STAAR SURGICAL CO - Quarter Report: 2021 April (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended:    April 2, 2021

Or

Commission file number: 0-11634

STAAR SURGICAL COMPANY

(Exact Name of Registrant as Specified in its Charter)

(626) 303-7902

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☑     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐     No ☑

The registrant has 46,895,095 shares of common stock, par value $0.01 per share, issued and outstanding as of April 30, 2021.

STAAR SURGICAL COMPANY

INDEX

PART I – FINANCIAL INFORMATION

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

1

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

2

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

3

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

4

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

5

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 1 — Basis of Presentation and Significant Accounting Policies

The Condensed Consolidated Financial Statements of the Company present the financial position, results of operations, and cash flows of STAAR Surgical Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Commission. In accordance with those rules and regulations certain information and footnote disclosures normally included in the Comprehensive Financial Statements have been condensed or omitted pursuant to such rules and regulations. The Consolidated Balance Sheet as of January 1, 2021 was derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2021.

The Condensed Consolidated Financial Statements for the three months ended April 2, 2021 and April 3, 2020, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial condition and results of operations. The results of operations for the three months ended April 2, 2021 and April 3, 2020, are not necessarily indicative of the results to be expected for any other interim period or for the entire year.  

Each of the Company’s fiscal reporting periods ends on the Friday nearest to the quarter ending date and generally consists of 13 weeks.  Unless the context indicates otherwise “we,” “us,” the “Company,” and “STAAR” refer to STAAR Surgical Company and its consolidated subsidiaries.

Vendor Concentration

There was one vendor which accounted for over 11% and 10% of the Company’s consolidated accounts payable as of April 2, 2021 and January 1, 2021, respectively.  There were no vendors who accounted for over 10% of the Company’s consolidated purchases for the three months ended April 2, 2021 and April 3, 2020, respectively.  

Use of Estimates

During the COVID-19 pandemic, the Company believes it has used reasonable estimates and assumptions in determining valuation allowances for uncollectible trade receivables, sales returns reserves, obsolete and excess inventory reserves, deferred income taxes, and tax reserves, including valuation allowances for deferred tax assets, pension liabilities, evaluation of asset impairment, in determining the useful life of depreciable and definite-lived intangible assets, and in the variables and assumptions used to calculate and record stock-based compensation.  Throughout the COVID-19 pandemic the Company offered extended payment terms to assist its surgeon customers and their clinics as they resumed business. Although the Company experienced some delays in payments on accounts receivable as a result of the COVID-19 pandemic in the first half of 2020, the Company experienced improvements since the third quarter of 2020 as elective refractive surgeries resumed.  The Company is unaware of any material impairment of customer receivables.  The Company’s sales representatives throughout the world remain engaged with customers conducting online training and other educational courses which have been very well attended.  This activity has given the Company insight into COVID-19’s impact on customers and potential impairment of receivables.

Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted

On January 1, 2021 (beginning of fiscal year 2021), the Company adopted Accounting Standards Update (“ASU”) 2019‑12, “Income Taxes (Topic 740):  Simplifying the Accounting for Income Taxes,” which removes the following exceptions:  exception to the incremental approach for intraperiod tax allocation; exception to accounting for basis differences when there are ownership changes in foreign investments; and exception to interim period tax accounting for year to date losses that exceed anticipated losses.  ASU 2019-12 also improves financial reporting for franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods.  The adoption of ASU 2019-12 did not have a material impact on the Condensed Consolidated Financial Statements.

6

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 2 — Inventories

Inventories, net are stated at the lower of cost and net realizable value, determined on a first-in, first-out basis and consisted of the following (in thousands):

Note 3 — Prepayments, Deposits, and Other Current Assets

Prepayments, deposits, and other current assets consisted of the following (in thousands):

Note 4 — Property, Plant and Equipment

Property, plant and equipment, net consisted of the following (in thousands):

Note 5 –Intangible Assets

Intangible assets, net consisted of the following (in thousands):

7

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 6 – Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

Note 7 – Lines of Credit

Since 1998, the Company’s wholly owned Japanese subsidiary, STAAR Japan, has had an agreement with Mizuho Bank which provides for borrowings of up to 500,000,000 Yen, at an interest rate equal to the uncollateralized overnight call rate (approximately 0.07% as of April 2 2021) plus a 0.50% spread, and may be renewed quarterly (the current line expires on May 21, 2021).  The credit facility is not collateralized.  The Company had 142,500,000 Yen outstanding on the line of credit as of April 2, 2021 and January 1, 2021 (approximately $1,288,000 and $1,379,000 based on the foreign exchange rates on April 2, 2021 and January 1, 2021, respectively), which approximates fair value due to the short-term maturity and market interest rates of the line of credit.  In case of default, the interest rate will be increased to 14% per annum.  There was 357,500,000 Yen available for borrowing as of April 2, 2021 and January 1, 2021 (approximately $3,232,000 and $3,459,000 based on the foreign exchange rate on April 2, 2021 and January 1, 2021, respectively).  At maturity on May 21, 2021, the Company expects to renew this line of credit for an additional three months, with similar terms.

In September 2013, the Company’s wholly owned Swiss subsidiary, STAAR Surgical AG, entered into a framework agreement for loans (“framework agreement”) with Credit Suisse (the “Bank”). The framework agreement provides for borrowings of up to 1,000,000 CHF (Swiss Francs) (approximately $1,100,000 at the rate of exchange on April 2, 2021 and January 1, 2021), to be used for working capital purposes. Accrued interest and 0.25% commissions on average outstanding borrowings is payable quarterly and the interest rate will be determined by the Bank based on the then prevailing market conditions at the time of borrowing. The framework agreement is automatically renewed on an annual basis based on the same terms assuming there is no default. The framework agreement may be terminated by either party at any time in accordance with its general terms and conditions. The framework agreement is not collateralized and contains certain conditions such as providing the Bank with audited financial statements annually and notice of significant events or conditions, as defined in the framework agreement. The Bank may also declare all amounts outstanding to be immediately due and payable upon a change of control or a “material qualification” in STAAR Surgical independent auditors’ report, as defined. There were no borrowings outstanding as of April 2, 2021 and January 1, 2021.

The Company is in compliance with covenants of its credit facilities and lines of credit as of April 2, 2021.

8

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 8 – Leases

Finance Leases

The Company entered into finance leases primarily related to purchases of equipment used for manufacturing or computer-related equipment.  These finance leases are two to five years in length and have fixed payment amounts for the term of the contract and have options to purchase the assets at the end of the lease term.  Supplemental balance sheet information related to finance leases consisted of the following (dollars in thousands):

Supplemental cash flow information related to finance leases consisted of the following (dollars in thousands):

The Company entered into operating leases primarily related to real property (office, manufacturing and warehouse facilities), automobiles and copiers.  These operating leases are two to ten years in length with options to extend.  The Company did not include any lease extensions in the initial valuation unless the Company was reasonably certain to extend the lease.  Depending on the lease, there are those with fixed payment amounts for the entire length of the contract or payments which increase periodically as noted in the contract or increased at an inflation rate indicator.  For operating leases that increase using an inflation rate indicator, the Company used the inflation rate at the time the lease was entered into for the length of the lease term.  Supplemental balance sheet information related to operating leases consisted of the following (dollars in thousands):

9

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 8 – Leases (Continued)

Operating Leases

Supplemental cash flow information related to operating leases was as follows (dollars in thousands):

Future Minimum Lease Commitments

Estimated future minimum lease payments under operating and finance leases having initial or remaining non-cancelable lease terms more than one year as of April 2, 2021 is as follows (in thousands):

Note 9 — Income Taxes

The Company recorded an income tax provision as follows (in thousands):

The Company recorded income taxes of $1,247,000 for the three months ended April 2, 2021 due to pre-tax income generated in certain foreign jurisdictions.  The Company recorded an income tax benefit of $1,158,000 for the three months ended April 3, 2020 due to a release of its U.S. valuation allowance of $1,369,000, as a result of the Company revising its global forecasts in response to the impacts of COVID‑19, and due to changes in the usage and release of certain deferred tax assets, offset by pre-tax income generated in certain foreign jurisdictions.  The Company’s quarterly provision for income taxes is determined by estimating an annual effective tax rate.  This estimate may fluctuate throughout the year as new information becomes available affecting its underlying assumptions.  There are no unrecognized tax benefits related to uncertain tax positions taken by the Company.   All earnings from the Company’s subsidiaries are not considered to be permanently reinvested.

The 2017 Tax Act subjects a U.S. shareholder to tax on Global Intangible Low Tax Income (“GILTI”) earned by certain foreign subsidiaries.  In general, GILTI is the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets.  The provision further allows a deduction of 50 percent of GILTI, however this deduction is limited by the Company’s U.S. taxable income.  The Company has elected to account for GILTI as a current period expense when incurred.

10

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 9 — Income Taxes (Continued)

The final regulations also allow companies to exclude certain high-taxed income from their GILTI calculation (the GILTI high-tax exclusion).  The GILTI high-tax exclusion applies if the effective foreign tax rate is 90% or more of the rate that would apply if the income were subject to the maximum US rate of tax specified in section 11 (currently 18.9%, based on a maximum rate of 21%).  The final regulations also provide that the GILTI high-tax exclusion is an annual election made each year and is retroactive to years beginning after December 31, 2017.  The Company has made the election to exclude certain high-taxed income from its GILTI calculation for the three months ended April 2, 2021 and April 3, 2020.

The ultimate realization of deferred tax assets is dependent upon future generation of income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the projected future income and tax planning strategies in making this assessment. Since January 1, 2021, the Company had three years of accumulated profits for federal and various state income tax purposes as a result of GILTI.  However, the three-year income position is not solely determinative and, accordingly, management considers all other available positive and negative evidence in its analysis. This includes existing profits in foreign jurisdiction as well as projected future profits. As further described in Notes 1 and 10 of the Company’s fiscal 2020 Form 10-K, under the “incremental cash tax savings approach,” the Company recorded a valuation allowance release of $3,576,000 and $294,000 against the federal and certain states deferred tax assets, respectively, as of April 2, 2021, and January 1, 2021.  

Total U.S. net deferred tax assets were $3,870,000 as of April 2, 2021 and January 1, 2021.  Under the incremental cash tax savings approach, the U.S. valuation allowances of $41,467,000 and $42,080,000, will remain as the usage of the remaining net operating losses and deferred tax assets will not result in cash tax savings and therefore provide no additional benefit as of April 2, 2021 and January 1, 2021, respectively.  

Note 10 – Defined Benefit Pension Plans

The Company has defined benefit plans covering employees of its Switzerland and Japan operations.  The following table summarizes the components of net periodic pension cost recorded for the Company’s defined benefit pension plans (in thousands):

The Company currently is not required to and does not make contributions to its Japan pension plan.  The Company’s contributions to its Swiss pension plan are as follows (in thousands):

11

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 11 — Stockholders’ Equity

Stock-Based Compensation

The cost that has been charged against income for stock-based compensation is set forth below (in thousands):

The Company recorded stock-based compensation costs in the following categories (in thousands):

Incentive Plan

The Amended and Restated Omnibus Equity Incentive Plan (“the Plan”) provides for various forms of stock-based incentives. To date, of the available forms of awards under the Plan, the Company has granted only stock options, restricted stock, unrestricted share grants, restricted stock units (“RSUs”) and performance stock units (“PSUs”). Options under the Plan are granted at fair market value on the date of grant, become exercisable generally over a three-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control and pre-established financial metrics are met (as defined in the Plan). Grants of restricted stock outstanding under the Plan generally vest over periods of one to three years. Grants of RSUs and PSUs outstanding under the Plan generally vest based on service, performance, or a combination of both.  As of April 2, 2021, there were 3,040,305 shares available for grant under the Plan.

Assumptions

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the weighted-average assumptions noted in the following table.  Expected volatilities are based on historical volatility of the Company’s stock. The expected term of options granted is derived from the historical exercises and post-vesting cancellations and represents the period of time that options granted are expected to be outstanding.  The Company has calculated an 6% estimated forfeiture rate based on historical forfeiture experience.  The risk-free rate is based on the U.S. Treasury yield curve corresponding to the expected term at the time of the grant.  

12

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 11 — Stockholders’ Equity (Continued)

Stock Options

A summary of stock option activity under the Plan for the three months ended April 2, 2021 is presented below:

Restricted Stock, Restricted Stock Units and Performance Stock Units

A summary of restricted stock, RSUs and PSUs activity under the Plan for the three months ended April 2, 2021 is presented below:

Note 12 - Commitments and Contingencies

Litigation and Claims

On December 31, 2020, Amir Sitabkhan filed a stockholder derivative complaint against certain members of our Board of Directors, Caren Mason, Stephen C. Farrell, John C. Moore, and Louis E. Silverman, as well as current Chief Financial Officer (CFO) Patrick F. Williams and former CFO Deborah Andrews in the U.S. District Court for the Central District of California. The plaintiff alleges breaches of fiduciary duties by, among other things, allowing STAAR to disseminate misleading statements to investors regarding its sales and growth in China and overstating marketing and research and development expenses, failing to properly oversee the Company, and unjust enrichment. The complaint sought damages, restitution and governance reforms, attorneys’ fees, and costs. On January 21, 2021, the court granted the parties’ stipulation extending the time for defendants to respond to the complaint to March 8, 2021.  On March 9, 2021, Mr. Sitabkhan’s counsel filed a notice of voluntary dismissal of the lawsuit, which dismissed the lawsuit without prejudice.

Employment Agreements

The Company’s Chief Executive Officer entered into an employment agreement with the Company, effective March 1, 2015. She 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 its assets, or termination “without cause or for good reason” as defined in the employment agreements.

13

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 13 — Basic and Diluted Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands except per share amounts):

Because the Company had a net loss for the three months ended April 3, 2020, the number of diluted shares is equal to the number of basic shares.  The following table sets forth (in thousands) the weighted average number of options to purchase shares of common stock, restricted stock, RSUs and PSUs with either exercise prices or unrecognized compensation cost per share greater than the average market price per share of the Company’s common stock, which were not included in the calculation of diluted per share amounts because the effects would be anti-dilutive.

14

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 14 — Disaggregation of Sales, Geographic Sales and Product Sales

In the following tables, sales are disaggregated by category, sales by geographic market and sales by product data.  The following breaks down sales into the following categories (in thousands):

The Company markets and sells its products in over 75 countries and conducts its manufacturing in the United States.  Other than China and Japan, the Company does not conduct business in any country in which its sales exceed 10% of worldwide consolidated net sales. Sales are attributed to countries based on location of customers. The composition of the Company’s net sales to unaffiliated customers was as follows (in thousands):

100% of the Company’s sales are generated from the ophthalmic surgical product segment and the chief operating decision maker makes operating decisions and allocates resources based upon the consolidated operating results, and therefore the Company operates as one operating segment for financial reporting purposes. The Company’s principal products are implantable Collamer lenses (“ICLs”) used in refractive surgery and intraocular lenses (“IOLs”) used in cataract surgery.  The composition of the Company’s net sales by product line was as follows (in thousands):

One customer, the Company’s distributor in China, accounted for 39% and 33% of net sales for the three months ended April 2, 2021 and April 3, 2020, respectively.  As of April 2, 2021 and January 1, 2021, respectively, one customer, the Company’s distributor in China, accounted for 37% and 46% of consolidated trade receivables.

15

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 15 — COVID-19 and CARES Act Developments

In December 2019, COVID-19 surfaced and in March 2020, the World Health Organization declared a pandemic related to the rapid spread of COVID-19 around the world.  The impact of the COVID-19 outbreak on the businesses and the economy in the U.S. and the rest of the world is, and is expected to continue to be, uncertain and may continue to be significant. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected. On March 17, 2020, the Company suspended most of its production and non-essential business locations where employees can work from home.  A very limited number of manufacturing personnel remained at work for critical late staged processes, until the end of March 2020.  Manufacturing resumed on April 27, 2020.  The Company’s revenues have been adversely impacted, and the Company experienced a substantial slowdown in sales beginning March 20, 2020 in global geographies characterized as “hot spots” for the COVID-19 virus, including parts of Europe, North America, Asia, the Middle East and India.  In certain of these markets, sales have paused as elective surgeries are discouraged to support COVID-19 related needs.  The Company expects decreases in sales in certain geographies to continue in 2021 as different geographies resume business activities on differing timelines.  

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.  The Company did not apply for or require financing available under the CARES Act and does not expect to do so.  The Company will continue to monitor the impact that the CARES Act may have on its business, financial condition, results of operations, or liquidity.

The Consolidated Appropriations Act (“CAA”) among other things, opened up another round of Paycheck Protection Program loans, expanding eligibility to small nonprofits, destination marking organizations, and housing cooperatives, provided additional funding for the Economic Injury Disaster Loans and grants, extends the Employee Retention Tax Credit, also extended and expanded Paid Sick and Family Leave Credits and the Employee Social Security tax deferral.  The Company will continue to monitor the impact that the CAA may have on its business, financial condition, results of operations, or liquidity.

16

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, 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 (including the EVO family of lenses in the U.S. and the EVO Viva family of lenses for presbyopia internationally); 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 2021 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 in our Annual Report on Form 10-K in “Item 1A. Risk Factors” filed on February 24, 2021.  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.

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, and we also make lenses for use in surgery to treat cataracts. 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. 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 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. We position our IOL lenses used in surgery that treats cataracts based on quality and value.

Recent Developments

For the first quarter of 2021 STAAR’s net sales increased 44% over the prior year driven by 54% global ICL unit growth as markets continued to more fully reopen following COVID-19 related shutdowns and we continued to gain momentum towards realization of a lens-based future for refractive vision correction. Notable markets for ICL unit growth in the first quarter of 2021 included China, Japan, South Korea, APAC Distributor Markets, India, Spain, Germany, European Distributor Markets, and the U.S. In late April, the FDA received our clinical data for our EVO family of myopia lenses with the goal of bringing EVO to the U.S. market later this year. We are continuing the phased rollout of our EVO Viva lens, which is the presbyopia-correcting lens that received CE Mark approval in 2020.

17

While COVID-19 hotspots and government public health mandates may reoccur moving forward, we anticipate less business interruption and continued interest in our EVO ICL lens-based refractive solutions throughout 2021.

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 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.

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 three months ended April 2, 2021 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 January 1, 2021.

Results of Operations

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

Net Sales

Net sales for the three months ended April 2, 2021 were $50.8 million, an increase of 44% from $35.2 million reported during the same period of 2020.  The increase in net sales was due to increased ICL sales of $17.2 million, partially offset by a decrease in other product sales of $1.6 million.  Changes in foreign currency favorably impacted net sales by $1.2 million.

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Total ICL sales for the three months ended April 2, 2021 were $46.5 million, an increase of 58% from $29.3 million reported for the same period of 2020, with unit increase of 54%. The APAC region sales increased by 62%, with unit growth up 59%, due to sales growth in Japan up 77%, China up 67%, India up 65%, other APAC Distributors up 47%, and Korea up 32%.  The Europe, Middle East, Africa and Latin America region sales increased 51% with unit increase of 38%, due to sales growth in Distributor Operations up 71%, Germany up 58%, Latin America up 59% and Spain up 55%.  The North America region sales increased 44%, with unit increase of 49%, due increased sales in Canada up 60% and the U.S. up 42%.  First quarter 2021 sales growth continues to follow the third and four quarter 2020 sales growth trends experienced after the initial COVID-19 pandemic closures occurred in many of our primary markets during the first half of 2020. Changes in foreign currency favorably impacted ICL sales by $1.0 million for the three months ended April 2, 2021.  ICL sales represented 91.6% and 83.4% of our total sales for the three months ended April 2, 2021 and April 3, 2020, respectively.

Other product sales, including IOLs were $4.3 million for the three months ended April 2, 2021, a decrease of 27% from $5.8 million reported for the same period of 2020.  The decrease was due to product yield issues requiring rework related to preloaded injector parts manufactured on our behalf by a third-party vendor then sold by us to a third-party manufacturer for product they sell to their customers, as well as decreased IOL sales.  Changes in foreign currency favorably impacted other product sales by $0.2 million for the three months ended April 2, 2021.  Other product sales represented 8.4% and 16.6% of our total sales for the three months ended April 2, 2021 and April 3, 2020, respectively.

Gross Profit

Gross profit for the three months ended April 2, 2021 was $39.1 million, a 58.1% increase compared to the $24.8 million reported for the same period of 2020.  Gross profit margin increased to 77.1% of revenue for the three months ended April 2, 2021 compared to 70.4% of revenue for the three months ended April 3, 2020, due to geographic sales mix, a decreased mix of injector part sales which carry a lower margin, and for the three months ended April 3, 2020 were $150,000 period costs recorded as a result of COVID-19 and the resulting manufacturing pause which began on March 17, 2020.  

General and Administrative Expense

General and administrative expenses for the three months ended April 2, 2021 were $10.2 million, a 28.1% increase compared to the $8.0 million reported for the same period of 2020, due to increased variable compensation, salary-related expenses, facility costs and corporate insurance, partially offset by decreased tax consulting costs.

Selling and Marketing Expense

Selling and marketing expenses for the three months ended April 2, 2021 were $13.2 million, a 19.7% increase compared to the $11.0 million reported for the same period of 2020, due to increased salary-related expenses, variable compensation and advertising and promotional activities, slightly offset by travel expenses.

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Research and Development Expense

Research and development expenses for the three months ended April 2, 2021 were $8.3 million, a 19.7% increase compared to the $6.9 million reported for the same period of 2020, primarily due to increased variable compensation, clinical expenses associated with our EVO clinical trial in the U.S and salary-related expenses.

Other Expense, Net