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: July 1, 2022
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 48,038,340 shares of common stock, par value $0.01 per share, issued and outstanding as of August 5, 2022.
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
16
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
21
ITEM 4.
CONTROLS AND PROCEDURES
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
22
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
July 1, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
$
202,490
199,706
Accounts receivable trade, net of allowance for credit losses of
$55 and $43, respectively
62,811
43,531
Inventories, net
18,089
17,274
Prepayments, deposits and other current assets
13,066
10,900
Total current assets
296,456
271,411
Property, plant and equipment, net
42,813
35,912
Finance lease right-of-use assets, net
420
506
Operating lease right-of-use assets, net
30,363
31,310
Intangible assets, net
184
218
Goodwill
1,786
Deferred income taxes
3,217
3,813
Other assets
786
822
Total assets
376,025
345,778
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
12,716
8,699
Obligations under finance leases
166
127
Obligations under operating leases
3,708
3,283
Allowance for sales returns
5,550
4,816
Other current liabilities
24,374
31,877
Total current liabilities
46,514
48,802
295
382
26,880
28,269
1,037
811
Asset retirement obligations
169
198
Pension liability
1,823
8,758
Total liabilities
76,718
87,220
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 60,000 shares authorized: 48,024 and
47,716 shares issued and outstanding at July 1, 2022 and
December 31, 2021, respectively
480
477
Additional paid-in capital
387,328
373,519
Accumulated other comprehensive loss
249
(4,048
)
Accumulated deficit
(88,750
(111,390
Total stockholders’ equity
299,307
258,558
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 2, 2021
Net sales
81,101
62,367
144,301
113,119
Cost of sales
17,229
13,164
31,165
24,774
Gross profit
63,872
49,203
113,136
88,345
Selling, general and administrative expenses:
General and administrative
13,983
11,441
25,923
21,653
Selling and marketing
24,233
18,853
41,503
32,054
Research and development
8,636
8,260
16,577
16,519
Total selling, general and administrative expenses
46,852
38,554
84,003
70,226
Operating income
17,020
10,649
29,133
18,119
Other expense, net:
Interest income (expense), net
43
(5
37
(12
Loss on foreign currency transactions
(1,860
(131
(2,775
(1,430
Royalty income
177
151
450
311
Other income (expense), net
89
51
(34
Total other income (expense), net
(1,551
66
(2,137
(1,165
Income before income taxes
15,469
10,715
26,996
16,954
Provision for income taxes
2,431
2,148
4,356
3,395
Net income
13,038
8,567
22,640
13,559
Net income per share:
Basic
0.27
0.18
0.47
0.29
Diluted
0.26
0.17
0.46
Weighted average shares outstanding:
47,889
47,099
47,822
46,858
49,223
49,491
49,264
49,373
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income:
Defined benefit plans:
Net change in plan assets
2,593
(457
6,661
2,627
Reclassification into other income (expense), net
33
120
85
240
Foreign currency translation loss
(1,502
(111
(2,516
(1,227
Tax effect
188
69
67
Other comprehensive income (loss), net of tax
1,312
(379
4,297
1,709
Comprehensive income
14,350
8,188
26,937
15,268
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 April 1, 2022
47,810
478
378,690
(1,063
(101,788
276,317
—
Other comprehensive income
Common stock issued upon exercise of options
202
2,232
2,234
Stock-based compensation
6,406
Unvested restricted stock
7
Vested restricted and performance stock
5
Balance, at July 1, 2022
48,024
Balance, at April 2, 2021
46,857
469
348,063
(3,457
(130,899
214,176
Other comprehensive loss
530
7,871
7,876
4,382
Vested restricted stock
Balance, at July 2, 2021
47,391
474
360,316
(3,836
(122,332
234,622
4
Balance, at December 31, 2021
47,716
251
3,143
3,146
10,666
50
Balance, at January 1, 2021
46,448
464
338,194
(5,545
(135,891
197,222
906
9
14,101
14,110
8,021
34
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
2,024
1,754
Amortization of intangibles
15
17
845
Change in net pension liability
52
(27
Loss on disposal of property and equipment
Stock-based compensation expense
9,648
7,322
Provision for sales returns and bad debts
800
932
Inventory provision
1,428
697
Changes in working capital:
Accounts receivable
(20,137
(13,797
Inventories
(1,825
2,238
Prepayments, deposits, and other current assets
(2,260
(307
3,243
(268
(6,992
181
Net cash provided by operating activities
13,148
Cash flows from investing activities:
Acquisition of property and equipment
(7,810
(5,683
Net cash used in investing activities
Cash flows from financing activities:
Repayment of finance lease obligations
(45
(278
Proceeds from the exercise of stock options
Proceeds from vested restricted stock
Net cash provided by financing activities
3,101
13,833
Effect of exchange rate changes on cash and cash equivalents
(1,143
(668
Increase in cash and cash equivalents
2,784
20,630
Cash and cash equivalents, at beginning of the period
152,453
Cash and cash equivalents, at end of the period
173,083
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 December 31, 2021 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 31, 2021.
The Condensed Consolidated Financial Statements for the three and six months ended July 1, 2022 and July 2 2021, 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 July 1, 2022 and July 2, 2021, 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 no vendors that accounted for over 10% of the Company’s consolidated accounts payable as of July 1, 2022 and December 31, 2021. There were no vendors that accounted for over 10% of the Company’s consolidated purchases for the three and six months ended July 1, 2022 and July 2, 2021, respectively.
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
5,119
3,971
Work in process
3,446
4,031
Finished goods
11,222
10,429
Total inventories, gross
19,787
18,431
Less inventory reserves
(1,698
(1,157
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
4,397
4,047
Prepaid insurance
1,351
2,647
Prepaid marketing
2,244
543
Consumption tax receivable
519
830
Value added tax (VAT) receivable
2,208
2,197
BVG (Swiss Pension) prepayment
1,021
Swiss social insurance prepayment
945
Other(1)
381
621
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
26,611
24,127
Computer equipment and software
8,977
8,807
Furniture and fixtures
4,478
3,658
Leasehold improvements
12,081
11,821
Construction in process
26,828
21,827
Total property, plant and equipment, gross
78,975
70,240
Less accumulated depreciation
(36,162
(34,328
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
9,227
(9,043
9,315
(9,097
Note 6 – Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
Accrued salaries and wages
9,305
12,030
Accrued bonuses
2,754
8,091
Income taxes payable
4,074
2,248
Marketing obligations
2,481
2,243
5,760
7,265
Total other current liabilities
No individual item in “Other” exceeds 5% of the other current liabilities.
8
Note 7 – 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):
30
35
475
Finance lease right-of-use assets, gross
522
1,016
(102
(510
Total finance lease liability
461
509
Weighted-average remaining lease term (in years)
2.7
3.2
Weighted-average discount rate
4.09
%
4.02
Supplemental cash flow information related to finance leases consisted of the following (dollars in thousands):
Amortization of finance lease right-of-use asset
39
20
82
56
Interest on finance lease liabilities
Cash paid for amounts included in the measurement of finance lease liabilities:
Operating cash flows
Financing cash flows
27
45
278
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):
782
760
446
472
Real property
34,108
34,426
Operating lease right-of-use assets, gross
35,336
35,658
(4,973
(4,348
Total operating lease liability
30,588
31,552
7.4
7.8
3.66
3.56
Note 7 – Leases (Continued)
Operating Leases (Continued)
Supplemental cash flow information related to operating leases was as follows (dollars in thousands):
Operating lease cost
1,166
857
2,304
1,640
Cash paid for amounts included in the measurement of operating lease liabilities:
1,034
801
1,966
1,586
Right-of-use assets obtained in exchange for new operating lease liabilities
2,081
3,356
2,756
4,007
Maturities of Lease Liabilities
Maturities of lease liabilities under operating and finance leases having initial or remaining non-cancelable lease terms more than one year as of July 1, 2022 is as follows (in thousands):
As of July 1, 2022
12 Months Ended
June 2023
5,340
June 2024
5,392
179
June 2025
4,624
128
June 2026
3,700
June 2027
3,655
Thereafter
12,613
Total future minimum lease payments
35,324
488
Less amounts representing interest
(4,736
Present value of future minimum lease payments
Current lease obligations
(3,708
(166
Long-term lease obligations
Note 8 — Income Taxes
The Company recorded an income tax provision as follows (in thousands):
The effective tax rates for the three months ended July 1, 2022 and July 2, 2021 was 15.7% and 20.0%, respectively, and was 16.1% and 20.0%, for the six months ended July 1, 2022 and July 2, 2021, respectively. The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% for the three and six months ended July 1, 2022 and July 2, 2021, respectively, primarily due to the income taxes generated in foreign jurisdictions. The effective tax rate for the three and six months ended July 1, 2022 was lower than the same period in 2021 primarily due to jurisdictions in which the income is earned.
10
Note 9 – 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)
309
329
635
677
Interest cost(2)
14
41
28
Expected return on plan assets(2)
(123
(101
(241
(200
Prior service credit(2),(3)
(46
(11
(91
(22
Actuarial loss recognized in current period(2),(3)
79
131
176
262
Net periodic pension cost
362
520
745
Recognized in selling general and administrative expenses on the Condensed Consolidated Statements of Income.
(2)
Recognized in other 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
220
204
436
397
Note 10 — 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
2,457
4,784
5,256
Restricted stock
442
232
551
398
Restricted stock units
1,231
1,993
1,348
Performance stock units
1,310
108
1,692
201
Nonemployee stock options
314
57
628
119
Total stock-based compensation expense
5,754
3,992
The Company recorded stock-based compensation costs in the following categories (in thousands):
106
54
2,806
1,815
4,587
3,254
1,324
953
2,213
1,518
1,170
2,672
2,193
Total stock-based compensation expense, net
Amounts capitalized as part of inventory
652
390
1,018
699
Total stock-based compensation expense, gross
11
Note 10 — 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. As of July 1, 2022, there were 2,156,185 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 5% 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
53
Risk-free interest rate
3.27
0.83
1.83
0.84
Expected term (in years)
5.10
5.38
Stock Options
A summary of stock option activity under the Plan for six months ended July 1, 2022 is presented below:
Stock
Options
(in 000’s)
Minimum
Exercise
Price
Maximum
Outstanding at December 31, 2021
2,435
Granted
421
Exercised
(251
Forfeited or expired
(16
Outstanding at July 1, 2022
2,589
5.34
154.96
Exercisable at July 1, 2022
1,873
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 July 1, 2022 is presented below (shares in thousands):
Restricted
RSUs
PSUs
Unvested at December 31, 2021
113
Vested
Unvested at July 1, 2022
199
118
12
Note 11 - Commitments and Contingencies
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 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 12 — 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
47,893
47,102
47,826
46,861
Less: Unvested restricted stock
(4
(3
Denominator for basic calculation
Weighted average effects of potentially diluted common stock:
Stock options
1,299
2,283
1,386
2,405
24
88
90
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.
1,153
862
173
Restricted stock, RSUs and PSUs
267
122
1,420
984
13
Note 13 — 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
76,444
57,368
134,013
102,785
Consignment sales
4,657
4,999
10,288
10,334
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
3,872
2,704
6,502
5,044
Foreign:
China
46,150
32,930
74,389
52,573
Japan
10,302
9,283
21,935
18,886
20,777
17,450
41,475
36,616
Total foreign sales
77,229
59,663
137,799
108,075
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
77,922
59,235
136,597
105,736
Other product sales:
Cataract IOLs
2,547
3,074
5,449
6,799
Other surgical products
632
58
2,255
584
Total other product sales
3,179
3,132
7,704
7,383
One customer, the Company’s distributor in China, accounted for 57% and 53% of net sales for the three months ended July 1, 2022 and July 2, 2021, respectively, and the same customer accounted for 52% and 46% for the six months ended July 1, 2022 and July 2, 2021, respectively. As of July 1, 2022 and December 31, 2021, respectively, one customer, the Company’s distributor in China, accounted for 60% and 47% of consolidated trade receivables.
Note 14 — 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. The Company continues to monitor the commercial and operational impact of new variants of COVID-19.
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 2022 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 in our Annual Report on Form 10-K in “Item 1A. Risk Factors” filed on February 23, 2022. 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 cataract IOL lenses used in surgery that treats cataracts based on quality and value.
Recent Developments
During the second quarter, net sales grew 30% and ICL units grew 42% compared to the prior year quarter. Highlights included unit growth in China up 45%, the U.S. up 36%, Japan up 41%, India up 181%, and Other Asia Pacific markets up 66%, all as compared to the prior year quarter. The U.S. commercial launch of the EVO Visian ICL family of myopia lenses (EVO) continued with the announced partnership with Joe Jonas, who earlier in the month received EVO lenses to correct his distance vision. In the next several weeks, Joe Jonas and other paid EVO ambassador influencers will share their journey to Visual Freedom via a global advertising, marketing and social media campaigns funded by STAAR regarding the EVO Visian ICL lens. We reaffirm our previously provided outlook for fiscal 2022 net sales of approximately $295 million, which takes into account currency headwinds, and a continuation of the current level of COVID-19 related challenges in China and elsewhere, offset by stronger than expected global demand for our EVO lenses. We continue to monitor the commercial and operational impact of new variants of COVID-19 in our markets, which remains uncertain at this time and may adversely affect our financial results. We are also monitoring inflation globally, which may adversely affect our financial results in the future if it persists.
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 July 1, 2022 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 31, 2021.
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 Net Sales
for Three Months
Percentage of Net
Sales for Three Months
100.0
21.2
21.1
21.6
21.9
78.8
78.9
78.4
78.1
17.2
18.4
18.0
19.1
29.9
30.2
28.8
28.4
10.7
13.2
11.4
14.6
Total selling, general and administrative
57.8
61.8
58.2
62.1
21.0
17.1
20.2
16.0
(1.9
)%
0.1
(1.5
(1.0
18.7
15.0
3.0
3.5
16.1
13.7
15.7
12.0
Net Sales
Percentage
Change
2022 vs. 2021
31.5
29.2
(17.1
(19.9
—*
1.5
4.3
30.0
27.6
*
Denotes change is greater than +100%.
Net sales for the three months ended July 1, 2022 increased 30% from the same period of 2021. The increase in net sales was due to increased ICL sales of $18.7 million. Changes in foreign currency unfavorably impacted net sales by $3.1 million.
Net sales for the six months ended July 1, 2022 increased 28% from same period of 2021. The increase in net sales was due to increased ICL sales of $30.9 million. Changes in foreign currency unfavorably impacted net sales by $5.0 million.
Total ICL sales for the three months ended July 1, 2022 increased 32% from the same period of 2021, with unit increase of 42%. The APAC region sales increased by 37%, with unit growth up 45%, due to sales growth in India up 192%, other APAC regions up 65%, China up 39%, Japan up 16% and Korea up 16%. The Europe, Middle East, Africa and Latin America region sales increased 6% with unit increase of 30%, due to sales growth in in distributor markets up 24%, partially offset by sales decreases in our direct markets down 7%. The North America region sales increased 42%, with unit increase of 32%, primarily to sales growth in the U.S. up 47%. In late March 2022, the U.S. started to sell EVO ICLs. Changes in foreign currency unfavorably impacted ICL sales by $2.6 million for the three months ended July 1, 2022, which impacted our Europe, Middle East, Africa and Japan markets. ICL sales represented 96.1% and 95.0% of our total sales for the three months ended July 1, 2022 and July 2, 2021, respectively.
Total ICL sales for the six months ended July 1, 2022 increased 29% from the same period of 2021, with unit increase of 36%. The APAC region sales increased by 36%, with unit growth up 40%, due to sales growth in India up 92%, other APAC regions up 58%, China up 41%, Japan up 19% and Korea up 15%. The Europe, Middle East, Africa and Latin America region sales increased 2% with unit increase of 19%, due to sales due to sales growth in distributor markets up 15%, offset by sales decreases in our direct markets down 6%. The North America region sales increased 32%, with unit increase of 25%, primarily to sales growth in the U.S. up 35%. In late March 2022, the U.S. started to sell EVO ICLs. Changes in foreign currency unfavorably impacted ICL sales by $4.0 million for the six months ended July 1, 2022, which impacted our Europe, Middle East, Africa and Japan markets. ICL sales represented 94.7% and 93.5% of our total sales for the three months ended July 1, 2022 and July 2, 2021, respectively.
Other product sales, including cataract IOLs for the three and six months ended July 1, 2022, increased 1% and 4%, respectively from the same period of 2021, due to increased preloaded injector part sales, offset by decreased sales of cataract IOLs. In the first half of 2021, we experienced product yield issues requiring rework related to preloaded injector parts manufactured on our behalf by a third-party vendor then sold by us to a third-party manufacturer for product they sell to their customers. Changes in foreign currency unfavorably impacted other product sales by $0.6 million and $1.1 million for the three and six months July 1, 2022, respectively. Other product sales represented 3.9% and 5.0% of our total sales for the three months ended July 1, 2022 and July 2, 2021, respectively and represented 5.3% and 6.5% of our total sales for the six months ended July 1, 2022 and July 2, 2021, respectively.
Gross Profit
29.8
28.1
Gross margin
Gross profit for the three months ended July 1, 2022 increased 29.8% from the same period of 2021. Gross profit margin decreased slightly to 78.8% of revenue for the three months ended July 1, 2022 compared to 78.9% of revenue for the three months ended July 2, 2021, due to inventory reserves recognized as a result of discontinuance of our older generation Visian ICL in the U.S. and increased period costs associated with manufacturing projects, offset by increased product and geographic sales mix.
Gross profit for the six months ended July 1, 2022 increased 28.1% from the same period of 2021. Gross profit margin increased to 78.4% of revenue for the six months ended July 1, 2022 compared to 78.1% of revenue for the six months ended July 2, 2021, due mainly to product and geographic sales mix, partially offset by inventory reserves recognized as a result of discontinuance of our older generation Visian ICL in the U.S. and increased period costs associated with manufacturing projects.
18
General and Administrative Expense
General and administrative expense
22.2
19.7
Percentage of sales
General and administrative expenses for the three months ended July 1, 2022 increased 22.2% from the same period of 2021 due to increased stock-based compensation expenses and facility costs. General and administrative expenses for the six months ended July 1, 2022 increased 19.7% from the same period of 2021 due to increased facility costs, stock-based compensation expenses and outside services.
Selling and Marketing Expense
Selling and marketing expense
28.5
29.5
Selling and marketing expenses for the three months ended July 1, 2022 increased 28.5% from the same period of 2021 due to increased advertising and promotional activities and trade shows, partially offset by decreased salary-related and payroll tax expenses. Selling and marketing expenses for the six months ended July 1, 2022 increased 29.5% from the same period of 2021 due to increased advertising and promotional activities and trade shows.
Research and Development Expense
Research and development expense
4.6
0.4
Research and development expenses for the three and six months ended July 1, 2022 increased 4.6% and 0.4%, respectively, from the same period of 2021 due mainly to increased in salary-related and payroll tax expenses and stock-based compensation, offset by decreased clinical expenses associated with our clinical trials.
Other Expense, Net
(83.4
The change in other expense, net for the three and six months ended July 1, 2022 and July 2, 2021, respectively, was due primarily to foreign exchange losses (primarily euro).
19
Income Taxes
Income tax provision
28.3
The effective tax rates for the three months ended July 1, 2022 and July 2, 2021 was 15.7% and 20.0%, respectively, and was 16.1% and 20.0%, for the six months ended July 1, 2022 and July 2, 2021, respectively. Our effective tax rates differ from the U.S. federal statutory rate of 21% for the three and six months ended July 1, 2022 and July 2, 2021, respectively, primarily due to the income taxes generated in foreign jurisdictions. The effective tax rate for the three and six months ended July 1, 2022 was lower than the same period in 2021 primarily due to jurisdictions in which the income is earned.
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, 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. Our financial condition at July 1, 2022 and December 31, 2021 included the following (in millions):
202.5
199.7
2.8
Current assets
296.5
271.4
25.1
Current liabilities
46.5
48.8
(2.3
Working capital
250.0
222.6
27.4
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. We do not have any off-balance sheet arrangements.
A summary of cash flows for the six months ended July 1, 2022 and July 2, 2021 was as follows (dollars 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 July 1, 2022 net cash used by operating activities consisted of $22.6 million in net income, $14.0 million in non-cash items, offset by $28.0 million in working-capital changes.
The increase in investments of property, plant and equipment for the six months ended July 1, 2022 relative to the same period of 2021, was due to increased investments in manufacturing facilities.
Net cash provided by financing activities for the six months ended July 1, 2022 consisted of $3.1 million of proceeds from the exercise of stock options. For the six months ended July 2, 2021, net cash provided by financing activities consisted of $14.1 million of proceeds from the exercise of stock options, partially offset by $0.2 million repayment of finance lease obligations.
Commitments
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.
During the six months ended July 1, 2022, 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 31, 2021.
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 July 1, 2022 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 December 31, 2021. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.
Not Applicable.
None.
3.1
Amended and Restated Certificate of Incorporation.(1)
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. **
101
Financial statements from the quarterly report on Form 10-Q of STAAR Surgical Company for the quarter ended July 1, 2022 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 July 1, 2022, 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.
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 10, 2022
By:
/s/ PATRICK F. WILLIAMS
Patrick F. Williams
Chief Financial Officer
(on behalf of the Registrant and as its principal financial officer)
23