STAAR Surgical Company — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017, compared with the three months ended April 1, 2016. The supplied request metadata states “2016 Q1,” but the filing itself is for the first quarter of 2017 and was filed May 3, 2017.
Business Context
STAAR designs, manufactures, and sells implantable ophthalmic lenses and delivery systems, primarily implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company sells in more than 60 countries, with approximately 90% of first-quarter sales generated outside the United States. STAAR operates as one ophthalmic surgical products segment.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $20.4 million | $19.3 million | Up 5.6% |
| Gross profit | $14.6 million | $13.0 million | Up 12.2% |
| Gross margin | 71.6% | 67.4% | Up 420 basis points |
| Operating loss | $2.1 million | $10.1 million | Improved |
| Net loss | $2.2 million | $8.0 million | Improved |
| Basic and diluted loss per share | $0.05 loss | $0.20 loss | Improved |
| Cash used in operating activities | $0.6 million | $3.0 million | Improved |
Product sales: ICL sales increased 15.9% to $15.3 million. IOL sales declined 9.1% to $4.6 million, while other surgical product sales declined 53.7% to $0.5 million.
Expense profile: General and administrative expense declined 36.7% to $5.4 million; marketing and selling expense declined 14.9% to $6.5 million; and research and development expense declined 30.7% to $4.8 million. The reductions primarily reflected the absence of the $6.9 million non-cash stock-based compensation charge recorded in Q1 2016 after immediate vesting of equity awards.
Liquidity and debt: Cash, cash equivalents, and restricted cash totaled $13.6 million at March 31, 2017, down from $14.1 million at December 30, 2016. Cash and cash equivalents alone were $13.5 million. The Japanese subsidiary had approximately $4.5 million outstanding under its 500 million yen line of credit, with no availability remaining under that facility. Capital lease obligations totaled $2.7 million, including current and noncurrent portions. The company stated that it was in compliance with its credit-facility covenants and believed available cash and operating cash flow would satisfy foreseeable working-capital needs.
Balance sheet: Total assets were $65.4 million and total liabilities were $28.5 million at March 31, 2017. Stockholders’ equity was $37.0 million. The accumulated deficit increased to $161.3 million from $159.1 million at December 30, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by ICL demand, particularly in China, Japan, Canada, and other Asia-Pacific markets.
- ICL units increased 20% globally, while ICL sales increased 16%; average selling prices declined in Asia-Pacific and Europe, Middle East and Africa.
- Gross margin improved primarily because of a favorable mix of higher-margin ICL units and the absence of certain prior-year cost charges.
- The prior-year period included a $6.9 million non-cash charge from accelerated vesting of equity awards, including $0.6 million in cost of sales, $2.9 million in general and administrative expense, $1.5 million in marketing and selling expense, and $1.9 million in research and development expense.
- Operating cash use improved by $2.4 million year over year, although the company remained cash-flow negative from operations.
- The tax result changed from a $1.6 million benefit in Q1 2016 to a $0.1 million provision in Q1 2017, primarily because the prior-year benefit reflected foreign operating losses, accelerated stock compensation, and tax benefits related to dissolution of a foreign subsidiary.
Guidance, Outlook, Risks, and Unusual Items
- Management continued to expect double-digit ICL unit growth over the next twelve months, excluding the United States and Korea, driven by adoption of the EVO Visian ICL.
- Management expected full-year 2017 gross margin to exceed 2016 levels, while total operating expenses could trend above 2016 levels because of continued investment in clinical affairs, infrastructure, marketing, and research and development.
- Management expected 2017 IOL sales to be broadly similar to 2016, excluding the decline associated with discontinuation of the U.S. silicone IOL product line. IOL sales were expected to be flat to declining during the remainder of 2017.
- Higher-than-normal India orders reflected a delayed registration renewal and could adversely affect normal import timing in the second quarter. Korea experienced appreciably lower unit sales due to market and economic conditions.
- The company reported challenges involving a material used in silicone IOL preloaded injectors and was investigating the potential impact. Injector-part sales were expected to recover in subsequent quarters.
- STAAR stated that internal FDA remediation work was completed in the first quarter and that it had notified the FDA that it was ready for inspection. The filing does not provide a completed inspection date or final resolution.
- A first-in-human clinical trial for a next-generation ICL with extended depth of focus continued with positive results; management targeted a limited surgeon introduction in 2017.
- The company faces international currency, regulatory, import and export, political, and customer-concentration risks. A China distributor represented 22% of Q1 2017 sales and more than 24% of trade receivables at March 31, 2017.
- A securities class action had been certified in January 2017, and a stockholder derivative case was under appeal after dismissal. No loss accrual was recorded because the likelihood and amount of any loss were not estimable.
- The company adopted several accounting updates, including standards concerning inventory measurement, share-based compensation, deferred tax classification, and restricted cash. Management stated that the adoptions had no material effect on the financial statements.
Most Important Facts for Investors to Verify
- Whether FDA inspection and remediation activities were completed successfully and whether additional compliance costs or operating restrictions arise.
- The sustainability of ICL growth, especially in China, India, Japan, and other Asia-Pacific markets, and the effect of lower average selling prices.
- The timing and financial impact of the Indian registration renewal and the silicone IOL injector-material issue.
- Whether continued operating losses and negative operating cash flow require additional borrowing, equity issuance, or other financing.
- The renewal and terms of the Japanese credit facility, which was fully drawn at March 31, 2017.
- The outcome and potential exposure from the certified securities litigation and derivative litigation.
- Whether higher planned operating investment results in expense growth exceeding revenue and gross-margin gains.