LENSAR, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. LENSAR develops and sells or leases femtosecond laser systems and related consumables and services for cataract surgery. It completed its spin-off from PDL BioPharma on October 1, 2020 and began trading independently as LNSR. Unless noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $7.1 | $8.1 | $18.1 | $22.1 |
| Operating loss | $(4.7) | $(5.3) | $(11.7) | $(10.8) |
| Net loss | $(4.8) | $(5.8) | $(12.9) | $(12.2) |
| Net loss per share | $(0.64) | $(5.44) | $(4.04) | $(11.39) |
| Net cash used in operations | Not provided for quarter | Not provided for quarter | $(11.8) | $(5.8) |
- Q3 revenue fell 11.4% year over year; nine-month revenue fell 18.0%. Product revenue declined 14.1% in Q3 and 19.3% year to date; lease revenue fell 20.6% year to date, including $0.3 million of COVID-related lease concessions. Management attributed the declines primarily to COVID-19 disruption, fewer elective cataract procedures and lower laser-system sales.
- Gross profit before amortization was $3.9 million in Q3 2020 versus $3.3 million in Q3 2019, and $9.4 million versus $8.6 million for the nine-month periods. Corresponding gross margins were approximately 54.5% and 40.6% for Q3, and 52.0% and 38.8% year to date. Lower system-sales mix and lower lease depreciation contributed to the improvement.
- Q3 selling, general and administrative expense rose 58.7% to $6.3 million, mainly due to higher personnel and stock-based compensation. Nine-month R&D expense decreased 18.7% to $5.0 million, although ALLY development consulting and supply costs increased.
- EBITDA, a company-defined non-GAAP measure, was a loss of $4.2 million in Q3 2020 versus $4.4 million in Q3 2019; the nine-month loss increased to $9.7 million from $7.8 million.
Financial position, cash flow and capital
- At September 30, cash was $42.7 million, compared with $4.6 million at year-end 2019. Current assets were $60.0 million and current liabilities $8.3 million. Inventory increased to $13.7 million from $8.1 million.
- Total liabilities were $11.8 million, including $3.4 million of long-term operating lease liabilities. The $32.6 million PDL note and Series A preferred-stock liability were extinguished in July through common-stock recapitalization transactions; neither remained outstanding at quarter-end.
- Nine-month operating cash outflow was $11.8 million, including a $8.1 million cash use from inventory growth. Investing cash outflow was $0.2 million. Financing provided $50.0 million, including PDL equity and capital contributions. Cash at period-end therefore reflects substantial financing support, not operating cash generation.
- PDL’s recapitalization and contributions included $16.4 million from common-stock sales and a $20.7 million cash contribution. The company reported $68.9 million of stockholders’ equity at quarter-end, versus a $30.6 million deficit at year-end 2019.
- Management stated that cash on hand was expected to cover projected obligations for at least 12 months from issuance of the statements. As of November 10, 2020, management expected cash and product-sale proceeds to fund operations into 2022; additional capital may be needed if forecasts are not achieved.
Changes, outlook and key risks
- The installed base grew to 219 systems at September 30, from 207 at December 31, 2019, even as system sales and procedure volumes declined. Procedures fell 12.4% in the first nine months. International sales remained significant; South Korea was a major source of the year-to-date revenue decline.
- ALLY is in development as a compact system combining femtosecond laser and phacoemulsification functions. LENSAR anticipated submitting a 510(k) application by the end of Q1 2022 and beginning commercialization by year-end 2022; these are targets, subject to development and regulatory clearance.
- Management expected laser-system sales declines to continue through at least year-end 2020. The filing gives no quantified revenue or earnings guidance and warns that COVID-19’s duration and impact are uncertain. The company expects continuing losses, operating cash outflows, higher public-company costs and increased R&D spending.
- Key risks include renewed disruption to elective surgery, patient willingness to pay for procedures not generally covered by payors, competition, distributor and customer concentration, reliance on some single-source suppliers, customer credit exposure, regulatory delays, and the cost and execution risk of ALLY. A minimum $2.5 million of supply purchases was committed over the following nine months; up to $2.4 million in additional milestone payments could be triggered by regulatory approval and commercialization of the next-generation system.
- The Orlando facility lease was extended through November 2027, increasing the lease liability. PDL continued to provide certain transition services for limited periods after the spin-off. Historical statements include PDL cost allocations that may not reflect future stand-alone expenses. Management reported no material legal proceedings and effective disclosure controls as of September 30, 2020.
Investor verification priorities
- Track quarterly system placements, procedure volumes, recurring consumables revenue and South Korea sales to assess recovery from COVID-related declines.
- Reconcile operating cash burn, inventory levels and liquidity against management’s expectation of funding operations into 2022; assess whether further financing is required.
- Monitor ALLY development, third-party phacoemulsification supply arrangements, 510(k) timing, commercialization costs and any milestone or royalty obligations.
- Compare actual stand-alone costs after the spin-off with historical PDL allocations, including transition-service charges and public-company expenses.
- Review the effect of stock-based compensation and equity issuance on reported expenses, share count and dilution; the filing reports $16.1 million of unrecognized restricted-stock compensation at quarter-end.