NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 Comprehensive Financial Statements have been condensed or omitted pursuant to such
rules and regulations. The Consolidated Balance Sheet as of December 29, 2017 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 29, 2017.
The Condensed Consolidated
Financial Statements for the three months ended March 30, 2018 and March 31, 2017, 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 months ended March 30, 2018 and March 31, 2017, 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):
|
|
March 30, 2018
|
|
|
December 29, 2017
|
|
|
March 31, 2017
|
|
Cash and cash equivalents
|
|
$
|
20,771
|
|
|
$
|
18,520
|
|
|
$
|
13,500
|
|
Restricted cash included in other long-term assets
|
|
|
121
|
|
|
|
121
|
|
|
|
119
|
|
Total cash, cash equivalents and restricted cash as shown in the Consolidated Statements of Cash Flows
|
|
$
|
20,892
|
|
|
$
|
18,641
|
|
|
$
|
13,619
|
|
The Company has restricted
cash of approximately $121,000 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.
Revenue
On December 30, 2017 (beginning
of FY 2018), the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and its subsequent
amendments: (i) ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”;
(ii) ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing;”
(iii) ASU No. 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance
Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”;
(iv) ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”;
and (v) ASU No. 2016-20, “Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements to Topic
606”, using the modified retrospective method, and determined that there was no cumulative effect adjustment on the Consolidated
Financial Statements. The Company determined that the adoption of the new standard did not materially impact the revenue recognition
on its Consolidated Financial Statements.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 1 — Basis of Presentation and Significant Accounting
Policies (Continued)
Revenue (Continued)
The Company recognizes
revenue when its contractual performance obligations with customers are satisfied. The Company’s performance obligations
are generally limited to single sales orders with product shipping to the customer within a month of receipt of the sales order.
Substantially all of the Company’s revenues are recognized at a point-in-time when control of its products transfers to the
customer, which is typically upon shipment (as discussed below). The Company presents sales tax and similar taxes it collects from
its customers on a net basis (excluded from revenues).
The Company sells
certain injector parts to an unrelated customer and supplier (collectively referred to as “supplier”) whereby these
injector part sales are either made as a final sale to the supplier or, are sold to be combined with an acrylic IOL by the supplier
into finished goods inventory (a preloaded acrylic IOL). These finished goods are then sold back to the Company at an agreed upon,
contractual price. The Company makes a profit margin on either type of sale with the supplier and each type of sale is made under
separate purchase and sales orders between the two parties resulting in cash settlement for the orders sold or repurchased. For
parts that are sold as a final sale, the Company recognizes a sale and those sales are classified as other product sales in total
net sales. For the injector parts that are sold to be combined with an acrylic IOL into finished goods, the Company records the
transaction at its carrying value deferring any profit margin as contra-inventory, until the finished goods inventory is sold
to an end-customer (not the supplier) at which point the Company recognizes revenues.
For all sales, the
Company is considered the principal in the transaction as the Company is the party providing specified goods it has control over
prior to when control is transferred to the customer. Cost of sales includes cost of production, freight and distribution, royalties,
and inventory provisions, net of any purchase discounts. Shipping and handling activities that occur after the customer obtains
control of the goods are recognized as fulfillment costs.
The Company generally
permits returns of product if the product is returned within the time allowed by its return policies and records an allowance for
estimated returns at the time revenue is recognized. The Company’s allowance for estimated returns considers historical trends
and experience, the impact of new product launches, the entry of a competitor, availability of timely and pertinent information
and the various terms and arrangements offered, including sales with extended credit terms. For estimated returns, sales are reported
net of estimated returns and cost of sales are reported net of estimated returns that can be resold. On the Condensed Consolidated
Balance Sheets, the balances associated for estimated sales returns are as follows:
|
|
March 30, 2018
|
|
|
December 29, 2017
|
|
Estimated returns - inventory
(1)
|
|
$
|
631
|
|
|
$
|
534
|
|
Allowance for sales returns
|
|
|
2,685
|
|
|
|
2,546
|
|
|
(1)
|
Recognized in inventories, net on the Condensed Consolidated
Balance Sheets
|
The Company performs
ongoing credit evaluations of its customers and adjusts credit limits based on customer payment history and credit worthiness,
as determined by the Company’s review of its customers’ current credit information. The Company continuously monitors
collections and payments from customers and maintains a provision for estimated credit losses and uncollectible accounts based
upon its historical experience and any specific customer collection issues that have been identified. Amounts determined to be
uncollectible are written off against the allowance for doubtful accounts.
The Company disaggregates
its revenue into the following categories: non-consignment sales, consignment sales and royalty income.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 1 — Basis of Presentation and Significant Accounting
Policies (Continued)
Revenue (Continued)
Non-consignment Sales
The Company recognizes
revenue from non-consignment product sales at a point-in-time when control has been transferred, which is typically at shipping
point, except for certain customers and for the STAAR Japan subsidiary, which is typically recognized when the customer receives
the product. The Company does not have significant deferred revenues as of March 30, 2018 or March 31, 2017, as delivery to the
customer is generally made within the same or the next day of shipment.
The Company also enters
into certain strategic cooperation agreements with customers in which, as consideration for minimum purchase commitments the customers
make, the Company agrees, among other things, to pay for marketing, educational training and general support of the Company’s
products. The provisions in these arrangements allow for these payments to be made directly to the customer in lieu of marketing
and support or, payments can be made for distinct marketing, educational training and general support services provided by the
customer or another party. For payments the Company makes to another party, or reimburses the customer, for distinct marketing
and support services, the Company recognizes these payments as sales and marketing expense as incurred. These agreements are generally
for periods of 12 months with quarterly minimum purchase commitments. The Company recognizes sales and marketing expenses in the
period in which it expects the customer will achieve its minimum purchase commitment, generally quarterly, and any unpaid amounts
are recorded in Other Current Liabilities in “Other” on the Condensed Consolidated Statements of Operations, see Note
6. Reimbursements made directly to the customer for general marketing incentives are treated as a reduction in revenues. The Company’s
performance obligations generally occur in the same quarter as the shipment of product.
Since the payments
for distinct or non-distinct services occur within the quarter corresponding with the purchases made by the customer and the shipments
made by the Company to that customer, there is no remaining performance obligation by the Company to the customer. Accordingly,
there are no deferred revenues associated with these types of arrangements as of March 30, 2018 and March 31, 2017.
Consignment Sales
The Company’s
products are marketed to ophthalmic surgeons, hospitals, ambulatory surgery centers or vision centers, and distributors. IOLs
and ICLs may be offered to surgeons and hospitals on a consignment basis. The Company maintains title and risk of loss of consigned
inventory and recognizes revenue for consignment inventory at a point-in-time when the Company is notified that the lenses have
been implanted, and so the performance obligation occurs at a point in time.
Royalty Income
From time to time,
the Company licenses its patents to third parties in connection with the manufacture of product. One type of licensing contract
requires that the licensee pay the Company a quarterly royalty based on a percentage of the licensee’s quarterly sales.
The Company recognizes the revenue at a point-in-time, typically quarterly based on various factors including information from
the licensee, historical performance and contract minimums. Another type of licensing contract requires that the licensee pay
the Company a lump sum royalty once certain milestones are achieved, such as upon the first commercial sale of a product incorporating
a licensed patent or technology (performance obligation occurs over a period of time); no such income was recognized for the three
months ended March 30, 2018 and March 31, 2017.
See Note 9 for additional
information on disaggregation of revenues, geographic sales information and product sales.
The following table summarizes
the impact of adopting Topic 606 on the Company’s Condensed Consolidated Financial Statements for March 30, 2018:
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances without the adoption of 606
|
|
Accounts receivable trade, net
|
|
$
|
22,960
|
|
|
$
|
(2,685
|
)
|
|
$
|
20,275
|
|
Total current assets
|
|
|
62,111
|
|
|
|
(2,685
|
)
|
|
|
59,426
|
|
Total assets
|
|
|
78,292
|
|
|
|
(2,685
|
)
|
|
|
75,607
|
|
Allowance for sales returns
|
|
|
2,685
|
|
|
|
(2,685
|
)
|
|
|
—
|
|
Total current liabilities
|
|
|
25,596
|
|
|
|
(2,685
|
)
|
|
|
22,911
|
|
Total liabilities
|
|
|
32,375
|
|
|
|
(2,685
|
)
|
|
|
29,690
|
|
Total liabilities and stockholders’ equity
|
|
|
78,292
|
|
|
|
(2,685
|
)
|
|
|
75,607
|
|
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 1 — Basis of Presentation and Significant Accounting
Policies (Continued)
Recently Adopted Accounting
Pronouncements
On December 30, 2017
(beginning of FY 2018), the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update
(“ASU”) 2017-09 “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,”
which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes
to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting
under ASC 718. The adoption of ASU 2017-09 did not have a material impact on the Condensed Consolidated Financial Statements.
On December 30, 2017
(beginning of FY 2018), the Company adopted ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The standard requires that an employer report
the service cost component in the same line items as other compensation costs arising from services rendered by the pertinent
employees during the period. The other components of net benefit cost are required to be presented in the income statement separately
from the service cost component and outside of operating profit. The adoption of ASU 2017-09 did not have a material impact on
the Condensed Consolidated Financial Statements, however the Company reclassified the non-service component of net periodic pension
costs from selling, general and administrative expense to other income, net, for the three months ended March 31, 2017 to confirm
with current presentation.
On December 30, 2017
(beginning of FY 2018), the Company adopted ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other
Than Inventory”, which removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income
tax effects of intra-entity transfers of assets other than inventory, using the modified retrospective method, and determined that
there was no cumulative effect adjustment on the Consolidated Financial Statements. The adoption of ASU 2016-16 did not have a
material impact on the Condensed Consolidated Financial Statements.
On December 30, 2017
(beginning of FY 2018), the Company adopted ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments” (“ASU 2016-15”), which clarifies how companies present and classify certain
cash receipts and cash payments in the statement of cash flows. The adoption of ASU 2016-15 did not have a material impact on
the Condensed Consolidated Financial Statements.
Recent Accounting Pronouncements Not Yet
Adopted
In February 2016,
the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires lessees to recognize assets and liabilities for leases
with lease terms greater than twelve months in the statement of financial position. Leases will be classified as either finance
or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 also requires
improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising
from leases. The update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within
that reporting period. Early adoption is permitted. The Company is gathering data to evaluate the impact the adoption of ASU 2016-02
may have on its Condensed Consolidated Financial Statements and expects to complete the evaluation by the third quarter of 2018.
In February 2018,
the FASB issued 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. This is effective for fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt this standard as of December
29, 2018 (beginning of Fiscal Year 2019) and is currently evaluating the impact on ASU 2018-02 will have on its Condensed Consolidated
Financial Statements.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
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):
|
|
March 30,
2018
|
|
|
December 29,
2017
|
|
Raw materials and purchased parts
|
|
$
|
2,485
|
|
|
$
|
2,506
|
|
Work in process
|
|
|
2,451
|
|
|
|
1,996
|
|
Finished goods
|
|
|
10,566
|
|
|
|
11,533
|
|
|
|
|
15,502
|
|
|
|
16,035
|
|
Less inventory reserves
|
|
|
2,058
|
|
|
|
2,361
|
|
Total
|
|
$
|
13,444
|
|
|
$
|
13,674
|
|
Note 3 — Prepayments, Deposits, and Other Current
Assets
Prepayments, deposits, and other current assets
consisted of the following (in thousands):
|
|
March, 30,
2018
|
|
|
December 29,
2017
|
|
Prepayments and deposits
|
|
$
|
2,121
|
|
|
$
|
1,435
|
|
Prepaid insurance
|
|
|
743
|
|
|
|
943
|
|
Income tax receivable
|
|
|
108
|
|
|
|
181
|
|
Consumption tax receivable
|
|
|
253
|
|
|
|
541
|
|
Value added tax (VAT) receivable
|
|
|
723
|
|
|
|
910
|
|
BVG Prepayment
|
|
|
634
|
|
|
|
10
|
|
Other current assets
(1)
|
|
|
354
|
|
|
|
187
|
|
Total
|
|
$
|
4,936
|
|
|
$
|
4,207
|
|
(1)
No individual
item in “other current assets” exceeds 5% of the total prepayments, deposits and other current assets.
Note 4 — Property, Plant and Equipment
Property, plant and equipment, net consisted
of the following (in thousands):
|
|
March 30,
2018
|
|
|
December 29,
2017
|
|
Machinery and equipment
|
|
$
|
18,490
|
|
|
$
|
16,562
|
|
Furniture and fixtures
|
|
|
9,453
|
|
|
|
9,201
|
|
Leasehold improvements
|
|
|
9,678
|
|
|
|
9,631
|
|
|
|
|
37,621
|
|
|
|
35,394
|
|
Less accumulated depreciation
|
|
|
25,765
|
|
|
|
25,618
|
|
Total
|
|
$
|
11,856
|
|
|
$
|
9,776
|
|
Note 5 — Intangible Assets
Intangible assets, net consisted of the following
(in thousands):
|
|
March 30, 2018
|
|
|
December 29, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Long-lived amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses
|
|
$
|
9,281
|
|
|
$
|
(9,003
|
)
|
|
$
|
278
|
|
|
$
|
9,244
|
|
|
$
|
(8,973
|
)
|
|
$
|
271
|
|
Customer relationships
|
|
|
1,476
|
|
|
|
(1,476
|
)
|
|
|
—
|
|
|
|
1,392
|
|
|
|
(1,392
|
)
|
|
|
—
|
|
Developed technology
|
|
|
938
|
|
|
|
(938
|
)
|
|
|
—
|
|
|
|
885
|
|
|
|
(885
|
)
|
|
|
—
|
|
Total
|
|
$
|
11,695
|
|
|
$
|
(11,417
|
)
|
|
$
|
278
|
|
|
$
|
11,521
|
|
|
$
|
(11,250
|
)
|
|
$
|
271
|
|
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 6 — Other Current Liabilities
Other current liabilities
consisted of the following (in thousands):
|
|
March 30,
2018
|
|
|
December 29,
2017
|
|
Accrued salaries and wages
|
|
$
|
4,410
|
|
|
$
|
2,407
|
|
Accrued insurance
|
|
|
384
|
|
|
|
565
|
|
Accrued consumption tax
|
|
|
321
|
|
|
|
446
|
|
Accrued income taxes
|
|
|
184
|
|
|
|
210
|
|
Accrued bonuses
|
|
|
1,328
|
|
|
|
2,026
|
|
Other
(1)
|
|
|
1,443
|
|
|
|
1,685
|
|
Total
|
|
$
|
8,070
|
|
|
$
|
7,339
|
|
(1)
No individual
item in “Other” exceeds 5% of the other current liabilities.
Note 7 — 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
|
|
|
|
March 30,
2018
|
|
|
March 31,
2017
|
|
Service cost
(1)
|
|
$
|
138
|
|
|
$
|
129
|
|
Interest cost
(2)
|
|
|
14
|
|
|
|
14
|
|
Expected return on plan assets
(2)
|
|
|
(26
|
)
|
|
|
(23
|
)
|
Net amortization of transitional obligation
(2),(3)
|
|
|
3
|
|
|
|
3
|
|
Prior service credit
(2),(3)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
Actuarial loss recognized in current period
(2),(3)
|
|
|
28
|
|
|
|
17
|
|
Net periodic pension cost
|
|
$
|
151
|
|
|
$
|
138
|
|
(1)
Recognized
in selling general and administrative expenses on the Condensed Consolidated Statements of Operations.
(2)
Recognized
in other income, net on the Condensed Consolidated Statements of Operations.
(3)
Amounts
reclassified from accumulated other comprehensive loss.
During the three months
ended March 30, 2018 and March 31, 2017, the Company contributions were $66,000 and $64,000, respectively, to its Swiss pension
plan. The Company currently is not required to and does not make contributions to its Japan pension plan.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 8 — Basic and Diluted
Net Income (Loss) Per Share
The following table sets
forth the computation of basic and diluted net income (loss) per share (in thousands except per share amounts):
|
|
Three Months Ended
|
|
|
|
March 30,
2018
|
|
|
March 31,
2017
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
583
|
|
|
$
|
(2,203
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares and denominator for basic calculation:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
41,431
|
|
|
|
40,772
|
|
Less: Unvested restricted stock
|
|
|
(21
|
)
|
|
|
(23
|
)
|
Denominator for basic calculation
|
|
|
41,410
|
|
|
|
40,749
|
|
Weighted average effects of potentially dilutive common stock:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,396
|
|
|
|
—
|
|
Unvested restricted stock
|
|
|
264
|
|
|
|
—
|
|
Restricted stock units
|
|
|
17
|
|
|
|
—
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted calculation
|
|
|
43,087
|
|
|
|
40,749
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
Net income (loss) per share – diluted
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
Because the Company
had a net loss for the quarter ended March 31, 2017, the number of diluted shares is equal to the number of basic shares. Outstanding
options and warrants to purchase common stock, restricted stock and restricted stock units would have had an anti-dilutive effect
on diluted per share amounts.
The following table sets forth (in thousands) the weighted average number of options and warrants 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
|
|
|
|
March 30,
2018
|
|
|
March 31,
2017
|
|
Options
|
|
$
|
385
|
|
|
$
|
2,567
|
|
Restricted stock and restricted stock units
|
|
|
4
|
|
|
|
146
|
|
Total
|
|
$
|
389
|
|
|
$
|
2,713
|
|
Note 9 — Disaggregation of Revenues,
Geographic Sales and Product Sales
In the following tables,
revenues are disaggregated by category, sales by geographic market and sales by product data. The following breaks down revenues
into the following categories (in thousands):
|
|
Three Months Ended
|
|
|
|
March 30,
2018
|
|
|
March 31,
2017
|
|
Non-consignment sales
|
|
$
|
22,181
|
|
|
$
|
15,756
|
|
Consignment sales
|
|
|
4,912
|
|
|
|
4,594
|
|
Total net sales
|
|
|
27,093
|
|
|
|
20,350
|
|
Royalty income
(1)
|
|
|
157
|
|
|
|
131
|
|
Total revenues
|
|
$
|
27,250
|
|
|
$
|
20,481
|
|
|
(1)
|
Shown as a separate line item in other income, net on the Condensed
Consolidated Statements of Operations.
|
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 9 — Disaggregation of Revenues,
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,
Japan, the United States and Korea, 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
|
|
|
|
March 30,
2018
|
|
|
March 31,
2017
|
|
China
|
|
$
|
7,910
|
|
|
$
|
4,626
|
|
Japan
|
|
|
5,083
|
|
|
|
3,799
|
|
Korea
|
|
|
2,195
|
|
|
|
1,426
|
|
United States
|
|
|
1,756
|
|
|
|
1,958
|
|
Other
(1)
|
|
|
10,149
|
|
|
|
8,541
|
|
Total net sales
|
|
$
|
27,093
|
|
|
$
|
20,350
|
|
(1)
No other
location individually exceeds 10% of the total sales.
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
|
|
|
|
March 30,
2018
|
|
|
March 31,
2017
|
|
ICls
|
|
$
|
21,158
|
|
|
$
|
15,271
|
|
Other product sales
|
|
|
|
|
|
|
|
|
IOLs
|
|
|
4,058
|
|
|
|
4,606
|
|
Other surgical products
|
|
|
1,877
|
|
|
|
473
|
|
Total other product sales
|
|
|
5,935
|
|
|
|
5,079
|
|
Total net sales
|
|
$
|
27,093
|
|
|
$
|
20,350
|
|
One customer, our distributor in China, accounted
for 29% and 23% of net sales for the three ended March 30, 2018 and March 31, 2017, respectively. As of March 30, 2018 and December
29, 2017, respectively, one customer, our distributor in China, accounted for 31% and 24% of consolidated trade receivables.
Note 10 — Stock-Based Compensation
The
cost that has been charged against income for stock-based compensation is set forth below (in thousands):
|
|
Three Months Ended
|
|
|
|
March 30,
2018
|
|
|
March 31,
2017
|
|
Employee stock options
|
|
$
|
619
|
|
|
$
|
268
|
|
Restricted stock
|
|
|
51
|
|
|
|
40
|
|
Restricted stock units
|
|
|
598
|
|
|
|
202
|
|
Nonemployee stock options
|
|
|
33
|
|
|
|
—
|
|
Total
|
|
$
|
1,301
|
|
|
$
|
510
|
|
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 10 — Stock-Based Compensation
(Continued)
The
Company recorded stock-based compensation costs in the following categories on the accompanying Condensed Consolidated Statements
of Operations (in thousands):
|
|
Three Months Ended
|
|
|
|
March 30,
2018
|
|
|
March 31,
2017
|
|
Cost of sales
|
|
$
|
3
|
|
|
$
|
2
|
|
General and administrative
|
|
|
519
|
|
|
|
264
|
|
Marketing and selling
|
|
|
460
|
|
|
|
116
|
|
Research and development
|
|
|
319
|
|
|
|
128
|
|
Total stock-based compensation expense
|
|
|
1,301
|
|
|
|
510
|
|
Amounts capitalized as part of inventory
|
|
|
122
|
|
|
|
52
|
|
Total stock-based compensation
|
|
$
|
1,423
|
|
|
$
|
562
|
|
Stock
Option Plan
Our Amended and Restated
2013 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,
restricted stock units (“RSUs”), and performance contingent stock units. Options under the plan are granted at fair
market value on the date of grant, become exercisable over a three-year period, or as determined by our 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
under certain circumstances in the event of a change in control (as defined in the Plan). Pursuant to the Plan, options for 4,070,281
shares were outstanding at March 30, 2018 with exercise prices ranging between $0.95 and $17.62 per share. Restricted stock grants
under the Plan generally vest over a period between one to three years. There were 21,143 shares of restricted stock and 379,901
RSUs outstanding at March 30, 2018. As of March 30, 2018, there were 653,076 shares available for grants 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 11%
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
|
|
|
|
March 30,
2018
|
|
|
March 31,
2017
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
53
|
%
|
|
|
57
|
%
|
Risk-free interest rate
|
|
|
2.61
|
%
|
|
|
1.96
|
%
|
Expected term (in years)
|
|
|
5.72
|
|
|
|
5.67
|
|
A summary of option activity
under the Plan for the quarter ended March 30, 2018 is presented below:
|
|
Option
Shares
(000’s)
|
|
Outstanding at December 29, 2017
|
|
|
3,725
|
|
Granted
|
|
|
412
|
|
Exercised
|
|
|
(56
|
)
|
Forfeited or expired
|
|
|
(11
|
)
|
Outstanding at March 30, 2018
|
|
|
4,070
|
|
Exercisable at March 30, 2018
|
|
|
2,793
|
|
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 10 — Stock-Based Compensation
(Continued)
A summary of restricted
stock and RSU activity under the Plan for the quarter ended March 30, 2018 is presented below:
|
|
Restricted
Shares
(000’s)
|
|
|
Restricted
Units
(000’s)
|
|
Outstanding at December 29, 2017
|
|
|
21
|
|
|
|
488
|
|
Granted
|
|
|
—
|
|
|
|
47
|
|
Vested
|
|
|
—
|
|
|
|
(152
|
)
|
Forfeited or expired
|
|
|
—
|
|
|
|
(3
|
)
|
Outstanding at March 30, 2018
|
|
|
21
|
|
|
|
380
|
|
Note 11 — Income Taxes
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.
The Company recorded an
income tax provision of $301,000 for the three months ended March 31, 2018 and $141,000 for the three months ended March 31, 2017
primarily due to pre-tax income generated in certain foreign jurisdictions. There are no unrecognized tax benefits related
to uncertain tax positions taken by the Company.
For the fiscal year-ended
December 29, 2017 and prior years, the Company provided withholding and U.S. taxes on all unremitted foreign earnings, as the earnings
from the Company’s foreign subsidiaries were not considered to be permanently reinvested. Effective for the current year,
the Company no longer provides U.S. taxes on foreign earnings (see discussion below). Although foreign earnings are no longer subject
to U.S. taxation, the Company continues to provide withholding taxes related to such unremitted earnings.
U.S. Federal Income
Tax Reform
On December 22, 2017, the United States enacted major tax reform legislation. Most of the changes from
the new law are effective for years beginning after December 31, 2017 with the noted exemption of the deemed repatriation of offshore
earnings. Public Law No. 115-97, commonly referred to as the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”) put into effect
a number of changes impacting operations outside the United States including, but not limited to, the imposition of a one-time
tax “deemed repatriation” on accumulated offshore earnings not previously subject to U.S. tax, and shifts the U.S taxation
of multinational corporations from a worldwide system of taxation to a territorial system. As such, the 2017 Tax Act provides an
exemption against U.S. taxation on foreign earnings generated after December 31, 2017 and repatriated back to the U.S.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 12 — Commitments and Contingencies
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 March 30, 2018) plus a 0.50%
spread, and may be renewed quarterly (the current line expires on May 21, 2018). The credit facility is not collateralized. The
Company had 500,000,000 Yen outstanding on the line of credit as of March 30, 2018 and December 29, 2017 (approximately $4,706,000
and $4,438,000 based on the foreign exchange rates on March 30, 2018 and December 29, 2017, 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. As of March 30, 2018 and December 29, 2017, there were no available borrowings under
the line. At maturity on May 21, 2018, 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 March 30, 2018 and December 29, 2017), 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 March 30, 2018 and December 29, 2017.
Covenant Compliance
The Company is in compliance
with the covenants of its credit facilities as of the date of this filing.
Lease Line of Credit (Capital Leases)
On March 8, 2018, the
Company entered into lease schedule 011 with Farnam Street Financial, Inc. (“Farnam”). The line of credit provides
for borrowings of up to $500,000 at a lease rate factor of 3.94% per $1 for hardware equipment and 4.75% per $1 for non-hardware
equipment. Interim rent is paid until the full amount of the line is used at which time the lease commences. As of March 30, 2018,
approximately $500,000 of the line was available for borrowing.
On March 8, 2018, the
Company entered into lease schedule 010R with Farnam. Under 010R, equipment with a cost of $1,560,000 was financed over a period
of 24 months at a lease rate factor of 3.94% per $1 for hardware equipment and 4.75% per $1 for non-hardware equipment. At the
end of the lease the Company can opt to continue to rent the equipment, return the equipment, or exercise a fair market value purchase
option. As of March 30, 2018, approximately $1,497,000 was outstanding on this capital lease.
On January 31, 2017, the
Company entered into lease schedule 009R with Farnam. Under 009R, equipment with a cost of $1,957,000 was financed over a period
of 24 months at a lease rate factor of 3.94% per $1 for hardware equipment and 4.75% per $1 for non-hardware equipment. At the
end of the lease the Company can opt to continue to rent the equipment, return the equipment, or exercise a fair market value purchase
option. As of March 30, 2018 and December 29, 2017, approximately $822,000 and $1,067,000, respectively, was outstanding on this
capital lease.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
Note 12 — Commitments and Contingencies (Continued)
Litigation and Claims
From time to time the
Company may be subject to various claims and legal proceedings arising out of the normal course of our business. These claims and
legal proceedings may relate to contractual rights and obligations, employment matters, and claims of product liability. The most
significant of these actions, proceedings and investigations are described below. STAAR maintains insurance coverage for product
liability and certain securities claims. Legal proceedings can extend for several years, and most of the matters concerning the
Company are at early stages of the legal and administrative process. As a result, these matters have not yet progressed sufficiently
through discovery and/or development of important factual information and legal issues to enable the Company to determine whether
the proceedings are material to the Company or to estimate a range of possible loss, if any. Unless otherwise disclosed, the Company
is unable to estimate the possible loss or range of loss for the legal proceedings described below. While it is not possible to
accurately predict or determine outcomes of these items, an adverse determination in one or more of these items currently pending
could have a material adverse effect on the Company’s Condensed Consolidated Statements of Operations, Balance Sheets, or
Statements of Cash Flows.
Stockholder Derivative
Litigation: Forestal Action
On June 21, 2016, Kevin
Forestal filed a stockholder derivative complaint against our then-current Board of Directors, which included Caren Mason, Mark
B. Logan, Stephen C. Farrell, Richard A. Meier, John C. Moore, J. Steven Roush, Louis E. Silverman, and William P. Wall, and STAAR
as well as Barry G. Caldwell and John S. Santos in the U.S. District Court for the Central District of California. The plaintiff
alleges breaches of fiduciary duties by, among other things, allowing STAAR to disseminate misleading statements to investors regarding
the condition of the Company’s Quality System, failing to properly oversee the Company, and unjust enrichment. The complaint
seeks damages, restitution and governance reforms, attorneys’ fees, and costs. On January 31, 2017, the court granted the
Company’s Motion to Dismiss. On February 6, 2017, plaintiff filed a Notice of Appeal, and on July 17, 2017 plaintiff filed
his appellate brief. On September 14, 2017, the Company filed its appellate answering brief. The hearing before the Ninth Circuit
Court of Appeals is scheduled for June 8, 2018. Although the ultimate outcome of this action cannot be determined with certainty,
the Company believes that the allegations in the Complaint are without merit. The Company has not recorded any loss or accrual
in the accompanying Condensed Consolidated Financial Statements at March 30, 2018 and December 29, 2017 for this matter as the
likelihood and amount of loss, if any, has not been determined and is not currently estimable.
Employment Agreements
The Company’s Chief
Executive Officer 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.
Note 13 — Reclassifications
In accordance with
ASU 2014-09, in order to disclose contract assets and contract liabilities, the Company reclassified the estimated amount of inventory
expected to be returned from the allowance for sales returns to inventories, net on the Condensed Consolidated Balance Sheets.
In addition, the Company reclassified the allowance for sales returns from accounts receivable, net to a separate line item in
current liabilities on the Condensed Consolidated Balance Sheets. The Company reclassified inventory reserves from Changes in
Working Capital – Inventory in the Condensed Consolidated Statements of Cash Flows to the non-cash section of the Statement
for the three months ended March 31, 2017. In accordance with ASU 2017-7, the Company reclassified the non-service cost component
of net periodic pension costs from General and Administrative Expenses to Other Income, net on the Condensed Consolidated Statements
of Operations.