NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
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 and nine months ended September 28, 2018 and September 29, 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 and nine months ended September 28, 2018
and September 29, 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):
|
|
September 28,
2018
|
|
|
December 29,
2017
|
|
|
September 29,
2017
|
|
Cash and cash equivalents
|
|
$
|
102,195
|
|
|
$
|
18,520
|
|
|
$
|
16,133
|
|
Restricted cash included in other long-term assets
|
|
|
121
|
|
|
|
121
|
|
|
|
120
|
|
Total cash, cash equivalents and restricted cash as shown in the Consolidated Statements of Cash Flows
|
|
$
|
102,316
|
|
|
$
|
18,641
|
|
|
$
|
16,253
|
|
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“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 (UNAUDITED) (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, 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:
|
|
September 28,
2018
|
|
|
December 29,
2017
|
|
Estimated returns - inventory
(1)
|
|
$
|
678
|
|
|
$
|
534
|
|
Allowance for sales returns
|
|
|
2,802
|
|
|
|
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.
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 September 28, 2018 or September 29, 2017, as delivery
to the customer is generally made within the same or the next day of shipment.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
Note 1 — Basis of Presentation and Significant Accounting
Policies (Continued)
Revenue (Continued)
The Company also enters
into certain strategic cooperation agreements with customers in which, as consideration for certain commitments made by the customer,
including minimum purchase commitments, 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 or payments can be made directly to a third party for distinct marketing, educational training and general support
services provided to or on behalf of the customer by the third 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 strategic cooperation agreements are generally for periods of 12 months or more 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 September 28, 2018 or September 29, 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 on consigned inventory
and recognizes revenue for consignment inventory at a point-in-time when the Company is notified that the lenses have been implanted,
thus completing the performance obligation.
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; royalty income was as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
Royalty income
(1)
|
|
$
|
159
|
|
|
$
|
141
|
|
|
$
|
465
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Shown as a separate line item in other income, net on the Condensed Consolidated Statements
of Operations.
|
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 and nine months ended September 28, 2018 or September 29, 2017, respectively.
See Note 9 for additional
information on disaggregation of revenues, geographic sales information and product sales.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
Note 1 — Basis of Presentation and Significant Accounting
Policies (Continued)
Revenue (Continued)
The following table summarizes
the impact of adopting Topic 606 on the Company’s Condensed Consolidated Balance Sheets for September 28, 2018 (in 000’s)
(see also Note 14):
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances
without the
adoption of
606
|
|
Accounts receivable trade, net
|
|
$
|
23,732
|
|
|
$
|
(2,802
|
)
|
|
$
|
20,930
|
|
Total current assets
|
|
|
147,297
|
|
|
|
(2,802
|
)
|
|
|
144,495
|
|
Total assets
|
|
|
162,988
|
|
|
|
(2,802
|
)
|
|
|
160,186
|
|
Allowance for sales returns
|
|
|
2,802
|
|
|
|
(2,802
|
)
|
|
|
—
|
|
Total current liabilities
|
|
|
27,540
|
|
|
|
(2,802
|
)
|
|
|
24,738
|
|
Total liabilities
|
|
|
34,124
|
|
|
|
(2,802
|
)
|
|
|
31,322
|
|
Total liabilities and stockholders’ equity
|
|
|
162,988
|
|
|
|
(2,802
|
)
|
|
|
160,186
|
|
Recently Adopted Accounting Pronouncements
On December 30, 2017 (beginning
of FY 2018), the Company adopted 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, see Note 7 for additional information.
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.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
Note 1 — Basis of Presentation and Significant Accounting
Policies (Continued)
Recent Accounting Pronouncements Not Yet
Adopted (Continued)
In July 2018, the FASB
issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which narrows aspects of the guidance issued
in ASU 2016-02 including those regarding residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification,
lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax
credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain
transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance
for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance
for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial
direct costs on rate implicit in the lease, and failed sale and leaseback transactions.
Also, in July 2018, the
FASB issued ASU 2018-11, “Leases (Topic 842): Targeted improvements,” which provide an additional and optional transition
method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard
at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which
it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases).
The Company is nearing
the completion of its assessment and is performing a final review of its evaluation of the new standard. The Company elected to
use the practical expedients of not assessing expired contracts, using current lease classification and not assessing any initial
direct costs. The Company has also elected not to capitalize leases that have terms less than 12 months. The Company will initially
apply the new standard on December 29, 2018 (beginning of Fiscal Year 2019) and recognize a cumulative-effect adjustment to the
opening balance of retained earnings. The Company does not believe the adoption of the new standard will result in a material adjustment
to beginning retained earnings. The Company is still evaluating the effects on its financial statement disclosures.
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.
In June 2018, the FASB
issued 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. 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 2018-07 will have
on its Condensed Consolidated Financial Statements.
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.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (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):
|
|
September 28,
2018
|
|
|
December 29,
2017
|
|
Raw materials and purchased parts
|
|
$
|
2,586
|
|
|
$
|
2,506
|
|
Work in process
|
|
|
2,755
|
|
|
|
1,996
|
|
Finished goods
|
|
|
12,247
|
|
|
|
11,533
|
|
|
|
|
17,588
|
|
|
|
16,035
|
|
Less inventory reserves
|
|
|
1,408
|
|
|
|
2,361
|
|
Total
|
|
$
|
16,180
|
|
|
$
|
13,674
|
|
Note 3 — Prepayments, Deposits, and Other Current
Assets
Prepayments, deposits, and other current
assets consisted of the following (in thousands):
|
|
September 28,
2018
|
|
|
December 29,
2017
|
|
Prepayments and deposits
|
|
$
|
2,039
|
|
|
$
|
1,435
|
|
Prepaid insurance
|
|
|
529
|
|
|
|
943
|
|
Consumption tax receivable
|
|
|
764
|
|
|
|
541
|
|
Value added tax (VAT) receivable
|
|
|
1,198
|
|
|
|
910
|
|
Other current assets
(1)
|
|
|
660
|
|
|
|
378
|
|
Total
|
|
$
|
5,190
|
|
|
$
|
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):
|
|
September 28,
2018
|
|
|
December 29,
2017
|
|
Machinery and equipment
|
|
$
|
18,607
|
|
|
$
|
16,562
|
|
Furniture and fixtures
|
|
|
9,853
|
|
|
|
9,201
|
|
Leasehold improvements
|
|
|
9,883
|
|
|
|
9,631
|
|
|
|
|
38,343
|
|
|
|
35,394
|
|
Less accumulated depreciation
|
|
|
26,881
|
|
|
|
25,618
|
|
Total
|
|
$
|
11,462
|
|
|
$
|
9,776
|
|
Note 5 –Intangible Assets
Intangible assets, net consisted of the following
(in thousands):
|
|
September 28, 2018
|
|
|
December 29, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Long-lived amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses
|
|
$
|
9,240
|
|
|
$
|
(8,996
|
)
|
|
$
|
244
|
|
|
$
|
9,244
|
|
|
$
|
(8,973
|
)
|
|
$
|
271
|
|
Customer relationships
|
|
|
1,381
|
|
|
|
(1,381
|
)
|
|
|
—
|
|
|
|
1,392
|
|
|
|
(1,392
|
)
|
|
|
—
|
|
Developed technology
|
|
|
878
|
|
|
|
(878
|
)
|
|
|
—
|
|
|
|
885
|
|
|
|
(885
|
)
|
|
|
—
|
|
Total
|
|
$
|
11,499
|
|
|
$
|
(11,255
|
)
|
|
$
|
244
|
|
|
$
|
11,521
|
|
|
$
|
(11,250
|
)
|
|
$
|
271
|
|
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
Note 6 – Other Current Liabilities
Other current liabilities
consisted of the following (in thousands):
|
|
September 28,
2018
|
|
|
December 29,
2017
|
|
Accrued salaries and wages
|
|
$
|
3,792
|
|
|
$
|
2,407
|
|
Accrued insurance
|
|
|
33
|
|
|
|
565
|
|
Accrued consumption tax
|
|
|
820
|
|
|
|
446
|
|
Accrued income taxes
|
|
|
1,121
|
|
|
|
210
|
|
Accrued bonuses
|
|
|
3,408
|
|
|
|
2,026
|
|
Other
(1))
|
|
|
1,761
|
|
|
|
1,685
|
|
Total
|
|
$
|
10,935
|
|
|
$
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
Service cost
(1)
|
|
$
|
137
|
|
|
$
|
128
|
|
|
$
|
414
|
|
|
$
|
386
|
|
Interest cost
(2)
|
|
|
15
|
|
|
|
14
|
|
|
|
44
|
|
|
|
42
|
|
Expected return on plan assets
(2)
|
|
|
(28
|
)
|
|
|
(24
|
)
|
|
|
(82
|
)
|
|
|
(71
|
)
|
Net amortization of transitional obligation
(2),(3)
|
|
|
3
|
|
|
|
3
|
|
|
|
8
|
|
|
|
9
|
|
Prior service credit
(2),(3)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
(17
|
)
|
|
|
(6
|
)
|
Actuarial loss recognized in current period
(2),(3)
|
|
|
28
|
|
|
|
17
|
|
|
|
85
|
|
|
|
52
|
|
Net periodic pension cost
|
|
$
|
149
|
|
|
$
|
136
|
|
|
$
|
452
|
|
|
$
|
412
|
|
|
(1)
|
Recognized in selling general and administrative expenses on the Condensed Consolidated Statements
of Operations.
|
|
(2)
|
For 2018, recognized in other income (expense), net, and for 2017, recognized in selling, general
and administrative on the Condensed Consolidated Statements of Operations.
|
|
(3)
|
Amounts reclassified from accumulated other comprehensive loss.
|
The Company currently
is not required to and does not make contributions to its Japan pension plan. The Company’s contributions to its Swiss pension
plan are as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
Employer contribution
|
|
$
|
80
|
|
|
$
|
66
|
|
|
$
|
225
|
|
|
$
|
197
|
|
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (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
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,459
|
|
|
$
|
1,173
|
|
|
$
|
3,872
|
|
|
$
|
(2,001
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
43,065
|
|
|
|
41,131
|
|
|
|
42,076
|
|
|
|
40,960
|
|
Less: Unrestricted stock
|
|
|
(11
|
)
|
|
|
(21
|
)
|
|
|
(11
|
)
|
|
|
(21
|
)
|
Denominator for basic calculation
|
|
|
43,054
|
|
|
|
41,110
|
|
|
|
42,065
|
|
|
|
40,939
|
|
Weighted average effects of potentially dilutive common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,686
|
|
|
|
837
|
|
|
|
2,245
|
|
|
|
—
|
|
Unvested restricted stock
|
|
|
4
|
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
Restricted stock units
|
|
|
281
|
|
|
|
157
|
|
|
|
296
|
|
|
|
—
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted calculation
|
|
|
46,025
|
|
|
|
42,104
|
|
|
|
44,618
|
|
|
|
40,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.09
|
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.09
|
|
|
$
|
(0.05
|
)
|
Because the Company had
a net loss for the nine months ended September 29, 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
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
Options
|
|
|
389
|
|
|
|
1,545
|
|
|
|
278
|
|
|
|
2,497
|
|
Restricted stock and restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
159
|
|
Total
|
|
|
389
|
|
|
|
1,545
|
|
|
|
279
|
|
|
|
2,656
|
|
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
|
|
|
Nine Months Ended
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28, 2018
|
|
|
September 29,
2017
|
Non-consignment sales
|
|
$
|
27,503
|
|
|
$
|
19,590
|
|
|
$
|
79,345
|
|
|
$
|
53,432
|
|
Consignment sales
|
|
|
4,267
|
|
|
|
3,883
|
|
|
|
13,423
|
|
|
|
12,327
|
|
Total net sales
|
|
|
31,770
|
|
|
|
23,473
|
|
|
|
92,768
|
|
|
|
65,759
|
|
Royalty income
(1)
|
|
|
159
|
|
|
|
141
|
|
|
|
465
|
|
|
|
400
|
|
Total revenues
|
|
$
|
31,929
|
|
|
$
|
23,614
|
|
|
$
|
93,233
|
|
|
$
|
66,159
|
|
(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 (UNAUDITED) (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
and Japan, the Company does not conduct business in any country in which its sales exceed 10% of worldwide consolidated net sales.
Sales are attributed to countries based on location of customers. The composition of the Company’s net sales to unaffiliated
customers is set forth below (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
China
|
|
$
|
13,349
|
|
|
$
|
7,397
|
|
|
$
|
35,224
|
|
|
$
|
18,069
|
|
Japan
|
|
|
6,006
|
|
|
|
4,633
|
|
|
|
17,781
|
|
|
|
12,849
|
|
Other
(1)
|
|
|
12,415
|
|
|
|
11,443
|
|
|
|
39,763
|
|
|
|
34,841
|
|
Total revenues
|
|
$
|
31,770
|
|
|
$
|
23,473
|
|
|
$
|
92,768
|
|
|
$
|
65,759
|
|
(1)
|
|
No other location individually exceeds 10% of the total sales.
|
In
addition, domestic and foreign sales are as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
Domestic
|
|
$
|
1,676
|
|
|
$
|
1,896
|
|
|
$
|
5,327
|
|
|
$
|
5,946
|
|
Foreign
|
|
|
30,094
|
|
|
|
21,577
|
|
|
|
87,441
|
|
|
|
59,813
|
|
Total revenues
|
|
$
|
31,770
|
|
|
$
|
23,473
|
|
|
$
|
92,768
|
|
|
$
|
65,759
|
|
100%
of the Company’s sales are generated from the ophthalmic surgical product segment and the chief operating decision maker
makes operating decisions and allocates resources based upon the consolidated operating results, and therefore the Company operates
as one operating segment for financial reporting purposes. The Company’s principal products are implantable Collamer lenses
(“ICLs”) used in refractive surgery and intraocular lenses (“IOLs”) used in cataract surgery. The composition
of the Company’s net sales by product line is as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
ICLs
|
|
$
|
26,418
|
|
|
$
|
18,110
|
|
|
$
|
74,868
|
|
|
$
|
49,698
|
|
Other product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IOLs
|
|
|
3,824
|
|
|
|
3,892
|
|
|
|
12,068
|
|
|
|
12,875
|
|
Other surgical products
|
|
|
1,528
|
|
|
|
1,471
|
|
|
|
5,832
|
|
|
|
3,186
|
|
Total other product sales
|
|
|
5,352
|
|
|
|
5,363
|
|
|
|
17,900
|
|
|
|
16,061
|
|
Total net sales
|
|
$
|
31,770
|
|
|
$
|
23,473
|
|
|
$
|
92,768
|
|
|
$
|
65,759
|
|
One customer, our distributor
in China, accounted for 42% and 38% of net sales for the three and nine months ended September 28, 2018, respectively, and the
same customer accounted for 32% and 27% of net sales for the three and nine months ended September 29, 2017, respectively. As of
September 28, 2018 and December 29, 2017, respectively, one customer, our distributor in China, accounted for 36% and 24% of consolidated
trade receivables.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
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
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
Employee stock options
|
|
$
|
1,197
|
|
|
$
|
443
|
|
|
$
|
2,713
|
|
|
$
|
1,204
|
|
Restricted stock
|
|
|
82
|
|
|
|
50
|
|
|
|
192
|
|
|
|
136
|
|
Restricted stock units
|
|
|
501
|
|
|
|
314
|
|
|
|
1,593
|
|
|
|
845
|
|
Nonemployee stock options
|
|
|
247
|
|
|
|
—
|
|
|
|
428
|
|
|
|
—
|
|
Total
|
|
$
|
2,027
|
|
|
$
|
807
|
|
|
$
|
4,926
|
|
|
$
|
2,185
|
|
The
Company recorded stock-based compensation costs in the following categories on the accompanying Condensed Consolidated Statements
of Operations (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
Cost of sales
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
11
|
|
|
$
|
6
|
|
General and administrative
|
|
|
701
|
|
|
|
377
|
|
|
|
1,875
|
|
|
|
1,035
|
|
Marketing and selling
|
|
|
471
|
|
|
|
214
|
|
|
|
1,297
|
|
|
|
558
|
|
Research and development
|
|
|
851
|
|
|
|
214
|
|
|
|
1,743
|
|
|
|
586
|
|
Total stock-based compensation expense
|
|
|
2,027
|
|
|
|
807
|
|
|
|
4,926
|
|
|
|
2,185
|
|
Amounts capitalized as part of inventory
|
|
|
182
|
|
|
|
107
|
|
|
|
449
|
|
|
|
269
|
|
Total stock-based compensation
|
|
$
|
2,209
|
|
|
$
|
914
|
|
|
$
|
5,375
|
|
|
$
|
2,454
|
|
Stock
Option Plan
Our 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 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). Restricted stock grants under the Plan generally vest
over a period between one to three years. As of September 28, 2018, there were 2,488,237 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
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
|
September 28,
2018
|
|
|
September 29,
2017
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
53
|
%
|
|
|
57
|
%
|
|
|
53
|
%
|
|
|
57
|
%
|
Risk-free interest rate
|
|
|
2.84
|
%
|
|
|
1.83
|
%
|
|
|
2.71
|
%
|
|
|
1.95
|
%
|
Expected term (in years)
|
|
|
5.72
|
|
|
|
5.67
|
|
|
|
5.72
|
|
|
|
5.67
|
|
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
Note 10 — Stock-Based Compensation
(Continued)
A summary of option
activity under the Plan for the quarter ended September 28, 2018 is presented below:
|
|
Option
Shares
(000’s)
|
|
Outstanding at December 29, 2017
|
|
|
3,725
|
|
Granted
|
|
|
805
|
|
Exercised
|
|
|
(524
|
)
|
Forfeited or expired
|
|
|
(27
|
)
|
Outstanding at September 28, 2018
|
|
|
3,979
|
|
Exercisable at September 28, 2018
|
|
|
2,584
|
|
As of September 28, 2018, exercise prices
of outstanding stock options ranged between $0.95 and $39.90 per share.
A summary of restricted
stock and RSU activity under the Plan for the quarter ended September 28, 2018 is presented below:
|
|
Restricted
Shares
(000’s)
|
|
|
Restricted
Units
(000’s)
|
|
Outstanding at December 29, 2017
|
|
|
21
|
|
|
|
488
|
|
Granted
|
|
|
11
|
|
|
|
49
|
|
Vested
|
|
|
(21
|
)
|
|
|
(185
|
)
|
Forfeited or expired
|
|
|
—
|
|
|
|
(8
|
)
|
Outstanding at September 28, 2018
|
|
|
11
|
|
|
|
344
|
|
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 $346,000 and $1,452,000 for the three and nine months ended September 28, 2018, respectively, and $410,000
and $697,000 for the three and nine months ended September 29, 2017, respectively, 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 foreign withholding and U.S. income 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. income 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. federal 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 (UNAUDITED) (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 September 28, 2018) plus
a 0.50% spread, and may be renewed quarterly (the current line expires on November 21, 2018). The credit facility is
not collateralized. The Company had 472,500,000 Yen and 500,000,000 Yen outstanding on the line of credit as of September
28, 2018 and December 29, 2017, respectively (approximately $4,162,000 and $4,438,000 based on the foreign exchange rates on September
28, 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 September 28,
2018 there was 27,500,000 Yen (approximately $242,000) available for borrowing and as of December 29, 2017 there were no available
borrowings under the line. At maturity on November 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 September 28, 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 September 28, 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 September 28,
2018, approximately $392,000 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 September 28, 2018, approximately $1,044,000 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 September 28, 2018 and December 29, 2017, approximately $330,000 and $1,067,000, respectively, was outstanding on
this capital lease.
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
Note 12 - Commitments and Contingencies (Continued)
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 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 – Stockholders’
Equity
On August 10, 2018,
the Company closed an offering of its common stock. As part of this transaction, the Company issued 1,999,850 shares of its common
stock at a price of $36.309 per share. Net proceeds, after deducting expenses, received from this offering were $72,150,000. The
Company intends to use the net proceeds of this offering to fund operations, which may include advancing and broadening commercialization
of its ICL family of products, funding pipeline research and development activities and clinical trials, funding incremental investments
in automation and precision manufacturing, and capital expenditures, such as information systems, and for general corporate purposes,
including working capital. The Company has not yet determined the amounts on any of the areas listed above or the timing of these
expenditures. The Company invests 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.
Note 14 — 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, see Note 1.
Certain compensation
related expenses were reclassified from General and Administrative to Marketing and Selling and Research and Development line items
on the Condensed Consolidated Statements of Operations for the three and nine months ended September 29, 2017 to conform with 2018
presentation.