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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2023

Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-11634

STAAR Surgical Company

(Exact Name of Registrant as Specified in its Charter)

Delaware | 95-3797439
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.)
25651 Atlantic Ocean Drive Lake Forest, California | 92630
(Address of Principal Executive Offices) | (Zip Code)

(626) 303-7902

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common | STAA | NASDAQ

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.

Large accelerated filer | ☑ |  | Accelerated filer | ☐
Non-accelerated filer | ☐ |  | Smaller reporting company | ☐
Emerging growth company | ☐ |  |  |

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 48,333,250 shares of common stock, par value $0.01 per share, issued and outstanding as of April 28, 2023.

STAAR SURGICAL COMPANY

INDEX

|  |  | PAGE NUMBER
PART I – FINANCIAL INFORMATION |  | 1
ITEM 1 | FINANCIAL STATEMENTS |  | 1
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 16
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |  | 21
ITEM 4. | CONTROLS AND PROCEDURES |  | 21
PART II – OTHER INFORMATION |  | 21
ITEM 1. | LEGAL PROCEEDINGS |  | 21
ITEM 1A. | RISK FACTORS |  | 21
ITEM 4. | MINE SAFETY DISCLOSURES |  | 22
ITEM 5. | OTHER INFORMATION |  | 22
ITEM 6. | EXHIBITS |  | 22

PART I – FINANCI AL INFORMATION

ITEM 1. FINANCI AL STATEMENTS

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDA TED BALANCE SHEETS

(In thousands, except par value amounts)

(Unaudited)

|  | March 31, 2023 |  |  | December 30, 2022 |
ASSETS |  |  |  |  |  |
Current assets: |  |  |  |  |  |
Cash and cash equivalents |  | $ | 89,968 |  |  | $ | 86,480 |
Investments available for sale |  |  | 113,879 |  |  |  | 125,159 |
Accounts receivable trade, net of allowance for credit losses of $43 and $20, respectively |  |  | 63,494 |  |  |  | 62,447 |
Inventories, net |  |  | 27,808 |  |  |  | 24,161 |
Prepayments, deposits and other current assets |  |  | 17,722 |  |  |  | 13,476 |
Total current assets |  |  | 312,871 |  |  |  | 311,723 |
Investments available for sale |  |  | 13,445 |  |  |  | 13,902 |
Property, plant and equipment, net |  |  | 53,453 |  |  |  | 50,921 |
Finance lease right-of-use assets, net |  |  | 303 |  |  |  | 342 |
Operating lease right-of-use assets, net |  |  | 31,182 |  |  |  | 30,270 |
Intangible assets, net |  |  | 165 |  |  |  | 173 |
Goodwill |  |  | 1,786 |  |  |  | 1,786 |
Deferred income taxes |  |  | 4,744 |  |  |  | 4,824 |
Other assets |  |  | 956 |  |  |  | 957 |
Total assets |  | $ | 418,905 |  |  | $ | 414,898 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |
Accounts payable |  | $ | 9,102 |  |  | $ | 11,576 |
Obligations under finance leases |  |  | 171 |  |  |  | 169 |
Obligations under operating leases |  |  | 3,538 |  |  |  | 3,524 |
Allowance for sales returns |  |  | 5,303 |  |  |  | 5,706 |
Other current liabilities |  |  | 28,949 |  |  |  | 30,741 |
Total current liabilities |  |  | 47,063 |  |  |  | 51,716 |
Obligations under finance leases |  |  | 167 |  |  |  | 210 |
Obligations under operating leases |  |  | 28,030 |  |  |  | 27,136 |
Deferred income taxes |  |  | 1,369 |  |  |  | 1,489 |
Asset retirement obligations |  |  | 218 |  |  |  | 220 |
Pension liability |  |  | 3,134 |  |  |  | 1,935 |
Total liabilities |  |  | 79,981 |  |  |  | 82,706 |
Commitments and contingencies |  |  |  |  |  |
Stockholders’ equity: |  |  |  |  |  |
Common stock, $0.01 par value; 60,000 shares authorized: 48,331 and 48,212 shares issued and outstanding at March 31, 2023 and December 30, 2022, respectively |  |  | 483 |  |  |  | 482 |
Additional paid-in capital |  |  | 409,303 |  |  |  | 404,189 |
Accumulated other comprehensive gain (loss) |  |  | (937 | ) |  |  | 156 |
Accumulated deficit |  |  | (69,925 | ) |  |  | (72,635 | )
Total stockholders’ equity |  |  | 338,924 |  |  |  | 332,192 |
Total liabilities and stockholders’ equity |  | $ | 418,905 |  |  | $ | 414,898 |

See accompanying notes to the condensed consolidated financial statements.

1

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED S TATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Net sales |  | $ | 73,528 |  |  | $ | 63,200 |
Cost of sales |  |  | 15,966 |  |  |  | 13,936 |
Gross profit |  |  | 57,562 |  |  |  | 49,264 |
Selling, general and administrative expenses: |  |  |  |  |  |
General and administrative |  |  | 18,098 |  |  |  | 11,940 |
Selling and marketing |  |  | 26,354 |  |  |  | 17,270 |
Research and development |  |  | 10,310 |  |  |  | 7,941 |
Total selling, general and administrative expenses |  |  | 54,762 |  |  |  | 37,151 |
Operating income |  |  | 2,800 |  |  |  | 12,113 |
Other income (expense), net: |  |  |  |  |  |
Interest income (expense), net |  |  | 1,822 |  |  |  | (6 | )
Gain (loss) on foreign currency transactions |  |  | 34 |  |  |  | (915 | )
Royalty income |  |  | — |  |  |  | 273 |
Other income, net |  |  | 63 |  |  |  | 62 |
Total other income (expense), net |  |  | 1,919 |  |  |  | (586 | )
Income before income taxes |  |  | 4,719 |  |  |  | 11,527 |
Provision for income taxes |  |  | 2,009 |  |  |  | 1,925 |
Net income |  | $ | 2,710 |  |  | $ | 9,602 |
Net income per share: |  |  |  |  |  |
Basic |  | $ | 0.06 |  |  | $ | 0.20 |
Diluted |  | $ | 0.05 |  |  | $ | 0.19 |
Weighted average shares outstanding: |  |  |  |  |  |
Basic |  |  | 48,247 |  |  |  | 47,755 |
Diluted |  |  | 49,500 |  |  |  | 49,288 |

See accompanying notes to the condensed consolidated financial statements.

2

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Net income |  | $ | 2,710 |  |  | $ | 9,602 |
Other comprehensive income (loss): |  |  |  |  |  |
Defined benefit plans: |  |  |  |  |  |
Net change in plan assets |  |  | (1,177 | ) |  |  | 4,068 |
Reclassification into other income (expense), net |  |  | (52 | ) |  |  | 52 |
Investments available for sale: |  |  |  |  |  |
Change in unrealized gain (loss) |  |  | 116 |  |  |  | — |
Reclassification into other income (expense), net |  |  | (2 | ) |  |  | — |
Foreign currency translation gain (loss) |  |  | (129 | ) |  |  | (1,014 | )
Tax effect |  |  | 151 |  |  |  | (121 | )
Other comprehensive income (loss), net of tax |  |  | (1,093 | ) |  |  | 2,985 |
Comprehensive income |  | $ | 1,617 |  |  | $ | 12,587 |

See accompanying notes to the condensed consolidated financial statements.

3

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

|  | Three Months Ended |
|  | Common Stock Shares |  |  | Common Stock Par Value |  |  | Additional Paid-In Capital |  |  | Accumulated Other Compre- hensive Income (Loss) |  |  | Accumulated Deficit |  |  | Total |
Balance, at December 30, 2022 |  |  | 48,212 |  |  | $ | 482 |  |  | $ | 404,189 |  |  | $ | 156 |  |  | $ | (72,635 | ) |  | $ | 332,192 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,710 |  |  |  | 2,710 |
Other comprehensive loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1,093 | ) |  |  | — |  |  |  | (1,093 | )
Common stock issued upon exercise of options |  |  | 40 |  |  |  | — |  |  |  | 529 |  |  |  | — |  |  |  | — |  |  |  | 529 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | 6,434 |  |  |  | — |  |  |  | — |  |  |  | 6,434 |
Repurchase of employee common stock for taxes withheld |  |  | (31 | ) |  |  | — |  |  |  | (1,849 | ) |  |  | — |  |  |  | — |  |  |  | (1,849 | )
Vested restricted and performance stock |  |  | 110 |  |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1 |
Balance, at March 31, 2023 |  |  | 48,331 |  |  | $ | 483 |  |  | $ | 409,303 |  |  | $ | (937 | ) |  | $ | (69,925 | ) |  | $ | 338,924 |
Balance, at December 31, 2021 |  |  | 47,716 |  |  | $ | 477 |  |  | $ | 373,519 |  |  | $ | (4,048 | ) |  | $ | (111,390 | ) |  | $ | 258,558 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,602 |  |  |  | 9,602 |
Other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,985 |  |  |  | — |  |  |  | 2,985 |
Common stock issued upon exercise of options |  |  | 49 |  |  |  | 1 |  |  |  | 911 |  |  |  | — |  |  |  | — |  |  |  | 912 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | 4,260 |  |  |  | — |  |  |  | — |  |  |  | 4,260 |
Vested restricted and performance stock |  |  | 45 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Balance, at April 1, 2022 |  |  | 47,810 |  |  | $ | 478 |  |  | $ | 378,690 |  |  | $ | (1,063 | ) |  | $ | (101,788 | ) |  | $ | 276,317 |

See accompanying notes to the condensed consolidated financial statements.

4

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED S TATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Cash flows from operating activities: |  |  |  |  |  |
Net income |  | $ | 2,710 |  |  | $ | 9,602 |
Adjustments to reconcile net income to net cash used in operating activities: |  |  |  |  |  |
Depreciation of property, plant, and equipment |  |  | 1,113 |  |  |  | 994 |
Amortization of intangibles |  |  | 7 |  |  |  | 8 |
Accretion/Amortization of investments available for sale |  |  | (983 | ) |  |  | — |
Deferred income taxes |  |  | 57 |  |  |  | — |
Change in net pension liability |  |  | (13 | ) |  |  | 41 |
Stock-based compensation expense |  |  | 6,065 |  |  |  | 3,894 |
Provision for sales returns and bad debts |  |  | (377 | ) |  |  | (194 | )
Inventory provision |  |  | 614 |  |  |  | 434 |
Changes in working capital: |  |  |  |  |  |
Accounts receivable |  |  | (1,110 | ) |  |  | (3,927 | )
Inventories |  |  | (3,920 | ) |  |  | (1,483 | )
Prepayments, deposits, and other current assets |  |  | (4,249 | ) |  |  | (4,505 | )
Accounts payable |  |  | (3,168 | ) |  |  | 2,668 |
Other current liabilities |  |  | (1,840 | ) |  |  | (12,142 | )
Net cash used in operating activities |  |  | (5,094 | ) |  |  | (4,610 | )
Cash flows from investing activities: |  |  |  |  |  |
Acquisition of property and equipment |  |  | (2,901 | ) |  |  | (2,539 | )
Purchase of investments available for sale |  |  | (27,445 | ) |  |  | — |
Proceeds from sale or maturity of investments available for sale |  |  | 40,279 |  |  |  | — |
Net cash provided by (used in) investing activities |  |  | 9,933 |  |  |  | (2,539 | )
Cash flows from financing activities: |  |  |  |  |  |
Repayment of finance lease obligations |  |  | (42 | ) |  |  | (18 | )
Repurchase of employee common stock for taxes withheld |  |  | (1,849 | ) |  |  | — |
Proceeds from the exercise of stock options |  |  | 529 |  |  |  | 912 |
Proceeds from vested restricted stock |  |  | 1 |  |  |  | — |
Net cash provided by (used in) financing activities |  |  | (1,361 | ) |  |  | 894 |
Effect of exchange rate changes on cash and cash equivalents |  |  | 10 |  |  |  | (384 | )
Increase (decrease) in cash and cash equivalents |  |  | 3,488 |  |  |  | (6,639 | )
Cash and cash equivalents, at beginning of the period |  |  | 86,480 |  |  |  | 199,706 |
Cash and cash equivalents, at end of the period |  | $ | 89,968 |  |  | $ | 193,067 |

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 December 30, 2022 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 December 30, 2022.

The Condensed Consolidated Financial Statements for the three months ended March 31, 2023 and April 1, 2022, 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 March 31, 2023 and April 1, 2022, 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.

Note 2 — Investments Available for Sale

During the second half of 2022, the Company started to invest its cash in slightly higher yielding securities. Investments available for sale (“AFS”) and the related fair value measurement consisted of the following (dollars in thousands):

|  | March 31, 2023 |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Fair Value Measurements |
|  | Amortized Cost |  |  | Unrealized Gains |  |  | Unrealized Losses |  |  | Estimated Fair Value |  |  | Level 1 |  |  | Level 2 |
Commercial paper |  | $ | 34,464 |  |  | $ | 4 |  |  | $ | (28 | ) |  | $ | 34,440 |  |  | $ | — |  |  | $ | 34,440 |
Certificates of deposit |  |  | 18,414 |  |  |  | 3 |  |  |  | (42 | ) |  |  | 18,375 |  |  |  | — |  |  |  | 18,375 |
U.S. Treasury securities |  |  | 24,430 |  |  |  | 26 |  |  |  | (9 | ) |  |  | 24,447 |  |  |  | 24,447 |  |  |  | — |
U.S. agency securities |  |  | 10,965 |  |  |  | 15 |  |  |  | (2 | ) |  |  | 10,978 |  |  |  | — |  |  |  | 10,978 |
Corporate debt securities |  |  | 39,342 |  |  |  | 3 |  |  |  | (261 | ) |  |  | 39,084 |  |  |  | — |  |  |  | 39,084 |
Total investments AFS |  | $ | 127,615 |  |  | $ | 51 |  |  | $ | (342 | ) |  | $ | 127,324 |  |  | $ | 24,447 |  |  | $ | 102,877 |
|  | December 30, 2022 |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Fair Value Measurements |
|  | Amortized Cost |  |  | Unrealized Gains |  |  | Unrealized Losses |  |  | Estimated Fair Value |  |  | Level 1 |  |  | Level 2 |
Commercial paper |  | $ | 44,054 |  |  | $ | 11 |  |  | $ | (62 | ) |  | $ | 44,003 |  |  | $ | — |  |  | $ | 44,003 |
Certificates of deposit |  |  | 17,355 |  |  |  | 4 |  |  |  | (75 | ) |  |  | 17,284 |  |  |  | — |  |  |  | 17,284 |
U.S. Treasury securities |  |  | 21,847 |  |  |  | 3 |  |  |  | (15 | ) |  |  | 21,835 |  |  |  | 21,835 |  |  |  | — |
U.S. agency securities |  |  | 10,688 |  |  |  | 16 |  |  |  | (3 | ) |  |  | 10,701 |  |  |  | — |  |  |  | 10,701 |
Corporate debt securities |  |  | 45,522 |  |  |  | 4 |  |  |  | (288 | ) |  |  | 45,238 |  |  |  | — |  |  |  | 45,238 |
Total investments AFS |  | $ | 139,466 |  |  | $ | 38 |  |  | $ | (443 | ) |  | $ | 139,061 |  |  | $ | 21,835 |  |  | $ | 117,226 |

6

STAAR SURGICAL COMPANY

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

Note 2 — Investments Available for Sale (Continued)

The Company obtains the fair value from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers and other industry and economic events.

The Company assessed each debt security with gross unrealized losses for impairment. As part of that assessment, the Company concluded that it does not intend to sell and it is more-likely-than-not that the Company will not be required to sell, prior to the recovery of the amortized cost basis. The Company did no t recognize impairment for the three months ended March 31, 2023.

The following table shows the fair value of investments AFS by contractual maturity (dollars in thousands):

|  | As of March 31, 2023 |
|  | Within one year |  |  | After one year through five years |  |  |  | Total |
Commercial paper |  | $ | 34,440 |  |  | $ | — |  |  |  | $ | 34,440 |
Certificates of deposit |  |  | 18,375 |  |  |  | — |  |  |  |  | 18,375 |
U.S. Treasury securities |  |  | 16,331 |  |  |  | 8,116 |  |  |  |  | 24,447 |
U.S. agency securities |  |  | 9,256 |  |  |  | 1,722 |  |  |  |  | 10,978 |
Corporate debt securities |  |  | 35,477 |  |  |  | 3,607 |  |  |  |  | 39,084 |
Total investments AFS |  | $ | 113,879 |  |  | $ | 13,445 |  |  |  | $ | 127,324 |

During the three months ended March 31, 2023, the Company sold $600,000 in securities due to a downgraded credit rating. The Company recognized a realized gain upon sale of $2,000 during the three months ended March 31, 2023.

Note 3 — 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):

|  | March 31, 2023 |  |  | December 30, 2022 |
Raw materials and purchased parts |  | $ | 7,252 |  |  | $ | 6,703 |
Work in process |  |  | 5,886 |  |  |  | 5,499 |
Finished goods |  |  | 16,455 |  |  |  | 13,633 |
Total inventories, gross |  |  | 29,593 |  |  |  | 25,835 |
Less inventory reserves |  |  | (1,785 | ) |  |  | (1,674 | )
Total inventories, net |  | $ | 27,808 |  |  | $ | 24,161 |

Note 4 — Prepayments, Deposits, and Other Current Assets

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

|  | March 31, 2023 |  |  | December 30, 2022 |
Prepayments and deposits |  | $ | 5,245 |  |  | $ | 3,986 |
Prepaid insurance |  |  | 2,468 |  |  |  | 2,620 |
Prepaid marketing costs |  |  | 2,388 |  |  |  | 2,534 |
Consumption tax receivable |  |  | 872 |  |  |  | 864 |
Value added tax (VAT) receivable |  |  | 4,677 |  |  |  | 2,661 |
BVG (Swiss Pension) prepayment |  |  | 1,536 |  |  |  | 111 |
Other(1) |  |  | 536 |  |  |  | 700 |
Total prepayments, deposits and other current assets |  | $ | 17,722 |  |  | $ | 13,476 |

(1)
No individual category in “other current assets” exceeds 5% of the total prepayments, deposits and other current assets.

7

STAAR SURGICAL COMPANY

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

Note 5 — Property, Plant and Equipment

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

|  | March 31, 2023 |  |  | December 30, 2022 |
Machinery and equipment |  | $ | 28,241 |  |  | $ | 28,026 |
Computer equipment and software |  |  | 9,283 |  |  |  | 9,266 |
Furniture and fixtures |  |  | 4,451 |  |  |  | 4,276 |
Leasehold improvements |  |  | 15,466 |  |  |  | 14,965 |
Construction in process |  |  | 34,947 |  |  |  | 32,269 |
Total property, plant and equipment, gross |  |  | 92,388 |  |  |  | 88,802 |
Less accumulated depreciation |  |  | (38,935 | ) |  |  | (37,881 | )
Total property, plant and equipment, net |  | $ | 53,453 |  |  | $ | 50,921 |

Note 6 – Intangible Assets

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

|  | March 31, 2023 |  |  | December 30, 2022 |
Long-lived amortized intangible assets |  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Net |  |  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Net |
Patents and licenses |  | $ | 9,235 |  |  | $ | (9,070 | ) |  | $ | 165 |  |  | $ | 9,240 |  |  | $ | (9,067 | ) |  | $ | 173 |

Note 7 – Other Current Liabilities

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

|  | March 31, 2023 |  |  | December 30, 2022 |
Accrued salaries and wages |  | $ | 8,181 |  |  | $ | 10,862 |
Accrued bonuses |  |  | 2,339 |  |  |  | 6,925 |
Severance payable |  |  | 1,595 |  |  |  | 410 |
Income taxes payable |  |  | 5,461 |  |  |  | 3,845 |
Marketing obligations |  |  | 1,832 |  |  |  | 1,374 |
Other(1) |  |  | 9,541 |  |  |  | 7,325 |
Total other current liabilities |  | $ | 28,949 |  |  | $ | 30,741 |

(1)
No individual category in “Other” exceeds 5% of the other current liabilities.

Note 8 – Leases

Finance Leases

The Company entered into finance leases primarily related to purchases of equipment used for manufacturing, computer-related equipment or furniture and fixtures. 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):

8

STAAR SURGICAL COMPANY

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

Note 8 – Leases (Continued)

Finance Leases (Continued)

|  | March 31, 2023 |  |  | December 30, 2022 |
Machinery and equipment |  | $ | 30 |  |  | $ | 30 |
Computer equipment and software |  |  | 18 |  |  |  | 18 |
Furniture and fixtures |  |  | 475 |  |  |  | 475 |
Finance lease right-of-use assets, gross |  |  | 523 |  |  |  | 523 |
Less accumulated depreciation |  |  | (220 | ) |  |  | (181 | )
Finance lease right-of-use assets, net |  | $ | 303 |  |  | $ | 342 |
Current finance lease obligations |  | $ | 171 |  |  | $ | 169 |
Long-term finance lease obligations |  |  | 167 |  |  |  | 210 |
Total finance lease liability |  | $ | 338 |  |  | $ | 379 |
Weighted-average remaining lease term (in years) |  |  | 2.0 |  |  |  | 2.2 |
Weighted-average discount rate |  |  | 4.12 | % |  |  | 4.10 | %

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

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Amortization of finance lease right-of-use asset |  | $ | 39 |  |  | $ | 43 |
Interest on finance lease liabilities |  |  | 4 |  |  |  | 3 |
Cash paid for amounts included in the measurement of finance lease liabilities: |  |  |  |  |  |
Operating cash flows |  |  | 4 |  |  |  | 3 |
Financing cash flows |  |  | 42 |  |  |  | 18 |

Operating Leases

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 does 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):

|  | March 31, 2023 |  |  | December 30, 2022 |
Machinery and equipment |  | $ | 807 |  |  | $ | 789 |
Computer equipment and software |  |  | 445 |  |  |  | 446 |
Real property |  |  | 35,565 |  |  |  | 34,465 |
Operating lease right-of-use assets, gross |  |  | 36,817 |  |  |  | 35,700 |
Less accumulated depreciation |  |  | (5,635 | ) |  |  | (5,430 | )
Operating lease right-of-use assets, net |  | $ | 31,182 |  |  | $ | 30,270 |
Current operating lease obligations |  | $ | 3,538 |  |  | $ | 3,524 |
Long-term operating lease obligations |  |  | 28,030 |  |  |  | 27,136 |
Total operating lease liability |  | $ | 31,568 |  |  | $ | 30,660 |
Weighted-average remaining lease term (in years) |  |  | 7.4 |  |  |  | 7.5 |
Weighted-average discount rate |  |  | 4.49 | % |  |  | 3.87 | %

9

STAAR SURGICAL COMPANY

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

Note 8 – Leases (Continued)

Operating Leases (Continued)

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

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Operating lease cost |  | $ | 1,107 |  |  | $ | 1,138 |
Cash paid for amounts included in the measurement of operating lease liabilities: |  |  |  |  |  |
Operating cash flows |  |  | 1,173 |  |  |  | 932 |
Right-of-use assets obtained in exchange for new operating lease liabilities |  |  | 1,909 |  |  |  | 675 |

Future Maturities of Lease Liabilities

Estimated future maturities of lease liabilities under operating and finance leases having initial or remaining non-cancelable lease terms more than one year as of March 31, 2023 is as follows (in thousands):

.

As of March 31, 2023 12 Months Ended |  | Operating Leases |  |  | Finance Leases |
March 2024 |  | $ | 5,488 |  |  | $ | 182 |
March 2025 |  |  | 5,655 |  |  |  | 170 |
March 2026 |  |  | 4,322 |  |  |  | — |
March 2027 |  |  | 4,364 |  |  |  | — |
March 2028 |  |  | 4,416 |  |  |  | — |
Thereafter |  |  | 13,877 |  |  |  | — |
Total future minimum lease payments |  | $ | 38,122 |  |  | $ | 352 |
Less amounts representing interest |  |  | (6,554 | ) |  |  | (14 | )
Total lease liability |  | $ | 31,568 |  |  | $ | 338 |

Note 9 — Income Taxes

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

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Provision for income taxes |  | $ | 2,009 |  |  | $ | 1,925 |

The effective tax rates for the three months ended March 31, 2023 and April 1, 2022 were 42.6% and 16.7%, respectively. The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% for the three months ended March 31, 2023 and April 1, 2022, respectively, primarily due to the income taxes generated in foreign jurisdictions.

10

STAAR SURGICAL COMPANY

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

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):

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Service cost(1) |  | $ | 249 |  |  | $ | 326 |
Interest cost(2) |  |  | 87 |  |  |  | 20 |
Expected return on plan assets(2) |  |  | (87 | ) |  |  | (118 | )
Prior service credit(2),(3) |  |  | (45 | ) |  |  | (45 | )
Actuarial loss recognized in current period(2),(3) |  |  | (7 | ) |  |  | 97 |
Net periodic pension cost |  | $ | 197 |  |  | $ | 280 |

(1)
Recognized in selling general and administrative expenses on the Condensed Consolidated Statements of Income.
(2)
Recognized in other expense, net on the Condensed Consolidated Statements of Income.
(3)
Amounts reclassified from accumulated other comprehensive income (loss).

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):

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Employer contribution |  | $ | 217 |  |  | $ | 216 |

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):

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Employee stock options |  | $ | 2,977 |  |  | $ | 2,327 |
Restricted stock |  |  | 67 |  |  |  | 109 |
Restricted stock units |  |  | 1,601 |  |  |  | 762 |
Performance stock units |  |  | 1,106 |  |  |  | 382 |
Nonemployee stock options |  |  | 314 |  |  |  | 314 |
Total stock-based compensation expense |  | $ | 6,065 |  |  | $ | 3,894 |

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

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Cost of sales |  | $ | 149 |  |  | $ | 70 |
General and administrative |  |  | 3,363 |  |  |  | 1,781 |
Selling and marketing |  |  | 857 |  |  |  | 889 |
Research and development |  |  | 1,696 |  |  |  | 1,154 |
Total stock-based compensation expense, net |  |  | 6,065 |  |  |  | 3,894 |
Amounts capitalized as part of inventory |  |  | 369 |  |  |  | 366 |
Total stock-based compensation expense, gross |  | $ | 6,434 |  |  | $ | 4,260 |

11

STAAR SURGICAL COMPANY

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

Note 11 — Stockholders’ Equity (Continued)

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 March 31, 2023, there were 856,885 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 a 7% 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.

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Expected dividend yield |  |  | 0 | % |  |  | 0 | %
Expected volatility |  |  | 60 | % |  |  | 54 | %
Risk-free interest rate |  |  | 3.96 | % |  |  | 1.71 | %
Expected term (in years) |  |  | 5.05 |  |  |  | 5.10 |

Stock Options

A summary of stock option activity under the Plan for three months ended March 31, 2023 is presented below:

|  | Stock Options (in 000’s) |  |  | Minimum Exercise Price |  |  | Maximum Exercise Price |
Outstanding at December 30, 2022 |  |  | 2,469 |  |  |  |  |  |  |
Granted |  |  | 496 |  |  |  |  |  |  |
Exercised |  |  | (40 | ) |  |  |  |  |  |
Forfeited or expired |  |  | (24 | ) |  |  |  |  |  |
Outstanding at March 31, 2023 |  |  | 2,901 |  |  | $ | 5.54 |  |  | $ | 154.96 |
Exercisable at March 31, 2023 |  |  | 1,980 |  |  |  |  |  |  |

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 March 31, 2023 is presented below (shares in thousands):

|  | Restricted Stock |  |  | RSUs |  |  | PSUs |
Unvested at December 30, 2022 |  |  | 4 |  |  |  | 192 |  |  |  | 118 |
Granted |  |  | — |  |  |  | 223 |  |  |  | 173 |
Vested |  |  | — |  |  |  | (80 | ) |  |  | (30 | )
Forfeited or expired |  |  | — |  |  |  | (6 | ) |  |  | (11 | )
Unvested at March 31, 2023 |  |  | 4 |  |  |  | 329 |  |  |  | 250 |

12

STAAR SURGICAL COMPANY

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

Note 12 - Commitments and Contingencies

Severance Payable

As of March 31, 2023 and December 30, 2022 there was severance payable of $1,595,000 and $410,000, respectively. recognized in other current liabilities on the Consolidated Balance Sheets, which included approximately $1,490,000 and $300,000, respectively, in one-time employee benefits to be paid to certain employees in STAAR Japan who work primarily in IOL sales. During the three months ended March 31, 2023, the Company recognized $1,242,000 related to this. The Company is expected to incur through the end of 2023, one-time employee benefits of approximately $1,475,000 related to this. These one-time employee benefits are recognized in general and administrative expense on the Consolidated Statements of Income.

Litigation and Claims

From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. These legal proceedings and other matters may relate to, among other things, contractual rights and obligations, employment matters, or claims of product liability. STAAR maintains insurance coverage for various matters, including product liability and certain securities claims. While the Company does not believe that any of the claims known is likely to have a material adverse effect on the Company’s financial condition or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.

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 its assets, or termination “without cause or for good reason” as defined in the employment agreements.

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):

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Numerator: |  |  |  |  |  |
Net income |  | $ | 2,710 |  |  | $ | 9,602 |
Denominator: |  |  |  |  |  |
Weighted average common shares: |  |  |  |  |  |
Common shares outstanding |  |  | 48,251 |  |  |  | 47,758 |
Less: Unvested restricted stock |  |  | (4 | ) |  |  | (3 | )
Denominator for basic calculation |  |  | 48,247 |  |  |  | 47,755 |
Weighted average effects of potentially diluted common stock: |  |  |  |  |  |
Stock options |  |  | 1,116 |  |  |  | 1,470 |
Unvested restricted stock |  |  | 3 |  |  |  | 1 |
RSUs |  |  | 81 |  |  |  | 55 |
PSUs |  |  | 53 |  |  |  | 7 |
Denominator for diluted calculation |  |  | 49,500 |  |  |  | 49,288 |
Net income per share: |  |  |  |  |  |
Basic |  | $ | 0.06 |  |  | $ | 0.20 |
Diluted |  | $ | 0.05 |  |  | $ | 0.19 |

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.

13

STAAR SURGICAL COMPANY

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

Note 13 — Basic and Diluted Net Income Per Share (Continued)

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Stock options |  |  | 1,392 |  |  |  | 613 |
Restricted stock, RSUs and PSUs |  |  | 15 |  |  |  | 24 |
Total |  |  | 1,407 |  |  |  | 637 |

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):

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Non-consignment sales |  | $ | 67,163 |  |  | $ | 57,569 |
Consignment sales |  |  | 6,365 |  |  |  | 5,631 |
Total net sales |  | $ | 73,528 |  |  | $ | 63,200 |

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):

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Domestic |  | $ | 4,551 |  |  | $ | 2,630 |
Foreign: |  |  |  |  |  |
China |  |  | 35,090 |  |  |  | 28,239 |
Japan |  |  | 10,936 |  |  |  | 11,633 |
Other(1) |  |  | 22,951 |  |  |  | 20,698 |
Total foreign sales |  |  | 68,977 |  |  |  | 60,570 |
Total net sales |  | $ | 73,528 |  |  | $ | 63,200 |

(1)
No other location individually exceeds 10% of the total sales.

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):

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
ICLs |  | $ | 70,625 |  |  | $ | 58,675 |
Other product sales: |  |  |  |  |  |
Cataract IOLs |  |  | 1,476 |  |  |  | 2,902 |
Other surgical products(1) |  |  | 1,427 |  |  |  | 1,623 |
Total other product sales |  |  | 2,903 |  |  |  | 4,525 |
Total net sales |  | $ | 73,528 |  |  | $ | 63,200 |

(1) Other surgical products include delivery systems and normal recurring sales adjustments such as sales return allowances.

One customer, the Company’s distributor in China, accounted for 48% and 45% of net sales for the three months ended March 31, 2023 and April 1, 2022, respectively. As of March 31, 2023 and December 30, 2022, respectively, one customer, the Company’s distributor in China, accounted for 55% and 59% of consolidated trade receivables.

14

STAAR SURGICAL COMPANY

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

Note 15 — COVID-19 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 as COVID-19 variant strains emerge. 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. While COVID-19 restrictions have since eased globally during 2022, a resurgence of the COVID-19 pandemic in global geographies, depending upon its duration and severity, could material adversely impact the global economy and the Company's industry, operations and financial condition and performance. The Company continues to monitor the commercial and operational impact of new variants of COVID-19 in its markets.

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

The matters addressed in this Item 2 that are not historical information constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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.

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 cataract IOL lenses used in surgery that treats cataracts based on quality and value.

Recent Developments

STAAR achieved 20% growth in both ICL units and sales in the first quarter, compared to the first quarter of 2022, with unit growth in APAC up 19%, EMEA up 18%, and the U.S. up 78%. In China, ICL procedure volumes increased strongly in the first quarter of 2023 with end-market procedures reaching a record level. Due to our growth investments and the increase in stock-based compensation we now anticipate operating margin for fiscal year 2023 will be approximately 10%, at the middle of the range of our 5-year average. We anticipate accelerating sales momentum as we move through the year. We are therefore raising our outlook for fiscal 2023 net sales from $340 million to approximately $348 million, which includes approximately $3 million of Other Product sales in the first quarter. Our updated outlook represents 28% global ICL sales growth year over year.

Regarding our Other Products business, in March we issued a Field Safety Notice to affected customers in Japan, France, Germany, Poland, and Italy to stop using our KS-SP preloaded acrylic IOL product manufactured by STAAR Japan, used in cataract procedures (unrelated to the EVO ICL). This was done as a precautionary measure in response to a Field Safety Notice issued by another company regarding a similarly manufactured product. Our communication asked customers to stop using

16

the KS-SP product until we determine the specific root cause, and is not considered a product recall. STAAR will update customers after completing its investigation. As of March 31, 2023, we had approximately $1.2 million of KS-SP inventory.

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 three months ended March 31, 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.

|  | Percentage of Net Sales for Three Months |
|  | March 31, 2023 |  |  | April 1, 2022 |
Net sales |  |  | 100.0 | % |  |  | 100.0 | %
Cost of sales |  |  | 21.7 | % |  |  | 22.1 | %
Gross profit |  |  | 78.3 | % |  |  | 77.9 | %
General and administrative |  |  | 24.7 | % |  |  | 18.9 | %
Selling and marketing |  |  | 35.8 | % |  |  | 27.3 | %
Research and development |  |  | 14.0 | % |  |  | 12.6 | %
Total selling, general and administrative |  |  | 74.5 | % |  |  | 58.8 | %
Operating income |  |  | 3.8 | % |  |  | 19.1 | %
Total other income (expense), net |  |  | 2.6 | % |  |  | (0.9 | )%
Income before income taxes |  |  | 6.4 | % |  |  | 18.2 | %
Provision for income taxes |  |  | 2.7 | % |  |  | 3.0 | %
Net income |  |  | 3.7 | % |  |  | 15.2 | %

Net Sales

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

|  | Three Months Ended |  |  | Percentage Change |
|  | March 31, 2023 |  |  | April 1, 2022 |  |  | 2023 vs. 2022 |
ICLs |  | $ | 70,625 |  |  | $ | 58,675 |  |  |  | 20.4 | %
Other product sales: |  |  |  |  |  |  |  |  |
Cataract IOLs |  |  | 1,476 |  |  |  | 2,902 |  |  |  | (49.1 | )%
Other surgical products |  |  | 1,427 |  |  |  | 1,623 |  |  |  | (12.1 | )%
Total other product sales |  |  | 2,903 |  |  |  | 4,525 |  |  |  | (35.8 | )%
Net sales |  | $ | 73,528 |  |  | $ | 63,200 |  |  |  | 16.3 | %

Net sales for the three months ended March 31, 2023 increased 16% from the same period of 2022. The increase in net sales was primarily due to increased ICL sales of $12.0 million. Changes in foreign currency unfavorably impacted net sales by $2.0 million.

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Total ICL sales for the three months ended March 31, 2023 increased 20% from the same period of 2022, with unit increase of 20%. The APAC region sales increased by 20%, with unit growth up 19%, due to sales growth in other APAC regions up 34%, China up 25%, Korea up 19% and Japan up 6%. The Europe, Middle East, Africa and Latin America region sales increased 10% with unit increase of 18%, due to sales growth in in our distributor markets up 16% and direct markets up 6%. The North America region sales increased 56%, with unit growth up 60%, primarily due to sales growth in the U.S. up 71%. In late March 2022, the U.S. started to sell EVO ICLs. Changes in foreign currency unfavorably impacted ICL sales by $1.7 million for the three months ended March 31, 2023, which impacted our Japan and Europe, Middle East and Africa markets. ICL sales represented 96.1% and 92.8% of our total sales for the three months ended March 31, 2023 and April 1, 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 months ended March 31, 2023, decreased 36% from the same period of 2022, due to primarily to decreased sales of cataract IOLs. Changes in foreign currency unfavorably impacted other product sales by $0.3 million for the three months ended March 31, 2023. Other product sales represented 3.9% and 7.2% of our total sales for the three months ended March 31, 2023 and April 1, 2022, respectively.

Gross Profit

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

|  | Three Months Ended |  |  | Percentage Change |
|  | March 31, 2023 |  |  | April 1, 2022 |  |  | 2023 vs. 2022 |
Gross profit |  | $ | 57,562 |  |  | $ | 49,264 |  |  |  | 16.8 | %
Gross margin |  |  | 78.3 | % |  |  | 77.9 | % |  |  |

Gross profit for the three months ended March 31, 2023 increased 16.8% from the same period of 2022. Gross profit margin increased to 78.3% of revenue for the three months ended March 31, 2023 compared to 77.9% of revenue for the three months ended April 1, 2022, due mainly to product and geographic sales mix, partially offset by increased period costs associated with manufacturing projects.

General and Administrative Expense

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

|  | Three Months Ended |  |  | Percentage Change |
|  | March 31, 2023 |  |  | April 1, 2022 |  |  | 2023 vs. 2022 |
General and administrative expense |  | $ | 18,098 |  |  | $ | 11,940 |  |  |  | 51.6 | %
Percentage of sales |  |  | 24.7 | % |  |  | 18.9 | % |  |  |

General and administrative expenses for the three months ended March 31, 2023 increased 51.6% from the same period of 2022 due to increased bonus and stock-based compensation expenses, Japan one-time employee benefits, outside services, salary-related and payroll tax expenses and facility costs.

Selling and Marketing Expense

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

|  | Three Months Ended |  |  | Percentage Change |
|  | March 31, 2023 |  |  | April 1, 2022 |  |  | 2023 vs. 2022 |
Selling and marketing expense |  | $ | 26,354 |  |  | $ | 17,270 |  |  |  | 52.6 | %
Percentage of sales |  |  | 35.8 | % |  |  | 27.3 | % |  |  |

Selling and marketing expenses for the three months ended March 31, 2023 increased 52.6% from the same period of 2022 due to increased advertising and promotional activities, especially in the U.S., sales commission expenses and trade shows and sales meetings expenses.

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Research and Development Expense

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

|  | Three Months Ended |  |  | Percentage Change |
|  | March 31, 2023 |  |  | April 1, 2022 |  |  | 2023 vs. 2022 |
Research and development expense |  | $ | 10,310 |  |  | $ | 7,941 |  |  |  | 29.8 | %
Percentage of sales |  |  | 14.0 | % |  |  | 12.6 | % |  |  |

Research and development expenses for the three months ended March 31, 2023 increased 29.8% from the same period of 2022 due mainly to increased salary-related and payroll tax expenses and clinical expenses associated with our U.S. post-approval clinical trials.

Other Expense, Net

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

|  | Three Months Ended |  |  | Percentage Change |
|  | March 31, 2023 |  |  | April 1, 2022 |  |  | 2023 vs. 2022 |
Other income (expense), net |  | $ | 1,919 |  |  | $ | (586 | ) |  |  | — | *
Percentage of sales |  |  | 2.6 | % |  |  | (0.9 | )% |  |  |

* Denotes change is greater than +100%.

The change in other income (expense), net for the three months ended March 31, 2023 and April 1, 2022, respectively, was due to increased interest income mainly due to our investments held available for sale and foreign exchange gains (primarily euro), for the three months ended March 31, 2023 compared to foreign exchange losses for three months ended April 1, 2022.

Income Taxes

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

|  | Three Months Ended |  |  | Percentage Change |
|  | March 31, 2023 |  |  | April 1, 2022 |  |  | 2023 vs. 2022 |
Income tax provision |  | $ | 2,009 |  |  | $ | 1,925 |  |  |  | 4.4 | %

The effective tax rates for the three months ended March 31, 2023 and April 1, 2022 were 42.6% and 16.7%, respectively. Our effective tax rates differ from the U.S. federal statutory rate of 21%, primarily due to the income taxes 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 March 31, 2023 and December 31, 2021 included the following (in thousands):

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|  | March 31, 2023 |  |  | December 30, 2022 |  |  | 2023 vs. 2022 |
Cash and cash equivalents |  | $ | 89,968 |  |  | $ | 86,480 |  |  | $ | 3,488 |
Investments available for sale |  |  | 127,324 |  |  |  | 139,061 |  |  |  | (11,737 | )
Total |  | $ | 217,292 |  |  | $ | 225,541 |  |  | $ | (8,249 | )
Current assets |  | $ | 312,871 |  |  | $ | 311,723 |  |  | $ | 1,148 |
Current liabilities |  |  | 47,063 |  |  |  | 51,716 |  |  |  | (4,653 | )
Working capital |  | $ | 265,808 |  |  | $ | 260,007 |  |  | $ | 5,801 |

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 three months ended March 31, 2023 and April 1, 2022 was as follows (in thousands):

|  | Three Months Ended |
|  | March 31, 2023 |  |  | April 1, 2022 |
Cash flows from: |  |  |  |  |  |
Operating activities |  | $ | (5,094 | ) |  | $ | (4,610 | )
Investing activities |  |  | 9,933 |  |  |  | (2,539 | )
Financing activities |  |  | (1,361 | ) |  |  | 894 |
Effect of exchange rate changes |  |  | 10 |  |  |  | (384 | )
Net increase (decrease) in cash and cash equivalents |  |  | 3,488 |  |  |  | (6,639 | )
Cash and cash equivalents, at beginning of year |  |  | 86,480 |  |  |  | 199,706 |
Cash and cash equivalents, at end of year |  | $ | 89,968 |  |  | $ | 193,067 |

For the three months ended March 31, 2023 net cash used by operating activities consisted of $14.3 million in working-capital changes partially offset by $6.5 million in non-cash items and net income of $2.7 million.

Starting in the second half of 2022, we decided to invest our cash in slightly higher yielding securities. For the three months ended March 31, 2023, net cash provided by investment activities was $10.0 million which consisted of $40.3 million of proceeds from the sale or maturity of investments AFS, partially offset by $27.4 million in purchases of investments AFS and $2.9 million in purchases of property, plant and equipment. For the three months ended April 1, 2022, net cash used in investment activity consisted of $2.5 million in purchases of property, plant and equipment.

Net cash used in financing activities for the three months ended March 31, 2023 was $1.4 million which consisted of $1.8 million to repurchase of employee common stock for taxes withheld, partially offset by $0.5 million of proceeds from the exercise of stock options. For the three months ended April 1, 2022, net cash provided by financing activities consisted of $0.9 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.

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ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK

During the three months ended March 31, 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.

ITEM 4. CONTROLS AND PROCEDURES

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 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHE R INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. These legal proceedings and other matters may relate to, among other things, contractual rights and obligations, employment matters, or claims of product liability. STAAR maintains insurance coverage for various matters, including product liability and certain securities claims. While the Company does not believe that any of the claims known is likely to have a material adverse effect on the Company’s financial condition or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.

ITEM 1A. RIS K FACTORS

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.

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ITEM 4. MINE SAF ETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

3.1 | Amended and Restated Certificate of Incorporation.(1)
3.2 | Amended and Restated Bylaws.(2)
4.1 | Form of Certificate for Common Stock, par value $0.01 per share.(3)
†4.2 | Amended and Restated Omnibus Equity Incentive Plan.(4)
†10.30 | Letter of the Company dated March 24, 2023 to Magda Michna, Chief Clinical, Regulatory and Medical Affairs Officer, regarding compensation.*
†10.31 | Form of Executive Severance Agreement.*
†10.32 | Letter of the Company dated March 24, 2023 to Warren Foust, Chief Operating Officer, regarding compensation.(5)
31.1 | Certifications Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 | Certifications Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
101 | Financial statements from the quarterly report on Form 10-Q of STAAR Surgical Company for the quarter ended March 31, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL), are filed herewith and include: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text.*
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, has been formatted in Inline XBRL with applicable taxonomy extension information contained in Exhibit 101.

(1)
Incorporated by reference to Appendix 2 of the Company’s Proxy Statement on Form DEF 14A as filed with the Commission on April 13, 2018.
(2)
Incorporated by reference to the Company’s Current Report on Form 8-K as filed with the Commission on February 1, 2023.
(3)
Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Company’s Registration Statement on Form 8‑A/A as filed with the Commission on April 18, 2003.
(4)
Incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q, for the period ended July 3, 2020, as filed with the Commission on August 5, 2020.
(5)
Incorporated by reference to the Company’s Current Report on Form 8-K as filed with the Commission on March 24, 2023.

* Filed herewith.

** Furnished herewith.

† Management contract or compensatory plan.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  |  | STAAR SURGICAL COMPANY
Dated: |  | May 3, 2023 | By: |  | /s/ PATRICK F. WILLIAMS
|  |  |  |  | Patrick F. Williams
|  |  |  |  | Chief Financial Officer
|  |  |  |  | (on behalf of the Registrant and as its principal financial officer)

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