We have audited the accompanying consolidated balance sheets of STAAR Surgical Company and subsidiaries (the “Company”) as of December 28, 2018 and December 29, 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 28, 2018, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 28, 2018 and December 29, 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of
December 28, 2018
, based on criteria established in
Internal Control – Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 21, 2019 expressed an unqualified opinion thereon.
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue during the year ended December 28, 2018 due to the adoption of the Accounting Standards Codification 606, “Revenue from Contracts with Customers.”
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
—
Organization and Description of Business and Accounting Policies
Organization and Description of Business
STAAR Surgical Company and subsidiaries (the “Company”), a Delaware corporation, was first incorporated in 1982 for the purpose of developing, producing, and marketing implantable lenses for the eye and delivery systems used to deliver the lenses into the eye. Principal products are implantable Collamer lenses (“ICLs”) and intraocular lenses (“IOLs”). ICLs, consisting of the Company’s ICL family of products, including the Toric implantable Collamer lenses (“TICL”) and EVO+ Visian ICL, are intraocular lenses used to correct refractive conditions such as myopia (near-sightedness), hyperopia (far-sightedness) and astigmatism. IOLs are prosthetic intraocular lenses used to restore vision that has been adversely affected by cataracts, and include the Company’s lines of silicone and Collamer IOLs and the Preloaded Injector (a silicone or acrylic IOL preloaded into a single-use disposable injector).
As of December 28, 2018, the Company’s significant subsidiaries consisted of:
|
•
|
STAAR Surgical AG, a wholly owned subsidiary formed in Switzerland that markets and distributes ICLs and Preloaded IOLs.
|
|
•
|
STAAR Japan, a wholly owned subsidiary that markets and distributes Preloaded IOLs and ICLs.
|
The Company operates as one operating segment, the ophthalmic surgical market, for financial reporting purposes (see Note 16).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of STAAR Surgical Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to financial statements of prior years to conform to the current year presentation (see Note 18).
Fiscal Year and Interim Reporting Periods
The Company’s fiscal year ends on the Friday nearest December 31 and each of the Company’s quarterly reporting periods generally consists of 13 weeks. Fiscal years 2018, 2017 and 2016 are based on a 52-week period.
Foreign Currency
The functional currency of the Company’s Japanese subsidiary, STAAR Japan, Inc., is the Japanese yen. The functional currency of the Company’s Swiss subsidiary, STAAR Surgical AG, is the U.S. dollar.
Assets and liabilities of the Company’s Japanese subsidiary are translated at rates of exchange in effect at the close of the period. Sales and expenses are translated at the weighted average of exchange rates in effect during the period. Net foreign translation gain (loss) is as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Foreign currency translation gain
(1)
|
|
$
|
242
|
|
|
$
|
387
|
|
|
$
|
224
|
|
Gain (loss) on foreign currency transactions
(2)
|
|
|
(836
|
)
|
|
|
819
|
|
|
|
(147
|
)
|
(1)
|
Shown as a separate line item on the Consolidated Statements of Comprehensive Income (Loss).
|
(2)
|
Shown as a separate line item on the Consolidated Statements of Operations.
|
F-8
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and Description of Business and Accounting Policies (Continued)
Use of Estimates
The consolidated financial statements have been prepared in conformity with GAAP and, as such, include amounts based on significant estimates and judgments of management with consideration given to materiality. Significant estimates used include determining valuation allowances for uncollectible trade receivables, sales returns reserves, obsolete and excess inventory reserves, deferred income taxes, and tax reserves, including valuation allowances for deferred tax assets, pension liabilities, evaluation of asset impairment, in determining the useful life of depreciable and definite-lived intangible assets, and in the variables and assumptions used to calculate and record stock-based compensation. Actual results could differ materially from those estimates.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company maintains cash deposits with major banks which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows at December 28, 2018, December 29, 2017 and December 30, 2016 (in 000’s):
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
103,877
|
|
|
$
|
18,520
|
|
|
$
|
13,999
|
|
Restricted cash included in other long-term assets
|
|
|
122
|
|
|
|
121
|
|
|
|
119
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
103,999
|
|
|
$
|
18,641
|
|
|
$
|
14,118
|
|
The Company has 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.
Revenue Recognition
On December 30, 2017 (beginning of fiscal year 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. Revenue recognition for 2017 and 2016 continue to be in accordance with Topic 605.
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).
F-9
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and Description of Business and Accounting Policies (Continued)
Revenue Recognition (Continued)
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 disaggregates its revenue into the following categories: non-consignment sales and consignment sales.
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 Company’s STAAR Japan subsidiary, which is typically recognized when the customer receives the product. The Company does not have significant deferred revenues as of December 28, 2018, December 29, 2017 or December 30, 2016, 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 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 in accordance with ASC 606-10-32-25. 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 Consolidated Balance Sheets, see Note 7. 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 December 28, 2018, December 29, 2017 or December 30, 2016.
F-10
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and Description of Business and Accounting Policies (Continued)
Revenue Recognition (Continued)
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.
See Note 16 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 Balance Sheets for December 28, 2018 (in 000’s):
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances
without the
adoption of
606
|
|
Accounts receivable trade, net
|
|
$
|
25,946
|
|
|
$
|
(2,895
|
)
|
|
$
|
23,051
|
|
Total current assets
|
|
|
151,572
|
|
|
|
(2,895
|
)
|
|
|
148,677
|
|
Total assets
|
|
|
167,339
|
|
|
|
(2,895
|
)
|
|
|
164,444
|
|
Allowance for sales returns
|
|
|
2,895
|
|
|
|
(2,895
|
)
|
|
|
—
|
|
Total current liabilities
|
|
|
27,728
|
|
|
|
(2,895
|
)
|
|
|
24,833
|
|
Total liabilities
|
|
|
34,913
|
|
|
|
(2,895
|
)
|
|
|
32,018
|
|
Total liabilities and stockholders’ equity
|
|
|
167,339
|
|
|
|
(2,895
|
)
|
|
|
164,444
|
|
Allowance for Doubtful Accounts
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.
Concentration of Credit Risk and Revenues
Financial instruments that potentially subject the Company to credit risk principally consist of trade receivables. This risk is limited due to the large number of customers comprising the Company’s customer base, and their geographic dispersion. As of December 28, 2018 and December 29, 2017, there was one customer who accounted for 36% and 22% of the Company’s consolidated trade receivables, respectively. Ongoing credit evaluations of customers’ financial condition are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses, taken together, have not exceeded management’s expectations.
There was one customer who accounted for 37%, 27% and 20% of the Company’s consolidated net sales for the years ended 2018, 2017 and 2016, respectively.
F-11
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and Description of Business and Accounting Policies (Continued)
Sales Return Reserve
The Company generally may permit returns of product if the product, upon issuance of a Return Goods Authorization, 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 Consolidated Balance Sheets, the balances associated for estimated sales returns are as follows:
|
|
2018
|
|
|
2017
|
|
Estimated returns - inventory
(1)
|
|
$
|
722
|
|
|
$
|
534
|
|
Allowance for sales returns
(2)
|
|
|
2,895
|
|
|
|
2,182
|
|
(1)
|
Recognized in inventories, net on the Consolidated Balance Sheets
|
(2)
|
For 2017, recognized in accounts receivable trade, net on the Consolidated Balance Sheets
|
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value (ASC 820-10-50):
|
•
|
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
•
|
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
•
|
Level 3 – Inputs to the valuation methodology are unobservable; that reflect management’s own assumptions about the assumptions market participants would make and significant to the fair value.
|
The carrying values reflected on the Consolidated Balance Sheets for cash and cash equivalents, trade accounts receivable, net, prepayments, deposits and other current assets, accounts payable, other current liabilities and line of credit approximate their fair values because of the short maturity of these instruments.
Inventories, Net
Inventories, net are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable value. Inventories include the costs of raw material, labor, and manufacturing overhead, work in process and finished goods. Inventories also include as a contra item, deferred margins for certain injector parts described under the revenue recognition policy. The Company provides estimated inventory allowances for excess, expiring, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value to properly reflect inventory at the lower of cost or market.
F-12
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and Description of Business and Ac
counting Policies (Continued)
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Depreciation on property, plant, and equipment is computed using the straight-line method over the estimated useful lives of the assets as noted below. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related lease term. Major improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred.
The estimated useful lives of assets are as follows:
Machinery and equipment
|
|
5-10 years
|
Furniture and equipment
|
|
3-7 years
|
Computers, software, and peripherals
|
|
2-5 years
|
Leasehold improvements
|
|
The shorter of the useful life of the asset or the term of the associated lease
|
Goodwill
Goodwill, which has an indefinite life, is not amortized but instead is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at the reporting unit level. Reporting units can be one level below the operating segment level, and can be combined when reporting units within the same operating segment have similar economic characteristics. The Company has determined that its reporting units have similar economic characteristics, and therefore, can be combined into one reporting unit for the purposes of goodwill impairment testing. The Company performed its annual impairment test and determined that its goodwill was not impaired. As of December 28, 2018 and December 29, 2017, the carrying value of goodwill was $1,786,000.
Long-Lived Assets
The Company reviews property, plant, and equipment and intangible assets, excluding goodwill, 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. A review of long lived assets was conducted as of December 28, 2018 and December 29, 2017 and no impairment was identified.
Amortization is computed on the straight-line basis, which is the Company’s best estimate of the economic benefits realized over the estimated useful lives of the assets which range from 3 to 20 years for patents, certain acquired rights and licenses, 10 years for customer relationships, and 3 to 10 years for developed technology.
Vendor Concentration
As of December 28, 2018 there were no vendors which accounted for over 10% of the Company’s consolidated accounts payable. As of December 29, 2017, there was one vendor who accounted for 12% of the Company’s consolidated accounts payable. There was one vendor who accounted for 10% of the Company’s consolidated purchases for the year ended 2018. There were no vendors who accounted for over 10% of the Company’s consolidated purchases for the years ended 2017 and 2016, respectively.
F-13
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and
Description of Business and Accounting Policies (Continued)
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Advertising Costs
Advertising costs, which are included in marketing and selling expenses, are expensed as incurred, and were as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Advertising costs
|
|
$
|
8,981
|
|
|
$
|
6,102
|
|
|
$
|
6,160
|
|
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities, net operating loss and credit carryforwards, and uncertainty in income taxes, on a jurisdiction-by-jurisdiction basis. Valuation allowances, or reductions to deferred tax assets, are recognized if, based on the weight of available evidence, it is more likely than not that some portion or all the deferred tax asset may not be realized or realizable in the jurisdiction in which they arise. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period of enactment.
The Company recognizes the income tax benefit from an uncertain tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination, including resolutions of any related appeals or litigation processes. The amount of tax benefit recorded, if any, is limited to the amount that is greater than 50 percent likely to be realized upon settlement with the taxing authority (that has full knowledge of all relevant information). Accrued interest, if any, related to uncertain tax positions is included as a component of income tax expense, and penalties, if incurred, are recognized as a component of operating income or loss. The Company does not have any uncertain tax positions as of any of the periods presented. The Company did not incur significant interest and penalties for any period presented.
On December 22, 2017, the United States enacted major tax reform legislation, the 2017 Tax Act, which enacted a broad range of changes to the federal tax code. Key provisions that could have an impact on the Company’s Consolidated Financial Statements are the deemed repatriation of foreign earnings, the remeasurement of certain net deferred assets and other liabilities for the change in the U.S. corporate tax rate from 35 percent to 21 percent, and the elimination of the alternative minimum tax (“AMT”) which were included in the Company’s 2017 Consolidated Financial Statements.
We applied the guidance in SAB 118 when accounting for the enactment-date effects of the 2017 Tax Act in 2017 and throughout 2018. At December 28, 2018, we have completed our accounting for all the enactment-date income tax effects of the Tax Act.
Beginning in 2017, the 2017 Tax Act subjects a U.S. shareholder to tax on Global Intangible Low Tax Income (“GILTI”) earned by certain foreign subsidiaries. In January 2018, the FASB released guidance (Staff Q&A Topic 740, No. 5) on the accounting for tax on the GILTI provisions of the 2017 Tax Act. 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 by the Company’s pre-GILTI U.S. income. In addition, Staff Q&A Topic 740, No. 5 states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI as a current period expense when incurred.
F-14
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and Description of Business and Accounting Policies (Continued)
Basic and Diluted Net Income (Loss) Per Share
The Company has only one class of common stock and no participating securities which would require the two-class method of calculating basic earnings per share. Basic per share information is calculated by dividing net income (loss) by the weighted average number of shares outstanding, net of unvested restricted stock and unvested restricted stock units, during the period. Diluted per share information is calculated by dividing net income (loss) by the weighted average number of shares outstanding, adjusted for the effects of potentially dilutive common stock, which are comprised of outstanding warrants, stock options, unvested restricted stock, and restricted stock units, during the period, using the treasury-stock method (See Note 15).
Employee Defined Benefit Plans
The Company maintains a passive pension plan (the “Swiss Plan”) covering employees of its Swiss subsidiary. The Swiss Plan conforms to the features of a defined benefit plan.
The Company also maintains a noncontributory defined benefit pension plan which covers substantially all the employees of STAAR Japan.
The Company recognizes the funded status, or difference between the fair value of plan assets and the projected benefit obligations of the pension plan on the Consolidated Balance Sheets, with a corresponding adjustment to accumulated other comprehensive income (loss). If the projected benefit obligation exceeds the fair value of plan assets, then that difference or unfunded status represents the pension liability. The Company records a net periodic pension cost in the Consolidated Statements of Operations. The liabilities and annual income or expense of both plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of asset return (asset returns and fair-value of plan assets are applicable for the Swiss Plan only). The fair values of plan assets are determined based on prevailing market prices (see Note 10).
Stock-Based Compensation
Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three to four years for executive officers and employees, and one year for members of its Board of Directors (the “Board”) (see Note 11).
The Company also, at times, issues restricted stock to its executive officers, employees and the Board, which are restricted and unvested common shares issued at fair market value on the date of grant. For the restricted shares issued to the Board, the restricted stock vests over a one-year service period, for executive officers and employees, it is typically a three-year service period, and are subject to forfeiture (or acceleration, depending upon the circumstances) until vested or the service period is completed. Restricted stock compensation expense is recognized on a straight-line basis over the requisite service period of one to three years, based on the grant-date fair value of the stock. Restricted stock is considered legally issued and outstanding on the grant date (see Notes 11 and 15).
F-15
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and Description of Business and Accounting Policies (Continued)
Stock-Based Compensation (Continued)
The Company issues restricted stock units (“RSUs”) (see Note 11), which can have only a service condition or a performance contingent restricted stock award based upon the Company meeting certain internally established performance conditions that vest only if those conditions are met or exceeded and the grantee is still employed with the Company. Restricted stock unit compensation expense is recognized on a straight-line basis over the requisite service period. The Company recognizes compensation cost for the performance condition RSUs when the Company concludes that it is probable that the performance condition will be achieved, net of an estimate of pre-vesting forfeitures, over the requisite service period based on the grant-date fair value of the stock. The Company reassesses the probability of vesting at each reporting period and adjusts compensation cost based on its probability assessment.
Once the RSUs are vested, equivalent common shares will be issued or issuable to the grantee and therefore the RSUs are not included in total common shares issued and outstanding until vested (see Notes 11 and 15).
The Company accounts for options granted to persons other than employees and directors under ASC 505-50,
Equity –Based Payments to Non-Employees
. The fair value of such options is re-measured each reporting period using the Black-Scholes option-pricing model and income or expense is recognized over the vesting period for changes to the fair value for the unvested options. As the options vest, no such re-measurement is necessary or performed.
Comprehensive Income (Loss)
The Company presents comprehensive income (loss) in the Consolidated Balance Sheets and the Consolidated Statements of Comprehensive Income (Loss). Total comprehensive income (loss) includes, in addition to the net income (loss), changes in equity that are excluded from the Consolidated Statements of Operations and are recorded directly into a separate section of stockholders’ equity on the Consolidated Balance Sheets. The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive income (loss) attributable to the Company for the years ended December 28, 2018, December 29, 2017 and December 30, 2016 (in thousands):
|
|
Foreign
Currency
Translation
|
|
|
Defined
Benefit
Pension
Plan – Japan
|
|
|
Defined
Benefit
Pension
Plan –
Switzerland
|
|
|
Accumulated
Other Com-
prehensive
Income
(Loss)
|
|
Balance at January 1, 2016
|
|
$
|
(145
|
)
|
|
$
|
95
|
|
|
$
|
(1,530
|
)
|
|
$
|
(1,580
|
)
|
Other comprehensive income (loss)
|
|
|
224
|
|
|
|
(9
|
)
|
|
|
426
|
|
|
|
641
|
|
Tax effect
|
|
|
(68
|
)
|
|
|
2
|
|
|
|
(45
|
)
|
|
|
(111
|
)
|
Balance at December 30, 2016
|
|
|
11
|
|
|
|
88
|
|
|
|
(1,149
|
)
|
|
|
(1,050
|
)
|
Other comprehensive income (loss)
|
|
|
387
|
|
|
|
(6
|
)
|
|
|
(406
|
)
|
|
|
(25
|
)
|
Tax effect
|
|
|
(120
|
)
|
|
|
6
|
|
|
|
39
|
|
|
|
(75
|
)
|
Balance at December 29, 2017
|
|
|
278
|
|
|
|
88
|
|
|
|
(1,516
|
)
|
|
|
(1,150
|
)
|
Other comprehensive income (loss)
|
|
|
242
|
|
|
|
(107
|
)
|
|
|
(290
|
)
|
|
|
(155
|
)
|
Tax effect
|
|
|
(74
|
)
|
|
|
29
|
|
|
|
30
|
|
|
|
(15
|
)
|
Balance at December 28, 2018
|
|
$
|
446
|
|
|
$
|
10
|
|
|
$
|
(1,776
|
)
|
|
$
|
(1,320
|
)
|
F-16
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and Description of Business and Accounting Policies (Continued)
Recently Adopted Accounting Pronouncements
On December 30, 2017 (beginning of fiscal year 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 Consolidated Financial Statements.
On December 30, 2017 (beginning of fiscal year 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 Consolidated Financial Statements, see Note 10 for additional information.
On December 30, 2017 (beginning of fiscal year 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 Consolidated Financial Statements.
On December 30, 2017 (beginning of fiscal year 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 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.
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.
F-17
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1
—
Organization and Descri
ption of Business and Accounting Policies (Continued)
Recent Accounting Pronouncements Not Yet Adopted (Continued)
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 of 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 is still evaluating the effects on its financial statement disclosures. The Company expects to apply the modified retrospective method to adopt the standard on December 29, 2018 (beginning of fiscal year 2019) and has determined that the cumulative adjustment to the accumulated deficit will decrease by $115,000. The Company has determined that the initial operating lease right of use asset, net and the operating lease liability is approximately $5,800,000 and has also determined that the finance lease right of use asset, net (which is currently recognized in property, plant and equipment, net) is approximately $3,300,000.
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). The adoption of ASU 2018‑02 is not expected to have a material impact on the 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 has determined that the cumulative adjustment to the accumulated deficit will decrease by $315,000.
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 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 Consolidated Financial Statements.
F-18
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2 —
Accounts Re
ceivable Trade, Net
Accounts receivable trade, net consisted of the following at December 28, 2018 and December 29, 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Domestic
|
|
$
|
807
|
|
|
$
|
804
|
|
Foreign
|
|
|
25,689
|
|
|
|
19,580
|
|
Total accounts receivable trade, gross
|
|
|
26,496
|
|
|
|
20,384
|
|
Less allowance for doubtful accounts
|
|
|
550
|
|
|
|
349
|
|
Less allowance for sales returns
|
|
|
—
|
|
|
|
2,182
|
|
Total accounts receivable trade, net
|
|
$
|
25,946
|
|
|
$
|
17,853
|
|
Note 3 — Inventories, Net
Inventories, net consisted of the following at December 28, 2018 and December 29, 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Raw materials and purchased parts
|
|
$
|
2,678
|
|
|
$
|
2,506
|
|
Work in process
|
|
|
2,195
|
|
|
|
1,996
|
|
Finished goods
|
|
|
13,214
|
|
|
|
11,169
|
|
Total inventories, gross
|
|
|
18,087
|
|
|
|
15,671
|
|
Less inventory reserves
|
|
|
1,383
|
|
|
|
2,361
|
|
Total inventories, net
|
|
$
|
16,704
|
|
|
$
|
13,310
|
|
Note 4 — Prepayments, Deposits and Other Current Assets
Prepayments, deposits and other current assets consisted of the following
at December 28, 2018 and December 29, 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Prepayments and deposits
|
|
$
|
1,707
|
|
|
$
|
1,435
|
|
Prepaid insurance
|
|
|
1,271
|
|
|
|
943
|
|
Consumption tax receivable
|
|
|
912
|
|
|
|
541
|
|
Value added tax (VAT) receivable
|
|
|
565
|
|
|
|
910
|
|
Income tax receivable
|
|
|
285
|
|
|
|
181
|
|
Other
(1)
|
|
|
305
|
|
|
|
197
|
|
Total prepayments, deposits and other current assets
|
|
$
|
5,045
|
|
|
$
|
4,207
|
|
(1)
|
No individual item in “other” exceeds 5% of the total prepayments, deposits and other current assets.
|
F-19
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5 —
Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following at December 28, 2018 and December 29, 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Machinery and equipment
|
|
$
|
19,000
|
|
|
$
|
16,562
|
|
Furniture and fixtures
|
|
|
9,860
|
|
|
|
9,201
|
|
Leasehold improvements
|
|
|
10,045
|
|
|
|
9,631
|
|
Total property, plant and equipment, gross
|
|
|
38,905
|
|
|
|
35,394
|
|
Less accumulated depreciation
|
|
|
27,454
|
|
|
|
25,618
|
|
Total property, plant and equipment, net
|
|
$
|
11,451
|
|
|
$
|
9,776
|
|
Depreciation expense and gain (loss) on disposal of property, plant and equipment were as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Depreciation expense
|
|
$
|
2,430
|
|
|
$
|
3,133
|
|
|
$
|
2,664
|
|
Loss on disposal of property, plant and equipment
|
|
|
10
|
|
|
|
623
|
|
|
|
222
|
|
The loss recognized for the year ended December 29, 2017 consisted primarily of an asset, with a net book value of $599,000, that was no longer in use.
Note 6 — Intangible Assets, Net
Intangible assets, net consisted of the following
at December 28, 2018 and December 29, 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Long-lived amortized intangible assets
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patents and licenses
|
|
$
|
9,257
|
|
|
$
|
(9,014
|
)
|
|
$
|
243
|
|
|
$
|
9,244
|
|
|
$
|
(8,973
|
)
|
|
$
|
271
|
|
Customer relationships
|
|
|
1,420
|
|
|
|
(1,420
|
)
|
|
|
—
|
|
|
|
1,392
|
|
|
|
(1,392
|
)
|
|
|
—
|
|
Developed technology
|
|
|
902
|
|
|
|
(902
|
)
|
|
|
—
|
|
|
|
885
|
|
|
|
(885
|
)
|
|
|
—
|
|
Total intangible assets, net
|
|
$
|
11,579
|
|
|
$
|
(11,336
|
)
|
|
$
|
243
|
|
|
$
|
11,521
|
|
|
$
|
(11,250
|
)
|
|
$
|
271
|
|
Amortization expense for intangible assets were as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Amortization expense
|
|
$
|
34
|
|
|
$
|
221
|
|
|
$
|
228
|
|
F-20
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6 — Intangible Assets, Net (Continued)
Future amortization of intangible assets is as follows (in thousands):
Year Ended
|
|
Amount
|
|
2019
|
|
$
|
34
|
|
2020
|
|
|
34
|
|
2021
|
|
|
34
|
|
2022
|
|
|
34
|
|
2023
|
|
|
34
|
|
Thereafter
|
|
|
73
|
|
Total
|
|
$
|
243
|
|
Note 7 — Other Current Liabilities
Other current liabilities consisted of the following at December 28, 2018 and December 29, 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Accrued salaries and wages
|
|
$
|
3,172
|
|
|
$
|
2,407
|
|
Accrued insurance
|
|
|
1,061
|
|
|
|
565
|
|
Accrued consumption tax
|
|
|
995
|
|
|
|
446
|
|
Accrued bonuses
|
|
|
5,113
|
|
|
|
2,058
|
|
Income taxes payable
|
|
|
1,105
|
|
|
|
210
|
|
Other
(1)
|
|
|
1,985
|
|
|
|
1,653
|
|
Total other current liabilities
|
|
$
|
13,431
|
|
|
$
|
7,339
|
|
(1)
|
No individual item in “Other” exceeds 5% of the other current liabilities.
|
Note 8 — Liabilities
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 December 28, 2018) plus a 0.50% spread, and may be renewed quarterly (the current line expires on February 21, 2019). The credit facility is not collateralized. The Company had 417,500,000 Yen and 500,000,000 Yen outstanding on the line of credit as of December 28, 2018 and December 29, 2017, respectively (approximately $3,780,000 and $4,438,000 based on the foreign exchange rates on December 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 December 28, 2018, there was 82,500,000 Yen (approximately $747,000 based on the foreign exchange rate on December 28, 2018) available for borrowing and as of December 29, 2017 there were no available borrowings under the line. At maturity on February 21, 2019, this line of credit is intended to be renewed until May 21, 2019, with similar terms.
F-21
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8 — Liabilities (Continued)
Lines of Credit (Continued)
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 December 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 December 28, 2018 and December 29, 2017.
Covenant Compliance
The Company is in compliance with covenants of its credit facilities and lines of credit as of December 28, 2018.
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 December 28, 2018, approximately $387,000 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 December 28, 2018, approximately $864,000 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 December 28, 2018 and December 29, 2017, approximately $83,000 and $1,067,000, respectively, was outstanding on this capital lease.
Asset Retirement Obligation
The Company recorded certain Asset Retirement Obligations (“ARO”), in accordance with ASC 410-20 in connection with the Company’s obligation to return its Japan facility to its “original condition”, as defined in the lease agreement. The Company has recorded approximately $206,000 and $202,000, representing the fair value of the ARO liability obligation in noncurrent liabilities at December 28, 2018 and December 29, 2017, respectively. The lease expires in 2019, however, the Company has no plans to vacate the facility and has started negotiations during 2019 to extend the lease beyond 2019.
F-22
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9 —
Income Taxes
Provision (Benefit) for Income Taxes
Income (loss) from continuing operations before provision (benefit) for income taxes was as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
$
|
(2,629
|
)
|
|
$
|
(3,318
|
)
|
|
$
|
(10,399
|
)
|
Foreign
|
|
|
9,268
|
|
|
|
1,022
|
|
|
|
(2,045
|
)
|
Income (loss) before income taxes
|
|
$
|
6,639
|
|
|
$
|
(2,296
|
)
|
|
$
|
(12,444
|
)
|
The provision (benefit) for income taxes consisted of the following (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
10
|
|
|
|
12
|
|
|
|
18
|
|
Foreign
|
|
|
1,220
|
|
|
|
378
|
|
|
|
1,031
|
|
Total current provision
|
|
|
1,230
|
|
|
|
390
|
|
|
|
1,049
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state
|
|
|
—
|
|
|
|
(546
|
)
|
|
|
—
|
|
Foreign
|
|
|
441
|
|
|
|
(1
|
)
|
|
|
(1,364
|
)
|
Total deferred provision (benefit)
|
|
|
441
|
|
|
|
(547
|
)
|
|
|
(1,364
|
)
|
Provision (benefit) for income taxes
|
|
$
|
1,671
|
|
|
$
|
(157
|
)
|
|
$
|
(315
|
)
|
F-23
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9 — Income Taxes (Continued)
Provision (Benefit) for Income Taxes (Continued)
A reconciliation of the statutory U.S. federal tax rate to the Company’s effective tax rate was as follows (dollars in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
Computed provision (benefit) for taxes based on
income at statutory rate
|
|
|
21.0
|
%
|
|
$
|
1,394
|
|
|
|
34.0
|
%
|
|
$
|
(781
|
)
|
|
|
34.0
|
%
|
|
$
|
(4,231
|
)
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
0.6
|
|
|
|
41
|
|
|
|
(0.9
|
)
|
|
|
21
|
|
|
|
(3.0
|
)
|
|
|
373
|
|
Change in the future federal tax rate
|
|
|
—
|
|
|
|
—
|
|
|
|
(833.0
|
)
|
|
|
19,125
|
|
|
|
—
|
|
|
|
—
|
|
State minimum taxes, net of federal income
tax benefit
|
|
|
0.1
|
|
|
|
8
|
|
|
|
(0.3
|
)
|
|
|
8
|
|
|
|
(0.1
|
)
|
|
|
12
|
|
State tax benefit
|
|
|
(6.7
|
)
|
|
|
(447
|
)
|
|
|
8.3
|
|
|
|
(190
|
)
|
|
|
6.2
|
|
|
|
(767
|
)
|
Foreign tax differential
|
|
|
(11.0
|
)
|
|
|
(730
|
)
|
|
|
(1.3
|
)
|
|
|
29
|
|
|
|
(8.9
|
)
|
|
|
1,109
|
|
Expiration of state net operating tax loss
carryforwards
|
|
|
—
|
|
|
|
—
|
|
|
|
(36.4
|
)
|
|
|
836
|
|
|
|
(7.2
|
)
|
|
|
892
|
|
Foreign earnings not permanently reinvested,
net of the participation exemption
|
|
|
(14.0
|
)
|
|
|
(926
|
)
|
|
|
108.1
|
|
|
|
(2,482
|
)
|
|
|
6.5
|
|
|
|
(809
|
)
|
Foreign dividend withholding
|
|
|
4.8
|
|
|
|
317
|
|
|
|
(0.3
|
)
|
|
|
7
|
|
|
|
3.8
|
|
|
|
(478
|
)
|
ASC 718 Share Based Payment Adjustment
|
|
|
(6.5
|
)
|
|
|
(434
|
)
|
|
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
0.5
|
|
|
|
30
|
|
|
|
(2.6
|
)
|
|
|
59
|
|
|
|
1.1
|
|
|
|
(139
|
)
|
Valuation allowance
|
|
|
36.4
|
|
|
|
2,418
|
|
|
|
731.2
|
|
|
|
(16,789
|
)
|
|
|
(29.9
|
)
|
|
|
3,723
|
|
Effective tax provision (benefit)
|
|
|
25.2
|
%
|
|
$
|
1,671
|
|
|
|
6.8
|
%
|
|
$
|
(157
|
)
|
|
|
2.5
|
%
|
|
$
|
(315
|
)
|
The Company recorded an income tax provision of $1,671,000 during the year ended 2018 due to profits generated in its foreign operations. The Company recorded an income tax benefit of $157,000 during the year ended 2017 due primarily to a U.S. income tax benefit related to an alternative minimum tax carryforward, offset by income tax expense generated from profits in its foreign operations. The Company recorded an income tax benefit of $315,000 during the year ended 2016 due to losses generated in its foreign operations and a reduction in foreign withholding taxes in connection with the dissolution of one of its foreign subsidiaries.
Included in the state tax provision is an increase to the state deferred tax asset and corresponding increase to the valuation allowance of $447,000 for the year ended 2018, primarily related to the loss generated in 2018. For the years ended 2017 and 2016, there was a decrease to the state deferred tax asset and corresponding decrease to the valuation allowance of $646,000 and $125,000, respectively, primarily related to the expiration of state net operating loss carryforwards.
Included in the foreign deferred tax provision is an increase of $36,000 in foreign deferred liabilities for the year ended 2018. For the years ended 2017 and 2016, there was a decrease in foreign deferred liabilities of $47,000 and $617,000, respectively.
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. During 2018, 2017 and 2016 there were no withholding taxes paid to foreign jurisdictions.
F-24
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9 — Income Taxes (Continued)
Provision (Benefit) for Income Taxes (Continued)
As discussed in Note 1, on December 22, 2017, the United States enacted major tax reform legislation, the 2017 Tax Act, which enacted a broad range of changes to the federal tax code. Most of the changes from the new law are effective for years beginning after December 31, 2017, with the noted exception of the deemed repatriation of the offshore earnings.
For 2018, in accordance with the 2017 Tax Act, the Company included GILTI of $7,700,000 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 by the Company’s pre-GILTI U.S. tax income.
For 2017, in accordance with the 2017 Tax Act, there was an adjustment made to the inclusion amount for cumulative unearned foreign earnings and profits that were previously deferred from U.S. income taxes. At that time, for 2017, the Company made reasonable estimates of the impact and included $5,700,000 in foreign earnings which were fully offset by deemed foreign tax credits. This inclusion amount was later finalized at $7,500,000, which were fully offset by deemed foreign tax credits.
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. For 2017, the federal portion of the deferred tax assets and liabilities were revalued from 34% to 21% percent, based on the enacted 2017 Tax Act. Significant components of the Company’s deferred tax assets (liabilities) at December 28, 2018 and December 29, 2017 were as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts and sales returns
|
|
$
|
252
|
|
|
$
|
230
|
|
Inventories
|
|
|
560
|
|
|
|
381
|
|
Accrued vacation
|
|
|
387
|
|
|
|
322
|
|
Accrued other expenses
|
|
|
1,232
|
|
|
|
559
|
|
Stock-based compensation
|
|
|
2,489
|
|
|
|
1,444
|
|
Pensions
|
|
|
884
|
|
|
|
720
|
|
Depreciation and amortization
|
|
|
843
|
|
|
|
959
|
|
Net operating loss carryforwards
|
|
|
34,347
|
|
|
|
33,770
|
|
Business, foreign, AMT and R&D credit carryforwards
|
|
|
3,256
|
|
|
|
3,706
|
|
Prepaid expenses
|
|
|
272
|
|
|
|
188
|
|
Capitalized R&D
|
|
|
968
|
|
|
|
941
|
|
Other
|
|
|
122
|
|
|
|
92
|
|
Valuation allowance
|
|
|
(43,075
|
)
|
|
|
(40,656
|
)
|
Total deferred tax assets
|
|
$
|
2,537
|
|
|
$
|
2,656
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Foreign tax withholding
|
|
$
|
(1,282
|
)
|
|
$
|
(881
|
)
|
Amortization of R&D
|
|
|
(759
|
)
|
|
|
(723
|
)
|
Net foreign earnings not permanently reinvested
|
|
|
(240
|
)
|
|
|
(160
|
)
|
Total deferred tax liabilities
|
|
|
(2,281
|
)
|
|
|
(1,764
|
)
|
Total net deferred tax assets
|
|
$
|
256
|
|
|
$
|
892
|
|
F-25
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9 — Income Taxes (Continued)
Deferred Tax Assets and Liabilities (Continued)
As of December 28, 2018, the Company had net deferred tax liabilities in Switzerland of $909,000 (which included $1,282,000 of withholding taxes on unremitted foreign earnings) and net deferred tax assets in Japan of $905,000 (which included a $44,000 valuation allowance related to non-deductible stock compensation for directors) included in the Company’s components of deferred income tax assets and liabilities table. As of December 29, 2017, the Company had net deferred tax liabilities in Switzerland of $377,000 (which included $881,000 of withholding taxes on unremitted foreign earnings) and net deferred tax assets of $722,000 in Japan included in the Company’s components of deferred income tax assets and liabilities table.
The Company had accrued net income taxes payable of $820,000 and $29,000 at December 28, 2018 and December 29, 2017, respectively, primarily due to taxes owed in foreign jurisdictions.
Valuation allowance
ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset may not be realizable. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. In evaluating the Company’s ability to recover the deferred tax assets within a jurisdiction from which they arise, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, 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 successful implementation of 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 that historical results provide, the Company considers 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.
U.S. Jurisdiction
The ultimate realization of deferred tax assets is dependent upon future generation of income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the projected future income and tax planning strategies in making this assessment. After consideration of all the information available, including the Company’s history of cumulative losses domestically, and the volatility in forecasting future foreign profits, 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 evidence each reporting period in assessing the need to maintain a full valuation allowance against the Company’s deferred tax assets. Continued growth and profits in foreign jurisdictions will be evaluated and considered in the determination by Management of whether it is more likely than not that the Company’s deferred tax assets will be realizable in a later period.
Further, pursuant to the provisions of Internal Revenue Code Section 382, significant changes in ownership may restrict the future utilization of these tax loss carry forwards.
F-26
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9 — Income Taxes (Continued)
U.S. Jurisdiction (Continued)
As of December 28, 2018, the Company had federal net operating loss carryforwards of $135,000,000 available to reduce future income taxes of its U.S. operations. The pre-2018 federal net operating loss carryforwards expire in varying amounts between 2020 and 2038. In California, the main state from which the Company conducts its domestic operations, the Company has state net operating losses of $29,000,000 available to reduce future California income taxes. The California net operating loss carryforwards expire in varying amounts between 2028 and 2038.
Foreign Jurisdictions
STAAR Surgical AG
Due to STAAR Surgical AG’s history of profits, the deferred tax assets are considered fully realizable. The Company had net deferred tax assets in Switzerland of $373,000 and $505,000 as of December 28, 2018 and December 29, 2017, respectively.
STAAR Japan, Inc.
Since 2012, STAAR Japan functions as a limited-risk distributor with a guaranteed return from STAAR AG and accordingly, STAAR Japan’s deferred tax assets are considered fully realizable. The Company had net deferred tax assets of $905,000 and $722,000 as of December 28, 2018 and December 29, 2017, respectively.
The following tax years remain subject to examination:
Significant jurisdictions
|
|
Open Years
|
U.S. Federal
|
|
2015 – 2017
|
California
|
|
2014 – 2017
|
Switzerland
|
|
2017
|
Japan
|
|
2016 – 2017
|
F-27
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10 –
Employee Benefit Plans
Defined Benefit Plan – Switzerland
The Company maintains a passive pension plan (the “Swiss Plan”) covering employees of its Swiss subsidiary, which is accounted for as a defined benefit plan.
In Switzerland employers are required to provide a minimum pension plan for their staff. Contributions of both the employees and employer finance the Swiss Plan. The amount of the contributions is defined by the plan regulations and cannot be decreased without amending the plan regulations. It is required that the employer contribute an amount equal to or greater than the employee contribution.
The following table shows the changes in the benefit obligation and plan assets and the Swiss Plan’s funded status as of December 28, 2018 and December 29, 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of period
|
|
$
|
7,445
|
|
|
$
|
6,363
|
|
Service cost
|
|
|
474
|
|
|
|
381
|
|
Interest cost
|
|
|
56
|
|
|
|
53
|
|
Participant contributions
|
|
|
361
|
|
|
|
260
|
|
Benefits deposited (paid)
|
|
|
189
|
|
|
|
(185
|
)
|
Actuarial loss (gain)
|
|
|
269
|
|
|
|
721
|
|
Prior service credit
|
|
|
—
|
|
|
|
(148
|
)
|
Projected benefit obligation, end of period
|
|
$
|
8,794
|
|
|
$
|
7,445
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Plan assets at fair value, beginning of period
|
|
$
|
4,144
|
|
|
$
|
3,606
|
|
Actual return on plan assets (including foreign currency impact)
|
|
|
3
|
|
|
|
203
|
|
Employer contributions
|
|
|
433
|
|
|
|
260
|
|
Participant contributions
|
|
|
361
|
|
|
|
260
|
|
Benefits deposited (paid)
|
|
|
189
|
|
|
|
(185
|
)
|
Plan assets at fair value, end of period
|
|
$
|
5,130
|
|
|
$
|
4,144
|
|
Funded status (pension liability), end of year
(1)
|
|
$
|
(3,664
|
)
|
|
$
|
(3,301
|
)
|
Amount Recognized in Accumulated Other Comprehensive Income
(Loss), net of tax:
|
|
|
|
|
|
|
|
|
Actuarial loss on plan assets
|
|
$
|
(1,035
|
)
|
|
$
|
(934
|
)
|
Actuarial loss on benefit obligation
|
|
|
(2,145
|
)
|
|
|
(1,902
|
)
|
Actuarial gain recognized in current year
|
|
|
630
|
|
|
|
527
|
|
Prior service credit
|
|
|
165
|
|
|
|
184
|
|
Effect of curtailments
|
|
|
609
|
|
|
|
609
|
|
Accumulated other comprehensive loss
|
|
$
|
(1,776
|
)
|
|
$
|
(1,516
|
)
|
Accumulated benefit obligation at year end
|
|
$
|
(8,230
|
)
|
|
$
|
(6,932
|
)
|
(1)
|
The underfunded balance was included in pension liability on the Consolidated Balance Sheets.
|
F-28
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10 – Employee Benefit Plans (Continued)
Defined Benefit Plan – Switzerland (Continued)
Net periodic pension cost associated with the Swiss Plan included the following components (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Service cost
(1)
|
|
$
|
474
|
|
|
$
|
381
|
|
|
$
|
469
|
|
Interest cost
(2)
|
|
|
56
|
|
|
|
53
|
|
|
|
65
|
|
Expected return on plan assets
(2)
|
|
|
(116
|
)
|
|
|
(94
|
)
|
|
|
(89
|
)
|
Prior service credit
(2),(3)
|
|
|
(21
|
)
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Actuarial loss recognized in current period
(2),(3)
|
|
|
113
|
|
|
|
72
|
|
|
|
111
|
|
Net periodic pension cost
|
|
$
|
506
|
|
|
$
|
405
|
|
|
$
|
549
|
|
(
1)
|
Recognized in selling general and administrative expenses on the Consolidated Statements of Operations.
|
(2)
|
For year ended 2018, recognized in other income (expense), net, and for years ended 2017 and 2016, recognized in selling, general and administrative expenses on the Consolidated Statements of Operations.
|
(3)
|
Amounts reclassified from accumulated other comprehensive income (loss).
|
Changes in other comprehensive income (loss), net of tax, associated with the Swiss included the following components (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current year actuarial gain (loss) on plan assets
|
|
$
|
(101
|
)
|
|
$
|
98
|
|
|
$
|
(8
|
)
|
Current year actuarial loss on benefit obligation
|
|
|
(243
|
)
|
|
|
(644
|
)
|
|
|
(269
|
)
|
Actuarial gain (loss) recorded in current year
|
|
|
103
|
|
|
|
65
|
|
|
|
(98
|
)
|
Prior service credit
|
|
|
(19
|
)
|
|
|
126
|
|
|
|
(6
|
)
|
Change in other comprehensive loss
|
|
$
|
(260
|
)
|
|
$
|
(355
|
)
|
|
$
|
(381
|
)
|
The amount in accumulated other comprehensive income (loss) as of December 28, 2018 that is expected to be recognized as a component of the net periodic pension costs during fiscal year 2019 is $129,000.
Net periodic pension cost and projected and accumulated pension obligation for the Company’s Swiss Plan were calculated on December 28, 2018 and December 29, 2017 using the following assumptions:
|
|
2018
|
|
|
2017
|
|
Discount rate
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
Salary increases
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
Expected return on plan assets
|
|
|
2.5
|
%
|
|
|
2.5
|
%
|
Expected average remaining working lives in years
|
|
|
10.0
|
|
|
|
10.2
|
|
The discount rates are based on an assumed duration of the pension obligations and estimated using the rates of returns for AAA and AA-rated Swiss and foreign CHF-denominated corporate bonds listed on the SIX Swiss Exchange. The salary increase rate was based on the Company’s best estimate of future increases over time. The expected long-term rate of return on plan assets is based on the expected asset allocation and assumptions concerning long-term interest rates, inflation rates, and risk premiums for equities above the risk-free rates of return. These assumptions take into consideration historical long-term rates of return for relevant asset categories.
F-29
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10 – Employee Benefit Plans (Continued)
Defined Benefit Plan – Switzerland (Continued)
Under Swiss law, pension funds are legally independent from the employer and all the contributions are invested with regulated entities. The Company has a contract with Allianz Suisse Life Insurance Company’s BVG Collective Foundation (the “Foundation”) to manage its Swiss pension fund. Multiple employers contract with the Foundation to manage the employers’ respective pension plans. The Foundation manages the pension plans of its contracted employers as a collective entity. The investment strategy is determined by the Foundation and applies to all members of the collective Foundation. There are no separate financial statements for each employer contract. The pension plan assets of all the employers that contract with the Foundation are comingled. They are considered multiple-employer plans under ASC 715-30-35-70 and therefore accounted for as single-employer plans.
As there are no separate financial statements for each employer contract, there are no individual investments that can be directly attributed to the Company’s pension plan assets. However, the funds contributed by an employer are specifically earmarked for its employees and the total assets of the plan allocable to Company’s employees are separately tracked by the Foundation. The lack of visibility into the specific investments of the plan assets and how they are valued is a significant unobservable input, therefore, the Company considers the plan assets collectively to be Level 3 assets under the fair value hierarchy (see Note 1).
The table below sets forth the fair value of Plan assets at December 29, 2017 and December 28, 2018, and the related activity in years ended 2017 and 2018, in accordance with ASC 715-20-50-1(d) (in thousands):
|
|
Insurance
Contracts
(Level 3)
|
|
Beginning balance at December 31, 2016
|
|
$
|
3,606
|
|
Actual return on plan assets
|
|
|
203
|
|
Purchases, sales, and settlement
|
|
|
335
|
|
Ending balance at December 29, 2017
|
|
$
|
4,144
|
|
Actual return on plan assets
|
|
|
3
|
|
Purchases, sales, and settlement
|
|
|
983
|
|
Ending balance at December 28, 2018
|
|
$
|
5,130
|
|
During fiscal year 2019, the Company expects to make cash contributions totaling approximately $483,000 to the Swiss Plan.
The estimated future benefit payments for the Swiss Plan are as follows (in thousands):
Year Ended
|
|
Amount
|
|
2019
|
|
$
|
65
|
|
2020
|
|
|
75
|
|
2021
|
|
|
86
|
|
2022
|
|
|
102
|
|
2023
|
|
|
113
|
|
Thereafter
|
|
|
1,497
|
|
Total
|
|
$
|
1,938
|
|
F-30
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10 – Employee Benefit Plans (Continued)
Defined Benefit Plan-Japan
STAAR Japan maintains a noncontributory defined benefit pension plan (“Japan Plan”) substantially covering all the employees of STAAR Japan. Benefits under the Japan Plan are earned, vested, and accumulated based on a point-system, primarily based on the combination of years of service, actual and expected future grades (management or non-management) and actual and future zone (performance) levels of the employees. Each point earned is worth a fixed monetary value, 1,000 Yen per point, regardless of the level grade or zone of the employee. Gross benefits are calculated based on the cumulative number of points earned over the service period multiplied by 1,000 Yen. The mandatory retirement age limit is 60 years old.
STAAR Japan administers the pension plan and funds the obligations of the Japan Plan from STAAR Japan’s operating cash flows. STAAR Japan is not required, and does not intend, to provide contributions to the Plan to meet benefit obligations and therefore does not have any plan assets. Benefit payments are made to beneficiaries as they become due.
The funded status of the benefit plan at December 28, 2018 and December 29, 2017 was as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of period
|
|
$
|
1,352
|
|
|
$
|
1,240
|
|
Service cost
|
|
|
153
|
|
|
|
147
|
|
Interest cost
|
|
|
4
|
|
|
|
4
|
|
Actuarial gain
|
|
|
119
|
|
|
|
32
|
|
Benefits paid
|
|
|
(9
|
)
|
|
|
(116
|
)
|
Foreign exchange adjustment
|
|
|
27
|
|
|
|
45
|
|
Projected benefit obligation, end of period
|
|
$
|
1,646
|
|
|
$
|
1,352
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Plan assets at fair value, beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
|
|
—
|
|
|
|
—
|
|
Employer contributions
|
|
|
—
|
|
|
|
—
|
|
Benefits paid
|
|
|
—
|
|
|
|
—
|
|
Distribution of plan assets
|
|
|
—
|
|
|
|
—
|
|
Foreign exchange adjustment
|
|
|
—
|
|
|
|
—
|
|
Plan assets at fair value, end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status (pension liability), end of year
(1)
|
|
$
|
(1,646
|
)
|
|
$
|
(1,352
|
)
|
Amount Recognized in Accumulated Other Comprehensive Income
(Loss), net of tax:
|
|
|
|
|
|
|
|
|
Transition obligation
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
Actuarial gain (loss)
|
|
|
(36
|
)
|
|
|
(35
|
)
|
Prior service cost
|
|
|
8
|
|
|
|
8
|
|
Net gain (loss)
|
|
|
38
|
|
|
|
122
|
|
Accumulated other comprehensive income
|
|
$
|
10
|
|
|
$
|
88
|
|
Accumulated benefit obligation at year end
|
|
$
|
(1,416
|
)
|
|
$
|
(1,158
|
)
|
(1)
|
The underfunded balance was included in pension liability on the Consolidated Balance Sheets.
|
F-31
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10 – Employee Benefit Plans (Continued)
Defined Benefit Plan-Japan (Continued)
Net periodic pension cost associated with the Japan Plan included the following components (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Service cost
(1)
|
|
$
|
153
|
|
|
$
|
147
|
|
|
$
|
148
|
|
Interest cost
(2)
|
|
|
4
|
|
|
|
4
|
|
|
|
6
|
|
Net amortization of transitional obligation
(2),(3)
|
|
|
11
|
|
|
|
11
|
|
|
|
12
|
|
Prior service credit
(2),(3)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Actuarial loss recognized in current period
(2),(3)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(13
|
)
|
Net periodic pension cost
|
|
$
|
167
|
|
|
$
|
158
|
|
|
$
|
152
|
|
(1)
|
Recognized in selling general and administrative expenses on the Consolidated Statements of Operations.
|
(2)
|
For the year ended 2018, recognized in other income (expense), net, and for the years ended 2017 and 2016, recognized in selling, general and administrative expenses on the Consolidated Statements of Operations.
|
(3)
|
Amounts reclassified from accumulated other comprehensive loss.
|
Changes in other comprehensive income (loss), net of tax, associated with the Japan Plan include the following components (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Amortization of net transition obligation
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Amortization of actuarial gain (loss)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
25
|
|
Actuarial income (loss) recorded in current year
|
|
|
(84
|
)
|
|
|
(22
|
)
|
|
|
(37
|
)
|
Change in other comprehensive income (loss)
|
|
$
|
(78
|
)
|
|
$
|
(14
|
)
|
|
$
|
(4
|
)
|
The amount in accumulated other comprehensive income (loss) as of December 28, 2018 that is expected to be recognized as a component of the net periodic pension cost in fiscal year 2019 is approximately $1,000.
Net periodic pension cost and projected and accumulated pension obligation for the Company’s Japan Plan were calculated on December 28, 2018 and December 29, 2017 using the following assumptions:
|
|
2018
|
|
|
2017
|
|
Discount rate
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
Salary increases
|
|
|
6.0
|
%
|
|
|
6.2
|
%
|
Expected return on plan assets
|
|
N/A
|
|
|
N/A
|
|
Expected average remaining working lives in years
|
|
|
9.4
|
|
|
|
9.1
|
|
The discount rates are based on the yield curve of corporate bonds rated AA or higher. The salary increase average rate was based on the Company’s best estimate of future increases over time.
F-32
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10 – Employee Benefit Plans (Continued)
Defined Benefit Plan-Japan (Continued)
The estimated future benefit payments for the Japan Plan are as follows (in thousands):
Year Ended
|
|
Amount
|
|
2019
|
|
$
|
32
|
|
2020
|
|
|
33
|
|
2021
|
|
|
92
|
|
2022
|
|
|
30
|
|
2023
|
|
|
191
|
|
Thereafter
|
|
|
931
|
|
Total
|
|
$
|
1,309
|
|
Defined Contribution Plan
The Company has a 401(k) profit sharing plan (“401(k) Plan”) for the benefit of qualified employees in the U.S. During the year ended December 28, 2018 employees who participate may elect to make salary deferral contributions to the 401(k) Plan up to the $18,500 of the employees’ eligible payroll subject to annual Internal Revenue Code maximum limitations (with a $6,000 annual catch-up contribution permitted for those over 50 years old). The Company’s contribution percentage is 80% of the employee’s contribution up to the first 6% of the employee’s compensation. In addition, STAAR may make a discretionary contribution to qualified employees, in accordance with the 401(k) Plan. The Company’s contributions, net of forfeitures, to the 401(k) Plan were as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Employer contributions, net of forfeitures
|
|
$
|
996
|
|
|
$
|
764
|
|
|
$
|
703
|
|
Note 11 — Stockholders’ Equity
Immediate Vesting of All Unvested Equity Awards
On February 11, 2016, a shareholder increased its beneficial ownership of the Company’s common stock to approximately 26% of all shares outstanding. This triggered the “Change in Control” provision in the Amended and Restated 2003 Omnibus Equity Incentive Plan (“Plan”). As a result, all then unvested equity awards outstanding under the Plan immediately vested. Consequently, we recorded an aggregate $6,857,000 non-cash charge to stock-based compensation in the Consolidated Statements of Operations on that date
($4,569,000 for stock options and $2,288,000 for restricted stock and restricted stock units)
. This charge was recorded and included in the following categories of the Consolidated Statements of Operations for the year ended December 30, 2016: $2,931,000 in general and administrative expenses, $1,527,000 in marketing and selling expenses, $1,838,000 in research and development expenses and $561,000 in manufacturing costs. Approximately $3,338,000 of the $6,857,000 of accelerated charges would have been recognized for stock-based compensation by the Company in fiscal years subsequent to 2016 had the Change in Control provision not been triggered.
F-33
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 11 — Stockholders’ Equity (Continued)
Incentive Plan
The Amended and Restated Omnibus Equity Incentive Plan (“the Plan”) provides for various forms of stock-based incentives. To date, of the available forms of awards under the Plan, the Company has granted only stock options, restricted stock, unrestricted share grants, and restricted stock units (“RSUs”). Options under the Plan are granted at fair market value on the date of grant, become exercisable generally over a three-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control and pre-established financial metrics are met (as defined in the Plan). Grants of restricted stock outstanding under the Plan generally vest over periods of one to three years. Grants of RSUs outstanding under the Plan generally vest based on service, performance, or a combination of both. On June 14, 2018, stockholders approved a proposal to increase the number of shares under the Plan by 2,235,000 shares, for a total of 15,385,000 shares. As of December 28, 2018, there were 2,479,205 shares available for grant under the Plan.
Stock-Based Compensation
There was no net income tax benefit recognized in the Consolidated Statements of Operations for stock-based compensation expense for non-qualified stock options, as the Company fully offsets net deferred tax assets with a valuation allowance (see Note 9). The Company does not recognize deferred income taxes for incentive stock option compensation expense, and records a tax deduction only when a disqualified disposition has occurred (see Note 9).
The following
table
represents the fair value of stock-based compensation granted during the year ended 2018 (in thousands):
|
|
Fair Value
|
|
Stock options
|
|
$
|
9,702
|
|
Restricted stock units
|
|
|
849
|
|
Restricted stock
|
|
|
335
|
|
Total stock-based compensation expense
|
|
$
|
10,886
|
|
The cost that has been charged against income for stock-based compensation is set forth below (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Employee stock option
|
|
$
|
4,013
|
|
|
$
|
1,731
|
|
|
$
|
5,485
|
|
Restricted stock
|
|
|
274
|
|
|
|
186
|
|
|
|
298
|
|
Restricted stock units
|
|
|
2,120
|
|
|
|
1,226
|
|
|
|
2,717
|
|
Nonemployee stock options
|
|
|
355
|
|
|
|
18
|
|
|
|
58
|
|
Total stock-based compensation expense
|
|
$
|
6,762
|
|
|
$
|
3,161
|
|
|
$
|
8,558
|
|
F-34
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 11 — Stockholders’ Equity (Continued)
Stock-Based Compensation (Continued)
The Company recorded stock-based compensation expense in the following categories (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cost of sales
|
|
$
|
15
|
|
|
$
|
8
|
|
|
$
|
612
|
|
General and administrative
|
|
|
2,635
|
|
|
|
1,487
|
|
|
|
3,809
|
|
Marketing and selling
|
|
|
1,805
|
|
|
|
805
|
|
|
|
1,961
|
|
Research and development
|
|
|
2,307
|
|
|
|
861
|
|
|
|
2,176
|
|
Total stock-based compensation expense, net
|
|
|
6,762
|
|
|
|
3,161
|
|
|
|
8,558
|
|
Amounts capitalized as part of inventory
|
|
|
637
|
|
|
|
372
|
|
|
|
269
|
|
Total stock-based compensation expense, gross
|
|
$
|
7,399
|
|
|
$
|
3,533
|
|
|
$
|
8,827
|
|
As of December 28, 2018, total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plan were as follows (in thousands):
|
|
2018
|
|
Stock options
|
|
$
|
9,767
|
|
Restricted stock and restricted stock units
|
|
|
2,007
|
|
Total unrecognized stock-based compensation cost
|
|
$
|
11,774
|
|
This cost is expected to be recognized over a weighted-average period of approximately two years.
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.
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
53
|
%
|
|
|
57
|
%
|
|
|
57
|
%
|
Risk-free interest rate
|
|
|
2.71
|
%
|
|
|
1.96
|
%
|
|
|
1.34
|
%
|
Expected term (in years)
|
|
|
5.72
|
|
|
|
5.67
|
|
|
|
5.57
|
|
F-35
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 11 — Stockholders’ Equity (Continued)
Stock Options
A summary of option activity under the Plan for the year ended December 28, 2018 is presented below:
|
|
Shares
(in 000’s)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
(in 000’s)
|
|
Outstanding at December 29, 2017
|
|
|
3,725
|
|
|
$
|
8.78
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
826
|
|
|
|
23.19
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(596
|
)
|
|
|
8.72
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(35
|
)
|
|
|
11.27
|
|
|
|
|
|
|
|
|
|
Outstanding at December 28, 2018
|
|
|
3,920
|
|
|
$
|
11.80
|
|
|
|
6.80
|
|
|
$
|
76,615
|
|
Exercisable at December 28, 2018
|
|
|
2,660
|
|
|
$
|
8.53
|
|
|
|
5.79
|
|
|
$
|
60,455
|
|
A summary of unvested options activity under the Plan for the year ended December 28, 2018 was as follows:
|
|
Shares
(in 000’s)
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Unvested at December 29, 2017
|
|
|
1,148
|
|
|
$
|
4.96
|
|
Granted
|
|
|
826
|
|
|
|
11.95
|
|
Forfeited or expired
|
|
|
(35
|
)
|
|
|
5.73
|
|
Vested
|
|
|
(679
|
)
|
|
|
4.90
|
|
Unvested at December 28, 2018
|
|
|
1,260
|
|
|
$
|
9.67
|
|
The weighted average grant date fair value of options granted and the total intrinsic value of options exercised were as follows:
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Weighted-average grant-date fair value
|
|
$
|
11.95
|
|
|
$
|
5.42
|
|
|
$
|
3.77
|
|
Intrinsic value of options (in thousands)
|
|
$
|
13,699
|
|
|
$
|
3,065
|
|
|
$
|
1,737
|
|
F-36
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 11 — Stockholders’ Equity (Continued)
Restricted Stock
A summary of restricted stock activity under the Plan for the year ended December 28, 2018 was as follows:
|
|
Shares
(in 000’s)
|
|
|
Weighted-
Average Grant-
Date Fair Value
|
|
Outstanding at December 29, 2017
|
|
|
21
|
|
|
$
|
9.60
|
|
Granted
|
|
|
11
|
|
|
|
29.43
|
|
Vested
|
|
|
(21
|
)
|
|
|
9.70
|
|
Outstanding at December 28, 2018
|
|
|
11
|
|
|
$
|
29.80
|
|
Restricted Stock Units
A summary of restricted stock units’ activity under the Plan for the year ended December 28, 2018 was as follows:
|
|
Units
(in 000’s)
|
|
|
Weighted-
Average Grant-
Date Fair Value
|
|
Outstanding at December 29, 2017
|
|
|
488
|
|
|
$
|
9.45
|
|
Granted
|
|
|
49
|
|
|
|
17.22
|
|
Vested
|
|
|
(206
|
)
|
|
|
9.65
|
|
Forfeited or expired
|
|
|
(9
|
)
|
|
|
11.05
|
|
Outstanding at December 28, 2018
|
|
|
322
|
|
|
$
|
10.46
|
|
Stock Offering
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.
F-37
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 12 — Commitments and Contingencies
Lease Obligations
The Company leases certain property, plant and equipment under non-cancellable capital and operating lease agreements. These leases vary in duration and contain renewal options and/or escalation clauses. Current and long-term obligations under capital leases are included in the Company’s Consolidated Balance Sheets.
Estimated future minimum lease payments under leases having initial or remaining non-cancelable lease terms more than one year as of December 28, 2018 are as follows (in thousands):
Year Ended
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
2019
|
|
$
|
2,606
|
|
|
$
|
1,153
|
|
2020
|
|
|
2,202
|
|
|
|
332
|
|
2021
|
|
|
980
|
|
|
|
143
|
|
2022
|
|
|
507
|
|
|
|
4
|
|
2023
|
|
|
202
|
|
|
|
—
|
|
Thereafter
|
|
|
12
|
|
|
|
—
|
|
Total minimum lease payments, including interest
|
|
$
|
6,509
|
|
|
$
|
1,632
|
|
Less amounts representing interest
|
|
|
—
|
|
|
|
75
|
|
Total minimum lease payments
|
|
$
|
6,509
|
|
|
$
|
1,557
|
|
Rent expense was as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Rent expense
|
|
$
|
2,293
|
|
|
$
|
2,436
|
|
|
$
|
2,243
|
|
The Company had the following assets under capital lease at December 28, 2018 and December 29, 2017 (in thousands):
|
|
2018
|
|
|
|
|
2017
|
|
Machinery and equipment
|
|
$
|
2,650
|
|
|
|
|
$
|
1,430
|
|
Furniture and fixtures
|
|
|
1,925
|
|
|
|
|
|
1,611
|
|
Leasehold improvements
|
|
|
27
|
|
|
|
|
|
—
|
|
Total assets under capital lease, gross
|
|
$
|
4,602
|
|
|
|
|
$
|
3,041
|
|
Less accumulated depreciation
|
|
|
1,274
|
|
|
|
|
|
581
|
|
Total assets under capital lease, net
|
|
$
|
3,328
|
|
|
|
|
$
|
2,460
|
|
Depreciation expense for assets under capital lease was as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Depreciation expense
|
|
$
|
760
|
|
|
$
|
580
|
|
|
$
|
220
|
|
As of December 28, 2018, there were open purchase orders of $4,668,000 and severance payable of $41,000.
F-38
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 12 — Commitments and Contingencies (Continued)
Indemnification Agreements
The Company has entered into indemnification agreements with its directors and officers that may require the Company: (a) to indemnify them against liabilities that may arise by reason of their status or service as directors or officers, except as prohibited by applicable law; (b) to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and (c) to make a good faith determination whether or not it is practicable for the Company to obtain directors’ and officers’ insurance. The Company currently has directors’ and officers’ liability insurance through a third-party carrier. Also, in connection with the sale of products and entering into business relationships in the ordinary course of business, the Company may make representations affirming, among other things, that its products do not infringe on the intellectual property rights of others and agrees to indemnify customers against third-party claims for such infringement as well as its negligence. The Company has not been required to make material payments under such provisions.
Tax Filings
The Company’s tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. Management believes the Company has adequately provided for taxes; however, final assessments, if any, could be significantly different than the amounts recorded in the consolidated financial statements.
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.
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. The most significant of these actions, proceedings and investigations, both of which were resolved and disclosed prior to the filing of this Annual Report on Form 10-K, are described below. 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.
Stockholder Securities Litigation: Todd Action
On July 8, 2014, a putative securities class action lawsuit was filed by Edward Todd against STAAR and three officers in the U.S. District Court for the Central District of California. The plaintiff claimed that STAAR made misleading statements to and omitted material information from our investors between February 27, 2013 and September 29, 2014 about alleged regulatory violations at STAAR’s Monrovia manufacturing facility. On June 20, 2017, plaintiff sought preliminary approval of a proposed class action settlement in the amount of $7,000,000. On or about July 28, 2017, the Company’s insurance carriers directly funded the entire settlement amount to the court-authorized escrow account. On October 23, 2017, the court granted plaintiff’s application for final approval of the class action settlement in the amount of $7,000,000.
F-39
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 12 — Commitments and Continge
ncies (Continued)
Litigation and Claims (Continued)
Stockholder Derivative Litigation: Forestal Action
On June 21, 2016, Kevin Forestal filed a stockholder derivative complaint against our then-current Board of Directors. On January 31, 2017, the court granted the Company’s Motion to Dismiss. On June 29, 2018, the Ninth Circuit Court of Appeals affirmed the District Court’s ruling dismissing the complaint.
Note 13 — Related Party Transactions
The Company has made various advances to certain non-executive employees. Amounts due from employees included in prepayments, deposits, and other current assets at December 28, 2018 and December 29, 2017 were as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Due from employees
|
|
$
|
10
|
|
|
$
|
12
|
|
Note 14 — Supplemental Disclosure of Cash Flow Information
The Company’s non-cash operating activities, non-cash investing and financing activities, and cash paid were as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Non-cash operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance receivable
|
|
$
|
—
|
|
|
$
|
7,000
|
|
|
$
|
—
|
|
Settlement liability
|
|
$
|
—
|
|
|
$
|
7,000
|
|
|
$
|
—
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets obtained by capital lease
|
|
$
|
1,656
|
|
|
$
|
563
|
|
|
$
|
2,383
|
|
Purchase of property and equipment included in accounts payable
|
|
$
|
207
|
|
|
$
|
121
|
|
|
$
|
485
|
|
Cash paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
130
|
|
|
$
|
90
|
|
|
$
|
112
|
|
Taxes
|
|
$
|
635
|
|
|
$
|
881
|
|
|
$
|
699
|
|
F-40
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 15 —
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):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,968
|
|
|
$
|
(2,139
|
)
|
|
$
|
(12,129
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
42,598
|
|
|
|
41,025
|
|
|
|
40,352
|
|
Less: Unvested restricted stock
|
|
|
(11
|
)
|
|
|
(21
|
)
|
|
|
(23
|
)
|
Denominator for basic calculation
|
|
|
42,587
|
|
|
|
41,004
|
|
|
|
40,329
|
|
Weighted average effects of potentially diluted common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,360
|
|
|
|
—
|
|
|
|
—
|
|
Unvested restricted stock
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock units
|
|
|
300
|
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted calculation
|
|
|
45,257
|
|
|
|
41,004
|
|
|
|
40,329
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.30
|
)
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.30
|
)
|
Because the Company had a net loss for the years ended 2017 and 2016, the number of diluted shares is equal to the number of basic shares. Outstanding options, 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 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.
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
|
315
|
|
|
|
2,237
|
|
|
|
4,069
|
|
Restricted stock and restricted stock units
|
|
|
—
|
|
|
|
203
|
|
|
|
76
|
|
Total
|
|
|
315
|
|
|
|
2,440
|
|
|
|
4,145
|
|
Note 16
— 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):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Non-consignment sales
|
|
$
|
106,338
|
|
|
$
|
74,163
|
|
|
$
|
65,037
|
|
Consignment sales
|
|
|
17,616
|
|
|
|
16,448
|
|
|
|
17,395
|
|
Total net sales
|
|
|
123,954
|
|
|
|
90,611
|
|
|
|
82,432
|
|
F-41
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 16
— Disaggregation of Revenues, Geographic Sales and Product Sales (Continued)
The Company markets and sells its products in more than 75 countries and conducts its manufacturing in the United States. Other than China, Japan and the United States, the Company does not conduct business in any country in which its sales in that country exceed 10% of consolidated net sales. Sales are attributed to countries based on location of customers. The composition of the Company’s net sales to unaffiliated customers was as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
China
(1)
|
|
$
|
46,070
|
|
|
$
|
24,473
|
|
|
$
|
16,624
|
|
Japan
|
|
|
23,151
|
|
|
|
18,125
|
|
|
|
17,327
|
|
United States
|
|
|
7,316
|
|
|
|
7,894
|
|
|
|
9,859
|
|
Other
(2)
|
|
|
47,417
|
|
|
|
40,119
|
|
|
|
38,622
|
|
Total net sales
|
|
$
|
123,954
|
|
|
$
|
90,611
|
|
|
$
|
82,432
|
|
(1)
|
Starting in fiscal 2018, the China region includes sales into China and Hong Kong. Sales for fiscal 2017 and 2016, also reflect sales into Hong Kong so as to be comparable to 2018 presentation, where previously Hong Kong sales were included in the other line item.
|
(2)
|
No other location individually exceeds 10% of the total net sales.
|
In addition, domestic and foreign sales were as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
$
|
7,316
|
|
|
$
|
7,894
|
|
|
$
|
9,859
|
|
Foreign
|
|
|
116,638
|
|
|
|
82,717
|
|
|
|
72,573
|
|
Total net sales
|
|
$
|
123,954
|
|
|
$
|
90,611
|
|
|
$
|
82,432
|
|
100% of the Company’s sales are generated from the ophthalmic surgical product segment and the chief operating decision maker makes the operating decisions and allocates resources based upon the consolidated operating results, therefore, the Company operates as one operating segment for financial reporting purposes. The Company’s principal products are IOLs used in cataract surgery and ICLs used in refractive surgery. The composition of the Company’s net sales by product line was as follows (in thousands):
|
|
Years Ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
ICLs
|
|
$
|
101,082
|
|
|
$
|
68,325
|
|
|
$
|
59,111
|
|
Other product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
IOLs
|
|
|
16,193
|
|
|
|
17,258
|
|
|
|
19,706
|
|
Other surgical products
|
|
|
6,679
|
|
|
|
5,028
|
|
|
|
3,615
|
|
Total other product sales
|
|
|
22,872
|
|
|
|
22,286
|
|
|
|
23,321
|
|
Total net sales
|
|
$
|
123,954
|
|
|
$
|
90,611
|
|
|
$
|
82,432
|
|
F-42
STAAR SURGICAL COMPANY AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 16
— Disaggregation of Revenues, Geographic Sales and Product Sales (Continued)
The composition of the Company’s long-lived assets, consisting of property and equipment, net, and intangible assets, net, between those in the United States, Switzerland, and Japan is set forth below as of December 28, 2018 and December 29, 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
U.S.
|
|
$
|
10,416
|
|
|
$
|
8,523
|
|
Switzerland
|
|
|
705
|
|
|
|
912
|
|
Japan
|
|
|
573
|
|
|
|
612
|
|
Total
|
|
$
|
11,694
|
|
|
$
|
10,047
|
|
The Company sells its products internationally, which subjects the Company to several potential risks, including fluctuating exchange rates (to the extent the Company’s transactions are not in U.S. dollars), regulation of fund transfers by foreign governments, United States and foreign export and import duties and tariffs, and political instability.
Note 17
—
Quarterly Financial Data (Unaudited)
Summary unaudited quarterly financial data from continuing operations for years ended 2018 and 2017 was as follows (in thousands except per share data). The Company has derived this data from the unaudited consolidated interim financial statements that, in the Company’s opinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.
December 28, 2018
|
|
1
st
Quarter
|
|
|
2
nd
Quarter
|
|
|
3
rd
Quarter
|
|
|
4
th
Quarter
|
|
Net sales
|
|
$
|
27,093
|
|
|
$
|
33,905
|
|
|
$
|
31,770
|
|
|
$
|
31,186
|
|
Gross profit
|
|
|
19,431
|
|
|
|
25,227
|
|
|
|
23,860
|
|
|
|
22,992
|
|
Net income
|
|
|
583
|
|
|
|
1,830
|
|
|
|
1,459
|
|
|
|
1,096
|
|
Net income per share – basic and diluted
|
|
|
0.01
|
|
|
|
0.04
|
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2017
|
|
1
st
Quarter
|
|
|
2
nd
Quarter
|
|
|
3
rd
Quarter
|
|
|
4
th
Quarter
|
|
Net sales
|
|
$
|
20,350
|
|
|
$
|
21,936
|
|
|
$
|
23,473
|
|
|
$
|
24,852
|
|
Gross profit
|
|
|
14,577
|
|
|
|
15,474
|
|
|
|
16,849
|
|
|
|
17,380
|
|
Net income (loss)
|
|
|
(2,203
|
)
|
|
|
(971
|
)
|
|
|
1,173
|
|
|
|
(138
|
)
|
Net income (loss) per share – basic and diluted
|
|
|
(0.05
|
)
|
|
|
(0.02
|
)
|
|
|
0.03
|
|
|
|
0.00
|
|
Quarterly and year-to-date computations of net income (loss) per share amounts are made independently. Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year.
Note 18 – Reclassifications
Certain compensation related expenses were reclassified from General and Administrative to Marketing and Selling and Research and Development line items on the Consolidated Statements of Operations for the years ended 2017 and 2016 to conform with 2018 presentation.
F-43