STAAR Surgical Co (STAA) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the STAAR Surgical fourth quarter and year end 2004 results conference call. All this time all participants are in a listen-only mode. Following today's presentation instructions will be given. for the question and answer session. If anyone needs assistance at any time during the conference please press the star followed by the zero. As a reminder this conference is being recorded today Wednesday March 9, 2005. I will turn the conference over to Doug Shirk.with the EBG Group Please go ahead.

Thank you operator and good afternoon everyone thank you for joining us for the STAAR Surgical conference call to review financial results for fourth quarter full year 2004 that ended January 2, 2005. The newest release reviewing the results crossed the wire shortly after the market closed. If you haven't received a copy of the release and would like one you can call our office at 415-896-6820 and we will get one to you imeadiatly. Additionally we have arraign for a tape replay for this call which may be accessed by phone. The replay will take effect approximately one hour after the call's conclusion and remain in effect through midnight Pacific Time on Wednesday March 16. The dial in number is 800-405-2236 or for international callers 303-590-3000. You need a pass code of 11025076 and the pound sign to access the replay number. This call is broadcast live and an achieved replay will be available.

To access the webcast go to STAAR's website at www.STAAR.com. Before we get started during the course of this conference call, the company will make projections, or rather forward looking statements, regarding future events including statements about the sales and beliefs about revenues and earnings and cash earn for 2005. We wish to caution you that such statements are approximates. Actual results may differ materially.

The risks and uncertainties include the company's ability to implement cost saving strategies and realize expected savings, the results of the company's response to FDA observations, the ability to energize domestic sales of cataract products, the ability to maintain product sales and gross profit margin, the need to obtain regulatory approval for new products, the acceptance of new product by medical practitioners and consumers , the rapid pace of technological change in the eye care industry. General domestic and international economic conditions.

Access to financing and other factors beyond the control of STAAR's Surgical company. Including those details from time to time in the STAAR's report filed with t he SEC. In addition is the factors underline the company's forecasters dynamic and subject to change. These forecasts are to be assumed to be realistic only as of the date they are given. The company doesn't under take to update them. How ever they may choose to do so from time to time and if they do so they submits the update to the investing public. Now return the call over to David Bailey Chairman President and Chief Executive Officer STAAR Surgical Company

Thank you Doug. Welcome, everyone. We had strong sales in the fourth quarter increasing year over year by 9.4 percent. This increase was generated despite the U.S. market showing a continued decline in line with the third quarter of 8 percent. The fourth quarter as with full year numbers reflected a study international sales level with strong trends in preloaded cataract lenses and ICL's. The later posted year over year growth of 37.6 percent.

More telling was the growth trend in the second half of the year, where we saw gains of 6 - - a little over 60 percent versus the prior year six month period. The ICL technology continues to make head way in current international markets with strong and continued interest from the physicians and opportunity for geographic expansion to new approvals. The Toric ICL grew significantly last year and we expect to see strong growth going forward with an increasing share versus standard lens. Our business in Germany saw real growth net of currently versus prior year. 47 percent of total revenues now come from our two international affiliates in Germany and Australia.

With a little over 10 percent coming from our distributor business in Switzerland. Overall international is on a sustained path to establish the ICL and the preloaded a significant proprietary elements of our total business. In the U.S., compliance issues with the FDA continue to negatively impact the implementation of our business plan. Although with are continuing to work with FDA for a final approvable letter for the ICL, any launch of the product by STAAR Surgical will be delayed until overall compliance issues have been resolved.

Although we have worked hard for a long time. Hired some of the best consultants and increased our internal resource considerably we are governed by the FDA time lines and procedures. We were pleased with a meeting we had with FDA in January, in which stability issues highlighted in the 483 observations around the Collamer material were removed from the agenda. The FDA confirmed the observations on these items cited during last summers audit have been adequately addressed in our response of November 4. In addition the clearance to allow investigators to use more ICLs under the be clinical trial protocol in our mind endorsed a positive view of our Collamer material by ODE.

The FDA consider considering what if any compliance action to take with regard to the issues that was the subject of our January meeting. With regard to Collamer we've always viewed it as an excellent material ideally suited to Interocular use and have done much work over the last year to offer further evidence of this fact. Our game plan going forward remains under changed to obtain the final approval letter ODE and work with compliance in tandem on resolution of remaining issues. We believe it is likely a reaudit will be required to move forward in any direction and we plan to request one.

While all of this continues to prevent introduction of ICL in the U.S. our business considers to reward in that key market. The eight percent decline noted in our release has continued in the early part of the first quarter. There is no doubt we have lost selling focus by the independent sales reps as a result of a number of issues not least of which are delays in new product approvals such as the Three Piece Collamer and obviously the ICL as well as some persistent rumors we are about to sell the company. The overhang from compliance issues does not help the situation at all. In the short-term we anticipate the roll out of the new Collamer Three Piece lens will help the situation.

We now believe the roll-out will occur in Q2 with an expected positive financial impact by Q3. Optimal cartilage ludrisity is been achieved along with a robust lens design and good delivery. This continued unforecasted decline in the U.S. business has put additional strains on our U.S. cash flows. In order to proactively offset the sales decline and preserve cash. We implemented a down sizing in early February which will reduce annual expenditure by a little over $1 million.

In addition, we have eliminated a lot of consulting cost that is hit the P&L last year around compliance. This totals another estimated $1million. We are planning down sizing options and looking at any and all but must preserve expenditure levels on compliance activity. The key factor here is a long-term solution to our current situation. We have targeted total savings of $3 million as indicated in our release.

However, given our anticipated future positive events such as the launch of the 3P Collamer were carefully managing the expanse reduction activity. As you will recall on our last call we made a commitment to share holders to look at all options to provide capital the for the business. We are working with Morgan Stanley to explore those options. They were chosen because they know the optometric space and have bandwidth to support us to the full extent in this activity. What is clear is that many companies are interested in our technology.

Remains to be seen whether that interest will result in an attractive way forward for our company and shareholders. Unresolved FDA compliance issues have forced us to proactively explore such options. With these issues resolved we expect to become a healthy vibrant company. My preference is to have these resolved internally and move forward as previously planned. And as we have experienced there is an element of uncertainty associated with the strategy and we want to to be sure to explore other options.

I believe we are doing this in the most professional and systematic way possible. As a result of the time required to accomplish these goals. We will be looking at limited fund raising in the near future. Our goal will be to generate between $8 t o $10 million and to generate these funds from current shareholders. Overall our two big issues continue to be declining U.S. sales and the lack of the ICL in the market. We are countering this on a number of fronts which have already included the implementation of significant cost saving initiatives particularly in the U.S. Introduction of the Three Piece Collamer lens in the second quarter will, we believe, add meaningful to US sales.

Introduction of the lens will add to production volumes and help us to counter the negative effect of shrinking volume in our plants. We continue to invest heavily in internal resolution of the compliance issues. In the belief we must be in a strong position for reordered. We also see reasons to be optimistic receiving an approvable letter for the ICL from U.S. FDA although the timing is uncertain and any such approvable letter will be dendant upon the resolution of compliance issues described above.

This cannot be guaranteed but the signs, we believe, are positive. On the international front we expect ICL sales to continue their positive trend and see increasing penetration of the Toric. These are outstanding products with significant potential. As a back stop to all of this activity we have as stated been earnestly exploring strategic options to make sure we can fully execute on our potential going forward.

This activity began last year, continues in earnest and result in interesting options for our company and share holders. Taken together we believe the above represents a solid plan to get us out of the current short-term difficulties. I continue to be convinced our strategic plan and direction remains solid. Fundamentally market interest and acceptance of the ICL technology in markets where it is approved is solid and growing. I'd now like to hand over to John for a review of our fourth quarter financial results as well as our current financial condition.

Thank you, David. Before I start the financial summery I'd like to make a minor correction to an earlier date. Our year end was '04 was 12/31/04 and not the January date previously mentioned. Thank you.

The fourth quarter was a period focussed on resolving FDA compliance issues responding to the FDA audit observations implementing changes to our quality systems and putting in to place the manufacturing process improvements. From a financial prospective this had a profound and negative effect on gross profit.

Increases in manufacturing engineering expenses, consultants, inventory write-offs, process improvements and changing all have had a short-term impact on cost of protection resulting in reduction of gross profit for the quarter. On the positive side R&D has maintained its focus on the redesign of the Three Piece Collamer lens and insertion system and has made excellent progress.

The ICL ended the year with a very positive international sales performance and generated exceptional interest at the October AAO which was highlighted by a live surgery C&D event. Brief summery of the financials. Start with net sales. Sales for the fort quarter which ended as mentioned earlier December 31, 2004 increased 1.2 million or 9.4 percent to $14 million. Constant currency sales increased 633,000 or 5 percent. In the U.S. market sales declined 471,000 or 8 percent due to reduction in Silicon IOL sales and One Piece Collamer IOL sales this was partially offset by sales of the cruise control device which is a disposable single use device which is used with a variety [inaudible] on multiplication machines.

International sales increased by 1.7 million or 24 percent largely due to a 56 percent increase in ICL and Toric ICL sales and continued exciting growth of the preloaded IOL. ICL sales were not material impacted by currency as most are invoiced in U.S. dollars. Sales for year to date period December 31, 2004 were 51.7 million or a 1.3 million or 2.5 percent increase over the same period in 2003. Currency at a 2.2 million favorable impact for the year. On a constant currency basis sales for the year declined 900,000, or 1 .8 percent.

Domestic sales declined 1.8 million or 7.8 percent and as in the quarter primarily related to declines in silicone IOL sales declining Collamer One Piece sales, partially offset by increases in cruise control and STAAR sales. Sales in the international markets increased 3.1 million or 11.5 percent due to a 37.6 percent again in the ICL Toric ICL sales. Significant preloaded injector sales partially offset by a 25.8 percent reduction in the distributed Visocril IOL which reflects our strategy to replace generic lens sales with proprietary STAAR products.

Gross profit margin was 47.2 percent for the quarter ended December 31, 2004 compared to 56.6 percent for the quarter ended January 2, 2004. This decline was due to increases in manufacturing engineering, quality control, inventory reserve portions, unfavorable product, geographical mix. Manufacturing margins represent net sales minus direct cost to manufacture decreased over the prior year due to manufacturing process changes and lower production volumes due to declining U.S. IOL sales.

For fiscal year 2004 gross profit margin was 50.6 percent compared to 55.2 percent for fiscal year 2003. As in the quarter significant increases in manufacturing engineering linked to the validation of the new Three Piece Collamer IOL and its insertion system. Process changes in improvements. Quality control expenses reflecting the global strengthening of this organization. Consulting expenses and the write-off of discontinued lens accounted for the reduction in margins. As we move forward it is worth noting that consulting expenses in this area have been reduced on annualize basis by approximately $1 million.

Manufacturing margins for the year to date period, decreased approximately one percent due to increased production costs in the later half of the year and unfavorable product and geographical mix. G&A expenses for the fourth quarter increased 333,000 or 13.2 percent primarily due to the cost of compliance with the Sarbanes Oxley act of 2002. During the year ended December 31, 2004 G&A expenses decreased 90,000 or 1 percent over the comparable prior year period.

This improvement in G&A spending was a result of reduced bank charges associated with the extinguished Wells Fargo line of credit, reduced legal expense, and the closing of subsidiary, restructuring of the circuitry operation and reduced amortization of intangibles. And these were partially offset by the cost of compliance of Sarbanes Oxley Act and some increased insurance premiums. In promotion sales and marketing, marketing and selling expenses for Q4 were down 192,000 or 3.3 percent compared to prior year quarter. This reflects actions taken to reduce variable marketing expenses in response to delays in the US ICL approval.

Lower promotional activity accounted for the majority of the reduced spending and partially offset by the unfavorable impact of foreign currency changes in our German subsidiary. Year to date marketing and selling expenses increased approximately 793,000 which was 4.1 percent increase over the year ended January 2, 2004. This increase was due to head count additions in the US market, increased salaries and commissions internationally and unfavorable exchange rates in our German business. As mentioned earlier the reduction of variable spending in US marketing and sales partially offset these increases.

Further cost reductions with annualize savings of approximately 1 million have been taken since the end of the year. And additional reductions are under review. Research and Development and Regulatory affairs expense for the quarter increased 118,000 or 9.5 percent over the prior year period. Increased spending was due to cost related to consultants utilized for ongoing interaction with the FDA and an increase in cost in the redesign of the Three Piece Collamer lens and insertion system. These expenses were partially offset by decreased R&D cost of subsidiaries the company consolidated the activities into one location.

Year to date R&D spending up 1.1 million or 22 percent over the prior year increased head count, consulting expenses, and project spending on lens delivery systems and redesign of the Collamer Three Piece Lens and delivery system accounted for this increase. These expenses were partially offset by the decreased R&D cost of subsidiaries as the company again consolidated these activities into one location. We do not anticipate the spending will be maintained at this level going forward, due to exceptional charges incurred in the second quarter and that most of the development expense is now complete on the Three Piece Collamer project. Net loss for the fourth quarter was 4.4 million or 21 cents per share.

This compares to a net loss of 3.5 million or 19 cents per share in Q4 of 2004. Shares outstanding were 20,000,593 versus 18, 000, 389 in the prior year quarter. Net loss for the quarter was unfavorably impacted approximately 3 cents by a $500,000 reserve against the partially collateralized note from a former director of the company. Net loss for the year was 11.3 million or 58 cents per share. For the prior year period the net loss was 8.4 million or 47 cents per share, there were 19,000,602 shares outstanding. On December 31 of '04, January 2 of 04 there was 17,740,000 shares outstanding.

Looking at cash flow on the balance sheet the net decrease in cash for the fourth quarter was 2,530,000. Cash used in operating activities was 3.1 million and cash used in investing activities was 516,000. Of this amount 536,000 was invested in the purchase of property planning and equipment. Cash provided by financing activities was 473,000. We are highly focused on our cash flow issues and implemented expense reductions to reduce cash outflow.

One of the major challenges in the area has been the continuing decline in U.S. sales and subsequent reduction and cash collections. For the year cash used in operating activities was 8.8 million. Cash used in investing activities was 2.2. Investing activities consisted with purchase of 1.7 million in property, plant and equipment. 768,000 in the purchase of minority interest in subsidiary and 330,000 in proceeds for collection of notes receivable.

Cash from financing activities included 11.6 million in net proceeds from and equity placement and 829,000 from the exercise of stock options. Total cash and cash equivalents in short-term investments were $9.3 million at the end of Q4. Notes payable were $3million which is flat to the prior year notes payable number. Accounts receivable day sales outstanding was 41, an increase or 2 days since year end 2003 and increase of 700,000. Inventory increased by 2.3 million ending the quarter at 186 days on hand down from 210 days on hand at year end 2003.

The increase in inventory was primarily due to ICL inventory build and Nedau (ph) manufacturing facility in anticipation of U.S. launch and the higher cost of inventory. As mentioned in the press release the company believes that it is likely to receive a growing opinion for year ended December 31, 2004. Re-occurring losses are anticipated to continue until such time as the FDA issues are resolved and ICL is improved.

Given the uncertainty on the timing of the resolution, the company expects to take the following actions. We will seek additional funds through private placement of equity, further reduce discretionary spending, we will continue to explore strategic options with Morgan Stanley and agressively address problems in the U.S. Cataract Business driven by the overhang of FDA compliance issues. At fiscal year end STAAR had 32.6 million in current assets and 13.5 million in current liabilities. Thank you. Turn it back to David.

Thanks. That was a comprehensive summery. Like to now open up for questions operator.

[Operator Instructions] Our first question from Kate Sharadin with Pacific Club Equities (ph) , please go ahead.

Hi, everybody.

Hi Kate

Good Afternoon.

Could you walk us through exactly now what you are working on in order to request your reinspection or your reaudit since the January meeting?

As I said in the text, we're largely driven by FDA time lines and we've got two tandem activities going on. One working toward the approval with ODE which is ongoing and continuous. And as you heard from my text, we're reasonably optimistic but always have to caution. Any such letter would be subject to resolution of compliance issues for STAAR Surgical to be able to launch the product.

And at the same time we're working internally and continue to work very hard on our compliance issues and in terms of getting those resolved we continue to wait on our response from FDA following the meeting we had in January. We are working on both fronts aggressively but continue obviously to be partly driven or largely driven by FDA time lines and FDA response. I don't know whether that exactly answers your question Kate but that's as precise as I can be in terms of what's happening.

I think the way we understood it after the meeting was that it was almost like you presented the things you would address but wasn't that much feedback from FDA and if I understand now really still hasn't been. Trying to understand what they are doing.

As I said. At the meeting we presented our latest update. We have given I think it was a total of nine updates during the course of '04 and that included the November 4th response to the 483 observations. We were pleased going into the meeting to be informed that observations related to the material had been responded to adequately in our November the 4th response.

And so that was very pleasing because we have always believed that the Collamer material was excellent and, in addition we were pleased to get the clearance to allow investigators to use more ICL's, under the clinical trials that clearance came for ODE and in our mind endorsed the view of the material. During the meeting we talked through our latest update and we submitted an additional one since the meeting and will continue to submit updates as we await a response from FDA and busily, we believe that there's likely to be a reaudit to move the compliance issues forward in what ever direction, and so we plan for that and plan to continue to keep a dialogue with compliance.

Okay. So aside from the stability issues which obviously were addressed, have they in fact addressed any of your other responses? Or no.

I think it's fair to say we haven't had any confirmation on the other responses.

Okay, that's helpful

I don't believe we have had any responses on the other items.

Okay. And then do you have an idea when you might close around the financing? Is it within this month do you think? So we can figure out on that.

Not sure. We're going to move fairly quickly. John is going to head that activity up. Intention would be to move quickly to give us a leeway on being able to look at the strategic options. very thoroughly and effectively so we can look and decide which of those might be best to increase the value for our share holders. So just generally quickly, Kate.

And the last question, on the Three Piece, you said second quarter, is that something at the early part of the quarter? .

Obviously ASCRS, is early February this year, Sorry ASCRS the American Society of Cataracts, I'm getting confused with Europe. April 15 through the18 so obviously, we're targeting as early as possible. Giving ourselves a bit of room. As I said previously, as I reiterated here we have good lubricity, on the [inaudible] which is essential for this kind of lens, a very robust redesign on the lens and we're driving towards closure for all new design of our paperwork. Hopefully earlier rather late. With a positive impact of financials assuming all goes well.

Okay. Thank you.

And our next question from Rauch Ryan Sun Trust Robinson Humphrey.

Hi good afternoon guys. Just a couple of questions. One quick follow-up real quick to make sure I understand. The private placement, is that a done deal? Is that going to happen for sure? Something you're still just contemplating. Where are we in the decision process?

We've made the decision we'll move ahead.

With that in mind how do we address the possibility for example first I should ask can you talk about how long you've been engaged by Morgan Stanley for strategic alternatives?

We started talking to Morgan Stanley, and John headed that up, soon after making our commitment to the shareholders on the last call to explore options to maximize value other than just purely looking at equity. We reviewed a variety of options and closed on Morgan Stanley because they know Optometric [inaudible] very well and have the bandwidth so we've been working with them for a while.

I'm just trying, seems there's mixed messages going on from one part of the company you're decreasing the sales force, another part increasing cash inflow, another part looking at a potential acquisition which would make sense you're increasing cash flow. Are some of the deals that Morgan Stanley brought to you so far, have they been dependant on FDA approval of the ICL . Is that why we haven't seen something happen until now?

A lot in there. Let me see if we can respond. I don't believe we're sending mixed messaging. I don't want to comment on exactly what kind of deal have been brought or not brought, et cetera. We are exploring all strategic options and would not want to go into any more details at this time. In terms of the down sizing that you referred to, as we indicated in mine and John's text and the press release we are conscious of cash burn. And took steps early very early in February, made some difficult decisions to stop investing in a limited direct sales force that we had. That decision was not easily taken.

We felt strategically that was a good decision but unfortunately because of the delays that investment was clearly not going to give as a return because new products weren't going into the sales force and into that direct sales force and they had started with a low base of sales, had actually grown it significantly in percentage terms but nevertheless that group was heavily so we took a difficult decision to move to more or less back to the total independent sales force that we have. So it's not a mixed message it's following through on the commitment very carefully.

And on the strategic options that can include many different possibilities beyond simple acquisition. And with regard to the equity raise really as I said that is in order to bolster our current cash position so that we can take time to explore the strategic options very carefully and see which adds most value for our shareholders without being rushed into any particular one. I said there's a lot of interest in our technology and we want to be careful to look and investigate all options carefully.

Okay. Let me just test it one more time just to see with regard to the strategic alternative that you may have seen already, is it fair to say there's some component in there that folks are looking at that dependent on FDA approval of the ICL that may be delaying their willingness to enter into such an agreement?

I don't want to get into any more details at this time on the strategic options and I would be if I answered that question. I think best to be aware of one thing. Compliance issues are related to STAAR Surgical and approvable - - approvalbility and taking a product to market can run in tandem. As they are as we work they can run in tandem with different companies. That's the only comment I would make related to that.

Okay and lastly - -

A different company could get to the compliance issues or not have compliance issues more quickly than we may or will without wishing the forecast the fact is if a company doesn't have compliance I knows and they have an approvable product than they can get to market much more quickly. Maybe that starts to answer your question.

Okay. And just kind of looking at the domestic market over the next quarters here with the first quarter trends being as you described. Help us correlate the sales in the U.S. with the three piece Collamer coming on. Should we just for our purposes assume a continued decline, do you feel there could be upside despite the less number of feet on the street there? .

Well, I don't want to get into a guidance discustition but let me scope the point on down sizing the sales force. That direct sales force was new geography where we had limited sales so it represented a small portion of the total U.S. sales. Yes they were growing significantly but nevertheless nowhere near covering costs.

We've stepped back to the total independent model. I don't think that changes a rate limiting step on the roll-out of a Cataract product. I believe the independent sales force once we get their attention and increased selling time that there's been a number of describes but once we get their increased attention and sell is time with a new product it will show significant interest and will not be a factor on the roll-out of the Collamer Three Piece.

Okay. Thanks very much.

We've always had a substantially independent effort. We've invested in a direct effort. We've stepped back from that so the independent effort will be the one that drives any new products out in Cataract segment.

Thank you very much. Have a nice afternoon.

Thanks a lot.

And our next question from Larry Higmovich [ph] with HMTC. Please go ahead.

The question for John Billy. Can you give us some rough idea on the amount of money you're trying to raise on this private placement?

Yeah,Larry, basically what we are looking at is somewhere we wanted to give ourselves and I think David said it nicely resources and a place to explore all of our options and not be constrained in our deliberation. We are looking for somewhere around $8-$10 million.

Okay. Next question, David, I'll trying to get a better understanding why it's taken so long to get the Collamer back on the market. Can you give me help in that?

Yes, this has been a continual embarrassment. And obviously I'm disappointed about that. The team has technical challenges around the lubricity of cartridges and we have undoubtedly slipped. One of the reasons for the slip as I said on previous calls not wishing to make excuses but fact we introduced a new design procedure in April of last year.

We've effectively had two teams in quality the over the last four months because we used a lot of consultants in that area and then brought in employees so we have team issues with new employees and then you have a new design control procedure, mix that with technical hurdles on the cartridges. We've had the lens ready much earlier than the injector and the two are now finally coming together along with the design control elements to get signatures.

You've got a multitude of factors and some additional ones laid on as a result of compliance and all our efforts in quality and as I said frankly it's been an embarrassment to me that it's taken longer than previously forecast. I think we are getting extremely close now and constantly keep challenging ourselves and I'm looking forward to getting it out there. I think it's a $3-$5 million opportunity within the first year of launch. The lens is extremely nice, the Collamer material is extreme unique. Surgeons like it. It doesn't have some of the down sides of Acrylics and operating within the major segment of the market so I'm hoping that we can get that out and get the sales force excited about it.

And, David, final question, on the sales force, how many sales people have you let go and sounds like you're talking about a specific geographic area. Can you talk about that, please?

We brought the direction or Nick did in an area where we didn't have much coverage which was the Northwest. and it was a team of seven that we released. Difficult decision. Don't like to do that but obviously in this situation of delays of uncertainty around absolute time lines for new products we had to take that difficult decision and we took it early February.

Geographically Northwest, seven sales reps and some of them have transitioned to be independents so we haven't lost all of the selling up there and one hopes if we can get the Three Piece out as quickly as we like that will give opportunity to earn significant income, Larry.

Thank you, David.

Our next question from Rick Dujay [ph] with Columbia Management. Please go ahead.

I've got two questions. The growing concern opinion from the auditors, will that be resolved upon a capital raise? Will that go away, in other words?

Yet to be determined we would need to look what the orders are saying under concern and many of you may understand the details behind the concern is the ability of the company to have cash on hand 12 month beyond our 10K date. They're looking at roughly cash on hand through 2006. So many factors in that area I don't want to try to project what that will be. Quite honestly we have not received the going concern yet from the, from our auditors. We took the conservative approach that that might be the fact and decided to disclose that.

Just related to that, I assume is it fair to say in addition to sort of buying yourself time to more thoroughly explore the Morgan Stanley process, you also had a conversation with the auditors as to what they might think is appropriate on a capital raise or the 8-10 million just related to.

That is an independent decision from any discussions that we've had with our auditors.

Okay. A second unrelated question related to the approvable letter. Are you pursuing with the FDA an approvable letter as a stand alone company or are those discussions somewhat tied to the Morgan Stanley process?

Totally independent with STAAR based on our submission. Stand alone. Absolutely.

That's all I have for now. Thanks.

Ladies and gentlemen, any additional questions please press the star. [Operator Instructions] Our next question from Bill Wall. with FMO Capital Please go ahead.

Hi, gentleman and congratulations on the European sales performance. I think it's a positive sign on the quality of the technology and efforts. obviously concerned about the capital raise and wanted to get an understanding with respect to how this works with the Morgan Stanley process. The first question. Is the Morgan Stanley mandate to evaluate a sale of the entire company?

The Morgan Stanley mandate is to evaluate strategic options in order to enhance value.

Would that include a sale of the company?

It would include any and all strategic options.

You wouldn't rule it out. Is what your saying?

I would not rule anything out.

With respect to the growing concern opinion, What effect does that have on the UBS credit facility?

That's a good question and uncertain at this point in time. My first feeling is that it probably won't impact but I can't say that for sure.

Have you spoken to them?

We have not.

On the 500,000 reserve to the note to the former director, are you essentially of the view now that that's largely a lost cause getting repaid on that or pursuing that still?

No.

Just emphasize that, no. We have spent a considerable amount of effort at least in my three years collecting every dollar of those notes that were able to be collected. I look at this one in a similar fashion. The reserve was for we had put a forbearance agreement due up March 1st and we were getting push backs from that individual about the ability to pay. Our position on that note was to reserve the un-collateralized portion of that. It's capitalize by stock and by real estate and so basically we took a conservative position and reserved it down to its capitalize value.

Right. Would you characterize the entire board as behind the Morgan Stanley effort at this point in unanimous view pursuing strategic alternative as soon as.

The board took that decision.

And it was unanimous?

Yes. The board is fully behind that decision.

And is Morgan Stanley behind the capital raising as well as the review?

No that is an independent exercise.

Why are you bifurcating it?

We took to Morgan Stanley and the primary decision around Morgan Stanley is related to the primary activity of strategic options. They were chosen because of their knowledge of the space and bandwidth and so they were chosen for their expertise in exploring options in our particular industry. The type we are financing we are contemplated we decided in discussions with Morgan Stanley this would best be achieved by using a different institution so it's a very amicable and collective decision.

I think it's very sensible to raise the capital now to forestall a fire sell if it came to that but I think linking it to the review and sharing with share holders what the endgame is here, either go it alone or options you have makes sense but I think it's critical you provide clarity on that because obviously in November we were hearing the Three Piece was coming out in Q1 and now hearing Q2 and I understand pushing on a string with the FDA but the runway isn't long enough and I would encourage a combination of money raising as well as alternatives to be shared with the shock holders as soon as reasonably possible. A great opportunity but events conspired to delay it a bit. Look forward to hearing more about that and urge you to keep in touch with us.

Thanks. We will, Bill. And just to finalize on the note, more of an accounting driven issue, not reflective of the company's intention to get repayment on it.

Thanks.

Ladies and gentlemen (operators instruction) Our next question is a follow-up from Rick Dujay with Columbian Management. Please go ahead.

Related to the Morgan Stanley / capital raise effort. If something were to come to the surface among these multiple interested parties in advance of the capital raise that looks like a good strategic option, you're not so wed to the process that you would go ahead and continue with the delusion in the capital raise anyway, would you?

Just cannot speculate at the moment on that.

The strategic options, the Morgan Stanley assignment that included acquisitions, you guys are in a tight capital bind right now. I assume that is not really . a priority in that process ... is that fair?

No, as I've said we've asked them to review all strategic options and we want be sure we have the time and the runway to explore those.

Okay. As a fairly large shareholder in your company that, you know, sounds like I'm going to be asked whether I want to participate in a rights offering shortly, I'm not sure I'm excited about blindly participating in a rights offering with the potential for you guys to go out and make an acquisition at this juncture.

One of the prior questions is you need to provide more clarity about what's going on and I think that's critical in the capital raise to the extent that you don't I think the valuation, gets hurt and we all suffer. Keep that in mind, I guess, from a shareholder that's among your top shareholders.

I very much appreciate your input on the view. We listen carefully. we are just in the process. Thank you for the input. Always welcome.

We have time for one more question.Our next question comes from Tysons Housie with Housie Advisory Management, please go ahead.

A couple quick questions. Were anyone interested in a straight licensing deal of the ICL in the U.S.? Let me rephrase that. If you did something in a partnership do you think that would expedite clearing up difficulties you appear to have with the FDA 483? Partner with somebody on a licensing deal do you think that would expedite getting to the market?

I referenced that earlier and the short answer is, yes, it would. Following an approvable that we've obtained. Yes, it would.

Any interest in the product or is that in some sort of licensing deal or can you not say at this juncture?

All I would say is reiterate what I said in our text which is a lot of interest in our technology. Wouldn't want to go further than that.

And at that time we have no funeral questions. I'll turn the call back to management for concluding questions. please go ahead

Thank you all for the input and particularly the input of everybody on the call. I just want to reiterate that we have short-term difficulties here mainly caused by the compliance issues. It's an uncertain time line as to when we can get over those.

I think the Morgan Stanley activity is extremely important to the company but I think its also critical that we make sure we have the time to explore all those options and ensure we go down the right path. I'm confident that we will have lots of choices and I look forward to keeping shareholders apprised as we move along the process. Thank you all for your interest.

Ladies and gentlemen that does conclude the STAAR Surgical conference.