STAAR Surgical Company Form 10-Q Summary
Reporting period: Three months ended April 1, 2016, compared with three months ended April 3, 2015. The request metadata identifies “2015 Q1,” but the filing is for the first quarter of 2016. The filing was signed May 11, 2016.
Business Context
STAAR designs, manufactures and sells implantable lenses and delivery systems for refractive and cataract surgery. Its principal products are implantable Collamer lenses (ICLs) and intraocular lenses (IOLs). The company sells in more than 60 countries, with 87% of first-quarter 2016 sales generated outside the United States, and reports one ophthalmic surgical products segment.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $19.269 million | $18.858 million | Up 2.2% |
| Gross profit | $12.993 million | $12.899 million | Up 0.8% |
| Gross margin | 67.4% | 68.4% | Down 100 basis points |
| Operating loss | $10.053 million | $1.510 million | Higher loss |
| Net loss | $8.041 million | $2.340 million | Higher loss |
| Net loss per diluted share | $0.20 | $0.06 | Higher loss per share |
| Net cash used in operations | $2.979 million | $2.209 million | Higher use of cash |
ICL sales increased 7.5% to $13.180 million, while IOL sales declined 5.4% to $5.067 million and other product sales declined 17.9% to $1.022 million. ICL growth was supported by China, Germany and higher average selling prices; IOL performance was affected by soft U.S. sales and the planned phase-out of IOL sales in China.
Operating expenses increased materially: general and administrative expense rose 64.0% to $8.465 million, marketing and selling expense rose 35.4% to $7.675 million, and research and development expense rose 93.0% to $6.906 million. The company recorded a $6.9 million non-cash stock-based compensation charge following the immediate vesting of all unvested equity awards.
Other income was $0.408 million compared with other expense of $0.858 million in the prior-year quarter, primarily because of foreign-currency transaction gains. The company recorded a $1.604 million income tax benefit, largely related to foreign operating losses and the dissolution of a foreign subsidiary.
Cash and cash equivalents declined to $8.968 million at April 1, 2016 from $13.402 million at January 1, 2016. Investing cash use was $1.006 million, primarily for property and equipment, and financing cash use was $0.696 million. Total assets were $61.880 million and total liabilities were $23.549 million at quarter-end.
Debt consisted primarily of a fully drawn Japanese line of credit of approximately $4.5 million. No borrowings were outstanding under the Swiss facility. The company stated that it was in compliance with its credit-facility covenants.
Material Changes and Unusual Items
- On February 11, 2016, a shareholder’s beneficial ownership increased to approximately 26%, triggering a change-in-control provision in the equity incentive plan.
- All unvested equity awards immediately vested, producing a $6.9 million non-cash stock-based compensation charge, including $2.9 million in general and administrative expense, $1.5 million in marketing and selling expense, $1.9 million in research and development expense and $0.6 million in manufacturing costs.
- Approximately $3.7 million of the accelerated charge otherwise would have been recognized during fiscal 2016.
- The company resolved a dispute involving allegedly defective injectors; the third-party manufacturer agreed to repair or replace them without financial expense to STAAR, and the related business relationship was extended through December 31, 2019.
- In May 2016, after the quarter-end, STAAR voluntarily recalled two lots of Class I injector cartridges shipped to the United States and Canada. Fewer than 500 units were estimated to remain in the field, and the company did not expect a material recall cost.
Outlook, Liquidity, Risks and Contingencies
Management identified four 2016 priorities: FDA remediation and quality-system improvements; creation of a broader premium market for ICLs; expanded clinical validation and regulatory activities; and development of new products, materials and delivery systems.
STAAR expects approximately $2 million of FDA remediation costs during 2016, including approximately $0.5 million incurred in the first quarter. Management stated that available cash and operating cash flow should meet foreseeable working-capital needs, but acknowledged that additional financing could become necessary and may not be available on acceptable terms.
The company expected an estimated annual effective tax rate of approximately 30%. It does not anticipate paying dividends for the foreseeable future.
International operations expose STAAR to foreign-exchange, regulatory, political, tariff and fund-transfer risks. Customer concentration is significant: distributors in China and Korea accounted for 16% and 11% of first-quarter 2016 sales, respectively, and the China distributor represented 21% of trade receivables at April 1, 2016.
A putative securities class action concerning alleged disclosures about regulatory violations at the Monrovia facility remained pending. The court denied STAAR’s motion to dismiss on April 12, 2016. The company recorded no loss because the likelihood and amount of any loss were not determinable.
Management concluded that disclosure controls and procedures were effective as of quarter-end, and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the substantial Q1 operating loss normalizes after excluding the $6.9 million non-cash equity-award acceleration charge.
- The sustainability of ICL growth, particularly in China and Germany, and the effect of pricing and currency changes.
- The recovery prospects for IOL sales in the United States and the impact of the China phase-out and injector recall.
- Cash-burn trends, the fully drawn Japanese credit facility and the company’s ability to fund FDA remediation and product-development spending.
- Progress and costs associated with FDA remediation, quality-system improvements and regulatory approvals, including the Toric ICL program.
- The potential financial impact of the securities litigation and any other product-liability or regulatory matters.
- The effect of customer concentration and international foreign-exchange exposure on future revenue, receivables and liquidity.