Staar Surgical Co: Form 10-Q for the period ended Sep 29, 2023

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. Readers can recognize forward-looking statements by the use of words like “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe,” “will,” “should,” “forecast” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements about any of the following: any projections of or guidance as to earnings, revenue, sales, profit margins, expense rate, cash, effective tax rate, product mix, capital expense or any other financial items; the expected impact of the COVID-19 pandemic and related public health measures (including but not limited to their impact on sales, operations or clinical trials globally), the plans, strategies, and objectives of management for future operations or prospects for achieving such plans; statements regarding new, existing, or improved products, including but not limited to, expectations for success of new, existing, and improved products in the U.S. or international markets or government approval of a new or improved products; commercialization of new or improved products; future economic conditions or size of market opportunities; expected costs of operations; statements of belief, including as to achieving 2023 business plans; expected regulatory activities and approvals, product launches, and any statements of assumptions underlying any of the foregoing.

Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and we can give no assurance that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described in our Annual Report on Form 10-K in “Item 1A. Risk Factors” filed on February 23, 2023. We undertake no obligation to update these forward-looking statements after the date of this report to reflect future events or circumstances or to reflect actual outcomes.

The following discussion should be read in conjunction with the audited consolidated financial statements of STAAR, including the related notes, provided in this report.

We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included on our website in the ‘Investor Relations’ sections. Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.

Overview

STAAR Surgical Company designs, develops, manufactures, and sells implantable lenses for the eye and companion delivery systems used to deliver the lenses into the eye. We are the world’s leading manufacturer of intraocular lenses for patients seeking refractive vision correction. All 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.” The field of refractive surgery includes both lens-based procedures, using products like our ICL family of products, and laser-based procedures like LASIK. Successful refractive surgery can correct common vision disorders such as myopia, hyperopia, and astigmatism. STAAR employs a commercialization strategy that strives for sustainable profitable growth. Our goal is to position our refractive lenses throughout the world as primary and premium solutions for patients seeking visual freedom from wearing eyeglasses or contact lenses while achieving excellent visual acuity through refractive vision correction.

Recent Developments

STAAR achieved 13% growth in ICL sales in the third quarter of 2023, compared to the third quarter of 2022, with ICL sales growth in the Asia Pacific markets up 13%, EMEA markets up 14%, and the Americas up 5%. In China, ICL sales were up 14% compared to the second quarter of 2022. The uncertain economic environment globally and world events may have an impact on our surgeon customers and patients. As a result, while we are reaffirming our previously provided outlook for fiscal 2023 ICL sales of $320 million to $325 million, revenue may come in at the lower end of the range should macroeconomic weakness and/or other disruptions materialize.

On October 25, we began a voluntary recall of approximately 300 EVO/EVO+ lenses with a measurement deviating +/- 0.5 diopters from the as labeled power. We have identified and fixed the problem. We do not expect material operational costs related to this matter.

Critical Accounting Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Income discusses and analyzes data in our unaudited Condensed Consolidated Financial Statements provided in this report, 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.

Management believes that there have been no significant changes during the nine months ended September 29, 2023 to the items that we disclosed as our critical accounting 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 30, 2022.

Results of Operations

The following table shows the percentage of our total sales represented by certain items reflected in our Condensed Consolidated Statements of Income for the periods indicated.

Net Sales

The following table presents our net sales, by product (dollars in thousands):

* Denotes change is greater than +100%.

Net sales for the three months ended September 29, 2023 increased 6% from the same period of 2022. The increase in net sales was primarily due to increased ICL sales of $9.1 million, slightly offset by decreased other product sales of $4.9 million. Changes in foreign currency favorably impacted net sales by $0.1 million.

Net sales for the nine months ended September 29, 2023 increased 12% from the same period of 2022. The increase in net sales was primarily due to increased ICL sales of $36.3 million, slightly offset by decreased other product sales of $10.5 million. Changes in foreign currency unfavorably impacted net sales by $2.3 million.

Total ICL sales for the three months ended September 29, 2023 increased 13% from the same period of 2022, with unit increase of 14%. The APAC region sales increased by 13%, with unit growth up 15%, due to sales growth in India up 40%, China up 14%, Japan up 12% and other APAC regions up 6%. The EMEA region sales increased 14% with unit growth up 13%, due to sales increases in our distributor markets up 20% and direct markets up 9%. The Americas region sales increased 5%, with unit growth up 3%, primarily due to sales growth in Canada up 26% and the U.S. up 6%, partially offset by sales decrease in Latin America of 12%. Changes in foreign currency favorably impacted ICL sales by $0.1 million for the three months ended September 29, 2023. ICL sales represented 100.9% and 94.6% of our total sales for the three months ended September 29, 2023 and September 30, 2022, respectively.

Total ICL sales for the nine months ended September 29, 2023 increased 17% from the same period of 2022, with unit increase of 19%. The APAC region sales increased by 20%, with unit growth up 21%, due to sales growth in China up 24%, India up 20%, other APAC regions up 10%, Japan up 10% and Korea up 4%. The EMEA region sales increased 4%, with unit decrease of 2%, due to sales increases in our distributor markets up 5% and our direct markets up 3%. The Americas region sales increased 18%, with unit growth up 16%, primarily due to sales growth in the U.S. up 23%. In late March 2022, the U.S. started to sell EVO ICLs. Changes in foreign currency unfavorably impacted ICL sales by $2.0 million for the nine months ended September 29, 2023, which impacted our Japan and Europe, Middle East and Africa markets. ICL sales represented 99.5% and 94.6% of our total sales for the nine months ended September 29, 2023 and September 30, 2022, respectively.

Other product sales, includes cataract IOLs, delivery systems and normal recurring sales adjustments such as sales return allowances. As a result of third-party materials and supply chain challenges that affect our cataract IOLs and associated delivery devices, we will no longer manufacture cataract IOLs, though we will continue to support these products through the end of 2023, as supplies permit. We do not expect this decision to have a significant impact to revenue growth in future years. Other product sales for the three and nine months ended September 29, 2023, decreased 119% and 89%, respectively, from the same period of 2022, due primarily to a reduction in cataract IOL sales, decreased sales of cataract IOL injector parts and increased sales return reserves. Changes in foreign currency unfavorably impacted other product sales by $0.3 million for the nine months ended September 29, 2023. Other product sales represented (0.9%) and 5.4% of our total sales for the three months ended September 29, 2023 and September 30, 2022, respectively, and represented 0.5% and 5.4% of our total sales for the nine months ended September 29, 2023 and September 30, 2022, respectively.

Gross Profit

The following table presents our gross profit and gross profit margin (dollars in thousands):

Gross profit for the three months ended September 29, 2023 increased 5.3%, from the same period of 2022. Gross profit margin decreased to 79.2% of revenue for the three months ended September 29, 2023 compared to 79.5% of revenue for the three months ended September 30, 2022, due mainly to increased sales return reserves and period costs associated with manufacturing projects, partially offset by product and geographic sales mix.

Gross profit for the nine months ended September 29, 2023 increased 10.6%, from the same period of 2022. Gross profit margin decreased to 78.0% of revenue for the nine months ended September 29, 2023 compared to 78.8% of revenue for the nine months ended September 30, 2022, due mainly to reserves related to cataract IOLs.

General and Administrative Expense

The following table presents our general and administrative expenses (dollars in thousands):

General and administrative expenses for the three months ended September 29, 2023 increased 37.5% from the same period of 2022 due to increased salary-related and payroll tax expenses, outside services, facility costs and bonus and stock-based compensation expenses.

General and administrative expenses for the nine months ended September 29, 2023 increased 38.9% from the same period of 2022 due to increased salary-related and payroll tax expenses, outside services, bonus and stock-based compensation expenses, facility costs and Japan one-time employee benefits.

Selling and Marketing Expense

The following table presents our selling and marketing expenses (dollars in thousands):

Selling and marketing expenses for the three months ended September 29, 2023 increased 15.0% from the same period of 2022 due to increased advertising and promotional activities, salary-related and payroll tax expenses, and bonus and stock-based compensation expenses, partially offset by decreased trade shows and sales meetings expenses.

Selling and marketing expenses for the nine months ended September 29, 2023 increased 31.9% from the same period of 2022 due to increased advertising and promotional activities, especially in the U.S., salary-related and payroll tax expenses, bonus and stock-based compensation expenses and sales commission expenses.

Research and Development Expense

The following table presents our research and development expenses (dollars in thousands):

Research and development expenses for the three and nine months ended September 29, 2023 increased 19.3% and 28.0% from the same period of 2022, respectively, due mainly to increased salary-related and payroll tax expenses and clinical expenses associated with our U.S. post-approval clinical trials, and for the nine months ended September 29, 2023, increased bonus and stock-based compensation expenses as compared to the nine months ended September 30, 2022.

Other Expense, Net

The following table presents our other expenses, net (dollars in thousands):

* Denotes change is greater than +100%.

The change in other income (expense), net for the three and nine months ended September 29, 2023 and September 30, 2022, respectively, was due to increased interest income mainly due to our investments held available for sale and lower foreign exchange losses.

Income Taxes

The following table presents our income tax provision (dollars in thousands):

The effective tax rates for the three months ended September 29, 2023 and September 30, 2022 were 28.6% and 18.4%, respectively, and were 31.9% and 16.9% for the nine months ended September 29, 2023 and September 30, 2022, respectively. Our effective tax rates differ from the U.S. federal statutory rate of 21%, primarily due to the income tax expense generated in foreign jurisdictions.

Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof, and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.

Liquidity and Capital Resources

We believe that current cash and cash equivalents, investments available for sale (“AFS”) and future cash flow from operating activities will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the financial statements included in this quarterly report. Our financial condition at September 29, 2023 and December 30, 2022 included the following (in thousands):

Cash and cash equivalents include cash and balances in deposits and money market accounts held at banks and financial institutions. Our investment policy primary objective is capital preservation while maximizing our return on investment. Investments available for sale may include U.S. government and corporate debt securities, commercial paper, certain certificates deposit and related security types, that are rated by two nationally recognized statistical rating organizations with minimum investment grade ratings of AAA to A-/A-1+ to A-2, or the equivalent. The maturity of individual investments may not extend 24 months from the date of purchase. There are also limits to the amount of credit exposure in any given security type. We do not have any off-balance sheet arrangements.

A summary of cash flows for the nine months ended September 29, 2023 and September 30, 2022 was as follows (in thousands):

For the nine months ended September 29, 2023 net cash used by operating activities consisted of $61.3 million in working-capital changes partially offset by $30.3 million in non-cash items and net income of $13.6 million.

Starting in the second half of 2022, we decided to invest our cash in slightly higher yielding securities. For the nine months ended September 29, 2023, net cash provided by investment activities was $52.0 million which consisted of $119.4 million of proceeds from the sale or maturity of investments AFS, partially offset by $52.3 million in purchases of investments AFS and $15.1 million in purchases of property, plant and equipment. For the nine months ended September 30, 2022, net cash used in investment activity was $109.7 million which consisted of $95.6 million in purchases of investments AFS and $14.1 million in purchases of property, plant and equipment.

Net cash provided by financing activities for the nine months ended September 29, 2023 was $7.0 million which consisted of $9.3 million of proceeds from the exercise of stock options, partially offset by $2.1 million to repurchase of employee common stock for taxes withheld. For the nine months ended September 30, 2022, net cash provided by financing activities consisted of $8.2 million of proceeds from the exercise of stock options.

Commitments

Employment Agreements

The Company’s Chief Executive Officer entered into an employment agreement with the Company, effective January 1, 2023. He 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 of its assets, or termination “without cause or for good reason” as defined in the employment agreements.

During the nine months ended September 29, 2023, there have been no material changes in the Company’s qualitative and quantitative market risk since the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 30, 2022.

Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of the disclosure controls and procedures of the Company. Based on that evaluation, our CEO and CFO concluded, as of the end of the period covered by this quarterly report on Form 10-Q, that our disclosure controls and procedures were effective. For purposes of this statement, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, including the CEO and the CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud or material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, our internal control system can provide only reasonable assurance of achieving its objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and can provide only reasonable, not absolute, assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, or the degree of compliance with the policies and procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 29, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our short and long-term success is subject to many factors that are beyond our control. Investors and prospective investors should consider carefully information contained in this report and the risks and uncertainties described in “Part I—Item 1A—Risk Factors” of the Company’s Form 10-K for the fiscal year ended December 30, 2022. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.