LENSAR had a phantom stock plan under which it granted phantom stock units (“PSUs”) to LENSAR directors and employees. In connection with the Company’s issuance of restricted stock awards under the 2020 Plan (as defined below), all remaining outstanding awards under the Phantom Stock Plan were cancelled, and no further awards are outstanding under such plan. As such, the liability recorded for unvested phantom stock units was remeasured at fair value immediately prior to the modification on July 22, 2020, which resulted in a decrease in fair value of $108. The fair value of $306 was reclassified from Accrued liabilities to Additional paid-in capital on the modification date. The fair value of the underlying common stock was determined using preliminary valuation techniques with the most reliable information currently available.

The total shares authorized for grant were 0 and 1,560 as of December 31, 2020 and 2019, respectively.

The estimated fair value of the common stock underlying the PSUs was determined by the board of directors, with input from management. In the absence of a public trading market for the common stock, the Company developed 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. Valuations of the Company’s common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. In evaluating the PSUs, the Company first established the enterprise value of the Company using generally accepted valuation methodologies including discounted cash flow analysis, comparable public company analysis and comparable acquisitions analysis. Prior to the Recapitalization Transactions, the Company then allocated the equity value among the securities that comprised the capital structure of the Company using the Black Scholes Option-Pricing model after deducting the liquidation preference. Under the Option-Pricing model, the common stock was 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. After the Recapitalization Transactions, the Company then allocated the equity value among the fully diluted shares outstanding as a result of the Recapitalization Transactions.

The fair value of the Company’s common stock, as used for purposes of determining the fair value of the PSUs, was estimated using the following assumptions:

	Year Ended December 31,
	2020	2019
Risk-free interest rate	0.1 - 0.2%		1.6	%
Expected term (years)	0.11 - 0.25		3
Expected volatility	55 - 70%		60	%
Dividends	0.0%		0.0	%
Marketability discount	4 - 8%		23	%

Expected term: As its share-based compensation awards were generally non-transferrable and represented in substance a liquidation interest in the Company, the Company estimated the expected term input to the Black-Scholes model to be equivalent to the Company’s expected time to a liquidity event.

Risk-free interest rate: The risk-free interest rate was based on the rates paid on securities issued by the U.S. Treasury with a term approximating the expected time to liquidity of the Company’s common stock.

Expected volatility: The expected volatility for the Company’s stock-based compensation awards was based on an index of the historical volatilities of a group of comparable publicly-traded medical device and other peer companies, which the Company believed was representative of the volatility over the time to liquidity of its common stock.

Expected dividend yield: The Company does not intend to pay dividends for the foreseeable future. Accordingly, the Company used a dividend yield of zero in the assumptions.

Marketability discount: The estimated fair value reflected a non-marketability discount to reflect the fact that the stockholders could not freely trade the common stock in the public markets and was based on the anticipated likelihood and timing of a liquidity event.

As of December 31, 2020 and 2019, the Company’s liabilities related to the PSU recorded in liabilities were zero and $1,179, respectively. The fair value of the PSUs as of December 31, 2019 was $14.94. The following table summarizes the phantom share activity during the years ended December 31, 2020 and 2019:

	2020					2019
	Number of Units			Weighted- average grant- date fair value per share		Number of Units			Weighted- average grant- date fair value per share
Non-vested at beginning of year		43		$	6.39		109		$	6.39
Granted		—		$	—		6		$	10.80
Vested		(6	)	$	6.39		(71	)	$	6.75
Forfeited		—		$	—		(1	)	$	6.39
Cancelled		(37	)	$	6.39		—		$	—
Non-vested at end of year		—		$	—		43		$	6.39

During the year ended December 31, 2020, six shares were transferred from PDL to settle vested shares. As of December 31, 2020, zero units are vested but unsettled.

On July 9, 2020, the Board of Directors approved the LENSAR Inc. 2020 Incentive Award Plan (the “2020 Plan”). Under the 2020 Plan, the Company is authorized to issue up to 3,333 shares in the form of stock options, restricted stock, restricted stock unit awards and other stock-based awards. The amount and terms of grants are determined by the Company’s Board of Directors or a duly authorized committee thereof. Participants must pay the Company, or make provisions to pay, any required withholding taxes by the date of the event creating the tax liability. Participants may generally satisfy the tax liability in cash or in stock.

On July 22, 2020, the Board of Directors approved the grants of 1,847 shares of restricted stock in connection with the proposed Spin-Off to certain individuals under the 2020 Plan in consideration of future services to be rendered to the Company. The aggregate grant date fair value of these restricted stock awards was determined to be $19,951 or $10.80 per share based on the fair value of the underlying common stock using preliminary valuation techniques with the most reliable information currently available. The vesting schedule of the restricted stock awards is (i) 40% vest on the later of three months following the completion of the proposed Spin-Off or six months following the grant date (provided the proposed 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.

On October 1, 2020, the Board of Directors modified certain July 22, 2020 restricted stock awards to waive the excess share forfeiture restriction. A total of 18 shares of restricted stock awards were released under this waiver. The incremental fair value of the modified awards was not material and the vesting schedule did not change.

On October 6, 2020, the Board of Directors approved grants of four shares of restricted stock to certain individuals under the 2020 Plan in consideration of future services to be rendered to the Company. The aggregate grant date fair value of these restricted stock awards was determined to be $46 or $10.90 per share based on the fair value of the underlying common stock as determined as the closing market price as quoted by Nasdaq. The vesting schedule of the restricted stock awards is (i) 40% vest on January 22, 2021, (ii) 30% vest on January 22, 2022, and (iii) 30% vest on July 22, 2023.

On December 7, 2020, the Board of Directors modified certain July 22, 2020 restricted stock awards to board members and executives to amend and extend the vesting schedules applicable to the July 22, 2020 restricted stock awards. In order to comply with tax laws and to recognize the individuals’ agreement to the extension to the vesting schedule of the July 22, 2020 restricted stock awards, each individual was issued an additional restricted stock award, which represents 20% of the total number of shares subject to the July 22, 2020 restricted stock award, totaling 305 additional shares of restricted stock. The aggregate grant date fair value of the additional restricted stock awards was determined to be $2,201 or $7.22 per share based on the fair value of the underlying common stock as determined as the closing market price as quoted by Nasdaq. No additional incremental fair value of the modified restricted stock awards will be recorded as the fair value of common stock on the date of modification was less than the grant date fair value. The modified and newly granted restricted stock awards provide for vesting in quarterly installments over the three-year period following the modification date.

The following table summarizes the restricted stock award activity under the 2020 Plan for the year ended December 31, 2020:

	2020
	Number of Units			Weighted- average grant- date fair value per share
Non-vested at beginning of year		—		$	—
Granted		2,174		$	10.30
Vested		(96	)	$	10.19
Cancelled		(28	)	$	10.89
Non-vested at end of year		2,050		$	10.30

Prior to the Spin-off, the estimated fair value of the common stock was determined as described above. After the Spin-off, the fair value of common stock was determined as the closing market price as quoted by Nasdaq.

The total fair value of restricted stock awards vested during the years ended December 31, 2020 and 2019 was $970 and zero, respectively.

The weighted-average grant date fair value for restricted stock awards granted under the 2020 Plan for the year ended December 31, 2020 was $10.30. No awards were granted under the 2020 Plan during the year ended December 31, 2019.

At December 31, 2020, there was approximately $13,231 of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 1.3 years. The unrecognized compensation expense is expected to be amortized as follows:

	Year Ended December 31,
	2021		2022		2023
Unrecognized stock-based compensation expense	$	5,733	$	4,701	$	2,797

The amounts included in this table are based on restricted stock awards outstanding at December 31, 2020 and assumes the requisite service period is fulfilled for all restricted stock awards outstanding. Actual stock-based compensation expense in future periods may vary from those reflected in the table.

In September 2020, the Board of Directors approved the LENSAR Inc. 2020 Employee Stock Purchase Plan (the “2020 ESPP”), under which eligible employees are permitted to purchase common stock at a discount through payroll deductions. A total of 340 shares of common stock are reserved for issuance and will be increased on the first day of each fiscal year, beginning in 2022, by an amount equal to the lesser of (i) 1.0% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; or (ii) a lesser amount as determined by the Board of Directors. The price of the common stock purchased will be the lower of 85% of the fair market value of the common stock at the beginning of an offering period or at the end of a purchase period. The 2020 ESPP is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the IRC.

As of December 31, 2020, no shares of common stock have been issued to employees participating in the 2020 ESPP and 340 shares were available for future issuance under the 2020 ESPP.

The grant date fair value of the shares to be issued under the Company’s 2020 ESPP was estimated using the Black-Scholes valuation model.

The following table sets forth the total stock-based compensation expense recognized under the 2020 Plan, the 2020 ESPP and the Phantom Stock Plan in the Company’s statements of operations:

	Year Ended December 31,
	2020		2019
Cost of revenue—product	$	303	$	29
Cost of revenue—service		165		17
Selling, general and administrative expenses		7,529		696
Research and development expenses		876		76
Total	$	8,873	$	818

PDL had equity incentive plans under which it granted equity awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance share and performance unit awards, deferred compensation awards and other stock-based or cash-based awards. As of December 31, 2020 and 2019, PDL granted awards to one LENSAR employee which consisted of restricted stock awards. There were no other grants to LENSAR employees of any other award types under PDL’s equity incentive plan.

PDL granted restricted stock awards to an employee of LENSAR pursuant to a stockholder approved stock-based incentive plan. As LENSAR received the employee’s services in consideration for these awards, stock-based compensation expense for the awards granted to the LENSAR employee has been reflected in the statements of operations. As the stock-based compensation plans are PDL’s plans and the awards were settled by PDL, the offset to the expense was recognized through additional paid-in capital on the balance sheets. Stock-based compensation expense related to the PDL awards for the years ended December 31, 2020 and 2019 was approximately $153 and $100 recorded in selling, general and administrative expense, respectively.

Restricted stock has the same rights as other issued and outstanding shares of PDL’s common stock, including, in some cases, the right to accrue dividends, which are held in escrow until the award vests. The compensation expense related to these awards was determined using the fair market value of PDL’s common stock on the date of the grant, and the compensation expense was recognized ratably over the vesting period. The restricted stock award granted to the LENSAR employees vested over one to two years and compensation expense associated with these awards was recognized on a straight-line basis over the vesting period.

The total fair value of restricted stock awards vested during the years ended December 31, 2020 and 2019 was approximately $180 and $100, respectively.

The weighted-average grant date fair value for restricted stock awards granted under PDL’s 2005 Amended and Restated Equity Incentive Plan for the years ended December 31, 2020 and 2019 was $3.07 and $3.46, respectively.

At December 31, 2020, there was $0 total unrecognized compensation expense related to restricted stock awards.