STAAR Surgical Company — Form 10-Q Summary
Business Context and Reporting Period
STAAR designs, manufactures, and sells implantable Collamer lenses, intraocular lenses, and related delivery systems for refractive and cataract surgery. The filing covers the three months ended April 3, 2020, compared with the three months ended March 29, 2019. The filing metadata references 2019 Q1, but the reported period is fiscal 2020 Q1.
The company operates as one ophthalmic surgical products segment and sells in more than 75 countries. Approximately 95% of 2019 sales were generated outside the United States.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $35.2 million | $32.6 million | Up 8.0% |
| Gross profit | $24.8 million | $24.2 million | Up 2.4% |
| Gross margin | 70.4% | 74.2% | Down 3.8 percentage points |
| Operating income (loss) | $(1.1) million | $1.6 million | Declined |
| Net income (loss) | $(0.1) million | $1.4 million | Declined |
| Net cash from operating activities | $(8.2) million | $0.7 million | Declined |
ICL sales were $29.3 million, up 5.6%, while ICL units increased 9%. Other product sales rose 21.9% to $5.8 million, primarily due to higher preloaded injector-part sales. ICLs represented 83.4% of total sales.
Operating expenses increased to $25.9 million from $22.6 million. General and administrative expense rose 16.6%, marketing and selling expense rose 8.7%, and research and development expense rose 22.4%, including higher EVO clinical-trial, quality-validation, headcount, and compensation costs.
The company recorded a $1.2 million income tax benefit, principally from releasing U.S. deferred-tax valuation allowances. This benefit partially offset the pretax loss. Approximately $4.7 million of U.S. valuation allowance had been released as of April 3, 2020, while approximately $36.3 million of U.S. valuation allowance remained.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $110.9 million at April 3, 2020, compared with $120.0 million at January 3, 2020.
- Working capital was $142.2 million, compared with $140.2 million at year-end 2019.
- Current liabilities were $29.9 million, and total liabilities were $41.8 million.
- Debt was limited primarily to a $1.3 million Japanese line of credit and finance-lease obligations of $0.7 million. A Swiss credit facility of up to approximately $1.0 million was undrawn.
- The Japanese facility had approximately $3.3 million available and was expected to be renewed in May 2020 on similar terms. The company was in compliance with its credit covenants.
- Investing cash outflows were $2.2 million, primarily for property and equipment. Financing cash inflows were $1.3 million, including $2.0 million from stock-option exercises.
- Management stated that cash, cash equivalents, and expected operating cash flow should fund anticipated needs for at least 12 months from issuance of the financial statements.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8%, led by ICL growth and higher injector-part sales.
- Gross margin declined from 74.2% to 70.4% because of manufacturing-expansion costs, lower-margin injector-part mix, and $0.15 million of COVID-19-related manufacturing-pause costs.
- The company moved from operating income of $1.6 million to an operating loss of $1.1 million as operating expenses grew faster than gross profit.
- The company moved from net income of $1.4 million to a net loss of $0.1 million.
- Operating cash flow changed from a $0.7 million inflow to an $8.2 million outflow, primarily due to working-capital movements, including delayed customer payments and changes in other current liabilities.
- Japan ICL unit growth was 79%; Korea grew 14%, Canada 10%, China 7%, and Germany 5%. North America ICL sales declined 5%, while EMEA and Latin America declined 4%.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 materially affected demand. China procedures were disrupted in February, and global sales slowed substantially beginning March 20 as elective surgeries were deferred.
- Most production and non-essential business locations were suspended on March 17, 2020. Manufacturing resumed April 27, 2020. The company continued paying employee salaries, commissions, wages, and benefits during the disruption.
- Management expected weaker sales in parts of Europe and North America through the second quarter and potentially longer, with timing dependent on local reopening and patient demand.
- Management expected approximately $1.4 million of additional second-quarter period costs, plus potentially unquantified safety, personal protective equipment, and facility-modification costs.
- The company reported no significant COVID-19-related supply-chain challenges as of the filing, but expected modestly longer lead times for certain made-to-order lenses.
- Customer payment delays were occurring, although management was not aware of impairment of receivables. A Chinese distributor represented 33% of quarterly sales and 48% of trade receivables at quarter-end, creating significant concentration risk.
- The U.S. EVO clinical trial paused and began restarting as sites reopened. The EVO EDOF lens remained under review by DEKRA, with a possible staged CE Mark launch in the second or third quarter of 2020; the pandemic could delay approval.
- The company did not apply for CARES Act financing and did not expect to need it because of its balance-sheet strength.
- Known litigation was not expected to materially affect financial condition or results, although product-liability and other claims could create significant harm if outcomes were adverse.
- A new shelf registration statement was filed on May 6, 2020 for up to $200 million of securities. It was not effective as of the filing date, and management stated there were no current plans to offer securities.
Investor Verification Items
- Verify the duration and magnitude of COVID-19 effects on elective procedures, customer orders, collections, manufacturing utilization, and second-quarter revenue.
- Monitor gross-margin recovery and the expected $1.4 million of second-quarter COVID-19-related period costs.
- Assess liquidity and operating cash flow if customer payment delays persist or sales remain depressed.
- Evaluate concentration exposure to the Chinese distributor, which accounted for 33% of quarterly sales and 48% of quarter-end trade receivables.
- Track EVO clinical-trial enrollment, DEKRA review, CE Mark timing, and U.S. regulatory progress.
- Review the sustainability of the tax benefit from U.S. valuation-allowance releases and the remaining deferred-tax valuation allowance.
- Confirm renewal and terms of the Japanese credit line and any future use of the $200 million shelf registration.