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STAAR SURGICAL CO - Quarter Report: 2019 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:    September 27, 2019

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 0-11634

 

STAAR SURGICAL COMPANY

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

95-3797439

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

25651 Atlantic Ocean Drive
Lake Forest, California

 

92630

(Address of Principal Executive Offices)

(Zip Code)

 

(626) 303-7902

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common

STAA

NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No 

The registrant has 44,609,387 shares of common stock, par value $0.01 per share, issued and outstanding as of October 25, 2019.

 


STAAR SURGICAL COMPANY

 

INDEX

 

 

 

 

PAGE

NUMBER

 

 

 

 

PART I – FINANCIAL INFORMATION

 

1

 

 

 

 

ITEM 1

FINANCIAL STATEMENTS

 

1

 

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

20

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

26

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

26

 

 

 

 

PART II – OTHER INFORMATION

 

26

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

26

 

 

 

 

ITEM 1A.

RISK FACTORS

 

26

 

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

27

 

 

 

 

ITEM 5.

OTHER INFORMATION

 

27

 

 

 

 

ITEM 6.

EXHIBITS

 

27

 

 

 


PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

(Unaudited)

 

 

 

September 27, 2019

 

 

December 28,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

112,327

 

 

$

103,877

 

Accounts receivable trade, net of allowance of doubtful accounts of

   $75 and $550, respectively

 

 

30,789

 

 

 

25,946

 

Inventories, net

 

 

16,440

 

 

 

16,704

 

Prepayments, deposits and other current assets

 

 

5,406

 

 

 

5,045

 

Total current assets

 

 

164,962

 

 

 

151,572

 

Property, plant and equipment, net

 

 

14,846

 

 

 

11,451

 

Finance lease right-of-use assets, net

 

 

2,006

 

 

 

 

Operating lease right-of-use assets, net

 

 

6,677

 

 

 

 

Intangible assets, net

 

 

252

 

 

 

243

 

Goodwill

 

 

1,786

 

 

 

1,786

 

Deferred income taxes

 

 

1,460

 

 

 

1,278

 

Other assets

 

 

752

 

 

 

1,009

 

Total assets

 

$

192,741

 

 

$

167,339

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Line of credit

 

$

2,340

 

 

$

3,780

 

Accounts payable

 

 

7,535

 

 

 

6,524

 

Obligations under finance leases

 

 

752

 

 

 

1,098

 

Obligations under operating leases

 

 

2,789

 

 

 

 

Allowance for sales returns

 

 

3,691

 

 

 

2,895

 

Other current liabilities

 

 

12,865

 

 

 

13,431

 

Total current liabilities

 

 

29,972

 

 

 

27,728

 

Obligations under finance leases

 

 

471

 

 

 

459

 

Obligations under operating leases

 

 

4,003

 

 

 

 

Deferred income taxes

 

 

1,539

 

 

 

1,022

 

Asset retirement obligations

 

 

211

 

 

 

206

 

Deferred rent

 

 

 

 

 

188

 

Pension liability

 

 

7,205

 

 

 

5,310

 

Total liabilities

 

 

43,401

 

 

 

34,913

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 60,000 shares authorized: 44,606 and

   44,195 shares issued and outstanding at September 27, 2019 and

   December 28, 2018, respectively

 

 

446

 

 

 

442

 

Additional paid-in capital

 

 

299,597

 

 

 

289,584

 

Accumulated other comprehensive loss

 

 

(2,520

)

 

 

(1,320

)

Accumulated deficit

 

 

(148,183

)

 

 

(156,280

)

Total stockholders’ equity

 

 

149,340

 

 

 

132,426

 

Total liabilities and stockholders’ equity

 

$

192,741

 

 

$

167,339

 

 

See accompanying notes to the condensed consolidated financial statements.

 

1


STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Net sales

 

$

39,055

 

 

$

31,770

 

 

$

111,302

 

 

$

92,768

 

Cost of sales

 

 

10,004

 

 

 

7,910

 

 

 

28,172

 

 

 

24,250

 

Gross profit

 

 

29,051

 

 

 

23,860

 

 

 

83,130

 

 

 

68,518

 

Selling, general and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

7,098

 

 

 

6,087

 

 

 

21,443

 

 

 

18,054

 

Marketing and selling

 

 

12,463

 

 

 

10,620

 

 

 

34,288

 

 

 

28,733

 

Research and development

 

 

6,156

 

 

 

5,570

 

 

 

17,889

 

 

 

16,323

 

Total selling, general and administrative expenses

 

 

25,717

 

 

 

22,277

 

 

 

73,620

 

 

 

63,110

 

Operating income

 

 

3,334

 

 

 

1,583

 

 

 

9,510

 

 

 

5,408

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

266

 

 

 

(29

)

 

 

796

 

 

 

(65

)

Gain (loss) on foreign currency transactions

 

 

(584

)

 

 

52

 

 

 

(821

)

 

 

(545

)

Royalty income

 

 

106

 

 

 

159

 

 

 

440

 

 

 

465

 

Other income, net

 

 

26

 

 

 

40

 

 

 

124

 

 

 

61

 

Total other income (expense), net

 

 

(186

)

 

 

222

 

 

 

539

 

 

 

(84

)

Income before income taxes

 

 

3,148

 

 

 

1,805

 

 

 

10,049

 

 

 

5,324

 

Provision for income taxes

 

 

760

 

 

 

346

 

 

 

2,380

 

 

 

1,452

 

Net income

 

$

2,388

 

 

$

1,459

 

 

$

7,669

 

 

$

3,872

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.03

 

 

$

0.17

 

 

$

0.09

 

Diluted

 

$

0.05

 

 

$

0.03

 

 

$

0.16

 

 

$

0.09

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44,563

 

 

 

43,054

 

 

 

44,426

 

 

 

42,065

 

Diluted

 

 

46,857

 

 

 

46,025

 

 

 

46,848

 

 

 

44,618

 

 

See accompanying notes to the condensed consolidated financial statements.

2


STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Net income

 

$

2,388

 

 

$

1,459

 

 

$

7,669

 

 

$

3,872

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in plan assets

 

 

(1,037

)

 

 

(21

)

 

 

(1,677

)

 

 

(51

)

Reclassification into other income, net

 

 

26

 

 

 

25

 

 

 

80

 

 

 

76

 

Foreign currency translation gain (loss)

 

 

(22

)

 

 

(321

)

 

 

317

 

 

 

(114

)

Tax effect

 

 

115

 

 

 

105

 

 

 

80

 

 

 

38

 

Other comprehensive loss, net of tax

 

 

(918

)

 

 

(212

)

 

 

(1,200

)

 

 

(51

)

Comprehensive income

 

$

1,470

 

 

$

1,247

 

 

$

6,469

 

 

$

3,821

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3


STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

Common

Stock Shares

 

 

Common

Stock Par

Value

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Compre-

hensive

Income

(Loss)

 

 

Accumulated

Deficit

 

 

Total

 

Balance, at June 28, 2019

 

 

44,534

 

 

$

445

 

 

$

296,063

 

 

$

(1,602

)

 

$

(150,571

)

 

$

144,335

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,388

 

 

 

2,388

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(918

)

 

 

 

 

 

(918

)

Common stock issued upon exercise of options

 

 

64

 

 

 

1

 

 

 

718

 

 

 

 

 

 

 

 

 

719

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,816

 

 

 

 

 

 

 

 

 

2,816

 

Vested restricted stock

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, at September 27, 2019

 

 

44,606

 

 

$

446

 

 

$

299,597

 

 

$

(2,520

)

 

$

(148,183

)

 

$

149,340

 

Balance, at June 29, 2018

 

 

41,877

 

 

$

419

 

 

$

210,488

 

 

$

(989

)

 

$

(158,835

)

 

$

51,083

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,459

 

 

 

1,459

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(212

)

 

 

 

 

 

(212

)

Proceeds from public stock offering

 

 

2,000

 

 

 

20

 

 

 

72,130

 

 

 

 

 

 

 

 

 

72,150

 

Common stock issued upon exercise of options

 

 

219

 

 

 

2

 

 

 

2,173

 

 

 

 

 

 

 

 

 

2,175

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,209

 

 

 

 

 

 

 

 

 

2,209

 

Vested restricted stock

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, at September 28, 2018

 

 

44,104

 

 

$

441

 

 

$

287,000

 

 

$

(1,201

)

 

$

(157,376

)

 

$

128,864

 

 

See accompanying notes to the condensed consolidated financial statements.

4


STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(In thousands)

(Unaudited)

 

 

 

 

Nine Months Ended

 

 

 

Common

Stock Shares

 

 

Common

Stock Par

Value

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Compre-

hensive

Income

(Loss)

 

 

Accumulated

Deficit

 

 

Total

 

Balance, at December 28, 2018

 

 

44,195

 

 

$

442

 

 

$

289,584

 

 

$

(1,320

)

 

$

(156,280

)

 

$

132,426

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,669

 

 

 

7,669

 

Adoption of ASC 842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

113

 

 

 

113

 

Adoption of ASU 2018-07

 

 

 

 

 

 

 

 

(315

)

 

 

 

 

 

315

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(1,200

)

 

 

 

 

 

(1,200

)

Common stock issued upon exercise of options

 

 

190

 

 

 

2

 

 

 

1,827

 

 

 

 

 

 

 

 

 

1,829

 

Stock-based compensation

 

 

 

 

 

 

 

 

8,501

 

 

 

 

 

 

 

 

 

8,501

 

Unvested restricted stock

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested restricted stock

 

 

210

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Balance, at September 27, 2019

 

 

44,606

 

 

$

446

 

 

$

299,597

 

 

$

(2,520

)

 

$

(148,183

)

 

$

149,340

 

Balance, at December 29, 2017

 

 

41,383

 

 

$

414

 

 

$

204,920

 

 

$

(1,150

)

 

$

(161,248

)

 

$

42,936

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,872

 

 

 

3,872

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(51

)

 

 

 

 

 

(51

)

Proceeds from public offering of stock

 

 

2,000

 

 

 

20

 

 

 

72,130

 

 

 

 

 

 

 

 

 

72,150

 

Common stock issued upon exercise of options

 

 

525

 

 

 

5

 

 

 

4,575

 

 

 

 

 

 

 

 

 

4,580

 

Stock-based compensation

 

 

 

 

 

 

 

 

5,375

 

 

 

 

 

 

 

 

 

5,375

 

Unvested restricted stock

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested restricted stock

 

 

185

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Balance, at September 28, 2018

 

 

44,104

 

 

$

441

 

 

$

287,000

 

 

$

(1,201

)

 

$

(157,376

)

 

$

128,864

 

 

See accompanying notes to the condensed consolidated financial statements.

 

5


STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

7,669

 

 

$

3,872

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation of property, plant, and equipment

 

 

2,853

 

 

 

1,792

 

Amortization of intangibles

 

 

26

 

 

 

26

 

Deferred income taxes

 

 

526

 

 

 

363

 

Change in net pension liability

 

 

264

 

 

 

233

 

Loss on disposal of property and equipment

 

 

14

 

 

 

8

 

Stock-based compensation expense

 

 

7,778

 

 

 

4,926

 

Provision for sales returns and bad debts

 

 

309

 

 

 

892

 

Inventory provision

 

 

1,222

 

 

 

1,181

 

Changes in working capital:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,260

)

 

 

(3,989

)

Inventories

 

 

(179

)

 

 

(3,625

)

Prepayments, deposits, and other current assets

 

 

(230

)

 

 

(1,021

)

Accounts payable

 

 

546

 

 

 

2,121

 

Other current liabilities

 

 

(536

)

 

 

3,643

 

Net cash provided by operating activities

 

 

16,002

 

 

 

10,422

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(7,169

)

 

 

(1,721

)

Acquisition of patents and licenses

 

 

(30

)

 

 

 

Net cash used in investing activities

 

 

(7,199

)

 

 

(1,721

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from public offering of stock

 

 

 

 

 

72,150

 

Repayment of finance lease obligations

 

 

(998

)

 

 

(1,396

)

Repayment on line of credit

 

 

(1,512

)

 

 

(251

)

Proceeds from the exercise of stock options

 

 

1,829

 

 

 

4,580

 

Proceeds from vested restricted stock

 

 

2

 

 

 

2

 

Net cash provided by (used in) financing activities

 

 

(679

)

 

 

75,085

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

204

 

 

 

(111

)

Increase in cash, cash equivalents and restricted cash

 

 

8,328

 

 

 

83,675

 

Cash, cash equivalents and restricted cash, at beginning of the period

 

 

103,999

 

 

 

18,641

 

Cash, cash equivalents and restricted cash, at end of the period

 

$

112,327

 

 

$

102,316

 

 

See accompanying notes to the condensed consolidated financial statements.

 

6


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 1 — Basis of Presentation and Significant Accounting Policies

The Condensed Consolidated Financial Statements of the Company present the financial position, results of operations, and cash flows of STAAR Surgical Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Commission. In accordance with those rules and regulations certain information and footnote disclosures normally included in the Comprehensive Financial Statements have been condensed or omitted pursuant to such rules and regulations. The Consolidated Balance Sheet as of December 28, 2018 was derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2018.

The Condensed Consolidated Financial Statements for the three and nine months ended September 27, 2019 and September 28, 2018, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial condition and results of operations. The results of operations for the three and nine months ended September 27, 2019 and September 28, 2018, are not necessarily indicative of the results to be expected for any other interim period or for the entire year.  

Each of the Company’s fiscal reporting periods ends on the Friday nearest to the quarter ending date and generally consists of 13 weeks.  Unless the context indicates otherwise “we,” “us,” the “Company,” and “STAAR” refer to STAAR Surgical Company and its consolidated subsidiaries.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows (in 000’s):

 

 

 

September 27, 2019

 

 

December 28,

2018

 

 

September 28,

2018

 

Cash and cash equivalents

 

$

112,327

 

 

$

103,877

 

 

$

102,195

 

Restricted cash(1)

 

 

 

 

 

122

 

 

 

121

 

Total cash, cash equivalents and restricted cash

 

$

112,327

 

 

$

103,999

 

 

$

102,316

 

 

(1)

Included in other assets on the Condensed Consolidated Balance Sheets.

The Company had restricted cash set aside as collateral for a standby letter of credit required by the California Department of Public Health for unforeseen future regulatory costs related to the decommissioning of certain manufacturing equipment.  Since the quarter ended June 28, 2019, the Company was no longer required to set aside collateral for this standby letter of credit.

Allowance for Doubtful Accounts

The allowance for doubtful accounts decreased during the nine months ended September 27, 2019 due to specific past due receivables that were previously reserved and subsequently collected.

Lease Accounting

On December 29, 2018 (beginning of fiscal year 2019), the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and its subsequent amendments affecting the Company: (i) ASU 2018-10, “Codification Improvements to Topic 842, Leases,” and (ii) ASU 2018-11, “Leases (Topic 842):  Targeted improvements,” using the modified retrospective method.  Upon adoption of ASU 2016-02, the Company recognized a cumulative adjustment of $113,000 which decreased the accumulated deficit and recognized right-of-use (“ROU”) assets and lease liabilities for operating leases, whereby the Company’s accounting finance leases remained substantially unchanged.

7


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 1 — Basis of Presentation and Significant Accounting Policies (Continued)

Lease Accounting (Continued)

The Company recognizes ROU assets and lease liabilities for leases with terms greater than twelve months in the Condensed Consolidated Balance Sheets.  Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Condensed Consolidated Statement of Income.  

A contract contains a lease if the contract conveys the right to control an identified asset for a period of time in exchange for consideration.  An asset is either explicitly identified or implicitly identified and must be physically distinct.  In addition, the Company must have both the right to obtain substantially all of the economic benefits from use of the identified asset and has the right to direct the use of the identified asset.

Certain leases may have non-lease components such as common area maintenance expense for building leases and maintenance expenses for automobile leases.  In general, the Company separates common area maintenance expense component from the value of the ROU asset and lease liability when evaluating rental properties under ASU 2016-02, whereas, the Company includes the maintenance and service components in the value of the ROU asset and lease liability while evaluating automobile leases under ASU 2016-02.

When determining whether a lease is a finance lease or an operating lease, ASU 2016-02 does not specifically define criteria to determine “major part of remaining economic life of the underlying asset” and “substantially all of the fair value of the underlying asset.” For lease classification determination, the Company continues to use (i) greater to or equal to 75% to determine whether the lease term is a major part of the remaining economic life of the underlying asset and (ii) greater to or equal to 90% to determine whether the present value of the sum of lease payments is substantially all of the fair value of the underlying asset.

The Company uses either the rate implicit in the lease or its incremental borrowing rate as the discount rate in lease accounting.

When adopting ASU 2016-02, the Company did not reassess any expired or existing contracts, reassess the lease classification for any expired or existing leases and reassess initial direct costs for exiting leases.  The Company also elected not to capitalize leases that have terms of twelve months or less.

The Company reviews ROU assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company measures recoverability of these assets by comparing the carrying value of such assets to the estimated undiscounted future cash flows the assets are expected to generate. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value.

Vendor Concentration

As of September 27, 2019, there was one vendor which accounted for 13% of the Company’s consolidated accounts payable.  As of December 28, 2018, there were no vendors which accounted for over 10% of the Company’s consolidated accounts payable.

Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted

On December 29, 2018 (beginning of fiscal year 2019), the Company adopted ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220):  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” provides an option to reclassify stranded tax effects within Accumulated Other Comprehensive Income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded.  The adoption of ASU 2018‑02 did not have material impact on the Condensed Consolidated Financial Statements.

On December 29, 2018 (beginning of fiscal year 2019), the Company adopted ASU 2018-07, “Compensation-Stock Compensation (Topic 718):  Improvements to Nonemployee Share-Based Payment Accounting,” aligns the accounting for share-based payments to nonemployees similar to employees.  Upon the adoption of ASU 2018-07, the Company recognized a cumulative adjustment of $315,000 which decreased the accumulated deficit.

8


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 1 — Basis of Presentation and Significant Accounting Policies (Continued)

Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted (Continued)

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820):  Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which modifies certain disclosures requirements for reporting fair value measurements.  This is effective for fiscal years ending after December 15, 2019.  Early adoption is permitted.  The Company will adopt this standard as of January 4, 2020 (beginning of fiscal year 2020) and is currently evaluating the disclosure requirements and its effect on the Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20); Disclosure Framework – Changes in the Disclosure Requirement for Defined Benefit Plans,” which modifies disclosure requirements for employers that sponsor defined benefit pension or other post retirement plans.  This is effective for fiscal years ending after December 15, 2020.  Early adoption is permitted.  The Company will adopt this standard as of January 2, 2021 (beginning of fiscal year 2021) and is currently evaluating the disclosure requirements and its effect on the Condensed Consolidated Financial Statements.

Note 2 — Inventories

Inventories, net are stated at the lower of cost and net realizable value, determined on a first-in, first-out basis and consisted of the following (in thousands):

 

 

September 27, 2019

 

 

December 28,

2018

 

Raw materials and purchased parts

 

$

1,374

 

 

$

2,678

 

Work in process

 

 

724

 

 

 

2,195

 

Finished goods

 

 

15,596

 

 

 

13,214

 

Total inventories, gross

 

 

17,694

 

 

 

18,087

 

Less inventory reserves

 

 

1,254

 

 

 

1,383

 

Total inventories, net

 

$

16,440

 

 

$

16,704

 

 

Note 3 — Prepayments, Deposits, and Other Current Assets

Prepayments, deposits, and other current assets consisted of the following (in thousands):

 

 

September 27, 2019

 

 

December 28,

2018

 

Prepayments and deposits

 

$

2,630

 

 

$

1,707

 

Prepaid insurance

 

 

585

 

 

 

1,271

 

Consumption tax receivable

 

 

549

 

 

 

912

 

Value added tax (VAT) receivable

 

 

587

 

 

 

565

 

Income tax receivable

 

 

523

 

 

 

285

 

Other(1)

 

 

532

 

 

 

305

 

Total prepayments, deposits and other current assets

 

$

5,406

 

 

$

5,045

 

 

(1)

No individual item in “other current assets” exceeds 5% of the total prepayments, deposits and other current assets.

9


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 4 — Property, Plant and Equipment

Property, plant and equipment, net consisted of the following (in thousands):

 

 

September 27, 2019

 

 

December 28,

2018

 

Machinery and equipment

 

$

17,027

 

 

$

16,905

 

Computer equipment and software

 

 

6,074

 

 

 

5,992

 

Furniture and fixtures

 

 

4,157

 

 

 

3,868

 

Leasehold improvements

 

 

10,118

 

 

 

10,045

 

Construction in process

 

 

5,952

 

 

 

2,095

 

Total property, plant and equipment, gross

 

 

43,328

 

 

 

38,905

 

Less accumulated depreciation

 

 

28,482

 

 

 

27,454

 

Total property, plant and equipment, net

 

$

14,846

 

 

$

11,451

 

Construction in process includes the cost of design plans and build out of facilities and the cost of equipment, as well as the direct costs incurred in the testing and validation of machinery and equipment and facilities before they are ready for productive use.  Upon placement in service, costs are reclassified into the appropriate asset category and depreciation commences.

Note 5 –Intangible Assets

 

Intangible assets, net consisted of the following (in thousands):

 

 

 

September 27, 2019

 

 

December 28, 2018

 

Long-lived amortized intangible assets

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Patents and licenses

 

$

9,301

 

 

$

(9,049

)

 

$

252

 

 

$

9,257

 

 

$

(9,014

)

 

$

243

 

 

Note 6 – Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

 

 

 

September 27, 2019

 

 

December 28,

2018

 

Accrued salaries and wages

 

$

4,209

 

 

$

3,172

 

Accrued insurance

 

 

43

 

 

 

1,061

 

Accrued consumption tax

 

 

771

 

 

 

995

 

Accrued bonuses

 

 

2,354

 

 

 

5,113

 

Income taxes payable

 

 

2,464

 

 

 

1,105

 

Marketing obligations

 

 

747

 

 

 

361

 

Other(1)

 

 

2,277

 

 

 

1,624

 

Total other current liabilities

 

$

12,865

 

 

$

13,431

 

 

(1)

No individual item in “Other” exceeds 5% of the other current liabilities.

10


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 7 – Lines of Credit

Since 1998, the Company’s wholly owned Japanese subsidiary, STAAR Japan, has had an agreement with Mizuho Bank which provides for borrowings of up to 500,000,000 Yen, at an interest rate equal to the uncollateralized overnight call rate (approximately 0.06% as of September 27, 2019) plus a 0.50% spread, and may be renewed quarterly (the current line expires on November 21, 2019).  The credit facility is not collateralized.  The Company had 252,500,000 Yen and 417,500,000 Yen outstanding on the line of credit as of September 27, 2019 and December 28, 2018, respectively (approximately $2,340,000 and $3,780,000 based on the foreign exchange rates on September 27, 2019 and December 28, 2018, respectively), which approximates fair value due to the short-term maturity and market interest rates of the line of credit.  In case of default, the interest rate will be increased to 14% per annum.  There was 247,500,000 Yen and 82,500,000 Yen available for borrowing as of September 27, 2019 and December 28, 2018, respectively (approximately $2,293,000 and $747,000 based on the foreign exchange rate on September 27, 2019 and December 28, 2018, respectively).  At maturity on November 21, 2019, the Company expects to renew this line of credit for an additional three months, with similar terms.

In September 2013, the Company’s wholly owned Swiss subsidiary, STAAR Surgical AG, entered into a framework agreement for loans (“framework agreement”) with Credit Suisse (the “Bank”). The framework agreement provides for borrowings of up to 1,000,000 CHF (Swiss Francs) (approximately $1,000,000 at the rate of exchange on September 27, 2019 and December 28, 2018), to be used for working capital purposes. Accrued interest and 0.25% commissions on average outstanding borrowings is payable quarterly and the interest rate will be determined by the Bank based on the then prevailing market conditions at the time of borrowing. The framework agreement is automatically renewed on an annual basis based on the same terms assuming there is no default. The framework agreement may be terminated by either party at any time in accordance with its general terms and conditions. The framework agreement is not collateralized and contains certain conditions such as providing the Bank with audited financial statements annually and notice of significant events or conditions, as defined in the framework agreement. The Bank may also declare all amounts outstanding to be immediately due and payable upon a change of control or a “material qualification” in STAAR Surgical independent auditors’ report, as defined. There were no borrowings outstanding as of September 27, 2019 and December 28, 2018.

The Company is in compliance with covenants of its credit facilities and lines of credit as of September 27, 2019.

During the nine months ended September 27, 2019, the Company converted the lease line of credit schedule 011 with Farnam Street Financial, Inc. into a finance lease liability of approximately $500,000.

Note 8 – Leases

Finance Leases

The Company entered into finance leases primarily related to purchases of equipment used for manufacturing or computer-related equipment.  These finance leases are two to five years in length and have fixed payment amounts for the term of the contract and have options to purchase the assets at the end of the lease term.  Supplemental balance sheet information related to finance leases consisted of the following (dollars in thousands):

 

 

 

September 27, 2019

 

Machinery and equipment

 

$

1,885

 

Computer equipment and software

 

 

923

 

Furniture and fixtures

 

 

102

 

Leasehold improvements

 

 

27

 

Finance lease right-of-use assets, gross

 

 

2,937

 

Less accumulated depreciation

 

 

931

 

Finance lease right-of-use assets, net

 

$

2,006

 

 

 

 

 

 

Total finance lease liability

 

$

1,223

 

Weighted-average remaining lease term (in years)

 

 

1.4

 

Weighted-average discount rate

 

 

6.27

%

 

11


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 8Leases (Continued)

Finance Leases (Continued)

Supplemental cash flow information related to finance leases consisted of the following (dollars in thousands):

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 27,

2019

 

September 27,

2019

 

Amortization of finance lease right-of-use asset

 

$

141

 

$

447

 

Interest on finance lease liabilities

 

 

17

 

 

58

 

Cash paid for amounts included in the measurement of finance lease liabilities:

 

 

 

 

 

 

 

Operating cash flows

 

 

17

 

 

58

 

Financing cash flows

 

 

317

 

 

998

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 

 

 

 

679

 

Operating Leases

The Company entered into operating leases primarily related to real property (office, manufacturing and warehouse facilities), automobiles and copiers.  These operating leases are two to five years in length with options to extend.  The Company did not include any lease extensions in the initial valuation unless the Company was reasonably certain to extend the lease.  Depending on the lease, there are those with fixed payment amounts for the entire length of the contract or payments which increase periodically as noted in the contract or increased at an inflation rate indicator.  For operating leases that increase using an inflation rate indicator, the Company used the inflation rate at the time the lease was entered into for the length of the lease term. Supplemental balance sheet information related to operating leases consisted of the following (dollars in thousands):

 

 

September 27, 2019

 

Machinery and equipment

$

813

 

Computer equipment and software

 

462

 

Real property

 

10,634

 

Operating lease right-of-use assets, gross

 

11,909

 

Less accumulated depreciation

 

5,232

 

Operating lease right-of-use assets, net

$

6,677

 

 

 

 

 

Total operating lease liability

$

6,792

 

Weighted-average remaining lease term (in years)

 

2.4

 

Weighted-average discount rate

 

1.79

%

 

Supplemental cash flow information related to operating leases was as follows (dollars in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 27,

2019

 

Operating lease cost

 

$

726

 

 

$

2,020

 

Cash paid for amounts included in the measurement of operating lease liabilities:

 

 

 

 

 

 

 

 

Operating cash flows

 

 

739

 

 

 

2,031

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

140

 

 

 

2,797

 

12


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 8Leases (Continued)

Future Minimum Lease Commitments

Estimated future minimum lease payments under operating and finance leases having initial or remaining non-cancelable lease terms more than one year as of September 27, 2019 and December 28, 2018 are as follows (in thousands):

 

As of September 27, 2019

12 Months Ended

 

Operating Leases

 

 

Finance Leases

 

September 2020

 

$

2,920

 

 

$

790

 

September 2021

 

 

1,833

 

 

 

426

 

September 2022

 

 

1,082

 

 

 

45

 

September 2023

 

 

867

 

 

 

8

 

September 2024

 

 

319

 

 

 

4

 

Thereafter

 

 

 

 

 

 

Total minimum lease payments, including interest

 

$

7,021

 

 

$

1,273

 

Less amounts representing interest

 

 

229

 

 

 

50

 

Total minimum lease payments

 

$

6,792

 

 

$

1,223

 

 

As of December 28, 2018

12 Months Ended

 

Operating Leases

 

 

Finance Leases

 

December 2019

 

$

2,606

 

 

$

1,153

 

December 2020

 

 

2,202

 

 

 

332

 

December 2021

 

 

980

 

 

 

143

 

December 2022

 

 

507

 

 

 

4

 

December 2023

 

 

202

 

 

 

 

Thereafter

 

 

12

 

 

 

 

Total minimum lease payments, including interest

 

 

6,509

 

 

 

1,632

 

Less amounts representing interest

 

 

 

 

 

75

 

Total minimum lease payments

 

$

6,509

 

 

$

1,557

 

 

13


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 9 Income Taxes

The Company recorded an income tax provision as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Provision for income taxes

 

$

760

 

 

$

346

 

 

$

2,380

 

 

$

1,452

 

The income tax provision is primarily due to pre-tax income generated in certain foreign jurisdictions.  The Company’s quarterly provision for income taxes is determined by estimating an annual effective tax rate.  This estimate may fluctuate throughout the year as new information becomes available affecting its underlying assumptions.  There are no unrecognized tax benefits related to uncertain tax positions taken by the Company.   

All earnings from the Company’s subsidiaries are not considered to be permanently reinvested.  Accordingly, the Company provides withholding and U.S. taxes on all unremitted foreign earnings.

The 2017 Tax Act subjects a U.S. shareholder to tax on Global Intangible Low Tax Income (“GILTI”) earned by certain foreign subsidiaries.  In general, GILTI is the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets.  The provision further allows a deduction of 50 percent of GILTI, however this deduction is limited to the Company’s U.S. taxable income.  The Company has elected to account for GILTI as a current period expense when incurred.

For the nine months ended September 27, 2019, the Company included GILTI of $12,084,000 in U.S. gross income, which was fully offset with net operating loss carryforwards.  The Company was not able to utilize the deduction of 50 percent of GILTI, as this deduction is limited to the Company’s U.S. taxable income.

As of September 27, 2019, the Company established a full valuation allowance in the U.S. for all periods presented due to the significant uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets, with the exception of the refundable alternative minimum tax credit of $273,000. Management will continue to monitor and evaluate all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, impact of GILTI in the U.S., tax-planning strategies, and results of recent operations.

In projecting future taxable income, the Company begins with historical results and incorporates assumptions including overall current and projected business and industry conditions, the amount of future federal, state, and foreign pretax operating income, the reversal of temporary differences and the feasible and prudent tax-planning strategies.  These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses.  In evaluating the objective evidence, the Company considers, among other financial information, three years of cumulative operating results.  Valuation allowances, or reductions to deferred tax assets, are recognized if, based on the weight of all the available evidence, it is more likely than not that some portion or all the deferred tax asset may not be realized.  As the Company experiences continued growth and profits the need for a valuation allowance will be evaluated each reporting period by Management to determine whether it is more likely than not that the Company’s deferred tax assets will be realizable in a later period. Any such changes in the assessment of a full or partial valuation allowance could have a material impact on earnings. 

 

14


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 10 – Defined Benefit Pension Plans

 

The Company has defined benefit plans covering employees of its Switzerland and Japan operations.  The following table summarizes the components of net periodic pension cost recorded for the Company’s defined benefit pension plans (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Service cost(1)

 

$

240

 

 

$

137

 

 

$

720

 

 

$

414

 

Interest cost(2)

 

 

20

 

 

 

15

 

 

 

60

 

 

 

44

 

Expected return on plan assets(2)

 

 

(36

)

 

 

(28

)

 

 

(103

)

 

 

(82

)

Net amortization of transitional obligation(2),(3)

 

 

 

 

 

3

 

 

 

 

 

 

8

 

Prior service credit(2),(3)

 

 

(6

)

 

 

(6

)

 

 

(17

)

 

 

(17

)

Actuarial loss recognized in current period(2),(3)

 

 

32

 

 

 

28

 

 

 

97

 

 

 

85

 

Net periodic pension cost

 

$

250

 

 

$

149

 

 

$

757

 

 

$

452

 

 

(1)

Recognized in selling general and administrative expenses on the Condensed Consolidated Statements of Income.

(2)

Recognized in other income (expense), net on the Condensed Consolidated Statements of Income.

(3)

Amounts reclassified from accumulated other comprehensive income (loss).

 

The Company currently is not required to and does not make contributions to its Japan pension plan.  The Company’s contributions to its Swiss pension plan are as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Employer contribution

 

$

141

 

 

$

80

 

 

$

404

 

 

$

225

 

 

Note 11 — Stockholders’ Equity

Stock-Based Compensation

The cost that has been charged against income for stock-based compensation is set forth below (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Employee stock options

 

$

2,178

 

 

$

1,197

 

 

$

5,770

 

 

$

2,713

 

Restricted stock

 

 

77

 

 

 

82

 

 

 

236

 

 

 

192

 

Restricted stock units

 

 

246

 

 

 

501

 

 

 

1,661

 

 

 

1,593

 

Nonemployee stock options

 

 

57

 

 

 

247

 

 

 

111

 

 

 

428

 

Total stock-based compensation expense

 

$

2,558

 

 

$

2,027

 

 

$

7,778

 

 

$

4,926

 

 

The Company recorded stock-based compensation costs in the following categories (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Cost of sales

 

$

7

 

 

$

4

 

 

$

43

 

 

$

11

 

General and administrative

 

 

1,082

 

 

 

701

 

 

 

2,878

 

 

 

1,875

 

Marketing and selling

 

 

692

 

 

 

471

 

 

 

2,553

 

 

 

1,297

 

Research and development

 

 

777

 

 

 

851

 

 

 

2,304

 

 

 

1,743

 

Total stock-based compensation expense, net

 

 

2,558

 

 

 

2,027

 

 

 

7,778

 

 

 

4,926

 

Amounts capitalized as part of inventory

 

 

258

 

 

 

182

 

 

 

723

 

 

 

449

 

Total stock-based compensation expense, gross

 

$

2,816

 

 

$

2,209

 

 

$

8,501

 

 

$

5,375

 

 

15


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 11 — Stockholders’ Equity (Continued)

Incentive Plan

The Amended and Restated Omnibus Equity Incentive Plan (“the Plan”) provides for various forms of stock-based incentives. To date, of the available forms of awards under the Plan, the Company has granted only stock options, restricted stock, unrestricted share grants, and restricted stock units (“RSUs”). Options under the Plan are granted at fair market value on the date of grant, become exercisable generally over a three-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control and pre-established financial metrics are met (as defined in the Plan). Grants of restricted stock outstanding under the Plan generally vest over periods of one to three years. Grants of RSUs outstanding under the Plan generally vest based on service, performance, or a combination of both.  As of September 27, 2019, there were 1,629,976 shares available for grant under the Plan

Assumptions

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the weighted-average assumptions noted in the following table.  Expected volatilities are based on historical volatility of the Company’s stock. The expected term of options granted is derived from the historical exercises and post-vesting cancellations and represents the period of time that options granted are expected to be outstanding.  The Company has calculated an 8% estimated forfeiture rate based on historical forfeiture experience.  The risk-free rate is based on the U.S. Treasury yield curve corresponding to the expected term at the time of the grant.  

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Expected dividend yield

 

 

0

%

 

 

0

%

 

 

0

%

 

 

0

%

Expected volatility

 

 

53

%

 

 

53

%

 

 

53

%

 

 

53

%

Risk-free interest rate

 

 

1.55

%

 

 

2.84

%

 

 

2.40

%

 

 

2.71

%

Expected term (in years)

 

 

5.67

 

 

 

5.72

 

 

 

5.67

 

 

 

5.72

 

 

Stock Options

A summary of stock option activity under the Plan for the nine months ended September 27, 2019 is presented below:

 

 

 

Stock

Options

(in 000’s)

 

 

Minimum

Exercise

Price

 

 

Maximum

Exercise

Price

 

Outstanding at December 28, 2018

 

 

3,920

 

 

 

 

 

 

 

 

 

Granted

 

 

818

 

 

 

 

 

 

 

 

 

Exercised

 

 

(190

)

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(23

)

 

 

 

 

 

 

 

 

Outstanding at September 27, 2019

 

 

4,525

 

 

$

3.50

 

 

$

43.84

 

Exercisable at September 27, 2019

 

 

3,104

 

 

 

 

 

 

 

 

 

 

16


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 11 — Stockholders’ Equity (Continued)

Restricted Stock and Restricted Stock Units

A summary of restricted stock and RSU activity under the Plan for the nine months ended September 27, 2019 is presented below:

 

 

 

Restricted

Stock

(in 000’s)

 

 

Restricted

Stock

Units

(in 000’s)

 

Unvested at December 28, 2018

 

 

11

 

 

 

322

 

Granted

 

 

11

 

 

 

19

 

Vested

 

 

(11

)

 

 

(210

)

Forfeited or expired

 

 

 

 

 

(6

)

Unvested at September 27, 2019

 

 

11

 

 

 

125

 

 

Note 12 - Commitments and Contingencies

Litigation and Claims

From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business.  These legal proceedings and other matters may relate to, among other things, contractual rights and obligations, employment matters, or claims of product liability.  STAAR maintains insurance coverage for various matters, including product liability and certain securities claims.  While the Company does not believe that any of the claims known is likely to have a material adverse effect on the Company’s financial condition or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.

Employment Agreements

The Company’s Chief Executive Officer entered into an employment agreement with the Company, effective March 1, 2015. She and certain officers have as provisions of their agreements certain rights, including continuance of cash compensation and benefits, upon a “change in control,” which may include an acquisition of substantially all its assets, or termination “without cause or for good reason” as defined in the employment agreements.

17


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 13 — Basic and Diluted Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands except per share amounts):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,388

 

 

$

1,459

 

 

$

7,669

 

 

$

3,872

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

44,573

 

 

 

43,065

 

 

 

44,436

 

 

 

42,076

 

Less:  Unvested restricted stock

 

 

(10

)

 

 

(11

)

 

 

(10

)

 

 

(11

)

Denominator for basic calculation

 

 

44,563

 

 

 

43,054

 

 

 

44,426

 

 

 

42,065

 

Weighted average effects of potentially diluted common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

2,194

 

 

 

2,686

 

 

 

2,260

 

 

 

2,245

 

Unvested restricted stock

 

 

2

 

 

 

4

 

 

 

6

 

 

 

12

 

Restricted stock units

 

 

98

 

 

 

281

 

 

 

156

 

 

 

296

 

Denominator for diluted calculation

 

 

46,857

 

 

 

46,025

 

 

 

46,848

 

 

 

44,618

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.03

 

 

$

0.17

 

 

$

0.09

 

Diluted

 

$

0.05

 

 

$

0.03

 

 

$

0.16

 

 

$

0.09

 

 

The following table sets forth (in thousands) the weighted average number of options to purchase shares of common stock, restricted stock, and restricted stock units with either exercise prices or unrecognized compensation cost per share greater than the average market price per share of the Company’s common stock, which were not included in the calculation of diluted per share amounts because the effects would be anti-dilutive.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Stock options

 

 

1,836

 

 

 

389

 

 

 

1,446

 

 

 

278

 

Restricted stock and restricted stock units

 

 

 

 

 

 

 

 

 

 

 

1

 

Total

 

 

1,836

 

 

 

389

 

 

 

1,446

 

 

 

279

 

 

Note 14 — Disaggregation of Sales, Geographic Sales and Product Sales

In the following tables, sales are disaggregated by category, sales by geographic market and sales by product data.  The following breaks down sales into the following categories (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Non-consignment sales

 

$

34,696

 

 

$

27,503

 

 

$

98,518

 

 

$

79,345

 

Consignment sales

 

 

4,359

 

 

 

4,267

 

 

 

12,784

 

 

 

13,423

 

Total net sales

 

$

39,055

 

 

$

31,770

 

 

$

111,302

 

 

$

92,768

 

18


STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 14 — Disaggregation of Sales, Geographic Sales and Product Sales (Continued)

The Company markets and sells its products in over 75 countries and conducts its manufacturing in the United States.  Other than China and Japan, the Company does not conduct business in any country in which its sales exceed 10% of worldwide consolidated net sales. Sales are attributed to countries based on location of customers. The composition of the Company’s net sales to unaffiliated customers is set forth below (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

China

 

$

18,361

 

 

$

13,349

 

 

$

49,526

 

 

$

35,224

 

Japan

 

 

7,345

 

 

 

6,006

 

 

 

19,139

 

 

 

17,781

 

Other(1)

 

 

13,349

 

 

 

12,415

 

 

 

42,637

 

 

 

39,763

 

Total net sales

 

$

39,055

 

 

$

31,770

 

 

$

111,302

 

 

$

92,768

 

 

(1)

No other location individually exceeds 10% of the total sales.

In addition, domestic and foreign sales are as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Domestic

 

$

1,783

 

 

$

1,676

 

 

$

5,849

 

 

$

5,327

 

Foreign

 

 

37,272

 

 

 

30,094

 

 

 

105,453

 

 

 

87,441

 

Total net sales

 

$

39,055

 

 

$

31,770

 

 

$

111,302

 

 

$

92,768

 

 

100% of the Company’s sales are generated from the ophthalmic surgical product segment and the chief operating decision maker makes operating decisions and allocates resources based upon the consolidated operating results, and therefore the Company operates as one operating segment for financial reporting purposes. The Company’s principal products are implantable Collamer lenses (“ICLs”) used in refractive surgery and intraocular lenses (“IOLs”) used in cataract surgery.  The composition of the Company’s net sales by product line is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

ICLs

 

$

33,815

 

 

$

26,418

 

 

$

96,033

 

 

$

74,868

 

Other product sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IOLs

 

 

4,093

 

 

 

3,824

 

 

 

11,984

 

 

 

12,068

 

Other surgical products

 

 

1,147

 

 

 

1,528

 

 

 

3,285

 

 

 

5,832

 

Total other product sales

 

 

5,240

 

 

 

5,352

 

 

 

15,269

 

 

 

17,900

 

Total net sales

 

$

39,055

 

 

$

31,770

 

 

$

111,302

 

 

$

92,768

 

 

One customer, the Company’s distributor in China, accounted for 47% and 44% of net sales for the three and nine months ended September 27, 2019, respectively, and the same customer accounted for 42% and 38% of net sales for the three and nine months ended September 28, 2018, respectively.  As of September 27, 2019 and December 28, 2018, respectively, one customer, the Company’s distributor in China, accounted for 40% and 37% of consolidated trade receivables.

Note 15 — Reclassifications

 

Computer equipment and software was reclassified into a separate line item from furniture and fixtures in Note 4 for the fiscal year ended 2018 to conform with the 2019 presentation.

 

 

19


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The matters addressed in this Item 2 that are not historical information constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can recognize forward-looking statements by the use of words like “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe,” “will,” “should,” “forecast” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements about any of the following: any projections of or guidance as to earnings, revenue, sales, profit margins, expense rate, cash, effective tax rate, capital expense or any other financial items; the plans, strategies, and objectives of management for future operations or prospects for achieving such plans; statements regarding new, existing, or improved products, including but not limited to, expectations for success of new, existing, and improved products in the U.S. or international markets or government approval of a new or improved products (including the EVO family of lenses in the U.S. and the EDOF ICL for presbyopia internationally); commercialization of new or improved products; future economic conditions or size of market opportunities; expected costs of operations; statements of belief, including as to achieving 2019 business plans; expected regulatory activities and approvals, product launches, and any statements of assumptions underlying any of the foregoing.

Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and we can give no assurance that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described in in our Annual Report on Form 10-K in “Item 1A. Risk Factors” filed on February 21, 2019.  We undertake no obligation to update these forward-looking statements after the date of this report to reflect future events or circumstances or to reflect actual outcomes.

The following discussion should be read in conjunction with the audited consolidated financial statements of STAAR, including the related notes, provided in this report.

Overview

STAAR Surgical Company designs, develops, manufactures, and sells implantable lenses for the eye and companion delivery systems used to deliver the lenses into the eye. We are the world’s leading manufacturer of intraocular lenses for patients seeking refractive vision correction, and we also make lenses for use in surgery to treat cataracts. All the lenses we make are foldable, which allows the surgeon to insert them into the eye through a small incision during minimally invasive surgery. Refractive surgery is performed to treat the type of visual disorders that have traditionally been corrected using eyeglasses or contact lenses. We refer to our lenses used in refractive surgery as “implantable Collamer® lenses” or “ICLs.” The field of refractive surgery includes both lens-based procedures, using products like our ICL family of products, and laser-based procedures like LASIK. Successful refractive surgery can correct common vision disorders such as myopia, hyperopia, and astigmatism. Cataract surgery is a common outpatient procedure where the eye’s natural lens that has become cloudy with age is removed and replaced with an artificial lens called an intraocular lens (IOL) to restore the patient’s vision. STAAR employs a commercialization strategy that strives for sustainable profitable growth. Our goal is to position our refractive lenses throughout the world as primary and premium solutions for patients seeking visual freedom from wearing eyeglasses or contact lenses while achieving excellent visual acuity through refractive vision correction. We position our IOL lenses used in surgery that treats cataracts based on quality and value.

 

Recent Developments

We achieved record sales for our third quarter and all-time record cash generation in the third quarter.  We believe the results through the first three quarters of 2019 put us on track to achieve the growth targets of 20% annual top line revenue growth, 30% ICL unit growth, positive cash flow, and higher GAAP net income than 2018, as we disclosed earlier this year for fiscal 2019. Subsequent to the end of the quarter we received a letter from FDA dated October 25, 2019 approving our supplement seeking approval for the clinical trial for our EVO family of lenses in the U.S.  The letter included a few additional study design recommendations which we are working to include in the study protocol.  We are responding to FDA within a week or so.  We continue to qualify study sites and expect our timelines will not be impacted as we work to close out the study design including FDA’s recommendations.

Critical Accounting Policies

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited Condensed Consolidated Financial Statements provided in this report, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses,

20


 

and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.

An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. On December 29, 2018 (beginning of fiscal year 2019), the Company adopted Accounting Standards Update 2016-02, “Leases (Topic 842)” and its subsequent amendments, the impact of this new accounting standard are discussed in Notes 1 and 8 of the Condensed Consolidated Financial Statements.  Other than the adoption of Topic 842, management believes that there have been no significant changes during the nine months ended September 27, 2019 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 28, 2018.

Results of Operations

The following table shows the percentage of our total sales represented by certain items reflected in our Condensed Consolidated Statements of Income for the periods indicated.

 

 

 

Percentage of Net Sales

for Three Months

 

 

Percentage of Net Sales

for Six Months

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

September 27,

2019

 

 

September 28,

2018

 

Net sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of sales

 

 

25.6

%

 

 

24.9

%

 

 

25.3

%

 

 

26.1

%

Gross profit

 

 

74.4

%

 

 

75.1

%

 

 

74.7

%

 

 

73.9

%

General and administrative

 

 

18.2

%

 

 

19.2

%

 

 

19.3

%

 

 

19.5

%

Marketing and selling

 

 

31.9

%

 

 

33.4

%

 

 

30.8

%

 

 

31.0

%

Research and development

 

 

15.8

%

 

 

17.5

%

 

 

16.1

%

 

 

17.6

%

Total selling, general and administrative

 

 

65.9

%

 

 

70.1

%

 

 

66.2

%

 

 

68.1

%

Operating income

 

 

8.5

%

 

 

5.0

%

 

 

8.5

%

 

 

5.8

%

Total other income (expense), net

 

 

(0.5

)%

 

 

0.7

%

 

 

0.5

%

 

 

(0.1

)%

Income before income taxes

 

 

8.0

%

 

 

5.7

%

 

 

9.0

%

 

 

5.7

%

Provision for income taxes

 

 

1.9

%

 

 

1.1

%

 

 

2.1

%

 

 

1.6

%

Net income

 

 

6.1

%

 

 

4.6

%

 

 

6.9

%

 

 

4.1

%

 

Net Sales

 

 

 

Three Months Ended

 

 

Percentage

Change

 

 

Nine Months Ended

 

 

Percentage

Change

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

ICLs

 

$

33,815

 

 

$

26,418

 

 

 

28.0

%

 

$

96,033

 

 

$

74,868

 

 

 

28.3

%

Other product sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IOLs

 

 

4,093

 

 

 

3,824

 

 

 

7.0

%

 

 

11,984

 

 

 

12,068

 

 

 

(0.7

)%

Other surgical products

 

 

1,147

 

 

 

1,528

 

 

 

(24.9

)%

 

 

3,285

 

 

 

5,832

 

 

 

(43.7

)%

Total other product sales

 

 

5,240

 

 

 

5,352

 

 

 

(2.1

)%

 

 

15,269

 

 

 

17,900

 

 

 

(14.7

)%

Net sales

 

$

39,055

 

 

$

31,770

 

 

 

22.9

%

 

$

111,302

 

 

$

92,768

 

 

 

20.0

%

 

Net sales for the three months ended September 27, 2019 were $39.1 million, an increase of 23% from $31.8 million reported during the same period of 2018.  The increase in net sales was due to an increase in ICL sales of $7.4 million.

Net sales for the nine months ended September 27, 2019 were $111.3 million, an increase of 20% from $92.8 million reported during the same period of 2018.  The increase in net sales was due to an increase in ICL sales of $21.2 million, partially offset by a decrease in other product sales of $2.6 million.  Foreign currency, primarily the euro, negatively impacted net sales by approximately $1.3 million for the nine months ended September 27, 2019.

21


 

Total ICL sales for the three months ended September 27, 2019 were $33.8 million, a 28% increase from $26.4 million reported for the same period of 2018, with unit growth up 35%. The sales increase was driven by the APAC region, which grew 37% with unit growth of 43%, primarily due to sales growth in China up 38%, Japan up 63%, Korea up 33% and other APAC distributors up 19%, partially offset by decreased sales in India of 14%.  The Europe, Middle East, Africa and Latin America region grew 5% with unit growth up 8%, due to sales growth in Spain up 12%, Distributor Operations up 7% and Germany up 5%, partially offset by decreased sales in Latin America of 9%. The North America region grew 19%, with unit growth of 2%, primarily due to sales growth of 24% in the U.S., as a result of sales of Toric ICL in 2019 (none in 2018), partially offset by decreased sales in Canada.  ICL sales represented 86.6% and 83.2% of our total sales for the three months ended September 27, 2019 and September 28, 2018, respectively.

Total ICL sales for the nine months ended September 27, 2019 were $96.0 million, a 28% increase from $74.9 million reported for the same period of 2018, with unit growth up 36%. The sales increase was driven by the APAC region, which grew 41% with unit growth of 47%, primarily due to sales growth in Japan up 58%, China up 41%, Korea up 41%, other APAC distributors up 23% and India up 9%.  The Europe, Middle East, Africa and Latin America region increased 1% with unit growth up 6%, due primarily to sales growth in UK up 30%, Germany up 6% and Spain up 3%, partially offset by decreased sales in the Middle East and Latin America of 8%.  The North America region grew 17%, with unit growth of 2%, primarily due to sales growth of 25% in the U.S., as a result of sales of Toric ICL in 2019 (none in 2018), partially offset by decreased sales in Canada.  ICL sales represented 86.3% and 80.7% of our total sales for the nine months ended September 27, 2019 and September 28, 2018, respectively.

Other product sales, including IOLs were $5.2 million for the three months ended September 27, 2019, a decrease of 2% from $5.4 million reported for the same period of 2018.  Other product sales, including IOLs were $15.3 million for the nine months ended September 27, 2019, a decrease of 15% from $17.9 million reported for the same period of 2018.  The decrease for both periods is primarily due to the decrease in preloaded injector part sales to a third-party manufacturer for product they sell to their customers, and for the three months ended September 27, 2019, partially offset by an increase in IOL sales.  Other product sales represented 13.4% and 16.8% of our total sales for the three months ended September 27, 2019 and September 28, 2018, respectively and represented 13.7% and 19.3% of our total sales for the nine months ended September 27, 2019 and September 28, 2018, respectively.

Gross Profit

 

 

 

Three Months Ended

 

 

Percentage

Change

 

 

Nine Months Ended

 

 

Percentage

Change

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

Gross profit

 

$

29,051

 

 

$

23,860

 

 

 

21.8

%

 

$

83,130

 

 

$

68,518

 

 

 

21.3

%

Gross margin

 

 

74.4

%

 

 

75.1

%

 

 

 

 

 

 

74.7

%

 

 

73.9

%

 

 

 

 

 

Gross profit for the three months ended September 27, 2019 was $29.1 million, a 21.8% increase compared to the $23.9 million reported for the same period of 2018.  Gross profit margin decreased to 74.4% of revenue for the three months ended September 27, 2019 compared to 75.1% of revenue for the three months ended September 28, 2018, due to period expenses incurred in the construction of new manufacturing facilities intended to satisfy growing demand for existing products and products currently under review by regulatory agencies.  The gross margin impact of lower average selling prices was more than offset by the favorable impact of improved product mix.

Gross profit for the nine months ended September 27, 2019 was $83.1 million, a 21.3% increase compared to the $68.5 million reported for the same period of 2018.  Gross profit margin increased to 74.7% of revenue for the nine months ended September 27, 2019 compared to 73.9% of revenue for the nine months ended September 28, 2018, due to increased sales of ICLs and decreased sales of injector parts resulting in favorable product mix, partially offset by the effect of lower average selling prices and period expenses incurred in the construction of new manufacturing facilities, as discussed above.

General and Administrative Expense

 

 

 

Three Months Ended

 

 

Percentage

Change

 

 

Nine Months Ended

 

 

Percentage

Change

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

General and administrative expense

 

$

7,098

 

 

$

6,087

 

 

 

16.6

%

 

$

21,443

 

 

$

18,054

 

 

 

18.8

%

Percentage of sales

 

 

18.2

%

 

 

19.2

%

 

 

 

 

 

 

19.3

%

 

 

19.5

%

 

 

 

 

22


 

 

General and administrative expenses for the three months ended September 27, 2019 were $7.1 million, an increase of 16.6% when compared with $6.1 million reported for same period of 2018. General and administrative expenses for the nine months ended September 27, 2019 were $21.4 million, an increase of 18.8% when compared with $18.1 million reported for same period of 2018.  The increase in general and administrative expenses for both periods was due to an increase in headcount and salary-related expenses including stock-based compensation, and increased facility costs and professional fees.

Marketing and Selling Expense

 

 

 

Three Months Ended

 

 

Percentage

Change

 

 

Nine Months Ended

 

 

Percentage

Change

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

Marketing and selling expense

 

$

12,463

 

 

$

10,620

 

 

 

17.4

%

 

$

34,288

 

 

$

28,733

 

 

 

19.3

%

Percentage of sales

 

 

31.9

%

 

 

33.4

%

 

 

 

 

 

 

30.8

%

 

 

31.0

%

 

 

 

 

 

Marketing and selling expenses for the three months ended September 27, 2019 were $12.5 million, an increase of 17.4% when compared with $10.6 million reported for same period of 2018. Marketing and selling expenses for the nine months ended September 27, 2019 were $34.3 million, an increase of 19.3% when compared with $28.7 million reported for same period of 2018.   The increase in marketing and selling expenses for both periods was due our continued investments in digital, strategic and consumer marketing, and for the nine months ended September 27, 2019, also includes increases in headcount and salary-related expenses including stock-based compensation, and travel expenses.

Research and Development Expense

 

 

 

Three Months Ended

 

 

Percentage

Change

 

 

Nine Months Ended

 

 

Percentage

Change

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

Research and development expense

 

$

6,156

 

 

$

5,570

 

 

 

10.5

%

 

$

17,889

 

 

$

16,323

 

 

 

9.6

%

Percentage of sales

 

 

15.8

%

 

 

17.5

%

 

 

 

 

 

 

16.1

%

 

 

17.6

%

 

 

 

 

 

Research and development expenses for the three months ended September 27, 2019 were $6.2 million, an increase of 10.5% compared to $5.6 million for the for same period of 2018. Research and development expenses for the nine months ended September 27, 2019 were $17.9 million, an increase of 9.6% compared to $16.3 million for the for same period of 2018.  The increase for the three months ended September 27, 2019 was primarily due to an increase in expenses related to clinical trial activities.  The increase for the nine months ended September 27, 2019 was mainly due to increases in headcount and salary-related expenses including stock-based compensation, and expenses related to clinical trial activities.

Other Income (Expense), Net

 

 

 

Three Months Ended

 

 

Percentage

Change

 

 

Nine Months Ended

 

 

Percentage

Change

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

Other income (expense), net

 

$

(186

)

 

$

222

 

 

 

—*

 

 

$

539

 

 

$

(84

)

 

 

—*

 

Percentage of sales

 

 

-0.5

%

 

 

0.7

%

 

 

 

 

 

 

0.5

%

 

 

-0.1

%

 

 

 

 

 

 

*

Denotes change is greater than +100%.

Other expense, net for the three months ended September 27, 2019 was $0.2 million compared to other income of $0.2 million reported for the same period of 2018.  The decrease in other expense, net was mainly due to the increase in foreign exchange losses (primarily the euro), offset by an increase in interest income earned on cash and cash equivalents.  Other income, net for the nine months ended September 27, 2019 was $0.5 million, an increase from other expense, net of $0.1 million reported for the same period of 2018.  The increase in other income, net was due to an increase in interest income earned on cash and cash equivalents, offset by an increase in foreign exchange losses (primarily the euro).  

23


 

Income Taxes

 

 

 

Three Months Ended

 

 

Percentage

Change

 

 

Nine Months Ended

 

 

Percentage

Change

 

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

 

September 27,

2019

 

 

September 28,

2018

 

 

2019 vs. 2018

 

Income tax provision

 

$

760

 

 

$

346

 

 

 

—*

 

 

$

2,380

 

 

$

1,452

 

 

 

63.9

%

 

 

*

Denotes change is greater than +100%.

 

The provision for income taxes is determined using an estimated annual effective tax rate.  We recorded income taxes of $0.8 million and $2.4 million for the three and nine months ended September 27, 2019, respectively and $0.3 million and $1.5 million for the three and nine months ended September 28, 2018, respectively.  The income tax provision was due primarily to pre-tax income generated in certain foreign jurisdictions.  We have no unrecognized tax benefits pertaining to any uncertain tax positions as of any period presented. 

For the three and nine months ended September 27, 2019, we included Global Intangible Low Tax Income (“GILTI”) of $4.4 million and $12.1 million, respectively, in U.S. gross income, which was fully offset with net operating loss carryforwards.  We were not able to utilize the deduction of 50 percent of GILTI, as this deduction is limited to the Company’s U.S. taxable income.

Due to our history of losses in the U.S., we have maintained a full valuation allowance to offset the value of our U.S. net deferred tax assets on our balance sheet as of September 27, 2019, with the exception of the remaining refundable alternative minimum tax credit of $0.3 million.  However, global profit is now includable in U.S. income under GILTI and as a result we have reported income in the U.S. in fiscal year 2018.  As our global profitability improves, including our ability to meet or exceed forecasts, we will continue to reassess at each reporting period the need for a full or partial valuation allowance on our U.S. net deferred tax assets.  We determine the need for a valuation allowance based upon all available positive and negative evidence, including reversals of deferred tax liabilities, projected future taxable income, impact of GILTI in the U.S., tax planning strategies, and results of recent operations. If it is more likely than not that the deferred tax asset is realizable, we would record an income tax benefit for all or a portion of the valuation allowance in the period in which such determination is made.  Any such changes in the assessment of a full or partial valuation allowance could have a material impact on earnings.  The valuation allowance was approximately $39.8 million as of September 27, 2019.

Liquidity and Capital Resources

We believe our current cash balances coupled with cash flows from operating activities is expected to be adequate to cover our operational and business needs through at least the next 12 months.  Our financial condition at September 27, 2019 and December 28, 2018 included the following (in millions):

 

 

 

September 27, 2019

 

 

December 28,

2018

 

 

2019 vs.

2018

 

Cash and cash equivalents

 

$

112.3

 

 

$

103.9

 

 

$

8.4

 

Current assets

 

$

165.0

 

 

$

151.6

 

 

$

13.4

 

Current liabilities

 

 

30.0

 

 

 

27.7

 

 

 

2.3

 

Working capital

 

$

135.0

 

 

$

123.9

 

 

$

11.1

 

 

We invest the net proceeds in short-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.  Additionally, at September 27, 2019, we have a line of credit with a Japanese lender, in the amount of $4.6 million, with $2.3 million of availability and a line of credit with a Swiss lender, in the amount of $1.0 million, which is fully available for borrowing.

Net cash provided by operating activities was $16.0 million and $10.4 million for the nine months ended September 27, 2019 and September 28, 2018, respectively.  Net cash provided by operating activities for the nine months ended September 27, 2019, consisted of $13.0 million in non-cash items and $7.7 million in net income, offset by $4.7 million in working-capital changes.  The increase in net cash provided by operating activities during the nine months ended September 27, 2019 was due to an increase in net income of $3.8 million and an increase of $3.6 million in non-cash items offset by a decrease in net working capital of $1.8 million.

Net cash used in investing activities was $7.2 million and $1.7 million for the nine months ended September 27, 2019 and September 28, 2018, respectively, and relate primarily to the acquisition of property, plant, and equipment.  The increase

24


 

in investment in property, plant and equipment during 2019, relative to 2018, is primarily due to investments in manufacturing facilities intended to satisfy growing demand for our products.

Net cash used in financing activities was $0.7 million for the nine months ended September 27, 2019 and net cash provided by financing activities was $75.1 million for the nine months ended September 28, 2018.  Net cash used in financing activities for the nine months ended September 27, 2019 consisted of $1.5 million repayment on the Japan line of credit and $1.0 million repayment of finance lease obligations, offset by $1.8 million of proceeds from the exercise of stock options.  During the nine months ended September 28, 2018, we closed an offering of our common stock and received $72.2 million.

Credit Facilities and Commitments

Lines of Credit and Leases

See Notes 7 and 8 of the accompanying Condensed Consolidated Financial Statements.

Covenant Compliance

The Company is in compliance with the covenants of its credit facilities as of September 27, 2019.

Employment Agreements

The Company’s Chief Executive Officer entered into an employment agreement with the Company, effective March 1, 2015.  She and certain officers have as provisions of their agreements certain rights, including continuance of cash compensation and benefits, upon a “change in control,” which may include an acquisition of substantially all of its assets, or termination “without cause or for good reason” as defined in the employment agreements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as that term is defined in the rules of the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

25


 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the nine months ended September 27, 2019, there have been no material changes in the Company’s qualitative and quantitative market risk since the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 28, 2018.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of the disclosure controls and procedures of the Company.  Based on that evaluation, our CEO and CFO concluded, as of the end of the period covered by this quarterly report on Form 10-Q, that our disclosure controls and procedures were effective.  For purposes of this statement, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, including the CEO and the CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud or material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, our internal control system can provide only reasonable assurance of achieving its objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and can provide only reasonable, not absolute, assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, or the degree of compliance with the policies and procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 27, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business.  These legal proceedings and other matters may relate to, among other things, contractual rights and obligations, employment matters, or claims of product liability.  STAAR maintains insurance coverage for various matters, including product liability and certain securities claims.  While we do not believe that any of the claims known is likely to have a material adverse effect on our financial condition or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.

ITEM 1A.

RISK FACTORS

Our short and long-term success is subject to many factors that are beyond our control. Investors and prospective investors should consider carefully information contained in this report and the risks and uncertainties described in “Part I—Item 1A—Risk Factors” of the Company’s Form 10-K for the fiscal year ended December 28, 2018. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.

26


 

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

 

None.

ITEM 6.

EXHIBITS

 

   3.1

Amended and Restated Certificate of Incorporation.(1)

 

 

   3.2

Amended and Restated Bylaws.(2)

 

 

   4.1

Form of Certificate for Common Stock, par value $0.01 per share.(3)

 

 

 †4.2

Amended and Restated Omnibus Equity Incentive Plan.(4)

 

 

 31.1

Certifications Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 31.2

Certifications Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 32.1

Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

 

 

 101

Financial statements from the quarterly report on Form 10-Q of STAAR Surgical Company for the quarter ended September 27, 2019, formatted in Inline Extensible Business Reporting Language (iXBRL), are filed herewith and include: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text.*

 

 

 104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2019, has been formatted in Inline XBRL with applicable taxonomy extension information contained in Exhibit 101.

 

(1)

Incorporated by reference to Appendix 2 of the Company’s Proxy Statement on Form DEF 14A as filed with the Commission on April 13, 2018

(2)

Incorporated by reference to Appendix 3 of the Company’s Proxy Statement on Form DEF 14A as filed with the Commission on April 13, 2018.

(3)

Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Company’s Registration Statement on Form 8‑A/A as filed with the Commission on April 18, 2003.

(4)

Incorporated by reference to Appendix 1 of the Company’s Proxy Statement on Form DEF 14A as filed with the Commission on April 13, 2018.

*

Filed herewith.

**

Furnished herewith.

Management contract or compensatory plan.

27


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

STAAR SURGICAL COMPANY

 

 

 

 

 

 

Dated:

 

October 30, 2019

By:

 

/s/ DEBORAH J. ANDREWS

 

 

 

 

 

Deborah J. Andrews

 

 

 

 

 

Chief Financial Officer

 

 

 

 

 

(on behalf of the Registrant and as its principal financial officer)

 

28