# STAAR SURGICAL CO (STAA) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from STAAR SURGICAL CO's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/718937/000095017024020572/staa-20231229.htm
Accession: 0000950170-24-020572
Filing date: 2024-02-27
Report date: 2023-12-29
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/STAA/
All MD&A years: /company/STAA/mda/
Previous year: /company/STAA/mda/fy2022/ (FY 2022)
Next year: /company/STAA/mda/fy2024/ (FY 2024)

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The matters addressed in this Item 7 that are not historical information constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created therein. In some cases readers can recognize forward-looking statements by the use of words like “anticipate,” “estimate,” “expect,” “project,” “intend,” “may,” “plan,” “believe,” “will,” “should,” “could,” “forecast,” “potential,” “continue,” “ongoing” (or the negative of those words and similar words or expressions), although not all forward-looking statements contain these words. In particular, these include statements about any of the following: any projections of or guidance as to future earnings, revenue, sales, profit margins, expense rate, cash, effective tax rate, product mix, capital expense or any other financial items; the 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 business plans for 2024 and beyond; expected regulatory activities and approvals, product launches, and any statements of assumptions underlying any of the foregoing.

Although we believe that the expectations reflected in these forward-looking statements are reasonable, 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 materially from those expressed or implied by such forward-looking statements because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described in this Annual Report in “Item 1A. Risk Factors.” We disclaim any intention or obligation to update or review any financial projections or forward-looking statements due to new information or other events except as required by law.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to promote understanding of our financial condition and results of operations. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the Consolidated Financial Statements and the Notes to those statements included in this Annual Report.

Overview

STAAR Surgical Company designs, develops, manufactures, and sells implantable lenses for the eye and accessory delivery systems used to deliver the lenses into the eye. We are the leading manufacturer of lenses used worldwide in corrective or “refractive” surgery. We have been dedicated solely to ophthalmic surgery for over 40 years. Our goal is to position our refractive lenses throughout the world as primary and premium solutions for patients seeking visual freedom from wearing eyeglasses or contact lenses while achieving excellent visual acuity through refractive vision correction.

STAAR generates worldwide revenue almost exclusively from sales of our implantable Collamer lenses, or “ICLs.” Our ICLs are made from Collamer, which is a proprietary collagen copolymer material created and exclusively used by STAAR to make our lenses soft, flexible and biocompatible with the eye. Our ICLs are phakic lenses, meaning that they are implanted into the eye without removing the eye’s natural crystalline lens. This distinguishes an ICL procedure from other refractive procedures, as it does not involve the removal of corneal eye tissue. All of our ICLs are foldable, which allows the surgeon to insert them into the eye through a small incision during minimally invasive surgery. Further, while ICLs are intended to be permanent, our ICLs are reversible lens implants, meaning they can be removed by a doctor if desired.

We market and sell our ICLs for refractive surgery to treat myopia (nearsightedness) as our “EVO” family of lenses. We believe our EVO lenses are an “Evolution in Visual Freedom” designed to provide premium refractive outcomes while optimizing patient comfort. Our EVO family of lenses includes our EVO ICL, EVO+ ICL, and EVO Visian ICL. Our newest offering, EVO Viva, has an extended depth of focus (EDoF) optic, which is designed to treat myopia with presbyopia (age-related loss of ability to focus). We also market and sell an ICL lens to treat hyperopia (farsightedness), which we call our Visian ICL. We make our ICL product offerings available in multiple models, powers and lengths, including some with toric ICL (TICL) versions to correct for astigmatism (blurred vision). Not all of our products are currently available in all markets where we sell ICLs today.

Our growth strategy includes making our complete ICL product line available in our existing geographic markets and expanding into attractive markets where we do not sell our products today. In addition, we are focused on driving

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awareness of the ICL procedure and the clinical benefits of our ICLs, and providing surgeon training, support and education, particularly in our newer markets. Historically, the Company also manufactured and sold intraocular lenses (or IOLs) for use in surgery to treat cataracts. As the Company has focused its business and strategy on its ICL product offerings, we have phased out our cataract IOL product line. For the year ended December 29, 2023, the Company reported worldwide revenue of $322.4 million, 99% of which was generated from sales of ICLs.

See Item 1. “Business,” for a discussion of:

•
Operations

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Principal Products

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Distribution and Customers

•
Competition

•
Regulatory Matters

•
Research and Development

Strategic Imperatives for 2024

We believe we have a significant opportunity to fundamentally transform how myopia and other refractive conditions are treated. We want to be the first choice for doctors and for patients seeking visual freedom from wearing eyeglasses or contact lenses. As more patients look to ICLs as a potential treatment option, we recognize the need to further educate and train ophthalmic surgeons about our ICLs and our ICL procedure. In 2024, we intend to increase the number of strategic collaborations with leading refractive surgeons and practices in the U.S. to collaborate on marketing, training and education activities. In addition, we are investing in enhanced systems and tools to make ordering and fulfillment faster and easier. In 2024, we will also continue to drive awareness of the ICL procedure to reach even more potential patients and effectively communicate the clinical benefits of our ICLs. While we work to launch our existing product portfolio in attractive global markets, we are also investing in product innovation. In 2024, a key focus will be on our new lens delivery devices, as well continuing to develop our next generation lens technologies. Finally, we will continue to evaluate opportunities to acquire new product lines, technologies, and companies.

Results of Operations

The following table sets forth the percentage of total sales represented by certain items reflected in the Company’s Consolidated Statement of Income for the period indicated.

[[GREPCENT_TABLE]]
[["","","Percentage of Net Sales"],["","","2023","","","2022","","","2021"],["Net sales","","","100.0","%","","","100.0","%","","","100.0","%"],["Cost of sales","","","21.6","%","","","21.5","%","","","22.5","%"],["Gross profit","","","78.4","%","","","78.5","%","","","77.5","%"],["General and administrative","","","22.4","%","","","19.2","%","","","19.2","%"],["Selling and marketing","","","33.4","%","","","31.2","%","","","29.2","%"],["Research and development","","","13.8","%","","","12.7","%","","","14.7","%"],["Total selling, general and administrative","","","69.6","%","","","63.1","%","","","63.1","%"],["Operating income","","","8.8","%","","","15.4","%","","","14.4","%"],["Total other income (expense), net","","","1.7","%","","","0.6","%","","","(0.9",")%"],["Income before income taxes","","","10.5","%","","","16.0","%","","","13.5","%"],["Provision for income taxes","","","3.8","%","","","2.1","%","","","1.6","%"],["Net income","","","6.7","%","","","13.9","%","","","11.9","%"]]
[[/GREPCENT_TABLE]]

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Net Sales

The following table presents our net sales, by product for the fiscal years presented (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021"],["","","% of Total","","","Sales","","","% of Total","","","Sales","","","% of Total","","","Sales"],["ICLs","","","99.1","%","","$","319,427","","","","94.8","%","","$","269,712","","","","92.4","%","","$","212,905"],["Other product sales"],["Cataract IOLs","","","0.3","%","","","1,139","","","","3.4","%","","","9,638","","","","5.4","%","","","12,519"],["Other surgical products","","","0.6","%","","","1,849","","","","1.8","%","","","5,041","","","","2.2","%","","","5,048"],["Total other product sales","","","0.9","%","","","2,988","","","","5.2","%","","","14,679","","","","7.6","%","","","17,567"],["Net sales","","","100.0","%","","$","322,415","","","","100.0","%","","$","284,391","","","","100.0","%","","$","230,472"]]
[[/GREPCENT_TABLE]]

Net sales for 2023 increased 13% from 2022. The increase in net sales was due to increased ICL sales of $49.7 million, partially offset by a decrease in other product sales of $11.7 million. Changes in foreign currency unfavorably impacted net sales by $2.1 million.

Net sales for 2022 increased 23% from 2021. The increase in net sales was due to increased ICL sales of $56.8 million, partially offset by a decrease in other product sales of $2.9 million. Changes in foreign currency unfavorably impacted net sales by $12.9 million.

Total ICL sales for 2023 increased 18% from 2022, with unit growth up 19%. The sales increase was driven by the APAC region, which grew 21% with unit growth of 22%, primarily due to sales growth in China up 25%, India up 14%, other APAC Distributors up 13%, Japan up 11% and Korea up 11%. The Europe, Middle East and Africa region sales increased 7% with units similar to prior year, due to sales increases in our distributor markets up 8% and direct markets up 7%. The Americas region sales increased 11%, with unit increase of 9%, due to sales growth in the U.S. up 14% and Canada up 5%, partially offset by a sales decrease in our Latin America distributor markets down 3%. Changes in foreign currency unfavorably impacted ICL sales by $1.8 million, which impacted our Japan and Europe, Middle East and Africa markets. ICL sales represented 99.1% of our total sales for fiscal year 2023.

Total ICL sales for 2022 increased 27% from 2021, with unit growth up 33%. The sales increase was driven by the APAC region, which grew 32% with unit growth of 36%, primarily due to sales growth in other APAC Distributors up 43%, China up 38%, India up 37%, Korea up 18% and Japan up 14%. The Americas region sales increased 43%, with unit increase of 35%, due to sales growth in the U.S. up 59%, Latin America distributor markets up 11% and Canada up 10%. The Europe, Middle East and Africa region sales decreased 2% with unit increase of 16%, due to sales decrease in our direct markets down 8%, partially offset by sales growth in our distributor markets of 9%. Changes in foreign currency unfavorably impacted ICL sales by $10.3 million, which impacted our Japan and Europe, Middle East and Africa markets. ICL sales represented 94.8% of our total sales for fiscal year 2022.

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 affected our cataract IOLs and associated delivery devices, we have phased out sales of our cataract IOLs as we focus on growing our ICL business. During 2023, we stopped manufacturing cataract IOLs, and we do not plan to sell cataract IOLs in 2024. We do not expect this decision to have a significant impact to revenue growth in future years. Other product sales for 2023 decreased 80% from 2022, mainly due to decreased sales of cataract IOLs, decreased sales of cataract IOL injector parts and increased sales return reserves related to cataract IOLs. Changes in foreign currency unfavorably impacted other product sales by $0.3 million. Other product sales represented 1.0% of our total sales for fiscal year 2023.

Other product sales in 2022 decreased 16% from 2021, mainly due to decreased cataract IOL sales. Changes in foreign currency unfavorably impacted other product sales by $2.6 million. Other product sales represented 5.2% of our total sales for fiscal year 2022.

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Gross Profit

The following table presents our gross profit and gross profit margin for the fiscal years presented (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Percentage Change"],["","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Gross profit","","$","252,651","","","$","223,383","","","$","178,637","","","","13.1","%","","","25.0","%"],["Gross profit margin","","","78.4","%","","","78.5","%","","","77.5","%"]]
[[/GREPCENT_TABLE]]

Gross profit for 2023 increased 13.1% from 2022. Gross profit margin decreased to 78.4% of revenue for 2023 compared to 78.5% of revenue for 2022, due to reserves related to cataract IOLs and increased period costs associated with manufacturing expansion projects, offset by an increased mix of ICL sales, which carry a higher margin.

Gross profit for 2022 increased 25.0% from 2021. Gross profit margin increased to 78.5% of revenue for 2022 compared to 77.5% of revenue for 2021, due to geographic sales mix and an increased mix of ICL sales, which carry a higher margin, partially offset by increased period costs associated with manufacturing expansion projects.

General and Administrative Expense

The following table presents our general and administrative expense for the fiscal years presented (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Percentage Change"],["","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["General and administrative expense","","$","72,319","","","$","54,742","","","$","44,142","","","","32.1","%","","","24.0","%"],["Percentage of sales","","","22.4","%","","","19.2","%","","","19.2","%"]]
[[/GREPCENT_TABLE]]

General and administrative expenses for 2023 increased 32.1% from 2022, due to increased salary-related and payroll tax expenses, outside services, facilities costs, bonus and stock-based compensation expenses and Japan one-time employee benefits.

General and administrative expenses for 2022 increased 24.0% from 2021, due to increased facilities costs, bonus and stock-based compensation expenses, outside services and salary-related and payroll tax expenses.

Selling and Marketing Expense

The following table presents our selling and marketing expense for the fiscal years presented (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Percentage Change"],["","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Selling and marketing expenses","","$","107,834","","","$","88,856","","","$","67,294","","","","21.4","%","","","32.0","%"],["Percentage of sales","","","33.4","%","","","31.2","%","","","29.2","%"]]
[[/GREPCENT_TABLE]]

Selling and marketing expenses for 2023 increased 21.4% from 2022, due to increased advertising and promotional activities, salary-related payroll tax expenses, sales commission expenses and travel expenses, partially offset by bonus and stock-based compensation expenses.

Selling and marketing expenses for 2022 increased 32.0% from 2021, due to increased advertising and promotional activities, trade shows and sales meetings expense, travel expenses and bonus and stock-based compensation expenses.

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Research and Development Expense

The following table presents our research and development expense for the fiscal years presented (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Percentage Change"],["","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Research and development expense","","$","44,401","","","$","35,983","","","$","33,862","","","","23.4","%","","","6.3","%"],["Percentage of sales","","","13.8","%","","","12.7","%","","","14.7","%"]]
[[/GREPCENT_TABLE]]

Research and development expenses for 2023 increased 23.4% from 2022 due to increased salary-related and payroll tax expenses and clinical expenses associated with our U.S. post-approval clinical trials.

Research and development expenses for 2022 increased 6.3% from 2021 due to increased salary-related and payroll tax expenses and bonus and stock-based compensation expenses, partially offset by decreased clinical expenses associated with our U.S. EVO clinical trials.

Research and development expense consist primarily of compensation and related costs for personnel responsible for the research and development of new and existing products, the regulatory and clinical activities required to acquire and maintain product approvals globally and medical affairs expenses. These costs are expensed as incurred.

Other Income (Expense), Net

The following table presents our other income (expense), net for the fiscal years presented (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Percentage Change"],["","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Other income (expense), net","","$","5,599","","","$","1,750","","","$","(2,035",")","","","\u2014","*","","","\u2014","*"],["Percentage of sales","","","1.7","%","","","0.6","%","","","(0.9",")%"]]
[[/GREPCENT_TABLE]]

* Denotes change is greater than +100%.

The change in other income, net for 2023 was due to increased interest income as a result of higher interest rates during 2023. The change in other income (expense), net for 2022 was due to increased interest income, as a result of our investments held available for sale and higher interest rates and decreased foreign exchange losses (primarily euro).

Other income (expense), net generally relates to interest income earned on cash, cash equivalents and investments available for sale, interest expense on finance lease obligations, gains or losses on foreign currency transactions, and royalty income. The table below summarizes the year over year changes in other income (expense), net (in thousands):

[[GREPCENT_TABLE]]
[["","","Favorable (Unfavorable)"],["","","2023 vs. 2022","","","2022 vs. 2021"],["Interest income (expense), net","","$","4,538","","","$","2,486"],["Foreign exchange","","","(202",")","","","1,257"],["Royalty income","","","(730",")","","","(211",")"],["Other","","","243","","","","253"],["Net change in other income (expense), net","","$","3,849","","","$","3,785"]]
[[/GREPCENT_TABLE]]

Provision for Income Taxes

The following table presents our provision for income taxes for the fiscal years presented (in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Percentage Change"],["","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Provision for income taxes","","$","12,349","","","$","5,887","","","$","3,793","","","","\u2014","*","","","55.2","%"],["Effective tax rate","","","36.6","%","","","12.9","%","","","12.1","%"]]
[[/GREPCENT_TABLE]]

* Denotes change is greater than +100%.

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Our effective tax rates differ from the U.S. federal statutory rate of 21% for 2023, 2022 and 2021, respectively, primarily due to the income taxes generated in foreign jurisdictions and realizability of deferred tax assets. Also impacting our effective tax rates was a $3.3 million recapture of our U.S. valuation allowance in 2023 and a $0.9 million and $3.4 million release of our U.S. valuation allowance in 2022 and 2021, respectively. During 2023, 2022 and 2021, there were no unrecognized benefits related to uncertain tax positions taken by us.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents, investments available for sale and cash flow from operating activities. We believe these sources of liquidity will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the financial statements included in this Annual Report. We expect that cash flow from operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, working capital needs, capital expenditures, and capital deployment decisions. In addition, future capital requirements will depend on many factors including our growth rate in net sales, the timing and extent of spending to support our growth strategy, the expansion of selling and marketing activities, the timing of introductions of new products, as well as global macroeconomic factors.

Our financial condition at December 29, 2023, December 30, 2022 and December 31, 2021 included the following (in thousands):

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Cash and cash equivalents","","$","183,038","","","$","86,480","","","$","199,706","","","$","96,558","","","$","(113,226",")"],["Investments available for sale","","","49,391","","","","139,061","","","","\u2014","","","","(89,670",")","","","139,061"],["Total","","$","232,429","","","$","225,541","","","$","199,706","","","$","6,888","","","$","25,835"],["Current assets","","$","365,269","","","$","311,723","","","$","271,411","","","$","53,546","","","$","40,312"],["Current liabilities","","$","65,036","","","$","51,716","","","$","48,802","","","$","13,320","","","$","2,914"],["Working capital","","$","300,233","","","$","260,007","","","$","222,609","","","$","40,226","","","$","37,398"]]
[[/GREPCENT_TABLE]]

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. Additionally, during 2021 we fully repaid and cancelled our Japan line of credit and cancelled our Swiss framework agreement given our current cash resources. We do not have any off-balance sheet arrangements.

Our current liquidity and capital resources, as discussed above, will enable us to meet our known contractual obligations as of December 29, 2023 (in thousands):

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[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["Contractual Obligations","","Total","","","1 Year","","","2 \u2013 3 Years","","","4 \u2013 5 Years","","","More than 5 Years"],["Finance lease obligations (Note 9)*","","$","213","","","$","171","","","$","42","","","$","\u2014","","","$","\u2014"],["Operating lease obligations (Note 9)*","","","45,868","","","","6,247","","","","10,829","","","","11,087","","","","17,705"],["Pension benefit payments (Note 11)*","","","5,055","","","","236","","","","383","","","","4,214","","","","222"],["Asset retirement obligation (Note 13)*","","","103","","","","\u2014","","","","103","","","","\u2014","","","","\u2014"],["Open purchase orders (Note 13)*","","","18,199","","","","16,452","","","","1,260","","","","487","","","","\u2014"],["Total","","$","69,438","","","$","23,106","","","$","12,617","","","$","15,788","","","$","17,927"]]
[[/GREPCENT_TABLE]]

* Refer to the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K

Overview of changes in cash and cash equivalents and other working capital accounts.

The following table presents a summary of cash flows for the fiscal years presented (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021"],["Cash flows from:"],["Operating activities","","$","14,594","","","$","35,715","","","$","43,962"],["Investing activities","","","74,347","","","","(156,376",")","","","(13,645",")"],["Financing activities","","","7,415","","","","8,297","","","","17,793"],["Effect of exchange rate changes","","","202","","","","(862",")","","","(857",")"],["Net change in cash and cash equivalents","","","96,558","","","","(113,226",")","","","47,253"],["Cash and cash equivalents, at beginning of year","","","86,480","","","","199,706","","","","152,453"],["Cash and cash equivalents, at end of year","","$","183,038","","","$","86,480","","","$","199,706"]]
[[/GREPCENT_TABLE]]

For 2023, net cash provided by operating activities consisted of $34.1 million in non-cash items and $21.3 million in net income, offset by $40.8 million in working-capital changes. For 2022, net cash provided by operating activities consisted of $39.7 million in net income and $24.9 million in non-cash items, offset by $28.9 million in working-capital changes. For 2021, net cash provided by operating activities consisted of $27.5 million in net income and $18.8 million non-cash items, offset by $2.4 million in working-capital changes.

Since 2022 we decided to invest our cash in investments available for sale, in accordance with our investment policy. For 2023, cash provided by investment activities resulted from proceeds from the sale or maturity of investments available for sale of $144.8 million that was used to supplement working-capital, partially offset by $52.3 million in purchases of investments available for sale and $18.2 million in purchases of property, plant and equipment. For 2022, net cash used in investment activities resulted from $155.7 million in purchases of investments available for sale and $18.1 million in purchases of property, plant and equipment, partially offset by $17.5 million of proceeds from the maturity of investments available for sale. For 2021, cash used in investing activities resulted from $13.6 million in purchases of property, plant and equipment. Our investment in property, plant and equipment during 2023 and 2022, and the increase during 2022, relative to 2021, was primarily due to investments in manufacturing facilities.

For 2023, net cash provided by financing activities of $7.4 million consisted primarily from the exercise of stock options of $9.7 million, partially offset by $2.1 million to repurchase employee common stock for taxes withheld. For 2022, net cash provided by financing activities of $8.3 million consisted primarily of proceeds from the exercise of stock options. For 2021, net cash provided by financing activities consisted of $19.4 million of proceeds from the exercise of stock options, partially offset by $1.3 million repayment on the Japan line of credit and $0.3 million repayment of finance lease obligations.

Accounts receivable, net was $94.7 million and $62.4 million at December 29, 2023 and December 30, 2022, respectively. Days’ Sales Outstanding (DSO) was 113 and 89 days, respectively for 2023 and 2022. The increase in DSO in 2023 was temporary and was due to extended payment terms to our largest customer outside of the U.S. due to unfavorable foreign currency conditions. We have a solid and lengthy relationship with this customer, for which collectability is reasonably assured. We do not believe the temporary increase in net accounts receivable reflected a trend, nor that it would have a material impact on cash flows as our available liquidity and capital resources had sufficient working capital despite the increase in net accounts receivable.

Inventories, net was $35.1 million and $24.2 million at December 29, 2023 and December 30, 2022, respectively. Days’ Inventory on Hand (DOH) was 142 and 94 days for 2023 and 2022, respectively, for finished goods, including consignment inventory. The increase in DOH was due to a planned increase of production to support sales growth of ICL products.

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Critical Accounting Estimates

Our accounting policies are more fully described in Note 1 of the Consolidated Financial Statements. As disclosed in Note 1, the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ, significantly at times, from these estimates if actual conditions differ from our assumptions.

We believe the following discussion represents our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Sales Return Reserves

We provide allowances for sales returns such that returns are matched against the sales from which they originated. While such allowances have historically been within our expectations, we cannot guarantee that we will continue to experience the same return rates that we have in the past. Measurement of such returns is based on an expected loss model which requires consideration of, among other factors, historical returns experience and current/anticipated trends, including the need to adjust for current conditions and product lines, the entry of a competitor, and judgments about the probable effects of relevant observable data. We consider all available information in our quarterly assessments of the adequacy of the allowance for sales returns.

Stock-Based Compensation

We account for the issuance of stock options by estimating the fair value using the Black-Scholes pricing model. This model’s calculations include the exercise price, the market price of shares on grant date, risk-free interest rates, expected term of the award, expected volatility of our stock and expected dividend yield. Stock-based compensation expense for other stock-based awards is measured at the date of grant based on the fair value of the award, which is the closing price of our common stock on the date of grant. For those awards which contain a performance condition, stock-based compensation expense will be recognized when it is probable that the performance condition will be achieved, net of an estimate of pre-vesting forfeitures, over the requisite service period based on the grant-date fair value of the stock. We reassess the probability of vesting at each reporting period and adjust stock-based compensation expense based on our probability assessment.

Income Taxes

In evaluating our ability to recover the deferred tax assets within a jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results and incorporate assumptions including overall current and projected business and industry conditions, projected sales growth, margins, costs and income by jurisdiction, the amount of future federal, state, and foreign pretax operating income, the reversal of temporary differences and the successful implementation of 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 management uses to manage its businesses. In evaluating the objective evidence that historical results provide, we also consider 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 of the deferred tax asset may not be realized.

Inventories

We provide estimated inventory allowances for excess, slow moving, expiring and obsolete inventory as well as inventory whose carrying value is more than net realizable value. These reserves are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on the expiration of products with a shelf life of less than four months, estimated forecasts of product demand and production requirements for the next twelve months. Several factors may influence the realizability of our inventories, including significant changes in demand, decisions to exit a product line, technological change, and new product development. While such inventory losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same loss rates that we have in the past.

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Employee Defined Benefit Plans - Pension

The liabilities and annual income or expense of our pension plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, expected years of service, salary increases and the expected long-term rate of asset return. The fair values of plan assets are determined based on prevailing market prices.

Foreign Exchange

Management does not believe that the fluctuation in the value of the dollar in relation to the currencies of its suppliers or customers in the last three fiscal years has adversely affected our ability to purchase or sell products at agreed upon prices. No assurance can be given, however, that adverse currency exchange rate fluctuations will not occur in the future, which could significantly affect our operating results. We do not currently hedge transactions to offset changes in foreign currency.

Inflation

Management believes inflation has not had a significant impact on our net sales and revenues and on income from continuing operations during the past three years.

Recent Accounting Pronouncements

See “Part II. Item 8. “Financial Statements and Supplementary Data – Note 1 – Organization and Description of Business and Accounting Policies – Recent Accounting Pronouncements Not Yet Adopted” of this Annual Report on Form 10-K.