STAAR Surgical Company—Form 10-Q Summary
Business Context and Reporting Period
STAAR Surgical designs, manufactures, and sells implantable lenses and delivery systems for refractive and cataract surgery in more than 60 countries. The filing covers the three and six months ended July 1, 2016, compared with July 3, 2015. Although the request metadata identifies “2015 Q2,” the filing itself is a 2016 second-quarter report.
Financial Performance and Position
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $21.0 million | $18.7 million | $40.2 million | $37.5 million |
| Gross profit | $14.6 million | $12.4 million | $27.6 million | $25.3 million |
| Gross margin | 69.7% | 66.3% | 68.6% | 67.3% |
| Operating loss | $(2.1) million | $(1.7) million | $(12.2) million | $(3.3) million |
| Net loss | $(2.1) million | $(1.6) million | $(10.2) million | $(3.9) million |
| Loss per share | $(0.05) | $(0.04) | $(0.25) | $(0.10) |
ICL sales increased 25.9% in the quarter and 16.7% year to date, while IOL sales declined 2.6% and 4.1%, respectively. Other product sales declined 59.1% in the quarter and 38.2% year to date. International sales represented 88% of second-quarter revenue.
Six-month operating cash flow was $(0.5) million, compared with $(1.4) million in the prior-year period. Investing cash flow was $(2.0) million, primarily for $2.0 million of capital expenditures. Financing cash flow was $1.1 million, including $1.2 million of sale-leaseback proceeds and $0.7 million from stock-option exercises.
Cash and cash equivalents were $12.7 million at July 1, 2016, compared with $13.4 million at January 1, 2016. Total liabilities were $27.3 million and stockholders’ equity was $38.0 million. Debt and financing obligations included a fully drawn Japanese line of credit of approximately $4.9 million and capital lease obligations totaling $1.7 million. The company reported compliance with its credit covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue grew 12.4%; six-month revenue grew 7.3%.
- Gross margin improved by 340 basis points in the quarter and 130 basis points year to date, driven primarily by higher-margin ICL mix, pricing, and lower ICL unit costs.
- Six-month operating loss expanded substantially because selling, general and administrative, marketing, and research and development costs increased.
- Six-month expenses included a $6.9 million non-cash stock-based compensation charge from accelerated vesting after a shareholder’s ownership increased to approximately 26% and triggered a change-in-control provision.
- Marketing and selling expense increased 29.2% year to date, while research and development expense increased 62.5%, reflecting rebranding, commercial expansion, quality-system improvements, clinical affairs, and regulatory investment.
- Foreign-currency translation produced $1.3 million of other comprehensive income year to date, while second-quarter foreign-currency transaction losses reduced other income.
Guidance, Outlook, Risks, and Unusual Items
- Management expects the 2016 effective tax rate to be approximately 32%, subject to future events.
- Management expects current cash balances and operating cash flow to fund foreseeable working-capital needs, including approximately $2.2 million of 2016 FDA-remediation costs; $1.0 million had been incurred during the first six months.
- Management expects investments to outpace revenue and gross-margin expansion for the remainder of 2016 and does not anticipate paying dividends for the foreseeable future.
- The company plans to cease selling silicone IOLs, AquaFlow, and related accessories in North America effective December 31, 2016. It recorded $426,000 of inventory reserves for related products and expects U.S. silicone IOL sales to continue declining.
- Injector sales to Nidek declined 73.3% because of settlements concerning allegedly defective injectors. The company expects modest Nidek injector sales through 2016 and noted uncertainty regarding future injector supply from a third-party manufacturer.
- Key strategic priorities are FDA remediation and quality-system overhaul, expansion of the ICL market, clinical and regulatory development, and new-product and delivery-system innovation.
- The Todd securities class action remains pending, and a new Forestal shareholder derivative action was filed in June 2016. The company has recorded no accrual because potential losses are not currently estimable.
- The company is exposed to customer concentration: a Chinese distributor represented 21% of second-quarter sales and 19% of year-to-date sales. Chinese and Korean distributors represented 23% and 10% of trade receivables, respectively, at July 1, 2016.
Important Facts for Investors to Verify
- Whether ICL growth and improved gross margins can offset continued IOL and injector declines.
- The recurring versus nonrecurring components of the $6.9 million accelerated stock-compensation charge and the impact of ongoing quality-system investments.
- The adequacy of cash and operating cash flow to fund FDA remediation, capital expenditures, and working capital while the Japanese credit line is fully drawn.
- Progress and cost of FDA remediation, regulatory approvals, and quality-system improvements.
- The success of converting North American silicone IOL customers to NanoFLEX and the effect of the product phase-out on inventory and revenue.
- Potential financial exposure from pending litigation, product-related claims, customer concentration, foreign exchange, and third-party injector supply.