Staar Surgical Co: Form 10-Q for the period ended Mar 28, 2025

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 (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created therein. In some cases readers can recognize forward-looking statements by the use of words like “anticipate,” “estimate,” “expect,” “project,” “intend,” “may,” “plan,” “believe,” “will,” “should,” “could,” “forecast,” “potential,” “continue,” “ongoing” (or the negative of those words and similar words or expressions), although not all forward-looking statements contain these words. Forward-looking statements include, without limitation, statements regarding the intent, belief or current expectations of the Company and its management regarding any of the following: demand for our implantable Collamer® lenses (“ICLs”); the benefits of our leadership realignment and related efforts; China macroeconomic conditions, procedure volumes, demand, and inventory levels; any projections of or guidance as to future earnings, revenue, sales, profit margins, expense rate, cash, effective tax rate, product mix, capital expense or any other financial items; 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 business plans for 2025 and beyond; 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, we caution investors and prospective investors that any such forward-looking statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors, which if they do not materialize or prove correct, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. We caution you not to place undue reliance on these forward-looking statements and to note they speak only as of the date hereof. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements include, without limitation, those described in our Annual Report on Form 10-K in “Item 1A. Risk Factors” filed on February 27, 2024. We disclaim any intention or obligation to update or review these financial projections or forward-looking statements due to new information or other events except as required by law.

The following discussion should be read in conjunction with the Company’s unaudited Condensed Consolidated Financial Statements, 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 accessory delivery systems used to deliver the lenses into the eye. We are the leading manufacturer of phakic implantable lenses used worldwide in corrective or “refractive” surgery. We have been dedicated solely to ophthalmic surgery for over 40 years. 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. We generate worldwide revenue almost exclusively from sales of our implantable Collamer® lenses, or “ICLs.” Our ICLs are made from Collamer, which is a proprietary collagen copolymer material created and exclusively used by STAAR to make our lenses soft, flexible and biocompatible with the eye. Our ICLs are phakic lenses, meaning that they are implanted into the eye without removing the eye’s natural crystalline lens. This distinguishes an ICL procedure from other refractive procedures, as it does not involve the removal of corneal eye tissue. All of our ICLs are foldable, which allows the surgeon to insert them into the eye through a small incision during minimally invasive surgery. Further, while ICLs are intended to be permanent, our ICLs are reversible lens implants, meaning they can be removed by a doctor if desired.

STAAR employs a commercialization strategy that strives for sustainable profitable growth. Our growth strategy includes making our complete ICL product line available in our existing geographic markets and expanding into attractive markets where we do not sell our products today. In addition, we are focused on driving awareness of the ICL procedure and the clinical benefits of our ICLs, and providing surgeon training, support and education, particularly in our newer markets.

Business Environment and Factors Affecting Comparability

For the three months ended March 28, 2025, we reported $42.6 million of net sales, a decrease of 45% compared to $77.4 million of net sales for the three months ended March 29, 2024. This significant decrease is primarily due to dynamics within our business in China. Net sales to our two distributors in China were $0.4 million for the three months ended March 28, 2025, compared to net sales of $38.5 million for the three months ended March 29, 2024. During the three months ended March 28, 2025, our distributors in China purchased fewer ICLs, as they were able to satisfy procedural demand largely from their existing inventory. Our distributors in China have historically purchased products from us in bulk shipments in advance of anticipated demand, which they use to satisfy orders from hospital customers based on scheduled surgeries. During fiscal 2024, our distributors in China purchased lenses above contracted minimums in anticipation of higher procedural volumes during what is typically a summer “high season” in China. Due to dynamic macroeconomic conditions and other factors, the number of ICL procedures performed during the high season and the second half of 2024 overall was lower than expected. Accordingly, our distributors in China held, as of December 27, 2024, elevated levels of ICL product inventory. While the level of inventory owned by our distributors in China has decreased substantially since December 27, 2024, we believe their ICL inventory is likely sufficient to meet currently expected procedure volumes for at least the first half of fiscal 2025. We therefore anticipate we will report minimal China ICL sales in the first half of fiscal 2025. As China in-country inventory is reduced during the first half of fiscal 2025, we would expect our China revenue to normalize. However, our ability to successfully address these challenges will depend on a number of factors, including the risk of a prolonged slowdown or disruption in China and the status of trade tariffs both globally and between the United States and China.

In April 2025, in response to the announcement of tariffs by the United States on Chinese goods, China announced retaliatory tariffs on U.S.-origin goods. In order to mitigate potential financial exposure from such tariffs, we negotiated and implemented consignment agreements with our two distributors in China, and we delivered consigned inventory to China in advance of the implementation of tariffs. While the tariff situation is evolving, we believe that these efforts to increase the amount of ICLs in China reduce the Company’s tariff risk in China in the near-term. In addition, we are rapidly ramping up our production capabilities in Switzerland to supplement our manufacturing capacity in the United States to provide optionality under multiple tariff scenarios.

Given that we now maintain consigned inventory in China, we believe that purchases by our distributors will largely be satisfied from our consigned inventory in-country in the near-term, rather than through bulk purchases. As a result, we expect our distributors will likely make more frequent purchases of ICLs in smaller quantities that are more closely aligned to actual procedural volumes as opposed to anticipated demand. We believe this will reduce the risk of elevated inventory buildup by our distributors, while at the same time maintaining sufficient ICL inventory in China to support quick and efficient delivery and fulfillment for surgical procedures.

Critical Accounting Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 three months ended March 28, 2025 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 27, 2024.

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 March 28, 2025 decreased 45% from the same period of 2024, primarily due to decreased China sales, partially offset by increased other product sales. The sales decrease was driven by the APAC region, which decreased by 61%, with ICL unit decrease of 62%. The decrease in the APAC region was driven by decreased sales in China, partially offset by sales growth in Korea and Japan. The Company expects China sales to return to normalized levels beginning in the third quarter of 2025. The EMEA region sales increased 10% with ICL unit growth up 10%, due to sales growth in our distributor and direct markets. The Americas region sales increased 9%, with ICL unit growth up 3%, primarily due to sales growth in the U.S. and our Latin America distributor markets. Changes in foreign currency unfavorably impacted net sales by $0.5 million.

Other product sales includes delivery systems and normal recurring sales adjustments such as sales return allowances.

Gross Profit

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

Gross profit for the three months ended March 28, 2025 decreased 54.1%, from the same period of 2024. Gross profit margin decreased to 65.8% of revenue for the three months ended March 28, 2025 compared to 78.9% of revenue for the three months ended March 29, 2024, due primarily to higher manufacturing costs per unit due to lower production volume, increased excess and obsolete inventory reserves and period costs associated with the expansion of the Company’s manufacturing capabilities in its Nidau, Switzerland facility.

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 March 28, 2025 increased 5.3% from the same period of 2024 due to increased salary-related and payroll tax expenses.

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 March 28, 2025 decreased 7.8% from the same period of 2024 due to decreased advertising and promotional activities.

Research and Development Expense

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

Research and development expenses for the three months ended March 28, 2025 increased 2.1% from the same period of 2024, due mainly to increased salary-related and payroll tax expenses, partially offset by decreased clinical expenses.

Restructuring, Impairment and Related Charges

The following table presents our restructuring, impairment and related charges (dollars in thousands):

* Denotes change is greater than +100%.

In the first quarter of 2025, we took a number of steps to change our leadership team, realign our leadership structure to better address market needs, reduce costs and discretionary spending and better position the Company to return to sustainable growth. As part of the leadership realignment and related efforts, during the three months ended March 28, 2025, we recognized costs related to severance, reduction in workforce, and consulting expenses of $9,447,000; impairment expenses on leasehold improvements and machinery and equipment of $7,059,000 as we will no longer be using these assets; and impairment on real property right-of-use assets of $3,407,000, as we are actively pursuing subleasing opportunities for two of our leased properties. In addition, we also recognized impairment of $2,751,000 for internally developed software that we will no longer be using as we will transition to a cloud-based software solution.

Other Income, Net

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

* Denotes change is greater than +100%.

The increase in other income, net for the three months ended March 28, 2025, was due mainly to higher foreign exchange gains for the three months ended March 28, 2025.

Income Taxes

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

* Denotes change is greater than +100%.

The effective tax rates for the three months ended March 28, 2025 and March 29, 2024 were 0.5% and (51.0)%, 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

Our principal sources of liquidity are cash, cash equivalents, investments available for sale (“AFS”) and cash flow from operating activities. We believe these sources of liquidity 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. We expect that cash flow from operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, working capital needs, capital expenditures, and capital deployment decisions. In addition, future capital requirements will depend on many factors including our growth rate in net sales, the timing and extent of spending to support our growth strategy, the expansion of selling and marketing activities, the timing of introductions of new products, as well as global macroeconomic factors. If our anticipated future cash flow from operating activities is insufficient to satisfy our future capital requirements in the long-term, we may need to seek additional capital. Our financial condition at March 28, 2025 and December 27, 2024 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’s 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 of 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 three months ended March 28, 2025 and March 29, 2024 was as follows (in thousands):

For the three months ended March 28, 2025, net cash used in operating activities consisted of $54.2 million in net loss; partially offset by $29.4 million in working-capital changes primarily rated to changes in accounts receivable, partially offset by changes in inventory, and $19.1 million in non-cash items primarily related to impairment on fixed assets and operating leases and stock-based compensation. For the three months ended March 29, 2024 net cash provided by operating activities consisted of $16.8 million in working-capital changes primarily related to changes in accounts receivable and cloud-based software, partially offset by changes in other liabilities and inventories; and $8.2 million in non-cash items primarily related to stock based compensation expenses, partially offset by a net loss of $3.3 million.

For the three months ended March 28, 2025, net cash provided by investment activities was $35.4 million which consisted of $51.1 million of proceeds from the maturity of investments AFS, partially offset by $14.7 million in purchases of investments AFS. For the three months ended March 29, 2024, net cash provided by investment activity was $16.2 million which consisted of $20.5 million of proceeds from the maturity of investments AFS, partially offset by $5.2 million in purchases of property, plant and equipment.

Net cash used by financing activities for the three months ended March 28, 2025 was $0.9 million which primarily consisted of $1.3 million to repurchase employee common stock for taxes withheld. For the three months ended March 29, 2024, net cash provided by financing activities was $4.1 million which consisted of $5.3 million of proceeds from the exercise of stock options, partially offset by $1.2 million to repurchase employee common stock for taxes withheld.

Commitments

Employment Agreements

The Company’s Chief Executive Officer entered into an employment agreement with the Company, effective February 26, 2025. 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 three months ended March 28, 2025, 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 27, 2024.

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 March 28, 2025 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 27, 2024. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.