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: October 2, 2020
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 46,109,765 shares of common stock, par value $0.01 per share, issued and outstanding as of October 30, 2020.
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
19
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
24
ITEM 4.
CONTROLS AND PROCEDURES
25
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
26
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
October 2, 2020
January 3, 2020
ASSETS
Current assets:
Cash and cash equivalents
$
128,338
119,968
Accounts receivable trade, net of allowance of doubtful accounts of
$131 and $88, respectively
42,063
30,996
Inventories, net
18,234
17,142
Prepayments, deposits and other current assets
7,368
6,560
Total current assets
196,003
174,666
Property, plant and equipment, net
22,662
17,065
Finance lease right-of-use assets, net
640
1,867
Operating lease right-of-use assets, net
7,725
6,684
Intangible assets, net
275
296
Goodwill
1,786
Deferred income taxes
5,007
3,750
Other assets
600
751
Total assets
234,698
206,865
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit
1,353
1,827
Accounts payable
7,830
8,050
Obligations under finance leases
422
560
Obligations under operating leases
2,215
2,700
Allowance for sales returns
4,427
3,644
Other current liabilities
17,612
17,697
Total current liabilities
33,859
34,478
73
366
5,571
4,086
Asset retirement obligations
216
211
Pension liability
8,587
7,840
Total liabilities
48,306
46,981
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 60,000 shares authorized: 46,072 and
44,822 shares issued and outstanding at October 3, 2020 and
January 3, 2020, respectively
461
448
Additional paid-in capital
328,074
304,288
Accumulated other comprehensive loss
(2,925
)
(3,048
Accumulated deficit
(139,218
(141,804
Total stockholders’ equity
186,392
159,884
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
Nine Months Ended
September 27, 2019
Net sales
47,081
39,055
117,462
111,302
Cost of sales
12,210
10,004
33,401
28,172
Gross profit
34,871
29,051
84,061
83,130
Selling, general and administrative expenses:
General and administrative
8,589
7,098
24,406
21,443
Selling and marketing
12,649
12,463
34,003
34,288
Research and development
8,751
6,156
22,960
17,889
Total selling, general and administrative expenses
29,989
25,717
81,369
73,620
Operating income
4,882
3,334
2,692
9,510
Other income (expense), net:
Interest income, net
266
237
796
Gain (loss) on foreign currency transactions
468
(584
388
(821
Royalty income
93
106
239
440
Other income (expense), net
(63
(83
124
Total other income (expense), net
499
(186
781
539
Income before income taxes
5,381
3,148
3,473
10,049
Provision for income taxes
1,489
760
887
2,380
Net income
3,892
2,388
2,586
7,669
Net income per share:
Basic
0.08
0.05
0.06
0.17
Diluted
0.16
Weighted average shares outstanding:
45,903
44,563
45,394
44,426
48,180
46,857
47,589
46,848
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income (loss):
Defined benefit plans:
Net change in plan assets
(334
(1,037
(387
(1,677
Reclassification into other income, net
70
212
80
Foreign currency translation loss
316
(22
402
317
Tax effect
(68
115
(104
Other comprehensive income (loss), net of tax
(16
(918
123
(1,200
Comprehensive income
3,876
1,470
2,709
6,469
3
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Stock Shares
Stock Par
Value
Additional
Paid-In
Capital
Accumulated
Other
Compre-
hensive
Income
(Loss)
Deficit
Total
Balance, at July 3, 2020
45,788
458
320,235
(2,909
(143,110
174,674
—
Other comprehensive loss
Common stock issued upon exercise of options
269
4,426
4,429
Stock-based compensation
3,413
Unvested restricted stock
11
Vested restricted stock
4
Balance, at October 2, 2020
46,072
Balance, at June 28, 2019
44,534
445
296,063
(1,602
(150,571
144,335
64
718
719
2,816
8
Balance, at September 27, 2019
44,606
446
299,597
(2,520
(148,183
149,340
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
Balance, at January 3, 2020
44,822
Other comprehensive income
1,146
12
13,974
13,986
9,812
Balance, at December 28, 2018
44,195
442
289,584
(1,320
(156,280
132,426
Impact of the adoption of lease accounting standard
113
Impact of adoption of nonemployee share-based payment standard
(315
315
190
1,829
8,501
210
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant, and equipment
2,276
2,853
Amortization of intangibles
(1,215
526
Change in net pension liability
522
264
Loss on disposal of property and equipment
14
Stock-based compensation expense
8,965
7,778
Provision for sales returns and bad debts
815
309
Inventory provision
1,195
1,222
Changes in working capital:
Accounts receivable
(10,975
(4,260
Inventories
(1,353
(179
Prepayments, deposits, and other current assets
(636
(230
(657
546
(151
(536
Net cash provided by operating activities
1,401
16,002
Cash flows from investing activities:
Acquisition of property and equipment
(6,259
(7,169
Acquisition of patents and licenses
(30
Net cash used in investing activities
(7,199
Cash flows from financing activities:
Repayment of finance lease obligations
(455
(998
Repayment on line of credit
(511
(1,512
Proceeds from the exercise of stock options
Proceeds from vested restricted stock
Net cash provided by (used in) financing activities
13,021
(679
Effect of exchange rate changes on cash, cash equivalents and restricted cash
207
204
Increase in cash, cash equivalents and restricted cash
8,370
8,328
Cash, cash equivalents and restricted cash, at beginning of the period
103,999
Cash, cash equivalents and restricted cash, at end of the period
112,327
6
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 January 3, 2020 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 January 3, 2020.
The Condensed Consolidated Financial Statements for the three and nine months ended October 2, 2020 and September 27, 2019, 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 nine months ended October 2, 2020 and September 27, 2019, 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 were two vendors which accounted for over 29% of the Company’s consolidated accounts payable as of October 2, 2020. There was one vendor which accounted for over 11% of the Company’s consolidated accounts payable as of January 3, 2020. There was one vendor who accounted for over 10% of the Company’s consolidated purchases for the three months ended October 2, 2020. There were no vendors who accounted for over 10% of the Company’s consolidated purchases for the nine months ended October 2, 2020.
Use of Estimates
During the COVID-19 pandemic, the Company believes it has used reasonable estimates and assumptions in determining valuation allowances for uncollectible trade receivables, sales returns reserves, obsolete and excess inventory reserves, deferred income taxes, and tax reserves, including valuation allowances for deferred tax assets, pension liabilities, evaluation of asset impairment, in determining the useful life of depreciable and definite-lived intangible assets, and in the variables and assumptions used to calculate and record stock-based compensation. Throughout the COVID-19 pandemic the Company offered extended payment terms to assist its surgeon customers and their clinics as they resumed business. During the quarter ended October 2, 2020, the Company has experienced improvements in customer payments and is unaware of any material impairment of customer receivables. The Company’s sales representatives throughout the world remain engaged with customers conducting online training and other educational courses which have been very well attended. This activity has given the Company insight into COVID-19’s impact on customers and potential impairment of receivables.
Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted
On January 4, 2020 (beginning of fiscal year 2020), the Company adopted Accounting Standards Update (“ASU”) 2016‑13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model; and (ii) provides for recording credit losses on available-for-sale debt securities through an allowance account. ASU 2016-13 also requires certain incremental disclosures. Subsequently, the FASB issued ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2020-02 and ASU 2020-03 to clarify and improve ASU 2016-13. The adoption of ASU 2016-13 did not have a material impact on the Condensed Consolidated Financial Statements.
7
Note 1 — Basis of Presentation and Significant Accounting Policies (Continued)
Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted (Continued)
On January 4, 2020 (beginning of fiscal year 2020), the Company adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which modifies certain disclosures requirements for reporting fair value measurements. The adoption of ASU 2018-13 did not have a material impact on the Condensed Consolidated Financial Statements.
On January 4, 2020 (beginning of fiscal year 2020), the Company adopted ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20); Disclosure Framework – Changes in the Disclosure Requirement for Defined Benefit Plans,” which modifies disclosure requirements for employers that sponsor defined benefit pension or other post retirement plans. The adoption of ASU 2018-14 did not have a material impact on the Condensed Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 removes the following exceptions: exception to the incremental approach for intra period tax allocation; exception to accounting for basis differences when there are ownership changes in foreign investments; and exception to interim period tax accounting for year to date losses that exceed anticipated losses. ASU 2019-12 also improves financial reporting for franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt this standard as of January 2, 2021 (beginning of fiscal year 2021) and is currently evaluating the disclosure requirements and its effect on the Condensed Consolidated Financial Statements.
Note 2 — 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
1,818
Work in process
4,693
1,870
Finished goods
13,018
12,976
Total inventories, gross
19,529
18,180
Less inventory reserves
1,295
1,038
Total inventories, net
Note 3 — Prepayments, Deposits, and Other Current Assets
Prepayments, deposits, and other current assets consisted of the following (in thousands):
Prepayments and deposits
3,534
3,031
Prepaid insurance
242
1,488
Consumption tax receivable
1,059
875
Value added tax (VAT) receivable
1,492
713
Other(1)
1,041
453
Total prepayments, deposits and other current assets
(1)
No individual item in “other current assets” exceeds 5% of the total prepayments, deposits and other current assets.
Note 4 — Property, Plant and Equipment
Property, plant and equipment, net consisted of the following (in thousands):
Machinery and equipment
21,275
17,173
Computer equipment and software
6,686
6,244
Furniture and fixtures
4,614
4,169
Leasehold improvements
11,200
10,151
Construction in process
10,293
8,477
Total property, plant and equipment, gross
54,068
46,214
Less accumulated depreciation
31,406
29,149
Total property, plant and equipment, net
Note 5 –Intangible Assets
Intangible assets, net consisted of the following (in thousands):
Long-lived amortized intangible assets
Gross
Carrying
Amount
Amortization
Net
Patents and licenses
9,369
(9,094
9,353
(9,057
Note 6 – Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
Accrued salaries and wages
5,194
4,400
Accrued bonuses
1,000
4,184
Accrued insurance
96
1,346
Income taxes payable
3,898
2,710
Accrued consumption tax
1,228
1,164
Accrued professional fees for clinical trials
1,554
567
Marketing obligations
1,197
633
3,445
2,693
Total other current liabilities
No individual item in “Other” exceeds 5% of the other current liabilities.
Note 7 – Lines of Credit
Since 1998, the Company’s wholly owned Japanese subsidiary, STAAR Japan, has had an agreement with Mizuho Bank which provides for borrowings of up to 500,000,000 Yen, at an interest rate equal to the uncollateralized overnight call rate (approximately 0.06% as of October 2, 2020) plus a 0.50% spread, and may be renewed quarterly (the current line expires on November 21, 2020). The credit facility is not collateralized. The Company had 142,500,000 Yen and 197,500,000 Yen outstanding on the line of credit as of October 2, 2020 and January 3, 2020, respectively (approximately $1,353,000 and $1,827,000 based on the foreign exchange rates on October 2, 2020 and January 3, 2020, respectively), which approximates fair value due to the short-term maturity and market interest rates of the line of credit. In case of default, the interest rate will be increased to 14% per annum. There was 357,500,000 Yen and 302,500,000 Yen available for borrowing as of October 2, 2020 and January 3, 2020, respectively (approximately $3,393,000 and $2,798,000 based on the foreign exchange rate on October 2, 2020 and January 3, 2020, respectively). At maturity on November 21, 2020, the Company expects to renew this line of credit for an additional three months, with similar terms.
9
Note 7 – Lines of Credit (Continued)
In September 2013, the Company’s wholly owned Swiss subsidiary, STAAR Surgical AG, entered into a framework agreement for loans (“framework agreement”) with Credit Suisse (the “Bank”). The framework agreement provides for borrowings of up to 1,000,000 CHF (Swiss Francs) (approximately $1,100,000 and $1,000,000 at the rate of exchange on October 2, 2020 and January 3, 2020 respectively), to be used for working capital purposes. Accrued interest and 0.25% commissions on average outstanding borrowings is payable quarterly and the interest rate will be determined by the Bank based on the then prevailing market conditions at the time of borrowing. The framework agreement is automatically renewed on an annual basis based on the same terms assuming there is no default. The framework agreement may be terminated by either party at any time in accordance with its general terms and conditions. The framework agreement is not collateralized and contains certain conditions such as providing the Bank with audited financial statements annually and notice of significant events or conditions, as defined in the framework agreement. The Bank may also declare all amounts outstanding to be immediately due and payable upon a change of control or a “material qualification” in STAAR Surgical independent auditors’ report, as defined. There were no borrowings outstanding as of October 2, 2020 and January 3, 2020.
The Company is in compliance with covenants of its credit facilities and lines of credit as of October 2, 2020.
Note 8 – Leases
Finance Leases
The Company entered into finance leases primarily related to purchases of equipment used for manufacturing or computer-related equipment. 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):
569
1,885
827
912
102
27
Finance lease right-of-use assets, gross
1,396
2,926
756
Total finance lease liability
495
926
Weighted-average remaining lease term (in years)
1.0
1.1
Weighted-average discount rate
3.71
%
6.17
Supplemental cash flow information related to finance leases consisted of the following (dollars in thousands):
Amortization of finance lease right-of-use asset
48
141
215
447
Interest on finance lease liabilities
17
58
Cash paid for amounts included in the measurement of finance lease liabilities:
Operating cash flows
Financing cash flows
109
455
998
Right-of-use assets obtained in exchange for new finance lease liabilities
22
679
10
Note 8 – Leases (Continued)
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 did 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):
845
765
462
Real property
14,115
11,116
Operating lease right-of-use assets, gross
15,422
12,343
7,697
5,659
Total operating lease liability
7,786
6,786
5.5
2.3
2.49
1.82
Supplemental cash flow information related to operating leases was as follows (dollars in thousands):
Operating lease cost
752
726
2,238
2,020
Cash paid for amounts included in the measurement of operating lease liabilities:
780
739
2,281
2,031
Right-of-use assets obtained in exchange for new operating lease liabilities
2,842
140
3,160
2,797
Future Minimum Lease Commitments
Estimated future minimum lease payments under operating and finance leases having initial or remaining non-cancelable lease terms more than one year as of October 2, 2020 is as follows (in thousands):
As of October 2, 2020
12 Months Ended
September 2021
2,374
433
September 2022
1,632
51
September 2023
1,404
15
September 2024
896
September 2025
637
Thereafter
Total minimum lease payments, including interest
8,171
507
Less amounts representing interest
385
Total minimum lease payments
Note 9 — Income Taxes
The Company recorded an income tax provision as follows (in thousands):
The Company recorded income taxes of $1,489,000 for the three months ended October 2, 2020 due to pre-tax income generated in certain foreign jurisdictions, partially offset by a reversal of $154,000 of its U.S. valuation allowance, as a result of an increase in foreign income and changes in the usage and release of certain deferred tax assets. The Company recorded income taxes of $760,000 for the three months ended September 27, 2019 due to pre-tax income generated in certain foreign jurisdictions and withholding taxes on foreign operations. The Company recorded income taxes of $887,000 for the nine months ended October 2, 2020 due to income tax expense from profits generated from its foreign operations, partially offset by the release of its U.S. valuation allowance. The Company recorded income taxes of $2,380,000 for the nine months ended September 27, 2019, primarily due to pre-tax income generated in certain foreign jurisdictions and withholding taxes on foreign operations. The Company’s quarterly provision for income taxes is determined by estimating an annual effective tax rate. This estimate may fluctuate throughout the year as new information becomes available affecting its underlying assumptions. In the fourth quarter of fiscal year 2019, the Company reversed all previously recorded withholding taxes recorded for 2019, at which time the Company formed STAAR Surgical UK Limited as a holding company for its foreign operations. Based on the current tax treaties between the U.S., United Kingdom and Switzerland, the Company will no longer accrue for Switzerland withholding taxes on foreign earnings after fiscal 2018 (see also Note 10 in its fiscal 2019 Form 10-K for more information). There are no unrecognized tax benefits related to uncertain tax positions taken by the Company. All earnings from the Company’s subsidiaries are not considered to be permanently reinvested.
The 2017 Tax Act subjects a U.S. shareholder to tax on Global Intangible Low Tax Income (“GILTI”) earned by certain foreign subsidiaries. In general, GILTI is the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets. The provision further allows a deduction of 50 percent of GILTI, however this deduction is limited by the Company’s U.S. taxable income. The Company has elected to account for GILTI as a current period expense when incurred.
On July 20, 2020 the U.S. Treasury issued final regulations for addressing the treatment of foreign income that is subject to a high rate of foreign tax (the GILTI high-tax exclusion). The final regulations allow companies to exclude certain high-taxed income from their GILTI calculation. The GILTI high-tax exclusion applies if the effective foreign tax rate is 90% or more of the rate that would apply if the income were subject to the maximum US rate of tax specified in section 11 (currently 18.9%, based on a maximum rate of 21%). The final regulations also provide that the GILTI high-tax exclusion is an annual election made each year and is retroactive to years beginning after December 31, 2017. The Company has made the election to exclude certain high-taxed income from its GILTI calculation for 2019 and the three and nine months ended October 2, 2020.
The ultimate realization of deferred tax assets is dependent upon future generation of income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the projected future income and tax planning strategies in making this assessment. As of fiscal year end 2019, the Company had three years of accumulated profits for federal and various state income tax purposes as a result of GILTI. However, the three-year income position is not solely determinative and, accordingly, management considers all other available positive and negative evidence in its analysis. This includes existing profits in foreign jurisdiction as well as projected future profits. As further described in Notes 1 and 10 of the Company’s fiscal 2019 Form 10-K, under the “incremental cash tax savings approach,” the Company recorded a valuation allowance release of $3,003,000 and $373,000 against the federal and certain states deferred tax assets, respectively. During the nine months ended October 2, 2020, the Company revised its global forecasts as a result of COVID‑19, and due to changes in the usage and release of certain deferred tax assets, the Company released an additional $1,215,000 of valuation allowance. As of October 2, 2020, the Company released approximately $4,591,000 of valuation allowance on its deferred tax assets in the U.S. jurisdiction utilizing the incremental cash tax savings approach.
Note 9 — Income Taxes (Continued)
Under the incremental cash tax savings approach, the U.S. valuation allowances of $35,745,000, will remain as the usage of the remaining net operating losses and deferred tax assets will not result in cash tax savings and therefore provide no additional benefit. As of October 2, 2020, the Company had net deferred tax assets in the U.S. of $4,727,000, which consisted of the federal and state valuation allowance release of $4,307,000 and $284,000, respectively, and the refundable alternative minimum tax credit of $136,000.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. The Company reviewed the provisions of the CARES Act, but does not expect it to have a material impact to its tax provision (also see note 15).
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)
320
240
959
720
Interest cost(2)
20
34
60
Expected return on plan assets(2)
(47
(36
(136
(103
Prior service credit(2),(3)
(9
(6
(26
(17
Actuarial loss recognized in current period(2),(3)
79
32
238
97
Net periodic pension cost
355
250
1,069
757
Recognized in selling general and administrative expenses on the Condensed Consolidated Statements of Income.
(2)
Recognized in other income (expense), net on the Condensed Consolidated Statements of Income.
(3)
Amounts reclassified from accumulated other comprehensive income (loss).
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
189
519
404
13
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
2,469
2,178
7,206
5,770
Restricted stock
119
77
273
236
Restricted stock units
415
246
1,238
1,661
Performance stock units
54
Nonemployee stock options
69
57
194
111
Total stock-based compensation expense
3,126
2,558
The Company recorded stock-based compensation costs in the following categories (in thousands):
30
82
43
1,307
1,082
3,601
2,878
Marketing and selling
807
692
2,674
2,553
982
777
2,608
2,304
Total stock-based compensation expense, net
Amounts capitalized as part of inventory
287
258
847
723
Total stock-based compensation expense, gross
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 July 30, 2020, stockholders approved a proposal to increase the number of shares under the plan by 2,650,000 shares, for a total of 18,035,000 shares. As of October 2, 2020, there were 3,376,152 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 an 6% 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.
Note 11 — Stockholders’ Equity (Continued)
Expected dividend yield
0
Expected volatility
53
Risk-free interest rate
0.31
1.55
0.53
2.40
Expected term (in years)
5.72
5.67
Stock Options
A summary of stock option activity under the Plan for the nine months ended October 2, 2020 is presented below:
Stock
Options
(in 000’s)
Minimum
Exercise
Price
Maximum
Outstanding at January 3, 2020
4,326
Granted
616
Exercised
(1,146
Forfeited or expired
(14
Outstanding at October 2, 2020
3,782
5.05
51.42
Exercisable at October 2, 2020
2,594
Restricted Stock, Restricted Stock Units and Performance Stock Units
A summary of restricted stock, RSUs and PSUs activity under the Plan for the nine months ended October 2, 2020 is presented below:
Restricted
Units
Performance
Unvested at January 3, 2020
104
127
Vested
(11
(93
(1
Unvested at October 2, 2020
137
Note 12 - Commitments and Contingencies
Litigation and Claims
On August 19, 2020, a putative federal securities class action, Alwazaan v. STAAR Surgical Co., et al., was filed against the Company and certain of its executives in the U.S. District Court for the Central District of California. On September 1, 2020, a substantially similar federal securities class action, Zhang v. STAAR Surgical Co., et al., was filed against the Company and the same executives in the U.S. District Court for the Central District of California. On September 11, 2020, the court consolidated the two actions under the caption In re STAAR Surgical Co. Securities Litigation. The plaintiffs in the lawsuit allege that the Company made material misstatements regarding its sales in China, its marketing spend, and its R&D expenses. Plaintiffs seek compensatory and punitive damages as well as attorneys’ fees. Although the ultimate outcome of this action cannot be determined with certainty, the Company denies any wrongdoing and will vigorously defend itself against these claims.
Employment Agreements
The Company’s Chief Executive Officer entered into an employment agreement with the Company, effective March 1, 2015. She 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
45,914
44,573
45,405
44,436
Less: Unvested restricted stock
(10
Denominator for basic calculation
Weighted average effects of potentially diluted common stock:
Stock options
2,208
2,194
2,124
2,260
68
98
66
156
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.
1,836
1,446
Restricted stock, restricted stock units and performance stock units
909
16
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
42,535
34,696
96,381
98,518
Consignment sales
4,546
4,359
21,081
12,784
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
1,477
1,783
4,098
5,849
Foreign:
China
23,301
18,361
53,619
49,526
Japan
9,208
7,345
24,973
19,139
13,095
11,566
34,772
36,788
Total foreign sales
45,604
37,272
113,364
105,453
No other location individually exceeds 10% of the total sales.
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
41,493
33,815
101,561
96,033
Other product sales
IOLs
3,325
4,093
9,880
11,984
Other surgical products
2,263
1,147
6,021
3,285
Total other product sales
5,588
5,240
15,901
15,269
One customer, the Company’s distributor in China, accounted for 49% and 46% of net sales for the three and nine months ended October 2, 2020, respectively, and the same customer, accounted for 47% and 44% of net sales for the three and nine months ended September 27, 2019, respectively. As of October 2, 2020 and January 3, 2020, respectively, one customer, the Company’s distributor in China, accounted for 59% and 43% of consolidated trade receivables.
Note 15 — COVID-19 and CARES Act 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 be significant. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected. On March 17, 2020, the Company suspended most of its production and non-essential business locations where employees can work from home. A very limited number of manufacturing personnel remained at work for critical late staged processes, until the end of March 2020. Manufacturing resumed on April 27, 2020. The Company’s revenues have been adversely impacted, as customers in China were not able to carry out procedures during the month of February 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, the Middle East and India. In certain of these markets, sales have paused as elective surgeries are discouraged to support COVID-19 related needs. The Company expects decreases in sales in certain geographies to continue through the remainder of 2020 and into 2021 as different geographies resume business activities on differing timelines.
The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The Company did not apply for or require financing available under the CARES Act and does not expect to do so given the strength of our balance sheet. The Company will continue to monitor the impact that the CARES Act may have on its business, financial condition, results of operations, or liquidity.
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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, 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 (including the EVO family of lenses in the U.S. and the EVO Viva family of lenses for presbyopia internationally); 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 2020 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, risks and uncertainties related to the COVID-19 pandemic and related public health measures, and those described in in our Annual Report on Form 10-K in “Item 1A. Risk Factors” filed on February 26, 2020, as well as the updated risk factor disclosed in our Quarterly Report on Form 10-Q in “Item 1A. Risk Factors” filed on May 16, 2020. 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.
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 IOL lenses used in surgery that treats cataracts based on quality and value.
Recent Developments
For the third quarter of 2020 STAAR’s net sales increased 21% over the prior year driven by 25% global ICL unit growth as markets more fully reopened following COVID-19 related shutdowns. Notable markets for ICL unit growth in the third quarter of 2020 included China, Japan, South Korea, Spain, Germany, European distributor markets, and rest of APAC. India and the Middle East were the two markets that remained most challenged by COVID-19 during the third quarter. During the third quarter we completed patient enrollment in our U.S. EVO clinical trial and by October 30, 2020 all primary patients in the trial were implanted with the lens. Primary study analysis will be conducted when 300 primary eyes complete six months of follow-up, which is anticipated early in the second quarter of 2021 with submission of the study results to the FDA shortly thereafter. Considering the subsequent six-month patient follow-up and time to prepare our data submission to the FDA, we believe we are on track for potential marketing approval and commercialization of EVO in the U.S. in the second half of 2021. Also, on November 4, 2020, we announced the first EVO Viva lens patient who was implanted in Belgium. We are embarking upon the phased rollout of that presbyopia-correcting lens in Europe.
While COVID-19 hotspots and government public health mandates may reoccur moving forward, we anticipate less business interruption and continued interest in our EVO ICL lens-based refractive solutions in the fourth quarter of 2020. We also continue to believe that we will achieve a 20% share of the refractive procedure market in China by the end of the year. Assuming significant COVID-19 hotspots and government public health mandates do not reoccur and global economic improvement progresses, our outlook for the fourth quarter of 2020 currently anticipates revenue in the range of $42 to $44 million with the caveat of increased spending to support a developing strong outlook for 2021.
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations 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.
An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the nine months ended October 2, 2020 to the items that we disclosed as our critical accounting policies and 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 January 3, 2020.
Results of Operations
The following table shows the percentage of our total sales represented by certain items reflected in our Condensed Consolidated Statements of Operations for the periods indicated.
Percentage of Net Sales
for Three Months
for Nine Months
100.0
25.9
25.6
28.4
25.3
74.1
74.4
71.6
74.7
18.2
20.8
19.3
26.9
31.9
29.0
30.8
18.6
15.8
19.5
16.1
Total selling, general and administrative
63.7
65.9
69.3
66.2
10.4
8.5
(0.5
)%
0.7
0.5
11.5
8.0
3.0
9.0
3.2
1.9
0.8
2.1
8.3
6.1
2.2
6.9
Net Sales
Percentage
Change
2020 vs. 2019
22.7
5.8
(18.8
(17.6
97.3
83.3
6.6
4.1
20.6
Net sales for the three months ended October 2, 2020 were $47.1 million, an increase of 21% from $39.1 million reported during the same period of 2019. The increase in net sales was due to increased ICL sales of $7.7 million and other product sales of $0.3 million. Changes in foreign currency favorably impacted net sales by $0.4 million.
Net sales for the nine months ended October 2, 2020 were $117.5 million, an increase of 6% from $111.3 million reported during the same period of 2019. The increase in net sales was due to increased ICL sales of $5.5 million and other product sales of $0.6 million. Changes in foreign currency favorably impacted net sales by $0.5 million.
Total ICL sales for the three months ended October 2, 2020 were $41.5 million, an increase of 23% from $33.8 million reported for the same period of 2019, with unit increase of 25%. The APAC region sales increased by 29%, with unit growth up 31% due to unit growth in Japan up 67%, other APAC Distributors up 67%, China up 33%, and Korea up 21%. The Europe, Middle East, Africa and Latin America region sales increased 7% with unit decrease of 2% due to a decrease in units in the Middle East and Africa of 54%, offset by unit growth in the UK up 44%, Spain up 24%, Distributor Operations up 17%, Germany up 13% and Latin America up 12%. The North America region sales decreased 3%, with unit decrease of 1%, due to a decrease in units of 8% in the U.S., offset by unit growth in Canada of 31%. ICL sales represented 88.1% and 86.6% of our total sales for the three months ended October 2, 2020 and September 27, 2019, respectively.
Total ICL sales for the nine months ended October 2, 2020 were $101.6 million, a 6% increase from $96.0 million reported for the same period of 2019, with unit growth up 10%. The APAC region sales increased by 13%, with unit growth up 17% due to unit growth in Japan up 62%, Korea up 17%, China up 16% and other APAC Distributors up 30%. The Europe, Middle East, Africa and Latin America region sales decreased 9% and units decreased 12%. The North America region sales and units decreased 22%. The decrease in both these regions were impacted by the COVID-19 pandemic in the first half of 2020; most markets started to reopen in mid-May/early June. ICL sales represented 86.5% and 86.3% of our total sales for the nine months ended October 2, 2020 and September 27, 2019, respectively.
Other product sales, including IOLs were $5.6 million for the three months ended October 2, 2020, an increase of 7% from $5.2 million reported for the same period of 2019. Other product sales were $15.9 million for the nine months ended October 2, 2020, an increase of 4% from $15.3 million reported for the same period of 2019. The increase in both periods was due to increased preloaded injector part sales to a third-party manufacturer for product they sell to their customers, offset by decreased IOL sales. Other product sales represented 11.9% and 13.4% of our total sales for the three months ended October 2, 2020 and September 27, 2019, respectively, and represented 13.5% and 13.7% of our total sales for the nine months ended October 2, 2020 and September 27, 2019, respectively.
Gross Profit
20.0
Gross margin
Gross profit for the three months ended October 2, 2020 was $34.9 million, a 20.0% increase compared to the $29.1 million reported for the same period of 2019. Gross profit margin decreased to 74.1% of revenue for the three months ended October 2, 2020 compared to 74.4% of revenue for the three months ended September 27, 2019, due to geographic sales mix, period costs associated with the manufacturing expansion projects, and increased mix of injector part sales which carry a lower margin.
21
Gross profit for the nine months ended October 2, 2020 was $84.1 million, a 1.1% increase compared to the $83.1 million reported for the same period of 2019. Gross profit margin decreased to 71.6% of revenue for the nine months ended October 2, 2020 compared to 74.7% of revenue for the three months ended September 27, 2019, due primarily to geographic sales mix, $1.2 million in expenses related to the COVID-19 manufacturing pause from March 17 through April 27, 2020, period costs associated with the manufacturing expansion projects and increased mix of injector part sales which carry a lower margin.
General and Administrative Expense
General and administrative expense
21.0
13.8
Percentage of sales
General and administrative expenses for the three months ended October 2, 2020 were $8.6 million, a 21.0% increase compared to the $7.1 million reported for the same period of 2019, due to increased salary-related expenses, variable compensation and facility costs. General and administrative expenses for the nine months ended October 2, 2020 were $24.4 million, a 13.8% increase compared to the $21.4 million reported for the same period of 2019, due to increased salary-related expenses, variable compensation, tax consulting, facility costs and corporate insurance, partially offset by decreased travel expenses.
Selling and Marketing Expense
Selling and marketing expense
1.5
(0.8
Selling and marketing expenses for the three months ended October 2, 2020 were $12.6 million, a 1.5% increase compared to the $12.5 million reported for the same period of 2019, due to increased salary-related expenses, advertising and promotional activities and variable compensation, offset by decreased trade show and travel expenses. Marketing and selling expenses for the nine months ended October 2, 2020 were $34.0 million, an 0.8% decrease compared to the $34.3 million reported for the same period of 2019, due to decreased trade show and travel expenses, offset by increased advertising and promotional activities, salary-related expenses and variable compensation.
Research and Development Expense
Research and development expense
42.2
28.3
Research and development expenses for the three months ended October 2, 2020 were $8.8 million, a 42.2% increase compared to the $6.2 million reported for the same period of 2019, primarily due to increased clinical expenses associated with our EVO clinical trial in the U.S., variable compensation and salary-related expenses. Research and development expenses for the nine months ended October 2, 2020 were $23.0 million, a 28.3% increase compared to the $17.9 million reported for the same period of 2019, primarily due to increased clinical expenses associated with our EVO clinical trial in the U.S., and increased salary-related expenses, partially offset by travel expense.
Other Income (Expense), Net
—*
44.9
*
Denotes change is greater than +100%.
Other income, net for the three months ended October 2, 2020 was $0.5 million, compared to other expense, net of $0.2 million reported for the same period of 2019. The change in other income (expense), net for the three months was due increased foreign exchange gains (primarily euro), partially offset by a decrease interest income, net, as a result of lower interest rates. Other income, net for the nine months ended October 2, 2020 was $0.8 million, a 44.9% increase compared to $0.5 million reported for the same period of 2019. The increase in other income, net for the nine months was due to increased foreign exchange gains (primarily the euro), offset by decreases in interest income, as a result of lower interest rates, and royalty income, which was impacted by COVID-19 pandemic.
Income Taxes
Income tax provision (benefit)
95.9
(62.7
We recorded income taxes of $1.5 million for the three months ended October 2, 2020 due to pre-tax income generated in certain foreign jurisdictions, partially offset by a reversal of $0.2 million of our U.S. valuation allowance, as a result of an increase in foreign income and changes in the usage and release of our deferred tax assets. We recorded income taxes of $0.8 million for the three months ended September 27, 2019 due to pre-tax income generated in certain foreign jurisdictions and withholding taxes on foreign operations. We recorded income taxes of $0.9 million for the nine months ended October 2, 2020 due to income tax expense from profits generated by our foreign operations, partially offset by the release of our U.S. valuation allowances. We recorded income taxes of $2.4 million for the nine months ended September 27, 2019 primarily due to pre-tax income generated in certain foreign jurisdictions and withholding taxes on foreign operations. In the fourth quarter of fiscal year 2019, we reversed all previously recorded withholding taxes recorded for 2019, at which time we formed STAAR Surgical UK Limited as a holding company for our foreign operations. Based on the current tax treaties between the U.S., United Kingdom and Switzerland, we will no longer accrue for Switzerland withholding taxes on foreign earnings after fiscal 2018 (see also Note 10 in our fiscal 2019 Form 10-K for more information). We have no unrecognized tax benefits pertaining to any uncertain tax positions as of any period presented.
ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset may not be realizable. As further described in Notes 1 and 10 of our fiscal 2019 Form 10-K, under the “incremental cash tax savings approach,” we recorded a valuation release of $3.0 million and $0.4 million against federal and certain states deferred tax assets, respectively. During the nine months ended October 2, 2020, we revised our global forecasts as a result of COVID-19, and due to changes in the usage and release of certain deferred tax assets, we released an additional $1.2 million of valuation allowance. As of October 2, 2020, we released approximately $4.6 million of valuation allowance on our deferred tax assets in the U.S. jurisdiction utilizing the incremental cash tax savings approach. The ultimate realization of deferred tax assets is dependent upon future generation of income during the periods in which temporary differences representing net future deductible amounts become deductible. We considered the projected future income, tax planning strategies and all other available evidence both positive and negative, as well as results of recent operations in making this assessment. In applying the incremental cash tax savings approach, we will continue to maintain a valuation allowance on the balance of the Company’s net U.S. deferred tax assets of $35.7 million.
Liquidity and Capital Resources
We believe that current cash, cash equivalents 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. Although we have experienced some delays in payments on accounts receivable as a result of the COVID-19 pandemic in the first half of 2020, this has improved during the third quarter of 2020 as our customers resume elective refractive surgery. However, at this time we are
23
unaware of any impairment of assets resulting from the COVID-19 pandemic. The Company did not apply for or require financing available under the Coronavirus Aid, Relief, and Economic Security “CARES” Act and does not expect to do so given the strength of our balance sheet. Our financial condition at October 2, 2020 and January 3, 2020 included the following (in millions):
128.3
120.0
Current assets
196.0
174.7
21.3
Current liabilities
33.9
34.5
(0.6
Working capital
162.1
140.2
21.9
We invest the net proceeds in short-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. Additionally, at October 2, 2020, we have a line of credit with a Japanese lender, in the amount of $1.3 million, with $3.4 million of availability and a line of credit with a Swiss lender, in the amount of $1.1 million, which is fully available for borrowing.
Net cash provided by operating activities was $1.4 million for the nine months ended October 2, 2020 compared to net cash provided by operating activities of $16.0 million for the nine months ended September 27, 2019. Net cash provided by operating activities for the nine months ended October 2, 2020, consisted of $12.6 in non-cash items and $2.6 million in net income, offset by $13.8 million in working-capital changes. The decrease in net cash provided by operating activities during the nine months ended October 2, 2020 was due to decreases in net working capital of $9.1 million, net income of $5.1 million and non-cash items of $0.4 million.
Net cash used in investing activities was $6.3 million and $7.2 million for the nine months ended October 2, 2020 and September 27, 2019, respectively, and relate primarily to the acquisition of property, plant, and equipment.
Net cash provided by financing activities was $13.0 million for the nine months ended October 2, 2020 compared to net cash used in financing activities of $0.7 million for the nine months ended September 27, 2019. Net cash provided by financing activities for the nine months ended October 2, 2020 consisted of $14.0 million of proceeds from the exercise of stock options, partially offset by $0.5 million repayment on the Japan line of credit and $0.5 million repayment of finance lease obligations.
Credit Facilities and Commitments
Lines of Credit and Leases
See Notes 7 and 8 of the accompanying Condensed Consolidated Financial Statements.
Covenant Compliance
The Company is in compliance with the covenants of its credit facilities as of October 2, 2020.
The Company’s Chief Executive Officer entered into an employment agreement with the Company, effective March 1, 2015. She 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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as that term is defined in the rules of the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
During the nine months ended October 2, 2020, 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 January 3, 2020.
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 October 2, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 January 3, 2020 and in “Part II—Item 1A—Risk Factors” of the Company’s Form 10-Q for the three months ended April 3, 2020. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.
Not Applicable.
On or about October 30, 2020, STAAR Surgical Company entered into a lease amendment (the “Lease Amendment”) with 2000 Gold L.P. (its Landlord), exercising its renewal option of a total of approximately 45,000 square feet of leased, industrial use real property located at 1911 Walker Avenue and 1900 Myrtle Avenue, Monrovia, California (“Premises”). The Lease Amendment expires October 31, 2023. The Company has conducted office and manufacturing related operations at the Premises since 2012.
3.1
Amended and Restated Certificate of Incorporation.(1)
Amended and Restated Bylaws.(2)
Form of Certificate for Common Stock, par value $0.01 per share.(3)
†4.2
Amended and Restated Omnibus Equity Incentive Plan.(4)
10.39
Lease agreement entered into on September 14, 2020 between STAAR Surgical Company and Calderari & Schwab.(5)
10.40
First Amendment to Lease Agreement dated October 1, 2020 between STAAR Surgical Company and Pacific Equity Partners, LLC.(6)
10.41
First Amendment to Lease Agreement dated October 30, 2020 between STAAR Surgical Company and 2000 Gold L.P.*
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. **
101
Financial statements from the quarterly report on Form 10-Q of STAAR Surgical Company for the quarter ended October 2, 2020 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.*
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2020, has been formatted in Inline XBRL with applicable taxonomy extension information contained in Exhibit 101.
Incorporated by reference to Appendix 2 of the Company’s Proxy Statement on Form DEF 14A as filed with the Commission on April 13, 2018
Incorporated by reference to Appendix 3 of the Company’s Proxy Statement on Form DEF 14A as filed with the Commission on April 13, 2018.
Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Company’s Registration Statement on Form 8‑A/A as filed with the Commission on April 18, 2003.
(4)
Incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q, for the period ended July 3, 2020, as filed with the Commission on August 5, 2020.
(5)
Incorporated by reference to the Company’s Current Report on Form 8-K as filed with the Commission on September 14, 2020.
(6)
Incorporated by reference to the Company’s Current Report on Form 8-K as filed with the Commission on October 8, 2020.
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:
November 4, 2020
By:
/s/ PATRICK F. WILLIAMS
Patrick F. Williams
Chief Financial Officer
(on behalf of the Registrant and as its principal financial officer)
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