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STAA > SEC Filings for STAA > Form 10-Q on 6-Aug-2013All Recent SEC Filings

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Form 10-Q for STAAR SURGICAL CO


6-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The matters addressed in this Item 2 that are not historical information constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and STAAR can give no assurances that its expectations will prove to be correct. Actual results could differ materially from those described in this report because of numerous factors, many of which are beyond the control of STAAR. These factors include, without limitation, those described in our Annual Report on Form 10-K for the fiscal year ended December 28, 2012. STAAR undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

The following discussion should be read in conjunction with STAAR's interim condensed financial statements and the related notes provided under "Item 1- Financial Statements" above.

Overview

STAAR Surgical Company ( "we," "us," the "Company," and "STAAR") designs, develops, manufactures and sells implantable lenses for the eye and injector devices used to deliver these lenses into the eye through a small incision. We are the world's leading manufacturer of intraocular lenses used in corrective or "refractive" surgery, and we also make lenses for use in surgery to treat cataracts. All of the lenses we make are foldable, which allows the surgeon to insert them into the eye through a small incision during minimally invasive surgery. Refractive surgery is performed to treat the type of visual disorders that have traditionally been corrected using eyeglasses or contact lenses. We refer to our lenses used in refractive surgery as "implantable Collamer® lenses" or "ICLs" and market them under the Visian® brand name. The field of refractive surgery includes both lens-based procedures, using products like the Visian ICL®, and laser-based procedures like LASIK. Successful refractive surgery can correct common vision disorders such as myopia (near-sightedness), hyperopia (far-sightedness) and astigmatism (irregular shape of cornea causing blurred vision). Cataract surgery is a common outpatient procedure where the eye's natural lens that has become cloudy with age is removed and replaced with an artificial lens called an intraocular lens (IOL) to restore the patient's vision.

STAAR Surgical Company, Visian®, Collamer®, STAARVISC®, Elastimide®, nanoFLEX® nanoPOINT™, CentraFLOW™, AquaPORT™, Epiphany® and AquaFlow™ are trademarks or registered trademarks of STAAR in the U.S. and other countries.

Collamer® is the brand name for STAAR's proprietary collagen copolymer lens material.

Products

A detailed description of STAAR's business appears in our Annual Report on Form 10-K for the fiscal year ended December 28, 2012, along with a glossary explaining many of the specialized terms used in describing our products and our business. We recommend that readers unfamiliar with STAAR refer to that description.

ICLs - Implantable Collamer Lenses for Refractive Surgery. Sales of refractive lenses make up over half of our total sales. Made from our proprietary biocompatible Collamer material, highlights of STAAR's family of Visian ICL products are as follows:

· The Visian ICL treats refractive disorders such as myopia (near-sightedness) and hyperopia (far-sightedness). STAAR began selling the Visian ICL outside the U.S. in 1996 and in the U.S. in 2006.

· The Visian ICL or TICL, treats myopic and hyperopic patients with astigmatism. STAAR has been selling the Visian TICL outside the U.S. since 2002. STAAR remains in dialogue with the FDA regarding its PMA Supplement submission seeking approval to sell the TICL in the U.S. This matter is further discussed below under, "Status of Regulatory Submission."

· STAAR currently sells several versions of the Visian ICL and Visian TICL globally; the V4, the V4b, which expands the population of eligible patients to individuals in the lower diopter ranges for both myopia and hyperopia, and the V4c, which includes the proprietary CentraFLOW technology (a port, KS-AquaPORT, in the center of the myopic Visian ICL and TICL) that eliminates the need for a peripheral iridectomy or irodotomy procedure prior to implanting the Visian ICL.

· STAAR's goal is to position the Visian ICL and TICL products throughout the world as primary choices for refractive surgery.

IOLs - Intraocular Lenses for Cataract Surgery. Our range of foldable IOLs for patients undergoing cataract surgery includes the following:

· Aspheric IOLs, available in single-piece and three-piece designs made from (i) Collamer, STAAR's proprietary biocompatible collagen copolymer lens material and (ii) from silicone. Aspheric IOLs are designed to improve the patient's quality of vision when compared to earlier spherical IOL designs. The aspheric silicone lenses are available in the U.S. and are sold preloaded in certain markets outside of the U.S., predominately in Japan. The Collamer three piece lens is only marketed and sold in the U.S.

· The nanoFLEX IOL, a single-piece Collamer aspheric IOL that can be implanted through a micro-incision with a single-use disposable nanoPOINT injector system is available in the U.S and territories that accept the CE Mark.

· The Preloaded Injector, a silicone or acrylic IOL preloaded into a single-use disposable injector is currently available outside the U.S. The acrylic IOL Preloaded Injector uses an acrylic lens sourced from a third party manufacturer. The KS-SP (single-piece) and KS-X (three piece) preloaded acrylic IOLs that can be implanted through a micro-incision with a single-use disposable injector system is available in Japan and on a limited basis in Europe. The third party supplier of these acrylic lenses is currently unable to meet STAAR's demand for the new KS IOL products, thus the company experienced approximately $1,200,000 in backorders from its European customers in the second quarter of 2013. We are seeking alternative suppliers but cannot predict whether our efforts will prove successful.

· STAAR Toric IOL is a single piece silicone toric IOL, used in cataract surgery to treat preexisting astigmatism and is currently only marketed in the U.S. A Collamer version of our toric IOL -nanoFLEX Toric has CE mark approval and initial shipments began to Europe late in the second quarter.

Other Surgical Products. We also sell other instruments and devices used in cataract or refractive surgery, which we either manufacture or have manufactured for us. However, we have been deemphasizing these products since 2009 because of their lower overall gross profit margins. In addition, we report sales of low margin injectors to our third party supplier of IOLs under this category. In recent periods, these sales have increased due to the parties' launch of their respective pre-loaded IOL systems, which are currently experiencing backorder due to high demand and the limited supply of third party IOLs.

Operations

STAAR operates its global administrative headquarters and a manufacturing facility in Monrovia, California, and also maintains manufacturing facilities in Nidau, Switzerland, and Aliso Viejo, California.

STAAR is implementing a project to consolidate its manufacturing into a single site at its Monrovia, California location, which we expect to yield significant savings in cost of goods, lower our global administrative and regulatory costs and reduce income taxes. Due to the higher than anticipated demand for the Visian ICL, we are extending the completion date for our closure of our Swiss manufacturing facility until the middle of 2014. During the second quarter of 2013, all sterile silicone IOLs were manufactured in the U.S. The Company received approval to manufacture and ship Visian ICLs, manufactured in the U.S. to countries that accept the CE Mark. This project, which is subject to significant risks, is further described under Note 11, "Manufacturing Consolidation Project and Tax Strategy."

Strategy and Key Operational Metrics

STAAR's strategy is to be valued as a leading global provider of innovative intraocular lens system technologies. STAAR employs a commercialization strategy that focuses on achieving sustainable profitable growth.

STAAR's key operational metrics for 2013 are guided by two principal strategic goals: to achieve and maintain profitability and to lay the groundwork for further growth. In pursuit of these goals, STAAR has aligned its business initiatives during 2013 along four key operational metrics it uses to gauge its success during the year. Those metrics are as follows:

· Increase total revenue by 8% to 10%.

- As discussed below in "Results of Operations," our total revenue increased by 14% in the second quarter of 2013. Total revenue increased by 15% in the first half of 2013. On July 31, 2013, we increased this revenue metric upward for growth in the range of 12% to 14% growth for the full year.

· Increase gross profit margins by 250 basis points for the full year.

- As discussed below in "Results of Operations," our gross profit was 69.5% in the second quarter of 2013 compared to 69.3% in the second quarter of 2012, and increased to 69.9% for the first half of 2013.

· Achieve profitability in each quarter of 2013.

- As discussed below in "Results of Operations," we achieved net income of $0.3 million in the second quarter of 2013 and $0.7 million for the first half of 2013.

· Manage the manufacturing consolidation with no material disruption to customer supply requirements or quality.

- The Company's consolidation efforts are proceeding substantially according to plans. On July 31, 2013, we revised this metric by extending the transfer of Swiss operations until the middle of 2014 to assure that we can meet higher than anticipated demand for the Visian ICL. By the end of 2013, we expect to have 100% of all IOL production, two thirds of ICL's and on third of TICL's manufactured in the U.S.

Other Highlights

In the second quarter of 2013, Visian ICLs grew in Europe, Middle East and Africa (EMEA) by 47% in revenue while units increased 30% and price 13%; in Asia Pacific (APAC) an increase of 29% in revenue, while units increased 28% and price 1%; in North America (NA) an increase of 9% in revenue, while units increased 13% and price declined 3%. We experienced noteworthy growth in China with a 77% increase in revenue, in France with a 41% increase, in Latin America with a 39% increase, in the Middle East with a 37% increase and in Spain with a 127% increase (driven by the conversion from a distributor sales model to a direct sales model). We believe growth in EMEA is due to growing acceptance of the Centra FLOW technology and new sales personnel hired in 2012. Regarding China, we believe we will continue to see growth during the second half of the year, followed by the anticipated approval of the Visian ICL with Centra FLOW technology during the first half of 2014.

Backorders of our preloaded acrylic IOLs in Europe were approximately $1,200,000 at the end of second quarter, due to demand for our KS-SP and KS-X products and the supply constraints we continue to experience from a third party supplier. This backorder position is expected to continue to limit IOL sales for the entire year and we are evaluating potential options to meet this demand, although this is an unlikely option in the short term. Our overall gross margins were limited primarily by a large increase in low margin IOL injector systems sales to the third party supplier for the buildup of the acrylic preloaded product supply for both companies. IOL sales in Japan represent 57% of total IOL sales and grew by 15% in units during the second quarter of 2013. With the weakening of the yen total IOL revenue in Japan was essentially flat. IOL sales in China declined by $810,000 due to our need to suspend allocation of KS IOL products available for sale due to the supply constraints.

STAAR continues its manufacturing consolidation efforts in the second quarter of 2013 in preparation of transferring Swiss and Japanese manufacturing activities to our Monrovia facility. In the second quarter of 2013, we spent $613,000 in consolidation costs and we expect to spend an additional $750,000 during the remainder of 2013.

Status of Regulatory Submissions. The Company received regulatory approval to sell and market the Visian ICL with CentraFLOW technology in Korea and Argentina during the second quarter of 2013. The Company currently anticipates approval of the Visian ICL with CentraFLOW for India during the third quarter and for China during the first half of 2014. In addition, the Company expects to receive CE Mark approval for the Visian ICL V5, which is preloaded and offers a larger optical zone, before the end of 2013. The current plans are to officially launch the product at the European Society of Cataract and Refractive Surgeons (ESCRS) meeting in October of this year.

Regarding our PMA Supplement submission to the FDA seeking approval for the TICL, on November 15, 2012, STAAR submitted to the FDA (1) clinical data showing no statistical difference in the clinical outcomes with or without the patient data that was obtained outside the study windows, (2) engineering data regarding the lens design, and (3) a validation report for the Toric ICL power calculation software. STAAR remains in dialogue with the agency regarding our PMA Supplement, and has responded to a series of questions from the FDA in the second quarter of 2013. The Company has been told by the FDA that the current intent is to take the TICL submission to the Advisory Panel. A date has not been established and the Company is responding to questions from the FDA and preparing the information needed for the Panel Package necessary for that meeting to occur. STAAR cannot predict when, or if, the FDA will grant approval of the TICL for use in the United States.

On October 9, 2012, STAAR submitted to the FDA a 180 day PMA Supplement regarding the V4c version of the Visian ICL. On February 12, 2013, in response to a request by the FDA, we submitted a Pre-Submission for the PMA Supplement. On June 17, 2013, the FDA responded to our proposal. We are evaluating the FDA's recommended changes to our proposed protocol and will respond in the future.

Critical Accounting Policies

This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.

An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the six months ended June 28, 2013 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 28, 2012.

Results of Operations

The following table shows the percentage of our total sales represented by the
specific items listed in our statements of operations for the periods indicated.

                            Percentage of Net Sales for       Percentage of Net Sales for Six
                                   Three Months                           Months
                           June 28,            June 29,        June 28,            June 29,
                             2013                2012            2013                2012
 Net sales                      100.0 %             100.0 %         100.0 %             100.0 %
 Cost of sales                   30.5                30.7            30.1                30.2
 Gross profit                    69.5                69.3            69.9                69.8

 General and
 administrative                  21.6                22.7            21.8                23.8
 Marketing and selling           31.2                33.7            30.3                31.9
 Research and
 development                      9.3                 9.5             8.4                 9.7
 Medical device tax               0.2                   -             0.3                   -
 Other general and
 administrative
 expenses                         3.4                 4.4             4.2                 4.0
                                 65.7                70.3            65.0                69.4
 Operating income
 (loss)                           3.8               (1.0)             4.9                 0.4
 Other income, net                1.0                   -           (0.3)                 0.6
 Income (loss) before
 provision for income
 taxes                            4.8               (1.0)             4.6                 1.0
 Provision for income
 taxes                            3.3                 2.2             2.5                 1.9
 Net income (loss)                1.5 %             (3.1) %           2.1 %             (0.8) %

* Denotes change is greater than +100%.

Net Sales
                                                                   Fav/
                                                                 (Unfav) %                                Fav/ (Unfav)
                                   Three Months Ended             Change           Six Months Ended         % Change
                                                                   2013          June 28,     June 29,        2013
                             June 28, 2013     June 29, 2012     vs. 2012          2013         2012        vs. 2012
Net sales                   $        18,164   $        15,942          13.9 %   $   36,165       31,451           15.0 %

ICL                                  11,261             8,606          30.9         21,892       17,211           27.2
IOL                                   5,863             6,774        (13.4)         12,211       13,132          (7.0)
Other                                 1,040               562          85.1          2,062        1,108           86.1

Net sales for the three months ended June 28, 2013 were $18.2 million, an increase of 13.9% compared to the $15.9 million reported during three months ended June 29, 2012. Net sales for the six months ended June 28, 2013 were $36.2 million, a 15% increase compared with $31.5 million reported during the six months ended June 28, 2012. The increase in net sales for the three and six month periods was due to increased sales of ICLs and Other surgical products, partially offset by a decrease in IOL sales. The effect of exchange had a negative impact on sales of $1,010,818 and $1,760,532, respectively, for the three and six months ended June 28, 2013.

Total ICL sales for the three months ended June 28, 2013 were $11.3 million, an increase of 30.9% compared with $8.6 million reported during the three months ended June 29, 2012. Total ICL sales for the six months ended June 28, 2013 were $21.9 million, an increase of 27.2% compared with $17.2 million reported during the six months ended June 29, 2012. ICL sales increased in each of the Company's top 11 markets led by China which grew 77% and 39%, respectively, and Spain which grew 127% and 141%, respectively, during the three and six months ended June 28, 2013. ICL sales represented 62.0% and 60.5%, respectively, of our total sales for the three and six months ended June 28, 2013, compared to 54.0% and 54.7% for the three and six month periods ended June 29, 2012.

Total IOL sales for the three months ended June 28, 2013 were $5.9 million, a decrease of 13.4%, when compared with $6.8 million for the three months ended June 29, 2012. Total IOL sales for the six months ended June 28, 2013 were $12.2 million, a decrease of 7.0%, when compared with $13.1 million for the six months ended June 29, 2012. IOL sales represent 32.3% and 33.8% of sales for the three and six months ended June 28, 2013, compared to 42.5% and 41.8% for the three and six month periods ended June 29, 2012. The decrease in IOL sales was due to effect of exchange which reduced IOL sales by $826,569 and $1,472,954, respectively, for the three and six months ended June 28, 2013.

Other product sales for the three and six months ended June 28, 2013 were $1.0 million and $2.1 million, an increase of 85.1% and 86.1%, respectively, when compared with $0.6 million and $1.1 million for the three and six months ended June 29, 2012. The increase in other product sales was due to an increase in injector part sales to a third party supplier.

Gross Profit
                                                                   Fav/                                       Fav/
                                                                 (Unfav)                                    (Unfav)
                                  Three Months Ended             % Change          Six Months Ended         % Change
                                                                   2013         June 28,       June 29,       2013
                           June 28, 2013       June 29, 2012     vs. 2012         2013           2012       vs. 2012
Gross Profit              $        12,620     $        11,045         14.3 %   $   25,274     $   21,947         15.2 %
Gross Profit Margin                  69.5 %              69.3 %                      69.9 %         69.8 %

Gross profit for the second quarter was $12.6 million, or 69.5% of revenue, compared with $11.0 million, or 69.3% of revenue, in the prior year period. During the first six months of 2013, gross profit was $25.2 million, or 69.9% of revenue, compared with $21.9 million, or 69.8% of revenue, in the prior year period. Gross margin for the three and six month periods was primarily impacted by the sales of low margin injectors to our third party acrylic preloaded IOL supplier (used for the product they sell into their market). These sales negatively impacted margins by 150 basis points for both periods.

General and Administrative
                                                                       Fav/                                       Fav/
                                                                     (Unfav)                                    (Unfav)
                                      Three Months Ended             % Change          Six Months Ended         % Change
                                                                       2013         June 28,       June 29,       2013
                              June 28, 2013        June 29, 2012     vs. 2012         2013           2012       vs. 2012
General and Administrative   $         3,923      $         3,633        (8.0) %   $    7,881     $    7,493        (5.2) %
Percentage of Sales                     21.6 %               22.7 %                      21.8 %         23.8 %

General and administrative expenses increased by 8.0% to $3.9 million in the second quarter of 2013 from the $3.6 million reported in the second quarter of 2012. General and administrative expenses for the six months ended June 28, 2013 were $7.9 million, an increase of 5.2% when compared with $7.5 million reported last year. The increase is due to an increase in stock based compensation expense and bonus accruals. General and administrative expenses were favorably impacted by foreign currency exchange by approximately $146,000 during the quarter and by approximately $216,000 for the six month period.

Marketing and Selling

                                                                   Fav/                                         Fav/
                                                                 (Unfav)                                      (Unfav)
                                 Three Months Ended              % Change          Six Months Ended           % Change
                                                                   2013        June 28,        June 29,         2013
                         June 28, 2013        June 29, 2012      vs. 2012        2013            2012         vs. 2012
Marketing and Selling   $         5,659      $         5,366        (5.5) %   $    10,945     $    10,029        (9.1) %
Percentage of Sales                31.2 %               33.7 %                       30.3 %          31.9 %

Marketing and selling expenses increased 5.5% to $5.7 million in the second quarter of 2013, compared with $5.4 million in the second quarter of 2012. Marketing and selling expenses for the six months ended June 28, 2013 were $11.0 million, an increase of 9.1% when compared with $10.0 million reported last year. The increase is due to increased headcount and promotional activities to support the increased level of sales. Marketing and selling expenses were favorably impacted by foreign currency exchange by approximately $288,000 during the quarter and by approximately $486,000 for the six month period.

Research and Development

                                                                Fav/                                         Fav/
                                                              (Unfav)                                      (Unfav)
                              Three Months Ended              % Change          Six Months Ended           % Change
                                                                2013        June 28,        June 29,         2013
                      June 28, 2013        June 29, 2012      vs. 2012        2013            2012         vs. 2012
Research and
Development          $         1,686      $         1,513       (11.4) %   $     3,052     $     3,059          0.2 %
Percentage of
Sales                            9.3 %                9.5 %                        8.4 %           9.7 %

Research and development expense increased in the second quarter of 2013, by 11.4% to $1.7 million, compared with $1.5 million in the second quarter of 2012. Research and development expense for the six months ended June 28, 2013 was $3.0 million, a slight decrease of 0.2% when compared with $3.1 million reported last year. The increase is due to increased costs of gaining regulatory approvals for new products in various markets around the world and development costs of the V5 Preloaded ICL. Research and development expenses were favorably impacted by foreign currency exchange by approximately $54,000 during the quarter and by approximately $81,000 for the six month period.

Other General and Administrative Expenses

                                                               Fav/                                           Fav/
                                                             (Unfav)                                         (Unfav)
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