STAAR Surgical Company: Form 10-Q Summary
Reporting period: Quarter and nine months ended October 2, 2020, compared with September 27, 2019. The request metadata identifies “2019 Q3,” but the filing is the third-quarter 2020 Form 10-Q.
Business Context
STAAR designs, manufactures and sells implantable ophthalmic lenses and delivery systems, including implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company operates as one ophthalmic surgical products segment and sells in more than 75 countries. China and Japan are its largest country markets.
Financial Performance and Liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $47.1 million | $39.1 million | $117.5 million | $111.3 million |
| Gross profit | $34.9 million | $29.1 million | $84.1 million | $83.1 million |
| Gross margin | 74.1% | 74.4% | 71.6% | 74.7% |
| Operating income | $4.9 million | $3.3 million | $2.7 million | $9.5 million |
| Operating margin | 10.4% | 8.5% | 2.3% | 8.5% |
| Net income | $3.9 million | $2.4 million | $2.6 million | $7.7 million |
| Diluted EPS | $0.08 | $0.05 | $0.05 | $0.16 |
Q3 net sales increased 20.6%, led by a 22.7% increase in ICL sales to $41.5 million and 25% ICL unit growth. ICLs represented 88.1% of Q3 sales. Nine-month sales increased 5.5%, while nine-month ICL sales increased 5.8% and unit volume increased 10%.
Q3 net income increased 63.0%, benefiting from higher sales, improved selling and marketing leverage, and a $0.5 million net gain in other income. For the nine-month period, profitability declined materially because of the COVID-19 disruption, lower gross margin, higher general and administrative and research and development costs, and higher clinical-trial spending.
Research and development expense increased 42.2% in Q3 and 28.3% for nine months, primarily due to the U.S. EVO clinical trial. General and administrative expense increased 21.0% in Q3 and 13.8% for nine months. Selling and marketing expense increased 1.5% in Q3 but declined 0.8% for nine months.
Cash and cash equivalents were $128.3 million at October 2, 2020, compared with $120.0 million at January 3, 2020. Working capital was $162.1 million versus $140.2 million at year-end. Nine-month operating cash flow was $1.4 million, down from $16.0 million, primarily because of working-capital usage, including a $11.0 million increase in accounts receivable. Capital expenditures were $6.3 million.
The company had $1.4 million outstanding under its Japanese line of credit, with approximately $3.4 million available, and no borrowings under its Swiss facility. Total liabilities were $48.3 million and stockholders’ equity was $186.4 million. Management stated that available cash and expected operating cash flow should fund anticipated needs for at least 12 months.
Material Changes and Unusual Items
- COVID-19 caused a production suspension from March 17 through April 27, 2020 and disrupted elective surgeries globally. The company recorded approximately $1.2 million of COVID-related manufacturing-pause expenses during the first nine months.
- Q3 recovery was strongest in China, Japan, South Korea and several European markets; India and the Middle East remained challenged.
- Nine-month gross margin fell to 71.6% from 74.7%, reflecting geographic mix, COVID-related manufacturing costs, manufacturing expansion costs and increased sales of lower-margin injector parts.
- Proceeds from stock-option exercises provided $14.0 million of financing cash flow during the first nine months. Shares outstanding increased to 46.1 million at October 30, 2020.
- The company released approximately $1.2 million of additional U.S. deferred-tax valuation allowance during the nine months and had released approximately $4.6 million cumulatively as of October 2, 2020. A remaining U.S. valuation allowance of approximately $35.7 million remained.
- One Chinese distributor represented 49% of Q3 sales, 46% of nine-month sales and 59% of trade receivables at October 2, 2020.
Guidance, Outlook and Risks
Management expected Q4 2020 revenue of $42 million to $44 million, assuming no significant resurgence of COVID-19 hotspots or government restrictions. Management also expected increased spending to support the 2021 outlook and continued to target a 20% share of China’s refractive procedure market by year-end 2020.
The U.S. EVO clinical trial had completed patient enrollment, with primary analysis expected after 300 primary eyes completed six months of follow-up, anticipated in early Q2 2021. Management believed potential U.S. marketing approval and commercialization could occur in the second half of 2021. A phased European rollout of the EVO Viva presbyopia-correcting lens had begun.
Key risks include renewed COVID-19 disruptions, delays in elective procedures, geographic and customer concentration, foreign-exchange exposure, regulatory approval and commercialization of EVO products, clinical-trial execution, margin pressure from product mix and expansion costs, and the pending securities class action alleging misstatements concerning China sales, marketing spending and research and development expenses. The company denies wrongdoing and intends to defend the case.
The Japanese credit line was scheduled to mature on November 21, 2020; management expected renewal for an additional three months on similar terms. The company reported compliance with its credit-facility covenants and no material off-balance-sheet arrangements.
Investor Verification Checklist
- Verify the requested period against the filing: this document covers Q3 2020, not Q3 2019.
- Assess sustainability of the Q3 sales recovery and the $42 million to $44 million Q4 revenue outlook amid potential COVID-19 restrictions.
- Monitor dependence on the Chinese distributor, which accounted for nearly half of sales and most trade receivables.
- Reconcile the sharp decline in nine-month operating cash flow with higher accounts receivable and inventory balances.
- Evaluate the effect of EVO clinical, regulatory and commercialization milestones on future research and development spending.
- Review the potential financial and disclosure consequences of the consolidated securities litigation.
- Confirm renewal and terms of the Japanese credit facility and track lease, pension and other contractual obligations.