STAAR Surgical Company Form 10-Q Summary
Reporting period: Three months ended April 3, 2015, compared with the three months ended April 4, 2014. The request metadata identifies “2014 Q1,” but the filing is for the first quarter of 2015. The financial statements are unaudited and prepared under U.S. GAAP.
Business Context
STAAR designs, manufactures, and sells ophthalmic surgical products, principally implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company sells in more than 60 countries and operates as one ophthalmic surgical product segment. Approximately 85% of fiscal 2014 sales were generated outside the United States.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $18.858 million | $20.178 million | Down 6.5% |
| Gross profit | $12.899 million | $13.884 million | Down 7.1% |
| Gross margin | 68.4% | 68.8% | Down 40 basis points |
| Operating loss | $1.510 million | $1.342 million | Loss increased 12.4% |
| Net loss | $2.340 million | $1.359 million | Loss increased 72.2% |
| Net loss per diluted share | $0.06 | $0.04 | Higher loss per share |
| Cash used in operating activities | $2.209 million | $2.594 million | Use decreased |
| Capital expenditures | $0.328 million | $1.414 million | Down 76.8% |
Operating loss was approximately 8.0% of sales, compared with 6.7% in the prior-year quarter. Net loss was approximately 12.4% of sales, compared with 6.7%. Research and development expense increased 2.7% to $3.579 million, including $1.4 million of FDA remediation expense. Stock-based compensation charged to expense was $0.994 million, compared with $1.500 million.
Product sales were mixed: ICL sales were $12.255 million, essentially flat year over year; IOL sales declined 19.0% to $5.358 million; and other surgical product sales declined 6.0% to $1.245 million. Foreign currency changes had an approximately $0.7 million unfavorable effect on sales and contributed to an $0.892 million foreign-currency transaction loss, compared with a $0.066 million gain in the prior-year quarter.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $10.809 million at April 3, 2015, down from $13.013 million at January 2, 2015.
- Current assets were $42.988 million and current liabilities were $15.048 million, implying a current ratio of approximately 2.9.
- The Japanese subsidiary had $4.178 million outstanding under a fully drawn line of credit, with no remaining availability. The facility expires June 30, 2015 and is renewable quarterly.
- The Swiss subsidiary had no borrowings under its approximately $1.0 million credit facility, which was fully available at quarter-end.
- Capital lease obligations totaled $0.753 million, including $0.342 million current and $0.411 million long term.
- Total liabilities were $20.460 million, and stockholders’ equity was $36.349 million.
- Management stated that current cash and operating cash flows should be sufficient for foreseeable working-capital needs, including approximately $4 million of FDA remediation costs expected in 2015. The company does not maintain a U.S. credit line.
Material Changes and Management Commentary
- ICL sales in EMEA declined 2% in dollars but increased 9% in units, while APAC sales declined 3% because of a 6% unit decline. North American ICL sales increased 18% in both units and dollars.
- IOL sales were affected by an unusually high Q1 2014 comparison, Japanese customer tax-planning purchases, and supply constraints affecting the KS-IOL product line. Management expected the third-party supplier’s production challenges to be resolved by the end of Q2 2015.
- Management expected customary toric ICL order-fulfillment levels to return during Q2 2015. ICL backlog declined to $0.340 million from a reported $3.3 million peak during Q1.
- Gross margin benefited from improved average unit costs and product mix but was offset by foreign-exchange effects, higher inventory reserves, and higher freight and distribution costs.
- Management expected an estimated annual effective tax rate of 21%.
Outlook, Risks, Contingencies, and Unusual Items
STAAR continued remediation of its manufacturing and quality systems following the FDA’s 2014 Warning Letter and a February 2015 Form 483 containing ten observations. The observations primarily addressed design changes, design transfer, verification and validation, documentation practices, and environmental monitoring. The company stated that remediation would take more than a year and that additional FDA action could materially affect operations. Management expected approximately $2.6 million of additional FDA remediation expense during the remainder of 2015 and indicated that costs could continue into 2016.
FDA approval of the Toric ICL in the United States remained uncertain and was not expected until the company made sufficient progress addressing the Warning Letter and Form 483 issues. The company also faces foreign-exchange exposure, international regulatory and political risks, reimbursement changes, dependence on distributors and suppliers, and potential product-quality or manufacturing disruptions. A South Korean distributor accounted for 12% of Q1 2015 sales.
The SEC concluded its informal inquiry into the company’s FDA-related disclosures on April 1, 2015 and did not intend to recommend enforcement action. A putative securities class-action lawsuit concerning alleged disclosures about regulatory violations remained pending; the company considered the allegations without merit and could not estimate any possible loss.
Subsequent events included approximately 214,000 stock options and 88,000 restricted stock units granted on April 7, 2015, a May 1, 2015 guarantee related to Spanish trade receivables that reduced Swiss credit availability, and approximately $0.469 million of separation costs recorded in May 2015.
Most Important Facts to Verify
- Whether FDA remediation is completed on schedule and within the expected 2015 cost estimate, and whether additional regulatory action occurs.
- The timing and likelihood of U.S. FDA approval for the Toric ICL.
- Whether KS-IOL supply constraints and toric ICL fulfillment issues were resolved as projected.
- The sustainability of cash balances given continuing operating losses, approximately $4 million of expected 2015 remediation costs, and no remaining availability on the Japanese credit line.
- The impact of currency movements, particularly the euro and other foreign currencies, on sales, margins, and transaction gains or losses.
- The outcome and potential financial exposure of the pending securities class action.