STAAR SURGICAL CO quarterly report, Q2 FY2018

STAAR Surgical Company — Form 10-Q Summary

Reporting period: Quarter and six months ended June 29, 2018, compared with June 30, 2017. The supplied metadata identifies “2017 Q2,” but the filing itself is the second-quarter 2018 Form 10-Q, filed August 1, 2018.

Business Context

STAAR designs, manufactures, and sells implantable ophthalmic lenses and delivery systems. The company operates in one reporting segment, with products consisting primarily of implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. Products are sold in more than 75 countries, and substantially all manufacturing is conducted in the United States.

Financial Performance and Liquidity

Metric	Three Months Ended June 29, 2018	Three Months Ended June 30, 2017	Six Months Ended June 29, 2018	Six Months Ended June 30, 2017
Net sales	$33.9 million	$21.9 million	$61.0 million	$42.3 million
Gross profit	$25.2 million	$15.5 million	$44.7 million	$30.1 million
Gross margin	74.4%	70.5%	73.2%	71.1%
Operating income (loss)	$3.0 million	$(1.3) million	$3.8 million	$(3.4) million
Net income (loss)	$1.8 million	$(1.0) million	$2.4 million	$(3.2) million
Diluted EPS	$0.04	$(0.02)	$0.06	$(0.08)

Second-quarter net sales increased 54.6%; first-half sales increased 44.3%.
ICL sales increased 67.3% in the quarter and 53.4% year to date, representing 80.5% and 79.4% of net sales, respectively. ICL unit growth was 66% in the quarter and 54% year to date.
Six-month operating cash flow was $2.3 million, compared with cash used in operations of $1.4 million in the prior-year period. Capital expenditures were $1.3 million, and financing activities provided $1.5 million.
Cash, cash equivalents, and restricted cash totaled $21.4 million at June 29, 2018, including $21.2 million of cash and cash equivalents and $0.1 million of restricted cash.
Total assets were $82.7 million and stockholders’ equity was $51.1 million. The accumulated deficit was $158.8 million.
The Japanese subsidiary had $4.5 million outstanding under a fully drawn line of credit. The Swiss subsidiary had a $1.0 million working-capital facility fully available, with no borrowings outstanding.
Capital lease obligations totaled $2.5 million, including $1.6 million current and $0.9 million long term. Management stated that the company was in compliance with credit covenants.

Material Changes Versus the Prior Comparable Period

Growth was led by ICLs, particularly in Asia-Pacific. Second-quarter ICL sales increased in Japan, China, India, Canada, Germany, and European distributor markets.
Gross margin improved 390 basis points in the quarter and 210 basis points for the first six months, primarily from lower unit costs, better overhead absorption, lower inventory provisions, and improved product mix.
Operating expenses increased in absolute dollars but declined as a percentage of sales. Six-month general and administrative expense rose 23.8%, marketing and selling expense rose 29.6%, and research and development expense rose 9.5%.
Other income shifted to other expense, primarily because of foreign-exchange losses, including a $0.5 million loss in the quarter and a $0.6 million loss for the first six months.
Stock-based compensation expense increased to $2.9 million for the first six months from $1.4 million in the prior-year period.
One distributor in China accounted for 41% of quarterly net sales, 36% of six-month net sales, and 40% of trade receivables at June 29, 2018, indicating significant customer and geographic concentration.
The company adopted ASC Topic 606 using the modified retrospective method. Management reported no material impact on revenue recognition and no cumulative-effect adjustment.

Guidance, Outlook, Risks, and Unusual Items

Management stated that second-half 2018 sales growth may exceed 20% and increased its full-year 2018 sales-growth target to more than 25%, compared with the prior target of approximately 20%, based on then-current market conditions.
Management expects gross margins to increase compared with 2017, operating expenses to be higher in the second half, and full-year 2018 GAAP net income to be at least breakeven. It also expects full-year operating cash flow to increase.
Third-quarter operating expenses were expected to be higher because the ESCRS congress occurred in the third quarter of 2018 versus the fourth quarter of 2017.
The Visian Toric ICL PMA submission remained under discussion with the FDA, and the company was conducting an early-stage European multi-site EVO with EDOF presbyopia clinical trial. Timing and success of these regulatory and clinical efforts were uncertain.
Foreign-exchange movements, international operations, customer concentration, product returns, regulatory approvals, product liability, clinical-trial execution, and competition remain important risks.
The Ninth Circuit affirmed dismissal of the Forestal stockholder derivative litigation on June 29, 2018. No loss or accrual was recorded.
The company stated that cash resources were sufficient to meet working-capital and expenditure requirements for at least the next 12 months and reported no material off-balance-sheet arrangements.

Important Facts for Investors to Verify

Verify the filing period: the document covers second-quarter and year-to-date 2018, not 2017.
Assess whether the elevated ICL growth rate and China-related demand were sustainable after the reporting date.
Monitor concentration in the Chinese distributor, including its share of sales and accounts receivable.
Reconcile reported profitability with increased stock-based compensation, foreign-exchange losses, taxes, and operating expenses.
Evaluate the ability to achieve management’s greater-than-25% full-year sales-growth target and at least breakeven GAAP net income.
Track FDA progress for the Visian Toric ICL, the EVO EDOF clinical trial, and related regulatory or commercialization costs.
Review the renewal of the Japanese credit line, capital lease commitments, working-capital requirements, and cash conversion.