STAAR Surgical Company Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016, compared with October 2, 2015. The request metadata identifies “2015 Q3,” but the filing itself is the September 30, 2016 Form 10-Q.
Business Context
STAAR designs, manufactures and sells implantable lenses and delivery systems for refractive and cataract surgery. The company operates as one ophthalmic surgical products segment, sells in more than 60 countries, and generated 88% of third-quarter sales outside the United States.
Principal products are implantable Collamer lenses (ICLs), intraocular lenses (IOLs), and other surgical products.
Financial Performance and Liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $20.1 million | $18.8 million | $60.3 million | $56.3 million |
| Gross profit | $14.9 million | $12.8 million | $42.5 million | $38.1 million |
| Gross margin | 74.2% | 68.3% | 70.5% | 67.6% |
| Operating loss | $(1.7) million | $(2.0) million | $(13.9) million | $(5.3) million |
| Net loss | $(1.8) million | $(1.8) million | $(12.0) million | $(5.7) million |
| Loss per share | $(0.04) | $(0.04) | $(0.30) | $(0.14) |
- Q3 sales increased 6.9%; nine-month sales increased 7.2%.
- ICL sales increased 14.7% in Q3 and 16.0% for the nine-month period. IOL sales increased 5.9% in Q3 but declined 1.1% year to date. Other product sales declined 58.6% in Q3 and 45.8% year to date.
- Q3 gross margin improved primarily from a higher mix of higher-margin ICLs, lower ICL unit costs and lower inventory reserves.
- Nine-month operating expenses increased 30.2%, driven by higher marketing and selling, research and development, and general and administrative expenses.
- Cash provided by operating activities was $0.9 million for the first nine months of 2016 versus $0.3 million used in the comparable 2015 period.
- Capital expenditures were $2.7 million, resulting in $2.6 million of net cash used in investing activities.
- Cash increased to $14.3 million at September 30, 2016 from $13.4 million at January 1, 2016.
- The Japanese subsidiary had approximately $4.9 million outstanding on its fully drawn line of credit, with no availability. Capital lease obligations totaled approximately $2.1 million, including current and noncurrent portions.
- Total liabilities were $28.6 million and stockholders’ equity was $37.7 million at September 30, 2016.
Material Changes Versus Prior Comparable Period
- Revenue growth was led by ICLs, particularly in Asia Pacific, where Q3 ICL revenue increased 28.5% and units increased 29.5%. North American ICL revenue declined 13.0%.
- China distributor sales represented 21% of Q3 revenue and 19% of nine-month revenue, increasing customer concentration exposure.
- Nine-month operating loss widened substantially despite higher sales because operating expenses increased faster than gross profit.
- The company recorded $8.1 million of stock-based compensation expense in the first nine months, including a $6.9 million non-cash charge from immediate vesting of unvested equity awards after a shareholder’s ownership increased to approximately 26%.
- The nine-month tax benefit was $1.7 million, compared with a $0.1 million tax provision in the prior-year period. Management expects an estimated 2016 annual effective tax rate of approximately 32%.
- U.S. silicone IOL sales are expected to continue declining, with planned discontinuation at the end of the fourth quarter of 2016. Conversion to NanoFLEX IOLs may not be successful.
Guidance, Outlook, Risks and Unusual Items
- Management expects existing cash and operating cash flows to fund foreseeable working-capital needs, including approximately $2.0 million of expected 2016 FDA remediation costs; $1.5 million had been incurred during the first nine months.
- No specific revenue or earnings guidance was provided. The filing states that additional financing may be required, although availability and terms cannot be assured.
- Strategic priorities include FDA remediation and quality-system improvements, expanding the ICL market, clinical and regulatory programs, and new product development.
- The toric EVO Visian ICL with a central port received Canadian approval for distribution in September 2016. Early human results for EVO+ Visian ICLs with extended depth of field were described as positive, but the clinical study remains ongoing.
- Material risks include regulatory remediation and approvals, product liability, international operations and foreign exchange, customer concentration, competitive and product-transition risks, and continued operating losses.
- Two shareholder-related lawsuits allege securities-law and fiduciary-duty violations concerning the company’s quality system and disclosures. No loss was accrued because the likelihood and amount of any loss were not estimable.
- The company stated that it was in compliance with credit-facility covenants, had no material off-balance-sheet arrangements, and had effective disclosure controls.
Important Facts for Investors to Verify
- Whether ICL growth, particularly in Asia Pacific and China, can offset declining North American sales and planned U.S. silicone IOL discontinuation.
- Progress, cost and timing of FDA remediation and quality-system improvements, including any effect on product approvals or commercialization.
- Whether operating expenses and stock-based compensation normalize sufficiently to reduce recurring operating losses.
- Cash burn, capital expenditures, the fully drawn Japanese credit line, and the availability of additional financing.
- Customer concentration, especially the Chinese distributor’s contribution to sales and receivables.
- Outcomes and potential financial exposure from the Todd securities litigation and Forestal derivative litigation.