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 DriveLake 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.
INDEX
PAGE
NUMBER
PART I – FINANCIAL INFORMATION
1
ITEM 1
FINANCIAL STATEMENTS
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
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
MINE SAFETY DISCLOSURES
27
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
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
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
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
471
459
4,003
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
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
Nine Months Ended
September 27,
2019
September 28,
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
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
0.16
Weighted average shares outstanding:
44,563
43,054
44,426
42,065
46,857
46,025
46,848
44,618
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive loss:
Defined benefit plans:
Net change in plan assets
(1,037
(21
(1,677
(51
Reclassification into other income, net
25
80
76
Foreign currency translation gain (loss)
(22
(321
317
(114
Tax effect
115
105
38
Other comprehensive loss, net of tax
(918
(212
(1,200
Comprehensive income
1,470
1,247
6,469
3,821
3
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Stock Shares
Stock Par
Value
Additional
Paid-In
Capital
Accumulated
Other
Compre-
hensive
Income
(Loss)
Deficit
Total
Balance, at June 28, 2019
44,534
445
296,063
(1,602
(150,571
144,335
Other comprehensive loss
Common stock issued upon exercise of options
64
718
719
Stock-based compensation
2,816
Vested restricted stock
8
Balance, at September 27, 2019
44,606
Balance, at June 29, 2018
41,877
419
210,488
(989
(158,835
51,083
Proceeds from public stock offering
2,000
72,130
72,150
219
2,173
2,175
2,209
Balance, at September 28, 2018
44,104
441
287,000
(1,201
(157,376
128,864
4
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
Balance, at December 28, 2018
44,195
Adoption of ASC 842
113
Adoption of ASU 2018-07
(315
315
190
1,827
1,829
8,501
Unvested restricted stock
11
210
Balance, at December 29, 2017
41,383
414
204,920
(1,150
(161,248
42,936
Proceeds from public offering of stock
525
5
4,575
4,580
5,375
185
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
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
526
363
Change in net pension liability
264
233
Loss on disposal of property and equipment
14
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
546
2,121
(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
Cash flows from financing activities:
Repayment of finance lease obligations
(998
(1,396
Repayment on line of credit
(1,512
(251
Proceeds from the exercise of stock options
Proceeds from vested restricted stock
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
102,316
6
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):
102,195
Restricted cash(1)
122
121
Total cash, cash equivalents and restricted cash
(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
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.
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):
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
Note 3 — Prepayments, Deposits, and Other Current Assets
Prepayments, deposits, and other current assets consisted of the following (in thousands):
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
No individual item in “other current assets” exceeds 5% of the total prepayments, deposits and other current assets.
9
Note 4 — Property, Plant and Equipment
Property, plant and equipment, net consisted of the following (in thousands):
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
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):
December 28, 2018
Long-lived amortized intangible assets
Gross
Carrying
Amount
Amortization
Net
Patents and licenses
9,301
(9,049
9,257
(9,014
Note 6 – Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
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
2,277
1,624
Total other current liabilities
No individual item in “Other” exceeds 5% of the other current liabilities.
10
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):
1,885
923
102
Finance lease right-of-use assets, gross
2,937
931
Total finance lease liability
1,223
Weighted-average remaining lease term (in years)
1.4
Weighted-average discount rate
6.27
%
Note 8 – Leases (Continued)
Finance Leases (Continued)
Supplemental cash flow information related to finance leases consisted of the following (dollars in thousands):
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
Financing cash flows
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):
813
462
Real property
10,634
Operating lease right-of-use assets, gross
11,909
5,232
Total operating lease liability
6,792
2.4
1.79
Supplemental cash flow information related to operating leases was as follows (dollars in thousands):
Operating lease cost
726
2,020
Cash paid for amounts included in the measurement of operating lease liabilities:
739
2,031
Right-of-use assets obtained in exchange for new operating lease liabilities
140
2,797
12
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
September 2020
2,920
790
September 2021
1,833
426
September 2022
1,082
45
September 2023
867
September 2024
319
Thereafter
Total minimum lease payments, including interest
7,021
1,273
Less amounts representing interest
229
50
Total minimum lease payments
As of December 28, 2018
December 2019
2,606
1,153
December 2020
2,202
332
December 2021
980
143
December 2022
507
December 2023
202
6,509
1,632
75
1,557
13
Note 9 — Income Taxes
The Company recorded an income tax provision as follows (in thousands):
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.
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):
Service cost(1)
240
137
720
Interest cost(2)
15
60
44
Expected return on plan assets(2)
(36
(28
(103
(82
Net amortization of transitional obligation(2),(3)
Prior service credit(2),(3)
(6
(17
Actuarial loss recognized in current period(2),(3)
32
28
97
85
Net periodic pension cost
250
149
757
452
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):
Employer contribution
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):
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
The Company recorded stock-based compensation costs in the following categories (in thousands):
701
2,878
1,875
692
2,553
1,297
777
851
2,304
1,743
Total stock-based compensation expense, net
Amounts capitalized as part of inventory
258
182
723
449
Total stock-based compensation expense, gross
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.
Expected dividend yield
0
Expected volatility
53
Risk-free interest rate
1.55
2.84
2.40
2.71
Expected term (in years)
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
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
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
Units
Unvested at December 28, 2018
322
19
Vested
(11
(210
Unvested at September 27, 2019
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.
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):
Numerator:
Denominator:
Weighted average common shares:
Common shares outstanding
44,573
43,065
44,436
42,076
Less: Unvested restricted stock
(10
Denominator for basic calculation
Weighted average effects of potentially diluted common stock:
Stock options
2,194
2,686
2,260
2,245
98
281
156
296
Denominator for diluted calculation
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.
1,836
389
1,446
278
Restricted stock and restricted stock units
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):
Non-consignment sales
34,696
27,503
98,518
79,345
Consignment sales
4,359
4,267
12,784
13,423
Total net sales
18
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):
China
18,361
13,349
49,526
35,224
Japan
7,345
6,006
19,139
17,781
12,415
42,637
39,763
No other location individually exceeds 10% of the total sales.
In addition, domestic and foreign sales are as follows (in thousands):
Domestic
1,783
1,676
5,849
5,327
Foreign
37,272
30,094
105,453
87,441
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):
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
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.
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,
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
for Six Months
100.0
25.6
24.9
25.3
26.1
74.4
75.1
74.7
73.9
18.2
19.2
19.3
19.5
31.9
33.4
30.8
31.0
15.8
17.5
16.1
17.6
Total selling, general and administrative
65.9
70.1
66.2
68.1
8.5
5.0
5.8
(0.5
)%
0.7
0.5
(0.1
8.0
5.7
9.0
1.9
1.1
2.1
1.6
6.1
4.6
6.9
4.1
Net Sales
Percentage
Change
2019 vs. 2018
28.0
28.3
7.0
(0.7
(24.9
(43.7
(2.1
(14.7
22.9
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
21.8
21.3
Gross margin
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
General and administrative expense
16.6
18.8
Percentage of sales
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
Marketing and selling expense
17.4
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
Research and development expense
10.5
9.6
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
Other income (expense), net
—*
-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
Income tax provision
63.9
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):
2019 vs.
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.
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.
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.
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.
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.
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.
Not Applicable.
None.
3.1
Amended and Restated Certificate of Incorporation.(1)
3.2
Amended and Restated Bylaws.(2)
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
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.
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
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.
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.
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.
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)