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: September 30, 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 48,206,299 shares of common stock, par value $0.01 per share, issued and outstanding as of October 28, 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
18
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
24
ITEM 4.
CONTROLS AND PROCEDURES
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
25
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
September 30, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
$
129,242
199,706
Investments available for sale
82,091
—
Accounts receivable trade, net of allowance for credit losses of
$103 and $43, respectively
55,429
43,531
Inventories, net
19,930
17,274
Prepayments, deposits and other current assets
10,218
10,900
Total current assets
296,910
271,411
13,360
Property, plant and equipment, net
48,048
35,912
Finance lease right-of-use assets, net
380
506
Operating lease right-of-use assets, net
29,503
31,310
Intangible assets, net
171
218
Goodwill
1,786
Deferred income taxes
3,710
3,813
Other assets
808
822
Total assets
394,676
345,778
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
7,567
8,699
Obligations under finance leases
167
127
Obligations under operating leases
3,474
3,283
Allowance for sales returns
5,040
4,816
Other current liabilities
29,072
31,877
Total current liabilities
45,320
48,802
252
382
26,032
28,269
1,554
811
Asset retirement obligations
158
198
Pension liability
1,228
8,758
Total liabilities
74,544
87,220
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 60,000 shares authorized: 48,202 and
47,716 shares issued and outstanding at September 30, 2022 and
December 31, 2021, respectively
482
477
Additional paid-in capital
398,448
373,519
Accumulated other comprehensive loss
(310
)
(4,048
Accumulated deficit
(78,488
(111,390
Total stockholders’ equity
320,132
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
Nine Months Ended
October 1, 2021
Net sales
76,046
58,352
220,347
171,471
Cost of sales
15,584
13,051
46,749
37,825
Gross profit
60,462
45,301
173,598
133,646
Selling, general and administrative expenses:
General and administrative
14,011
11,018
39,934
32,671
Selling and marketing
23,130
18,175
64,633
50,229
Research and development
9,616
8,271
26,193
24,790
Total selling, general and administrative expenses
46,757
37,464
130,760
107,690
Operating income
13,705
7,837
42,838
25,956
Other expense, net:
Interest income (expense), net
897
(23
934
(35
Loss on foreign currency transactions
(2,129
(610
(4,904
(2,040
Royalty income
77
185
527
496
Other income (expense), net
27
(13
178
(47
Total other expense, net
(1,128
(461
(3,265
(1,626
Income before income taxes
12,577
7,376
39,573
24,330
Provision for income taxes
2,315
1,356
6,671
4,751
Net income
10,262
6,020
32,902
19,579
Net income per share:
Basic
0.21
0.13
0.69
0.42
Diluted
0.12
0.67
0.40
Weighted average shares outstanding:
48,102
47,483
47,915
47,064
49,549
49,592
49,371
49,448
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income (loss):
Defined benefit plans:
Net change in plan assets
465
90
7,126
2,717
Reclassification into other income (expense), net
54
121
139
361
Investments available for sale unrealized loss
(432
Foreign currency translation gain (loss)
(958
29
(3,474
(1,198
Tax effect
312
(32
379
37
Other comprehensive income (loss), net of tax
(559
208
3,738
1,917
Comprehensive income
9,703
6,228
36,640
21,496
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 1, 2022
48,024
480
387,328
249
(88,750
299,307
Other comprehensive loss
Common stock issued upon exercise of options
166
5,032
5,034
Stock-based compensation
6,088
Vested restricted and performance stock
12
Balance, at September 30, 2022
48,202
Balance, at July 2, 2021
47,391
474
360,316
(3,836
(122,332
234,622
Other comprehensive income
183
4,210
4,212
4,046
Balance, at October 1, 2021
47,599
476
368,572
(3,628
(116,312
249,108
4
Balance, at December 31, 2021
47,716
417
8,175
8,179
16,754
Unvested restricted stock
7
62
Balance, at January 1, 2021
46,448
464
338,194
(5,545
(135,891
197,222
1,089
11
18,311
18,322
12,067
59
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
3,101
2,671
Amortization of intangibles
22
26
Accretion/Amortization of investments available for sale
(307
23
845
Change in net pension liability
40
91
Loss on disposal of property and equipment
Stock-based compensation expense
15,375
10,985
Provision for sales returns and bad debts
1,069
Inventory provision
2,020
1,097
Changes in working capital:
Accounts receivable
(13,108
(7,072
Inventories
(4,123
1,301
Prepayments, deposits, and other current assets
526
1,288
(1,834
(40
(2,253
3,622
Net cash provided by operating activities
32,745
35,464
Cash flows from investing activities:
Acquisition of property and equipment
(14,083
(8,956
Purchase of investments available for sale
(95,576
Net cash used in investing activities
(109,659
Cash flows from financing activities:
Repayment of finance lease obligations
(85
(314
Proceeds from the exercise of stock options
Proceeds from vested restricted stock
Net cash provided by financing activities
8,095
18,009
Effect of exchange rate changes on cash and cash equivalents
(1,645
(724
Increase (decrease) in cash and cash equivalents
(70,464
43,793
Cash and cash equivalents, at beginning of the period
152,453
Cash and cash equivalents, at end of the period
196,246
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 nine months ended September 30, 2022 and October 1, 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 nine months ended September 30, 2022 and October 1, 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash and balances in deposits and money market accounts held at banks and financial institutions. Such balances generally exceed the federal insurance limits; however, the Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.
Investments Available for Sale
Investments available for sale (“AFS”) are investments in debt securities for which the Company does not have the positive intent and ability to hold to maturity. The Company’s investment policy primary objective is capital preservation while maximizing its return on investment. Investments may include U.S. government and corporate debt securities, commercial paper, certain certificates of deposit and related security types, that are rated by two nationally recognized statistical rating organizations with minimum investment grade ratings of AAA to A-/A-1+ to A-2, or the equivalent. There are also limits to the amount of credit exposure in any given security type.
Investments AFS are measured at fair value and its unrealized gains and losses reported net of the allowance for credit losses and applicable income taxes, are recognized in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. The cost of investments AFS is adjusted for amortization of premiums and accretion of discounts to maturity. Interest earned, including amortization of premiums and accretion of discounts recognized, is included in interest income (expense) on the Consolidated Statements of Income. The cost of investments for purposes of computing realized and unrealized gains and losses is based on the specific identification method.
The Company recognizes other-than-temporary impairment (“OTTI”) of a debt security for which there has been a decline in fair value below amortized cost if (i) management intends to sell the security, (ii) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. The amount by which amortized cost exceeds the fair value of a debt security that is considered to have OTTI is separated into a component representing the credit loss, which is recognized in other income (expense) on the Consolidated Statements of Income, and a component related to all other factors, which is recognized in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. The measurement of the credit loss component is equal to the difference between the debt security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield.
Note 1 — Basis of Presentation and Significant Accounting Policies (Continued)
Vendor Concentration
There were no vendors that accounted for over 10% of the Company’s consolidated accounts payable as of September 30, 2022 and December 31, 2021. There were no vendors that accounted for over 10% of the Company’s consolidated purchases for the three and nine months ended September 30, 2022 and October 1, 2021, respectively.
Note 2 — Investments Available for Sale
In the three months ended September 30, 2022, the Company started to invest its cash in slightly higher yielding securities. Investments AFS and the related fair value measurement consisted of the following (dollars in thousands):
Amortized Cost
Unrealized Gains
Unrealized Losses
Estimated Fair Value
Level 2 Fair Value Measurements:
Commercial paper
35,093
(75
35,019
Certificates of deposit
14,404
(66
14,339
U.S. Treasury and agency securities
4,188
(1
4,187
Corporate debt securities
41,898
(297
41,606
Accrued interest receivable
300
Total investments AFS
95,883
(439
95,451
The Company obtains the fair value from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers and other industry and economic events.
The Company assessed each debt security with gross unrealized losses for credit impairment. As part of that assessment, the Company concluded that it is more-likely-than-not that the Company will not be required to sell, prior to the recovery of the amortized cost basis. The Company did not recognize impairment for the three and nine months ended September 30, 2022.
The following table shows the fair value of investments AFS by contractual maturity (dollars in thousands):
As of September 30, 2022
Within one year
After one year through five years
28,246
8
Note 3 — Inventories
Inventories, net are stated at the lower of cost and net realizable value, determined on a first-in, first-out basis and consisted of the following (in thousands):
Raw materials and purchased parts
5,607
3,971
Work in process
4,038
4,031
Finished goods
12,109
10,429
Total inventories, gross
21,754
18,431
Less inventory reserves
(1,824
(1,157
Total inventories, net
Note 4 — Prepayments, Deposits, and Other Current Assets
Prepayments, deposits, and other current assets consisted of the following (in thousands):
Prepayments and deposits
3,716
4,047
Prepaid insurance
517
2,647
Prepaid marketing
2,590
543
Consumption tax receivable
694
830
Value added tax (VAT) receivable
1,555
2,197
BVG (Swiss Pension) prepayment
722
15
Other(1)
424
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 5 — Property, Plant and Equipment
Property, plant and equipment, net consisted of the following (in thousands):
Machinery and equipment
27,860
24,127
Computer equipment and software
9,243
8,807
Furniture and fixtures
4,453
3,658
Leasehold improvements
12,212
11,821
Construction in process
31,398
21,827
Total property, plant and equipment, gross
85,166
70,240
Less accumulated depreciation
(37,118
(34,328
Total property, plant and equipment, net
9
Note 6 – Intangible Assets
Intangible assets, net consisted of the following (in thousands):
Long-lived amortized intangible assets
Gross
Carrying
Amount
Amortization
Net
Patents and licenses
9,194
(9,023
9,315
(9,097
Note 7 – Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
Accrued salaries and wages
9,174
12,030
Accrued bonuses
5,356
8,091
Income taxes payable
5,232
2,248
Marketing obligations
2,418
2,243
6,892
7,265
Total other current liabilities
No individual item in “Other” exceeds 5% of the other current liabilities.
Note 8 – Leases
Finance Leases
The Company entered into finance leases primarily related to purchases of equipment used for manufacturing, computer-related equipment or furniture and fixtures. These finance leases are two to five years in length and have fixed payment amounts for the term of the contract and have options to purchase the assets at the end of the lease term. Supplemental balance sheet information related to finance leases consisted of the following (dollars in thousands):
28
35
16
475
Finance lease right-of-use assets, gross
519
1,016
(139
(510
Current finance lease obligations
Long-term finance lease obligations
Total finance lease liability
419
509
Weighted-average remaining lease term (in years)
2.5
3.2
Weighted-average discount rate
4.11
%
4.02
10
Note 8 – Leases (Continued)
Finance Leases (Continued)
Supplemental cash flow information related to finance leases consisted of the following (dollars in thousands):
Amortization of finance lease right-of-use asset
39
71
Interest on finance lease liabilities
13
Cash paid for amounts included in the measurement of finance lease liabilities:
Operating cash flows
Financing cash flows
36
85
314
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):
762
760
446
472
Real property
33,751
34,426
Operating lease right-of-use assets, gross
34,959
35,658
(5,456
(4,348
Current operating lease obligations
Long-term operating lease obligations
Total operating lease liability
29,506
31,552
7.6
7.8
4.04
3.56
Supplemental cash flow information related to operating leases was as follows (dollars in thousands):
Operating lease cost
1,167
931
3,471
2,571
Cash paid for amounts included in the measurement of operating lease liabilities:
1,103
846
3,069
2,432
Right-of-use assets obtained in exchange for new operating lease liabilities
126
15,212
1,166
19,219
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 September 30, 2022 is as follows (in thousands):
.
12 Months Ended
September 2023
5,179
181
September 2024
5,152
176
September 2025
4,224
September 2026
3,659
September 2027
3,671
Thereafter
13,099
Total future minimum lease payments
34,984
442
Less amounts representing interest
(5,478
Present value of future minimum lease payments
Note 9 — Income Taxes
The Company recorded an income tax provision as follows (in thousands):
The effective tax rates for the three months ended September 30, 2022 and October 1, 2021 was 18.4% and 18.4%, respectively, and was 16.9% and 19.5%, for the nine months ended September 30, 2022 and October 1, 2021, respectively. The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% for the three and nine months ended September 30, 2022 and October 1, 2021, respectively, primarily due to the income taxes generated in foreign jurisdictions. The differences in the effective tax rate for the three and nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to jurisdictions in which the income is earned.
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)
306
326
941
1,003
Interest cost(2)
14
63
42
Expected return on plan assets(2)
(125
(99
(366
(299
Prior service credit(2),(3)
(44
(10
(135
Actuarial loss recognized in current period(2),(3)
98
131
274
393
Net periodic pension cost
257
362
777
1,107
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).
Note 10 – Defined Benefit Pension Plans (Continued)
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
230
204
666
601
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
2,865
2,594
7,649
7,850
Restricted stock
67
109
618
507
Restricted stock units
1,249
700
3,242
2,048
Performance stock units
1,240
124
2,932
325
Nonemployee stock options
136
255
Total stock-based compensation expense
5,727
3,663
The Company recorded stock-based compensation costs in the following categories (in thousands):
233
61
409
150
2,584
1,671
7,171
4,925
1,335
851
3,548
2,637
1,575
1,080
4,247
3,273
Total stock-based compensation expense, net
Amounts capitalized as part of inventory
383
1,379
1,082
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. As of September 30, 2022, there were 2,133,765 shares available for grant under the Plan.
Note 11 — Stockholders’ Equity (Continued)
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
2.91
0.79
1.88
0.84
Expected term (in years)
5.10
5.38
Stock Options
A summary of stock option activity under the Plan for nine months ended September 30, 2022 is presented below:
Stock
Options
(in 000’s)
Minimum
Exercise
Price
Maximum
Outstanding at December 31, 2021
2,435
Granted
443
Exercised
(417
Forfeited or expired
Outstanding at September 30, 2022
2,438
5.34
154.96
Exercisable at September 30, 2022
1,778
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 September 30, 2022 is presented below (shares in thousands):
Restricted
RSUs
PSUs
Unvested at December 31, 2021
116
113
Vested
(5
(57
Unvested at September 30, 2022
190
118
Note 12 - 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 13 — Basic and Diluted Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share (in thousands except per share amounts):
Numerator:
Denominator:
Weighted average common shares:
Common shares outstanding
48,106
47,486
47,919
47,067
Less: Unvested restricted stock
(4
(3
Denominator for basic calculation
Weighted average effects of potentially diluted common stock:
Stock options
1,336
2,013
1,378
2,277
64
86
55
45
21
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.
864
33
865
201
Restricted stock, RSUs and PSUs
20
866
885
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
71,223
53,819
205,236
156,604
Consignment sales
4,823
4,533
15,111
14,867
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
3,873
2,385
10,375
7,429
Foreign:
China
42,246
28,411
116,635
80,984
Japan
10,546
10,488
32,481
29,374
19,381
17,068
60,856
53,684
Total foreign sales
72,173
55,967
209,972
164,042
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
71,953
54,153
208,550
159,889
Other product sales:
Cataract IOLs
2,191
2,525
7,640
9,324
Other surgical products
1,902
1,674
4,157
2,258
Total other product sales
4,093
4,199
11,797
11,582
One customer, the Company’s distributor in China, accounted for 56% and 49% of net sales for the three months ended September 30, 2022 and October 1, 2021, respectively, and the same customer accounted for 53% and 47% for the nine months ended September 30, 2022 and October 1, 2021, respectively. As of September 30, 2022 and December 31, 2021, respectively, one customer, the Company’s distributor in China, accounted for 57% and 47% of consolidated trade receivables.
Note 15 — COVID-19 Developments
In December 2019, COVID-19 surfaced and in March 2020, the World Health Organization declared a pandemic related to the rapid spread of COVID-19 around the world. The impact of the COVID-19 outbreak on the businesses and the economy in the U.S. and the rest of the world is, and is expected to continue to be, uncertain and may continue to be significant as COVID-19 variant strains emerge. The Company’s revenues have been adversely impacted, and the Company experienced a substantial slowdown in sales beginning March 20, 2020 in global geographies characterized as “hot spots” for the COVID-19 virus, including parts of Europe, North America, Asia, the Middle East and India. In certain of these markets, sales have paused as elective surgeries are discouraged to support COVID-19 related needs. The Company continues to monitor the commercial and operational impact of new variants of COVID-19.
17
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 and 2023 business plans; expected regulatory activities and approvals, product launches, and any statements of assumptions underlying any of the foregoing.
Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and we can give no assurance that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described in 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
STAAR achieved 30% net sales growth in the third quarter despite constant currency challenges and, in Europe, macroeconomic headwinds. In the third quarter global ICL unit growth was up 40% year over year, highlighted by unit growth in China up 52%, the U.S. up 63%, Japan up 40%, South Korea up 49% and Asia Pacific distributor markets up 47%. We advanced our patient awareness, engagement and market building initiatives for EVO in the U.S. during and subsequent to the third quarter, and introduced our presbyopia lens, EVO Viva™, to surgeons at our Experts Meeting preceding the annual congress of the European Society of Cataract and Refractive Surgeons. In China, we expect to exceed a 25% share of refractive surgery market units by year end. Due to tighter COVID restrictions in China resulting in expected delayed demand in the fourth quarter, ongoing headwinds in Europe, weakness in the Yen and Euro, and lower Other Products sales, we now anticipate total net sales will be approximately $285 million for fiscal 2022. Our fiscal 2022 outlook includes ICL sales of approximately $272 million, representing 28% year over year growth, and Other Products sales of approximately $13 million.”
Our low margin Other Products business, which represents approximately 5% of sales and consists of cataract IOLs, IOL injectors and injector parts, has faced increasing supply chain challenges. As a result of third-party materials and supply chain
challenges that only affect our Other Products business, we will no longer be able to support Other Products as we have historically. We will continue to support customers of Other Products through the end of 2023. As we look to fiscal 2023, we expect to achieve approximately 30% ICL sales growth, year over year, to approximately $355 million in total company net sales which contemplates limited sales from Other Products. We do not expect contribution from Other Products thereafter. We continue to see significant growth potential for our EVO family of lenses globally.
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 nine months ended September 30, 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 Nine Months
100.0
20.5
22.4
21.2
22.1
79.5
77.6
78.8
77.9
18.4
18.9
18.1
19.0
30.4
31.1
29.3
12.7
14.2
12.0
14.5
Total selling, general and administrative
61.5
64.2
59.4
62.8
18.0
13.4
19.4
15.1
(1.5
)%
(0.8
(0.9
16.5
12.6
17.9
3.0
2.3
2.8
13.5
10.3
14.9
11.4
19
Net Sales
The following table presents our net sales, by product (dollars in thousands):
Percentage
Change
2022 vs. 2021
32.9
(13.2
(18.1
13.6
84.1
(2.5
1.9
30.3
28.5
Net sales for the three months ended September 30, 2022 increased 30% from the same period of 2021. The increase in net sales was due to increased ICL sales of $17.8 million. Changes in foreign currency unfavorably impacted net sales by $4.0 million.
Net sales for the nine months ended September 30, 2022 increased 29% from same period of 2021. The increase in net sales was due to increased ICL sales of $48.7 million. Changes in foreign currency unfavorably impacted net sales by $9.0 million.
Total ICL sales for the three months ended September 30, 2022 increased 33% from the same period of 2021, with unit increase of 40%. The APAC region sales increased by 40%, with unit growth up 47%, due to sales growth in Korea up 50%, China up 49%, other APAC regions up 49% and Japan up 12%. The Europe, Middle East, Africa and Latin America region sales decreased 9% with unit decrease of 2%, due to sales decreases in in our direct markets down 12% and distributor markets down 4%. The North America region sales increased 66%, with unit growth up 56%, primarily due to sales growth in the U.S. up 75%. In late March 2022, the U.S. started to sell EVO ICLs. Changes in foreign currency unfavorably impacted ICL sales by $3.2 million for the three months ended September 30, 2022, which impacted our Japan and Europe, Middle East and Africa markets. ICL sales represented 94.6% and 92.8% of our total sales for the three months ended September 30, 2022 and October 1, 2021, respectively.
Total ICL sales for the nine months ended September 30, 2022 increased 30% from the same period of 2021, with unit increase of 38%. The APAC region sales increased by 38%, with unit growth up 43%, due to sales growth in other APAC regions up 59%, India up 44%, China up 44%, Korea up 25% and Japan up 16%. The Europe, Middle East, Africa and Latin America region sales decreased 1% with unit growth up 12%, due to sales decreases in our direct markets down 8%, offset by sales growth in distributor markets up 8%. The North America region sales increased 43%, with unit growth up 35%, primarily due 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 $7.2 million for the nine months ended September 30, 2022, which impacted our Japan and Europe, Middle East and Africa markets. ICL sales represented 94.6% and 93.2% of our total sales for the nine months ended September 30, 2022 and October 1, 2021, respectively.
Other product sales, including cataract IOLs for the three months ended September 30, 2022, decreased 3% from the same period of 2021, due to decreased sales of cataract IOLs, partially offset by other surgical products. Other product sales for the nine months ended September 30, 2022, increased 2% due to other surgical products, offset by decreased sales of cataract IOLs. Included in other product sales are sales of preloaded injector parts. 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 $0.8 million and $1.8 million for the three and nine months September 30, 2022, respectively. Other product sales represented 5.4% and 7.2% of our total sales for the three months ended September 30, 2022 and October 1, 2021, respectively, and represented 5.4% and 6.8% of our total sales for the nine months ended September 30, 2022 and October 1, 2021, respectively.
Gross Profit
The following table presents our gross profit and gross profit margin (dollars in thousands):
33.5
29.9
Gross margin
Gross profit for the three months ended September 30, 2022 increased 33.5% from the same period of 2021. Gross profit margin increased to 79.5% of revenue for the three months ended September 30, 2022 compared to 77.6% of revenue for the three months ended October 1, 2021, due mainly to product and geographic sales mix, partially offset by increased period costs associated with manufacturing projects.
Gross profit for the nine months ended September 30, 2022 increased 29.9% from the same period of 2021. Gross profit margin increased to 78.8% of revenue for the nine months ended September 30, 2022 compared to 77.9% of revenue for the nine months ended October 1, 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.
General and Administrative Expense
The following table presents our general and administrative expenses (dollars in thousands):
General and administrative expense
27.2
22.2
Percentage of sales
General and administrative expenses for the three months ended September 30, 2022 increased 27.2% from the same period of 2021 due to increased stock-based compensation expenses, facility costs and outside services. General and administrative expenses for the nine months ended September 30, 2022 increased 22.2% from the same period of 2021 due to increased facility costs, stock-based compensation expenses and outside services.
Selling and Marketing Expense
The following table presents our selling and marketing expenses (dollars in thousands):
Selling and marketing expense
27.3
28.7
Selling and marketing expenses for the three months ended September 30, 2022 increased 27.3% from the same period of 2021 due to increased trade shows and sales meetings, advertising and promotional activities, travel expenses and stock-based compensation expenses. Selling and marketing expenses for the nine months ended September 30, 2022 increased 28.7% from the same period of 2021 due to increased advertising and promotional activities, trade shows and sales meetings, travel expenses and stock-based compensation expenses.
Research and Development Expense
The following table presents our research and development expenses (dollars in thousands):
Research and development expense
16.3
5.7
Research and development expenses for the three months ended September 30, 2022 increased 16.3% from the same period of 2021 due mainly to increased salary-related and payroll tax expenses. Research and development expenses for the nine months ended September 30, 2022 increased 5.7% from the same period of 2021 due mainly to increased salary-related and payroll tax expenses and stock-based compensation expenses, partially offset by decreased clinical expenses associated with our clinical trials.
Other Expense, Net
The following table presents our other expenses, net (dollars in thousands):
Other expense, net
—*
*
Denotes change is greater than +100%.
The change in other expense, net for the three and nine months ended September 30, 2022 and October 1, 2021, respectively, was due primarily to foreign exchange losses (primarily euro), and for the three and nine months ended September 30, 2022, partially offset by increased interest income mainly due to our investments held available for sale.
Income Taxes
The following table presents our income tax provision (dollars in thousands):
Income tax provision
70.7
40.4
The effective tax rates for the three months ended September 30, 2022 and October 1, 2021 was 18.4% and 18.4%, respectively, and was 16.9% and 19.5%, for the nine months ended September 30, 2022 and October 1, 2021, respectively. Our effective tax rates differ from the U.S. federal statutory rate of 21% for the three and nine months ended September 30, 2022 and October 1, 2021, respectively, primarily due to the income taxes generated in foreign jurisdictions. The differences in the effective tax rate for the three and nine months ended September 30, 2022 compared to the same period in 2021 was 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 and cash equivalents, investments available for sale 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 September 30, 2022 and December 31, 2021 included the following (in thousands):
224,693
24,987
Current assets
25,499
Current liabilities
(3,482
Working capital
251,590
222,609
28,981
Cash and cash equivalents include cash and balances in deposits and money market accounts held at banks and financial institutions. Our investment policy primary objective is capital preservation while maximizing our return on investment. Investments available for sale may include U.S. government and corporate debt securities, commercial paper, certain certificates deposit and related security types, that are rated by two nationally recognized statistical rating organizations with minimum investment grade ratings of AAA to A-/A-1+ to A-2, or the equivalent. There are also limits to the amount of credit exposure in any given security type. We do not have any off-balance sheet arrangements.
A summary of cash flows for the nine months ended September 30, 2022 and October 1, 2021 was as follows (in thousands):
Cash flows from:
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
For the nine months ended September 30, 2022, net cash used by operating activities consisted of $32.9 million in net income, $20.6 million in non-cash items, offset by $20.8 million in working-capital changes.
In the three months ended September 30, 2022, we decided to invest our cash in slightly higher yielding securities. For the nine months ended September 30, 2022, net cash used in investment activities was $109.7 million which consisted of $95.6 million in purchases of investments available for sale and $14.1 million in purchases of property, plant and equipment. The increase in investments of property, plant and equipment of $5.1 million for the nine months ended September 30, 2022 relative to the same period of 2021, was due to increased investments in manufacturing facilities.
Net cash provided by financing activities for the nine months ended September 30, 2022 consisted of $8.2 million of proceeds from the exercise of stock options. For the nine months ended October 1, 2021, net cash provided by financing activities consisted of $18.3 million of proceeds from the exercise of stock options, partially offset by $0.3 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 nine months ended September 30, 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 September 30, 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)
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 September 30, 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 September 30, 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:
November 2, 2022
By:
/s/ PATRICK F. WILLIAMS
Patrick F. Williams
Chief Financial Officer
(on behalf of the Registrant and as its principal financial officer)