STAAR Surgical : Second Quarter 2023 Transcript

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): August 2, 2023

STAAR Surgical Company

(Exact Name of Registrant as Specified in Charter)

Registrant's Telephone Number, Including Area Code: 626-303-7902

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

• Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
• Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
• Pre-commencementcommunication pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
• Pre-commencementcommunication pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1 933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

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. ☐

Item 7.01 Regulation FD Disclosure.

On August 2, 2023, the Company held a conference call to discuss the financial results for the quarter ended June 30, 2023. A transcript of the conference call is furnished as Exhibit 99.1 to this report and is incorporated herein by this reference.

The information furnished herewith pursuant to Item 7.01 of this Current Report, including Exhibit 99.1, shall not be deemed to be "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section. The information in Item 7.01 of this Current Report, and Exhibit 99.1, shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this Current Report, regardless of any general incorporation language in the filing.

Item 9.01 Financial Statements and Exhibits

99.1Transcript of conference call of the Company held on August 2, 2023.

SIGNATURE

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 hereunto duly authorized.

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

STAA.OQ - Q2 2023 STAAR Surgical Co Earnings Call

EVENT DATE/TIME: AUGUST 02, 2023 / 8:30PM GMT

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AUGUST 02, 2023 / 8:30PM, STAA.OQ - Q2 2023 STAAR Surgical Co Earnings Call

CORPORATE PARTICIPANTS

Brian Moore STAAR Surgical Company - VP of Investor, Media Relations & Corporate Development

Patrick F. Williams STAAR Surgical Company - CFO

Thomas G. Frinzi STAAR Surgical Company - President, CEO & Chairman

CONFERENCE CALL PARTICIPANTS

Anthony Charles Petrone Mizuho Securities USA LLC, Research Division-MD & Senior Medical Devices, Diagnostics and Therapeutics Equity Research Analyst

Bruce David Jackson The Benchmark Company, LLC, Research Division - Senior Equity Analyst

David Joshua Saxon Needham & Company, LLC, Research Division - Senior Analyst

James Philip Sidoti Sidoti & Company, LLC - Research Analyst

Malgorzata Maria Kaczor Andrew William Blair & Company L.L.C., Research Division - Partner & Research Analyst

Steven Michael Lichtman Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

Thomas M. Stephan Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

Xuyang Li Jefferies LLC, Research Division - Equity Analyst

PRESENTATION

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Second Quarter Financial Results Conference Call. (Operator Instructions) This call is being recorded today, Wednesday, August 2, 2023.

At this time, I would like to turn the conference over to Mr. Brian Moore, Vice President, Investor, Media Relations and Corporate Development for STAAR Surgical.

Brian Moore - STAAR Surgical Company - VP of Investor, Media Relations & Corporate Development

Thank you, operator, and good afternoon, everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to discuss the company's financial results for the second quarter ended June 30, 2023.

On the call today are Tom Frinzi, President and Chief Executive Officer; and Patrick Williams, Chief Financial Officer. The press release of our second quarter results was issued just after 4:00 p.m. Eastern Time and is now available on STAAR's website at www.staar.com.

Before we begin, let me quickly remind you that during the course of this conference call, the company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the company's projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the safe harbor statement in today's press release as well as STAAR's public periodic filings with the SEC. Except as required by law, STAAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so.

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AUGUST 02, 2023 / 8:30PM, STAA.OQ - Q2 2023 STAAR Surgical Co Earnings Call

In addition, to supplement the GAAP numbers, we have provided Non-GAAP Adjusted Net Income, Adjusted Net Income for ICL, the corresponding Adjusted Earnings per share and Sales in Constant Currency. During the quarter, the company also reported various accounting adjustments related to its other product, cataract IOL business. Please refer to the Non-GAAP financial measures tables to Adjusted Net Sales, Adjusted Cost of Sales, Adjusted Gross Profit Margin, Adjusted Operating Expenses and Adjusted Income Tax Provision. We believe that these Non-GAAP and adjusted numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the Non-GAAP information is included in today's press release. For brevity, all references to growth rates on today's call refer to year-over-year growth unless otherwise stated.

Following our prepared remarks, we will open the line to questions from publishing analysts. We ask analysts limit themselves to two initial questions, then re-queue with any follow-ups. We thank everyone in advance for their cooperation with this process.

And with that, I would like to now turn the call over to Tom Frinzi, President and CEO of STAAR.

Thomas G. Frinzi - STAAR Surgical Company - President, CEO & Chairman

Thank you, Brian, and good afternoon, everyone, and thank you for joining us on today's call. I am pleased to report STAAR achieved record sales and profitable growth for the second quarter 2023. Results were driven by our EVO family of proprietary Implantable Collamer Lenses, ICLs, which are designed to correct refractive error for people seeking visual freedom from the hassles of contacts and eyeglasses.

For the second quarter of 2023, total ICL sales were $93.1 million were in line with the outlook of approximately $93 million that we provided on our last earnings call in May. Globally, ICL sales growth in the second quarter was up 19% as reported and up 20% in Constant Currency. Global ICL unit growth was up 21% with results in the second quarter driven by strength in APAC, the largest region for refractive procedures. APAC was up 29% in units and 26% in sales for the second quarter of 2023. In China specifically, ICL units were up 35% and sales up 33% for the second quarter of 2023. And we are encouraged by a strong start to the peak implant season for ICLs in that market.

For the second quarter, sales in our EMEA region declined 9%, impacted by the ongoing macroeconomic and geopolitical environment, as well as an inability to ship ICLs into 1 non-European country as a result of a country-specific product labeling change. However, looking at European markets only, ICL units were up 6% and sales up 2% for the second quarter of 2023.

Turning attention to the United States. ICL sales grew 10% for the second quarter, well ahead of U.S. refractive industry procedure volumes, which the Refractive Surgery Council recently reported declines approximately 15% in the quarter. Sequentially, our U.S. sales in the second quarter were relatively flat.

Lower than expected results in the U.S., the macroeconomic impact in Europe and certain other refractive markets merits additional conservatism as we look to the second half of 2023. We have therefore today updated our fiscal 2023 ICL sales outlook to a range of approximately $320 million to

$325 million. At the midpoint, our new outlook represents a high level of sales growth at approximately 20%.

Since becoming CEO in January, I have now had the opportunity to make a more complete assessment of the business in the U.S. and around the world. We have implemented a high-performance management system that helps us get closer to our customers and other stakeholders and identify top priorities for accelerating EVO adoption. We have created cross-functional teams for each top priority who are accountable for achieving the desired results. Among the priorities and actions we have taken to accelerate adoption in the U.S. and globally are the following.

Number 1, we've enhanced our leadership in April, appointing 2 seasoned executives, Warren Foust as Chief Operating Officer; and Magda Michna as Chief Clinical, Regulatory and Medical Affairs Officer.

Number 2, we are taking actions to make our company even easier to do business with. The projects related to this top priority are focused on increasing surgeon confidence in measurement and lens size selection, simplifying our ordering process, delivering our lenses to customers faster, and longer term, making the EVO ICL even easier to deliver to the eye.

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AUGUST 02, 2023 / 8:30PM, STAA.OQ - Q2 2023 STAAR Surgical Co Earnings Call

Number 3, we have developed and are implementing new analytic tools, which is allowing us to better target high volume customers with favorable economics. For example, we have mapped the over 430 practices representing our 600-plus surgeon customers in the U.S., and as a result, we are implementing tailored programs that effectively leverage the knowledge we have gained from these tools.

Number 4, we will pilot a patient call center education and surgeon referral program aimed at better answering patient questions and shepherding patients to the most appropriate EVO customers. We believe the call center will create a closed loop for our patient Doc Finder, allowing us to better support and track the patient journey and thereby better monitor the effectiveness of our investment in the U.S. in consumer awareness and other activities.

We anticipate the actions and projects I just outlined, among others, will accelerate EVO adoption in the U.S. as we exit 2023 and beyond. Our vital few priorities and our learnings in the U.S. will also have positive implications for our markets globally. So while I've previously stated that laser vision correction is well established, I remain confident in EVO's ability to be successful in the U.S. and beyond. And my confidence is buoyed as I spent time in the field with key opinion leaders discussing the impact that EVO is and can have on their practices.

The investment rationale for STAAR remains compelling. We have a fantastic technology without peer. If you define good medicine as I do - excellent patient outcomes, high patient and surgeon satisfaction, and favorable economics - EVO is indeed good medicine. STAAR is the dominant player globally in lens-based refractive vision correction for 21 to 60 year olds who are facing an increasing epidemic of myopia.

Next, we expect to remain a high growth company based on our strength in APAC, the largest region for refractive procedures in the world. Additional growth will come as we deliver similar results in the U.S., the second largest market for refractive procedures in the world, and Europe emerges from the current macro and geopolitical headwinds. And finally, we are profitable, we generate cash and we have a rock solid balance sheet.

For those of you that would like to learn more, we will host an Investor and Analyst Meeting in New York next month on September 14 where we will outline in more detail initiatives, projects, including some next-generation product pipeline initiatives, and the significant growth opportunities ahead for STAAR. We also expect to have several EVO surgeons from around the world who will speak to their experience. Patrick?

Patrick F. Williams - STAAR Surgical Company - CFO

Thank you, Tom, and good afternoon, everyone.

Before I go through the various financial metrics, I want to reference additional Non-GAAP reconciliation tables in this quarter's earnings release. As we have previously mentioned on prior earnings calls and in our filings, we are exiting our other product, cataract IOL business, as we focus on our core ICL products. This resulted in some accounting adjustments, primarily due to excess inventory and a smaller sales return reserve adjustment. Please refer to the Non-GAAP financial measures tables in our earnings release as I will be referencing both as reported and adjusted impact in my prepared comments.

Total net sales for Q2 2023 were $92.3 million, up 14% as compared to the $81.1 million of net sales in Q2 2022 and up 26% on a sequential basis from Q1 2023 net sales of $73.5 million. The year-over-year increase in net sales is attributable to a $50 million or a 19% increase in ICL sales, partially offset by a $4 million decrease in other product sales. This included a $742,000 sales return reserve adjustment, or reduction in sales, for our other product cataract IOL business, resulting in adjusted net sales of $93 million or up 15% year-over-year. We continue to expect other products will represent a smaller and smaller percentage of net sales as we move through fiscal 2023 and taper our support of this non-core cataract IOL business.

Gross profit for Q2 2023 was $70.7 million, or 76.6% of net sales, as compared to gross profit of $63.9 million, or 78.8% of net sales, for Q2 2022, and $57.6 million or 78.3% of net sales for Q1 2023. The 220 basis point decrease in gross margin as compared to Q2 2022 is primarily due to inventory reserves related to the other product cataract IOL business. The 170 basis point sequential decrease in gross margin from the first quarter is also due to the other product cataract IOL inventory reserve.

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AUGUST 02, 2023 / 8:30PM, STAA.OQ - Q2 2023 STAAR Surgical Co Earnings Call

The total amount of additional inventory reserves was $2.8 million, and when adjusted, our gross margin was 79.8% in the quarter. Due to the additional IOL reserves booked in the second quarter, but primarily driven by the lower sales outlook for fiscal 2023, we now expect gross margin will be approximately 79% for both Q3 and Q4 and approximately 78% for the full year. We continue to drive initiatives to improve our manufacturing efficiency. When combined with more favorable geographic mix related to direct markets like the United States, we believe company gross margins can exceed 80% as we move beyond 2023.

Moving down the income statement. Total operating expenses for Q2 2023 were $62.1 million as compared to $46.9 million in Q2 2022 and $54.8 million in Q1 2023. This included $154,000 intangible asset impairment adjustment related to our other product cataract IOL business.

Taking a closer look at the components of operating expenses. G&A expense for Q2 2023 was $18.1 million compared to $14 million for Q2 2022 and $18.1 million for Q1 2023. The year-over-year increase in G&A is due to increased compensation-related expenses, outside services and facilities costs. For fiscal 2023, we continue to expect G&A expense will be approximately $19 million per quarter.

Selling and marketing expense was $32.3 million for Q2 2023 compared to $24.2 million for Q2 2022 and $26.4 million for Q1 2023. The increase in selling and marketing expense from the prior year was due to increased advertising and promotional expenses, compensation-related expenses, trade shows and meetings. The sequential increase in selling and marketing was due to increased advertising and promotional expense, trade shows and meetings and compensation-related expenses.

As we have said before, driving EVO adoption is a multi-pronged approach focused on physician training and confidence, along with increased brand awareness through our marketing efforts. We are not seeing the type of returns on our digital marketing investments that we had expected and have thus made the decision to reduce such investments until we can be more certain that patient conversion and the overall cost of patient acquisition meets our internal targets. Thus, we now expect selling and marketing expenses will be approximately $30 million in Q3 and $27 million in Q4, down from approximately $33 million each quarter previously. As we have said, the ability to flex our digital marketing investment allows us to react quickly to the market, and we will revisit this as we move beyond 2023.

Research and development expense was $11.8 million in Q2 2023 compared to $8.6 million for Q2 2022 and $10.3 million for Q1 2023. The year-over- year and sequential increase in R&D is due to increased compensation-related expenses and U.S. EVO post-approval clinical trial expenses associated with the 3-year study. For fiscal 2023, we now expect R&D expense will be slightly higher at approximately $12 million for Q3 and Q4 as we have made additional investments in our clinical and medical affairs, which falls under R&D, as we look to drive increased physician confidence through training, publications and other clinical studies.

Operating income in Q2 2023 was $8.6 million, or 9.3% of net sales, as compared to $17 million, or 21% of net sales for Q2 2022. We now anticipate other income expense will be slightly down at approximately $500,000 of income per quarter for the balance of the year, primarily due to foreign exchange gain losses that are booked on this line item.

We remain proud of our multiyear track record of profitability and cash generation, which we expect to continue and is rare for a high-growth medical device company. The reduction in our sales outlook for the full year and being primarily in high gross margin direct markets like the United States does reduce our overall operating income. But when partially offset with the reduction in sales and marketing investments, we now expect operating margin for the fiscal year 2023 will be approximately 5%.

Net income in Q2 2023 was $6.1 million, or $0.12 per diluted share, compared to net income of $13 million, or $0.26 per diluted share in Q2 2022. After taking into account the aforementioned adjustments related to our other product cataract IOL business, as well as a $405,000 tax effected benefit from those adjustments, our adjusted net income for ICL was $9.4 million, or $0.19 per diluted share. Tables reconciling the GAAP to Non-GAAP information and IOL accounting adjustments are included in today's financial release. For fiscal 2023, we now expect our effective tax rate will be slightly higher at approximately 35% in Q3 and Q4 due to the reduction in United States profitability, and as always, subject to no significant change in our valuation allowance.

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AUGUST 02, 2023 / 8:30PM, STAA.OQ - Q2 2023 STAAR Surgical Co Earnings Call

Turning now to our balance sheet. Our cash, cash equivalents and investments available for sale as of June 30, 2023, totaled $209.5 million as compared to $225.5 million at the end of the fourth quarter of 2022. The decrease in overall cash is due to the timing of accounts receivable, which historically grows in the second quarter and should be converted to cash in the third quarter. Though we have only booked approximately $6 million in CapEx at the end of Q2, we continue to expect we will invest approximately $26 million in property and equipment for the full year, primarily related to manufacturing capacity expansion, including some larger projects in the second half of this year.

As Tom mentioned earlier, today we updated our ICL net sales outlook to a range of $320 million to $325 million for fiscal 2023. We expect our other product sales will be essentially 0 for the full year fiscal 2023 due to the cataract IOL business adjustments I had referenced previously. A reconciliation to the midpoint of our outlook results in an approximate $22 million change from our prior ICL outlook. This includes an approximate $12 million lower sales contribution from the United States, approximately $5 million lower sales contribution for EMEA, or flat sales year-over-year, and an approximate $5 million reduction in sales from certain APAC markets, primarily South Korea, which has faced some economic headwinds. For Q3 2023, we expect global ICL sales and overall net sales will be approximately $80 million.

Next week, STAAR will be participating in the Canaccord Genuity Annual Growth Conference in Boston on August 9. We will also be participating in the Needham Virtual MedTech and Diagnostics Conference on August 15, the Piper Sandler West Coast Bus Tour on August 23, the William Blair West Coast Bus Tour on August 30; and the Goldman Sachs Annual European MedTech and Healthcare Services Conference in London on September 6. And as Tom mentioned, on Thursday, September 14, STAAR will host an Investor and Analyst Meeting in New York.

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

This concludes our prepared remarks. Operator, we are now ready to take questions.

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) Your first question comes from Bill Plovanic from Canaccord.

Unidentified Analyst

It's John on for Bill tonight. I think you could start on the U.S., which I think is maybe the most - what everyone's focused on. I appreciate all the detail that you gave there, Tom. But with the sequential flat to decline revenue, and I know you've made previous commercial investments there, too, beyond just adding Warren as COO. But can you talk about just when do you expect productivity from those commercial adds to ramp? I know you talked about potentially expecting it in the back half of this year, but just any incremental detail of what you're seeing there, and also just what you're hearing from surgeons?

Thomas G. Frinzi - STAAR Surgical Company - President, CEO & Chairman

Yes. Thanks, John, and good to hear from you. Give our best to Bill as well. I think, look, we said all along that laser vision correction is very well entrenched in the United States market. We've talked about the inertia of LASIK. And I think until we move EVO from a niche procedure to a more mainstream in a given refractive practice, it's just going to take time. But we believe we better understand the market today as we've made some investments in new analytical tools and certainly putting more feet on the street and getting candid feedback. So we remain very optimistic about it as we execute on the vital few projects that we've identified that we believe in the U.S. can create breakthrough opportunities, we're going to be just fine. I've said all along and as late as June, it was an 18- to 24-month process, and I think we're still working on that same timeline.

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AUGUST 02, 2023 / 8:30PM, STAA.OQ - Q2 2023 STAAR Surgical Co Earnings Call

Unidentified Analyst

Great. And just for a follow-up, too. I was a bit surprised on the commentary about the digital marketing not working out as you had anticipated. What do you think isn't working correctly there? Because it seems like it's had good patient traction. Is it that these patients who become aware of the procedure are seeing physicians who are not aware of EVO and then get converted to other procedures? Or what do you think the hiccup is in that?

Thomas G. Frinzi - STAAR Surgical Company - President, CEO & Chairman

Yes. I think you do see some of that bait and switch happening in the marketplace. And again, we said all along, the beauty of digital marketing is you can redirect it, you can turn it off, you can turn it on, and that's exactly what we're doing. I think we're just being more prudent about where we're spending the money. And I think a great example of that is the call center project that we're initiating in the back half of this year because it really gives us for the first time the opportunity to create this closed loop as a result of our Doc Finder. You've heard us talk very positively about the amount of traffic we're seeing on the Doc Finder, but it's always been a challenge to understand what happens to those patients. And now through this process, we're going to know exactly what's happening, and we're going to be able to direct interested patients to an appropriate EVO center where we know they're going to be treated well. So again, I think we're just a little smarter, a little wiser, and we're being a little bit more prudent about how we're going to spend those digital dollars.

Operator

Your next question comes from Anthony Petrone from Mizuho Group.

Anthony Charles Petrone - Mizuho Securities USA LLC, Research Division - MD & Senior Medical Devices, Diagnostics and Therapeutics Equity Research Analyst

Maybe one for Tom on guidance and then a follow-up just on balance sheet for Patrick. So maybe Tom, just walking through the shift here to $20 million to $23 million revision in total from the prior range. You sort of look at the 2Q performance. China was actually ahead of our expectations. Light in the United States. It was also light in Japan. So when we reconcile the quarterly performance of the guidance, is it mostly just U.S., or are we splitting that between Japan and U.S.? Or should we also be taking a little bit of deceleration into the back half of the year for China as well? And I'll have one follow-up.

Thomas G. Frinzi - STAAR Surgical Company - President, CEO & Chairman

Yes. No. Thank you, Anthony, for the question. I think you're right. We see a little bit of softness, as Patrick in his prepared remarks called out South Korea in particular, Japan to a little lesser degree, a little softer. We think China will continue to grow. As I mentioned in my prepared remarks, very encouraged by the first month, 1.5 months of the high season. That's really off to a phenomenal start. So I think China will continue to show that kind of growth. But again, globally, we believe we're a 20% per year growth company. We continue to be a high-growth organization. And I think that will continue beyond 2023, particularly as we begin to execute on these vital few projects. So I think a 20% top line growth is always going to be our goal and hopefully beyond that as we execute on these priorities.

Anthony Charles Petrone - Mizuho Securities USA LLC, Research Division - MD & Senior Medical Devices, Diagnostics and Therapeutics Equity Research Analyst

All right. That's helpful. And then the follow-up for Patrick, maybe just on the AR balance. Understand the seasonality here. I guess sequentially, it's up $34 million. In the prior 2 years, it was up about $15 million Q-over-Q from 1Q to 2Q. So maybe just walk through the outsized increase in receivables this cycle vis-a-vis the prior 2 cycles.

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