STAAR Surgical Company

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAR Surgical third quarter financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions. If you have a question, please press STAR followed by 1 on your telephone keypad. If you are using speaker equipment today, please lift the handset before making your decision. This call is being recorded today, Wednesday, November the 3rd, 2021. At this time, I would like to turn the conference over to Mr. Brian Moore, Vice President, Investor Media Relations in Corporate Development for Star Surgical. Brian, please proceed.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on the Star Surgical conference call this afternoon to discuss the company's financial results for the third quarter Ended October 1, 2021. On the call today are Karen Mason, President and Chief Executive Officer, and Patrick Williams, Chief Financial Officer. The press release of our third quarter results was issued just after 4 p.m. Eastern Time and is now available on STAR's website at www.star.com. Before we begin, let me quickly remind you that during the course of this conference call, the company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the company's projections, expectations, plans, beliefs, and prospects. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risk and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the safe harbor statement in today's press release, as well as STAR's public periodic filings with the SEC. Except as required by law, STAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes, and does not intend to do so. In addition, to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and adjusted earnings per share and sales in constant currency. We believe that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in today's press release. Following our prepared remarks, we will open the line to questions from publishing analysts. We ask analysts limit themselves to two initial questions, then re-queue with any follow-ups. We thank everyone in advance for their cooperation with this process. And with that, I would now like to turn the call over to Karen Mason, President and CEO of STAR.

Thank you, Brian. Good afternoon everyone and thank you for joining us on today's call. I am pleased to report that we experienced outstanding demand for our ICLs during the third quarter and achieved net sales above the high end of our previously provided outlook. Enthusiasm for our implantable polymer lenses continues to grow and has never been higher. In fact, orders for ICLs outstripped our supply of lenses in the quarter. With China being our largest market, our distributors' inventory levels in China were drawn down to historically low levels to meet surgeon and patient demand. While we were able to meet 35% growth levels to the surgeon and patient community from our distributors' inventory, we were only able to ship units equaling 19% growth to our distributor. COVID-related employment, production output, and modest supply chain challenges impacted the quarter and resulted in a backlog of over 20,000 lenses at the end of the third quarter, representing several million dollars of orders in-house. As many of you are aware, we have typically been able to meet the vast majority of demand for our spherical lenses and non-custom toric lenses through real-time production and finished goods inventory on hand at STAR within a few days of receiving an order. Continued strong demand combined with the aforementioned production challenges resulted in what we believe is a temporary, longer than usual delay in lens order fulfillment during the third quarter, which we are addressing and aim to fully resolve in the coming quarters. With regard to China, I am pleased to report that our EVO-ICL momentum in China continues unabated. We continue to increase our refractive market share projections for China next year and beyond. Overall, we achieved strong year-over-year global ICL unit growth of 29% in the third quarter of 2021 as compared to a significant achievement in the third quarter of 2020 where we met our pre-COVID growth projections. ICO unit growth by geography for Q3 included Japan up 44%, South Korea up 21%, India up 338%, Germany up 25%, European distributor markets up 22%, the Middle East and North Africa up 242%, and the US up 66% all as compared to the prior year quarter. I would also like to highlight the exciting levels of growth in distributor markets where we have recently made significant investments to convert to a hybrid market structure in several countries. As many of you know, we have star personnel working alongside our distributors in hybrid markets, leading the important commercial, clinical, and practice development work with our surgeon customers. In Belgium, the Netherlands, France, and Italy, we achieved 32% ICO unit growth in aggregate year over year in the third quarter of 2021 as compared to 20% in the year-ago quarter and just 10% in the third quarter of 2019. We are continuing to expand our plans for more distributor markets to move to the hybrid model in 2022 and 2023. Turning now to our strategic imperatives and the drivers of growth for STAR in the fourth quarter and beyond. In the US, our submission of clinical data for STARS evil family of myopia lenses remains under customary interactive FDA review. While our expectation of pre-COVID approval timelines by the FDA has now passed, we remain confident regarding an approval of our PMA supplement. We will provide further comment on the process and our interactions with the FDA when permitted and appropriate to do so. We are laying the foundation for growth in the U.S., which represents a tremendous market share opportunity for STAR, as the U.S. is the second largest refractive market in the world. During the third quarter, we made incremental marketing investments in several key U.S. cities with customers who have demonstrated a commitment to offering the ICL as a premium and primary refractive option through alliance agreements, which in other markets have resulted in meaningful increased levels of ICL unit growth. Investments include social media, patient education, training, and targeted digital marketing. Upon FDA approval, we will add at least one additional major metropolitan market to our advertising program, and in 2022, markedly increase our consumer advertising investment related to celebrity social media and digital campaigns designed to increase brand awareness and drive consumer desirability for our premium lens-based refractive vision correction procedure. We are also continuing our increased engagement with existing surgeons and potential new surgeon customers in the US. We currently plan to hold our second US Surgeons Council Summit next month in Dallas. The goal of our Surgeon Summits is to educate surgeons on our products through clinical presentations and highlight the patient, clinical, and revenue opportunity for surgeons by presentations from US and OUS surgeons who are already transitioning to a lens-based future of refractive vision correction with our implantable polymer lenses. Surgeon interest in next month's summit has been robust, and we anticipate a strong presence of leading surgeons from across the U.S. Additionally, to further engage the U.S. surgeon community, we are in the process of building an ICL experience center at our California corporate headquarters in Lake Forest. A first of its kind for STAR, the ICL Experience Center will offer surgeons and their staff in-person didactic training, surgical simulation, and marketing education and training. The center will feature STAR's next generation ICL planning ecosystem, which connects and integrates with the diagnostic equipment surgeons currently use for case management. We plan to open the U.S. ICL Experience Center in the first half of 2022. Given the outstanding demand for our ICLs, we are today raising our outlook for full-year fiscal 2021 net sales to a range of $230 million to $231 million, which represents growth of over 40% year over year. We are also reaffirming our previously communicated pre-COVID three-year outlook for 25% plus compound annual sales growth for fiscal 2020 through 2022, despite the 2020 COVID impacted growth rate of 9%. I will now turn the call over to Patrick to discuss our financial performance in more detail. Patrick?

Thank you, Karen, and good afternoon, everyone. Total net sales for Q3 21 were $58.4 million, up 24% as compared to the $47.1 million of net sales in Q3 2020, and above the outlook we provided to you in August for the third quarter net sales in the range of $57 million to $58 million. The year-over-year increase in net sales for Q3 21 was attributable to global ICL sales growth up 31%. We now anticipate robust levels of ICL unit growth in Q4 that will exceed 40% year over year. That, when combined with our strong results for the first three quarters of 2021, informs our raised outlook for full-year fiscal 2021 that Karen just outlined. In terms of product mix, ICL sales represented 93% of total company net sales for the third quarter of 2021, and other products represented 7%. We continue to anticipate a similar sales mix in the fourth quarter and that other product sales will be approximately $15 million for the full year 2021. Gross profit for Q3 2021 was $45.3 million or 77.6% of net sales as compared to gross profit of $34.9 million or 74.1% of net sales for Q3 2020 and $49.2 million or 78.9% of net sales for Q2 2021. The year-over-year increase in gross margin was due to the higher mix of ICLs, which command a higher margin than our other product business, partially offset by increased period costs associated with manufacturing projects. The sequential decrease in gross margin for the third quarter was due to a lower mix of ICLs and increased period costs associated with manufacturing projects. For the fourth quarter and full year 2021, we now expect gross margin to be towards the higher end of the 75% to 77% range we previously provided. Moving down the income statement, total operating expenses for Q3 2021 were $37.5 million or 64.2% of net sales as compared to $30 million or 63.7% of net sales in Q3 2020 and $38.6 million or 61.8% of net sales for Q2 2021. Taking a closer look at the components of operating expenses, General administrative expenses for Q3 2021 was $11 million compared to $8.6 million for Q3 2020 and $11.4 million for Q2 2021. The year-over-year increase in G&A was due to compensation-related expenses and outside services. The sequential decrease in G&A expenses was primarily due to lower payroll taxes related to fewer stock options being exercised. We expect fourth quarter G&A to now be approximately $12 million. Selling and marketing expense was $18.2 million for Q3 2021 compared to $12.6 million for Q3 2020 and $18.9 million for Q2 2021. The increase in selling and marketing expense from the prior year was due to advertising and promotional activities, compensation-related expenses, and trade shows. The sequential decrease from Q221 was due to lower payroll taxes related to fewer stock options being exercised. We expect fourth quarter selling and marketing to be approximately $17 million and trend higher in 2022 as the company increases investments in the EVO-ICL brand building initiatives Karen mentioned earlier. Research and development expense was $8.3 million in Q3 2021 compared to $8.8 million for Q3 2020. and flat with the $8.3 million for Q2 2021. The year-over-year decrease in research and development expenses is primarily due to lower expenses associated with our EVO clinical trial in the US and timing related to new headcount. We expect R&D for fourth quarter 2021 to be approximately $9 million. Operating income in Q3 2021 was $7.8 million or 13.4% of net sales as compared to operating income of $4.9 million or 10.4% of net sales for Q3 2020. The improvement in operating income is due to higher sales and leverage on fixed and variable operating expense during the quarter. Net income in Q3 2021 was $6 million or 12 cents per diluted share compared to net income of $3.9 million or 8 cents per share in Q3 2020. The company's effective tax rate for the nine months ended October 1st, 2021 was approximately 20%. For the fourth quarter, we expect our effective tax rate to be approximately 30%. On a non-GAAP basis, adjusted net income for Q3 2021 was $10.3 million or 21 cents per diluted share compared to adjusted net income of $6.7 million or 14 cents per diluted share in Q3 2020. A table reconciling the GAAP information to the non-GAAP information is included in today's financial release. Turning now to our balance sheet, our cash and cash equivalents as of October 1st, 2021, totaled $196.2 million, up $43.8 million compared to $152.5 million at the end of the fourth quarter of 2020. The increase in cash in the fourth quarter is primarily attributable to $35.5 million in cash generated from operations and $18.3 million in proceeds from the exercise of stock options. partially offset by $9 million in capital expenditures. For the full year 2021, we continue to anticipate total capital expenditures to be in the range of $15 million to $20 million as we continue to expand our global manufacturing capacity and footprint. Finally, Star Management will be participating in several upcoming investor events, including the Canaccord Genuity Virtual MedTech and Diagnostics Forum on November 18th, the Stevens Investment Conference on November 29th, and a William Blair-hosted C-suite call on December 7th. This concludes our prepared remarks. Operator, we are now ready to take questions.

Of course. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. As a reminder, that is star followed by one. Our first question comes from Anthony Petrone from Jefferies. Anthony, your line is now open.

Thanks and good afternoon, everyone. I hope everyone's doing well and congrats here on a strong performance in a difficult quarter. Maybe, Karen, to start with the comments on China and the supply chain headwinds specifically. Is the read-through here that the 20,000 lenses that you referenced in backlog in the prepared comments and in the press release, is that all related to China A? And then B, if there were no supply chain headwinds, would that have been realized in the quarter? And then the last one on that specifically is, you know, what is the dollar value on that $11 million that we should be thinking about? And I'll have one follow-up.

Okay, thank you very much, Anthony. We appreciate it. Yeah, we are very pleased with the quarter, and we are working on what we believe is a very short-lived situation that occurred in Q3 with regard to available lenses for shipment. So the 20,000 lenses would have been shipped in the quarter, the majority of them to China. We haven't really released a range in terms of the dollars, but If you do the math on the low end, it'd be at least 65 million in revenue for the quarter had we been able to ship. But, you know, we're not going to get down to too many specifics here, but definitely would have been a record quarter for STAR.

Yeah, that's helpful. And then I guess maybe timing on When the distributor could restock, I would imagine they can't run at this low level of inventory for an extensive amount of time. And then quickly on FDA, I understand your comments. Should we be reading the comments on timing that the delay is specifically around just COVID constraints and agency dealing with a backlog of clearances elsewhere? Thanks again. We'll hop back in queue.

So with regard to China, we are already replenishing inventory in China. We definitely will be prepared for the next big season, which begins in January. So our replenishment is already underway. With regard to the FDA, we continue to be in customary review. We have no other comment at that time. What we did when we talked about hoping to have an answer by the end of October. We were basing that on pre-COVID guidelines, which due to COVID, the FDA has been a bit challenged, and we more than accept and understand that, and we're continuing to be an active interface with the FDA and looking forward to a resolution. Thank you.

Our next question comes from Chris Cooley from Stevens. Chris, please proceed.

Good afternoon, and let me echo Anthony's sentiments. It was a great quarter. Just maybe two quick ones for me, if I may. When we think about the restocking efforts on these 20,000 units or 20,000 lenses, are we doing for, from your commentary, that, in fact, that should all ship out? during the fourth quarter. And I'm curious, with that kind of a significant channel fill, can you still keep pace? I guess what I'm trying to get at very simply is, do you catch up in the fourth quarter, or is this a phenomenon that carries over a little bit into the first half of next year, and then I've got to follow up?

So thank you very much, Chris. In terms of catching up, we expect to catch up in fourth quarter and Q1 of 2022. Our made-to-order custom lenses a little later in the year, but our supplied spherical and toric lenses for sure by the end of Q1 2022.

Super. And then just maybe just as a quick clarification on that same point, it sounds like the issues which you faced during the third quarter from a supply chain standpoint have have been addressed. I just want to clarify that here on the call. You aren't under any kind of backlog in terms of raw material purchases, and you're not necessarily seeing outsized delays in shipping. Just net-net, it was very, very strong demand there during the quarterly period, and with these headwinds that existed in the marketplace, you just couldn't keep pace. Am I interpreting that correctly?

Yes, really COVID related employment means that we did have individuals who either didn't return to work or chose to leave for other opportunities, which meant that we would bring in other individuals. We did update and modify our pay rates. We did hold job fairs, but we have to train all of these new individuals. And that's about a six to eight week process. So there was a little bit of production output that was impacted by that training schedule. We then had some production challenges in a particular area that are being addressed at this time, which are not concerning. And the amount of supply chain challenges have been rectified already. So we are feeling very good and have already dug into that 20,000 lens backup in Q4 in the first month in terms of a good percentage of it having shipped out.

Yeah, I think, Grace, you hit it on the head there at the end. You said less about supply and more that the demand was just so strong for us, and we just felt it was good for us to outline it as Karen did. The demand is there, and we're working through it, and we will continue to work through it. And I think the CapEx that we laid out there for people that we've done now for the last year is clearly about expanding our capacity and everything else. And so we're feeling good about where we're at and moving into next year.

Super. And if I could just squeeze one other quickie in, and then I'll get back in queue. While I'd love to ask about the FDA, I think I'll focus more so just in terms of rollout plans in the U.S., Really excited about the new ICL Experience Center. Just kind of curious when I think about that as well as your step up in DTC efforts, can you provide us any parameters about initially, you know, post-approval, you hope to be in X major markets, X number of surgeons trained in the U.S.? Obviously, those efforts are underway now, but just trying to think about some metrics that we can maybe look towards in terms of kind of gating the rollout in 2022.

So, Chris, I appreciate the question, but I think we're going to wait to answer it until we get FDA approval. Bottom line is that we just don't want to be in a situation where we're misperceived as pre-marketing here in terms—because we're not doing that. But I can tell you that, you know, as we said in the prepared remarks, these are several And, you know, we're ready and raring to go. So we'll give you all the detail when we can.

Thank you.

Thank you, Chris.

Our next question comes from Andrew Brackman from William Blair. Andrew, please go ahead.

Hi, good afternoon. Thanks for taking the questions. So maybe just one on the U.S. here, and I certainly understand all of the enthusiasm around the U.S. launch, especially given the strength of that demographic that you're initially targeting. But maybe here, as we think a couple of years out in the future, can you maybe just sort of talk about the playbook that you intend to use to move down that diopter curve and sort of target those people in that moderate sort of bucket of myopes? Thanks.

Thank you, Andrew. And you did a great survey. So many compliments for the work that you did. A lot of us learned from your work. So thank you for that. In terms of lower diopter opportunity for us, we've learned in China and in Europe that when surgeons get really comfortable and confident with the tougher cases, they then start to realize that all of the benefits of the lens are good for patients below minus five. And so we are keeping track of what our average diopter correction range is on a quarterly basis and it is getting better. And so our focus in the U.S. in the next couple of years is going to be all of the advantages of the lens for minus three and above, not just minus five, six, or seven. But the surgeons really begin offering patients the choice of ICL with all its inherent benefits and then we start to see way more work down the diopter curve. So it pretty much solves itself with the enthusiasm of those who get the lens early, and then the social media and the interest begins to build, and individuals who have much lower correction want all the advantages of the visual freedom the lens offers.

And if I could add something on it, you know, I think, Andrew, with your survey, the TAM is just so large, and I think a few quarters ago we talked about, the fact that we've now moved slightly below the minus 10, specifically in China, where we saw them buying more minus 10s and below versus above. But I think one of the things to remember is that you don't need large moves in that overall average. If we were to move slightly down on our overall average diopter use, let's say minus 10 to minus 9.5, minus 9 to minus 8.5 on average, there is a huge TAM available there for us. And so I think people should be very... People should understand that if they're trying to say that we need to get all the way down to a minus 3 in order to have a big revenue, that's not the case at all. There's a lot of business out there with people that are in those minus 7s, minus 8s, minus 9s. That's what the data is showing us today.

That's great. Thanks for that. And Karen, thanks for the compliments on the survey. Maybe just going back to your comments on the 25% growth CAGR from 2019 to 2022, I just want to check. I think that implies just over $290 million for revenue for 2022. But maybe as it relates to sort of your expectations there, you know, you gave that pre-COVID. Now that COVID has happened, can you maybe just sort of talk about how some of the buildup of that has changed, if at all? Has the geographic sort of mix changed as it relates to pre-COVID to now? Thanks for the questions.

Thank you. I think that the momentum that was building pre-COVID has come back roaring. And during COVID, especially since we've pretty much fully recovered in Q3 and Q4 of 2020, we now have really five quarters of what we would call more normal growth expectations, achievements, regardless of COVID. So I think the bottom line for us is as we look to next year, we're looking at very high growth rates to achieve beyond the 290 million. Our focus is to, you know, really with a strong kickoff, hopefully, in the U.S. market, as well as continuing very strong trending. For example, in China, 35% plus growth to the surgeon and patient community from the distributor is And that's just huge and it's continuing. So, you know, you take that and you take all the other growth statistics that I talked about earlier and, you know, we're extremely confident to pre-call 2022 at the same time that even though we had only 9% growth last year, which was great because ophthalmology was down 11%, but even with that 9% in year two of the three-year plan, we're still making the objective because the growth is so strong as we're saying, over 40% this year, and then on top of that, another very strong growth next year. So we're super excited and really looking forward to, you know, really improving for patients their choices in terms of refractive care.

Great. Thanks for the question.

Thank you. We now have a question from William Plovenick from Tanacord. William, your line is now open.

Good afternoon, everybody. This is Rohan on for Bill. I just had a question on the details regarding the limited market release of Evaviva in Europe. Could you provide some revenues, number of countries, you know, 2022 plans on that?

We are going to officially roll out to everyone, all surgeons, in all approved CME mark countries in September of 2022. We have not at this point released what that plan will be or what the revenue attributable to the EvoViva product will be. We will start to give those details in the January and February timeframe next year.

Okay, perfect. And maybe one for you, Patrick. If you could provide the breakout of the revenues from domestic Japan and China in this last quarter.

Let me make sure I understand the question again. Maybe ask it one more time. You said domestic demand in China? I want to make sure I understand that.

No, no. The breakout of revenues in China, Japan, and other in the last quarter.

Oh. Yeah, we have it in our queue, so it's probably better for me just to point you to that. We do call out China and Japan in there. For Japan, I would recommend that you remember that our IOL business also flows into Japan from a geography standpoint. But I can certainly pull it up, Rohan, and cite it. But I think it's better just to – we just filed our queue, so it's out there. You can get all that detail.

Cool. Thank you.

Our next question comes from the line of Steve Leitchman from Oppenheimer. Steve, your line is now open.

Hi, this is actually David on for Steve. Thanks for taking our questions. Maybe starting off, I was just wondering if you saw any COVID impact during the quarter, particularly with the Delta variant. Was there any months that you saw that impacted demand? Thank you.

So we keep track of all the major markets around the world where we obviously work with refractive surgeons to deliver our ICLs. And in this past quarter, in Q3, there has been limited concern in almost every market around the world. There have been some latecomers. Middle East was late. Latin America was kind of late coming in to their own More as you can see from the growth rate, for example, in Q3 was much higher. So I would say with the exception of a couple of those markets, a little bit in the smaller countries of Asia-Pac, the majority, almost all the markets where we are very active, they are managing COVID and the Delta variant very well.

Okay, great. Appreciate the color. Just one more. I was wondering if you could provide any details on, in terms of the growth you're seeing, how much of that is being driven by overall growth of the refractive market versus conversions of laser procedures?

The refractive market grows, on average, in the mid-single digits. As you can see, our growth rate is at least 25% plus. So we are growing faster than the market, and we are taking a share.

Got it. Thanks.

You're welcome.

Our next question comes from Ryan Simmerman from BTIG. Ryan, your line is now open.

Good afternoon. Thanks for taking the questions. Karen, if I could just ask a little bit about the supply issues in China a little further. I mean, I guess I'm curious if you could provide a little more clarity. You know, why were the supply issues exclusively impacting China but not other markets? Because, you know, production, you know, supply chain dynamics, these are all kind of U.S.-based issues that you guys are dealing with, COVID-related employment, all U.S.-based. So, you know, why was it specifically China and not, you know, some of the dynamics we saw in, say, Japan or Korea? Yeah.

Well, I think I don't want to give the impression that the 20,000 lenses were exclusively China. The majority were China. What we did was the right thing to do. We took a look at what our book of business was. We took a look at where the demand was, and then we properly moved lenses to where the need was greatest. When we looked at China, we recognized that we had enough inventory to in stock to be able to meet the majority of the critical demand. So it allowed us to work very successfully with our country manager and with our importer to properly take care of the majority of the business that was necessary. So obviously with China being 50% plus for business, you're going to have more product there than you have anywhere else in a single place. Bottom line is we very effectively managed it, and customer satisfaction is strong.

Okay, got it. And then the 20,000 orders, you know, I think some of those are custom ones. So, you know, how are you thinking about kind of the risk cancellation of the procedures, or how are the distributors coming up with that number? Is that based on kind of a scheduled surgery rate that you have kind of looking out maybe a quarter or two?

So when we look at the normally stocked inventory in the spheric and toric sizes, we're trying very hard to make sure that our recovery in that area is very swift and it's already underway because that is an area where you do have options as a patient. If you are a patient who is someone getting a made-to-order toric lens, you probably have marginal to no options related That doesn't make your need for visual freedom any less, but it does mean you're more willing to wait because the only real opportunity for excellent visual freedom for you as a made-to-order TORIC patient is what we deliver. So, you know, we never, ever want to be in a situation where we disappoint anyone in terms of time to delivery, but we expect that by mid-next year at the latest, more like the April-May timeframe, this will all be back to normal, which is the six- to eight-week lead time.

Okay, got it. And then just last one for me. Patrick, I think I've heard maybe from some other investors that you guys have kind of talked about your expectations for penetration in the U.S. refractive market. And so I'd love to just understand kind of, I think some others have been asking about this too, but what percentage of the U.S. refractive market do you think you could potentially own, you know, we'll call it 12 to 18 months post-launch. And, you know, how are you thinking about your launch now given the timelines or the impact timelines from the FDA? Thank you for taking the questions.

Yeah, I'm going to let Karen grab this one with the FDA. I think there's obviously some sensitivity on our side and a lot of it's contingent on that. So I'll let Karen take it from here.

Yeah, assuming that we have an EVO product in the United States, our goal is to get to at least 20% share as soon as possible. Our track record in other markets where we have had approval and have begun the business model and clinical model that's been so successful elsewhere is that we can do that in two to three years' time.

Thank you. Thank you.

We now have a question from Jim Sidoti from Sidoti & Company. Jim, please go ahead.

Good afternoon. Thanks for taking the questions. I just want to be clear. This supply chain manufacturing issue that you said you had in the quarter, Do you think there's any risk that these issues would prevent you from growing your historical 20-25% annually over the next few years?

No, Jim. We've been investing in expanding our production. And as you're aware, we've been investing in advanced manufacturing to expand the productivity and the amount of throughput that we have at our Monrovia facility. We're also reopening our NIDAW facility in Switzerland. And we also have expanded the manufacturing for our columnar buttons here in California. We're looking at millions of lenses of production capability over the next two to three years.

And let's kind of recalibrate here. We overperformed to what we said we were going to do in Q3, and we just raised guidance in Q4 and reaffirmed our growth going into 2022. So this is, as Karen has described, and you can look at our financial statements, you'll see that our inventory levels have gone down the last couple quarters as a percent of sales or percent of costs, however you want to look at it. And so we're just building that back up because demand has just been that robust. So we just felt that it was important that we outline this because I think people – have looked at the company and expected very big things, and those big things are there, and they're coming still, and we're very happy with the quarter and the guidance that we gave for the rest of the year.

Okay, and then my second question is in regards to sales and marketing and, you know, what you've done in other areas to increase your brand awareness, places like Japan and Korea. Is that primarily... that direct marketing effort? Is that primarily social media? Is it billboards? Are there other things that you're doing? I'm just trying to get a handle on what to expect when you do launch the product in the United States.

Yes. There is outdoor advertising. There is digital marketing. There is social media. There is celebrity influencers. There is co-marketing with customers in their strategic agreements. where they update and upgrade their websites. We do a lot of doc finder monitoring. We do a lot of digital marketing work to make sure that we have access to searches on Google. So our search engine marketing is very strong. So we do all of the above and it is very successful.

Yeah, it sure seems like it is. Looking forward to see what happens when you do get the U.S. approval.

Thank you, Jim. Our next question comes from the line of Bruce Jackson from the Benchmark Company. Bruce, please go ahead.

Hi. Good afternoon. Another manufacturing question, just to follow up on your earlier comments. You've been working on getting companies Switzerland reopened. Is it actually fully reopened right now? And if it's not open, when will it be in production?

We're looking at Switzerland in the fourth quarter of 2022. And, you know, at that point in time, we will be manufacturing the majority of demand for China out of that facility.

Okay, and then not to flog the supply chain issue too hard, but presumably then, when you do have that facility open, then that's going to give you some flexibility in terms of being able to meet the demand in 2022.

Yeah, I think supply chain, as I said, was modest. We had a couple of manufacturing challenges associated with supplier changeover in one case and another we wanted a changeover and there was limited supply for a short while. So these are not the kind of issues that you read about in the news related to semiconductors and fabrication required units that are sitting in cargo ships in Long Beach. We're in a situation where we had a few local supplier issues that really did slow us down more than we would have liked, but they have been rectified.

Yeah, and just to reiterate on the need out, we have enough capacity and we are actively expanding our Southern California capacity regardless of need out coming online. The lenses that we need over the next several quarters are not dependent on EDOW. EDOW is all about scaling up beyond that, going into 2023 into 2024. So we're in good shape right now when machines are coming online. And I just come back to what I said before, which is we're making those investments, as we said. We still plan to make a significant investment in Q4 and CapEx, which we'll report in 90 days.

Okay, great. That's very helpful. Thank you. Thank you.

Thank you, Bruce. Thank you for your participation on our call today. We look forward to speaking with many of you in the days and weeks ahead. We appreciate your interest and your investment in Starskirt Surgical.

This concludes today's call. Thank you for joining, and I hope you have a lovely rest of your day. You may now disconnect your line.