assets

         

Current assets:

         

Cash

   $ 4,715     $ 37,000     (C)    $ 41,715  

Accounts receivable, net of allowance for doubtful accounts of $24

     2,565       —            2,565  

Notes receivable, net of allowance for doubtful accounts of $11

     516       —            516  

Inventories

     12,633       —            12,633  

Prepaid and other current assets

     415       —            415  
  

 

 

   

 

 

      

 

 

 

Total current assets

     20,844       37,000          57,844  

Property and equipment, net

     843       —            843  

Equipment under lease, net

     2,147       —            2,147  

Notes and other receivable, long term, net of allowance for doubtful accounts of $13

     636       —            636  

Intangible assets, net

     12,735       —            12,735  

Other assets

     816       —            816  
  

 

 

   

 

 

      

 

 

 

Total assets

   $ 38,021     $ 37,000        $ 75,021  
  

 

 

   

 

 

      

 

 

 

Liabilities and stockholders’ (deficit) equity

         

Current liabilities:

         

Accounts payable

   $ 1,515     $ —          $ 1,515  

Accrued liabilities

     3,255       —            3,255  

Deferred revenue

     864       —            864  

Other current liabilities

     565       —            565  
  

 

 

   

 

 

      

 

 

 

Total current liabilities

     6,199       —            6,199  

Long-term operating lease liabilities

     48       —            48  

Note payable due to related party

     30,600       (30,600   (D)      —    

Mandatorily redeemable preferred stock

     37,214       (37,214   (D)      —    

Other long-term liabilities

     235       —            235  
  

 

 

   

 

 

      

 

 

 

Total liabilities

     74,296       (67,814        6,482  
  

 

 

   

 

 

      

 

 

 

Commitments and contingencies

         

Stockholders’ (deficit) equity:

         

Common stock, par value $0.01 per share, 150,000,000 shares authorized; 10,605,644 shares issued and outstanding on a pro forma basis

     11       95     (C),(D),(E)      106  

Additional paid-in capital

     10,116       104,719     (C),(D),(E)      114,835  

Accumulated deficit

     (46,402     —            (46,402
  

 

 

   

 

 

      

 

 

 

Total stockholders’ (deficit) equity

     (36,275     104,814          68,539  
  

 

 

   

 

 

      

 

 

 

Total liabilities and stockholders’ (deficit) equity

   $ 38,021     $ 37,000        $ 75,021  
  

 

 

   

 

 

      

 

 

 

See accompanying Notes to Unaudited Condensed Pro Forma Financial Statements

 

91


Table of Contents

LENSAR, Inc.

Notes to Unaudited Condensed Pro Forma Financial Statements

Note 1. Basis of Presentation

The accompanying unaudited condensed pro forma financial information was prepared in accordance with Article 11 of Regulation S-X of the SEC and presents the unaudited pro forma statements of operations and unaudited pro forma balance sheet based on the audited historical financial statements and unaudited interim condensed financial statements included in this information statement, after giving effect to the Pro Forma Transactions. The audited historical financial statements and unaudited interim condensed financial statements of LENSAR have been adjusted in the accompanying unaudited condensed pro forma financial information to give effect to pro forma events that are: (1) directly attributable to the Spin-Off and the related Pro Forma Transactions (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact on us.

The accompanying unaudited condensed pro forma financial information is presented for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by LENSAR if the Pro Forma Transactions had been consummated for the period presented or that will be achieved in the future.

Our historical statements of operations include allocations of certain expenses relating to support functions historically provided by PDL. These functions include, but are not limited to administration and organizational oversight, including employee benefits, finance and accounting, treasury and risk management, professional and legal services, among others. These historical allocations may not be indicative of our future cost structure. To operate as an independent public company, we expect to incur costs to replace those services previously provided by PDL in addition to incremental standalone costs. Due to the scope and complexity of these activities, the amount and timing of these incremental costs could vary and, consequently, are not included in the unaudited condensed pro forma financial statements.

The income tax effects of pro forma adjustments within the unaudited condensed pro forma financial information continue to be offset by our full valuation allowance.

All common share and per share amounts in the unaudited condensed pro forma financial information and notes thereto have been retroactively adjusted for all periods presented to give effect to a one-for-nine reverse stock split. See Note 17 to our audited financial statements and Note 15 to our unaudited condensed interim financial statements included elsewhere in this information statement for further information on this reverse stock split.

Note 2. Description of the Recapitalization Transactions, Capital Contributions and 2020 Plan

On July 10, 2020, we amended and restated our certificate of incorporation (the “Restated Charter”) to, among other things, (a) increase the number of shares of common stock ($0.01 par value per share) we are authorized to issue to 150,000,000 shares and (b) we issued to PDL a total of 3,414,825 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 (the “Series A Preferred Stock Recapitalization”). We currently do not have any shares of Series A Preferred Stock outstanding.

On July 13, 2020, we entered into a contribution and exchange agreement with PDL whereby we issued to PDL a total of 2,806,244 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 (the “Note Payable Recapitalization”).

 

92


Table of Contents

The Series A Preferred Stock Recapitalization, together with the Note Payable Recapitalization, is defined as the “Recapitalization Transactions”. The Recapitalization Transactions were accounted for under GAAP as an extinguishment of debt.

On July 9, 2020, our board of directors approved the 2020 Plan. Under the 2020 Plan, we may grant stock options, restricted stock, restricted stock unit awards and other stock-based awards.

On July 21, 2020 we issued an additional 740,740 shares of common stock to PDL in exchange for $8.0 million in cash (the “Capital Contribution”).

On July 22, 2020, our board of directors approved the grant of 1,847,298 shares of restricted stock in connection with the Spin-Off to certain individuals under the 2020 Plan in consideration of future services to be rendered to the Company. The vesting schedule of the restricted stock awards is (i) 40% vest on the later of three months following the closing of the Spin-Off or six months following the grant date (provided the Spin-Off has occurred prior to such date), (ii) 30% vest 18 months following grant date, and (iii) 30% vest 36 months following grant date. Additionally, the shares of restricted stock are subject to an excess share forfeiture restriction, whereby, as of the date of the Spin-Off, the number of shares issued to a participant pursuant to the grant notice plus all other shares of common stock held by such participant shall not exceed the target percentage stated in the participant’s restricted stock agreement multiplied by LENSAR’s fully diluted capitalization as of the date of the Spin-Off. Following the application of the excess share forfeiture restriction, the remaining shares shall be eligible to vest based on the aforementioned vesting schedule.

On August 24, 2020, we received cash of $29.0 million from PDL (the “Additional Capital Contribution”). We issued 746,767 shares of common stock to PDL in exchange for $8.3 million. The remaining $20.7 million was a cash contribution from PDL.

On September 10, 2020, we amended our amended and restated certificate of incorporation to effectuate a one-for-nine reverse stock split of our common stock.

Note 3. Pro Forma Adjustments

 

(A)

Reflects the removal of approximately $0.2 million and $0.5 million for the six months ended June 30, 2020 and for the year ended December 31, 2019, respectively, of separation costs directly related to the Pro Forma Transactions that were incurred during the historical periods and are not expected to have a continuing impact on our results of operations following the consummation of the Spin-Off.

 

(B)

Represents the basic and diluted weighted average number of shares of common stock outstanding as a result of pro forma adjustments. Refer to the table below for the reconciliation of the pro forma adjustments for the weighted average number of shares of common stock outstanding.

 

93


Table of Contents
     Shares  

Weighted average number of shares of common stock for the year ended December 31, 2019— Historical as reported

     1,070,000  

Reclassification of all shares of Series A Preferred stock

     3,414,825  

Conversion of note payable due to related party

     2,806,244  

Capital Contribution from PDL in exchange for common stock

     740,740  

Additional Capital Contribution from PDL in exchange for common stock (the Additional Capital Contribution)

     746,767  

Vested restricted stock awards under the 2020 Plan

     365,414  
  

 

 

 

Weighted average number of shares of common stock for the year ended December 31, 2019—Pro Forma

     9,143,990  
  

 

 

 

Increase in weighted average number of shares for vested restricted stock awards under the 2020 Plan

     365,414  
  

 

 

 

Weighted average number of shares of common stock for the six months ended June 30, 2020—Pro Forma

     9,509,403  
  

 

 

 

 

(C)

Represents the increase to cash of $37.0 million and the increase to common stock and additional paid-in capital of less than $0.1 million and $37.0 million, respectively, to reflect the Capital Contribution and the Additional Capital Contribution by PDL to us in exchange for the issuance of 1,487,507 shares of our common stock.

 

(D)

Represents the effect of the Recapitalization Transactions which resulted in the extinguishment of our note payable due to related party and our Series A Preferred stock of $30.6 million and of $37.2 million, respectively, and the increase to common stock and additional paid-in capital of $0.1 million and $67.1 million, respectively, in connection with the issuance of 6,221,069 shares of our common stock to extinguish our note payable and Series A Preferred stock. The Recapitalization Transactions with PDL resulted in an adjustment to equity for an aggregate gain on extinguishment of $0.6 million. An adjustment was also recorded in the unaudited pro forma statements of operations to decrease interest expense by $1.3 million and $2.0 million for the six months ended June 30, 2020 and for the year ended December 31, 2019, respectively, to reflect the elimination of interest expense associated with the Recapitalization Transactions.

The unaudited pro forma statement of operations does not include an adjustment to reflect a loss on extinguishment, which would have been incurred if the Recapitalization Transactions had been effective on January 1, 2019, as such event is one-time in nature and not expected to have a continuing impact on our results of operations.

Due to the change in the carrying values of our note payable due to related party and our Series A Preferred Stock as of the actual extinguishment date in July 2020, we expect to recognize an approximate $2.7 million gain on extinguishment which will be accounted for as a capital transaction between PDL and us and, accordingly, recorded directly within equity during the three months ended September 30, 2020.

 

(E)

Represents the estimated stock-based compensation expense under the 2020 Plan for the remaining shares of restricted stock following the application of the excess share forfeiture restriction, which resulted in 20,230 restricted stock awards not considered probable of vesting as of the assumed Spin-Off date used in the unaudited condensed pro forma financial information. The fair value of awards granted under the 2020 Plan will be recognized using a straight-line attribution method over the service period, except for portions of the award subject to performance conditions which will be recognized ratably over the service period for each separate performance vesting tranche. The grant date fair values of the restricted stock awards were determined based on the fair value of our underlying common stock as of the date of the grant using preliminary valuation techniques with the most reliable information available. Actual results may differ from these estimates and such differences may be material.

 

94


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presented below refer to and should be read in conjunction with the audited financial statements, unaudited condensed interim financial statements and the corresponding notes, each included elsewhere in this information statement. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, 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 Factors” section for a discussion of the uncertainties, risks and assumptions associated with these statements.

Spin-Off from PDL BioPharma, Inc.

PDL is considering spinning off its medical device business. The Spin-Off will create 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. Following the Spin-Off, we will become a stand-alone company and our business will consist of the assets, liabilities and operations of PDL’s medical device business.

Our historical financial statements have been prepared on a stand-alone basis and are derived from PDL’s consolidated financial statements and accounting records. Our financial statements reflect, in conformity with accounting principles generally accepted in the 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 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 are 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 have been 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.

Transactions with PDL that are expected to be settled for cash are reflected as outstanding in our balance sheets. These transactions primarily include payables to PDL related to certain historical cross charge cost allocations, the loan payable to PDL, and the Series A Preferred Stock held by PDL. The cash flows related to payables due to PDL for these certain historical cross charge cost allocations are reflected in our statements of cash flows as operating activities. The cash flows related to the loan payable due to PDL and our Series A Preferred Stock are reflected in our statements of cash flows as financing activities since these balances represent amounts financed by PDL. Transactions with PDL that have not been historically settled in cash or are not expected to be settled in cash have been included in the balance sheets as a component of equity and are reflected in our statements of cash flows as financing activities. In July 2020, we entered into a contribution and exchange agreement with PDL, whereby we issued to PDL a total of 2,806,244 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. In July 2020, we issued to PDL a total of 3,414,825 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.

 

95


Table of Contents

Following the Spin-Off, we expect to perform the functions described above using our own resources or purchased services. For an interim period, however, some of these functions may continue to be provided by PDL and we expect to enter into one or more transition service agreements with PDL in connection with the Spin-Off.

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. As we continue to innovate, we are designing a next-generation, integrated workstation, ALLY, which combines an enhanced femtosecond laser with a phacoemulsification system in a compact, mobile workstation that is designed to allow surgeons to perform a femtosecond laser assisted cataract procedure in a single operating room using a single device. We expect this combination product would 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.

Our current product portfolio consists of the Streamline IV LENSAR Laser System 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 workstation, 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 anticipate submitting an application for 510(k) clearance to the FDA by the end of the first quarter of 2022 and 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 in the United States and distributors in Germany, China, South Korea and other targeted international geographies. We believe there is significant opportunity for us to expand our presence in these countries and other markets and regions. In the United States, we sell our products through a direct sales organization that, as of June 30, 2020, consisted of 30 commercial team professionals, including regional sales managers, clinical applications and outcomes specialists, field service, technology and customer support personnel. We currently manufacture our LENSAR Laser System at a facility in Orlando, 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 a potential short-term disruption in the supply.

 

96


Table of Contents

Our revenue decreased from $14.0 million for the six months ended June 30, 2019 to $11.0 million for the six months ended June 30, 2020, representing a decline of 22%, primarily on account of the impact of COVID-19 as discussed below. Our revenue increased from $24.4 million for the year ended December 31, 2018 to $30.5 million for the year ended December 31, 2019, representing growth of 25%. Our net losses were $6.4 million, $8.2 million, $12.6 million and $14.7 million for the six months ended June 30, 2019 and June 30, 2020 and for the years ended December 31, 2018 and December 31, 2019, respectively. Additionally, our installed base of LENSAR Laser Systems has increased from 193 as of June 30, 2019 to 211 as of June 30, 2020. Although our installed base of LENSAR Laser Systems increased, the decrease in revenue was primarily driven by the impact of the COVID-19 pandemic and the associated decline in elective surgical procedures.

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;

 

   

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; 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, and 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.

Additionally, 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.

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. 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. 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

 

97


Table of Contents

communities while continuing our business activities where possible and legally permitted. To date, implementation of these measures has not required material expenditures, but the suspension of non-essential medical services has significantly impacted our revenues and cash flows and continues to disrupt our commercial operations. During the second quarter of 2020, we made lease concessions to several customers related to the effects of 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. We have also experienced minor supply chain disruptions as a result of COVID-19. We are continuing to monitor developments with respect to the outbreak and its potential impacts on our operations and those of 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 outside the 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 LENSAR 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.

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, labor and stock-based compensation costs, packaging costs, depreciation expense, freight and other related costs, which include shipping, inspection and excess and obsolete inventory charges. Cost of lease revenue primarily consists of depreciation expense associated with leased equipment and shipping costs associated with delivery of these systems. Cost of service revenue primarily consists of costs associated with providing maintenance services under the extended warranty contracts.

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 in the 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 commercialization of 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 the SEC, as well as increased expenses for director and officer insurance, investor relations and professional services.

 

98


Table of Contents

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, 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 a single unit.

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

Interest expense primarily consists of interest expense associated with the Series A Preferred Stock and a loan payable to PDL. The Series A Preferred Stock is classified as a liability on our balance sheet and related dividends are recorded as interest expense using the effective interest method. In July 2020, we entered into a contribution and exchange agreement with PDL, whereby we issued to PDL a total of 2,806,244 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. In July 2020, we issued to PDL a total of 3,414,825 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.

Results of Operations

Comparison of Six Months Ended June 30, 2020 and 2019

 

(Dollars in thousands)

   Six Months Ended June 30,      Change from
Prior Year %
 
   2020      2019  

Revenue:

        

Product

   $ 8,096      $ 10,433        (22.4 )% 

Lease

     1,446        2,060        (29.8 )% 

Service

     1,411        1,507        (6.4 )% 
  

 

 

    

 

 

    

Total revenue

   $ 10,953      $ 14,000        (21.8 )% 

Cost of revenue (excluding intangible amortization):

        

Product

   $ 3,468      $ 5,806        (40.3 )% 

Lease

     696        1,267        (45.1 )% 

Service

     1,275        1,638        (22.2 )% 
  

 

 

    

 

 

    

Total cost of revenue

   $ 5,439      $ 8,711        (37.6 )% 

 

99


Table of Contents

Revenue

Total revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 decreased by $3.0 million, or 22%. The decrease was primarily driven by the impact of the COVID-19 pandemic and the associated decline in elective surgical procedures.

Product revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 decreased by $2.3 million, or 22.4%. The decrease was primarily attributable to a decrease of $1.5 million related to a net decrease in sales of new and refurbished LENSAR Laser Systems. The number of procedures performed decreased by 18.4% in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to the impact of the COVID-19 pandemic.

Service revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 decreased by $0.1 million primarily due to decreased sales of our extended warranty services.

Geographically, the decrease in product and service revenue was primarily attributable to lower international net revenue due to decreased LENSAR Laser System sales. Our international sales represented 53.5% and 61.0% of product and service revenue for the six months ended June 30, 2020 and 2019, respectively. The decline was primarily driven by a decrease in LENSAR Laser System sales, PIDs and procedure licenses, comprised of a $2.4 million decrease in sales in South Korea, a $0.2 million decrease in Europe and a $0.2 million decrease in the United States, partially offset by $0.4 million increase in other countries.

Lease revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 decreased by $0.6 million primarily related to the impact of the COVID-19 pandemic, including $0.3 million of lease concessions made in the period ended June 30, 2020.

Cost of Revenue

Total cost of revenue for the six months ended June 30, 2020 was $5.4 million, a decrease of 37.6% when compared to total cost of revenue of $8.7 million for the six months ended June 30, 2019.

Cost of product revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 decreased by $2.3 million, or 40.3%. The decrease was primarily attributable to a decrease in the number of new and refurbished LENSAR Laser Systems that were sold in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. In addition, there was a decrease in the number of PIDs and procedure licenses sold in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Cost of service revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 decreased by $0.4 million, or 22.2%. This decrease was primarily attributable to a decrease in service, maintenance and warranty costs associated with lower sales volume. Although more systems were covered under service contracts, fewer service requests were made due to the COVID-19 pandemic.

Cost of lease revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 decreased by $0.6 million, or 45.1%. This decrease was primarily attributable to a decrease in rental depreciation as LENSAR Laser Systems reach the end of their depreciable life.

Operating Expenses

Selling, General, and Administrative. Selling, general, and administrative expenses for the six months ended June 30, 2020 were $8.8 million, an increase of $0.5 million, or 6.1%, compared to $8.3 million for the six months ended June 30, 2019. The increase was due to a $0.5 million increase in expenses allocated from PDL for corporate support functions, a $0.3 million increase in professional service fees, and a $0.3 million increase in

 

100


Table of Contents

personnel expense as headcount increases to support our continued growth. The increase was partially offset by a decrease of $0.3 million in trade show expenses due to cancellations related to COVID-19 and a $0.3 million decrease in travel expenses as a result of travel restrictions related to COVID-19. Selling, general and administrative expenses include $2.8 million and $2.3 million of expenses allocated from PDL for corporate support functions for the six months ended June 30, 2020 and 2019, respectively.

Research and Development. Research and development expenses for the six months ended June 30, 2020 were $3.0 million, an increase of $1.2 million, or 64.3%, compared to $1.8 million for the six months ended June 30, 2019. The increase was primarily attributable to a $0.7 million increase in research and development consulting services, as well as increased project costs of $0.4 million related to developing ALLY.

Amortization of Intangible Assets. Amortization of intangible assets is $0.6 million for the six months ended June 30, 2020 and 2019.

Other Income (Expense)

Interest expense increased by $0.3 million, or 33.7%, to $1.3 million for the six months ended June 30, 2020 from $1.0 million for the six months ended June 30, 2019. The increase was attributable to a $0.3 million increase of interest expense related to the loan payable to PDL in which the loan principal increased from December 31, 2019 to June 30, 2020.

Income Taxes

Prior to the Spin-Off, we are included in the consolidated federal tax return of PDL. The provision for income taxes is calculated by using a “separate return” method. Under this method, we are assumed to file a separate return with the applicable tax authority(ies). The current provision is the amount of tax payable or refundable on the basis of a hypothetical, current-year separate return. Deferred taxes are provided on temporary differences and on any attributes being carried forward that could be claimed on the hypothetical return. The need for a valuation allowance is assessed on a separate company basis and on projected separate return assets.

We maintain a full valuation allowance against our deferred tax assets.

Comparison of the Years Ended December 31, 2019 and 2018

 

(Dollars in thousands)    2019      2018      Change from
Prior Year %
 

Revenue:

        

Product

   $ 23,254      $ 17,239        34.9

Lease

     4,181        4,567        (8.5 )% 

Service

     3,093        2,582        19.8
  

 

 

    

 

 

    

Total revenue

   $ 30,528      $ 24,388        25.2

Cost of revenue (excluding intangible amortization):

        

Product

   $ 12,030      $ 8,315        44.7

Lease

     2,264        2,854        (20.7 )% 

Service

     3,005        2,471        21.6
  

 

 

    

 

 

    

Total cost of revenue

   $ 17,299      $ 13,640        26.8

Revenue

Total revenue for the year ended December 31, 2019 was $30.5 million, an increase of 25.2% when compared to total revenue of $24.4 million for the year ended December 31, 2018.

 

101


Table of Contents

Product revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018 increased by $6.0 million, or 34.9%. The increase was primarily attributable to an increase of $4.4 million in sales of PIDs and procedure licenses and an increase of $1.6 million relating to sales of an increased number of new and refurbished LENSAR Laser Systems. During the year ended December 31, 2019 we experienced a net increase of 23 laser systems in the field, which contributed to a 33% increase in the number of procedures performed with our laser systems in the year ended December 31, 2019.

Service revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018 increased by $0.5 million primarily due to increased sales of our extended warranty services.

Geographically, the increase in product and service revenue is primarily attributable to higher international net revenues due to increased sales volume. Changes in price did not have a material impact. Our international sales represented 59% and 49% of product and service revenues for the years ended December 31, 2019 and 2018, respectively. The growth is primarily driven by an increase in product sales, specifically systems, PID and procedure licenses, comprised of a $5.0 million increase in sales in South Korea, a $1.1 million increase in Europe and a $0.9 million increase in the United States, partially offset by $0.5 million decrease in other countries.

Lease revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018 decreased by $0.4 million primarily due to the conversion of three rental systems to sold systems and the timing of rental systems being placed in service within 2018 as compared to 2019.

Cost of Revenue

Total cost of revenue for the year ended December 31, 2019 was $17.3 million, an increase of 26.8% when compared to total cost of revenue of $13.7 million for the year ended December 31, 2018.

Cost of product revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018 increased by $3.7 million or 44.7%. The increase was primarily attributable to a $2.7 million increase in cost of materials and production for systems sold and a $0.9 million increase in cost of materials associated with the increase in PID sales, both of which were directly related to an increased number of LENSAR Laser Systems that were sold. We expect our cost of product revenue to continue to increase in absolute dollars as we increase our sales volume.

Cost of service revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018 increased by $0.5 million or 21.6%. This increase was primarily attributable to service, maintenance and warranty costs associated with increased sales volume and is also a function of a higher amount of systems under service agreements in the year ended December 31, 2019.

Cost of lease revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018 decreased by $0.6 million, or 20.7%. This decrease was primarily attributable to a decrease in rental depreciation, as we had fewer leased systems in the field due to the conversion of three rental systems to sold systems, and shipping costs related to leased systems.

Operating Expenses

Selling, General, and Administrative. Selling, general, and administrative expenses for the year ended December 31, 2019 were $17.1 million, an increase of $1.0 million, or 6.2%, compared to $16.1 million for the year ended December 31, 2018. The increase was primarily due to a $0.9 million increase in personnel costs as a result of larger incentive bonuses associated with increased revenues as well as additions in headcount to support our continued growth. Selling, general and administrative expenses include $4.4 million and $5.0 million of expenses allocated from PDL for corporate support functions for the years ended December 31, 2019 and 2018, respectively.

 

102


Table of Contents

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 of our direct commercial organization in the United States. Additionally, if we receive regulatory clearance for ALLY, we anticipate additional increases in selling, general and administrative expense as we prepare for and launch commercialization of 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 the SEC, as well as increased expenses for director and officer insurance, investor relations and professional services.

Research and Development. Research and development expenses for the year ended December 31, 2019 were $7.6 million, an increase of $4.8 million, or 171.8%, compared to $2.8 million for the year ended December 31, 2018. The increase was primarily attributable to a $4.2 million increase in project costs, including the exclusive licensing of intellectual property from Doug Patton and Ophthalmic Synergies, LLC for $3.5 million, for use in developing ALLY and higher lab and laser supply costs. Research and development personnel costs also increased by $0.6 million due to the continued development of ALLY.

As we continue to advance the development of ALLY, we expect our research and development expenditures to increase from 2019 levels, as we anticipate that the planned development of ALLY will consume significant capital resources.

Amortization of Intangible Assets. Amortization of intangible assets increased by $0.1 million, or 7.9%, to $1.2 million for the year ended December 31, 2019 from $1.1 million the year ended December 31, 2018. The increase is primarily due to the acquisition of certain intellectual property in 2019.

Other Income (Expense)

Interest expense decreased by $1.3 million, or 39.8%, to $2.0 million for the year ended December 31, 2019 from $3.3 million for the year ended December 31, 2018. The decrease of $1.3 million was due to a reduction in the dividend rate of our Series A Preferred Stock from 15% to 5% effective January 1, 2019. The decrease was offset by an increase of $0.2 million of interest expense related to the note payable to PDL in which the loan principal increased from December 31, 2018 to December 31, 2019.

Income Taxes

In general, our income tax returns are subject to examination by U.S. federal, state and local tax authorities for tax years 2009 forward. There was no interest and penalties associated with unrecognized tax benefits accrued on the balance sheet as of December 31, 2019 and 2018, respectively. We do not anticipate any material change to the amount of our unrecognized tax benefit over the next 12 months.

Non-GAAP Financial Measure

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 measure we use is set forth below for the six months ended June 30, 2020 and 2019 and the years ended December 31, 2019 and 2018.

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
(in thousands)    2019      2018      2020      2019  

EBITDA

   $ (8,848    $ (4,726    $ (5,503    $ (3,358

 

103


Table of Contents

EBITDA is defined as net loss before interest expense, income tax expense, interest income, depreciation and amortization of intangible assets. EBITDA is a non-GAAP financial measure. For more information about how we use this non-GAAP financial measure in our business, the limitations of this measure, and a reconciliation of EBITDA to net loss, the most directly comparable GAAP measure, please see the section titled “Information Statement Summary—Summary Historical Financial Data.”

Liquidity and Capital Resources

Overview

For the six months ended June 30, 2020 and 2019, we had net losses of $8.2 million and $6.4 million, respectively, and as of June 30, 2020, we had an accumulated deficit of $46.4 million. For the years ended December 31, 2019 and 2018, we had net losses of $14.7 million and $12.6 million, respectively, and as of December 31, 2019, we had an accumulated deficit of $38.2 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, pursue development and FDA clearance of our proprietary, next-generation, integrated workstation, 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, we also expect the ongoing COVID-19 pandemic will negatively affect our capital requirements and the availability of funds to finance those requirements outside of cash provided by PDL.

In May 2017, we entered into a credit agreement with PDL whereby, as of July 2020, we borrowed $32.6 million from PDL at an interest rate of 4% per annum. The credit agreement is included in note payable due to related party on our balance sheets and the aggregate principal balance outstanding as of June 30, 2020 and December 31, 2019 was $30.6 million and $20.2 million, respectively. In July 2020, we entered into a contribution and exchange agreement with PDL, whereby we issued to PDL a total of 2,806,244 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 in May 2017. The Series A Preferred Stock has an aggregate liquidation preference of $30.0 million, plus all accrued and unpaid dividends, whether or not declared. Dividends on each share of the Series A Preferred Stock accrued on an annual basis at an initial rate of 15.00% per annum of the liquidation preference, and decreased to 5.00% per annum of the liquidation preference effective January 1, 2019. In July 2020, we also exchanged all 30,000 shares of our Series A Preferred Stock, including any accrued and unpaid dividends thereon, for a total of 3,414,825 shares of our common stock. We currently do not have any shares of Series A Preferred Stock outstanding. See Note 17 to our audited annual financial statements and Note 15 to our unaudited condensed interim financial statements included elsewhere in this information statement for more detail.

In July 2020, we issued an additional 740,740 shares of our common stock to PDL in exchange for $8.0 million.

On August 4, 2020, PDL committed that through August 5, 2021 it will provide financial support to us of up to $20.0 million to fund our operating, financing and investing activities. This obligation was fulfilled on August 24, 2020 in connection with the receipt of a capital contribution of $29.0 million from PDL. We issued 746,767 shares of common stock to PDL in exchange for $8.3 million. The remaining $20.7 million was a cash contribution from PDL.

Historically, PDL, as our parent, has provided us cash management and other treasury services. Following the Spin-Off, PDL will no longer provide such services, and we expect our primary sources of liquidity will be our cash on hand, cash from the sale and lease of our systems and the sale of our consumables, and funds from additional financing activities. As of September 14, 2020, we expect our cash, together with cash generated from the sale of our products, to be sufficient to operate our business for at least the next 12 months.

 

104


Table of Contents

However, if these sources are insufficient to satisfy our liquidity requirements, we may seek additional funds from public and private stock offerings, borrowings under credit facilities or other sources. Such capital may not be available on favorable terms, or at all. Furthermore, 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. If we cannot raise capital on acceptable terms, we may not be able to develop or enhance our products, execute our business plan, take advantage of future opportunities or respond to competitive pressures, changes in our supplier relationships or unanticipated customer requirements. 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-generation laser 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 statements of cash flows (in thousands):

 

     Six Months Ended June 30,      Year Ended December 31,  
     2020      2019      2019      2018  

Net cash used in operating activities

   $ (11,739    $ (3,273    $ (12,589    $ (1,885

Net cash used in investing activities

     (235      (1,735      (2,089      (3,892

Net cash provided by financing activities

     12,074        4,923        15,949        6,955  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and restricted cash

   $ 100      $ (85    $ 1,271      $ 1,178  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Activities

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 an increase in net operating assets of $5.3 million, partially offset by non-cash charges of $1.8 million. The increase in net operating assets was primarily due to purchases of inventory of $6.0 million partially offset by a decrease in account receivable, net of $0.7 million. Non-cash charges consisted of depreciation, amortization, loss on disposal of property and equipment and stock-based compensation.

 

105


Table of Contents

Net cash used in operating activities for the six months ended June 30, 2019 was $3.3 million, consisting primarily of a net loss of $6.4 million, partially offset by a decrease in net operating assets of $0.7 million and non-cash charges of $2.4 million. The decrease in net operating assets was primarily due to changes in current and long-term accrued liabilities. Non-cash charges consisted of depreciation, amortization, and stock-based compensation.

Net cash used in operating activities for 2019 was $12.6 million, consisting primarily of a net loss of $14.7 million and an increase in net operating assets of $2.4 million, partially offset by non-cash charges of $4.4 million. The increase in net operating assets was primarily due to purchases of inventory of $4.8 million offset by accrued liabilities of $1.9 million. Non-cash charges consisted of depreciation, amortization, and stock-based compensation.

Net cash used in operating activities for 2018 was $1.9 million, consisting primarily of a net loss of $12.6 million partially offset by non-cash charges of $4.8 million and a decrease in net operating assets of $5.9 million. The decrease in net operating assets was primarily due to changes in current and long-term accrued liabilities. Non-cash charges consisted of depreciation, amortization, and stock-based compensation.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2020 was $0.2 million, which consisted of capital expenditures of $0.2 million for property and equipment.

Net cash used in investing activities for the six months ended June 30, 2019 was $1.7 million, which consisted of $1.7 million costs to acquire intangible assets.

Net cash used in investing activities for 2019 was $2.1 million, which consisted of $1.7 million costs to acquire intangible assets and capital expenditures of $0.4 million for property and equipment.

Net cash used in investing activities for 2018 was $3.9 million, which consisted of $2.1 million costs to acquire intangible assets, capital expenditures of $1.2 million for property and equipment, and $0.6 million related to payments of contingent consideration.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2020 was $12.1 million, primarily due to the proceeds of $10.4 million from the loan with PDL and a $1.8 million contribution from PDL partially offset by a $0.1 million distribution to PDL.

Net cash provided by financing activities for the six months ended June 30, 2019 was $4.9 million, primarily due to the proceeds of $4.2 million from the loan with PDL and a $1.8 million contribution from PDL partially offset by a $1.1 million payment of contingent consideration.

Net cash provided by financing activities for 2019 was $15.9 million, primarily due to the proceeds of $13.2 million from the loan with PDL and a $3.8 million contribution from PDL, partially offset by a $1.1 million payment of contingent consideration.

Net cash provided by financing activities for 2018 was $7.0 million, primarily due to the proceeds of $3.5 million from the loan with PDL and a $3.8 million contribution from PDL, partially offset by a $0.2 million payment of contingent consideration.

Off Balance Sheet Arrangements

As of December 31, 2019, we did not have any off-balance sheet arrangements, as defined under SEC Regulation S-K Item 303(a)(4)(ii).

 

106


Table of Contents

Contractual Obligations

The following table summarizes our contractual obligations and commercial commitments as of December 31, 2019:

 

     Payments Due by Period  
(in thousands)    Less than 1 year      1-3 years      3-5 years      Thereafter      Total  

Operating leases(1)

   $ 592      $ 353      $ —        $ —        $ 945  

Purchase obligations(2)

     9,600        800        —          —          10,400  

Loan payable to Parent(3)

     —          —          20,200        —          20,200  

Series A Preferred Stock(3)(4)

     —          —          —          49,923        49,923  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 10,192      $ 1,153      $ 20,200      $ 49,923      $ 81,468  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Amounts represent the lease for the LENSAR office and manufacturing facility in Orlando, Florida and operating leases for office equipment.

(2)

Consists of a $10.4 million minimum purchase obligation for inventory components for the manufacture and supply of certain components, $1.0 million of which are guaranteed by PDL. LENSAR expects to meet these requirements.

(3)

In July 2020, we entered into a contribution and exchange agreement with PDL, whereby we issued to PDL a total of 2,806,244 shares of our common stock in exchange for the $32.6 million outstanding under the Credit Agreement. We currently do not have any loans outstanding with PDL. In July 2020, we also exchanged all 30,000 shares of our Series A Preferred Stock, including any accrued and unpaid dividends thereon, for a total of 3,414,825 shares of our common stock. We currently do not have any shares of Series A Preferred Stock outstanding.

(4)

Consists of the aggregate liquidation preference of our Series A Preferred Stock of $30 million, plus cumulative dividends accrued and accruing through the redemption date of May 11, 2027.

Some of the amounts included in this table 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 reflected in the table.

Royalty and Milestone Payments

In connection with the acquisition of certain intellectual property in September 2019, we could be required to make milestone payments in the amount of $2.4 million, which are contingent upon the regulatory approval and commercialization of ALLY. In addition, we acquired certain intellectual property, which if used in the development of ALLY could result in additional royalty payments.

Quantitative and Qualitative Disclosures about Market Risk

Our cash is held in deposit demand accounts at a large financial institution in amounts in excess of the Federal Deposit Insurance Corporation, or FDIC, insurance coverage limit of $250,000 per depositor, per FDIC-insured bank, per ownership category. Management has reviewed the financial statements of this institution and believe it has sufficient assets and liquidity to conduct its operations in the ordinary course of business with little or no credit risk to us.

Financial instruments that potentially subject us to concentrations of credit risk principally consist of accounts receivable and notes receivable. We limit our credit risk with respect to accounts receivable and notes receivable by performing credit evaluations when deemed necessary, but we do not require collateral to secure amounts owed to us by our customers. We do have the ability to disable the LENSAR Laser System’s ability to operate for lack of payment and, in the case of notes receivable, repossess the LENSAR Laser System if scheduled payments lapse.

Inflationary factors, such as increases in our costs of revenues and operating expenses, may adversely affect our operating results. Although we do not believe inflation has had a material impact on its financial condition,

 

107


Table of Contents

results of operations or cash flows to date, a high rate of inflation in the future may have an adverse effect on its ability to maintain and increase its gross margin or decrease its operating expenses as a percentage of its revenues if its selling prices of its products do not increase as much or more than its increase in costs.

We currently have very infrequent and limited exposure to foreign currency fluctuations and do not engage in any hedging activities as part of our normal course of business.

Critical Accounting Policies and Significant Estimates

The preparation of financial statements and related disclosures in conformity with U.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 its Financial Statements and accompanying notes. Note 2, Summary of Significant Accounting Policies, to our financial statements included in this information statement describes the significant accounting policies and methods used in the preparation of 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 on accounting estimates and judgments on our financial condition and results of operations due to COVID-19 has introduced additional uncertainties. Actual results may differ from these estimates and such differences may be material.

Our significant accounting policies are more fully described and discussed in the notes to our financial statements. We believe that the following accounting policies described below are critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. We evaluate our estimates and assumptions on an ongoing basis.

Product and Service Revenue Recognition

Revenue is recognized from the sale of products and services when we transfer control of such promised products and services. The amount of revenue recognized reflects the consideration we expect to be entitled to receive in exchange for these products and services. A five-step model is utilized to achieve the core principle and includes the following steps: (1) identify the customer contract; (2) identify the contract’s performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when the distinct performance obligations are satisfied.

We principally derive our revenue from the sale and lease of the LENSAR Laser System and the sale of other related products and services, including PIDs, procedure licenses, and extended warranty service agreements. A procedure license represents a one-time right to utilize the LENSAR Laser System surgical application in connection with a surgery procedure. Without separately procuring procedure licenses granted by us, either together with the purchase of the LENSAR Laser System or under separate subsequent contracts, the customer does not have the right to use the surgical software application to perform surgical procedures. Typically, returns are not allowed.

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is required to determine the level of interdependency between the LENSAR Laser System and the sale of other related products and services. We evaluate each product or service promised in a contract to determine whether it represents a distinct performance obligation. A performance obligation is distinct if (1) the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and (2) the products or service is separately identifiable from other promises in the contract.

 

108


Table of Contents

For contracts involving the sale or lease of the LENSAR Laser System, our performance obligations generally include the LENSAR Laser System, PID, procedure license, and extended warranty service agreements. In addition, our customer contracts contain provisions for installation and training services, which are not assessed as performance obligations as they are determined to be immaterial promises in the context of the contract and are required for a customer to use the LENSAR Laser System.

We have determined that the LENSAR Laser System, PID and procedure license are each capable of being distinct because they are each sold separately and the customer can benefit from these products with the other readily available resources that are sold by us. In addition, we have determined each are separately identifiable because the LENSAR Laser System, PID and procedure license (1) are not highly interdependent or interrelated; (2) do not modify or customize one another; and (3) we do not provide a significant service of integrating the promised goods into a bundled output. This is because we are able to fulfill each promise in the contract independently of the others. That is, we would be able to fulfill our promise to transfer the LENSAR Laser System even if the customer did not purchase a PID or procedure license and we would be able to fulfill our promise to provide the PID or the procedure license even if the customer acquired the LENSAR Laser System separately.

The extended warranty, unlike our standard product warranty, is a performance obligation because it provides an incremental service that is beyond ensuring the product delivered will be consistent with stated contractual specifications.

When a contract contains multiple performance obligations, revenue is allocated to each performance obligation based on its relative standalone selling price.

We recognize revenue as the performance obligations are satisfied by transferring control of the product or service to a customer as described below. We record a contract liability, or deferred revenue, when we have an obligation to provide a product or service to the customer and payment is received or due in advance of our performance.

Product revenue. We recognize revenue for the sale of the products at a point in time when control is transferred to customers.

Equipment. LENSAR Laser System sales are recognized as Product revenue when the Company transfers control of the system. This usually occurs after the customer signs a contract, we install the system, and we perform the requisite training for use of the system for direct customers. LENSAR Laser System sales to distributors are recognized as revenue upon shipment.

PID and procedure licenses. The LENSAR Laser System requires both a PID and a procedure license to perform each procedure. We recognize Product revenue for PIDs when we transfer control of the PID. We recognize Product revenue for procedure licenses, which represent a one-time right to utilize the LENSAR Laser System surgical software application, at the point in time when control of the procedure license is transferred to the customer. Control transfers at the time a customer receives the license key. For the sale of PIDs and procedure licenses, we may offer volume discounts to certain customers. To determine the amount of revenue that should be recognized at the time control over these products transfers to the customer, we estimate the average per unit price, net of discounts.

Service revenue. We offer an extended warranty that provides additional maintenance services beyond the standard limited warranty. We recognize Service revenue from the sale of extended warranties over the warranty period on a ratable basis. Customers have the option of renewing the warranty period, which is considered a new and separate contract.

 

109


Table of Contents

Lease Revenue

We lease equipment to customers under operating lease arrangements. At contract inception we perform an evaluation to determine if a lease arrangement conveys the right to control the use of an identified asset. To the extent such rights of control are conveyed, we further make an assessment as to the applicable lease classification. The identification of specified assets and determination of appropriate lease classification may require the use of management judgement.

Some of our operating leases include a purchase option for the customer to purchase the leased asset at the end of the lease arrangement, subject to a new contract. We do not believe the purchase price qualifies as a bargain purchase option.

For lease arrangements with lease and non-lease components where we are the lessor, we allocate the contract’s transaction price (including discounts) to the lease and non-lease components on a relative standalone selling price which requires judgments. For those leases with variable lease payments, the variable lease payment is typically based upon use of the leased equipment or the purchase of procedure licenses and PIDs used with the leased equipment.

For operating leases, rental income is recognized on a straight-line basis over the lease term as lease revenue. Depreciation expense associated with the leased equipment under operating lease arrangements is reflected in cost of lease in the statements of operations.

Lessee leases

Lessee operating leases are included in other current liabilities and long-term operating lease liabilities in our balance sheets. We do not have lessee finance leases.

Operating lease ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease payments are discounted using our incremental borrowing rate as of the commencement date of each lease. Our remaining lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis as operating expense in our statements of operations over the lease term.

Inventory

Inventory, which consists of raw materials, work-in-process and finished goods, is stated at the lower of cost or net realizable value. Inventory levels are analyzed periodically on a first-in, first-out basis and written down to their net realizable value if they have become obsolete, have a cost basis in excess of its expected net realizable value or are in excess of expected requirements. We analyze current and future product demand relative to the remaining product shelf life to identify potential excess inventory. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage.

Intangible Assets

Intangible assets with finite useful lives consist primarily of acquired product rights, acquired technology, and customer relationships. Acquired product rights and acquired technology are amortized on a straight-line basis over their estimated useful lives, over 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. The estimated useful lives associated with finite-lived intangible assets are consistent with the estimated lives of the associated products and may be modified when circumstances warrant.

 

110


Table of Contents

Such assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The impairment reviews require significant estimates about fair value, including estimation of future cash flows, selection of an appropriate discount rate, and estimates of long-term growth rates. We have not recorded any impairment to our intangible assets for the six months ended June 30, 2020 and 2019 and the years ended December 31, 2019 and 2018.

Stock-based compensation

We have an equity incentive plan under which we grant phantom stock units, or PSUs, to LENSAR directors and employees. PSUs are awards in the form of phantom shares, denominated in a hypothetical equivalent number of shares of LENSAR common stock and with the value of each PSU equal to the fair value of LENSAR common stock at the date of grant.

Stock-based compensation is measured at the grant date based on the fair value of the award and is expensed over the requisite service period. The holders of the phantom stock units have the right to receive cash upon settlement. Awards of phantom stock are accounted for as a liability under ASC Topic 718 and changes in the fair value of the Company’s liability are recognized as compensation cost over the remaining requisite service period. Changes in the fair value of the liability that occur after the requisite service period are recognized as compensation cost during the period in which the changes occur. We remeasure the liability for the outstanding awards at the end of each reporting period and the compensation cost is based on the change for each reporting period. Forfeitures are accounted for as they occur.

Common stock valuation

The estimated fair value of our common stock is determined by our board of directors, with input from management. In the absence of a public trading market for the common stock, we develop an estimate of the fair value of the common stock based on the information known on the reporting date, upon a review of any recent events and their potential impact on the estimated fair value, and valuations from an independent third-party valuation firm.

In determining the fair value of our common stock, as used for purposes of determining the fair value of the PSUs, we establish the enterprise value of our company using generally accepted valuation methodologies including discounted cash flow analysis, comparable public company analysis and comparable acquisitions analysis. We then allocate the equity value among the securities that comprise the capital structure of LENSAR using the Black Scholes Option-Pricing model after deducting the liquidation preference of the Series A Preferred Stock. Under the Option-Pricing model, the common stock is modeled as a call option that gives its owner the right but not the obligation to buy the underlying enterprise value at a predetermined or exercise price. Common stock is considered to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock is liquidated.

The Black-Scholes Option-Pricing model requires the use of highly subjective and complex assumptions which impact the fair value of the common stock, including the option’s expected term and the implied volatility of the underlying stock. Because we have not operated as a stand-alone public company, there is a lack of company-specific historical and implied volatility data, and therefore we have estimated stock price volatility based upon an index of the historical volatilities of a group of comparable publicly-traded medical device peer companies. We have estimated the expected term using our expected time to a liquidity event. We also considered the fact that the stockholders could not freely trade the common stock in the public markets. Accordingly, the estimated fair value reflects a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.

 

111


Table of Contents

The assumptions used in calculating the fair value of stock-based awards represent our best estimates, however the estimates involve inherent uncertainties and judgment and the use of different values could produce materially different results.

Following the completion of the Spin-Off, our board of directors will determine the fair value of our common stock based on its closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.

Income Taxes

We are subject to U.S. federal, state, and local corporate income taxes at the entity level. Prior to the Spin-Off, our losses were included with PDL’s consolidated U.S. federal and state income tax returns. Income taxes as presented in our financial statements have been prepared on the separate return method as if we were a taxpayer separate from PDL.

The provision for income taxes is determined using the asset and liability approach. Under this method, we recognize deferred tax assets and liabilities for the temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates that apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any interest and penalties on uncertain tax positions are included within the tax provision.

JOBS Act Accounting Election

Section 107 of the JOBS Act provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

We will remain an emerging growth company until the earliest to occur of: (1) the last day of our first fiscal year in which we have total annual revenues of more than $1.07 billion; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

Recently Issued Accounting Standards

See Note 2, Summary of Significant Accounting Policies, to our audited financial statements and the unaudited condensed interim financial statements included in this information statement for a discussion of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 31, 2019 and June 30, 2020, respectively.

 

112


Table of Contents

BUSINESS

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. Surgeons have used our laser system to perform more than 430,000 cataract procedures, including 108,030 during the year ended December 31, 2019 and 41,490 during the six months ended June 30, 2020. As we continue to innovate, we are designing a next-generation, integrated workstation, ALLY, which combines an enhanced femtosecond laser with a phacoemulsification system in a compact, mobile workstation that is designed to allow surgeons to perform a femtosecond laser assisted cataract procedure in a single operating room using a single device. We expect this combination product could be a considerable 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 of ALLY to the U.S. Food and Drug Administration, or FDA, by the end of the first quarter of 2022 and to begin commercialization of ALLY in 2022.

A cataract occurs when the normally clear lens of the eye becomes cloudy or opaque, causing a decrease in vision. The majority of patients suffering from cataracts also present with visually significant astigmatism, which is an imperfection in the symmetry of the cornea that results in decreased visual acuity. In 2019, Market Scope estimated that approximately 70% to 90% of cataract patients present with addressable astigmatism prior to cataract surgery. Currently, the only way to treat cataracts is to surgically remove the natural lens of the eye. The principal steps in the procedure include a corneal incision, called an anterior capsulotomy; cataract phacoemulsification including the fragmentation, aspiration and removal of the cataract; and implantation of an artificial intraocular lens, or IOL. IOLs contain corrective power to replace the optical power of the natural lens. A variety of IOLs exist, including a standard monofocal IOL, or premium IOLs, such as multifocal, accommodating or toric IOLs.

Traditional cataract surgeries are performed by a surgeon using a metal or diamond blade to perform the anterior capsulotomy to enter the eye, and a bent needle to perform the anterior capsulotomy to provide the surgeon access to the nucleus of the cataract for fragmentation and subsequent removal. More recently, laser systems have been developed to assist surgeons in performing or facilitating these aspects of the cataract procedure, including assessing and fragmenting the cataract. In either case, cataract fragmentation and removal is achieved using a process called phacoemulsification. Currently, Medicare and most commercial third-party payors only cover the cost of traditional cataract surgery and the placement of a monofocal IOL, which may not produce the targeted visual outcome. To achieve their targeted visual outcome, patients may elect to have an advanced procedure that involves use of a laser system and implantation of a premium IOL, in which case the patient is responsible for the cost differential between the amount reimbursed by a third-party payor and the cost of the advanced procedure. However, based on management’s calculations derived from the 2019 Cataract Surgical Equipment Report, even when patients pay for and receive an advanced procedure that involves implantation of a premium IOL, approximately 43% still do not achieve the targeted visual outcome, typically characterized as a result within 0.5 diopters.

We believe the inability to achieve the targeted visual outcome is largely due to a failure to appropriately address corneal astigmatism even when using competing laser systems. We believe this lack of precision can be attributed to several limitations of competing laser devices, including imaging systems that require manual inputs, inaccuracies that result from reliance on manually transposing data and marking the eye for treatment, and

 

113


Table of Contents

the inability to use iris registration to integrate with preoperative devices. These devices also lack a cataract density imaging system, which allows the surgeon to customize the fragmentation and energy settings based on each individual patient’s cataract.

We developed our LENSAR Laser System to provide an alternative laser cataract treatment tool that allows the surgeon to better address astigmatism and improve visual outcomes. Our system incorporates a range of proprietary technology features that are designed to provide surgeons the following key benefits:

 

   

Advanced imaging. Our Augmented Reality imaging and processing technology collects a broad spectrum of biometric data and then reconstructs and presents a precise, three-dimensional model of each individual patient’s eye that is used to develop and implement the surgeon’s procedure plan.

 

   

Simplified procedures. Our system is designed to automate and perform various critical steps in the cataract procedure with the goal of providing surgeons with the confidence to perform these advanced procedures that include implantation of a premium IOL. For example, our IntelliAxis IV technology allows for the precise placement of arcuate corneal incisions, as well as the proprietary refractive capsulorhexis that creates tabs on the exact axis of astigmatism 180 degrees apart to help produce proper toric IOL placement. These tabs can even be visualized by the surgeon postoperatively to help further ensure proper placement without rotation, which can diminish the effectiveness of the toric IOL.

 

   

Efficient design. We designed the ergonomics of the system and its wireless capabilities to enable the system to integrate seamlessly into a surgeon’s existing surgical environment.

 

   

Precision and reproducibility. The system has multiple features specifically designed to enable precise placement and centration of the IOL in patients in a consistent and reproducible manner that is not possible in manual cataract surgery or using competing laser systems.

We believe the cumulative effect of these technologies is an advanced laser system that can be quickly integrated into a surgeon’s existing practice, is easy to use and provides surgeons the ability to deliver improved outcomes when addressing astigmatism in connection with cataract removal. In the Arcuate Keratotomy Study, of 189 eyes that underwent arcuate keratotomy with our laser system, 95.8% demonstrated post-operative refractive astigmatism of 0.5 diopters or less and 90% of eyes had a post-operative uncorrected distance visual acuity, or UDVA, of 20/30 or better.

We are focused on continuous innovation and are currently developing our proprietary, next-generation, integrated workstation, 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 a femtosecond laser assisted cataract procedure in a single operating room using this device. We anticipate submitting an application for 510(k) clearance to the FDA by the end of the first quarter of 2022 and to begin commercialization of ALLY in 2022. If ALLY is cleared by the FDA, we believe its lower operating costs 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 in the United States and distributors in Germany, China, South Korea and other targeted international geographies. We believe there is significant opportunity for us to expand our presence in these countries and other markets and regions. In the United States, we sell our products through a direct sales organization that, as of December 31, 2019, consisted of 30 commercial team professionals, including regional sales managers, clinical applications and outcomes specialists, field service, technology and customer support personnel.

 

114


Table of Contents

We have experienced considerable growth since we began commercializing our products in the United States in 2012. Our revenue increased from $24.4 million for the year ended December 31, 2018 to $30.5 million for the year ended December 31, 2019, representing annual revenue growth of 25%. Our revenue for the six months ended June 30, 2020 was $11.0 million, compared to revenue of $14.0 million for the six months ended June 30, 2019 representing a decline of 22%, primarily on account of the impact of COVID-19. Our net losses were $8.2 million, $12.6 million and $14.7 million for the six months ended June 30, 2020 and the years ended December 31, 2018 and December 31, 2019, respectively. Additionally, our installed base of LENSAR Laser Systems has increased from 207 as of December 31, 2019 to 211 as of June 30, 2020.

Our Strengths

We attribute our current and anticipated future success to the following factors:

 

   

Established large and growing market for cataract surgery. According to the 2019 Cataract Surgical Equipment Market Report, an estimated 29 million cataract/refractive lens surgical procedures were performed globally in 2019, with 4.3 million performed in the United States. We believe that growth in the cataract market generally will continue to be driven by an aging population. Moreover, as IOL technology and advanced laser techniques demonstrate improved vision correction, we expect to see a greater portion of cataract surgeries transition to these advanced refractive cataract procedures. According to the 2019 Premium Cataract Surgery Market Report, global cataract surgeries are projected to grow at a 3.1% compound annual growth rate, or CAGR, from 2019 to 2024, while the CAGR of advanced refractive cataract surgical procedures for the same period is projected to be 7.7%.

 

   

Disruptive technology platform providing improved visual outcomes. Our LENSAR Laser System was built specifically for laser refractive cataract surgery. Central to our LENSAR Laser System is our Augmented Reality technology, which begins by using scheimpflug imaging to scan the anterior segment of the eye, collecting a broad spectrum of biometric data. The system then uses a process called wave-tracing to take a series of two dimensional images derived from the imaging and scanning and, through precision processing of this biometric data, reconstruct a three-dimensional model of each individual patient’s eye. Using this model, surgeons can identify relevant anatomy and specific measurements within the eye, enabling them to plan and precisely place the laser pulses necessary to accomplish the desired treatment. Data presented in 2019 at the American Society of Cataract and Refractive Surgery, or ASCRS, demonstrated that 93% of patients receiving a toric IOL using the LENSAR Laser System achieved refractive correction within 0.5 diopter of the targeted outcome. In addition to improving visual outcomes, our system is designed to improve the efficiency and simplify the procedure for surgeons by including pre-programmable surgeon preferences, wireless integration with pre-operative diagnostic data, cataract density imaging, and accurate laser incision planning. We believe these features enable surgeons an unprecedented reproducibility and ability to optimize their treatments to achieve LASIK-like vision correction while also improving overall efficiency for the surgeon’s practice.

 

   

Demonstrated and growing commercial success. We believe our disruptive technology platform has enabled LENSAR to rapidly take market share in a highly competitive market. Based on the 2019 Cataract Surgical Equipment Market Report, it was estimated that we would achieve 13% worldwide market share in femtosecond laser assisted cataract surgery in 2019. Additionally, when looking at the average procedures per installed device, each of our LENSAR Laser Systems averaged 522 procedures in 2019 compared to the estimated industry average of 285 procedures per year per installed device, based on a 2019 Cataract Surgical Equipment Market Report. Since commercial launch, we have continued to grow our annual number of procedures and revenue, with procedures increasing most recently from 63,175 in 2017 to 108,030 in 2019, representing a CAGR of 30.8%, and revenue increasing from $20.6 million in 2017 to $30.5 million in 2019, representing a CAGR of 21.6%. We believe that our improved patient outcomes, along with increased surgeon efficiencies

 

115


Table of Contents
 

and growing commercial presence, will enable us to continue to drive our commercial success. The following chart shows the number of procedures performed per year from 2015 to 2019:

LENSAR Procedures per Year

LOGO

Source: Management.

 

   

Improved visual outcomes that drive more advanced, patient-pay procedures. Standard cataract procedures are generally covered by Medicare and other third-party payors, including commercial health plans. However, based on management’s calculations derived from the 2019 Cataract Surgical Equipment Report, approximately 43% of patients receiving a standard cataract procedure fail to achieve their targeted visual outcome and must rely on glasses for distance or near vision or to correct visually significant astigmatism. Moreover, surgeon reimbursement for these standard procedures continues to decline. More advanced procedures, such as laser-assisted cataract surgery and the use of toric and multifocal premium IOLs, can address these additional vison challenges but are generally not covered by Medicare or other third-party payors. Accordingly, patients are required to pay the additional cost associated with the use of these advanced technologies in the physicians’ practice. Historically, some patients may have been reluctant to incur the additional cost of a more advanced procedure that includes implantation of a premium IOL, and some surgeons may have been reluctant to recommend these procedures, because of concerns that the targeted visual outcome might not be achieved. We believe the clinical data supporting the effectiveness of our laser system in assisting surgeons to achieve desired outcomes will motivate additional patients to seek, and additional surgeons to offer, these more advanced procedures that include implantation of a premium IOL.

 

   

Focus on innovation to facilitate surgeon adoption. Our current Streamline IV laser system encompasses improved innovations such as wireless capability, advanced imaging, iris registration, and other features to improve its effectiveness and enhance efficiency. We are currently focused on developing a proprietary, next-generation, integrated workstation, known as ALLY, that is intended to further enhance the capabilities of our current femtosecond laser technology and combine it with an advanced phacoemulsification system. We are designing this compact, integrated workstation to operate anywhere in an operating room or in-office surgical suite and allow the surgeon to switch seamlessly and quickly between femtosecond laser and phacoemulsification without moving machines or patients. We believe this significant improvement in patient flow and efficiency will allow surgeons to offer this technology and its benefits to a broader base of patients. Moreover, by combining a

 

116


Table of Contents
 

femtosecond laser and phacoemulsification into a single system, we believe we can educate surgeons who currently rely solely on phacoemulsification on the benefits of adopting and integrating laser-assisted procedures into their practice.

 

   

Innovative intellectual property protected by a comprehensive patent portfolio. As of June 16, 2020, we owned approximately 98 issued patents and 56 pending patent applications globally. This portfolio covers key aspects of our technology, including the augmented reality imaging and processing, iris registration and patient interface features of our system. We have also licensed or acquired patent rights relating to our next-generation, integrated workstation. With regard to our next generation dual function system development project, we have licensed or acquired significant patent rights. For example, we have exclusively licensed two issued U.S. patents, four pending U.S. applications, one international patent application and one foreign patent application. In addition, we have acquired through assignment one issued U.S. patent, one pending U.S. application which has received a Notice of Allowance, three pending U.S. patent applications and five foreign patent applications.

 

   

Proven management team and board of directors. Our senior management team and board of directors consists of seasoned medical device professionals with deep industry experience. Our team has successfully led and managed dynamic growth phases in organizations and commercialized several products specifically in the cataract and refractive surgery field. Members of our team have worked with well-regarded, ophthalmology-focused medical technology companies such as Chiron Corporation, Alcon Inc., Advanced Medical Optics, Inc., Bausch + Lomb and STAAR Surgical.

While we believe these factors will contribute to further growth and success, we cannot assure you that the market for cataract surgery will continue to grow as we anticipate or that new disruptive technologies will not be introduced to displace our laser systems. Moreover, we must maintain and grow market acceptance for our laser system and convince physicians and patients that the out of pocket costs associated with procedures that use our laser systems will produce their targeted results. If we are unable to accomplish those goals, our business could suffer.

Market Overview

Current Cataract Treatment Alternatives

A cataract occurs when the normally clear lens of the eye becomes cloudy or opaque, causing a decrease in vision. The natural lens of the eye focuses light onto the back of the eye, or the retina. The clouding of this lens caused by a cataract can cause blurring and distortion of vision, colors that seem faded, glare or halos from lights at night, diminished vision and double vision. Cataracts typically affect both eyes, but it is not uncommon for a cataract in one eye to advance more rapidly. In most cases, the cataract is a naturally occurring process that is age-related, although it can also be caused by heredity, an injury to the eye or after surgery for another eye problem, such as glaucoma.

The majority of patients suffering from cataracts also present with visually significant astigmatism. Astigmatism is an imperfection in the symmetry of the cornea, creating a different, additional focal plane in a specific axis within the cornea. This causes a distortion of the light as it converges on the retina and causes blurry vision. In a Market Scope review of 6,000 patients in 2019, approximately 70% to 90% of patients had astigmatism prior to cataract surgery that was visually significant. To reduce the need for prescription distance or reading glasses following cataract surgery, it is important that little or no astigmatism remain. Conventionally, residual post-operative astigmatism has been targeted at less than or equal to 0.5 diopters, the unit measure of the refractive power of a lens. Surgeons may attempt to address low to moderate magnitudes of astigmatism using a procedure called limbal relaxing incisions, or LRI. LRI is performed by making two small incisions on the cornea, usually 180 degrees apart that are intended to return the cornea to a rounder, symmetrical shape. LRIs that are performed with a laser are referred to as arcuate corneal incisions, or AIs. More recently, and where the magnitude of astigmatism is higher, toric IOLs might be used to both correct the patient’s near or far vision and address any pre-existing astigmatism.

 

117


Table of Contents

Currently, the only way to treat cataracts is to surgically remove the natural lens of the eye. The standard cataract surgical procedure is typically performed in a hospital or in an outpatient ambulatory surgery center, or ASC. The patient receives drops topically, or an injection to numb the eye during the procedure and is usually released from the facility on the same day. The principal steps in the procedure include a corneal incision called an anterior capsulotomy, cataract fragmentation and removal of the cataract, and implantation of an IOL. IOLs contain corrective power to replace the optical power from the natural lens, and can also be used to correct the pre-existing visual errors in the natural lens removed in cataract surgery. Without an IOL, patients would need very thick eyeglasses or special contact lenses to see at all after cataract surgery. A variety of IOLs with different features exist. Some of the basic types include:

 

   

Monofocal IOLs. This type of lens has a single focus strength primarily used for distance vision. Most patients receiving this type of lens will typically require the use of reading glasses for near vision. More contemporary uses of these lenses are to correct one eye for distance and use a different power to correct one eye for reading. This is referred to as monovision and is not suitable for a large part of the population due to many patients being unable to adapt to the vision imbalance.

 

   

Accommodating IOLs. Similar to monofocal IOLs, these lenses have a single focus strength; however, they are designed to respond to eye muscle movements and shift focus from near to far. There are accommodating IOLs in development that have an optical fluid or multi-piece designs that are designed to move and shift focus but work on different principles.

 

   

Extended depth-of-focus or Multifocal IOLs. These IOLs are similar to glasses with bifocal or progressive trifocal lenses. Different areas of the lens have different focusing strengths that allow for near, far and medium vision.