UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2023
Or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-11634
STAAR Surgical Company
(Exact Name of Registrant as Specified in its Charter)
Delaware
95-3797439
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
25651 Atlantic Ocean DriveLake Forest, California
92630
(Address of Principal Executive Offices)
(Zip Code)
(626) 303-7902
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common
STAA
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The registrant has 48,499,892 shares of common stock, par value $0.01 per share, issued and outstanding as of July 28, 2023.
STAAR SURGICAL COMPANY
INDEX
PAGE
NUMBER
PART I – FINANCIAL INFORMATION
1
ITEM 1
FINANCIAL STATEMENTS
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
17
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
23
ITEM 4.
CONTROLS AND PROCEDURES
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
24
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
25
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
June 30, 2023
December 30, 2022
ASSETS
Current assets:
Cash and cash equivalents
$
94,695
86,480
Investments available for sale
97,312
125,159
Accounts receivable trade, net of allowance for credit losses of $31 and $20, respectively
94,442
62,447
Inventories, net
25,482
24,161
Prepayments, deposits and other current assets
16,072
13,476
Total current assets
328,003
311,723
17,525
13,902
Property, plant and equipment, net
55,924
50,921
Finance lease right-of-use assets, net
257
342
Operating lease right-of-use assets, net
31,530
30,270
Intangible assets, net
—
173
Goodwill
1,786
Deferred income taxes
4,672
4,824
Other assets
954
957
Total assets
440,651
414,898
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
11,441
11,576
Obligations under finance leases
162
169
Obligations under operating leases
4,013
3,524
Allowance for sales returns
6,653
5,706
Other current liabilities
31,925
30,741
Total current liabilities
54,194
51,716
125
210
28,189
27,136
1,295
1,489
Asset retirement obligations
101
220
Pension liability
3,050
1,935
Total liabilities
86,954
82,706
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 60,000 shares authorized: 48,499 and 48,212 shares issued and outstanding at June 30, 2023 and December 30, 2022, respectively
485
482
Additional paid-in capital
419,594
404,189
Accumulated other comprehensive gain (loss)
(2,521
)
156
Accumulated deficit
(63,861
(72,635
Total stockholders’ equity
353,697
332,192
Total liabilities and stockholders’ equity
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
Six Months Ended
July 1, 2022
Net sales
92,306
81,101
165,834
144,301
Cost of sales
21,580
17,229
37,546
31,165
Gross profit
70,726
63,872
128,288
113,136
Selling, general and administrative expenses:
General and administrative
18,097
13,983
36,195
25,923
Selling and marketing
32,277
24,233
58,631
41,503
Research and development
11,755
8,636
22,065
16,577
Total selling, general and administrative expenses
62,129
46,852
116,891
84,003
Operating income
8,597
17,020
11,397
29,133
Other income (expense), net:
Interest income, net
1,775
43
3,597
37
Loss on foreign currency transactions
(1,890
(1,860
(1,856
(2,775
Royalty income
177
450
Other income, net
10
89
73
151
Total other income (expense), net
(105
(1,551
1,814
(2,137
Income before income taxes
8,492
15,469
13,211
26,996
Provision for income taxes
2,428
2,431
4,437
4,356
Net income
6,064
13,038
8,774
22,640
Net income per share:
Basic
0.13
0.27
0.18
0.47
Diluted
0.12
0.26
0.46
Weighted average shares outstanding:
48,418
47,889
48,333
47,822
49,516
49,223
49,524
49,264
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income (loss):
Defined benefit plans:
Net change in plan assets
(547
2,593
(1,724
6,661
Reclassification into other income (expense), net
(51
33
(103
85
Investments available for sale:
Change in unrealized gain (loss)
(142
(26
(2
Foreign currency translation gain (loss)
(1,342
(1,502
(1,471
(2,516
Tax effect
498
188
649
67
Other comprehensive income (loss), net of tax
(1,584
1,312
(2,677
4,297
Comprehensive income
4,480
14,350
6,097
26,937
3
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CommonStock Shares
CommonStock ParValue
AdditionalPaid-InCapital
AccumulatedOtherCompre-hensiveIncome(Loss)
AccumulatedDeficit
Total
Balance, at March 31, 2023
48,331
483
409,303
(937
(69,925
338,924
Other comprehensive loss
Common stock issued upon exercise of options
155
1,475
1,477
Stock-based compensation
8,951
Repurchase of employee common stock for taxes withheld
(3
(135
Unvested restricted stock
Vested restricted and performance stock
6
Balance, at June 30, 2023
48,499
Balance, at April 1, 2022
47,810
478
378,690
(1,063
(101,788
276,317
Other comprehensive income
202
2,232
2,234
6,406
7
5
Balance, at July 1, 2022
48,024
480
387,328
249
(88,750
299,307
4
Balance, at December 30, 2022
48,212
195
2,004
2,006
15,385
(34
(1,984
116
Balance, at December 31, 2021
47,716
477
373,519
(4,048
(111,390
258,558
251
3,143
3,146
10,666
50
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of property, plant, and equipment
2,398
2,024
Amortization of intangibles
171
15
Accretion/Amortization of investments available for sale
(1,824
75
Change in net pension liability
(627
52
Loss on disposal of property and equipment
Stock-based compensation expense
14,488
9,648
Change in asset retirement obligation
(107
Provision for sales returns and bad debts
1,004
800
Inventory provision
3,630
1,428
Changes in working capital:
Accounts receivable
(32,344
(20,137
Inventories
(4,382
(1,825
Prepayments, deposits, and other current assets
(2,665
(2,260
(1,447
3,243
1,432
(6,992
Net cash provided by (used in) operating activities
(11,400
Cash flows from investing activities:
Acquisition of property and equipment
(5,915
(7,810
Purchase of investments available for sale
(42,602
Proceeds from sale or maturity of investments available for sale
68,622
Net cash provided by (used in) investing activities
20,105
Cash flows from financing activities:
Repayment of finance lease obligations
(82
(45
Proceeds from the exercise of stock options
Proceeds from vested restricted stock
Net cash provided by (used in) financing activities
(59
3,101
Effect of exchange rate changes on cash and cash equivalents
(431
(1,143
Increase in cash and cash equivalents
8,215
2,784
Cash and cash equivalents, at beginning of the period
199,706
Cash and cash equivalents, at end of the period
202,490
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Note 1 — Basis of Presentation and Significant Accounting Policies
The Condensed Consolidated Financial Statements of the Company present the financial position, results of operations, and cash flows of STAAR Surgical Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Commission. In accordance with those rules and regulations certain information and footnote disclosures normally included in the Comprehensive Financial Statements have been condensed or omitted pursuant to such rules and regulations. The Consolidated Balance Sheet as of December 30, 2022 was derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2022.
The Condensed Consolidated Financial Statements for the three and six months ended June 30, 2023 and July 1, 2022, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial condition and results of operations. The results of operations for the three and six months ended June 30, 2023 and July 1, 2022, are not necessarily indicative of the results to be expected for any other interim period or for the entire year.
Each of the Company’s fiscal reporting periods ends on the Friday nearest to the quarter ending date and generally consists of 13 weeks. Unless the context indicates otherwise “we,” “us,” the “Company,” and “STAAR” refer to STAAR Surgical Company and its consolidated subsidiaries.
Vendor Concentration
There was one vendor that accounted for over 10% of the Company’s consolidated accounts payable as of June 30, 2023. There were no vendors that accounted for over 10% of the Company’s consolidated accounts payable as of December 30, 2022.
Note 2 — Investments Available for Sale
During the second half of 2022, the Company started to invest its cash in slightly higher yielding securities. Investments available for sale (“AFS”) and the related fair value measurement consisted of the following (dollars in thousands):
Fair Value Measurements
Amortized Cost
Unrealized Gains
Unrealized Losses
Estimated Fair Value
Level 1
Level 2
Commercial paper
28,519
(19
28,500
Certificates of deposit
10,774
(13
10,762
U.S. Treasury securities
30,318
(203
30,115
U.S. agency securities
11,034
(32
11,002
Corporate debt securities
34,625
(170
34,458
Total investments AFS
115,270
(437
114,837
84,722
44,054
11
(62
44,003
17,355
(75
17,284
21,847
(15
21,835
10,688
16
10,701
45,522
(288
45,238
139,466
38
(443
139,061
117,226
Note 2 — Investments Available for Sale (Continued)
The Company obtains the fair value from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers and other industry and economic events.
The Company assessed each debt security with gross unrealized losses for impairment. As part of that assessment, the Company concluded that it does not intend to sell and it is more-likely-than-not that the Company will not be required to sell, prior to the recovery of the amortized cost basis. The Company did not recognize impairment for the three and six months ended June 30, 2023.
The following table shows the fair value of investments AFS by contractual maturity (dollars in thousands):
As of June 30, 2023
Within one year
After one year through five years
16,613
13,502
10,030
972
31,407
3,051
During the six months ended June 30, 2023, the Company sold $600,000 in securities during the first quarter of 2023 due to a downgraded credit rating. The Company recognized a realized gain upon sale of $2,000 during the six months ended June 30, 2023.
Note 3 — Inventories
Inventories, net are stated at the lower of cost and net realizable value, determined on a first-in, first-out basis and consisted of the following (in thousands):
Raw materials and purchased parts
7,341
6,703
Work in process
5,865
5,499
Finished goods
16,502
13,633
Total inventories, gross
29,708
25,835
Less inventory reserves
(4,226
(1,674
Total inventories, net
Note 4 — Prepayments, Deposits, and Other Current Assets
Prepayments, deposits, and other current assets consisted of the following (in thousands):
Prepayments and deposits
4,968
3,986
Prepaid insurance
1,190
2,620
Prepaid marketing costs
3,353
2,534
Consumption tax receivable
802
864
Value added tax (VAT) receivable
3,880
2,661
BVG (Swiss Pension) prepayment
1,211
111
Other(1)
668
700
Total prepayments, deposits and other current assets
8
Note 5 — Property, Plant and Equipment
Property, plant and equipment, net consisted of the following (in thousands):
Machinery and equipment
29,836
28,026
Computer equipment and software
9,591
9,266
Furniture and fixtures
4,491
4,276
Leasehold improvements
16,840
14,965
Construction in process
35,109
32,269
Total property, plant and equipment, gross
95,867
88,802
Less accumulated depreciation
(39,943
(37,881
Total property, plant and equipment, net
Note 6 – Intangible Assets
Intangible assets, net consisted of the following (in thousands):
Long-lived amortized intangible assets
GrossCarryingAmount
AccumulatedAmortization
Net
Patents and licenses
9,195
(9,195
9,240
(9,067
During the three and six months ended June 30, 2023, the Company recognized full impairment of $154,000 for its Japan patents and licenses related to cataract IOLs.
Note 7 – Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
Accrued salaries and wages
11,511
10,862
Accrued bonuses
1,707
6,925
Income taxes payable
7,202
3,845
Marketing obligations
1,354
1,374
10,151
7,735
Total other current liabilities
Note 8 – Leases
Finance Leases
The Company entered into finance leases primarily related to purchases of equipment used for manufacturing, computer-related equipment or furniture and fixtures. These finance leases are two to five years in length and have fixed payment amounts for the term of the contract and have options to purchase the assets at the end of the lease term. Supplemental balance sheet information related to finance leases consisted of the following (dollars in thousands):
9
Note 8 – Leases (Continued)
Finance Leases (Continued)
30
18
475
Finance lease right-of-use assets, gross
481
523
(224
(181
Current finance lease obligations
Long-term finance lease obligations
Total finance lease liability
287
379
Weighted-average remaining lease term (in years)
1.8
2.2
Weighted-average discount rate
4.23
%
4.10
Supplemental cash flow information related to finance leases consisted of the following (dollars in thousands):
Amortization of finance lease right-of-use asset
39
77
82
Interest on finance lease liabilities
Cash paid for amounts included in the measurement of finance lease liabilities:
Operating cash flows
Financing cash flows
40
27
45
Operating Leases
The Company entered into operating leases primarily related to real property (office, manufacturing and warehouse facilities), automobiles and copiers. These operating leases are two to ten years in length with options to extend. The Company does not include any lease extensions in the initial valuation unless the Company was reasonably certain to extend the lease. Depending on the lease, there are those with fixed payment amounts for the entire length of the contract or payments which increase periodically as noted in the contract or increased at an inflation rate indicator. For operating leases that increase using an inflation rate indicator, the Company used the inflation rate at the time the lease was entered into for the length of the lease term. Supplemental balance sheet information related to operating leases consisted of the following (dollars in thousands):
752
789
446
Real property
36,756
34,465
Operating lease right-of-use assets, gross
37,954
35,700
(6,424
(5,430
Current operating lease obligations
Long-term operating lease obligations
Total operating lease liability
32,202
30,660
7.2
7.5
4.44
3.87
Operating Leases (Continued)
Supplemental cash flow information related to operating leases was as follows (dollars in thousands):
Operating lease cost
1,357
1,166
2,464
2,304
Cash paid for amounts included in the measurement of operating lease liabilities:
1,152
1,034
2,325
1,966
Right-of-use assets obtained in exchange for new operating lease liabilities
1,511
2,081
3,420
2,756
Future Maturities of Lease Liabilities
Estimated future maturities of lease liabilities under operating and finance leases having initial or remaining non-cancelable lease terms more than one year as of June 30, 2023 is as follows (in thousands):
.
As of June 30, 202312 Months Ended
June 2024
5,990
June 2025
5,834
127
June 2026
4,463
June 2027
4,432
June 2028
4,476
Thereafter
13,433
Total future minimum lease payments
38,628
298
Less amounts representing interest
(6,426
(11
Total lease liability
Note 9 — Income Taxes
The Company recorded an income tax provision as follows (in thousands):
The effective tax rates for the three months ended June 30, 2023 and July 1, 2022 were 28.6% and 15.7%, respectively, and were 33.6% and 16.1% for the six months ended June 30, 2023 and July 1, 2022, respectively. The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% for the three and six months ended June 30, 2023 and July 1, 2022, respectively, primarily due to the income tax expense generated in foreign jurisdictions.
Note 10 – Defined Benefit Pension Plans
The Company has defined benefit plans covering employees of its Switzerland and Japan operations. The following table summarizes the components of net periodic pension cost recorded for the Company’s defined benefit pension plans (in thousands):
Service cost(1)
254
309
503
635
Interest cost(2)
90
21
41
Expected return on plan assets(2)
(91
(123
(178
(241
Prior service credit(2),(3)
(46
(90
Actuarial loss recognized in current period(2),(3)
(6
79
176
Net periodic pension cost
240
399
520
The Company currently is not required to and does not make contributions to its Japan pension plan. The Company’s contributions to its Swiss pension plan are as follows (in thousands):
Employer contribution
245
462
436
Note 11 — Stockholders’ Equity
Stock-Based Compensation
The cost that has been charged against income for stock-based compensation is set forth below (in thousands):
Employee stock options
3,479
2,457
6,456
4,784
Restricted stock
442
146
551
Restricted stock units
2,148
1,231
3,749
1,993
Performance stock units
2,403
1,310
3,509
1,692
Nonemployee stock options
314
628
Total stock-based compensation expense
8,423
5,754
The Company recorded stock-based compensation costs in the following categories (in thousands):
223
106
372
3,695
2,806
7,058
4,587
2,492
1,324
3,349
2,213
2,013
1,518
3,709
2,672
Total stock-based compensation expense, net
Amounts capitalized as part of inventory
528
652
897
1,018
Total stock-based compensation expense, gross
12
Note 11 — Stockholders’ Equity (Continued)
Incentive Plan
The Amended and Restated Omnibus Equity Incentive Plan (“the Plan”) provides for various forms of stock-based incentives. To date, of the available forms of awards under the Plan, the Company has granted only stock options, restricted stock, unrestricted share grants, restricted stock units (“RSUs”) and performance stock units (“PSUs”). Options under the Plan are granted at fair market value on the date of grant, become exercisable generally over a three-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control and pre-established financial metrics are met (as defined in the Plan). Grants of restricted stock outstanding under the Plan generally vest over periods of one to three years. Grants of RSUs and PSUs outstanding under the Plan generally vest based on service, performance, or a combination of both. On June 15, 2023, stockholders approved a proposal to increase the number of shares under the plan by 2,170,000 shares, for a total of 20,205,000 shares. As of June 30, 2023, there were 2,844,500 shares available for grant under the Plan.
Assumptions
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the weighted-average assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of options granted is derived from the historical exercises and post-vesting cancellations and represents the period of time that options granted are expected to be outstanding. The Company has calculated a 7% estimated forfeiture rate based on historical forfeiture experience. The risk-free rate is based on the U.S. Treasury yield curve corresponding to the expected term at the time of the grant.
Expected dividend yield
0
Expected volatility
58
54
59
Risk-free interest rate
3.41
3.27
1.83
Expected term (in years)
4.87
5.10
5.02
Stock Options
A summary of stock option activity under the Plan for six months ended June 30, 2023 is presented below:
StockOptions(in 000’s)
MinimumExercisePrice
MaximumExercisePrice
Outstanding at December 30, 2022
2,469
Granted
584
Exercised
(195
Forfeited or expired
(31
Outstanding at June 30, 2023
2,827
5.54
154.96
Exercisable at June 30, 2023
1,903
Restricted Stock, Restricted Stock Units and Performance Stock Units
A summary of restricted stock, RSUs and PSUs activity under the Plan for the six months ended June 30, 2023 is presented below (shares in thousands):
RestrictedStock
RSUs
PSUs
Unvested at December 30, 2022
192
118
259
178
Vested
(4
(80
(36
Unvested at June 30, 2023
365
13
Note 12 - Commitments and Contingencies
Severance Payable
As of June 30, 2023 and December 30, 2022 there was severance payable of $508,000 and $410,000, respectively. recognized in other current liabilities on the Consolidated Balance Sheets, which included approximately $341,000 and $300,000, respectively, in one-time employee benefits to be paid to certain employees in STAAR Japan who work primarily in IOL sales. During the three and six months ended June 30, 2023, the Company recognized $159,000 and $1,351,000, respectively, related to this. The Company is expected to incur through the end of 2023, one-time employee benefits of approximately $1,440,000 related to this. These one-time employee benefits are recognized in general and administrative expense on the Consolidated Statements of Income.
Litigation and Claims
From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. These legal proceedings and other matters may relate to, among other things, contractual rights and obligations, employment matters, or claims of product liability. STAAR maintains insurance coverage for various matters, including product liability and certain securities claims. While the Company does not believe that any of the claims known is likely to have a material adverse effect on the Company’s financial condition or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.
Employment Agreements
The Company’s Chief Executive Officer entered into an employment agreement with the Company, effective January 1, 2023. He and certain officers have as provisions of their agreements certain rights, including continuance of cash compensation and benefits, upon a “change in control,” which may include an acquisition of substantially all its assets, or termination “without cause or for good reason” as defined in the employment agreements.
Note 13 — Basic and Diluted Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share (in thousands except per share amounts):
Numerator:
Denominator:
Weighted average common shares:
Common shares outstanding
48,428
47,893
48,343
47,826
Less: Unvested restricted stock
(10
Denominator for basic calculation
Weighted average effects of potentially diluted common stock:
Stock options
986
1,299
1,050
1,386
46
63
61
Denominator for diluted calculation
The following table sets forth (in thousands) the weighted average number of options to purchase shares of common stock, restricted stock, RSUs and PSUs with either exercise prices or unrecognized compensation cost per share greater than the average market price per share of the Company’s common stock, which were not included in the calculation of diluted per share amounts because the effects would be anti-dilutive.
14
Note 13 — Basic and Diluted Net Income Per Share (Continued)
1,874
1,153
1,625
862
Restricted stock, RSUs and PSUs
267
122
2,001
1,420
1,649
984
Note 14 — Disaggregation of Sales, Geographic Sales and Product Sales
In the following tables, sales are disaggregated by category, sales by geographic market and sales by product data. The following breaks down sales into the following categories (in thousands):
Non-consignment sales
88,068
76,444
155,231
134,013
Consignment sales
4,238
4,657
10,603
10,288
Total net sales
The Company markets and sells its products in over 75 countries and conducts its manufacturing in the United States. Other than China and Japan, the Company does not conduct business in any country in which its sales exceed 10% of worldwide consolidated net sales. Sales are attributed to countries based on location of customers. The composition of the Company’s net sales to unaffiliated customers was as follows (in thousands):
Domestic
4,346
3,872
8,897
6,502
Foreign:
China
61,339
46,150
96,429
74,389
Japan
8,415
10,302
19,351
21,935
18,206
20,777
41,157
41,475
Total foreign sales
87,960
77,229
156,937
137,799
100% of the Company’s sales are generated from the ophthalmic surgical product segment and the chief operating decision maker makes operating decisions and allocates resources based upon the consolidated operating results, and therefore the Company operates as one operating segment for financial reporting purposes. The Company’s principal products are implantable Collamer lenses (“ICLs”) used in refractive surgery and intraocular lenses (“IOLs”) used in cataract surgery. The composition of the Company’s net sales by product line was as follows (in thousands):
ICLs
93,112
77,922
163,737
136,597
Other product sales:
Cataract IOLs
2,547
1,516
5,449
Other surgical products(1)
(846
632
581
2,255
Total other product sales
(806
3,179
2,097
7,704
(1) Other surgical products include delivery systems and normal recurring sales adjustments such as sales return allowances.
Note 14 — Disaggregation of Sales, Geographic Sales and Product Sales (Continued)
One customer, the Company’s distributor in China, accounted for 66% and 57% of net sales for the three months ended June 30, 2023 and July 1, 2022, respectively, and the same customer accounted for 58% and 52% for the six months ended June 30, 2023 and July 1, 2022, respectively. As of June 30, 2023 and December 30, 2022, respectively, one customer, the Company’s distributor in China, accounted for 74% and 59% of consolidated trade receivables.
Note 15 — COVID-19 Developments
In December 2019, COVID-19 surfaced and in March 2020, the World Health Organization declared a pandemic related to the rapid spread of COVID-19 around the world. The impact of the COVID-19 outbreak on the businesses and the economy in the U.S. and the rest of the world is, and is expected to continue to be, uncertain and may continue to be significant as COVID-19 variant strains emerge. The Company’s revenues have been adversely impacted, and the Company experienced a substantial slowdown in sales beginning March 20, 2020 in global geographies characterized as “hot spots” for the COVID-19 virus, including parts of Europe, North America, Asia, the Middle East and India. In certain of these markets, sales have paused as elective surgeries are discouraged to support COVID-19 related needs. While COVID-19 restrictions have since eased globally during 2022, a resurgence of the COVID-19 pandemic in global geographies, depending upon its duration and severity, could material adversely impact the global economy and the Company's industry, operations and financial condition and performance. The Company continues to monitor the commercial and operational impact of new variants of COVID-19 in its markets.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The matters addressed in this Item 2 that are not historical information constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can recognize forward-looking statements by the use of words like “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe,” “will,” “should,” “forecast” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements about any of the following: any projections of or guidance as to earnings, revenue, sales, profit margins, expense rate, cash, effective tax rate, product mix, capital expense or any other financial items; the expected impact of the COVID-19 pandemic and related public health measures (including but not limited to their impact on sales, operations or clinical trials globally), the plans, strategies, and objectives of management for future operations or prospects for achieving such plans; statements regarding new, existing, or improved products, including but not limited to, expectations for success of new, existing, and improved products in the U.S. or international markets or government approval of a new or improved products; commercialization of new or improved products; future economic conditions or size of market opportunities; expected costs of operations; statements of belief, including as to achieving 2023 business plans; expected regulatory activities and approvals, product launches, and any statements of assumptions underlying any of the foregoing.
Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and we can give no assurance that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described in our Annual Report on Form 10-K in “Item 1A. Risk Factors” filed on February 23, 2023. We undertake no obligation to update these forward-looking statements after the date of this report to reflect future events or circumstances or to reflect actual outcomes.
The following discussion should be read in conjunction with the audited consolidated financial statements of STAAR, including the related notes, provided in this report.
We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included on our website in the ‘Investor Relations’ sections. Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.
Overview
STAAR Surgical Company designs, develops, manufactures, and sells implantable lenses for the eye and companion delivery systems used to deliver the lenses into the eye. We are the world’s leading manufacturer of intraocular lenses for patients seeking refractive vision correction, and we also make lenses for use in surgery to treat cataracts. All the lenses we make are foldable, which allows the surgeon to insert them into the eye through a small incision during minimally invasive surgery. Refractive surgery is performed to treat the type of visual disorders that have traditionally been corrected using eyeglasses or contact lenses. We refer to our lenses used in refractive surgery as “implantable Collamer® lenses” or “ICLs.” The field of refractive surgery includes both lens-based procedures, using products like our ICL family of products, and laser-based procedures like LASIK. Successful refractive surgery can correct common vision disorders such as myopia, hyperopia, and astigmatism. Cataract surgery is a common outpatient procedure where the eye’s natural lens that has become cloudy with age is removed and replaced with an artificial lens called an intraocular lens (“IOL”) to restore the patient’s vision. STAAR employs a commercialization strategy that strives for sustainable profitable growth. Our goal is to position our refractive lenses throughout the world as primary and premium solutions for patients seeking visual freedom from wearing eyeglasses or contact lenses while achieving excellent visual acuity through refractive vision correction. We position our cataract IOL lenses used in surgery that treats cataracts based on quality and value.
Recent Developments
STAAR achieved 19% growth in ICL sales in the second quarter, compared to the second quarter of 2022, with sales growth in the Asia Pacific markets up 26%, EMEA markets down 9%, and the U.S. up 10%. In China, ICL sales were up 33% compared to the second quarter of 2022. Sales in our EMEA markets were impacted by the on-going macroeconomic and geopolitical environment, as well as an inability to ship ICLs into one non-European country as a result of a country-specific product labeling change. We have taken a number of steps and implemented initiatives that we expect will accelerate EVO adoption in the U.S. as we exit 2023 and beyond. Also, we have adjusted the timing of certain marketing investments as we remain committed to prudent spending and return on our investments. Given increased conservatism related to the global
environment, and slower than expected growth in the U.S, we updated our fiscal 2023 ICL sales outlook to a range of approximately $320 million to $325 million.
As part of our previously disclosed decision to wind down (i.e., no longer manufacture and reduce support) our Other Products business (i.e., our low margin cataract IOLs and related delivery systems), we decided to take additional sales return and inventory reserves for our remaining Other Products business. This included a $0.7 million sales return reserve for expected returns of our acrylic IOLs; $1.2 million inventory reserve for acrylic IOLs; and $1.6 million inventory reserve for silicone IOLs. As previously disclosed, in March 2023 we issued a Field Safety Notice to affected customers in parts of Europe and Japan to stop using our acrylic cataract IOLs. This was done as a precautionary measure in response to a Field Safety Notice issued by another company regarding a similarly manufactured product. To date, testing of our acrylic cataract IOL and injector system has been inconclusive and has not identified a root cause that would result in a safety issue. Nevertheless, in an abundance of caution, STAAR Japan has asked clinics to no longer use the acrylic IOL system and return them for a credit.
Critical Accounting Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Income discusses and analyzes data in our unaudited Condensed Consolidated Financial Statements provided in this report, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that 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 that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.
Management believes that there have been no significant changes during the six months ended June 30, 2023 to the items that we disclosed as our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 30, 2022.
Results of Operations
The following table shows the percentage of our total sales represented by certain items reflected in our Condensed Consolidated Statements of Income for the periods indicated.
Percentage of NetSales for Three Months
Percentage of NetSales for Six Months
100.0
23.4
21.2
22.6
21.6
76.6
78.8
77.4
78.4
19.6
17.2
21.8
18.0
35.0
29.9
35.4
28.8
12.7
10.7
13.3
11.4
Total selling, general and administrative
67.3
57.8
70.5
58.2
9.3
21.0
6.9
20.2
(0.1
)%
(1.9
1.1
(1.5
9.2
19.1
8.0
18.7
2.6
3.0
2.7
6.6
16.1
5.3
15.7
Net Sales
The following table presents our net sales, by product (dollars in thousands):
PercentageChange
2023 vs. 2022
19.5
19.9
(98.4
(72.2
Other surgical products
*
(74.2
(72.8
13.8
14.9
* Denotes change is greater than +100%.
Net sales for the three months ended June 30, 2023 increased 14% from the same period of 2022. The increase in net sales was primarily due to increased ICL sales of $15.2 million, slightly offset by decreased other product sales of $4.0 million. Changes in foreign currency unfavorably impacted net sales by $0.4 million.
Net sales for the six months ended June 30, 2023 increased 15% from the same period of 2022. The increase in net sales was primarily due to increased ICL sales of $27.1 million, slightly offset by decreased other product sales of $5.6 million. Changes in foreign currency unfavorably impacted net sales by $2.4 million.
Total ICL sales for the three months ended June 30, 2023 increased 19% from the same period of 2022, with unit increase of 21%. The APAC region sales increased by 26%, with unit growth up 29%, due to sales growth in China up 33%, India up 14% and Japan up 13%, partially offset by sales decreases in Korea down 15%. The Europe, Middle East, Africa and Latin America region sales decreased 9% with unit decrease of 23%, due to sales decreases in our distributor markets down 14% and direct markets down 4%. The North America region sales increased 10%, with unit growth up 10%, primarily due to sales growth in the U.S. up 10%. Changes in foreign currency unfavorably impacted ICL sales by $0.4 million for the three months ended June 30, 2023, which impacted our Japan and Europe, Middle East and Africa markets. ICL sales represented 100.9% and 96.1% of our total sales for the three months ended June 30, 2023 and July 1, 2022, respectively.
Total ICL sales for the six months ended June 30, 2023 increased 20% from the same period of 2022, with unit increase of 21%. The APAC region sales increased by 23%, with unit growth up 25%, due to sales growth in China up 30%, other APAC regions up 13%, India up 11%, Japan up 9% and Korea up 5%. The Europe, Middle East, Africa and Latin America region sales were flat with unit decrease of 7%, due to sales decreases in our distributor markets down 1%, offset by growth in in our direct markets up 1%. The North America region sales increased 29%, with unit growth up 30%, primarily due to sales growth in the U.S. up 34%. In late March 2022, the U.S. started to sell EVO ICLs. Changes in foreign currency unfavorably impacted ICL sales by $2.1 million for the six months ended June 30, 2023, which impacted our Japan and Europe, Middle East and Africa markets. ICL sales represented 98.7% and 94.7% of our total sales for the six months ended June 30, 2023 and July 1, 2022, respectively.
Other product sales, includes cataract IOLs, delivery systems and normal recurring sales adjustments such as sales return allowances. As a result of third-party materials and supply chain challenges that affect our cataract IOLs and associated delivery devices, we will no longer manufacture cataract IOLs, though we will continue to support these products through the end of 2023, as supplies permit. We do not expect this decision to have a significant impact to revenue growth in future years. Other product sales for the three and six months ended June 30, 2023, decreased 125% and 73%, respectively, from the same period of 2022, due to primarily to a reduction in cataract IOL sales, decreased sales of cataract IOL injector parts and sales return reserves related to cataract IOLs. Changes in foreign currency unfavorably impacted other product sales by $0.3 million for the six months ended June 30, 2023. Other product sales represented (0.9%) and 3.9% of our total sales for the three months ended June 30, 2023 and July 1, 2022, respectively, and represented 1.3% and 5.3% of our total sales for the six months ended June 30, 2023 and July 1, 2022, respectively.
19
Gross Profit
The following table presents our gross profit and gross profit margin (dollars in thousands):
13.4
Gross margin
Gross profit for the three and six months ended June 30, 2023 increased 10.7% and 13.4%, respectively, from the same periods of 2022. Gross profit margin decreased to 76.6% and 77.4% of revenue for the three and six months ended June 30, 2023, respectively, compared to 78.8% and 78.4% of revenue for the three and six months ended July 1, 2022, respectively, due mainly to reserves related to cataract IOLs.
General and Administrative Expense
The following table presents our general and administrative expenses (dollars in thousands):
General and administrative expense
29.4
39.6
Percentage of sales
General and administrative expenses for the three months ended June 30, 2023 increased 29.4% from the same period of 2022 due to increased salary-related and payroll tax expenses, outside services and facility costs.
General and administrative expenses for the six months ended June 30, 2023 increased 39.6% from the same period of 2022 due to increased bonus and stock-based compensation expenses, salary-related and payroll tax expenses, Japan one-time employee benefits, outside services, and facility costs.
Selling and Marketing Expense
The following table presents our selling and marketing expenses (dollars in thousands):
Selling and marketing expense
33.2
41.3
Selling and marketing expenses for the three months ended June 30, 2023 increased 33.2% from the same period of 2022 due to increased advertising and promotional activities, especially in the U.S., salary-related and payroll tax expenses, bonus and stock-based compensation expenses, sales commission expenses and trade shows and sales meetings expenses.
Selling and marketing expenses for the six months ended June 30, 2023 increased 41.3% from the same period of 2022 due to increased advertising and promotional activities, especially in the U.S., salary-related and payroll tax expenses, sales commission expenses, trade shows and sales meetings expenses and bonus and stock-based compensation expenses.
20
Research and Development Expense
The following table presents our research and development expenses (dollars in thousands):
Research and development expense
36.1
33.1
Research and development expenses for the three and six months ended June 30, 2023 increased 36.1% and 33.1% from the same period of 2022, respectively, due mainly to increased salary-related and payroll tax expenses and clinical expenses associated with our U.S. post-approval clinical trials, and for the six months ended June 30, 2023, increased bonus and stock-based compensation expenses as compared to the six months ended July 1, 2022.
Other Expense, Net
The following table presents our other expenses, net (dollars in thousands):
Other income (expense), net
93.2
The change in other income (expense), net for the three and six months ended June 30, 2023 and July 1, 2022, respectively, was due to increased interest income mainly due to our investments held available for sale and for the six months ended June 30, 2023 lower foreign exchange losses as compared to the six months ended July 1, 2022.
Income Taxes
The following table presents our income tax provision (dollars in thousands):
Income tax provision
1.9
The effective tax rates for the three months ended June 30, 2023 and July 1, 2022 were 28.6% and 15.7%, respectively, and were 33.6% and 16.1% for the six months ended June 30, 2023 and July 1, 2022, respectively. Our effective tax rates differ from the U.S. federal statutory rate of 21%, primarily due to the income tax expense generated in foreign jurisdictions.
Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof, and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.
Liquidity and Capital Resources
We believe that current cash and cash equivalents, investments available for sale (“AFS”) and future cash flow from operating activities will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the financial statements included in this quarterly report. Our financial condition at June 30, 2023 and December 30, 2022 included the following (in thousands):
December 30,2022
(24,224
209,532
225,541
(16,009
Current assets
16,280
Current liabilities
2,478
Working capital
273,809
260,007
13,802
Cash and cash equivalents include cash and balances in deposits and money market accounts held at banks and financial institutions. Our investment policy primary objective is capital preservation while maximizing our return on investment. Investments available for sale may include U.S. government and corporate debt securities, commercial paper, certain certificates deposit and related security types, that are rated by two nationally recognized statistical rating organizations with minimum investment grade ratings of AAA to A-/A-1+ to A-2, or the equivalent. The maturity of individual investments may not extend 24 months from the date of purchase. There are also limits to the amount of credit exposure in any given security type. We do not have any off-balance sheet arrangements.
A summary of cash flows for the six months ended June 30, 2023 and July 1, 2022 was as follows (in thousands):
Cash flows from:
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes
Net increase in cash and cash equivalents
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
For the six months ended June 30, 2023 net cash used by operating activities consisted of $39.5 million in working-capital changes partially offset by $19.3 million in non-cash items and net income of $8.8 million.
Starting in the second half of 2022, we decided to invest our cash in slightly higher yielding securities. For the six months ended June 30, 2023, net cash provided by investment activities was $20.1 million which consisted of $68.6 million of proceeds from the sale or maturity of investments AFS, partially offset by $42.6 million in purchases of investments AFS and $5.9 million in purchases of property, plant and equipment. For the six months ended July 1, 2022, net cash used in investment activity consisted of $7.8 million in purchases of property, plant and equipment.
Net cash used in financing activities for the six months ended June 30, 2023 was $0.1 million which consisted of $2.0 million to repurchase of employee common stock for taxes withheld and $0.1 million to repay finance lease obligations, offset by $2.0 million of proceeds from the exercise of stock options. For the six months ended July 1, 2022, net cash provided by financing activities consisted of $3.1 million of proceeds from the exercise of stock options.
22
Commitments
The Company’s Chief Executive Officer entered into an employment agreement with the Company, effective January 1, 2023. He and certain officers have as provisions of their agreements certain rights, including continuance of cash compensation and benefits, upon a “change in control,” which may include an acquisition of substantially all of its assets, or termination “without cause or for good reason” as defined in the employment agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the six months ended June 30, 2023, there have been no material changes in the Company’s qualitative and quantitative market risk since the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 30, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of the disclosure controls and procedures of the Company. Based on that evaluation, our CEO and CFO concluded, as of the end of the period covered by this quarterly report on Form 10-Q, that our disclosure controls and procedures were effective. For purposes of this statement, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our management, including the CEO and the CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud or material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, our internal control system can provide only reasonable assurance of achieving its objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. 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 acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and can provide only reasonable, not absolute, assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, or the degree of compliance with the policies and procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
Our short and long-term success is subject to many factors that are beyond our control. Investors and prospective investors should consider carefully information contained in this report and the risks and uncertainties described in “Part I—Item 1A—Risk Factors” of the Company’s Form 10-K for the fiscal year ended December 30, 2022. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
Following our June 15, 2023 Annual Shareholders Meeting, the Board of Directors determined to continue our past practice, supported by the most recent shareholder non-binding advisory vote, to include a shareholder vote on the compensation of executives in our proxy materials every year until the next required vote on the frequency of shareholder votes on the compensation of executives.
During the quarter ended June 30, 2023, no director or officer adopted or terminated:
ITEM 6.EXHIBITS
3.1
Amended and Restated Certificate of Incorporation.(1)
3.2
Amended and Restated Bylaws.(2)
4.1
Form of Certificate for Common Stock, par value $0.01 per share.(3)
†4.2
Amended and Restated Omnibus Equity Incentive Plan.(4)
31.1
Certifications Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
32.1
Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
Financial statements from the quarterly report on Form 10-Q of STAAR Surgical Company for the quarter ended June 30, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL), are filed herewith and include: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text.*
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, has been formatted in Inline XBRL with applicable taxonomy extension information contained in Exhibit 101.
* Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated:
August 2, 2023
By:
/s/ PATRICK F. WILLIAMS
Patrick F. Williams
Chief Financial Officer
(on behalf of the Registrant and as its principal financial officer)
26