Business Context and Reporting Period
STAAR Surgical Company designs, manufactures and sells implantable Collamer lenses (ICLs), intraocular lenses (IOLs), and related delivery systems for refractive and cataract surgery. The filing is a Form 10-Q for the quarter and six months ended July 3, 2020, compared with June 28, 2019. The request metadata identifies “2019 Q2,” but the filing itself reports fiscal 2020 second-quarter results.
STAAR operates as one ophthalmic surgical product segment, sells in more than 75 countries, and manufactures in the United States. China and Japan are its largest identified markets.
Key Financial Metrics
| Metric | Three Months Ended July 3, 2020 | Year-over-Year Change | Six Months Ended July 3, 2020 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $35.2 million | (11.3%) | $70.4 million | (2.6%) |
| Gross profit | $24.4 million | (18.3%) | $49.2 million | (9.0%) |
| Gross margin | 69.4% | Down from 75.4% | 69.9% | Down from 74.9% |
| Operating income (loss) | $(1.1) million | Down from $4.6 million | $(2.2) million | Down from $6.2 million |
| Net income (loss) | $(1.2) million | Down from $3.9 million | $(1.3) million | Down from $5.3 million |
| Diluted EPS | $(0.03) | Down from $0.08 | $(0.03) | Down from $0.11 |
| Net cash from operating activities | Not separately provided for the quarter | — | $(8.2) million | Down from $4.2 million provided |
ICLs generated $30.7 million of second-quarter sales, down 10.8%, and $60.1 million for the first six months, down 3.5%. Other product sales were $4.5 million in the quarter, down 14.6%, and $10.3 million year to date, up 2.8%. ICLs represented 87.3% of quarterly sales and 85.3% of year-to-date sales.
Second-quarter cost of sales included approximately $1.0 million of expenses related to the COVID-19 manufacturing pause. Six-month gross profit was also affected by approximately $1.2 million of manufacturing-pause costs, manufacturing expansion project costs, geographic sales mix, and a higher proportion of lower-margin injector-part sales.
General and administrative expense increased 4.5% in the quarter and 10.3% year to date, while research and development expense increased 19.9% and 21.1%, respectively, primarily due to headcount, salary-related costs, and the U.S. EVO clinical trial. Marketing and selling expense decreased 11.6% in the quarter and 2.2% year to date, mainly because of lower travel and trade-show spending.
Financial Position, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $116.3 million at July 3, 2020, compared with $120.0 million at January 3, 2020.
- Working capital was $150.9 million, up from $140.2 million at year-end 2019. Current assets were $182.5 million and current liabilities were $31.6 million.
- Six-month operating cash flow was negative $8.2 million, driven principally by working-capital use, including an $8.4 million increase in accounts receivable and a $0.9 million increase in inventory.
- Investing cash flow was negative $4.2 million, primarily for property and equipment. Financing cash flow was positive $8.7 million, including $9.6 million from stock-option exercises.
- Debt consisted primarily of a $1.3 million Japanese line of credit and finance lease obligations of $0.6 million. A Swiss working-capital facility of approximately $1.1 million was fully available and had no borrowings outstanding.
- The Japanese facility had approximately $3.3 million of remaining availability and was scheduled to mature August 21, 2020; management expected renewal on similar terms. The company reported compliance with applicable covenants.
- Management stated that cash, cash equivalents, and expected operating cash flow should cover anticipated needs for at least 12 months from issuance of the financial statements.
Material Changes Versus the Prior Comparable Period
- COVID-19 caused a significant decline in elective procedures and sales, particularly in North America, Europe, the Middle East, Africa, and Latin America. Manufacturing was substantially suspended from March 17 through April 27, 2020.
- Quarterly sales declined 11.3%, gross margin contracted by 6.0 percentage points, and the company moved from operating and net income to operating and net losses.
- APAC performance was more resilient: second-quarter ICL sales declined only 2%, with unit growth in Japan, Korea, and China. North American ICL sales declined 55% and the Europe, Middle East, Africa, and Latin America region declined 30%.
- Consignment sales increased to $11.7 million from $4.1 million, while non-consignment sales declined to $23.4 million from $35.6 million.
- Customer concentration increased in the quarter: one Chinese distributor represented 53% of quarterly sales, 43% of six-month sales, and 57% of trade receivables at July 3, 2020.
- The company released an additional $1.4 million of U.S. deferred-tax valuation allowance during the first six months, contributing to a $0.6 million tax benefit for the period. A substantial U.S. valuation allowance remained.
- Stock-option exercises generated $9.6 million of cash and increased shares outstanding to 45.8 million at July 3, 2020 from 44.8 million at January 3, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management expected third-quarter 2020 revenue to increase more than 20% sequentially from the second quarter, assuming no significant COVID-19 hotspots or renewed government mandates. This would imply year-over-year double-digit growth. Fourth-quarter revenue was expected to be similar to third-quarter revenue.
- Management reported stronger-than-anticipated demand in China as the peak season began and continued recovery in Japan, Korea, and China. It continued to target a 20% share of China’s refractive procedure market by year-end 2020.
- STAAR expected to meet demand for Spheric and Toric EVO lenses through the remainder of 2020 and planned to restart manufacturing at its Switzerland facility in 2021.
- Enrollment in the U.S. EVO myopia-lens clinical trial was expected to be completed by the end of September 2020, with potential U.S. approval and commercialization in the second half of 2021, subject to operating conditions and regulatory review.
- The EVO Viva extended-depth-of-focus presbyopia lens received CE Mark approval on July 2, 2020. A phased European rollout was expected to begin in Spain, Belgium, and Germany, with initial implants anticipated in September following physician training.
- COVID-19 remains the principal near-term risk, including renewed procedure restrictions, uneven geographic recoveries, delayed customer payments, supply-chain disruption, manufacturing interruptions, and uncertain demand.
- Other material risks include dependence on a major Chinese distributor, foreign-exchange exposure, product liability and regulatory risks, clinical-trial and product-approval uncertainty, vendor concentration, and the possibility that deferred tax assets will not be realized.
- The company reported no material off-balance-sheet arrangements and did not seek CARES Act financing.
- Known legal proceedings were not expected to have a material adverse effect, although unexpected claims or outcomes could cause significant harm.
Investor Verification Points
- Verify the pace and durability of post-pandemic procedure recovery, especially in North America and Europe, and compare actual third- and fourth-quarter revenue with management’s outlook.
- Monitor gross-margin recovery and the effect of manufacturing expansion costs, COVID-related costs, geographic mix, and injector-part sales.
- Assess operating cash conversion, accounts-receivable collections, and the extent of exposure to the major Chinese distributor.
- Confirm renewal and terms of the Japanese credit line and review the company’s continuing liquidity relative to lease, pension, capital-expenditure, and working-capital requirements.
- Track EVO clinical-trial enrollment, FDA review, EVO Viva commercialization, and any regulatory or manufacturing delays.
- Evaluate the sustainability of the U.S. deferred-tax valuation allowance releases and the remaining $36.5 million U.S. valuation allowance.