STAAR SURGICAL CO

On December 29, 2018 (beginning of fiscal year 2019), the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and its subsequent amendments affecting the Company: (i) ASU 2018-10, “Codification Improvements to Topic 842, Leases,” and (ii) ASU 2018-11, “Leases (Topic 842):  Targeted improvements,” using the modified retrospective method.  Upon adoption of ASU 2016-02, the Company recognized a cumulative adjustment of $113,000 which decreased the accumulated deficit and recognized right-of-use (“ROU”) assets and lease liabilities for operating leases, whereby the Company’s accounting finance leases remained substantially unchanged.

Certain leases may have non-lease components such as common area maintenance expense for building leases and maintenance expenses for automobile leases.  In general, the Company separates common area maintenance expense component from the value of the ROU asset and lease liability when evaluating rental properties under ASU 2016-02, whereas, the Company includes the maintenance and service components in the value of the ROU asset and lease liability while evaluating automobile leases under ASU 2016-02.

When determining whether a lease is a finance lease or an operating lease, ASU 2016-02 does not specifically define criteria to determine “major part of remaining economic life of the underlying asset” and “substantially all of the fair value of the underlying asset.” For lease classification determination, the Company continues to use (i) greater to or equal to 75% to determine whether the lease term is a major part of the remaining economic life of the underlying asset and (ii) greater to or equal to 90% to determine whether the present value of the sum of lease payments is substantially of the fair value of the underlying asset.

As of March 29, 2019, the Company established a full valuation allowance in the U.S. for all periods presented due to the significant uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets, with the exception of the refundable alternative minimum tax credit of $273,000. Management will continue to monitor and evaluate all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, impact of GILTI in the U.S., tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results and incorporates assumptions including overall current and projected business and industry conditions, the amount of future federal, state, and foreign pretax operating income, the reversal of temporary differences and the feasible and prudent tax-planning strategies.  These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses.  In evaluating the objective evidence, the Company considers three years of cumulative operating results.  Valuation allowances, or reductions to deferred tax assets, are recognized if, based on the weight of all the available evidence, it is more likely than not that some portion or all the deferred tax asset may not be realized.  As the Company experiences continued growth and profits the need for a valuation allowance will be evaluated each reporting period by Management to determine whether it is more likely than not that the Company’s deferred tax assets will be realizable in a later period. Any such changes in the assessment of a full or partial valuation allowance could have a material impact on earnings. 

We believe that the ICL continues to gain vision correction market share. Total ICL net sales for the first quarter of 2019 grew 31% over prior year quarter. Total ICL units grew 39% globally in the first quarter, including 86% growth in Japan, 62% in Korea, 56% in China, 27% in Germany and 23% in India as compared to the prior year quarter. The leading refractive ophthalmic societies in Germany and Japan have now expanded the recommended lower diopter range for use of the EVO Visian ICL to negative 3 diopters from negative 6 diopters. We believe current versions of the ICL can, in the near-to-medium term, achieve a 20% to 30% market share for myopia or distance vision correction, which would equate to between 800,000 and 1.2 million lenses per year.  We anticipate the “Other” product sales rate of decline will be sequentially less in the second and third quarters, in line with previously disclosed expectations. On an annual basis we continue to anticipate an approximately $3.6 million decline compared to prior year for the Other products segment. We purchased equipment for manufacture of our EVO Visian ICL with an EDOF optic (intended to treat presbyopia) at our Lake Forest facility and construction of clean rooms is underway at that facility. For our myopia lenses, the planned doubling of manufacturing capacity at our Monrovia, California facility is expected to begin in the second half of 2019.

STAAR Surgical Company’s Swiss subsidiary STAAR Surgical Ltd (the “Company”) entered into a lease agreement (the “Lease”) with GZK Real Estate Ltd (“Lessor”), to lease the real property located at Portstr. 35, 2555 Brügg, Switzerland including a commercial building of approximately 1,500 square meters (the “Premises”). The Lease is dated January 29, 2019, went into effect on March 1, 2019 and has an initial term through February 29, 2024. The foregoing summary is qualified in its entirety by reference to the Lease, which is filed as Exhibit 10.36 to this Quarterly Report on Form 10-Q and incorporated herein by this reference.