STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and six months ended July 3, 2015, compared with July 4, 2014. The supplied metadata identifies “2014 Q2,” but the filing itself is the 2015 second-quarter Form 10-Q, filed August 7, 2015. The financial statements are unaudited and prepared under U.S. GAAP.
Business context
STAAR designs, manufactures and sells implantable lenses and delivery systems for ophthalmic surgery. Its principal products are implantable Collamer lenses for refractive surgery and intraocular lenses for cataract surgery. The company sells in more than 60 countries, operates as one ophthalmic surgical products segment, and generated approximately 85% of first-half 2015 sales outside the United States.
Financial performance and position
| Metric | Three months ended July 3, 2015 | Three months ended July 4, 2014 | Six months ended July 3, 2015 | Six months ended July 4, 2014 |
|---|---|---|---|---|
| Net sales | $18.7 million | $20.0 million | $37.5 million | $40.2 million |
| Gross profit | $12.4 million | $13.7 million | $25.3 million | $27.6 million |
| Gross margin | 66.3% | 68.2% | 67.3% | 68.5% |
| Operating loss | $(1.7) million | $(1.4) million | $(3.3) million | $(2.7) million |
| Net loss | $(1.6) million | $(1.8) million | $(3.9) million | $(3.1) million |
| Basic and diluted loss per share | $(0.04) | $(0.05) | $(0.10) | $(0.08) |
| Operating cash flow | Not separately provided | Not separately provided | $(1.4) million | $(4.1) million |
Revenue declined 7% in both the quarter and six-month period. ICL sales were essentially flat, while IOL sales decreased 19% and other surgical product sales decreased 16% in the quarter. Foreign exchange reduced quarterly and year-to-date sales by approximately $2.1 million and $3.4 million, respectively. The company attributed lower gross margins primarily to weaker euro-denominated sales against largely U.S.-dollar-denominated costs.
Quarterly operating loss widened despite lower general and administrative and marketing expenses. Research and development expense increased 42% in the quarter and 19% year to date, primarily due to quality-system remediation costs. Net loss improved in the quarter due partly to favorable foreign-currency results, but increased for the six-month period.
Cash and cash equivalents were $15.3 million at July 3, 2015, compared with $13.0 million at January 2, 2015. Total assets were $60.3 million and total liabilities were $20.5 million. Stockholders’ equity was $39.8 million, compared with $37.1 million at year-end.
The Japanese subsidiary had approximately $4.1 million outstanding under a fully drawn line of credit, with no remaining availability. The Swiss subsidiary had no borrowings and approximately $614,000 of remaining availability after a Bankinter guarantee. Capital lease obligations totaled $654,000, including $349,000 current. The company reported compliance with its credit covenants.
Material changes versus the prior comparable period
- Sales decreased 7% year over year in both the second quarter and first half.
- ICL sales remained broadly stable, but IOL sales declined 19% in both periods; cited factors included foreign exchange, the discontinuation of sales to a former German distributor and unusually high prior-year distributor stocking.
- Gross margin declined by 1.9 percentage points in the quarter and 1.2 percentage points year to date.
- General and administrative expense decreased 12% in the quarter and 8% year to date, primarily from lower stock-based compensation and reduced travel and consulting expense.
- Marketing and selling expense decreased 17% in the quarter and 13% year to date.
- Research and development expense increased 42% in the quarter and 19% year to date because of quality-system remediation.
- Operating cash usage improved from $4.1 million to $1.4 million year to date, while financing cash flow increased to $4.5 million, including $2.8 million from warrant exercises and $1.9 million from stock-option exercises.
- Broadwood exercised 700,000 warrants for $2.8 million in May 2015; the related shares were issued on July 27, 2015, after the quarter ended.
Guidance, outlook, risks and unusual items
- Management expects approximately $4 million of quality-system remediation costs during 2015, of which $2.6 million had been incurred in the first six months. These costs are expected to continue into 2016, but the remaining amount was not estimable.
- Management expects to increase global ICL prices by approximately 5% to 7%, with most increases beginning around October 1, 2015.
- ICL backlog declined to approximately $100,000 from a $3.3 million peak in the first quarter, reflecting improved production. TICL order fulfillment returned to customary levels during the quarter.
- The FDA’s 2014 Warning Letter and 2015 Form 483 remain significant risks. The observations concern manufacturing, design-change, validation, documentation and environmental-monitoring processes. Management expects remediation to take more than one year.
- FDA approval of the Toric ICL in the United States remains uncertain and is not expected until the FDA determines that the company has sufficiently addressed the Warning Letter and Form 483 issues. Further regulatory or legal action could materially affect operations.
- The company stated that it does not expect to generate sufficient U.S. income to use all U.S. net operating loss tax credits before expiration. It projected an annual effective tax rate of 67%.
- A putative securities class action alleges misleading disclosures concerning regulatory violations at the Monrovia facility. The company considers the allegations meritless and intends to defend the case, but cannot estimate potential loss.
- Key operating risks include foreign-currency volatility, international regulatory and reimbursement changes, customer concentration, product quality and regulatory compliance, supply-chain issues, and dependence on international markets.
- Management believes existing cash and operating cash flow will meet foreseeable working-capital needs, but acknowledges that additional financing may be required and may not be available on acceptable terms.
Important facts for investors to verify
- Confirm the period being analyzed: the filing covers 2015 second-quarter and year-to-date results, not 2014 Q2.
- Track whether ICL price increases offset currency pressure and whether IOL sales recover from distributor and market-related declines.
- Monitor quality-system remediation spending, FDA responses, inspection results and the timing of TICL approval.
- Assess liquidity after considering the fully drawn Japanese credit line, ongoing operating losses and remediation spending.
- Review foreign-exchange exposure, particularly the effect of euro weakness on revenue and gross margin.
- Follow developments in the securities litigation and any potential regulatory or product-liability contingencies.
- Reconcile post-quarter issuance of 700,000 shares to Broadwood with subsequent share counts, dilution and warrant balances.