STAAR SURGICAL COMPANY The matters addressed in this Item 7 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 guidance as to earnings, revenue, sales, profit margins, expense rate, cash, effective tax rate, 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 theU.S. or international markets or government approval of a new or improved products (including the EVO family of lenses in theU.S. and the EVO Viva family of lenses for presbyopia internationally); 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 2021 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 this Annual Report in "Item 1A. Risk Factors." 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 lens-based 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 increased share of the refractive market and 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 IOL lenses used in surgery that treats cataracts based on quality and value.
See Item 1. "Business," for a discussion of:
• Operations
• Principal Products
• Distribution and Customers
• Competition
• Regulatory Matters
• Research and Development
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Strategic Priorities for 2021
For 2021 we intend to continue achieving and strengthening our 2020 strategic priorities, which are as follows:
• Position EVO Implantable Lenses as a Special and Transformational Pathway to
Visual Freedom;
• Execute Go-to-Market Strategy to Significantly Expand Market Share Globally;
• Innovate and Develop a Pipeline of Next Generation Premium Collamer-Based
Intraocular Lenses;
• Support the Transformation of the Refractive Surgery Paradigm to Lens-Based
through Clinical Validation and Medical Affairs Excellence;
• Continue our Focus on and Commitment to STAAR's Culture of Quality; and
• Deliver Shareholder Value.
To realize these priorities, we are planning to:
• Continue to invest in manufacturing and facilities expansion that
include, among other things: (i) increasing manufacturing capacity at our
Monrovia, California facility for our myopia ICLs; (ii) reopening and
expanding our manufacturing and distribution facilities in
and (iii) preparing for the validation of our
facility for the manufacturing of our EVO Viva for presbyopia lenses;
• Continue market share gains in all global markets, including China . We
will continue to focus on increasing consideration and usage of low and
mid-diopter ICLs;
• Continue to increase investment in Direct-to-Consumer marketing and
patient education in targeted markets; and
• Continue to strengthen existing and finalize new strategic agreements and
alliances with global partners.
Finally, we will continue to evaluate opportunities to acquire new product lines, technologies, and companies.
We continue to assess and manage through the potential impact of COVID-19, which remains uncertain at this time and may adversely affect our financial results. For example, we continue to monitor the commercial and operational impact of new variants of COVID-19 in our markets.
Results of Operations
The following table sets forth the percentage of total sales represented by
certain items reflected in the Company's Consolidated Statement of Income for
the period indicated.
Percentage of Net Sales
2020 2019 2018
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 27.6 % 25.5 % 26.2 %
Gross profit 72.4 % 74.5 % 73.8 %
General and administrative 20.7 % 19.5 % 19.6 %
Selling and marketing 28.0 % 30.3 % 31.1 %
Research and development 19.6 % 16.8 % 17.8 %
Total selling, general and administrative 68.3 % 66.6 % 68.5 %
Operating income 4.1 % 7.9 % 5.3 %
Total other income, net 0.9 % 0.8 % 0.0 %
Income before income taxes 5.0 % 8.7 % 5.3 %
Provision (benefit) for income taxes 1.4 % (0.7 )% 1.3 %
Net income 3.6 % 9.4 % 4.0 %
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The following table presents our net sales, by product for the fiscal years presented (dollars in thousands):
2020 2019 2018
% of % of % of
Total Sales Total Sales Total Sales
ICLs 86.5 % $ 141,407 86.1 % $ 129,322 81.5 % $ 101,082
Other product sales
IOLs 8.3 % 13,574 10.5 % 15,689 13.1 % 16,193
Other surgical products 5.2 % 8,479 3.4 % 5,174 5.4 % 6,679
Total other product sales 13.5 % 22,053 13.9 % 20,863 18.5 % 22,872
Net sales 100.0 % $ 163,460 100.0 % $ 150,185 100.0 % $ 123,954 Net sales for 2020 were
Net sales for 2019 were$150.2 million , a 21% increase over the$124.0 million reported in fiscal 2018. The increase in net sales was due to increased ICL sales of$28.2 million , partially offset by a decrease in other product sales of$2.0 million . Changes in foreign currency unfavorably impacted net sales by$1.3 million . Total ICL sales for 2020 were$141.4 million , a 9% increase from$129.3 million reported for fiscal 2019, with unit growth up 11%. The sales increase was driven by the APAC region, which grew 15% with unit growth of 17%, primarily due to sales growth inJapan up 56%, other APAC Distributors up 38%,Korea up 17% andChina up 11%. TheEurope ,Middle East ,Africa andLatin America region sales decreased 3% and units decreased 11%, as a result of decreased sales in theMiddle East down 35%,Latin America down 13% andSpain down 4%, partially offset by sales growth inGermany up 15%, theU.K. up 8% and Other Distributors up 4%. TheNorth America region sales decreased 14% and units decreased 12%, mainly due to decreased sales in theU.S. down 17%, slightly offset by sales growth inCanada up 2%. The decreases in these various regions were impacted by the COVID-19 pandemic in the first half of 2020; most markets started to reopen in mid-May/early June, withIndia and theMiddle East being the two markets that remained the most challenged by COVID-19 during the second half of 2020. Changes in foreign currency favorably impacted ICL sales by$1.0 million . ICL sales represented 86.5% of our total sales for fiscal year 2020. Total ICL sales for 2019 were$129.3 million , a 28% increase from$101.1 million reported for fiscal 2018, with unit growth up 33%. The sales increase was driven by the APAC region, which grew 40% with unit growth of 44%, primarily due to sales growth inJapan up 67%,China up 41%,Korea up 26%, other APAC Distributors up 16% andIndia up 12%. TheEurope ,Middle East ,Africa andLatin America region, grew 2% with unit growth of 7%, primarily due to increased sales inUK up 19%,Germany up 9% andSpain up 7%, partially offset by decreased sales in theMiddle East of 9% andLatin America of 8%. TheNorth America region grew 18%, with unit growth of 4%, primarily due to growth in theU.S. , as a result of sales of the Toric ICL in 2019, partially offset by decreased sales inCanada . Changes in foreign currency unfavorably impacted ICL sales by$1.3 million . ICL sales represented 86.1% of our total sales for fiscal year 2019. Other product sales, including IOLs were$22.1 million for fiscal 2020, an increase of 6% from$20.9 million reported in fiscal 2019, due to increased preloaded injector part sales to a third-party manufacturer for product they sell to their customers, partially offset by decreased IOL sales. Changes in foreign currency favorably impacted other product sales by$0.5 million . Other product sales represented 13.5% of our total sales for fiscal year 2020. Other product sales, including IOLs were$20.9 million for fiscal 2019, a decrease of 9% from$22.9 million reported in fiscal 2018, due to decreased preloaded injector part sales to a third-party manufacturer for product they sell to their customers and in IOL sales. Other product sales represented 13.9% of our total sales for fiscal year 2019. 33
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Gross Profit
The following table presents our gross profit and gross profit margin for the fiscal years presented (dollars in thousands):
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Gross profit $ 118,362 $ 111,954 $ 91,510 5.7 % 22.3 %
Gross margin 72.4 % 74.5 % 73.8 %
Gross profit for 2020 was $118.4 million , a 5.7% increase compared to the $112.0
million reported for 2019. Gross profit margin decreased to 72.4% of revenue for
2020 compared to 74.5% of revenue for 2019, due to geographic sales mix, $1.2
million in expenses related to the COVID-19 manufacturing pause from March 17
through April 27, 2020 , period costs associated with the manufacturing expansion
projects and increased mix of injector part sales which carry a lower margin,
partially offset by increased ICL volume.
Gross profit for 2019 was $112.0 million , a 22.3% increase compared to the $91.5
million reported for 2018. Gross profit margin increased to 74.5% of revenue for
2019 compared to 73.8% of revenue for 2018, due to favorable product mix
resulting from increased sales of ICLs, partially offset by period costs
associated with the project to resume manufacturing in Switzerland . The gross
margin impact of lower average selling prices was more than offset by the
favorable impact of improved product mix.
General and Administrative Expense
The following table presents our general and administrative expense for the fiscal years presented (dollars in thousands):
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
General and administrative expense $ 33,911 $ 29,313 $ 24,287 15.7 % 20.7 %
Percentage of sales 20.7 % 19.5 % 19.6 %
General and administrative expenses for 2020 were
General and administrative expenses for 2019 were
Selling and Marketing Expense
The following table presents our marketing and selling expense for the fiscal years presented (dollars in thousands):
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Selling and marketing expenses $ 45,764 $ 45,491 $ 38,600 0.6 % 17.9 %
Percentage of sales 28.0 % 30.3 % 31.1 %
Selling and marketing expenses for 2020 were
Selling and marketing expenses for 2019 were$45.5 million , an increase of 17.9% when compared with$38.6 million for 2018, due to increased headcount and salary-related expenses including stock-based compensation and continued investments in digital, consumer, and strategic marketing, and increased travel expenses. 34
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Research and Development Expense
The following table presents our research and development expense for the fiscal years presented (dollars in thousands):
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Research and development expense $ 31,918 $ 25,298 $ 22,028 26.2 % 14.8 %
Percentage of sales 19.6 % 16.8 % 17.8 %
Research and development expenses for 2020 were $31.9 million , an increase of
26.2% compared to $25.3 million for 2019 primarily due to increased clinical
expenses associated with our EVO clinical trial in the U.S. , and increased
salary-related expenses and variable compensation, partially offset by decreased
travel expenses.
Research and development expenses for 2019 were
Research and development expense consist primarily of compensation and related costs for personnel responsible for the research and development of new and existing products, the regulatory and clinical activities required to acquire and maintain product approvals globally and medical affairs expenses. These costs are expensed as incurred.
Other Income, Net
The following table presents our other income, net for the fiscal years presented (dollars in thousands):
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Other income, net $ 1,498 $ 1,174 $ 44 27.6 % -*
Percentage of sales 0.9 % 0.8 % 0.0 %
* Denotes change is greater than +100%.
Other income for 2020, 2019 and 2018 was$1.5 million ,$1.2 million and$0.0 million , respectively. The increase for 2020 is mainly due to increased foreign exchange gains (primarily euro), partially offset by decreased net interest income, as a result of lower interest rates. The increase in 2019 is mainly due to increased interest income earned on cash and cash equivalents and decreased foreign exchange losses (primarily euro). Other income, net generally relates to interest income earned on cash and cash equivalents, interest expense on notes payable and finance lease obligations, gains or losses on foreign currency transactions, and royalty income. The table below summarizes the year over year changes in other income, net (in thousands). Favorable (Unfavorable) 2020 vs. 2019 2019 vs. 2018 Interest income (expense), net $ (750 ) $ 823 Foreign exchange 1,381 319 Royalty income (111 ) (82 ) Other (196 ) 70 Net change in other income, net $ 324 $ 1,130
Provision (Benefit) for Income Taxes
The following table presents our provision (benefit) for income taxes for the fiscal years presented (in thousands):
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Provision (benefit) for income taxes
-* -*
* Denotes change is greater than +100%.
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We recorded income taxes of $2.4 million for 2020 due to pre-tax income
generated in certain foreign jurisdictions, which included a release of $0.5
million of our U.S. valuation allowance, as a result of increases in foreign
income and changes in the usage and release of our deferred tax assets. We
recorded an income tax benefit for 2019 due to a release of the federal and
certain state valuation allowances, offset by the income tax expense from
profits generated in our Swiss and Japan operations. We recorded income taxes
for 2018 as a result of income tax expense generated primarily from profits in
our Swiss and Japan operations and U.S. withholding taxes on those
profits. During 2020, 2019 and 2018, there are no unrecognized tax benefits
related to uncertain tax positions taken by us.
All earnings from our subsidiaries are not considered to be permanently
reinvested. Accordingly, we provided withholding and U.S. taxes on all
unremitted foreign earnings through 2018. Beginning 2019, we no longer need to
accrue withholding taxes on foreign earnings (Note 10 to the Consolidated
Financial Statements). During 2020, 2019 and 2018 there were no withholding
taxes paid to foreign jurisdictions.
On December 22, 2017 , the United States enacted major tax reform legislation,
the 2017 Tax Act, which enacted a broad range of changes to the federal tax
code. Key provisions that could have an impact on our Consolidated Financial
Statements are the deemed repatriation of foreign earnings, the re-measurement
of certain net deferred assets and other liabilities for the change in the U.S.
corporate tax rate from 35 percent to 21 percent, and the elimination of the
AMT.
We applied the guidance in SAB 118 when accounting for the enactment-date
effects of the 2017 Tax Act and throughout 2018. At that time, for 2017, we made
reasonable estimates of the impact and included $5.7 million in foreign
earnings, which were fully offset by the deemed foreign tax credit. This
inclusion amount was later finalized at $7.5 million . At December 28, 2018 , we
completed our accounting for all the enactment-date income tax effects of the
2017 Tax Act.
Beginning in 2018, the 2017 Tax Act subjects a U.S. shareholder to tax on Global
Intangible Low Tax Income (GILTI) earned by certain foreign subsidiaries. In
January 2018 , the FASB released guidance (Staff Q&A Topic 740, No. 5) on the
accounting for tax on the GILTI provisions of the 2017 Tax Act. In general,
GILTI is the excess of a U.S. shareholder's total net foreign income over a
deemed return on tangible assets. The provision further allows a deduction of 50
percent of GILTI, however this deduction is limited by our net operating loss
carryforwards. For 2020, 2019 and 2018, we included GILTI of $21.3 million ,
$15.1 million and $7.7 million , respectively, in U.S. gross income, which was
fully offset with net operating loss carryforwards.
ASC 740 requires that a valuation allowance be established when it is more
likely than not that all or a portion of a deferred tax asset may not be
realizable. The ultimate realization of deferred tax assets is dependent upon
future generation of income during the periods in which temporary differences
representing net future deductible amounts become deductible. We considered the
projected future income, tax planning strategies and all other available
evidence in making this assessment. Since January 3, 2020 , we had at least three
years of accumulated profits for federal income tax purposes as a result of
GILTI. Therefore, based upon our findings that the positive evidence outweighed
the negative evidence, sufficient for us to realize the benefit of our deferred
tax assets due to our projected future profits, we reduced the valuation
allowance.
Since 2019, we have made a policy election to apply the incremental cash tax
savings approach when analyzing the impact GILTI could have on our U.S.
valuation allowance. As a result of future expected GILTI inclusions, and
because of the Tax Act's ordering rules, U.S. companies may now expect to
utilize tax attribute carryforwards (e.g. net operating losses and deferred tax
assets) for which a valuation allowance has historically been recorded (this is
referred to as the "tax law ordering approach"). However, due to the mechanics
of the GILTI rules, companies that have a GILTI inclusion may realize a reduced
(or no) cash tax savings from utilizing such tax attribute carryforwards (this
view is referred to as the "incremental cash tax savings approach"). Applying
the incremental cash tax savings approach, resulted in the valuation allowance
release of $3.0 million and $0.4 million for Federal and state purposes,
respectively, during 2019. As a result of our fiscal 2020 operating results,
revising our global forecasts for fiscal 2021 and beyond as a result of COVID-19
in the first quarter of 2020 and changes in the usage and release of certain
deferred tax assets, we recorded a valuation allowance release of $0.6 million
against our federal deferred tax assets, and a valuation allowance release
reversal of $0.1 million against certain states deferred tax assets during 2020.
The remaining valuation allowance was $34.7 million and $7.4 million for federal
and state purposes, respectively, as of January 1, 2021 .
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See Critical Accounting Policies included later in this Item 7 for additional information about our provision for income taxes.
A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Note 10 of Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Liquidity and Capital Resources
We believe that current cash, cash equivalents and future cash flow from operating activities will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the financial statements included in this Annual Report. Although we have experienced some delays in payments on accounts receivable as a result of the COVID-19 pandemic in the first half of 2020, this improved during the second half of 2020 as our customers resumed elective refractive surgery. At this time we are unaware of any impairment of assets resulting from the COVID-19 pandemic. We did not apply for or require financing available under the Coronavirus Aid, Relief, and Economic Security "CARES" Act and do not expect to do so. Our financial condition atJanuary 1, 2021 ,January 3, 2020 andDecember 28, 2018 included the following (in millions): 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Cash and cash equivalents$ 152.5 $ 120.0 $ 103.9 $ 32.5 $ 16.1 Current assets$ 216.4 $ 174.7 $ 151.6 $ 41.7 $ 23.1 Current liabilities 41.2 34.5 27.7 6.7 6.8 Working capital$ 175.2 $ 140.2 $ 123.9 $ 35.0 $ 16.3 We invest our net proceeds in short-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of theU.S. government. Additionally, atJanuary 1, 2021 , we have a line of credit with a Japanese lender, in the amount of$1.4 million , with$3.5 million of availability and a line of credit with a Swiss lender, in the amount of$1.1 million , which is fully available for borrowing.
Overview of changes in cash and cash equivalents and other working capital accounts.
Net cash provided by operating activities was$21.0 million ,$25.8 million and$12.8 million for 2020, 2019 and 2018, respectively. For 2020, net cash provided by operating activities consisted of$17.8 million in non-cash items and$5.9 million in net income, offset by$2.7 million in working-capital changes. For 2019, net cash provided by operating activities consisted of$14.0 million in net income and$13.0 million in non-cash items, offset by$1.2 million in working-capital changes. For 2018, net cash provided by operating activities consisted of$12.3 million in non-cash items and$5.0 million in net income, offset by$4.5 million in working-capital changes. Net cash used in investing activities was$8.4 million ,$10.2 million and$2.2 million for 2020, 2019 and 2018 respectively, and relate primarily to the acquisition of property, plant, and equipment. The decrease in investment in property, plant and equipment during 2020, relative to 2019, is primarily due to a slight decrease in investments in manufacturing facilities. The increase in investment in property, plant and equipment during 2019, relative to 2018, is primarily due to continued increased investments in manufacturing intending to satisfy growing demand for our products. Net cash provided by financing activities was$19.6 million ,$0.1 million and 74.6 million for 2020, 2019 and 2018, respectively. For 2020, net cash provided by financing activities consisted of$20.6 million of proceeds from the exercise of stock options, partially offset by$0.6 million repayment of finance lease obligations and$0.5 million repayment on theJapan line of credit. For 2019, net cash provided by financing activities consisted of$3.5 million of proceeds from the exercise of stock options, offset by a$2.0 million repayment on theJapan line of credit and$1.3 million repayment of finance lease obligations. For 2018, net cash provided by financing activities resulting primarily from the proceeds of$72.2 million from the equity offering (refer to Note 12 to the Consolidated Financial Statements). In addition, the increase also consisted of$5.2 million of proceeds from the exercise of stock options, offset by$1.9 million repayment of finance lease obligations and$0.7 million repayment on theJapan line of credit. Accounts receivable, net was$35.2 million and$31.0 million atJanuary 1, 2021 andJanuary 3, 2020 , respectively. Days' Sales Outstanding (DSO) was 70 and 78 days in 2020 and 2019. The decrease in DSO was mainly due to increased customer collections of receivables in the fourth quarter of 2020. 37 -------------------------------------------------------------------------------- Inventories, net was$18.1 million and$17.1 million atJanuary 1, 2021 andJanuary 3, 2020 , respectively. Days' Inventory on Hand (DOH) was 114 and 159 days in 2020 and 2019, respectively, for finished goods, including consignment inventory. The decrease in DOH is due to increased sales of ICL products resulting in more frequent inventory turnover.
Shelf Registration
OnMay 6, 2020 , STAAR filed a universal shelf registration statement with theSEC covering the future public offering and sale of up to$200 million in equity or debt securities or any combination of such securities. The shelf registration statement became effective onFebruary 22, 2021 and expires onFebruary 22, 2024 . Among the purposes for which STAAR could use the proceeds of securities sold in the future under the shelf registration statement are working capital, capital expenditures, expansion of sales and marketing, and continuing research and development. STAAR could also use a portion of the net proceeds to acquire or invest in businesses, assets, products, and technologies that are complementary to our own, although we are not currently contemplating or negotiating any such acquisitions or investments. The availability of financing in the public capital markets through the shelf registration statement depends on several factors in place at the time of financing, including the strength of STAAR's business performance, general economic conditions and investment climate, and investor perceptions of those factors. If STAAR seeks financing under the shelf registration statement in the future, we cannot assure that such financing will be available on favorable terms, if at all.
Credit Facilities, Lease Line of Credit, Contractual Obligations, and Commitments
Credit Facilities
We have credit facilities with different lenders to support operations as detailed below.
Lines of Credit
Since 1998, our wholly owned Japanese subsidiary, STAAR Japan, has had an agreement withMizuho Bank which provides for borrowings of up to500,000,000 Yen , at an interest rate equal to the uncollateralized overnight call rate (approximately 0.07% as ofJanuary 1, 2021 ) plus a 0.50% spread, and may be renewed quarterly (the current line expires onFebruary 21, 2021 ). The credit facility is not collateralized. We had142,500,000 Yen and197,500,000 Yen outstanding on the line of credit as ofJanuary 1, 2021 andJanuary 3, 2020 , respectively, (approximately$1,379,000 and$1,827,000 based on the foreign exchange rates onJanuary 1, 2021 andJanuary 3, 2020 , respectively), which approximates fair value due to the short-term maturity and market interest rates of the line of credit. In case of default, the interest rate will be increased to 14% per annum. There was357,500,000 Yen and302,500,000 Yen available for borrowing as ofJanuary 1, 2021 andJanuary 3, 2020 , respectively (approximately$3,459,000 and$2,798,000 based on the foreign exchange rate onJanuary 1, 2021 andJanuary 3, 2020 , respectively). At maturity onFebruary 21, 2021 , this line of credit was renewed untilMay 21, 2021 , with similar terms. InSeptember 2013 , our wholly owned Swiss subsidiary,STAAR Surgical AG , entered into a framework agreement for loans ("framework agreement") with Credit Suisse (the "Bank"). The framework agreement provides for borrowings of up to1,000,000 CHF (Swiss Francs) (approximately$1,100,000 and$1,000,000 million at the rate of exchange onJanuary 1, 2021 andJanuary 3, 2020 , respectively), to be used for working capital purposes. Accrued interest and 0.25% commissions on average outstanding borrowings is payable quarterly and the interest rate will be determined by the Bank based on the then prevailing market conditions at the time of borrowing. The framework agreement is automatically renewed on an annual basis based on the same terms assuming there is no default. The framework agreement may be terminated by either party at any time in accordance with its general terms and conditions. The framework agreement is not collateralized and contains certain conditions such as providing the Bank with audited financial statements annually and notice of significant events or conditions, as defined in the framework agreement. The Bank may also declare all amounts outstanding to be immediately due and payable upon a change of control or a "material qualification" inSTAAR Surgical independent auditors' report, as defined. There were no borrowings outstanding as ofJanuary 1, 2021 andJanuary 3, 2020 .
Covenant Compliance
We are in compliance with the covenants of our credit facilities and lines of
credit as of
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Lease Line of Credit (Finance Leases)
During 2019, we converted the lease line of credit schedule 011 with
Contractual Obligations
The following table represents the Company's known contractual obligations as of
Payments Due by Period
2 - 3 4 - 5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
Line of credit (Note 8)* $ 1,379 $ 1,379 $ - $ - $ -
Finance lease obligations (Note 9)* 405 366 35 4 -
Operating lease obligations (Note 9)* 9,462 2,682 4,023
1,432 1,325
Pension benefit payments (Note 11)* 11,940 176 485
637 10,642
Asset retirement obligation (Note 13)* 221 221 - - -
Open purchase orders (Note 13)* 8,446 8,154 280 12 -
Total $ 31,853 $ 12,978 $ 4,823 $ 2,085 $ 11,967 * Refer to the Notes to the Consolidated Financial Statements in this Annual
Report on Form 10-K Critical Accounting Policies The preparation of financial statements in accordance with accounting principles generally accepted inthe United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowances for doubtful accounts and sales returns, inventory reserves and income taxes, among others. Our estimates are based on historical experiences, market trends and financial forecasts and projections, and on various other assumptions that management believes are reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these if actual conditions differ from our assumptions.
We believe the following represent our critical accounting policies.
Revenue Recognition
We recognize revenue when our contractual performance obligations with customers
are satisfied. Our performance obligations are generally limited to single sales
orders with product shipping to the customer within a month of receipt of the
sales order. Substantially all of our revenues are recognized at a point-in-time
when control of our products transfers to the customer, which is typically upon
shipment (as discussed below). We present sales tax and similar taxes we collect
from our customers on a net basis (excluded from revenues).
We sell certain injector parts to an unrelated customer and supplier
(collectively referred to as "supplier") whereby these injector part sales are
either made as a final sale to the supplier or, are sold to be combined with an
acrylic IOL by the supplier into finished goods inventory (a preloaded acrylic
IOL). These finished goods are then sold back to us at an agreed upon,
contractual price. We make a profit margin on either type of sale with the
supplier and each type of sale is made under separate purchase and sales orders
between the two parties resulting in cash settlement for the orders sold or
repurchased. For parts that are sold as a final sale, we recognize a sale and
those sales are classified as other product sales in total net sales. For the
injector parts that are sold to be combined with an acrylic IOL into finished
goods, we record the transaction at its carrying value deferring any profit
margin as contra-inventory, until the finished goods inventory is sold to an
end-customer (not the supplier) at which point we recognize revenues.
For all sales, we are considered the principal in the transaction as we are the
party providing specified goods under our control prior to when control is
transferred to the customer. Cost of sales includes cost of production, freight
and distribution, and inventory provisions, net of any purchase
discounts. Shipping and handling activities that occur after the customer
obtains control of the goods are recognized as fulfillment costs.
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Non-consignment sales
We recognize revenue from non-consignment product sales at a point-in-time when control has been transferred, which is typically at shipping point, except for certain customers and for our STAAR Japan subsidiary, which is typically recognized when the customer receives the product. We generally do not have significant deferred revenue as delivery to the customer is generally made within the same or the next day of shipment. We also enter into certain strategic cooperation agreements with customers in which, as consideration for certain commitments made by the customer, including minimum purchase commitments, we agree, among other things, to pay for marketing, educational training and general support of our products. The provisions in these arrangements allow for these payments to be made directly to the customer or payments can be made directly to a third party for distinct marketing, educational training and general support services provided to or on behalf of the customer by the third party. For payments we make to another party, or reimburse the customer for distinct marketing and support services, we recognize these payments as sales and marketing expense as incurred. These strategic cooperation agreements are generally for periods of 12 months or more with quarterly minimum purchase commitments. We recognize sales and marketing expenses in the period in which it expects the customer will achieve its minimum purchase commitment, generally quarterly, and any unpaid amounts are recorded in Other Current Liabilities in "Other" on the Consolidated Balance Sheets, see Note 7 to the Consolidated Financial Statements. Reimbursements made directly to the customer for general marketing incentives are treated as a reduction in revenues. Our performance obligations generally occur in the same quarter as the shipment of product. Since the payments for distinct or non-distinct services occur within the quarter corresponding with the purchases made by the customer and our shipments to that customer, there is no remaining performance obligation. Accordingly, there are no deferred revenues associated with these types of arrangements.
Consignment Sales
Our products are marketed to ophthalmic surgeons, hospitals, ambulatory surgery centers or vision centers, and distributors. IOLs and ICLs may be offered to surgeons and hospitals on a consignment basis. We maintain title and risk of loss on consigned inventory and recognize revenue for consignment inventory at a point-in-time when we are notified that the lenses have been implanted, thus completing the performance obligation.
Sales Return Reserves
Generally, we may permit returns of product if the product, upon issuance of a Returned Goods Authorization, is returned within the time allowed by our return policies, and in good condition. We provide allowances for sales returns such that returns are matched against the sales from which they originated. While such allowances have historically been within our expectations, we cannot guarantee that we will continue to experience the same return rates that we have in the past. Measurement of such returns, is based on an expected loss model which requires consideration of, among other factors, historical returns experience and current/anticipated trends, including the need to adjust for current conditions and product lines, the entry of a competitor, and judgments about the probable effects of relevant observable data. We consider all available information in our quarterly assessments of the adequacy of the allowance for sales returns. Sales are reported net of estimated returns. If the actual sales returns are higher or lower than estimated by management, additional reduction or increase in sales may occur.
Allowance for Doubtful Accounts
We maintain provisions for uncollectible accounts based on estimated losses
resulting from the inability of our customers to remit payments. If the
financial condition of customers were to deteriorate, thereby resulting in an
inability to make payments, additional allowances could be required. We perform
ongoing credit evaluations of our customers and adjust credit limits based upon
customer payment history and current creditworthiness, as determined by our
review of our customers' current credit information. We continuously monitor
collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that have been identified. We write off amounts
determined to be uncollectible against the allowance for doubtful accounts.
While such credit losses have historically been within our expectations and the
provisions established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past. Measurement of such losses,
is based on an expected loss model which requires consideration of historical
loss experience, including the need to adjust for current conditions, and
judgments about the probable effects of relevant observable data, including
present economic conditions such as delinquency rates and financial health of
specific customers. We consider all available information in our assessments of
the adequacy of the reserves for uncollectible accounts.
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Stock-Based Compensation
We account for the issuance of stock options to employees and directors by
estimating the fair value of options issued using the Black-Scholes pricing
model. This model's calculations include the exercise price, the market price of
shares on grant date, risk-free interest rates, expected term of the option,
expected volatility of our stock and expected dividend yield. The amounts
recorded in the financial statements for share-based compensation could vary
significantly if we were to use different assumptions. We also issue restricted
stock units ("RSUs") and performance stock units ("PSUs") which contain a
service condition such that they vest if the grantee is still employed with us
on a range of measurement dates, which are typically three years after the grant
date. On occasion, we also issue RSUs and PSUs to certain employees which
contain a performance condition such that they vest if the internally
established target is met or exceeded and the grantee is still employed with us
on the measurement date, which is typically one year after the grant date. We
recognize compensation cost for the RSUs and PSUs when it is probable that the
performance condition will be achieved, net of an estimate of pre-vesting
forfeitures, over the requisite service period based on the grant-date fair
value of the stock. We reassess the probability of vesting at each reporting
period and adjust compensation cost based on our probability assessment.
Income Taxes
We account for income taxes, on a jurisdiction-by-jurisdiction basis, under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled in the jurisdictions in which they arise. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the need to establish a valuation allowance for deferred tax assets based on the amount of existing temporary differences, the period in which they are expected to be recovered and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some or all the deferred tax assets will not be realized. We have made a policy election to apply the incremental cash tax savings approach when analyzing the impact GILTI could have on ourU.S. valuation allowance assessment. In many countries, including theU.S. , we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned by ourU.S. and foreign entities and are taxed accordingly. In the normal course of business, we are audited by federal, state and foreign tax authorities, and subject to inquiries from those tax authorities regarding the amount of taxes due. These inquiries may relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. We believe that our tax positions comply with applicable tax law and intend to defend our positions, if necessary.
Inventories
We provide estimated inventory allowances for excess, slow moving, expiring and
obsolete inventory as well as inventory whose carrying value is more than net
realizable value. These reserves are based on current assessments about future
demands, market conditions and related management initiatives. If market
conditions and actual demands are less favorable than those projected by
management, additional inventory write-downs may be required. We value our
inventory at the lower of cost or net realizable market values. We regularly
review inventory quantities on hand and record a provision for excess and
obsolete inventory based primarily on the expiration of products with a shelf
life of less than four months, estimated forecasts of product demand and
production requirements for the next twelve months. Several factors may
influence the realizability of our inventories, including decisions to exit a
product line, technological change, and new product development. These factors
could result in an increase in the amount of obsolete inventory quantities on
hand. Additionally, estimates of future product demand may prove to be
inaccurate, in which case the provision required for excess and obsolete
inventory may be understated or overstated. If in the future, we determine that
our inventory was overvalued, we would be required to recognize such costs in
cost of sales at the time of such determination. Likewise, if we determine that
our inventory was undervalued, cost of sales in previous periods could have been
overstated and we would be required to recognize such additional operating
income at the time of sale. While such inventory losses have historically been
within our expectations and the provisions established, we cannot guarantee that
we will continue to experience the same loss rates that we have in the past.
Therefore, although we make every effort to ensure the accuracy of forecasts of
future product demand, including the impact of planned future product launches,
any significant unanticipated changes in demand or technological developments
could have a significant impact on the value of our inventory and our reported
operating results.
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Lease Accounting
We recognize right-of-use ("ROU") assets and lease liabilities for leases with
terms greater than twelve months. Leases are classified as either finance or
operating, with classification affecting the pattern of expense
recognition. Certain leases may have non-lease components such as common area
maintenance expense for building leases and maintenance expenses for automobile
leases. In general, we separate common area maintenance expense component from
the value of the ROU asset and lease liability when evaluating rental
properties, whereas, we include the maintenance and service components in the
value of the ROU asset and lease liability while evaluating automobile leases.
We review ROU assets, for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. We measure
recoverability of these assets by comparing the carrying value of such assets to
the estimated undiscounted future cash flows the assets are expected to
generate. When the estimated undiscounted future cash flows are less than their
carrying amount, an impairment loss is recognized equal to the difference
between the assets' fair value and their carrying value.
Impairment of Long-Lived Assets
Intangible and other long lived-assets are reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable. Certain factors which may occur and indicate that an impairment exists include, but are not limited to, the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the underlying assets; and significant adverse industry or market economic trends. In reviewing for impairment, we compare the carrying value of such assets to the estimated undiscounted future net cash flows expected from the use of the assets and their eventual disposition. If the carrying value of assets is determined to be unrecoverable, we would estimate the fair value of the assets and record an impairment charge for the excess of the carrying value over the fair value. The estimate of fair value requires management to make several assumptions and projections, which could include, but would not be limited to, future revenues, earnings and the probability of certain outcomes and scenarios. Our policy is consistent with current accounting guidance as prescribed by ASC 360-10-35, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Goodwill , which has an indefinite life, is not amortized, but instead is subject to periodic testing for impairment.Goodwill is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. Certain factors which may occur and indicate that impairment exists include, but are not limited to the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the underlying assets; and significant adverse industry or market economic trends. If the carrying value of assets is determined to be unrecoverable, we would estimate the fair value of the reporting unit and record an impairment charge for the excess of the carrying value over the fair value. The estimate of fair value requires management to make several assumptions and projections, which could include, but would not be limited to, future revenues, earnings and the probability of certain outcomes and scenarios, including the use of experts.
Definite-Lived Intangible Assets
We also have other intangible assets mainly consisting of patents and licenses, certain acquired rights, developed technologies, and customer relationships. We capitalize the cost of acquiring patents and licenses. Amortization is computed on the straight-line basis over the estimated useful lives of the assets, which is our best estimate of the pattern of the economic benefits, which are based on legal, contractual, and other provisions, and range from 3 to 20 years for patents, certain acquired rights and licenses, 10 years for customer relationships and 3 to 10 years for developed technology. We review intangible assets for impairment in the assessment discussed above regarding Impairment of Long-Lived Assets.
Employee Defined Benefit Plans - Pension
We have maintained a passive pension plan (the "Swiss Plan") covering employees of our Swiss subsidiary. We determined that the features of the Swiss Plan conform to the features of a defined benefit plan. As a result, we adopted the recognition and disclosure requirements of ASC 715, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans."
STAAR Japan has a noncontributory defined benefit pension plan (the "Japan
Plan") substantially covering employees of our
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ASC 715. STAAR Japan is not required, and we do not intend to provide any future
contributions to this pension plan to meet benefit obligations and will
therefore not have any plan assets. Benefit payments are made to beneficiaries
from operating cash flows as they become due.
We recognize the funded status, or difference between the fair value of plan
assets and the projected benefit obligations of the pension plan on the
statement of financial position with a corresponding adjustment to accumulated
other comprehensive income or loss. If the projected benefit obligation exceeds
the fair value of plan assets, then that difference or unfunded status
represents the pension liability. We record a net periodic pension cost in the
consolidated statement of operations. The liabilities and annual income or
expense of both plans are determined using methodologies that involve several
actuarial assumptions, the most significant of which are the discount rate, and
the expected long-term rate of asset return. Assumptions of expected asset
returns and market-related values of plan assets are applicable to the Swiss
Plan only. The fair values of plan assets are determined based on prevailing
market prices. The amounts recorded in the financial statements pertaining to
our employee defined benefit plans could vary significantly if we were to use
different assumptions.
Foreign Exchange
Management does not believe that the fluctuation in the value of the dollar in
relation to the currencies of its suppliers or customers in the last three
fiscal years has adversely affected our ability to purchase or sell products at
agreed upon prices. No assurance can be given, however, that adverse currency
exchange rate fluctuations will not occur in the future, which could
significantly affect our operating results. We do not currently hedge
transactions to offset changes in foreign currency.
Inflation
Management believes inflation has not had a significant impact on our net sales and revenues and on income from continuing operations during the past three years.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See "Part II. Item 8. "Financial Statements and Supplementary Data - Note 1 - Organization and Description of Business and Accounting Policies - Recent Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted" of this Annual Report on Form 10-K.
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