STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017, compared with the quarter and six months ended July 1, 2016. The request metadata identifies “2016 Q2,” but the filing itself is for 2017 Q2.
Business Context
STAAR designs, manufactures and sells implantable ophthalmic lenses and delivery systems, principally implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company sells in more than 60 countries and operates as one ophthalmic surgical products segment. International sales represented approximately 90% of second-quarter revenue.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Net sales | $21.9 million | $21.0 million | 4.6% increase |
| Gross profit | $15.5 million | $14.6 million | 5.8% increase |
| Gross margin | 70.5% | 69.7% | 80 basis-point increase |
| Operating loss | $1.3 million | $2.1 million | Improved |
| Net loss | $1.0 million | $2.1 million | Improved |
| Net loss per share | $0.02 | $0.05 | Improved |
| Six-month metric | 2017 | 2016 |
|---|---|---|
| Net sales | $42.3 million | $40.2 million |
| Gross profit | $30.1 million | $27.6 million |
| Gross margin | 71.1% | 68.6% |
| Operating loss | $3.4 million | $12.2 million |
| Net loss | $3.2 million | $10.2 million |
| Net loss per share | $0.08 | $0.25 |
Revenue mix: Q2 ICL sales increased 5.9% to $16.3 million, while IOL sales declined 13.6% to $4.4 million. Other product sales increased 149.4% to $1.2 million, primarily from injector parts. For the first six months, ICL sales rose 10.5% to $31.6 million, IOL sales declined 11.4% to $9.0 million, and other product sales rose 12.8% to $1.7 million.
Cash flow: Six-month operating cash flow was negative $1.3 million versus negative $0.5 million in the prior-year period. Investing cash flow was negative $0.7 million, primarily for property and equipment, compared with negative $2.0 million previously. Financing activities provided $1.1 million, primarily from stock option exercises and vested restricted stock, partly offset by capital lease repayments. Cash, cash equivalents and restricted cash totaled $13.6 million at June 30, 2017, compared with $14.1 million at December 30, 2016.
Liquidity and debt: Cash and cash equivalents were $13.4 million. The Japanese subsidiary had approximately $4.5 million outstanding under a 500 million yen line of credit, with no remaining availability; the facility expires November 21, 2017. The Swiss subsidiary had a $1.0 million facility with no borrowings outstanding. Capital lease obligations totaled $2.4 million, including $1.3 million current. Management stated that current cash and expected operating cash flow should satisfy foreseeable working-capital needs, but the company remains dependent on operating cash flow.
Balance sheet: Total assets were $63.6 million and stockholders’ equity was $38.3 million at June 30, 2017. Inventory declined to $13.5 million from $14.8 million at year-end 2016. Trade receivables were $16.4 million. One Chinese distributor represented 27% of Q2 sales and 30% of trade receivables at quarter-end.
Material Changes Versus Prior Comparable Period
- Revenue growth was driven by ICLs, particularly in China, Japan and Canada, and by higher injector-part sales.
- ICL units increased 11% in Q2 and 15.2% for the six-month period, while average selling prices declined 4.1% for the six months.
- IOL revenue declined because of the discontinued U.S. silicone IOL business and production issues involving materials used in silicone IOL preloaded injectors in Japan.
- Gross margin improved due to higher Toric ICL sales, lower inventory provisions, improved unit costs and product mix, partly offset by lower selling prices and increased low-margin injector-part sales.
- Operating expenses declined substantially for the six-month period, primarily because 2016 included approximately $6.3 million of non-cash stock-based compensation related to accelerated vesting following a change-of-control provision.
- Foreign-currency transaction gains increased other income by $0.5 million in Q2 and $0.3 million for the six months; the prior-year quarter included a foreign-currency loss.
- Operating cash use increased despite the reduced net loss, principally because of working-capital changes, including lower accounts payable and other current liabilities.
Guidance, Outlook, Risks and Unusual Items
- Management continued to expect double-digit ICL unit growth in 2017, primarily from greater acceptance of the EVO Visian ICL, excluding the United States and Korea.
- Management expected full-year 2017 gross margin to exceed 2016 levels and operating expenses to be below 2016 levels.
- The company received CE Mark approval in May for the EVO+ Visian ICL with EDOF optic and intended to introduce it to selected European surgeons in 2017. A next-generation ICL EDOF clinical trial continued with positive results.
- Internal FDA remediation work was completed in the first quarter, and the company notified the FDA that it was ready for inspection. DEKRA recertified the facilities to ISO 13485 and recertified CE markings in July.
- Risks include regulatory inspections and remediation, product approvals, product and material quality issues, international and foreign-currency exposure, dependence on a major Chinese distributor, declining IOL sales, and continued operating cash use.
- A shareholder securities class-action settlement of $7.0 million received preliminary approval in July 2017. If finally approved, insurance carriers are expected to fund the entire settlement; no loss was accrued at June 30, 2017.
- A shareholder derivative action was dismissed, but the plaintiff appealed. The company recorded no liability because the likelihood and amount of any loss were not estimable.
- The company adopted several accounting updates in 2017 without material effects. It expected to adopt the new revenue standard using the modified retrospective method and did not anticipate a material impact.
Investor Verification Checklist
- Verify progress and timing of FDA remediation, inspection and any related regulatory consequences.
- Assess whether ICL unit growth can offset lower average selling prices and weaker IOL revenue.
- Monitor the silicone IOL injector-material issue and the effect on Japanese sales.
- Evaluate concentration risk from the Chinese distributor, which accounted for 27% of Q2 sales and 30% of quarter-end trade receivables.
- Reconcile cash burn, operating cash-flow dependence and the outstanding Japanese credit facility approaching its November 2017 renewal.
- Confirm final court approval and insurance funding of the $7.0 million securities litigation settlement.
- Distinguish recurring operating improvement from the prior-year comparison benefit created by unusually high 2016 stock-based compensation and other charges.