Glaukos 10Q 2019 Q3 Quarterly report

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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 September 30, 2019

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

Commission file number: 001-37463

GLAUKOS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware	33-0945406
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

229 Avenida Fabricante San Clemente, California	92672
(Address of registrant’s principal executive offices)	(Zip Code)

(949) 367-9600

(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 Stock		GKOS		New York Stock Exchange

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, a 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 ☒

As of November 5, 2019, there were 36,927,816 shares of the registrant’s Common Stock outstanding.

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GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended September 30, 2019

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We use Glaukos, our logo, iStent, iStent inject, iStent Infinite, iStent SA, iStent Supra, iPrism, iDose, MIGS and other marks as trademarks. This report contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report, including logos, artwork and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

References throughout this document to “we,” “us,” “our,” the “Company,” or “Glaukos” refer to Glaukos Corporation and its consolidated subsidiaries.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)


	September 30,		December 31,
	2019		2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	39,534	$	29,821
Short-term investments		113,385		110,667
Accounts receivable, net		24,345		18,673
Inventory, net		12,801		13,282
Prepaid expenses and other current assets		19,223		4,124
Total current assets		209,288		176,567
Restricted cash		8,881		8,775
Property and equipment, net		20,038		19,153
Operating lease right-of-use asset		12,146		-
Finance lease right-of-use asset		53,343		-
Income tax receivable		213		213
Deposits and other assets		3,527		2,262
Total assets	$	307,436	$	206,970

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	3,501	$	6,286
Accrued liabilities		29,602		23,964
Deferred rent		-		115
Total current liabilities		33,103		30,365
Operating lease liability		11,406		-
Finance lease liability		68,851		-
Other liabilities		3,960		2,745
Total liabilities		117,320		33,110

Commitments and contingencies (Note 10)

Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 shares issued and outstanding		-		-
Common stock, $0.001 par value; 150,000 shares authorized; 36,945 and 36,135 shares issued and 36,917 and 36,107 shares outstanding as of September 30, 2019 and December 31, 2018, respectively		37		36
Additional paid-in capital		414,665		378,352
Accumulated other comprehensive income		1,837		738
Accumulated deficit		(226,291)		(205,134)
Less treasury stock (28 shares as of September 30, 2019 and December 31, 2018)		(132)		(132)
Total stockholders' equity		190,116		173,860
Total liabilities and stockholders' equity	$	307,436	$	206,970

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net sales	$	58,509	$	43,908	$	171,135	$	127,202
Cost of sales		7,703		6,011		22,684		17,957
Gross profit		50,806		37,897		148,451		109,245
Operating expenses:
Selling, general and administrative		44,443		31,632		117,024		87,425
Research and development		17,278		13,202		48,277		36,719
In-process research and development (Note 1)		1,500		-		3,745		-
Total operating expenses		63,221		44,834		169,046		124,144
Loss from operations		(12,415)		(6,937)		(20,595)		(14,899)
Non-operating income (expense):
Interest income		780		583		2,368		1,568
Interest expense		(1,028)		-		(2,041)		-
Other expense, net		(656)		(230)		(508)		(1,346)
Total non-operating (expense) income		(904)		353		(181)		222
Loss before taxes		(13,319)		(6,584)		(20,776)		(14,677)
Provision for income taxes		187		37		381		53
Net loss	$	(13,506)	$	(6,621)	$	(21,157)	$	(14,730)
Basic and diluted net loss per share	$	(0.37)	$	(0.19)	$	(0.58)	$	(0.42)
Weighted average shares used to compute basic and diluted net loss per share		36,831		35,541		36,507		35,075

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net loss	$	(13,506)	$	(6,621)	$	(21,157)	$	(14,730)
Other comprehensive income:
Foreign currency translation gain		530		322		364		1,369
Unrealized gain (loss) on short-term investments, net of tax		74		74		735		(71)
Other comprehensive income		604		396		1,099		1,298
Total comprehensive loss	$	(12,902)	$	(6,225)	$	(20,058)	$	(13,432)

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)


						Accumulated
				Additional		other
	Common stock			paid-in		comprehensive		Accumulated		Treasury stock			Total
	Shares	Amount		capital		income		deficit		Shares	Amount		equity
Balance at December 31, 2018	36,135	$	36	$	378,352	$	738	$	(205,134)	(28)	$	(132)	$	173,860
Common stock issued under stock plans	226		—		5,406		—		—	—		—		5,406
Stock-based compensation	—		—		7,129		—		—	—		—		7,129
Other comprehensive income	—		—		—		436		—	—		—		436
Net loss	—		—		—		—		(1,342)	—		—		(1,342)
Balance at March 31, 2019	36,361	$	36	$	390,887	$	1,174	$	(206,476)	(28)	$	(132)	$	185,489
Common stock issued under stock plans	305		1		318		—		—	—		—		319
Stock-based compensation	—		—		8,247		—		—	—		—		8,247
Other comprehensive income	—		—		—		59		—	—		—		59
Net loss	—		—		—		—		(6,309)	—		—		(6,309)
Balance at June 30, 2019	36,666	$	37	$	399,452	$	1,233	$	(212,785)	(28)	$	(132)	$	187,805
Common stock issued under stock plans	279		—		6,666		—		—	—		—		6,666
Stock-based compensation	—		—		8,547		—		—	—		—		8,547
Other comprehensive income	—		—		—		604		—	—		—		604
Net loss	—		—		—		—		(13,506)	—		—		(13,506)
Balance at September 30, 2019	36,945	$	37	$	414,665	$	1,837	$	(226,291)	(28)	$	(132)	$	190,116


						Accumulated
				Additional		other
	Common stock			paid-in		comprehensive		Accumulated		Treasury stock			Total
	Shares	Amount		capital		(loss) income		deficit		Shares	Amount		equity
Balance at December 31, 2017	34,647	$	35	$	331,073	$	(591)	$	(192,183)	(28)	$	(132)	$	138,202
Common stock issued under stock plans	208		—		2,839		—		—	—		—		2,839
Stock-based compensation	—		—		5,402		—		—	—		—		5,402
Other comprehensive loss	—		—		—		(704)		—	—		—		(704)
Net loss	—		—		—		—		(2,711)	—		—		(2,711)
Balance at March 31, 2018	34,855	$	35	$	339,314	$	(1,295)	$	(194,894)	(28)	$	(132)	$	143,028
Common stock issued under stock plans	311		—		2,836		—		—	—		—		2,836
Stock-based compensation	—		—		6,461		—		—	—		—		6,461
Other comprehensive income	—		—		—		1,606		—	—		—		1,606
Net loss	—		—		—		—		(5,398)	—		—		(5,398)
Balance at June 30, 2018	35,166	$	35	$	348,611	$	311	$	(200,292)	(28)	$	(132)	$	148,533
Common stock issued under stock plans	829		1		13,925		—		—	—		—		13,926
Stock-based compensation	—		—		7,173		—		—	—		—		7,173
Other comprehensive income	—		—		—		396		—	—		—		396
Net loss	—		—		—		—		(6,621)	—		—		(6,621)
Balance at September 30, 2018	35,995	$	36	$	369,709	$	707	$	(206,913)	(28)	$	(132)	$	163,407

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2019		2018
Operating Activities
Net loss	$	(21,157)	$	(14,730)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		2,674		5,063
Amortization of lease right-of-use assets		2,405		-
Loss on disposal of fixed assets		26		83
Stock-based compensation		23,923		19,036
Unrealized foreign currency losses		469		1,541
Amortization of discount on short-term investments		(298)		(205)
Deferred rent and other liabilities		3,666		1,491
Changes in operating assets and liabilities:
Accounts receivable, net		(5,828)		(3,209)
Inventory, net		414		(2,511)
Prepaid expenses and other current assets		(2,326)		(1,695)
Accounts payable and accrued liabilities		(60)		(2,000)
Other assets		(86)		(1,128)
Net cash provided by operating activities		3,822		1,736
Investing activities
Purchases of short-term investments		(64,726)		(70,100)
Proceeds from sales and maturities of short-term investments		61,870		64,185
Purchases of property and equipment		(3,530)		(2,733)
Net cash used in investing activities		(6,386)		(8,648)
Financing activities
Proceeds from exercise of stock options		14,005		16,418
Proceeds from share purchases under Employee Stock Purchase Plan		3,388		3,509
Payment of employee taxes related to vested restricted stock units		(5,002)		(325)
Net cash provided by financing activities		12,391		19,602
Effect of exchange rate changes on cash and cash equivalents		(8)		80
Net increase in cash, cash equivalents and restricted cash		9,819		12,770
Cash, cash equivalents and restricted cash at beginning of period		38,596		24,508
Cash, cash equivalents and restricted cash at end of period	$	48,415	$	37,278
Supplemental disclosures of cash flow information
Taxes paid	$	96	$	13

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization and Basis of Presentation

Organization and business

Glaukos Corporation (Glaukos or the Company), incorporated in Delaware on July 14, 1998, is an ophthalmic medical technology and pharmaceutical company focused on the development and commercialization of novel therapies designed to treat glaucoma, corneal disorders and retinal diseases. The Company initially developed Micro-Invasive Glaucoma Surgery (MIGS) to address the shortcomings of traditional glaucoma treatment options. MIGS procedures involve the insertion of a micro-scale device or drug delivery system from within the eye’s anterior chamber through a small corneal incision. The Company’s MIGS devices are designed to reduce intraocular pressure (IOP) by restoring the natural outflow pathways for aqueous humor. The Company’s MIGS drug delivery systems are designed to reduce IOP by continuously eluting a glaucoma drug from within the eye, potentially providing sustained pharmaceutical therapy for extended periods of time. Glaukos intends to leverage its capabilities to build a portfolio of micro-scale surgical and pharmaceutical therapies in corneal health and retinal disease as well.

The accompanying condensed consolidated financial statements include the accounts of Glaukos and its wholly-owned subsidiaries. All significant intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.

Basis of presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.

The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements. As permitted under those rules, certain footnotes and other financial information that are normally required by GAAP have been condensed or omitted. In the opinion of management, the unaudited interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for the fair presentation of the Company’s financial information contained herein. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited financial statements at that date, but excludes disclosures required by GAAP for complete financial statements. These interim financial statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s financial statements and accompanying notes for the fiscal year ended December 31, 2018, which are contained in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on February 28, 2019. The results for the period ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period.

Proposed Acquisition of Avedro, Inc.

On August 7, 2019, the Company entered into an Agreement and Plan of Merger by and among Glaukos, Atlantic Merger Sub, Inc. (Merger Sub) and Avedro, Inc. (Avedro), pursuant to which Merger Sub will merge with and into Avedro, with Avedro continuing as the surviving corporation and a wholly owned subsidiary of the Company (the Merger). The Merger is subject to certain closing conditions, including but not limited to, the adoption of the Agreement and Plan of Merger by holders of a majority of the outstanding common stock of Avedro entitled to vote which is expected to occur on November 19, 2019. The closing of the Merger was also subject to the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act); however, early termination under the HSR Act was granted on August 28, 2019. If all remaining conditions are satisfied, upon the closing of the Merger, all issued and outstanding shares of Avedro common stock will be automatically cancelled and converted into the right to receive a number of shares of Glaukos common stock equal to the product of the number of shares of Avedro common stock multiplied by 0.365. The Company filed a Registration Statement on Form S-4 with the SEC on September 17, 2019 (the Registration Statement) to register the issuance of shares of Glaukos common stock to Avedro stockholders upon closing of the Merger, which was declared effective by the SEC on October 17, 2019. The Merger is expected to close in the fourth quarter of 2019. Following the Merger,

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existing Glaukos stockholders are expected to own approximately 85% of the combined company, with the former Avedro stockholders expected to own the remaining 15%, on a fully diluted basis.

Avedro provides several corneal strengthening solutions, including Photrexa, a bio-activated pharmaceutical therapy for the corneal cross-linking treatment of keratoconus. Through 2018, over 400,000 procedures have been performed globally with Avedro’s products, including more than 18,000 procedures performed in the United States alone.

The Merger is intended to expand the Company’s portfolio of pipeline products beyond the treatment of glaucoma to include pharmaceutical therapies for the treatment of corneal disorders as part of the Company’s strategic objective to build a portfolio of micro-scale surgical and pharmaceutical therapies in corneal health and retinal disease.

Licensing Arrangement with Intratus, Inc.

On July 22, 2019, the Company entered into a global licensing agreement with Intratus, Inc. (Intratus) for $1.5 million in cash, plus future performance-based consideration upon achievement of certain development, regulatory approvals and commercial milestones and royalties on commercial sales, pursuant to which the Company obtained an exclusive, royalty-bearing license to research, develop, manufacture and commercialize Intratus’ patented, non-invasive drug delivery platform designed for use in the treatment of dry eye disease, glaucoma and other corneal disorders such as blepharitis, conjunctivitis and related conditions.

The $1.5 million payment was immediately expensed to in-process research and development (IPR&D) as management determined there were no alternative future uses for the technology acquired.

Acquisition of DOSE Medical

On June 19, 2019, the Company entered into a definitive agreement and plan of merger to acquire DOSE Medical Corporation (DOSE) for $2.5 million in cash, plus potential future performance-based consideration upon achievement of certain regulatory approvals and commercial milestones and royalties on commercial sales (the DOSE Merger). If certain DOSE products receive United States Food and Drug Administration (FDA) approval within ten years following the closing of the DOSE Merger, the Company will pay the DOSE shareholders amounts between $5.0 million and $22.5 million, depending on the type of DOSE product approved. The Company will pay additional performance-based payments to DOSE shareholders if within ten years of closing of the DOSE Merger, such DOSE products receive approval from the EU European Medicines Agency, in which case the Company will pay the DOSE shareholders either $1.25 million and/or $2.5 million, depending on the type of DOSE product approved. Following FDA approval of such DOSE products, the Company will pay the DOSE shareholders quarterly royalty payments equal to 5% of net sales of such DOSE products for a period of ten years. The Company will also pay the DOSE shareholders additional performance-based payments of $7.5 million and $20.0 million upon the achievement of certain net sales milestones with respect to such DOSE products. Finally, under the terms of the DOSE Merger, the Company may elect to buyout the additional milestone and royalty payments described above by paying former DOSE shareholders between $10.0 and $55.0 million, depending on the type of DOSE product involved.

On June 27, 2019, the Company completed its acquisition of DOSE and DOSE became a wholly-owned subsidiary of the Company. The transaction was accounted for as an asset acquisition. Of the $2.5 million initial cash payment, $2.2 million was immediately charged to IPR&D expense as management determined there was no alternative future use related to the single group of identifiable assets purchased. The remaining $0.3 million of upfront consideration was capitalized as property & equipment, net and is being depreciated over the corresponding asset’s useful life. Management will account for the payment of the future performance-based consideration if and when earned.

DOSE was previously a wholly-owned subsidiary of the Company. In 2010, it was spun-out as a standalone entity and was accounted for as a consolidated variable interest entity. In 2015, the Company acquired the iDose product line and related assets from DOSE and upon the acquisition, the Company derecognized DOSE as a consolidated variable interest entity in the financial statements, and in 2017 the Company acquired DOSE’s IOP sensor system. Thomas W. Burns, the Company’s President, Chief Executive and a member of its board of directors, and William J. Link, Ph.D., Chairman of the Company’s board of directors, served on the board of directors of DOSE and certain members of the Company’s management and board of directors held an equity interest in DOSE prior to being acquired by the Company.

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Note 2. Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the nine months ended September 30, 2019, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019, with the exception of the Company’s adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (Accounting Standards Codification (ASC) 842). See section below entitled “Leases” and Note 5, Leases for further discussion of the Company’s adoption of ASC 842 and related disclosures.

Use of estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions. Management considers many factors in selecting appropriate financial accounting policies and controls and in developing the estimates and assumptions that are used in the preparation of these condensed consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. The most significant estimates in the accompanying condensed consolidated financial statements relate to revenue recognition, the incremental borrowing rate related to the Company’s leased assets and stock-based compensation expense. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, this process may result in actual results differing materially from those estimated amounts used in the preparation of the condensed consolidated financial statements.

Foreign currency translation

The accompanying condensed consolidated financial statements are presented in United States (U.S.) dollars. The Company considers the local currency to be the functional currency for its international subsidiaries. Accordingly, their assets and liabilities are translated into U.S. dollars using the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing throughout the periods presented. As a result, currency translation adjustments arising from period to period are charged or credited to accumulated other comprehensive income in stockholders’ equity. For the three and nine months ended September 30, 2019, the Company reported foreign currency translation gains of approximately $0.5 million and $0.4 million, respectively. For the three and nine months ended September 30, 2018, the Company reported foreign currency translation gains of approximately $0.3 million and $1.4 million, respectively.

Unrealized gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, primarily gains and losses on intercompany loans, are included in the condensed consolidated statements of operations as a component of other expense, net. For the three and nine months ended September 30, 2019 the Company reported net unrealized foreign currency transaction losses of $0.6 million and $0.5 million, respectively. For the three and nine months ended September 30, 2018, the Company reported net unrealized foreign currency transaction losses of $0.4 million and $1.5 million, respectively.

Cash, cash equivalents and short-term investments

The Company invests its excess cash in marketable securities, including money market funds, money market securities, bank certificates of deposits, corporate bonds, corporate commercial paper, U.S. government bonds and U.S. government agency bonds. For financial reporting purposes, liquid investment instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents are recorded at face value or cost, which approximates fair market value. The Company maintains cash balances in excess of amounts insured by the Federal Deposit Insurance Commission. Investments are stated at fair value as determined by quoted market prices. Investments are considered available-for-sale and, accordingly, unrealized gains and losses are included in accumulated other comprehensive income within stockholders’ equity.

The Company’s entire investment portfolio, except for restricted cash, is considered to be available for use in current operations and, accordingly, all such investments are stated at fair value using quoted market prices and classified as current assets, although the stated maturity of individual investments may be one year or more beyond the

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balance sheet date. The Company did not have any trading securities or restricted investments at September 30, 2019 or December 31, 2018.

Realized gains and losses and declines in value, if any, judged to be other-than-temporary on available-for-sale securities are reported in other expense, net. When securities are sold, any associated unrealized gain or loss previously reported as a separate component of stockholders’ equity is reclassified out of stockholders’ equity and recorded in the statements of operations in the period sold using the specific identification method. Accrued interest and dividends from investments are included in other expense, net. The Company periodically reviews its available-for-sale securities for other-than-temporary declines in fair value below the cost basis, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Restricted cash

The Company had a bank issue a letter of credit in the amount of $8.8 million related to its Aliso Viejo, California office building lease, which commenced on April 1, 2019. The letter of credit is secured with an amount of cash held in a restricted account of $8.9 million and $8.8 million as of September 30, 2019 and December 31, 2018, respectively. Beginning on the first day of the thirty-seventh month of the lease term, and on each twelve month anniversary thereafter, the letter of credit will be reduced by 20% until the letter of credit amount has been reduced to $2.0 million. See Note 10, Commitments and Contingencies for additional information related to the Aliso Viejo, California office building lease and associated letter of credit commitment.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that equate to the amount reported in the condensed consolidated statement of cash flows as of the beginning and end of the nine month period ended September 30, 2019 (in thousands):


		September 30,		December 31,
		2019		2018
Cash and cash equivalents	$	39,534	$	29,821
Restricted cash		8,881		8,775
Cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows	$	48,415	$	38,596

Fair value of financial instruments

The carrying amounts of cash equivalents, accounts receivable, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.

The valuation of assets and liabilities is subject to fair value measurements using a three-tiered approach and fair value measurements are classified and disclosed by the Company in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Leases

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. In September 2017, the FASB issued ASU No. 2017-13, which provides additional clarification and implementation guidance on the previously issued ASU No. 2016-02 (collectively, (ASC 842)). Under the new guidance, a lessee is required to recognize a lease liability and a right-of-use asset for all leases with terms in excess of 12 months.

Consistent with historical guidance, a lessee’s recognition, measurement, and presentation of expenses and cash flows arising from a lease will continue to depend primarily on its classification. ASC 842 was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted the requirements of ASC 842 effective January 1, 2019 and elected the modified retrospective method for all lease

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arrangements at the beginning of the period of adoption. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840, Leases.

For leases that commenced before the effective date of ASC 842, the Company elected the transition package of three practical expedients permitted within ASC 842, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs.

The Company did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e., leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. As a result of adopting ASC 842 as of January 1, 2019, the Company recorded an operating lease right-of-use asset of $12.8 million and related operating lease liability of $13.4 million, respectively, primarily related to facilities and certain equipment, based on the present value of the future lease payments on the date of adoption. Adopting ASC 842 did not have a material impact on the Company’s condensed consolidated statements of operations and cash flows. See Note 5, Leases for further discussion of the Company’s adoption of ASC 842 and related disclosures.

The Company determines if an arrangement is a lease at inception. As a lessee, right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company does not have any outstanding debt or committed credit facilities, the Company estimates the incremental borrowing rate based on prevailing financial market conditions, peer company credit analyses, and management judgment. Operating lease right-of-use assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The lease terms used to calculate the right-of-use asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition.

As of April 1, 2019, the Company recorded a finance lease right-of-use asset of $54.5 million and related finance lease liability of $67.2 million with respect to the commencement of its lease in Aliso Viejo, California based on the present value of the future lease payments on the date of commencement. As of September 30, 2019, the finance lease right-of-use asset excludes lease incentives totaling $12.7 million included in prepaid expenses and other current assets on the condensed consolidated balance sheets.

Revenue recognition

The Company accounts for revenue in accordance with ASC 606, Revenue Recognition – Revenue from Contracts with Customers and its related amendments (ASC 606) and applies the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company derives its revenue from sales of its products in the United States and internationally. Customers are primarily comprised of ambulatory surgery centers and hospitals, with distributors being used in certain international locations where the Company does not have a direct commercial presence.

The Company concluded that 1 performance obligation exists for the majority of its contracts with customers which is to deliver products in accordance with the Company’s normal delivery times. Revenue is recognized when this performance obligation is satisfied, which is the point in time when the Company considers control of a product to have

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transferred to the customer. Revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for those products or services. The Company has determined the transaction price to be the invoice price, net of adjustments, which includes estimates of variable consideration for product returns.

The Company offers volume-based rebate agreements to certain customers and, in these instances, the Company provides a rebate (in the form of a credit memo) at the contract’s conclusion, if earned by the customer. In such cases, the transaction price is allocated between the Company’s delivery of product and the issuance of a rebate at the contract’s conclusion for the customer to utilize on prospective purchases. The performance obligation to issue a customer’s rebate, if earned, is transferred over time and the Company’s method of measuring progress is the output method, whereby the progress is measured by the estimated rebate earned to date over the total rebate estimated to be earned over the contract period. The provision for volume-based rebates is estimated based on customers' contracted rebate programs and the customers’ projected sales levels. The Company periodically monitors its customer rebate programs to ensure the rebate allowance is fairly stated. The Company’s rebate allowance is included in accrued liabilities in the condensed consolidated balance sheets and estimated rebates accrued were not material during the periods presented.

Customers are not granted specific rights of return; however, the Company may permit returns of product from customers if such product is returned in a timely manner and in good condition. The Company provides a warranty on its products for one year from the date of shipment, and any product found to be defective or out of specification will be replaced at no charge during the warranty period. Estimated allowances for sales returns and warranty replacements are recorded at the time of sale of the product and are estimated based upon the historical patterns of product returns matched against sales, and an evaluation of specific factors that may increase the risk of product returns. Product returns and warranty replacements to date have been consistent with amounts reserved or accrued and have not been significant. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates which would affect net product revenue and earnings in the period such variances become known.

Research and development expenses

Major components of research and development expense include personnel costs, preclinical studies, clinical trials and related clinical product manufacturing, materials and supplies, and fees paid to consultants. Research and development costs are expensed as goods are received or services are rendered. Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use are also expensed as incurred as IPR&D.

At each financial reporting date, the Company accrues the estimated unpaid costs of clinical study activities performed during a period by third party clinical sites with whom the Company has agreements that provide for fees based upon the quantities of subjects enrolled and clinical evaluation visits that occur over the life of the study. The cost estimates are determined based upon a review of the agreements and data collected by internal and external clinical personnel as to the status of enrollment and subject visits, and are based upon the facts and circumstances known to the Company at each financial reporting date. If the actual performance of activities varies from the assumptions used in the cost estimates, the accruals are adjusted accordingly. There have been no material adjustments to the Company’s prior period accrued estimates for clinical trial activities during the three and nine months ended September 30, 2019.

Stock-based compensation

The Company recognizes compensation expense for all stock-based awards granted to employees and nonemployees, including members of its board of directors.

The fair value of stock option awards is estimated at the grant date using the Black-Scholes option pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line method. The determination of the fair value-based measurement of stock options on the date of grant using an option pricing model is affected by the determination of the fair value of the underlying stock as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s stock price volatility over the expected term of the grants, and actual and projected stock option exercise behaviors. In the future, as additional empirical evidence regarding these estimates becomes available, the Company may change or refine its approach of deriving them, and these changes could impact the fair value-based measurement of stock options granted in the future. Changes in the fair value-based measurement of stock awards could materially impact the Company’s operating results.

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The fair value of restricted stock unit (RSU) awards is equal to the closing market price of the Company’s common stock on the grant date.

Software costs

The Company currently expenses software service costs along with any associated implementation costs as services are provided and implementation costs are incurred.

Comprehensive loss

All components of comprehensive loss, including net loss, are reported in the condensed consolidated financial statements in the period in which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities and foreign currency translation adjustments.

Net loss per share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. For periods when the Company realizes a net loss, no common stock equivalents are included in the calculation of weighted average number of dilutive common stock equivalents as the effect of applying the treasury stock method is considered anti-dilutive. For periods when the Company realizes net income, diluted net income per share is calculated by dividing the net income by the weighted average number of common shares plus the sum of the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury stock method. Common stock equivalents are comprised of stock options outstanding and unvested RSUs under the Company’s incentive compensation plans, and shares issuable under the Company’s Employee Stock Purchase Plan (ESPP).

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive were as follows (in common stock equivalent shares, in thousands):


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2019	2018	2019	2018
Stock options outstanding	3,602	4,781	3,636	5,707
Unvested restricted stock units	232	196	364	355
Employee stock purchase plan	1	15	5	42
	3,835	4,992	4,005	6,104

Recently adopted accounting pronouncements

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02) that gives entities the option to reclassify to retained earnings tax effects related to items that have been stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (the Act). A company that elects to reclassify these amounts must reclassify stranded tax effects related to the Act’s change in U.S. federal tax rate for all items accounted for in other comprehensive income. Companies can also elect to reclassify other stranded effects that relate to the Act but do not directly relate to the change in the federal rate. Companies can choose whether to apply the amendments retrospectively to each period in which the effect of the Act is recognized or to apply the amendments in the period of adoption. The guidance was effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted ASU 2018-02 effective January 1, 2019 and the adoption did not have a material impact to the Company’s condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered, or the service has been rendered, and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The accounting standard was effective for fiscal years beginning after December 15,

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2018, including interim periods within those fiscal years. The Company adopted the guidance effective January 1, 2019 and the guidance did not have a material impact to the Company’s condensed consolidated financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification (the SEC Release), to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of GAAP or other regulatory requirements. Among other changes, the SEC Release expanded the disclosure requirements related to the analysis of stockholders’ equity within a Company’s interim condensed consolidated financial statements. Presentation of the changes in each caption of stockholders’ equity presented on the condensed consolidated balance sheets must be provided in a note or separate statement, and the Company has elected to include a separate statement (the Condensed Consolidated Statements of Stockholders’ Equity above) to present quarterly activity during the nine months ended September 30, 2019 and September 30, 2018.

See above under “Leases” for a discussion of ASC 842, which was adopted effective January 1, 2019.

Recently issued accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which provided additional implementation guidance on the previously issued guidance. The Company is assessing the potential impacts of these standards; however, it does not believe there will be a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 250): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which removes the second step of the impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of the reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This updated guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is assessing the potential impacts of the standard; however, it does not believe there will be a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (ASU 2018-13), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The guidance expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income (loss). ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is assessing the potential impacts of the standard; however, it does not believe there will be a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which amends current guidance to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 is effective for the Company for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. The Company is assessing the potential impacts of the standard; however, it does not believe there will be a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15) which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company is assessing the potential impacts of the standard on its consolidated financial statements.

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In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606 (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer and precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. For the Company, these amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted, including adoption in any interim period, for entities that have adopted ASC 606. The Company is assessing the potential impacts of the standard on its consolidated financial statements.

Note 3. Balance Sheet Details

Short-term investments

Short-term investments consisted of the following (in thousands):


	At September 30, 2019
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government agency bonds	less than 1		500		—		—		500
Bank certificates of deposit	less than 1		10,500		12		—		10,512
Commercial paper	less than 1		9,442		12		—		9,454
Corporate notes	less than 3		66,697		331		(2)		67,026
Asset-backed securities	less than 3		25,777		124		(8)		25,893
Total		$	112,916	$	479	$	(10)	$	113,385

	At December 31, 2018
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government bonds	less than 1	$	1,300	$	-	$	(3)	$	1,297
U.S. government agency bonds	less than 1		1,994		-		(12)		1,982
Bank certificates of deposit	less than 2		15,201		2		(3)		15,200
Commercial paper	less than 1		9,597		1		(5)		9,593
Corporate notes	less than 3		60,923		24		(194)		60,753
Asset-backed securities	less than 3		21,918		18		(94)		21,842
Total		$	110,933	$	45	$	(311)	$	110,667

Accounts receivable, net

Accounts receivable consisted of the following (in thousands):


	September 30,		December 31,
	2019		2018
Accounts receivable	$	25,085	$	19,333
Allowance for doubtful accounts		(740)		(660)
	$	24,345	$	18,673

Inventory, net

Inventory consisted of the following (in thousands):


	September 30,		December 31,
	2019		2018
Finished goods	$	4,260	$	4,256
Work in process		4,404		3,197
Raw material		4,137		5,829
	$	12,801	$	13,282

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Accrued liabilities

Accrued liabilities consisted of the following (in thousands):


	September 30,		December 31,
	2019		2018
Accrued bonuses	$	6,714	$	8,604
Accrued vacation benefits		2,696		2,446
Accrued legal expenses		4,604		2,466
Other accrued liabilities		15,588		10,448
	$	29,602	$	23,964

Note 4. Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands). The Company did not have any financial liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018.


			At September 30, 2019
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	September 30,		identical assets		inputs		inputs
	2019		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds ⁽ⁱ⁾	$	114	$	114	$	-	$	-
U.S. government agency bonds ⁽ⁱⁱ⁾		500		-		500		-
Bank certificates of deposit ^{(ii) (iii)}		11,713		-		11,713		-
Commercial paper ⁽ⁱⁱ⁾		9,454		-		9,454		-
Corporate notes ⁽ⁱⁱ⁾		67,026		-		67,026		-
Asset-backed securities ⁽ⁱⁱ⁾		25,893		-		25,893		-
	$	114,700	$	114	$	114,586	$	-


			At December 31, 2018
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	December 31,		identical assets		inputs		inputs
	2018		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds ⁽ⁱ⁾	$	1,156	$	1,156	$	-	$	-
U.S. government agency bonds ⁽ⁱⁱ⁾		1,982		-		1,982		-
U.S. government bonds ⁽ⁱⁱ⁾		1,297		-		1,297		-
Bank certificates of deposit ⁽ⁱⁱ⁾		15,201		-		15,201		-
Commercial paper ⁽ⁱⁱ⁾		9,593		-		9,593		-
Corporate notes ^{(ii) (iv)}		61,752		-		61,752		-
Asset-backed securities ⁽ⁱⁱ⁾		21,842		-		21,842		-
	$	112,823	$	1,156	$	111,667	$	-

(i)	Included in cash and cash equivalents with a maturity of three months or less from date of purchase on the condensed consolidated balance sheets.

(ii)	Included in short-term investments on the condensed consolidated balance sheets.

(iii)

As of September 30, 2019, a bank certificate of deposit investment totaling $1,201 (in thousands) is included in cash and cash equivalents on the condensed consolidated balance sheets, as the investment has a maturity of three months or less from the date of purchase on the condensed consolidated balance sheets.

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(iv)	As of December 31, 2018, a corporate note investment totaling $1,000 (in thousands) is included in cash and cash equivalents on the condensed consolidated balance sheets, as the investment has a maturity of three months or less from the date of purchase on the condensed consolidated balance sheets.

Money market funds and currency are highly liquid investments and are actively traded. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

U.S. government agency bonds, U.S. government bonds, bank certificates of deposit, commercial paper, corporate notes and asset-backed securities are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

There were 0 transfers between levels within the fair value hierarchy during the periods presented.

Note 5. Leases

The Company has operating and finance leases for facilities and certain equipment. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet. Lease expense for leases is recognized on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of ASC 842, the Company combines lease and non-lease components. See Note 2, Summary of Significant Accounting Policies for additional information.

The Company's leases have remaining non-cancelable lease terms of approximately one year to thirteen years, some of which include options to extend the leases for up to ten years, and some of which include options to terminate the lease within one year. The exercise of lease renewal options is at the Company's sole discretion. In certain of the Company’s lease agreements, the rental payments are adjusted periodically to reflect actual charges incurred for common area maintenance, landlord incentives and/or inflation.

The Company leases 2 adjacent facilities located in San Clemente, California. During December 2018, the Company extended the term of these facilities by three years, both of which now expire on December 31, 2024. Each agreement contains an option to extend the lease for 1 additional three year period at market rates. The total leased square footage of these facilities equals approximately 98,000. In conjunction with these extensions, the lease landlord agreed to provide the Company with a tenant improvement allowance in the amount of the cost of any leasehold improvements, not to exceed approximately $0.3 million upon the Company providing the necessary documentation evidencing the costs of the allowable leasehold improvements.

On November 14, 2018, the Company entered into an office building lease pursuant to which the Company will lease 1 property containing 3 existing office buildings, comprising approximately 160,000 rentable square feet of space, located in Aliso Viejo, California (Aliso Facility) which was accounted for as a finance lease. The term of the Aliso Facility commenced on April 1, 2019 and continues for thirteen years. The agreement contains an option to extend the lease for 2 additional five year periods at market rates. The Company intends to relocate its corporate administrative headquarters, along with certain laboratory, research and development and warehouse space, to the Aliso Facility. The Company currently intends to maintain its manufacturing facilities at its San Clemente location for the foreseeable future.

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The Company’s remaining U.S.-based and foreign subsidiaries’ leased office space totals less than 14,000 square feet.

The following table presents the lease balances within the condensed consolidated balance sheets:


Leases		September 30,
(in thousands)	Classification	2019
Assets
Operating	Operating lease right-of-use asset	$	12,146
Finance	Finance lease right-of-use asset		53,343
Total lease assets		$	65,489
Liabilities
Current
Operating	Accrued liabilities	$	1,561
Finance	Accrued liabilities		387
Noncurrent
Operating	Operating lease liability		11,406
Finance	Finance lease liability		68,851
Total lease liabilities		$	82,205

Note: As the implicit rates in the Company’s leases are not readily available, the incremental borrowing rate was determined based on the information available at commencement date in determining the present value of lease payments.

For the three and nine month periods ended September 30, 2019, the components of operating and finance lease expenses were as follows:


		Three Months Ended			Nine Months Ended
Lease Cost		September 30,			September 30,
(in thousands)	Classification	2019			2019
Fixed operating lease cost	Selling, general and administrative expenses	$	596	^(a)	$	1,770	^(a)

Finance lease cost	Amortization of right-of-use asset included in Selling, General and Administrative Expenses	$	593		$	1,185
Finance lease cost	Interest on lease liability	$	1,028		$	2,041

(a)	Includes short-term leases, which are immaterial.

The following table presents the maturity of the Company’s operating and finance lease liabilities as of September 30, 2019:


Maturity of Lease Liabilities	Operating		Finance
(in thousands)	Leases ^(a)		Leases ^(b)
Remainder of 2019	$	548	$	—
2020		1,973		1,547
2021		1,758		4,744
2022		1,666		4,887
2023		1,986		5,033
Thereafter		8,313		123,546
Total lease payments	$	16,244	$	139,757
Less: imputed interest		3,277		70,519
Total lease liabilities	$	12,967	$	69,238

(a)	Operating lease payments include $12.0 million related to options to extend lease terms that are reasonably certain of being exercised.

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(b)	Finance lease payments include $75.8 million related to options to extend lease terms that are reasonably certain of being exercised.

The weighted-average remaining lease term and weighted-average discount rate related to the Company’s operating and finance leases as of September 30, 2019 were:


Lease Term and Discount Rate	2019
Weighted-average remaining lease term (years)
Operating leases	7.8
Finance leases	22.5
Weighted-average discount rate
Operating leases	5.5	%
Finance leases	6.0	%

Supplemental cash flow information related to the Company’s operating and finance leases was as follows:


	Three Months Ended		Nine Months Ended
Other Information	September 30,		September 30,
(in thousands)	2019		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	540	$	1,480
Right-of-use asset obtained in exchange for lease obligations:
Operating lease	$	194	$	13,366
Finance lease		—		54,528

Note 6. Intangible Assets

GMP Vision Solutions intangible asset

In January 2007, the Company entered into an agreement (the Original GMP Agreement) with GMP Vision Solutions, Inc. (GMP) to acquire certain IPR&D in exchange for periodic royalty payments equal to a single-digit percentage of revenues received for royalty-bearing products and periodic royalty payments at a higher royalty rate applied to all amounts received in connection with the grant of licenses or sub-licenses of the related intellectual property.

In November 2013, the Company entered into an amended agreement with GMP in which remaining royalties payable to GMP (the Buyout Agreement) were canceled in exchange for the issuance of $17.5 million in promissory notes payable to GMP and a party related to GMP. The Company concluded that the $17.5 million transaction represented the purchase of an intangible asset. The Company estimated a useful life of five years over which the intangible asset was amortized to cost of sales in the accompanying statements of operations, which amortization period was determined after consideration of the projected outgoing royalty payment stream had the Buyout Agreement not occurred, and the remaining life of the patents obtained in the Original GMP Agreement. After determining that the pattern of future cash flows associated with this intangible asset could not be reliably estimated with a high level of precision, the Company concluded that the intangible asset would be amortized on a straight-line basis over the estimated useful life.

The Company recorded amortization expense of $0.9 million and $2.6 million related to this intangible asset in cost of sales for the three and nine months ended September 30, 2018, respectively and the intangible asset was fully amortized as of November 2018.

Note 7. Revenue from Contracts with Customers

The Company’s net sales are generated primarily from sales of iStent products to customers. Customers are primarily comprised of ambulatory surgery centers and hospitals, with distributors being used in certain international locations where the Company currently does not have a direct commercial presence.

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Disaggregation of revenue

The Company’s disaggregation of revenue is consistent with its operating segments disclosed in Note 11, Business Segment Information, and all of the Company’s net sales are considered revenue from contracts with customers.

Contract balances

Amounts are recorded as accounts receivable when the Company’s right to consideration becomes unconditional. As payment terms on invoiced amounts are typically 30 days, the Company does not consider any significant financing components in customer contracts given the expected time between transfer of the promised products and the payment of the associated consideration is less than one year. As of September 30, 2019 and December 31, 2018, all amounts included in accounts receivable, net on the condensed consolidated balance sheets are related to contracts with customers.

The Company does not have any contract assets given that the Company does not have any unbilled receivables and sales commissions are expensed within selling, general and administrative expenses within the condensed consolidated statement of operations when incurred as any incremental cost of obtaining contracts with customers would have an amortization period of less than one year.

Contract liabilities reflect consideration received from customers’ purchases allocated to the Company’s performance obligation to issue a rebate to customers who may be eligible for a rebate at the conclusion of their contract term. This performance obligation is transferred over time and the Company’s method of measuring progress is the output method, whereby the progress is measured by the estimated rebate earned to date over the total rebate estimated to be earned over the contract period. The Company’s rebate allowance is included in accrued liabilities in the condensed consolidated balance sheets and estimated rebates accrued were not material during the periods presented.

During the three and nine months ended September 30, 2019 and September 30, 2018, the Company did not recognize any revenue related to changes in transaction prices regarding its contracts with customers and did not recognize any material changes in revenue related to amounts included in contract liabilities at the beginning of the period.

Note 8. Stock-Based Compensation

The Company has 4 stock-based compensation plans (collectively, the Stock Plans)—the 2001 Stock Option Plan (the 2001 Stock Plan), the 2011 Stock Plan (the 2011 Stock Plan), the 2015 Omnibus Incentive Compensation Plan (the 2015 Stock Plan) and the ESPP. The 2015 Stock Plan permits grants of RSU awards.

The purpose of these plans is to provide incentives to employees, directors and nonemployee consultants. The Company no longer grants any awards under the 2001 Stock Plan or the 2011 Stock Plan. The maximum term of any stock options granted under the Stock Plans is 10 years. For employees and nonemployees, stock options generally vest 25% on the first anniversary of the original vesting date, with the balance vesting monthly or annually over the remaining three years. Stock options are granted at exercise prices at least equal to the fair value of the underlying stock at the date of the grant. For employees and nonemployees, generally, RSU awards vest 25% on each of the first, second, third and fourth anniversaries of the grant date and in certain cases, vest one year after grant date.

In 2019, the Compensation Committee approved the grant of performance-based equity awards (PBEAs) to the Company’s named executive officers and certain other employees pursuant to the 2015 Stock Plan. These PBEAs will only vest upon the Compensation Committee’s confirmation of the satisfaction of a pre-determined Company operational goal. The goal must be reached within three years of the grant date or the PBEA grants will lapse and be forfeited for no consideration.

The ESPP permits eligible employees to purchase shares of the Company’s common stock, using contributions via payroll deductions of up to 15% of their earnings, at a price per share equal to 85% of the lower of the stock’s fair market value on the offering date or purchase date. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

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Stock Options

The following table summarizes stock option activity under the 2001 Stock Plan, 2011 Stock Plan and 2015 Stock Plan during the nine months ended September 30, 2019 (in thousands except option exercise price):



				Weighted-
	Number of			Average
	Shares		Weighted-	Remaining
	Underlying	Average		Contractual		Aggregate
	Options	Exercise Price		Life (in years)		Intrinsic Value
Outstanding at December 31, 2018	6,307	$	23.69	6.7	$	204,896
Granted	186		68.10
Exercised	(583)		24.08		$	27,515
Canceled/forfeited/expired	(13)		38.57
Outstanding at September 30, 2019	5,897	$	25.04	6.2	$	222,005
Vested and expected to vest at September 30, 2019	5,834	$	24.85	6.1	$	220,714
Exercisable at September 30, 2019	4,352	$	19.79	5.5	$	185,936

Intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value of the common stock for the options that had exercise prices that were lower than the fair value per share of the common stock on the date of exercise.

The weighted average estimated grant date fair value per share of stock options granted during the three months ended September 30, 2019 was $30.71. There were not any stock options granted during the three months ended September 30, 2018. The weighted average estimated grant date fair value per share of stock options granted during the nine months ended September 30, 2019 and September 30, 2018 was $33.02 and $15.19, respectively.

The total fair value of stock options that vested during the three months ended September 30, 2019 and September 30, 2018 was $4.3 million and $4.7 million, respectively. The total fair value of stock options that vested during the nine months ended September 30, 2019 and September 30, 2018 was $15.3 million and $20.4 million, respectively.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model applying the assumptions noted in the following table. The weighted average assumptions used to estimate the fair value of options granted to employees and non-employees were as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Risk-free interest rate	1.61	%	**	%	2.17	%	2.67	%
Expected dividend yield	0.00	%	**	%	0.00	%	0.0	%
Expected volatility	47.0	%	**	%	46.8	%	44.9	%
Expected term (in years)	6.01		**		6.01		6.10

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**There were 0 stock options granted in the period.

Restricted Stock Units

The following table summarizes the activity of unvested RSUs (including PBEAs) under the Stock Plans during the nine months ended September 30, 2019:


			Weighted-
	Number of		average
	shares		grant date
	(in thousands)		fair value
Unvested at December 31, 2018	532	$	35.17
Granted	301		70.42
Vested	(210)		34.93
Canceled/forfeited	(17)		42.14
Unvested at September 30, 2019	606	$	52.39

The total fair value of RSUs made to employees and nonemployees is equal to the closing market price of the Company’s common stock on the grant date. The total fair value of RSUs that vested during the three and nine months ended September 30, 2019 was $1.4 million and $7.3 million, respectively. The total fair value of RSUs that vested during the three and nine months ended September 30, 2018 was $0.1 million and $1.2 million, respectively.

All share-based compensation arrangements

The following table summarizes the allocation of stock-based compensation related to stock options and RSUs in the accompanying condensed consolidated statements of operations (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Cost of sales	$	259	$	175	$	752	$	526
Selling, general and administrative		6,727		5,538		18,555		14,418
Research and development		1,561		1,460		4,616		4,092
Total	$	8,547	$	7,173	$	23,923	$	19,036

At September 30, 2019, the total unamortized stock-based compensation expense was approximately $54.4 million. Of the approximately $54.4 million in unamortized stock-based compensation expense, $28.9 million was attributable to stock options and is to be recognized over the stock options’ remaining vesting terms of approximately 4.0 years (2.1 years on a weighted average basis). The remaining $25.5 million was attributable to RSUs and is to be recognized over the restricted stock units’ vesting terms of approximately 4.0 years (1.6 years on a weighted-average basis).

The total stock-based compensation cost capitalized in inventory was not material for the three and nine month periods ended September 30, 2019 and September 30, 2018.

Note 9. Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate. For the three and nine months ended September 30, 2019, the Company’s effective tax rate of (1.4)% and (1.8)%, respectively, was lower than the U.S. federal statutory rate primarily due to the generation of U.S. net operating loss carryforwards for which no benefit has been recognized due to the Company’s full valuation allowance, as well as state and foreign income taxes. The effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used to estimate the annual effective tax rate, including factors such as expected utilization of net operating loss carryforwards, changes in or the interpretation of tax laws in jurisdictions where the Company conducts business, the Company’s expansion into new states or foreign countries, and the amount of valuation allowances against deferred tax assets. For the three and nine months ended September 30, 2019, the Company recorded a provision for income taxes of $0.2 million and $0.4 million, respectively, which was primarily comprised of state and foreign income taxes. For the

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three and nine months ended September 30, 2018, the Company recorded a provision for income taxes of $37,000 and $53,000, respectively, which was primarily comprised of state income taxes.

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities, along with net operating loss and tax credit carryforwards. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. For the three and nine months ended September 30, 2019, the Company has established a valuation allowance for all deferred tax assets.

Additionally, the Company follows an accounting standard addressing the accounting for uncertainty in income taxes that prescribes rules for recognition, measurement and classification in the financial statements of tax positions taken or expected to be taken in a tax return. As of September 30, 2019 and December 31, 2018, the Company has gross unrecognized tax benefits of $13.8 million and $13.5 million, respectively.

Note 10. Commitments and Contingencies

Legal Proceedings

Patent Litigation

On April 14, 2018, the Company filed a patent infringement lawsuit against Ivantis, Inc. (Ivantis) in the U.S. District Court for the Central District of California, Southern Division (the Court), alleging that Ivantis’ Hydrus^® Microstent device infringes the Company’s U.S. Patent Nos. 6,626,858 and 9,827,143. In August 2018, Ivantis filed counterclaims alleging that the Company’s iStent inject infringes 3 patents which Ivantis acquired after the start of the litigation (Acquired Patents). On March 18, 2019, the Court granted the Company’s early motion for summary judgment, finding that the Company does not infringe the Acquired Patents. Fact discovery on the Company’s claims against Ivantis closed in September 2019, with trial scheduled to begin on or around July 28, 2020. Additionally, in May 2018, Ivantis filed Inter Partes Review (IPR) petitions with the Patent Trial and Appeal Board (PTAB) on the patents the Company has asserted in the litigation. The PTAB denied institution of the petitions in December 2018, but Ivantis filed 2 additional IPR petitions shortly thereafter. The PTAB denied institution of the second round of petitions in July 2019. In April 2019, Ivantis filed an additional IPR petition, which the PTAB also denied in October 2019.

Securities Litigation

On October 1, 2019, an alleged Avedro stockholder filed a lawsuit challenging the Merger. Such lawsuit, a putative class action complaint, is captioned Kent v. Avedro, Inc., et. al, 1:19-cv-01845-MN (the Kent complaint), and was filed by Michael Kent in the United States District Court for the District of Delaware. The Kent complaint names as defendants Avedro and each member of the Avedro board of directors, including former directors Dr. Gilbert H. Kliman and Thomas W. Burns, as well as Glaukos and Merger Sub. The Kent complaint alleges violations of Section 14(a) and 20(a) of the Exchange Act, and Rule 14a-9. The plaintiff in this action generally alleges that the Registration Statement omits material information with respect to the Merger, which renders such Registration Statement false and misleading. The complaint seeks preliminary and permanent injunction of the Merger and, if the Merger is consummated, rescission or rescissory damages. The complaint also seeks the dissemination of a registration statement that discloses certain information requested by the plaintiff. In addition, the complaint seeks attorneys' and experts' fees.

NaN additional lawsuits challenging the Merger have also been filed by alleged Avedro stockholders. Those additional lawsuits allege similar causes of action, based on similar allegations, and seek similar relief to the Kent complaint. NaN of those lawsuits, Payne v. Avedro, Inc. et. al, 1:19-cv-02019-CFC in the United States District Court for the District of Delaware and Bushansky v. Avedro, Inc. et. al, 1:19-cv-10015-LAP in the United States District Court for the Southern District of New York, name as defendants Avedro and each member of the Avedro board of directors but do not name former Avedro directors, Glaukos or Merger Sub as defendants. The final lawsuit, Thompson v. Avedro, Inc., et. al, 1:19-cv-02075-UNA in the United States District Court for the Southern District of Delaware names the same defendants as the Kent complaint. The Company believes that all 4 of these complaints are without merit.

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With respect to each of the matters described above in this Legal Proceedings section, the Company is currently unable to predict the ultimate outcome of these matters or reasonably estimate a possible loss or range of loss, and thus, no amounts have been accrued in the condensed consolidated financial statements.

Secured letter of credit

The Company had a bank issue a letter of credit in the amount of $8.8 million that is related to its Aliso Facility. The letter of credit is secured with an amount of cash held in a restricted account of approximately $8.9 million as of September 30, 2019. Beginning as of the first day of the thirty-seventh month of the lease term, and on each twelve month anniversary thereafter, the letter of credit will be reduced by 20% until the letter of credit amount has been reduced to $2.0 million.

Regents of the University of California

On December 30, 2014, the Company executed an agreement (the UC Agreement) with the Regents of the University of California (the University) to correct inventorship in connection with a group of the Company’s U.S. patents (the Patent Rights) and to obtain from the University a covenant that it did not and would not claim any right or title to the Patent Rights and will not challenge or assist any others in challenging the Patent Rights. In connection with the UC Agreement, Glaukos agreed to pay to the University a low single-digit percentage of worldwide net sales of certain current and future products, including the Company’s iStent products, with a required minimum annual payment of $0.5 million. This ongoing product payment terminates on the date that the last of the Patent Rights expires, which is currently expected to be in 2022. For the three months ended September 30, 2019 and September 30, 2018, the Company recorded approximately $1.5 million and $1.1 million, respectively, in cost of sales in connection with this product payment. For the nine months ended September 30, 2019 and September 30, 2018, the Company recorded approximately $4.2 million and $3.2 million, respectively, in cost of sales in connection with this product payment obligation.

Executive Deferred Compensation Plan

Pursuant to the Company’s deferred compensation plan (the Deferred Compensation Plan), eligible senior level employees are permitted to make elective deferrals of compensation to which he or she will become entitled in the future. The Company has also established a rabbi trust that serves as an investment to shadow the Deferred Compensation Plan liability. The investments of the rabbi trust consist of company-owned life insurance policies (COLIs). The fair value of the Deferred Compensation Plan liability, included in other liabilities on the condensed consolidated balance sheets, was approximately $3.2 million and $2.0 million as of September 30, 2019 and December, 31, 2018, respectively, and the cash surrender value of the COLIs, included in deposits and other assets on the condensed consolidated balance sheets, which reflects the underlying assets at fair value, was approximately $3.1 million and $1.9 million as of September 30, 2019 and December 31, 2018, respectively.

Global enterprise systems implementation

Beginning in the first quarter of 2019, the Company is implementing new enterprise systems and other technology optimizations and facilities infrastructure globally. As of September 30, 2019, the Company has firm purchase commitments related to software costs and these systems implementations of approximately $7.2 million.

Note 11. Business Segment Information

Operating segments are identified as components of an enterprise about which segment discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. The Company operates its business on the basis of 1 reportable segment—ophthalmic medical devices.


	Three months ended				Nine months ended
	September 30,				September 30,
Geographic Net Sales Information (in thousands)	2019		2018		2019		2018
United States	$	47,588	$	36,413	$	139,893	$	106,337
International		10,921		7,495		31,242		20,865
Total net sales	$	58,509	$	43,908	$	171,135	$	127,202

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Item 2. Management’s Discussion and Analysis of 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 our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (SEC) on February 28, 2019.

This report contains forward-looking statements that are based on management's beliefs and assumptions and on information currently available to management. In some cases, you can identify forward-looking statements by the following words: "may," "will," "could," "would," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue," "ongoing" or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. You should refer to the "Risk Factors" section of this report for a discussion of important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

We are an ophthalmic medical technology and pharmaceutical company focused on the development and commercialization of novel therapies designed to treat glaucoma, corneal disorders and retinal diseases. We initially developed Micro-Invasive Glaucoma Surgery (MIGS) to address the shortcomings of traditional glaucoma treatment options. MIGS procedures involve the insertion of a micro-scale device or drug delivery system from within the eye’s anterior chamber through a small corneal incision. Our MIGS devices are designed to reduce intraocular pressure (IOP) by restoring the natural outflow pathways for aqueous humor. Our MIGS drug delivery systems are designed to reduce IOP by continuously eluting a glaucoma drug from within the eye, potentially providing sustained pharmaceutical therapy for extended periods of time. We intend to leverage our capabilities to build a portfolio of micro-scale surgical and pharmaceutical therapies in corneal health and retinal disease as well.

Our iStent, a trabecular micro-bypass stent that is designed to reduce intraocular pressure by restoring the natural physiologic pathways for aqueous humor, was the first commercially available MIGS treatment solution. Our next generation iStent inject, includes two stents pre-loaded in an auto-injection inserter that are also designed to lower intraocular pressure. The iStent and iStent inject are approved by the United States Food and Drug Administration (FDA) for insertion in combination with cataract surgery and are currently reimbursed by Medicare and all major national private payors. The iStent and iStent inject are also commercially available in select markets outside the United States (U.S.). In these non-U.S. markets, they are approved for use in conjunction with cataract surgery or as a standalone procedure, even though reimbursement may not always be available for all such procedures.

We are also developing the iStent Infinite and the iStent SA. The iStent Infinite, which includes three stents pre-loaded in an auto-injection inserter and is intended to lower IOP in refractory glaucoma patients in a standalone procedure, is currently being evaluated in a U.S. investigational device exemption (IDE) study, which completed enrollment in 2019. Similar to the iStent inject, the iStent SA is a two-stent product that uses a different auto injection inserter and is designed for use in a standalone procedure. Following an initial evaluation of the data from the U.S. pivotal trial, and based upon an assessment of benefits to potential risks, changing market dynamics and prioritization of resources, we have decided not to pursue FDA approval of the iStent Supra at this time.

We are also pursuing regulatory approval of our first sustained pharmaceutical therapy using our iDose drug delivery system. A U.S. investigational new drug (IND) Phase II study of our initial iDose platform product, iDose Travoprost, was completed in 2017 and U.S. Phase III clinical trials for this product commenced in 2018.

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We are also conducting research and development (R&D) activities to explore other potential drugs that may benefit from the use of the iDose drug delivery system. In addition, other proprietary R&D efforts are underway on early-stage technologies, including, without limitation, an IOP sensor system that is designed to capture and store a glaucoma patient’s short-interval IOP measurements over extended periods of time, and transmit data to the patient’s physician in order to enhance treatment decisions.

Our net sales increased to $58.5 million for the three months ended September 30, 2019 from $43.9 million for the three months ended September 30, 2018, and net sales increased to $171.1 million for the nine months ended September 30, 2019 from $127.2 million for the nine months ended September 30, 2018. We incurred net losses in each of the three month periods ended September 30, 2019 and September 30, 2018 of $13.5 million and $6.6 million, respectively, and incurred net losses in each of the nine month periods ended September 30, 2019 and September 30, 2018 of $21.2 million and $14.7 million, respectively.

As of September 30, 2019 and December 31, 2018, we had an accumulated deficit of $226.3 million and $205.1 million, respectively.

We have made and expect to continue to make significant investments in our global sales force, marketing programs, research and development activities, clinical studies, and general and administrative infrastructure. FDA-approved IDE studies and new product development programs in our industry are expensive. We have incurred a significant increase in administrative costs since we began operating as a public company. In addition, we are party to a long-term lease at a new facility in Aliso Viejo, California and have firm purchase commitments to implement global enterprise systems that began in the first quarter of 2019. Furthermore, our proposed acquisition of Avedro Inc. (Avedro), which is expected to close in the fourth quarter of 2019, may require significant ongoing expenses. Accordingly, although we achieved profitability in 2016 and certain periods of 2017 and 2018, we incurred a net loss for 2018 and for the nine months ended 2019, and there can be no assurance that we will be profitable in the future.

Recent Developments

Proposed Acquisition of Avedro, Inc.

On August 7, 2019, we entered into an Agreement and Plan of Merger by and among Glaukos, Atlantic Merger Sub, Inc. (Merger Sub) and Avedro, pursuant to which Merger Sub will merge with and into Avedro, with Avedro continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the Merger). The transaction is subject to certain closing conditions, including but not limited to, the adoption of the Agreement and Plan of Merger by holders of a majority of the outstanding common stock of Avedro entitled to vote, which is expected to occur on November 19, 2019. The closing of the Merger was also subject to the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act); however, early termination under the HSR Act was granted on August 28, 2019. If all remaining conditions are satisfied, upon the closing of the Merger, all issued and outstanding shares of Avedro common stock will be automatically cancelled and converted into the right to receive a number of shares of Glaukos common stock equal to the product of the number of shares of Avedro common stock multiplied by 0.365. We filed a Registration Statement on Form S-4 with the SEC on September 17, 2019 (the Registration Statement) to register the issuance of shares of our common stock to Avedro stockholders upon closing of the Merger, which was declared effective by the SEC on October 17, 2019. The Merger is expected to close in the fourth quarter of 2019. Following the transaction, our stockholders are expected to own approximately 85% of the combined company, with the former Avedro stockholders expected to own the remaining 15%, on a fully diluted basis. Avedro provides several corneal strengthening solutions, including Photrexa, a bio-activated pharmaceutical therapy for the corneal cross-linking treatment of keratoconus. Through 2018, over 400,000 procedures have been performed globally with Avedro’s products, including more than 18,000 procedures performed in the United States alone.

Licensing Arrangement with Intratus, Inc.

On July 22, 2019, we entered into a global licensing agreement with Intratus, Inc. (Intratus) for $1.5 million in cash, plus future performance-based consideration upon achievement of certain development, regulatory approvals and commercial milestones and royalties on commercial sales, pursuant to which we obtained an exclusive, royalty-bearing license to research, develop, manufacture and commercialize Intratus’ patented, non-invasive drug delivery platform designed for use in the treatment of dry eye disease, glaucoma and other corneal disorders such as blepharitis, conjunctivitis and related conditions.

The $1.5 million payment was immediately expensed to in-process research and development (IPR&D) as

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management determined there were no alternative future uses for the technology acquired.

Acquisition of DOSE Medical Corporation

On June 19, 2019, we entered into a definitive agreement and plan of merger to acquire DOSE Medical Corporation (DOSE) for $2.5 million in cash, plus potential future performance-based consideration upon achievement of certain regulatory approvals and commercial milestones and royalties on commercial sales (the DOSE Merger). If certain DOSE products receive FDA approval within ten years following the closing of the DOSE Merger, we will pay the DOSE shareholders amounts between $5.0 million and $22.5 million, depending on the type of DOSE product approved. We will pay additional performance-based payments to DOSE shareholders if within ten years of closing of the DOSE Merger, such DOSE products receive approval from the EU European Medicines Agency, in which case we will pay the DOSE shareholders either $1.25 million and/or $2.5 million, depending on the type of DOSE product approved. Following FDA approval of such DOSE products, we will pay the DOSE shareholders quarterly royalty payments equal to 5% of net sales of such DOSE products for a period of ten years. We will also pay the DOSE shareholders additional performance-based payments of $7.5 million and $20.0 million upon the achievement of certain net sales milestones with respect to such DOSE products. Finally, under the terms of the DOSE Merger, we may elect to buyout the additional milestone and royalty payments described above by paying former DOSE shareholders between $10.0 and $55.0 million, depending on the type of DOSE product involved. DOSE is currently conducting R&D on multiple micro-invasive, bioerodible, sustained-release drug delivery platforms designed to be used in the treatment of various retinal diseases, including age-related macular degeneration and diabetic macular edema.

DOSE was spun out from us in 2010 and had operated as a stand-alone entity since that time. In 2015, we acquired the iDose product line and related assets from DOSE and upon the acquisition, we derecognized DOSE as a consolidated variable interest entity in the financial statements, and in 2017 we acquired DOSE’s IOP sensor system. Thomas W. Burns, our President, Chief Executive and board of directors member, and William J. Link, Ph.D., Chairman of our board of directors, served on the board of directors of DOSE and certain members of our management and board of directors held an equity interest in DOSE prior to being acquired.

Distribution Agreement with Santen, Inc.

In April 2019, we announced that we had entered into a multi-year distribution agreement with Santen Inc., the U.S. subsidiary of Santen Pharmaceutical Co., Ltd. (Santen). Pursuant to this distribution agreement, upon potential FDA approval, we would become the exclusive U.S. distributor of the MicroShunt, which is currently being studied in an FDA pivotal study. Following anticipated completion of the premarket approval application (PMA) submission in 2019, Santen intends to seek FDA PMA approval and, if approved, U.S. launch of the product is targeted within calendar year 2020. The MicroShunt is a minimally-invasive ab-externo device being developed for treatment of primary open-angle glaucoma where IOP is uncontrolled with maximum tolerated medical therapy or where progression of the disease warrants surgery.

The transactions described above are intended to expand our portfolio of pipeline products beyond the treatment of glaucoma to include pharmaceutical therapies for the treatment of retinal diseases and corneal disorders.

Components of results of operations

Net sales

We currently operate in one reportable segment, ophthalmic medical devices, and substantially all of our net sales are derived from sales of our iStent products, net of customer returns and allowances. Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services.

We sell our products through a direct sales organization in the United States, and outside the United States we sell our products primarily through direct sales subsidiaries in sixteen countries and through independent distributors in certain countries in which we do not have a direct presence. The primary end-user customers for our products are hospitals and surgery centers.

We anticipate our net sales will increase as we expand our global sales and marketing infrastructure and continue to increase awareness of our products by expanding our sales base and increasing our marketing efforts. We also expect that our net sales within a fiscal year may be impacted seasonally and reflect seasonality patterns generally consistent with U.S. cataract procedure volumes, which are typically softer in the first quarter and stronger in the fourth

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quarter of a given year. However, until recently, our iStent was the only MIGS device approved for sale in the United States by the FDA. Thus, for several years we had commercialized the iStent in the United States without any direct MIGS competitors. Other MIGS devices have now become available in the United States and globally, including our iStent inject, or are in development by third parties that have entered or could enter the market and which may affect adoption of or demand for our products. These MIGS products or other products that may be developed and receive regulatory approval, could achieve greater commercial acceptance, demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our iStent, iStent inject or our other pipeline products under development, which may reduce demand for our primary products, the iStent and iStent inject as well as for our products in development.

Cost of sales

Cost of sales reflects the aggregate costs to manufacture our products and includes raw material costs, labor costs, manufacturing overhead expenses and the effect of changes in the balance of reserves for excess and obsolete inventory. We manufacture our iStent products at our current headquarters in San Clemente, California using components manufactured by third parties. Due to the relatively low production volumes of our iStent products compared to our potential capacity for those products, a significant portion of our per-unit costs is comprised of manufacturing overhead expenses. These expenses include quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management.

Beginning in late 2013, cost of sales had included amortization of the $17.5 million intangible asset we recognized in connection with our royalty buyout agreement with GMP Vision Solutions, Inc. in November 2013. Amortization expense was $0.9 million and $2.6 million during the three and nine months ended September 30, 2018, respectively, and the intangible asset was fully amortized as of November 2018.

Beginning in 2015, cost of sales includes a charge equal to a low single-digit percentage of worldwide net sales of certain current and future products, including our iStent products, with a required minimum annual payment of $0.5 million, which amount became payable to the Regents of the University of California (the University) in connection with our December 2014 agreement with the University (the UC Agreement) related to a group of our U.S. patents (the Patent Rights). For the three months ended September 30, 2019 and September 30, 2018, we recorded approximately $1.5 million and $1.1 million, respectively, in cost of sales in connection with this product payment. For the nine months ended September 30, 2019 and September 30, 2018, we recorded approximately $4.2 million and $3.2 million, respectively, in cost of sales in connection with this product payment obligation. This ongoing product payment obligation will terminate on the date the last of the Patent Rights expires, which is currently expected to be in 2022.

Under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), the 2.3% federal medical device excise tax on U.S. sales of medical devices manufactured by us was suspended from January 1, 2016 to December 31, 2017, and, pursuant to HR 195 passed on January 22, 2018, was further suspended through December 31, 2019.

Our future gross profit as a percentage of net sales, or gross margin, will be impacted by numerous factors including commencement of sales of products in our pipeline, or any other future products, which may have higher product costs. Our gross margin will also be affected by manufacturing inefficiencies that we may experience as we attempt to manufacture our products on a larger scale, manufacture new products and change our manufacturing capacity or output. Additionally, our gross margin will continue to be affected by the aforementioned expense related to the UC Agreement.

Selling, general and administrative

Our selling, general and administrative (SG&A) expenses primarily consist of personnel-related expenses, including salaries, sales commissions, bonuses, fringe benefits and stock-based compensation for our executive, financial, marketing, sales, and administrative functions. Other significant SG&A expenses include marketing programs; advertising; post-approval clinical studies; conferences and congresses; travel expenses; costs associated with obtaining and maintaining our patent portfolio; professional fees for accounting, auditing, consulting and legal services; costs to implement our global enterprise systems; and allocated overhead expenses.

We expect SG&A expenses to continue to grow as we increase our global sales and marketing infrastructure, our clinical education and general administration infrastructure in the United States. We also expect other nonemployee-related costs, including sales and marketing program activities for new products, outside services and accounting and general legal costs to increase as our overall operations grow. The timing of these increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products, as well as on the timing of any new product launches and other potential business and operational activities.

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Research and development

Our R&D activities primarily consist of new product development projects, pre-clinical studies, IDE studies, and other clinical trials. Our R&D expenses primarily consist of personnel-related expenses, including salaries, fringe benefits and stock-based compensation for our R&D employees; research materials; supplies and services; and the costs of conducting clinical studies, which include payments to investigational sites and investigators, clinical research organizations, consultants, and other outside technical services and the costs of materials, supplies and travel. We expense R&D costs as incurred. We expect our R&D expenses to increase as we initiate and advance our development programs, including our expanding glaucoma, retinal disease, corneal health, pharmaceutical and IOP sensor development efforts, and clinical trials.

Completion dates and costs for our clinical development programs include seeking regulatory approvals and our research programs can vary significantly for each current and future product candidate and are difficult to predict. As a result, while we expect our R&D costs to continue to increase for the foreseeable future, we cannot estimate with any degree of certainty the costs we will incur in connection with the development of our product candidates. We anticipate we will make determinations as to which programs and product candidates to pursue and how much funding to direct to each program and product candidate on an ongoing basis in response to the scientific success of early research programs, results of ongoing and future clinical trials, as well as ongoing assessments as to each current or future product candidate’s commercial potential and our likelihood of obtaining necessary regulatory approvals.

In-process research and development

Our IPR&D expenses relate to payments made in connection with the previously disclosed acquisition of DOSE in which DOSE became a wholly-owned subsidiary of the Company and our global licensing arrangement with Intratus.

Non-operating (expense) income, net

Non-operating (expense) income, net primarily consists of interest expense associated with our finance lease for our Aliso Viejo, California facility, interest income derived from our short-term investments, and unrealized gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the U.S. dollar, primarily related to intercompany loans.

Income taxes

Our tax provision is comprised of U.S. state and foreign income taxes. We do not currently provide a tax benefit for losses which arise from our operations for financial reporting purposes. We placed a full valuation allowance against our net deferred tax assets as we believe it is not more likely than not that our net deferred tax assets will be realized. We have provided for the tax effects of uncertain tax positions in our tax provision.

Additionally, we follow an accounting standard addressing the accounting for uncertainty in income taxes that prescribes rules for recognition, measurement and classification in the financial statements of tax positions taken or expected to be taken in a tax return. As of September 30, 2019 and December 31, 2018, we have gross unrecognized tax benefits of $13.8 million and $13.5 million, respectively.

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Results of Operations

Comparison of Three Months Ended September 30, 2019 and September 30, 2018


	Three Months Ended
	September 30,				% Increase
(in thousands)	2019		2018		(decrease)
Statements of operations data:
Net sales	$	58,509	$	43,908	33	%
Cost of sales		7,703		6,011	28	%
Gross profit		50,806		37,897	34	%
Operating expenses:
Selling, general and administrative		44,443		31,632	41	%
Research and development		17,278		13,202	31	%
In-process research and development		1,500		-	NM
Total operating expenses		63,221		44,834	41	%
Loss from operations		(12,415)		(6,937)	79	%
Total non-operating (expense) income, net		(904)		353	NM
Provision for income taxes		187		37	NM
Net loss	$	(13,506)	$	(6,621)	104	%

NM = Not Meaningful

Net sales

Net sales for the three months ended September 30, 2019 and September 30, 2018 were $58.5 million and $43.9 million, respectively, reflecting an increase of $14.6 million or 33%. The increase in net sales resulted primarily from expansion of direct sales operations in our existing international markets, U.S. sales of our iStent inject and the withdrawal from the market of a competitive MIGS device in late August 2018. Net sales in the United States were $47.6 million and $36.4 million for the three months ended September 30, 2019 and September 30, 2018, respectively, increasing by 31%. International sales for the three months ended September 30, 2019 and September 30, 2018 were $10.9 million and $7.5 million, respectively, increasing by 46%. Net sales at our subsidiaries in Australia, France, Germany, Japan, and the United Kingdom accounted for the majority of the increase internationally.

Cost of sales

Cost of sales for the three months ended September 30, 2019 and September 30, 2018 were $7.7 million and $6.0 million, respectively, reflecting an increase of $1.7 million or 28%. Our gross margin was 87% for the three months ended September 30, 2019 and 86% for the three months ended September 30, 2018.

Selling, general and administrative expenses

SG&A expenses for the three months ended September 30, 2019 and September 30, 2018 were $44.4 million and $31.6 million, respectively, reflecting an increase of approximately $12.8 million or 41%. The increase in SG&A expenses consisted of approximately $2.4 million in additional compensation and related employee expense associated with our growing number of domestic and international employees, and increases in consulting and professional services of approximately $3.3 million related to our global enterprise systems implementation, $1.8 million in legal fees associated with our previously-disclosed patent litigation and $2.4 million in legal and financial advisory fees associated with our planned acquisition of Avedro, with the remaining increase comprised of other SG&A expenses such as training samples related to our recent U.S. launch of iStent inject, and non-employee related expenses incurred by our foreign subsidiaries.

Research and development expenses

R&D expenses for the three months ended September 30, 2019 and September 30, 2018 were $17.3 million and $13.2 million, respectively, reflecting an increase of $4.1 million or 31%. The increase in R&D expenses was primarily the result of approximately $0.8 million in additional compensation and related employee expenses as well as an overall increase of approximately $3.2 million in other core R&D and clinical expenses, including expenses associated with our iDose Travoprost Phase III clinical trials.

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In-process research and development expenses

IPR&D expenses for the three months ended September 30, 2019 were $1.5 million related to the upfront payment for our exclusive global licensing agreement with Intratus. There were no IPR&D expenses for the three months ended September 30, 2018.

Non-operating (expense) income, net

We had non-operating expense, net of $0.9 million and non-operating income, net of $0.4 million for the three months ended September 30, 2019 and September 30, 2018, respectively. The change from net non-operating income to net non-operating expense primarily relates to interest expense associated with the financing lease for our Aliso Viejo, California facility and recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates, partially offset by increases in interest income related to our short-term investments.

Provision for income taxes

Our effective tax rate for the third quarter of 2019 was (1.4)%. For the three months ended September 30, 2019 and September 30, 2018, we recorded a provision for income taxes of $0.2 million and $37,000, respectively, which were primarily comprised of state and foreign income taxes in both periods.

Comparison of Nine Months Ended September 30, 2019 and September 30, 2018


	Nine Months Ended
	September 30,				% Increase
(dollars in thousands)	2019		2018		(decrease)
Statements of operations data:
Net sales	$	171,135	$	127,202	35	%
Cost of sales		22,684		17,957	26	%
Gross profit		148,451		109,245	36	%
Operating expenses:
Selling, general and administrative		117,024		87,425	34	%
Research and development		48,277		36,719	31	%
In-process research and development		3,745		-	NM
Total operating expenses		169,046		124,144	36	%
Loss from operations		(20,595)		(14,899)	38	%
Total non-operating (expense) income, net		(181)		222	NM
Provision for income taxes		381		53	NM
Net loss	$	(21,157)	$	(14,730)	44	%

NM = Not Meaningful

Net sales

Net sales for the nine months ended September 30, 2019 and September 30, 2018 were $171.1 million and $127.2 million, respectively, reflecting an increase of $43.9 million or 35%. The increase in net sales resulted primarily from expansion of direct sales operations in our existing international markets, U.S. sales of our iStent inject and the withdrawal from the market of a competitive MIGS device in late August 2018. Net sales in the United States were $139.9 million and $106.3 million for the nine months ended September 30, 2019 and September 30, 2018, respectively, increasing by 32%. International sales for the nine months ended September 30, 2019 and September 30, 2018 were $31.2 million and $20.9 million, respectively, increasing by 50%. Net sales at our subsidiaries in Australia, France, Germany, Japan, and the United Kingdom accounted for the majority of the increase internationally.

Cost of sales

Cost of sales for the nine months ended September 30, 2019 and September 30, 2018 were $22.7 million and $18.0 million, respectively, reflecting an increase of approximately $4.7 million or 26%. Our gross margin was 87% for the nine months ended September 30, 2019 and 86% for the nine months ended September 30, 2018.

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Selling, general and administrative expenses

SG&A expenses for the nine months ended September 30, 2019 and September 30, 2018 were $117.0 million and $87.4 million, respectively, reflecting an increase of approximately $29.6 million or 34%. The increase in SG&A expenses consisted of approximately $7.8 million in additional compensation and related employee expense associated with our growing number of domestic and international employees and increases in consulting and professional services of approximately $7.3 million related to our global enterprise systems implementation, $3.7 million in legal fees associated with our previously-disclosed patent litigation and $2.4 million in legal and financial advisory fees associated with our planned acquisition of Avedro, with the remaining increase comprised of other SG&A expenses such as training samples related to our recent U.S. launch of iStent inject, and non-employee related expenses incurred by our foreign subsidiaries.

Research and development expenses

R&D expenses for the nine months ended September 30, 2019 and September 30, 2018 were $48.3 million and $36.7 million, respectively, reflecting an increase of $11.6 million or 31%. The increase in R&D expenses was primarily the result of approximately $2.7 million in additional compensation and related employee expenses as well as an overall increase of approximately $8.9 million in other core R&D and clinical expenses, including expenses associated with our iDose Travoprost Phase III clinical trials.

In-process research and development expenses

IPR&D expenses for the nine months ended September 30, 2019 were $3.7 million, comprised of $2.2 million related to the purchase of certain DOSE assets and $1.5 million related to the upfront payment for our exclusive global licensing agreement with Intratus. There were no IPR&D expenses for the nine months ended September 30, 2018.

Non-operating (expense) income, net

We had non-operating expense, net of $0.2 million and non-operating income, net of $0.2 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. The change from net non-operating income to net non-operating expense primarily relates to interest expense associated with the financing lease for our Aliso Viejo, California facility and recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates, partially offset by increases in interest income related to our short-term investments.

Provision for income taxes

Our effective tax rate for the nine months ended September 30, 2019 was (1.8)%. For the nine months ended September 30, 2019 and September 30, 2018, we recorded a provision for income taxes of $0.4 million and $53,000, respectively, which were primarily comprised of state and foreign income taxes in both periods.

Liquidity and Capital Resources

For the nine months ended September 30, 2019, we incurred a net loss of $21.2 million; however, we generated cash from operations of $3.8 million. As of September 30, 2019, we had an accumulated deficit of approximately $226.3 million. We have funded our operations to date from the sale of equity securities, the issuance of notes payable, cash from exercises of stock options and warrants to purchase equity securities and cash generated from operations. We have made and expect to continue to make significant investments in our global sales force, marketing programs, research and development activities, clinical studies and general and administrative infrastructure. FDA-approved IDE studies and new product development programs in our industry are expensive. We have incurred a significant increase in administrative costs since we began operating as a public company. In addition, we are party to a long-term lease at a new facility in Aliso Viejo, California, have firm purchase commitments to implement global enterprise systems that began in the first quarter of 2019 and our proposed acquisition of Avedro, which is expected to close in the fourth quarter of 2019, may require significant ongoing expenses. Accordingly, although we were profitable in 2016 and certain periods in 2017 and 2018, and have generated cash from commercial operations in those years, we incurred a net loss in the year ended December 31, 2018 and the three and nine months ended September 30, 2019 and there can be no assurance that we will continue to be profitable or continue to generate cash from operations.

At September 30, 2019, we had $161.8 million in cash, cash equivalents, restricted cash and short-term investments. We plan to fund our operations and capital funding needs using existing cash and investments and cash

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generated from commercial operations, and we may seek to obtain additional financing in the future through debt or equity financings. There can be no assurance that we will be able to obtain additional financing on terms acceptable to us, or at all. We believe that our available cash, cash equivalents, investment balances and interest we earn on these balances and cash generated from commercial operations will be sufficient to fund our operations and satisfy our liquidity requirements for at least the next 12 months from the date our condensed consolidated financial statements for the three and nine months ended September 30, 2019 are made publicly available.

The following table summarizes our cash and cash equivalents, short-term investments and selected working capital data as of September 30, 2019 and December 31, 2018:


	September 30,		December 31,
	2019		2018
Cash and cash equivalents	$	39,534	$	29,821
Short-term investments		113,385		110,667
Accounts receivable, net		24,345		18,673
Accounts payable		3,501		6,286
Accrued liabilities		29,602		23,964
Working capital ⁽¹⁾		176,185		146,202

(1)	Working capital consists of total current assets less total current liabilities

Cash Flows

Our historical cash outflows have primarily been associated with cash used for operating activities such as the expansion of our sales, marketing and R&D activities; purchase of and growth in inventory and other working capital needs; the acquisition of intellectual property; and expenditures related to equipment and improvements used to increase our manufacturing capacity, to improve our manufacturing efficiency and for overall facility expansion.

The following table is a condensed summary of our cash flows for the periods indicated:


	Nine Months Ended
	September 30,
(in thousands)	2019		2018
Net cash provided by (used in):
Operating activities	$	3,822	$	1,736
Investing activities		(6,386)		(8,648)
Financing activities		12,391		19,602
Exchange rate changes		(8)		80
Net increase in cash, cash equivalents and restricted cash	$	9,819	$	12,770

At September 30, 2019, our cash and cash equivalents were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity.

Operating Activities

In the nine months ended September 30, 2019 and September 30, 2018 our operating activities generated $3.8 million and $1.7 million of net cash, respectively.

For the nine months ended September 30, 2019, net cash provided by operating activities reflected our net loss of $21.2 million, adjusted for non-cash items of $32.9 million, primarily consisting of stock-based compensation expense of $23.9 million, depreciation and amortization of $2.7 million and amortization of lease right-of-use assets of $2.4 million. This was partially offset by changes in operating assets and liabilities of $7.9 million, the majority of which resulted from increases in accounts receivable and prepaid expenses and other current assets.

For the nine months ended September 30, 2018, net cash provided by operating activities reflected our net loss of $14.7 million adjusted for non-cash items of $27.0 million, primarily consisting of stock-based compensation expense of $19.0 million and depreciation and amortization of $5.1 million. This was partially offset by changes in operating assets and liabilities of $10.5 million, the majority of which resulted from increases in accounts receivable, inventory and prepaid expenses and other current assets, and decreases in accounts payable and accrued liabilities.

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Investing activities

In the nine months ended September 30, 2019 and September 30, 2018, our investing activities used $6.4 million and $8.6 million of net cash, respectively.

For the nine months ended September 30, 2019, we used cash of approximately $64.7 million for purchases of short-term investments and received cash of approximately $61.9 million from sales and maturities of short-term investments.

For the nine months ended September 30, 2018, we used cash of approximately $70.1 million for purchases of short-term investments and received cash of approximately $64.2 million from sales and maturities of short-term investments.

Cash used for purchases of property and equipment was approximately $3.5 million and $2.7 million for the nine months ended September 30, 2019 and September 30, 2018, respectively.

We expect to increase our investment in property and equipment in the future as we expand our manufacturing capacity for current and new products, improve our manufacturing efficiency and for overall facility expansion, as previously discussed above.

Financing activities

In the nine months ended September 30, 2019 and September 30, 2018, our financing activities provided $12.4 million and $19.6 million of net cash, respectively.

For the nine months ended September 30, 2019, we received net cash proceeds of approximately $17.4 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $5.0 million for payment of employee taxes related to restricted stock unit vestings.

For the nine months ended September 30, 2018, we received net cash proceeds of approximately $19.9 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $0.3 million for payment of employee taxes related to restricted stock unit vestings.

Commitments

As of September 30, 2019, the Company had material commitments for capital expenditures of approximately $1.2 million and had material commitments related to our global enterprise systems implementation and software costs of approximately $7.2 million. We plan to fund these commitments with our cash and cash equivalents.

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements as defined in the rules and regulations of the Securities and Exchange Commission. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose. However, from time to time we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims including in connection with certain real estate leases, supply purchase agreements, and with directors and officers. The terms of such obligations vary by contract and in most instances a maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted, thus no liabilities have been recorded for these obligations on our balance sheets for any of the periods presented.

Critical accounting policies and significant estimates

Management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the condensed consolidated financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe

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to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions and such differences could be material to our financial position and results of operations.

Our critical accounting policies and significant estimates that involve a higher degree of judgment and complexity are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to our critical accounting policies and estimates as disclosed therein, with the exception of the Company’s adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASC 842). See the section entitled “Leases” within the Company’s Summary of Significant Accounting Policies and Note 5, Leases for further discussion of the Company’s adoption of ASC 842 and related disclosures.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our exposure to market risk since December 31, 2018. Refer to Item 7A “Quantitative and Qualitative Disclosures about “Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2018 for further detail.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange 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 recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting identified by management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during our third fiscal quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The information disclosed under “Legal Proceedings” in Note 10, Commitments and Contingencies is incorporated herein by reference.

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Item 1A. Risk Factors

The risks and uncertainties discussed below update, supersede and replace the risks and uncertainties previously disclosed in Part I, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, which was filed with the SEC on August 8, 2019. With the exception of risks relating to our planned acquisition of Avedro, Inc. and the new risk factor related to the exclusive forum provision in our Restated Certificate of Incorporation, we do not believe any of the changes constitute material changes from the risk factors previously disclosed in such prior Quarterly Report on Form 10-Q.

The risks discussed below are not the only ones facing our business but do represent those risks that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. Please read the cautionary notice regarding forward-looking statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Risks Related to Our Planned Acquisition of Avedro, Inc.

The failure to complete our planned acquisition of Avedro, Inc. (the Merger) in a timely manner or at all, may adversely affect our business and our stock price.

The Merger is expected to close in the fourth quarter of 2019. However, our and Avedro, Inc.’s (Avedro) obligations to consummate the Merger remain subject to the satisfaction or waiver of certain customary conditions, including, among others, (i) the adoption of the Agreement and Plan of Merger, dated as of August 7, 2019, by and among Avedro, Glaukos and Atlantic Merger Sub, Inc. (the Merger Agreement) by a majority of the shareholders of Avedro; (ii) the absence of (A) any temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction enjoining or otherwise prohibiting the consummation of the Merger or (B) any applicable law of a governmental authority of competent jurisdiction prohibiting or rendering illegal the consummation of the Merger; (iii) subject to certain qualifications, the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the Merger Agreement; and (iv) the absence of any material adverse effect on Avedro or our company since the date of the Merger Agreement that is continuing. The closing of the Merger was also subject to the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act); however, early termination under the HSR Act was granted on August 28, 2019. We cannot provide assurance that these or the other conditions to the completion of the Merger will be satisfied in a timely manner or at all. In addition, other factors may affect when and whether the Merger will occur. If the Merger is not completed, our share price could fall to the extent that our current price reflects an assumption that we will complete the Merger. Furthermore, if the Merger is not completed and the Merger Agreement is terminated, we may suffer other consequences that could adversely affect our business, results of operations and share price, including the following:

●

we have incurred and will continue to incur costs relating to the Merger (including significant legal and financial advisory fees) and many of these costs are payable by us whether or not the Merger is completed;

●

we could be required to reimburse Avedro for certain of its costs incurred in connection with the Merger and the Merger Agreement;

●

matters relating to the Merger (including integration planning) may require substantial commitments of time and resources by our management team, which could otherwise have been devoted to other opportunities that may have been beneficial to us;

●

we may be subject to additional legal proceedings related to the Merger or the failure to complete the Merger;

●

the failure to consummate the Merger may result in negative publicity and a negative impression of us in the investment community; and

●

any disruptions to our business resulting from the announcement and pendency of the Merger, including any adverse changes in our relationships with our customers, suppliers, collaboration partners and employees, may continue or intensify in the event the Merger is not consummated.

Uncertainty about the Merger may adversely affect our business and stock price, whether or not the Merger is completed.

We are subject to risks in connection with the announcement and pendency of the Merger, including the pendency and outcome of any legal proceedings against us, our directors and others relating to the Merger and the risks

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from possibly foregoing opportunities we might otherwise pursue absent the Merger. Furthermore, uncertainties about the Merger may cause our current and prospective employees to experience uncertainty about their future with us. These uncertainties may impair our ability to retain, recruit or motivate key management and other personnel.

In addition, in response to the announcement of the Merger, our existing or prospective customers, suppliers or collaboration partners may:

●

delay, defer or cease purchasing our products or providing goods or services to us;

●

delay or defer other decisions concerning us, or refuse to extend credit terms to us;

●

cease further joint development activities; or

●

otherwise seek to change the terms on which they do business with us.

While we are attempting to address these risks with our existing and prospective customers, suppliers or collaboration partners, they may be reluctant to purchase our products, supply us with goods and service or continue collaborations due to the potential uncertainty about the direction of our product offerings and the support and service of our products after we complete the Merger.

The Merger will involve substantial costs.

We have incurred and expect to continue to incur substantial costs and expenses relating directly to the Merger and the issuance of our common stock in connection with the Merger, including, fees and expenses payable to financial advisors, other professional fees and expenses, insurance premium costs, fees and costs relating to regulatory filings and notices, SEC filing fees, printing and mailing costs and other transaction-related costs, fees and expenses. If the Merger is not completed, we will have incurred substantial expenses for which no ultimate benefit will have been received.

We may fail to realize the benefits expected from the Merger, which could adversely affect our stock price.

The Merger, if completed, will be our largest acquisition to date. The anticipated benefits we expect from the Merger are, necessarily, based on projections and assumptions about the combined businesses of our company and Avedro, which may not materialize as expected or which may prove to be inaccurate. The value of our common stock following the completion of the Merger could be adversely affected if we are unable to realize the anticipated benefits from the Merger on a timely basis or at all. Achieving the benefits of the Merger will depend, in part, on our ability to integrate the business, operations and products of Avedro successfully and efficiently with our business. The challenges involved in this integration, which will be complex and time-consuming, include the following:

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difficulties entering new markets and integrating new technologies in which we have no or limited direct prior experience;

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successfully managing relationships with our combined supplier and customer base;

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coordinating and integrating independent research and development and engineering teams across technologies and product platforms to enhance product development while reducing costs;

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consolidating and integrating corporate, finance and administrative infrastructures and integrating and harmonizing business systems;

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coordinating sales and marketing efforts to effectively position our capabilities and the direction of product development;

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limitations prior to the completion of the Merger on the ability of management of our company and of Avedro to conduct planning regarding the integration of the two companies;

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the increased scale and complexity of our operations resulting from the Merger;

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retaining key employees of our company and Avedro;

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obligations that we will have to counterparties of Avedro that arise as a result of the change in control of Avedro; and

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minimizing the diversion of management attention from other important business objectives.

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If we do not successfully manage these issues and the other challenges inherent in integrating an acquired business of the size and complexity of Avedro, then we may not achieve the anticipated benefits of the Merger of Avedro and our revenue, expenses, operating results and financial condition could be materially adversely affected.

The acquisition of Avedro may result in significant charges or other liabilities that could adversely affect the financial results of the combined company.

The financial results of the combined company may be adversely affected by cash expenses and non-cash accounting charges incurred in connection with our integration of the business and operations of Avedro. The amount and timing of these possible charges are not yet known. Further, our failure to identify or accurately assess the magnitude of certain liabilities we are assuming in the Merger could result in unexpected litigation or regulatory exposure, unfavorable accounting charges, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on our business, operating results or financial condition. The price of our common stock following the Merger could decline to the extent the combined company’s financial results are materially affected by any of these events.

Lawsuits have been filed against Avedro, the Avedro board of directors, former Avedro directors, Glaukos and Merger Sub, and other lawsuits may be filed challenging the Merger. An adverse ruling in any such lawsuit may prevent the Merger from being completed.

As of November 5, 2019, four lawsuits have been filed by alleged Avedro stockholders challenging the Merger. The first lawsuit, a putative class action complaint, is captioned Kent v. Avedro, Inc., et. al, 1:19-cv-01845-MN (the Kent complaint), and was filed by Michael Kent in the United States District Court for the District of Delaware. The Kent complaint names as defendants Avedro and each member of the Avedro board of directors, including former directors Dr. Gilbert H. Kliman and Thomas W. Burns, as well as Glaukos and Merger Sub. The second lawsuit, Payne v. Avedro, Inc. et. al, 1:19-cv-02019-CFC (the Payne complaint), was filed by Robert Payne in the United States District Court for the District of Delaware and names as defendants Avedro and each member of the Avedro board of directors. The third lawsuit, Bushansky v. Avedro, Inc. et. al, 1:19-cv-10015-LAP (the Bushansky complaint), was filed by Stephen Bushansky in the United States District Court for the Southern District of New York and names as defendants Avedro and each member of the Avedro board of directors. The fourth lawsuit, Thompson v. Avedro, Inc., et. al, 1:19-cv-02075-UNA (the Thompson complaint), was filed by John Thompson in the United States District Court for the District of Delaware and names as defendants Avedro and each member of the Avedro board of directors, including former directors Dr. Gilbert H. Kliman and Thomas W. Burns, as well as Glaukos and Merger Sub.

The Kent, Payne, Bushansky, and Thompson complaints allege violations of Section 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiffs in these actions generally allege that the Registration Statement omits material information with respect to the Merger, which renders such Registration Statement false and misleading. The complaints seek preliminary and permanent injunction of the Merger and, if the Merger is consummated, rescission or rescissory damages. The complaints also seek the dissemination of a registration statement that discloses certain information requested by the plaintiffs. In addition, the complaints seek attorneys' and experts' fees.

The defendants believe that the complaints are without merit.

One of the conditions to completion of the Merger is the absence of any applicable law (including any order) being in effect that prohibits completion of the Merger. Accordingly, if a plaintiff is successful in obtaining an order prohibiting completion of the Merger, then such order may prevent the Merger from being completed, or from being completed within the expected timeframe.

Avedro and Glaukos may be targets of additional securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Merger from being completed.

Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements. Even if the lawsuits are without merit, defending against these claims could result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on Avedro's and Glaukos' respective liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Merger, then that injunction may delay or prevent the Merger from being completed, or from being completed within the expected timeframe, which may adversely affect Avedro's and Glaukos' respective business, financial position and results of operations.

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The issuance of shares of our common stock in connection with the Merger will dilute our shareholders’ ownership interest in the Company.

We will issue additional shares of our common stock to stockholders of Avedro such that after the consummation of the Merger, Avedro’s stockholders will own approximately 15% of our issued and outstanding shares of common stock on a fully diluted basis. This issuance of additional shares of our common stock will dilute your ownership interest in our Company, and you will have a reduced ownership and voting interest in Glaukos following the completion of the Merger.

Our future results will suffer if we do not effectively manage the expanded operations following the Merger.

Following the Merger, the size and scope of operations of our business will increase beyond the current size and scope of operations of our current business. In addition, we may continue to expand our size and operations through additional acquisitions or other strategic transactions. Our future success depends, in part, upon our ability to manage the expanded business, which may pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that we will be successful in managing such expanded business or that the expanded business will realize the expected economies of scale, synergies and other benefits currently anticipated from the Merger or anticipated from any additional acquisitions or strategic transactions.

Risks Related to Our Business

We have incurred significant losses since inception and there can be no guarantee that we reach sustained profitability.

Since the Company’s inception in July 1998, we have incurred significant operating losses. As of September 30, 2019, we had an accumulated deficit of approximately $226.3 million.

Losses have resulted principally from costs incurred in our clinical trial, research and development programs and from our general and administrative expenses. We have funded our operations to date from the sale of equity securities, the issuance of notes payable, cash from exercises of stock options and warrants to purchase equity securities and cash generated from commercial operations. We have devoted substantially all of our resources to the research and development of our products, the commercial launch of the iStent and iStent inject, the development of our proprietary sales network, and the assembly of a management team to build our business.

To implement our global business strategies we need to, among other things, further grow our global sales and marketing infrastructure to increase global market acceptance of our products and any other products that receive United States Food and Drug Administration (FDA) or equivalent foreign approval, fund ongoing research and development activities, expand our manufacturing capabilities, and obtain regulatory clearance or approval to commercialize our existing products in international markets or to commercialize those currently under development in the United States (U.S.) and internationally. As a result, we expect our expenses to increase significantly as we pursue these objectives. Our ability to reach sustained profitability is highly uncertain, especially given our limited commercial history selling our products globally and an increasingly competitive landscape, which makes forecasting our sales more difficult. In addition, we may experience transitory sales impacts related to the commercial launch of our iStent inject device, as customers deplete inventory in anticipation of the new product and as physicians participate in ordinary-course training for and sampling of the iStent inject. We will need to generate significant additional net sales to reach and maintain profitability. We cannot be sure that we will reach sustained profitability for any substantial period of time. Our failure to sustain profitability could have an adverse effect on the value of our common stock.

Substantially all of our net sales have been generated from sales of the iStent and the iStent inject, which have an increasingly competitive landscape, and we are substantially dependent on their success. If competition or other factors slow the market acceptance or usage of the iStent, the recently-approved iStent inject or our other products under development, our business will suffer.

Our primary sales-generating commercial products have been the iStent, which we began selling in the United States in the third quarter of 2012, and the iStent inject, which began selling in the United States in the second half of 2018. We rely heavily upon sales in the United States, which comprised 81% and 82% of our net sales for the three and nine months ended September 30, 2019, respectively. We expect to continue to derive a significant portion of our net sales from sales of these two products, particularly the iStent inject, in the United States, even if we are successful in continuing to commercialize our iStent products outside the United States, or receive necessary approvals to commercialize our other current and future pipeline products designed to treat glaucoma, corneal disorders and retinal

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diseases in the United States and other countries. Accordingly, our ability to generate net sales is highly dependent on our ability to market and sell the iStent and the iStent inject.

We initially developed MIGS to provide an alternative to the traditional glaucoma treatment and management paradigms. MIGS and our MIGS devices may experience a slowdown of market acceptance among eye care professionals, patients, healthcare payors and the medical community. There are a number of other available therapies marketed for the treatment of glaucoma, including medication therapies that are well established and are widely accepted by the medical community. There are also other MIGS devices that are currently available in the United States and globally or are in development by third parties that have entered or could enter the market and which may affect adoption of or demand for our products. For example, Ivantis, Inc. (Ivantis) obtained FDA approval of its Hydrus^® Microstent, a competitive MIGS device, in 2018. The Hydrus device, which is implanted into the trabecular meshwork like the iStent and iStent inject, is indicated for use in conjunction with cataract surgery for the reduction of IOP in adult patients with mild to moderate primary open-angle glaucoma. Alcon, Inc., which withdrew its Cypass^® suprachoroidal implant, a competitive MIGS device, from the market in August 2018, has indicated its intention to potentially reintroduce the product at a later date. These MIGS products, or other products that may be developed and receive regulatory approval, could achieve greater commercial acceptance, demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our iStent, iStent inject, or other products under development, which may reduce demand for our primary products, the iStent and the iStent inject, as well as for our products in development.

Eye care professionals, patients, healthcare payors and the medical community globally may be slow or fail to adopt our products for a variety of reasons, including, among others:

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lack of experience with our products;

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lack of availability of adequate coverage and reimbursement for hospitals, ambulatory surgery centers and physicians;

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our inability to convince key opinion leaders to provide recommendations regarding our products, or to convince eye care professionals, patients and healthcare payors that our products are attractive alternatives to other products and treatment solutions;

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lack of evidence supporting cost benefits or cost-effectiveness of our products over existing alternatives;

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perception that our products are unproven, investigational or experimental;

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the price of our products relative to competing treatment alternatives;

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physician preference for competitive MIGS devices in the market;

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patient safety concerns regarding the use of MIGS devices;

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liability risks generally associated with the use of new products and procedures; and

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training required to use new products.

Our growth depends on our ability to develop and commercialize additional products, including our recently commercialized iStent inject and our pipeline products. If we are not able to commercialize additional products, including our pipeline products, in a timely manner, our products may become obsolete over time, customers may not buy our products, our net sales and profitability may decline, and we may not experience growth in our business.

Demand for our products may change in ways we may not anticipate due to:

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changing coverage and reimbursement, coding and payments;

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changing customer needs;

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the introduction of new products and technologies;

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patient safety concerns;

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evolving surgical practices;

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evolving industry standards; and

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other unforeseen reasons.

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As a result, it is important that we continue to build a more complete product offering. Developing additional products is expensive and time-consuming, and could divert management’s attention away from expanding acceptance of the iStent and iStent inject and harm our business. Even if we are successful in developing our additional pipeline products, including those currently in development, the success of our new product offerings, if any, will depend on a variety of factors, including our ability to:

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properly identify and anticipate customer needs;

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commercialize new products in a cost-effective and timely manner;

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manufacture and deliver products in sufficient volumes on time;

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obtain regulatory approval for new products;

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receive adequate coverage and reimbursement for procedures performed with our products;

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differentiate our offerings from competitors’ offerings;

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achieve positive clinical outcomes;

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satisfy the increased demands from healthcare payors, providers and patients for lower-cost procedures;

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innovate and develop new materials, product designs and surgical techniques; and

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provide adequate medical and consumer education relating to new products and attract key ophthalmologists and other eye care professionals to advocate these new products.

Moreover, we will need to make a substantial investment in research and development before we can determine the commercial viability of any innovations, and we may not have the financial resources required to fund such research and development. In addition, even if we are able to successfully develop product enhancements or new products, these enhancements or new products may not produce net sales in excess of the costs of development, or they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying superior technologies or features.

Research programs to identify new products will require substantial technical, financial and human resources, whether or not any such products are ultimately identified. We may determine that one or more of our pre-clinical programs does not have sufficient potential to warrant the allocation of such resources. Our research programs may initially show promise in identifying potential products, yet fail to yield product candidates for clinical development for many reasons, including the following:

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the research methodology used may not be successful in identifying potential products;

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competitors may develop alternatives that render our future products, if any, obsolete;

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our products may not be deployed safely or effectively;

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our future products, if any, may, on further study, be shown to have harmful side effects or other characteristics that indicate they are unlikely to be effective;

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our clinical trials may not be successful; and

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we may not receive regulatory approval.

We have and may continue to enter into acquisitions, collaborations, in-licensing agreements, joint ventures, distribution agreements, alliances or partnerships with third parties that fail to result in a commercial product or net sales.

Thus far in 2019, we have completed several collaborative transactions, including a distribution arrangement with Santen, Inc., the acquisition of DOSE Medical Corporation and a licensing arrangement with Intratus, Inc. Additionally, we anticipate closing the Merger with Avedro during the fourth quarter of 2019. We entered into these transactions and may continue to enter into additional acquisitions, collaborations, in-licensing agreements, joint ventures, distribution agreements, alliances, or partnerships or undertake one or more of these transactions in order to retain our competitive position within the marketplace or to expand into new markets. However, we cannot assure you that we will be able to successfully complete any acquisition we choose to pursue, that we will be able to successfully integrate any such acquired business, product or technology in a cost-effective and non-disruptive manner, or that any

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potential commercial product related to such a transaction (including a distribution arrangement) will receive the necessary regulatory approvals to be marketed, distributed or sold, or that we will be successful in commercializing such product. If we are unable to integrate any acquired businesses, products or technologies effectively, receive regulatory approval of any product we planned to distribute or sell or successfully commercialize a product, our business would likely suffer. We cannot assure you that any such transaction will result in revenue growth, increased profitability or an enhancement in our business prospects.

If we are not successful in obtaining market acceptance of our products globally, overall utilization of our products may fall below targeted levels. If we are unable to establish a global sales and marketing organization, we may not be able to effectively commercialize our products, which would adversely affect our business prospects, results of operations and financial condition.

Because of the numerous risks and uncertainties associated with our global commercialization efforts, our products may not obtain market acceptance outside of the United States, which would adversely impact the overall utilization of our products. International markets differ significantly from the U.S. market, including as a result of differences in payor systems, reimbursement, competitive dynamics, market size, regulations and patient treatment regimens. As a result of the differences in these markets, you should not compare our financial results in the U.S. market to any potential results in the international markets nor should you rely on our past results as an indication of our future performance.

In order to generate increased sales, we will need to establish a global sales organization. Our future success will depend largely on our ability to train, retain and motivate skilled regional sales managers and direct sales representatives and distributors around the world with significant technical knowledge of MIGS and our products. Because of the competition for their services, we cannot assure you we will be able to retain such representatives on favorable or commercially reasonable terms, if at all. If we are unable to establish a global sales and marketing organization, we may not be able to effectively commercialize our products globally, which would adversely affect our business prospects, results of operations and financial condition.

Our global growth strategy requires us to enter new foreign markets to increase international sales. If we fail to obtain and maintain the regulatory approvals or the favorable reimbursement coverage or payment levels necessary to market our products in foreign jurisdictions, our market penetration opportunities will be limited. Foreign governments tend to impose strict price controls, which could negatively impact our profitability. Additionally, our existing and new potential international operations subject us to certain operating risks, which could adversely impact our results of operations and financial condition.

To implement our global growth strategy, we must continue to market our approved products in the international jurisdictions in which we are currently authorized, as well as expand such operations into additional foreign countries. In order to market our products in the European Union, Asia or other foreign jurisdictions, we must obtain and maintain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies from country to country and can involve additional testing. The time required to obtain approval abroad may be longer than the time required to obtain FDA clearance or approval. Foreign regulatory approval processes include many of the risks associated with obtaining FDA clearance or approval and we may not obtain foreign regulatory approvals on a timely basis, if at all. FDA clearance or approval does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries. However, the failure to obtain clearance or approval in one jurisdiction may have a negative impact on our ability to obtain clearance or approval elsewhere. If we do not obtain or maintain necessary approvals to commercialize our products in markets outside the United States, it would negatively affect our overall market penetration.

Even when we receive the necessary approvals to market our products in a foreign jurisdiction, we face challenges to reaching or maintaining profitability. In some foreign countries, particularly in the European Union, the pricing of medical devices is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to supply data that compares the cost-effectiveness of our products to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, it may not be profitable to sell our products in certain foreign countries, which could negatively affect the long-term growth of our business.

Our existing foreign operations, as well as our planned international growth, expose us to additional uncertainty and risks beyond regulatory authorization and reimbursement levels. Outside the United States, we sell our products

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through direct sales organizations in sixteen countries and a network of third-party distribution partners in other markets. These international operations expose us and our subsidiaries and third-party distributors to a variety of risks including, without limitation, the following:

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compliance with foreign regulations and laws, as well as U.S. laws that apply to activities in foreign jurisdictions, the adherence to which can be costly. Such regulations and laws expose us to penalties for non-compliance. These laws and regulations include various anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act, the French Sunshine Act, as well as privacy regulations such as the European Union’s General Data Protection Regulation (GDPR), which took effect in 2018, and export control regulations. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities and exclusion or debarment from government contracting;

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difficulties enforcing our intellectual property rights and defending against third-party threats and intellectual property enforcement actions against us, our distributors, or any of our third-party suppliers;

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reduced or varied protection for intellectual property rights in some countries;

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pricing pressure that we may experience internationally;

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foreign currency exchange rate fluctuations;

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a shortage of high-quality sales people and distributors, and the difficulties of managing foreign operations;

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the availability and level of third-party coverage and reimbursement within prevailing foreign healthcare systems that may require some of the patients who would be good candidates for the iStent or our other products to directly absorb medical costs, the ability of those patients to elect to privately pay for the iStent or our other products, or the potential necessity to reduce the selling prices of our products;

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relative disadvantages compared to competitors with more recognizable names, longer operating histories and better established distribution networks and customer relationships;

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the imposition of additional U.S. and foreign governmental controls or regulations;

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political and economic instability;

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changes in duties and tariffs, license obligations and other non-tariff barriers to trade;

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the imposition of restrictions on the activities of foreign agents, representatives and distributors;

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scrutiny of foreign tax authorities that could result in significant fines, penalties and additional taxes being imposed on us;

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laws and business practices favoring local companies;

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longer sales and payment cycles;

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difficulties in maintaining consistency with our internal guidelines;

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difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;

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the imposition of costly and lengthy new export licensing requirements and restrictions, particularly relating to technology;

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international terrorism and anti-U.S. sentiment;

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the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; and

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the imposition of new trade restrictions.

If we experience any of these risks, our sales in non-U.S. jurisdictions may be harmed, our results of operations would suffer and our business prospects would be negatively impacted.

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We currently operate primarily at a facility in a single location and any crippling accident, natural disaster or other force majeure event or disruption at this facility could materially affect our ability to operate and produce saleable products and could shut down our manufacturing capacity for an extended period. This and other manufacturing risks may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affect our operating results.

Our business strategy depends on our ability to manufacture our current and proposed products in sufficient quantities and on a timely basis so as to meet customer demand, while adhering to product quality standards, complying with regulatory requirements and managing manufacturing costs.

Our corporate headquarters and our manufacturing operations are currently located in an approximately 86,000 square foot campus located in San Clemente, California, comprised of two main buildings adjacent to U.S. Marine Corps Base Camp Pendleton and wilderness area susceptible to brushfires, earthquakes and other natural disasters. This location serves as our sole manufacturing location where we manufacture, inspect, package, release and ship nearly all of our final products pursuant to numerous U.S. and foreign regulatory approvals. This is also the location where we currently conduct substantially all of our research and development activities, customer and technical support, and management and administrative functions. In addition, in the fourth quarter of 2018, we entered into an office building lease pursuant to which we will lease one property containing three existing office buildings, comprising approximately 160,000 rentable square feet of space, located in Aliso Viejo, California. The term of the lease commenced on April 1, 2019 and continues for thirteen years. The agreement contains an option to extend the lease for two additional five year periods at market rates. We intend to relocate our corporate administrative headquarters, along with certain laboratory, research and development and warehouse space, to this new facility. Despite our efforts to safeguard our current San Clemente facility, including acquiring insurance on commercially reasonable terms, adopting environmental health and safety protocols and utilizing off-site storage of computer data, vandalism, terrorism or a natural or other disaster, such as an earthquake, fire or flood, could damage or destroy our manufacturing equipment or our inventory of component supplies or finished goods, cause substantial delays in our operations, result in the loss of key information, and cause us to incur additional expenses, including relocation expenses. If this facility or our future facility in Aliso Viejo suffers a crippling event, or a force majeure event, this could materially impact our ability to operate. Our insurance may not cover our losses in any particular case, or insurance may not be available on commercially reasonable terms to cover certain of these catastrophic events. In addition, regardless of the level of insurance coverage, damage to our facilities may have a material adverse effect on our business, financial condition and operating results. Additionally, if we are unable to continue to expand our manufacturing facility in compliance with regulatory requirements or to hire additional necessary manufacturing personnel, we may encounter operational interruptions, delays or additional costs in achieving our research, development and commercialization objectives, including in obtaining regulatory approvals of our product candidates and meeting customer demand, which could materially damage our business and financial position. As our business expands, we will require additional space, which could also result in a higher cost structure that could reduce our gross margin and negatively affect our operating results.

We are also subject to numerous other risks relating to our manufacturing capabilities, including:

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quality and reliability of product components that we source from third-party suppliers, including the risk of receiving components that do not meet our quality, sterility or manufacturing design standards ;

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our inability to secure product components in a timely manner or in sufficient quantities to meet customer demand, or on commercially reasonable terms;

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our inability to maintain compliance with quality system requirements;

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our failure to increase production capacity or volumes to meet demand;

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our inability to design or modify production processes to enable us to produce efficiently future products or implement changes in current products in response to design or regulatory requirements; and

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difficulty identifying and qualifying alternative suppliers for components in a timely manner, or at all.

As demand for our products increases, we will have to invest additional resources to purchase components, hire and train employees and enhance our manufacturing processes. If we fail to increase our production capacity efficiently, our sales may not increase in line with our expectations and our operating margins could fluctuate or decline. In addition, although we expect some of our products in development to share product features and components with the iStent and iStent inject, the manufacture of these products may require the modification of our current production processes or unique production processes, the hiring of specialized employees, the identification of new suppliers for specific components or the development of new manufacturing technologies. It may not be possible for us to manufacture these

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products at a cost or in quantities sufficient to make these products commercially viable or to maintain current operating margins.

We depend on a limited number of third-party suppliers for certain components and pharmaceuticals, and the loss of any of these suppliers, or their inability to provide us with an adequate supply of materials, could harm our business.

We rely on a limited number of third-party suppliers to supply components for the iStent, the iStent inject and its unique injector system and our other pipeline products, as well as drugs for our iDose and other drug delivery systems in development. Other than agreements with key suppliers, we generally do not enter into long-term supply agreements with our suppliers, and we order most components and other products on a purchase order basis. With respect to some components and other products, we have a sole supplier or a limited number of suppliers, and in some cases there may not be alternate suppliers who are capable or qualified to supply such components and products in a timely manner, or at all. The loss of these suppliers, or their inability to provide us with an adequate supply of components or products, could cause delay in the manufacture of our products, thereby impairing our ability to meet the demand of our customers and causing significant harm to our business. Although we strive to maintain inventory to mitigate supply interruptions, we are nevertheless exposed to risks, including limited control over costs, availability, quality, delivery schedules and supplier disputes.

We have been and may continue to be required to make significant “last time” purchases of components that are being discontinued by the supplier to ensure supply continuity. In addition, given our limited experience with certain suppliers, it may be difficult for us to assess their ability to timely meet our demand in the future based on past performance. If any one or more of our suppliers cease to provide us with sufficient quantities of components or drugs in a timely manner or on terms acceptable to us, we would have to seek alternative sources of supply. Because of factors such as the proprietary nature of our products, our quality control standards and regulatory requirements, we cannot quickly engage additional or replacement suppliers for some of our critical components. Even if we are able to identify and qualify a suitable second source to replace one of our key suppliers, if necessary, that replacement supplier would not have access to our previous supplier’s proprietary processes and would therefore be required to develop its own, which could result in further delay.

Failure of any of our suppliers to deliver products at the level our business requires would limit our ability to meet our sales commitments, which could harm our reputation and could have a material adverse effect on our business. We may also have difficulty obtaining similar components or drugs from other suppliers that are acceptable to the FDA or other regulatory agencies, and the failure of our suppliers to comply with strictly enforced regulatory requirements could expose us to regulatory action including warning letters, product recalls, termination of distribution, product seizures or civil penalties. It could also require us to cease using the components or drugs, seek alternative components, drugs or technologies and modify our products to incorporate alternative components, drugs or technologies, which could result in a requirement to seek additional regulatory approvals. Our suppliers may also encounter financial or other hardships unrelated to our demand for their products, which could inhibit their ability to fulfill our orders and meet our requirements. Any disruption of this nature or increased expense could harm our commercialization efforts and adversely affect our operating results.

In addition, we rely on our suppliers to supply us with components and pharmaceuticals that comply with regulatory requirements, Current Good Manufacturing Practices and quality control standards, and meet agreed upon specifications at acceptable costs and on a timely basis. Although we expect our third-party suppliers to act consistent with such standards, we do not control our suppliers, as they operate and oversee their own businesses. There is a risk that our suppliers will not always act consistent with our best interests, and may not always supply components that meet our needs. Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions. Accordingly, if we fail to obtain sufficient quantities of high-quality components and pharmaceuticals to meet demand for our products on a timely basis, we could lose customer orders, our reputation may be harmed and our business could suffer.

Failure to secure and maintain adequate coverage or reimbursement by third-party payors for procedures using the iStent, iStent inject or our other products in development, or changes in current coverage or reimbursement, could materially impact our net sales and future growth.

We currently derive a substantial portion of our net sales from sales in the United States of the iStent and iStent inject and expect this to continue for the next several years. Hospitals and ambulatory surgery centers that purchase the iStent and iStent inject typically bill various third-party payors, including Medicare, Medicaid, private commercial insurance companies, health maintenance organizations and other healthcare-related organizations, to cover all or a

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portion of the costs and fees associated with the MIGS procedures in which the iStent and the iStent inject are used and bill patients for any applicable deductibles or co-payments. Access to adequate coverage and reimbursement for the procedures using the iStent and the iStent inject (and our other approved products and products in development) by third-party payors is essential to the acceptance of our products by our customers.

Because there is generally no separate reimbursement for medical devices and other supplies used in such procedures, including the iStent and the iStent inject, the additional cost associated with the use of our iStent devices could impact the profit margin of the hospital or surgery center where the cataract surgery is performed if the incremental facility fee payment is not sufficient. Additionally, the implantation of more than one stent in a single procedure (as is the case with our iStent inject two-stent product) is considered by Medicare to be bundled with the first stent, and therefore there is no additional, incremental facility reimbursement available for implantation of a second stent. Some of our target customers may be unwilling to adopt our iStent or iStent inject in light of the additional associated cost. Further, any decline in the amount payors are willing to reimburse our customers for MIGS procedures could make it difficult for existing customers to continue using, or new customers to adopt, our iStent devices and could create additional pricing pressure for us. If we are forced to lower the price we charge for our products, our gross margins would decrease, which would adversely affect our ability to invest in and grow our business.

In addition, a key component of our global expansion strategy is obtaining reimbursement for the iStent and iStent inject devices and procedures by governmental or private payors within the foreign countries in which we are seeking to commercialize our products. The requirements and processes for obtaining approval for such reimbursement may vary significantly from country to country, entail prolonged delay, or be more difficult for foreign manufacturers with new, unfamiliar products and treatments. If we face one or more of these challenges as we pursue commercializing our products internationally, our business prospects will suffer.

Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medical device products and services exists among third-party payors. Therefore, coverage and reimbursement for medical device products and services can differ significantly from payor to payor. In addition, payors continually review new technologies for possible coverage and can, without notice, deny coverage for these new products and procedures. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained, or maintained if obtained.

Many third-party payors in the United States model their coverage policies and payment amounts after those determined by the Center for Medicare & Medicaid Services (CMS), the federal agency responsible for administering the Medicare program. CMS relies on an extensive network of Medicare Administrative Contractors (MACs) to develop coverage policies when no national coverage determination exists for a procedure. Because there currently is no Medicare national coverage determination for procedures using our iStent devices, we are required to provide scientific and clinical support for the use of the iStent and iStent inject (including our iStent devices in development, if approved) to each MAC separately, with no assurance that coverage and adequate reimbursement will be obtained. Although all MACs currently provide coverage and reimbursement for the MIGS procedure using the iStent and the iStent inject, difficulties in processing reimbursement or regional differences or reductions in the reimbursement amount for the physician professional services could negatively impact iStent and iStent inject penetration or usage by customers. These differences in MAC reimbursement could also negatively impact the amount paid by private commercial insurance companies, further negatively affecting customer penetration or usage.

Third-party payors, including CMS, regularly assess and propose changes to their coverage and reimbursement policies. Changes in these current policies impact the profit margin of the hospital or surgery center where the surgery is performed and increase costs to customers. For example, beginning in 2016, Medicare started to make a single, comprehensive payment for combination iStent insertion and cataract procedures performed in hospital outpatient departments (HOPDs), eliminating the separate payments that were available for the procedures in prior years and reducing the total reimbursement amount for the combination procedure in the HOPD. Further, any decline in the amount payors are willing to reimburse our customers for MIGS procedures could make it difficult for existing customers to continue using, or new customers to adopt, any of our iStent devices and could create additional pricing pressure for us. If we were forced to lower the price we charge for our products, our gross margins would decrease, which would adversely affect our ability to invest in and grow our business. Conversely, although the reimbursement payments from Medicare to surgery centers for the iStent procedure was increased in 2017, there can be no assurance that this increase will remain in effect in future years or that the amount of reimbursement will not be decreased in future years. Any reduction in the amount of Medicare reimbursement payments will have a negative effect on our net sales.

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Some third-party payors in the United States, including Medicaid and certain commercial payors, have developed policies that deny coverage for the MIGS procedures using the iStent or iStent inject. To support changes in these policies, we may need to conduct prospective, randomized controlled clinical trials and present data from such trials to these payors to demonstrate the medical necessity or cost-effectiveness of the iStent or our other approved products or products in development. There can be no assurance that coverage for our products will be expanded. In addition, those private payors that do not follow the Medicare guidelines may adopt different coverage and reimbursement policies for MIGS procedures performed with the iStent or the iStent inject, though we cannot predict whether coverage will be sufficient or if there will be coverage at all. Failure to obtain favorable payor policies could have a material adverse effect on our business and operations.

We believe that Medicare coverage and existing coverage by third-party payors represents more than 90% of our target patient population. U.S. third-party payors representing more than 90% of individuals covered by commercial insurance currently reimburse the iStent procedure. While we anticipate gaining coverage and reimbursement from additional third-party payors, we cannot guarantee that we will be successful or that coverage and reimbursement will be at levels that support continued penetration and usage by our customers. Moreover, compliance with the administrative procedures and requirements of third-party payors may result in delays in processing approvals by those third-party payors for customers to obtain coverage and reimbursement for procedures using the iStent or the iStent inject. Failure to secure or maintain adequate coverage or reimbursement for procedures using our iStent devices by third-party payors, or delays in processing approvals by those payors, could result in the cancellations of procedures to insert the iStent or iStent inject in combination with cataract surgery, resulting in the loss of net sales from these procedures. If these issues remain unresolved, they could have a material adverse effect on our business, financial condition and operating results.

Failure to secure or maintain adequate coverage or reimbursement for procedures using the iStent or iStent inject by third-party payors, or delays in processing approvals by those payors, could result in the cancellations of procedures to insert the iStent devices in combination with cataract surgery, resulting in the loss of net sales from these procedures. If these issues remain unresolved, they could have a material adverse effect on our business, financial condition and operating results.

In addition, although we have obtained temporary Category III Current Procedural Terminology (CPT) codes for the MIGS procedures associated with the insertion of our iStent products, including a separate CPT code for the additional stent inserted with the iStent inject product (for which there is no associated facility fee under Medicare), there is no guarantee that these billing codes or the payment amounts associated with such codes will not change in the future. Prior to expiration, there are two options: submit an application to convert to a permanent Category I code; or submit an application for a five-year extension of Category III status. If we are unable to maintain our existing codes or obtain new permanent Category I codes for procedures using our iStent products, or obtain new reimbursement codes for our other products in development, we will be subject to significant pricing pressure, which could harm our business, results of operations, financial condition and prospects. Additionally, if we do obtain a permanent Category I Code for procedures using our iStent products, certain national reimbursement levels for such procedures may be adjusted at that time. These fee reimbursement levels may be decreased or significantly decreased, which would have a material adverse effect on our business, financial condition and operating results.

Physicians are typically paid separately from the facility for surgical procedures involving the iStent or iStent inject. Unlike the facility payment amounts associated with the CPT codes that describe iStent and the additional iStent inject insertion, there is no published Medicare payment schedule at the national level for physician payment amounts. The physician payment rate is left to the discretion of the individual MAC. In order to adopt a new procedure, one of the factors that the surgeon evaluates is whether or not payment for the procedure adequately covers the surgeon’s time. As with the facility payment, the incremental payment the physician receives for inserting the iStent device, or the additional iStent inject stent, could play a role in a surgeon’s decision to adopt the technology. Accordingly, changes in the payment the physician receives could affect the extent to which physicians recommend the iStent or iStent inject procedure to patients, which could have a material adverse effect on our business, financial condition and operating results.

Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in international markets. Coverage decisions may depend upon clinical and economic standards that disfavor new products when more established or lower cost therapeutic alternatives are already available or subsequently become available. Adequate coverage and reimbursement from governmental and commercial payors are critical to new product acceptance. Third-party coverage and reimbursement for our products or any of our product candidates for which we may receive regulatory approval may not be available or adequate in either the United States or international markets.

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If our competitors are better able to develop and market products that are safer, more effective, less costly or otherwise more attractive than the iStent, iStent inject or any new products that we may develop, our commercial opportunity may be reduced or eliminated.

The medical device industry is highly competitive and subject to rapid and profound technological, market and product-related changes. Our success depends, in part, upon our ability to maintain a competitive position in the development of MIGS products. Our competitors, medical companies, academic and research institutions or others could develop new drugs, therapies, medical devices or surgical procedures to treat glaucoma that could render our products obsolete.

Until recently, our iStent was the only MIGS device approved for sale in the United States by the FDA. Thus, for several years we had commercialized the iStent in the United States without any direct MIGS competitors. Alcon, Inc. obtained FDA approval and commenced a commercial launch of its Cypass^® suprachoroidal implant, a competitive MIGS device, in 2016. Although Alcon withdrew its Cypass^® implant from the market in August 2018, it has indicated its intention to potentially reintroduce the product at a later date. In 2018, Ivantis obtained FDA approval of its Hydrus Microstent device, which is a trabecular meshwork implant that is indicated for use in conjunction with cataract surgery for the reduction of intraocular pressure in adult patients with mild-to-moderate primary open-angle glaucoma. These MIGS products, or other products that may be developed and receive regulatory approval, could achieve greater commercial acceptance, demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our iStent, iStent inject or our other products under development, which may reduce demand for our primary products, the iStent, and iStent inject as well as for our products in development. Demand for the iStent, the iStent inject or our future products may decline when such products and technologies are introduced, and our business may be harmed.

We also compete with other glaucoma therapies such as pharmaceuticals and other medical devices. Manufacturers of medical devices used in surgical therapy procedures for treating glaucoma include Alcon, Inc., Johnson & Johnson (through its acquisition of Abbott Medical Optics Inc.), Allergan plc (through its acquisition of AqueSys, Inc. and its Xen^®Glaucoma Treatment System), STAAR Surgical Company, Lumenis Ltd., NeoMedix, Inc., New World Medical, Inc., Sight Sciences, Inc., Iridex Corporation and Ellex Medical Lasers Limited. These and other manufacturers provide a variety of surgical products, including tubes, aqueous shunts, laser systems, trabeculotomy, blades and other filtration devices. We are aware of other companies, including, but not limited to, iSTAR Medical SA, that are conducting clinical trials or have filed for regulatory approval of glaucoma treatment devices. Additionally, in connection with our recent transactions in the fields of retinal and corneal disorder treatment, we are entering into well-established markets in which we have less experience than many large, pre-existing competitors.

Many of our current and potential competitors (including MIGS competitors) are large publicly traded companies or divisions of publicly traded companies and have several competitive advantages, including:

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greater financial and human resources for product development, sales and marketing and patent litigation;

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significantly greater name recognition;

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longer operating histories;

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established relationships with healthcare professionals, customers and third-party payors;

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additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives;

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more established sales and marketing programs and distribution networks; and

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greater experience in conducting research and development, manufacturing, clinical trials, preparing regulatory submissions and obtaining regulatory clearance or approval for drug and device products and marketing approved products.

As discussed above, the Xen device is being marketed by Allergan plc, a publicly traded company, and the Cypass^®, although it was withdrawn from the market by Alcon, Inc., a publicly traded company, may be reintroduced at a later date. As a result of these transactions, we are competing directly against other MIGS providers that have the efficiencies and advantages identified above.

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The training required for surgeons to use our products could reduce the market acceptance of our products.

As with any new method or technique, ophthalmic surgeons must undergo a thorough training program before they are qualified to perform procedures using our products. Surgeons could experience difficulty with the technique necessary to successfully insert our products, including intraoperative gonioscopy, and not achieve the technical competency necessary to be qualified to insert our devices. Also, even after successfully completing the training program, the physicians could experience difficulty inserting our products and cease utilizing them or limit their use significantly in practice. Surgeons may also experience greater success or competency with a competitive MIGS product.

We could also experience difficulty meeting expected levels of ophthalmic surgeons who complete our training program. This could happen due to less demand than expected, preference for competitive MIGS products, the length of time necessary to train each surgeon being longer than expected, the capacity of our sales representatives to train surgeons being less than anticipated, or if we are unable to sufficiently increase our sales organization. All of these events would lead to fewer trained ophthalmic surgeons qualified to insert our products, which could negatively impact our operating and financial results.

Ophthalmic surgeons may not use our products if they do not believe they are safe, efficient, effective and preferable alternatives to other treatment solutions in the market. If subsequent or continuing patient studies on the iStent or the iStent inject, patient outcomes, or studies on or patient outcomes from competitive MIGS products, demonstrate results that are inferior to or inconsistent with our existing data, our sales could be adversely impacted. Additionally, ophthalmic surgeons not completing the iStent device training program may nevertheless elect to perform iStent device procedures and experience inferior clinical outcomes.

We believe that ophthalmic surgeons will not use our products unless they conclude that our products provide a safe, efficient, effective and preferable alternative to currently available treatment options. If longer term patient studies or clinical experience indicate that treatment with our products is less effective, less efficient or less safe than our current data suggest, our sales would be harmed, and we could be subject to significant liability. Further, unsatisfactory patient outcomes or patient injury, due to either our products or competitive MIGS products, could cause negative publicity for our products, particularly in the early phases of product introduction for our products currently under development. For example, in August 2018, Alcon, Inc. withdrew its Cypass® suprachoroidal implant, a competitive MIGS device that is also designed to be implanted in the suprachoroidal space of the eye, from the market due to patient safety concerns that arose in a post-approval safety study. The FDA, and other federal, state, local and foreign regulatory authorities, may impose more stringent or higher standards in evaluating our pipeline iStent products for approval based upon the safety issues experienced with the Cypass® device. In addition, physicians may be slow to adopt our products if they perceive liability risks arising from their use. It is also possible that as our products become more widely used, latent defects could be identified, creating negative publicity and liability problems for us and adversely affecting demand for our products. Physicians may also conclude that the products offered by our MIGS competitors have greater efficacy than our products, which could result in a decline in our sales.

Ophthalmic surgeons may also determine not to use our products due to other potential risks to patients. For example, the iStent is rated “MRI Conditional” by the American Society for Testing and Materials. This means that a patient implanted with the iStent can be scanned via magnetic resonance imaging (MRI) only under the following conditions specified on the product label: static magnetic field of 3-Tesla or less, and maximum spatial magnetic field gradient of 4,000-Gauss/cm or less. Therefore, it may not be safe for iStent recipients to undergo MRIs in environments that do not match these specified conditions. Physicians may choose not to implant iStents because of this limitation, which could have an adverse impact on our net sales growth and financial results.

Additionally, inferior patient outcomes, or patient injury, may result if untrained or unqualified ophthalmic surgeons elect to perform any iStent procedures. Although our sales representatives manage the training program for ophthalmic surgeons to become qualified to insert our iStent devices in combination with cataract surgery, once training is completed the surgeon and/or surgical facility that the surgeon utilizes are cleared to purchase and maintain an iStent or iStent inject supply. There is a risk that untrained or unqualified ophthalmic surgeons could gain access to iStent devices from a facility’s inventory and conduct iStent procedures without having received qualified status from us. If performing iStent procedures by unqualified ophthalmic surgeons were to become pervasive, this could raise the risk of complications and inferior clinical outcomes, which could result in negative patient experiences or experiences being published and damaging our reputation and that of our iStent devices. This could result in lower penetration and utilization by ophthalmic surgeons and could have a material adverse effect on our net sales growth, expected operating results and financial condition.

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If an increasing number of ophthalmic surgeons do not continue to adopt the use of our products, our operating and financial results will be negatively impacted.

Product liability suits brought against us could cause us to incur substantial liabilities, limit sales of our existing products and limit commercialization of any products that we may develop.

If our product offerings, including the iStent and iStent inject, are defectively designed or manufactured, contain defective components, or are used or deployed improperly, or if someone claims any of the foregoing, whether or not such claims are meritorious, we may become subject to substantial and costly litigation. Any product liability claims brought against us, with or without merit, could divert management’s attention from our business, be expensive to defend, result in sizable damage awards against us, damage our reputation, increase our product liability insurance rates, prevent us from securing continuing coverage, or prevent or interfere with commercialization of our products. In addition, we may not have sufficient insurance coverage for all future claims. Product liability claims brought against us in excess of our insurance coverage would likely be paid out of cash reserves, harming our financial condition and results of operations.

Operating results could be unpredictable and may fluctuate significantly from quarter to quarter, which could adversely affect our business, financial condition, results of operations and the trading price of our common stock.

Our net sales from the sale of our approved iStent devices may experience volatility due to a number of factors, many of which are beyond our control, including:

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our ability to drive increased sales of our products;

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our ability to establish and maintain an effective and dedicated sales organization;

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fluctuations in the demand for our products;

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pricing pressure applicable to our products, including adverse third-party coverage and reimbursement outcomes and competitor pricing;

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results of clinical research and trials on our products or competitive MIGS products;

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fluctuations in the number of cataract procedures performed by our customers, which could decrease significantly during holiday seasons and summer months, when significant numbers of physicians and patients may schedule vacations;

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timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;

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decisions by customers to defer orders in anticipation of the introduction of new products or product enhancements by us;

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sampling by and additional training requirements for physicians upon the commercialization of a new product by the Company or one of its competitors;

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our ability to manage the risks associated with new product introductions, including, without limitation, managing product inventory levels to ensure we adequately meet product demands and avoid expenses and charges associated with product obsolescence, and shifts and changes in product demands and the associated impact on revenues and cost of goods sold;

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regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;

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interruption in the manufacturing or distribution of our products;

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the ability of our suppliers, including sole suppliers, to timely provide us with an adequate supply of product components;

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the effect of competing technological, industry and market developments;

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changes in our ability to obtain regulatory clearance or approval for our products or to obtain or maintain our CE Certificates of Conformity for our products;

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variances in the sales terms, timing or volume of customer orders from period to period;

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the length of our sales cycle, which varies and may be unpredictable; and

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our ability to expand the geographic reach of our sales and marketing efforts.

As a result, you should not rely on our results in any past period as an indication of future results and you should anticipate that fluctuations in our quarterly and annual operating results may continue and could generate volatility in the price of our common stock. We believe that quarterly comparisons of our financial results should not be relied upon as an indication of our future performance.

If we fail to manage our anticipated growth effectively, or are unable to increase or maintain our manufacturing capacity, we may not be able to meet customer demand for our products and our business could suffer.

Since the commercial launch of the iStent in July 2012, we have seen significant period-to-period growth in our business. We anticipate that this growth will continue in the near term as the iStent and the iStent inject continue to gain market acceptance and we develop and introduce new products, including through our distribution and licensing arrangements. Not only do we expect this growth to continue, but we must continue to grow in order to meet our business and financial objectives. However, continued growth may create numerous challenges, including:

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new and increased responsibilities for our management team;

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increased pressure on our operating, financial and reporting systems;

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increased pressure from our competitors;

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increased pressure to anticipate and satisfy market demand;

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additional manufacturing capacity requirements;

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strain on our ability to source a larger supply of components that meet our required specifications on a timely basis;

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management of an increasing number of relationships with our customers, suppliers and other third parties;

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entry into new international territories with unfamiliar regulations and business approaches; and

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the need to hire, train and manage additional qualified personnel.

Although we believe we have plans in place sufficient to ensure we have adequate capacity to meet our current business plans, there are uncertainties inherent in expanding our manufacturing capabilities, and we may not be able to sufficiently increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facility or launch new products. Also, we may not manufacture the right product mix to meet customer demand as we introduce new products. As a result, we may experience difficulties in meeting customer demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. If we fail to manage any of the above challenges effectively, our business may be harmed.

Our future growth depends on our ability to retain members of our senior management and other key employees. If we are unable to retain or recruit qualified personnel for growth, our business results could suffer.

We have benefited substantially from the leadership and performance of our senior management as well as certain key employees. For example, our chief executive officer, as well as other key members of our senior management, has experience successfully developing novel technologies and scaling early-stage medical device companies to achieve profitability. Our success will depend on our ability to retain our current management and key employees, and to attract and retain qualified personnel in the future. Competition for senior management and key employees in our industry is intense and we cannot guarantee that we will be able to retain our personnel or attract new, qualified personnel. The loss of services of certain members of our senior management or key employees could prevent or delay the implementation and completion of our strategic objectives, or divert management’s attention to seeking qualified replacements. Each member of senior management as well as our key employees may terminate employment without notice and without cause or good reason. The members of our senior management are not subject to non-competition agreements. Accordingly, the adverse effect resulting from the loss of certain members of senior management could be compounded by our inability to prevent them from competing with us.

In addition to competing for market share for our products, we also compete against our competitors for personnel, including qualified sales representatives that are necessary to grow our business. Also, we compete with

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universities and research institutions for scientific and clinical personnel that are important to our research and development efforts.

We also rely on consultants and advisors in our research, operations, clinical and commercial efforts to implement our business strategies. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

Our strategic plan requires us to continue growing our sales, marketing, clinical and operational infrastructure in order to generate, and meet, the demand for our products. If we fail to retain or attract these key personnel, we could fail to take advantage of the market for our iStent technologies and our business, financial condition and operating results could be adversely affected.

Our iDose implant, as well as other pipeline products, will be regulated as drugs and be subject to a different regulatory approval process than our other products in development. iDose, as well as our other pharmaceutical pipeline products, are in early stages of development and may never be commercialized.

As a drug delivery implant, iDose will be subject to a regulatory approval process similar to that for pharmaceuticals, as will certain other of our pipeline products. This process is often a more lengthy, costly and complex process than obtaining regulatory approval for a medical device. The future success of our iDose and other drug delivery systems depends on our ability to complete clinical trials, and will require significant development activities, clinical trials, regulatory approvals, and substantial additional investment.

This development program may not lead to a commercially viable product for several reasons. For example, we may fail to demonstrate safety and efficacy in pre-clinical tests or clinical trials, or we may have inadequate financial or other resources to pursue drug development efforts. From time to time, we may establish and announce certain development goals for our iDose product candidate and other pipeline products; however, it is difficult to predict accurately if and when we will achieve these goals. We may be unsuccessful in advancing this drug delivery implant into clinical testing or in obtaining FDA approval, and our long-term business prospects could be harmed.

Our business requires substantial capital and operating expenditures to operate and grow.

Although we raised net proceeds of approximately $113.6 million from our initial public offering in 2015 and generate net sales from our approved products, we may nevertheless need to raise substantial additional capital in the future to:

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expand our sales and marketing organization in the United States and internationally;

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fund our operations, clinical trials and commercialization efforts for new products, if any such products receive regulatory approval for commercial sale;

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scale-up our manufacturing operations;

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pursue additional research and development;

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enforce or defend, in litigation or otherwise, our patent or other intellectual property rights against infringement, misappropriation or other violation by third parties or any claims that we infringe or have otherwise violated third-party patent or other intellectual property rights; and

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acquire companies or in-license products or intellectual property.

We believe that our available cash, cash equivalents, investment balances and interest we earn on these balances and cash generated from operations will be sufficient to fund our operations and satisfy our liquidity requirements for at least the next 12 months from the date our condensed consolidated financial statements for the three and nine months ended September 30, 2019 are made publicly available. However, our future funding requirements will depend on many factors, including:

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the scope, rate of progress and cost of our clinical trials and other research and development activities;

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the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;

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the cost of asserting or defending, in litigation or otherwise, our patent or other intellectual property rights against infringement, misappropriation or other violation by third parties or any claims that we infringe or have otherwise violated third-party patent or other intellectual property rights;

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the terms and timing of any collaborative, licensing and other arrangements that we may establish;

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the cost and timing of regulatory approvals;

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the cost and timing of establishing sales, marketing and distribution capabilities;

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the cost of establishing clinical and commercial supplies of our products and any products that we may develop;

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the effect of competing technological and market developments;

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licensing technologies for future development; and

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the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

If we raise additional funds through further issuances of equity or issuances of convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing obtained by us in the future would likely be senior to our common stock, would likely cause us to incur interest expense, and could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may increase our expenses and make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may also be required to secure any such debt obligations with some or all of our assets.

We cannot assure you that we will be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may even have to scale back our operations. In addition, the Company maintains cash balances in excess of amounts insured by the Federal Deposit Insurance Commission.

Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt our operations and adversely affect our business and operating results.

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage sales and marketing data, accounting and financial functions, inventory management, product development tasks, clinical data, customer service and technical support functions. Our information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, power losses, computer system or data network failures, security breaches, data corruption and cyber-based attacks. Cyber-based attacks can include computer viruses, computer denial-of-service attacks, worms, and other malicious software programs or other attacks, covert introduction of malware to computers and networks, impersonation of authorized users, and efforts to discover and exploit any design flaws, bugs, security vulnerabilities or security weaknesses, as well as intentional or unintentional acts by employees or other insiders with access privileges, intentional acts of vandalism by third parties and sabotage. In addition, federal, state and international laws and regulations, such as GDPR, can expose us to enforcement actions and investigations by regulatory authorities, and potentially result in regulatory penalties and significant legal liability, if our information technology security efforts fail. In addition, a variety of our software systems are cloud-based data management applications, hosted by third-party service providers whose security and information technology systems are subject to similar risks.

The failure of either our or our service providers’ information technology could disrupt our entire operation or result in decreased sales, increased overhead costs, product shortages, loss or misuse of proprietary or confidential information, intellectual property or sensitive or personal information, all of which could have a material adverse effect on our reputation, business, financial condition and operating results.

We cannot be certain that our net operating loss tax carryforwards will be available to offset future taxable income.

At December 31, 2018, we had approximately $154.5 million, $120.6 million and $15.8 million of net operating loss carryforwards for federal, state and foreign purposes, respectively, available to offset future taxable income. The federal net operating loss carryforwards incurred prior to 2018 will being to expire in 2019. A federal net operating loss carryforward of $27.2 million will not expire, but can only be used to offset 80 percent of future taxable income. The state net operating loss carryforwards will begin to expire in 2019. The foreign net operating losses will

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begin to expire in 2023. At December 31, 2018, we had federal and state research and development carryforwards of approximately $9.1 million and $8.1 million, respectively, which begin to expire in 2021 for federal purposes and carry over indefinitely for state purposes. We have recorded a full valuation allowance against these tax attributes because we believe that uncertainty exists with respect to the future realization of the tax attributes as well as with respect to the amount of the tax attributes that will be available in future periods. To the extent available, we intend to use these net operating loss carryforwards to offset future taxable income associated with our operations. There can be no assurance that we will generate sufficient taxable income in the carryforward period to utilize any remaining net operating loss carryforwards before they expire.

In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the Code) contains rules that limit for U.S. federal income tax purposes the ability of a corporation that undergoes an “ownership change” to utilize its net operating losses (and certain other tax attributes) existing as of the date of such ownership change. Under these rules, a corporation is treated as having had an “ownership change” if there is more than a 50% increase in stock ownership by one or more “five percent shareholders,” within the meaning of Section 382 of the Code, during a rolling three-year period. We believe a portion of our existing net operating losses are subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize our net operating losses to offset future taxable income could be further limited, which could have a negative effect on our liquidity. For these reasons, we may not be able to utilize a material portion of our net operating losses, even if we continue to achieve profitability.

Risks Related to the Regulatory Environment

Our failure to obtain and maintain regulatory clearances or approvals on a timely basis, or at all, could prevent us from commercializing our current or pipeline products in the U.S., which could severely impede our ability to grow our business and/or harm our business, financial condition and operating results.

The iStent and the iStent inject are classified as medical devices. As a result, we are subject to extensive government regulation in the United States by the FDA and state regulatory authorities and by foreign regulatory authorities in the countries in which we conduct business. These regulations relate to, among other things, research and development, design, testing, clinical trials, manufacturing, clearance or approval, environmental controls, safety and efficacy, labeling, advertising, promotion, pricing, recordkeeping, reporting, import and export, post-approval studies and the sale and distribution of the iStent, the iStent inject and our other products in development.

In the United States, before we can market a new medical device, or a new use of, new claim for, or significant modification to, an existing product, we must first receive either clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (FDCA) or approval of a premarket approval application (PMA) from the FDA, unless an exemption applies. The process of obtaining PMA approval, which was required for the iStent and the iStent inject, is much more costly and uncertain than the 510(k) clearance process. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, in order to clear the proposed device for marketing. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA approval process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices for which the 510(k) process cannot be used and that are deemed to pose the greatest risk.

To the extent clinical data are required to support a 510(k) clearance or PMA approval process, clinical testing must be conducted in compliance with FDA requirements pertaining to human research. Depending on the risk posed by a device, we may be required to obtain an IDE from the FDA prior to beginning any clinical trial; similar notifications are required in other countries. Among other requirements, we must obtain approval from an independent Institutional Review Board (IRB) before such studies may begin. We may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the United States for any new devices we intend to market in the United States. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. We must also comply with other FDA requirements such as obtaining informed consent, monitoring, record-keeping, reporting and the submission of information regarding certain clinical trials to a public database maintained by the National Institutes of Health. Compliance with these requirements can require significant time and resources and if the FDA determines that we have not complied with such requirements, it may refuse to consider the data to support our applications or initiate enforcement actions.

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Modifications to products that are approved through a PMA application generally need FDA approval. Similarly, some modifications made to products cleared through a 510(k) may require a new 510(k). The FDA’s 510(k) clearance process usually takes from three to 12 months, but may last longer. The process of obtaining a PMA generally takes from one to three years, or even longer, from the time the PMA is submitted to the FDA until an approval is obtained. Any delay or failure to obtain necessary regulatory approvals would have a material adverse effect on our business, financial condition and prospects.

The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

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our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that our products are safe or effective for their intended uses;

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the disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our clinical trials or the interpretation of data from pre-clinical studies or clinical trials;

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failure of clinical sites to conduct the clinical trial in accordance with applicable regulatory requirements or our clinical protocols;

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serious and unexpected adverse effects experienced by participants in our clinical trials;

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the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;

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our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;

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the manufacturing process or facilities we use may not meet applicable requirements; and

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the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval.

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug products is also subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. We are not permitted to market any drug product candidate in the United States until we receive FDA approval of a new drug application (NDA) or other appropriate drug product application. Prior to submitting a marketing application, human clinical studies are required. In order for clinical studies of a new drug to commence in the United States, an Investigational New Drug (IND) application must be filed with the FDA; similar notifications are required in other countries. Informed consent also must be obtained from study participants. In general, studies may begin in the United States without specific approval by the FDA after a 30-day review period has passed. However, the FDA may prevent studies from moving forward, and may suspend or terminate studies once initiated. Studies are also subject to review by an independent review board (IRB) responsible for overseeing studies at particular sites and protecting human research study subjects. An IRB may prevent a study from beginning or suspend or terminate a study once initiated. Furthermore, the FDA may suggest amendments to any study protocol that may be necessary for the results to support approval. These amendments and the associated discussions with the FDA may further delay study initiation and, as a result, approval of our drug product. Generally, studies also may not commence until after receiving approval by an independent IRB. The IRB is responsible for overseeing studies at particular sites and protecting human research study subjects. An IRB may disapprove a study or suspend or terminate an approved study once initiated.

The FDA or other applicable foreign regulatory bodies can delay, limit or deny approval of a drug candidate for many reasons, including, but not limited to, the following:

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our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that the drug candidate is safe and effective for the requested indication;

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the FDA’s or the applicable foreign regulatory body’s disagreement with design or implementation of our clinical trials or the interpretation of data from preclinical studies or clinical trials;

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serious and unexpected drug-related side effects experienced by participants in our clinical trials or by individuals using drugs similar to our product candidates;

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our inability to demonstrate that the clinical and other benefits of the drug candidate outweigh any safety or other perceived risks;

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the FDA’s or the applicable foreign regulatory body’s requirement for additional preclinical or clinical studies;

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the FDA’s or the applicable foreign regulatory body’s non-approval of the drug candidate’s chemistry, manufacturing or controls or labeling;

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the FDA’s or the applicable foreign regulatory body’s failure to approve the manufacturing processes or facilities of third-party manufacturers; or

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Further, we are subject to laws directed at preventing fraud and abuse, which subject our marketing, training and other practices to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, government agencies or their contractors often conduct routine audits and request customer records and other documents to support claims submitted for payment of services rendered. Government agencies or their contractors also periodically open investigations and obtain information from healthcare providers. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including debarment, suspension or exclusion from Medicare, Medicaid and other government reimbursement programs, any of which would have a material adverse effect on our business.

Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably.

In the United States and in certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the regulatory and healthcare systems in ways that could impact our ability to sell our products profitably, if at all. In the United States in recent years, new legislation has been proposed and adopted at the federal and state levels that is effecting major changes in the healthcare system. In addition, new regulations and interpretations of existing healthcare statutes and regulations are frequently adopted.

For example, in 2011, the FDA announced a Plan of Action to modernize and improve the FDA’s premarket review of medical devices, and has implemented, and continues to implement, reforms intended to improve the timeliness and predictability of the premarket review process. In addition, as part of the Food and Drug Administration Safety and Innovation Act of 2012, Congress enacted several reforms entitled the Medical Device Regulatory Improvements and additional miscellaneous provisions that will further affect medical device regulation both pre-and post-approval.

Further, in December 2016, Congress enacted the 21st Century Cures Act (Cures Act), which contained several provisions related to the review and approval of new medical technologies. Along with other changes, the Cures Act established a statutory program for “breakthrough” devices. The FDA will apply additional resources to help speed the approval or clearance of devices that are designated as breakthrough devices. The Cures Act also included provisions related to the “least burdensome” principle with respect to demonstrating substantial equivalence or reasonable assurance of safety and effectiveness and expanded the number of patients that could be treated by a device approved under a Humanitarian Device Exemption, among other provisions.

Similarly, in August 2017, Congress enacted the FDA Reauthorization Act of 2017 (FDARA). FDARA reauthorized the FDA to collect device user fees, including a new user fee for de novo classification requests, and contained substantive amendments to the device provisions of the FDCA. Among other changes, FDARA required that the FDA update and revise its processes for scheduling inspections of device establishments, communicating about those inspections with manufacturers and providing feedback on the manufacturer’s responses to Form 483s. The statute also required that the FDA study the impact of device servicing, including third party servicers, and creates a new process for device sponsors to request classification of accessory devices as part of the PMA application for the parent device or to request a separate classification of accessory devices.

If, as a result of legislative or regulatory healthcare reform, we cannot sell the iStent or iStent inject (or our other products in development, if approved) profitably, our business would be harmed. In addition, any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products.

In March 2010, the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (ACA) was signed into law. While the goal of health care reform is to expand coverage to more individuals, it also involves increased government price controls, additional regulatory mandates and other measures designed to constrain

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medical costs. The ACA substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in the quality of healthcare items and services and significantly impacts the medical device industry. Among other things, the ACA:

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imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions (described in more detail below), which, under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), was suspended from January 1, 2016 to December 31, 2017, and, pursuant to HR 195 passed on January 22, 2018, was further suspended through December 31, 2019;

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establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research;

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implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and

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creates an independent payment advisory board that will submit recommendations to Congress to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislation, will remain in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. On April 16, 2015, President Obama signed into law the Medicare Access and CHIP Reauthorization Act of 2015, which, among other things, repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments beginning in 2019 that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations.

The medical device excise tax moratorium imposed by the PATH Act for 2016 and 2017 favorably impacted our gross profit margin in 2017, and will continue to do so through 2019, based upon its recent extension. However, this impact will not continue in 2020 when the tax is automatically reinstated, absent further legislation, as the iStent was subject to this excise tax prior to the moratorium and our recently-approved product and products in our pipeline potentially will be subject to this tax. There are no assurances that our business will not be materially adversely affected by the current, or possible future additional tax, provisions implemented under healthcare reform or appropriate legislation. It is also possible that legislation may be introduced and passed by Congress repealing the ACA in whole or in part and signed into law by President Trump. Because of the continued uncertainty about the likelihood or extent of a potential repeal of that legislation, we cannot quantify or predict with any certainty the likely impact of a repeal of ACA on our business model, prospects, financial condition or results of operations.

Additional state and federal healthcare reform measures may be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or product candidates or additional pricing pressures.

In May 2017, the EU adopted a new Medical Devices Regulation (EU) 2017/745 (MDR), which will repeal and replace the Medical Device Directive (MDD). The MDR will take effect beginning May 2020. The MDR does not set out a substantially different regulatory system, but provides for stricter controls of medical devices, including, among other things, strengthening of conformity assessment procedures, increased requirements as regards clinical data for devices and pre-market regulatory review of high-risk devices. The MDR also provides for greater control over conformity assessment of notified bodies and their standards, increased transparency, more robust device vigilance requirements and clarification of the rules for clinical investigations. Under provisions that govern the transition period until the MDR takes effect, medical devices with notified body certificates issued under the MDD prior to May 26, 2020 may continue to be marketed and sold as long as those certificates are valid, until May 27, 2024 at the latest. After the expiration of any applicable transitional period, only devices that have been CE marked under the MDR may be placed

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on the market in the EU. If, as a result of these regulatory changes, we cannot obtain or maintain the approvals necessary to sell our iStent products (including pipeline products, if approved) in the EU, our business would be harmed.

The clinical trial process required to obtain regulatory approvals is lengthy and expensive with uncertain outcomes, and could result in delays in new product introductions.

In order to obtain PMA and FDA approval for a product, the sponsor must conduct well-controlled clinical trials designed to assess the safety and efficacy of the product candidate. We also will be required to conduct clinical trials to obtain approval of products using the iDose drug delivery system, new indications for the iStent, iStent inject or new product candidates. Conducting clinical trials is a complex and expensive process, can take many years, and outcomes are inherently uncertain. We incur substantial expense for, and devote significant time to, clinical trials but cannot be certain that the trials will ever result in commercial sales. We may suffer significant setbacks in clinical trials, even after earlier clinical trials showed promising results, and failure can occur at any time during the clinical trial process. Any of our products may malfunction or may produce undesirable adverse effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials. We, the clinical trial investigators, the reviewing IRB, the FDA, or another regulatory authority may suspend or terminate clinical trials at any time to avoid exposing trial participants to unacceptable health risks.

Successful results of pre-clinical studies are not necessarily indicative of future clinical trial results, and predecessor clinical trial results may not be replicated in subsequent clinical trials. Additionally, the FDA may disagree with our interpretation of the data from our pre-clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to prove safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical trials, which could further delay the clearance or approval of our products. The data we collect from our pre- clinical studies and clinical trials may not be sufficient to support FDA clearance or approval, and if we are unable to demonstrate the safety and efficacy of our future products in our clinical trials, we will be unable to obtain regulatory clearance or approval to market our products.

In addition, we may estimate and publicly announce the anticipated timing of the accomplishment of various clinical, regulatory and other product development goals, which are often referred to as milestones. These milestones could include the right to affix the CE Mark in the European Union; the submission to the FDA of an IDE application, or an IND application, to commence a clinical trial for a new product candidate; the enrollment of patients in clinical trials; the release of data from clinical trials; and other clinical and regulatory events. The actual timing of these milestones could vary dramatically compared to our estimates, in some cases for reasons beyond our control. We cannot assure you that we will meet our projected milestones and if we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and, as a result, our stock price may decline.

Clinical trials are necessary to support PMA applications for our device product candidates and may be necessary to support PMA supplements for modified versions of our marketed device products. This would require the enrollment of large numbers of suitable subjects, which may be difficult to identify, recruit and maintain as participants in the clinical trial. The clinical trials supporting the PMA application for the iStent inject involved 505 randomized patients who were monitored for twenty-four months. Monitoring of these patients will continue for up to 36 additional months under a post-approval study for the iStent inject, and a second iStent inject post-approval study will involve 358 patients who will be followed for three years. The clinical trials supporting the PMA application for the iStent involved 289 patients. We conducted an extended iStent follow-up post-approval study with 108 patients from the pivotal study, and are currently conducting a post-approval study of 180 patients who are being monitored for three years. If the FDA were to require us to submit data on a greater number of patients or a longer follow-up period, we would incur additional expenses that could be significant. Adverse outcomes in the post-approval studies could also result in restrictions or withdrawal of approval of the PMA.

Before we can obtain regulatory approval for any drug product candidate, such as our iDose drug delivery implant, we must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the FDA and other regulatory agencies. Clinical trials of drug product candidates are expensive and take years to complete, and the outcome of such trials is uncertain. We completed a U.S. IND Phase II clinical trial of iDose Travoprost in 2017 and we commenced our U.S. Phase III clinical trial in 2018, which will include a large number of patients. Our ability to conduct additional iDose clinical trials depends on many factors, including the data obtained in the Phase III clinical trials.

Delays in the commencement or completion of clinical trials or testing could significantly affect our product development costs. We do not know whether planned clinical trials will begin on time, need to be redesigned, enroll an

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adequate number of patients in a timely manner or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed or terminated for a number of reasons, including delays or failures related to:

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the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our clinical protocol or studies, or concluding that our trial design is inadequate to demonstrate safety and efficacy;

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IRBs and third-party clinical investigators may delay or reject the trial protocol;

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obtaining FDA or comparable foreign regulatory approval to commence a clinical trial; or having a clinical trial placed on hold by such authorities;

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reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

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manufacturing sufficient quantities of a product candidate for use in clinical trials;

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obtaining IRB or ethics committees approval to conduct a clinical trial at each prospective site;

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recruiting and enrolling patients and maintaining their participation in clinical trials;

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having clinical sites observe trial protocol or continue to participate in a trial;

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patient non-compliance with trial protocols;

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addressing any patient safety concerns that arise during the course of a clinical trial;

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addressing any conflicts with new or existing laws or regulations; and

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third-party clinical investigators declining to participate in a trial or not performing the trial on the anticipated schedule.

Patient enrollment in clinical trials and completion of patient follow-up depend on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, patient compliance, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product being studied in relation to other available therapies, including any new treatments that may be approved for the indications we are investigating. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and efficacy of a product candidate, or they may be persuaded to participate in contemporaneous clinical trials of a competitor’s product candidate. In addition, patients participating in our clinical trials may drop out before completion of the trial or suffer adverse medical events (including death) unrelated to our products. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial or complete patient follow-up may delay commencement or completion of the clinical trial, cause an increase in the costs of the clinical trial and delays, or result in the failure of the clinical trial.

We could also encounter delays if the FDA concluded that our financial relationships with our principal investigators resulted in a perceived or actual conflict of interest that may have affected the interpretation of a study, the integrity of the data generated at the applicable clinical trial site or the utility of the clinical trial itself, or if we fail to disclose such financial relationships. Principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash compensation and/or stock options in connection with such services. If these relationships and any related compensation to or ownership interest by the clinical investigator carrying out the study result in perceived or actual conflicts of interest, or the FDA concludes that the financial relationship may have affected interpretation of the study, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of our marketing application by the FDA. Any such delay or rejection could prevent us from commercializing any of our products currently in development.

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Further, clinical trials may also be delayed as a result of ambiguous, inconclusive or negative interim or final results as to safety or efficacy. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRB overseeing the clinical trial at issue, the Data Safety Monitoring Board for such trial, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of factors, including:

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failure to conduct the clinical trial in accordance with applicable regulatory requirements or our clinical protocols;

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inspection of the clinical trial operations, trial sites or manufacturing facilities by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

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inability of a clinical investigator or clinical trial site to continue to participate in the clinical trial;

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unforeseen safety issues or adverse patient side effects;

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device malfunctions occurring with unexpected frequency or potential adverse consequences;

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we or third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol or investigational or statistical plans;

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third-party clinical investigators have significant financial interests related to us or our study such that the FDA deems the study results unreliable, or we or investigators fail to disclose such interests;

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failure to demonstrate a benefit from using the product candidate; and

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lack of adequate funding to continue the clinical trial.

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenues from these product candidates will be delayed or not realized at all. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of a clinical trial may also ultimately lead to the denial of regulatory approval of the subject product candidate.

If the FDA does not conclude that the iDose drug delivery implant satisfies the requirements for the Section 505(b)(2) regulatory approval pathway, or if the requirements for approval of the iDose drug delivery implant under Section 505(b)(2) are not as we expect, the approval pathway will likely take significantly longer, cost significantly more and encounter significantly more complications and risks than anticipated, and in any case may not be successful

We intend to seek FDA approval of an NDA under Section 505(b)(2) of the FDCA for our drug delivery implant, iDose. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, added Section 505(b)(2) to the FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant.

If the FDA does not allow us to pursue the 505(b)(2) regulatory approval pathway for iDose as anticipated, we may need to conduct additional clinical trials, provide additional data and information and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval would likely substantially increase. Moreover, the inability to pursue the 505(b)(2) regulatory approval pathway could result in new competitive products reaching the market faster than our product candidate, which could materially adversely impact our competitive position and prospects. In addition, circumstances could change that would render a 505(b)(2) application for the product no longer appropriate. Even if we are allowed to pursue the 505(b)(2) regulatory approval pathway for iDose, we cannot assure you that we will receive the requisite or timely approvals for commercialization of this product candidate.

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We and our suppliers are subject to extensive post-marketing regulatory requirements and failure to comply with applicable requirements could subject us to enforcement actions, including substantial penalties, and might require us to recall or withdraw a product from the market.

Once a medical device is approved, a manufacturer must notify the FDA of any modifications to the device. Any modification to a device that has received FDA clearance or approval that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires premarket clearance or approval from the FDA pursuant to a new 510(k) clearance or approval of a PMA supplement. The FDA requires every manufacturer to make the determination in the first instance regarding whether a modification to a cleared or approved device necessitates the filing of a new 510(k) notification or PMA supplement. The FDA may review any manufacturer’s decision and can disagree. If the FDA disagrees with any future determination by us that a new clearance or approval is not required, we may need to cease marketing or to recall the modified product until and unless we obtain clearance or approval. In addition, we could also be subject to significant regulatory fines or penalties. Any of these outcomes could harm our business.

A manufacturer must also submit periodic reports to the FDA as a condition of PMA approval. These reports include safety and effectiveness information about the device after its approval. Failure to submit such reports, or failure to submit the reports in a timely manner, could result in enforcement action by the FDA. Following its review of the periodic reports, the FDA might ask for additional information or initiate further investigation.

The PMA approvals for the iStent and the iStent inject are subject to several conditions of approval, including postmarket study and registry study requirements. Failure to comply with the conditions of approval could result in the withdrawal of PMA approval, and the inability to continue to market these devices. Failure to conduct the required studies in accordance with IRB and informed consent requirements could also be grounds for withdrawal of approval of the PMA.

Medical devices are also subject to other postmarket requirements including establishment registration and device listing, quality system requirements, reporting of adverse events and device malfunctions, reporting of corrections and removals, labeling requirements, and promotional restrictions. The regulations to which we are subject are complex and have become more stringent over time. Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities, which may include any of the following sanctions:

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untitled letters or warning letters;

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fines, injunctions, consent decrees and civil penalties;

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recalls, termination of distribution, administrative detention, or seizure of our products;

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customer notifications or repair, replacement or refunds;

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operating restrictions or partial suspension or total shutdown of production;

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delays in or refusal to grant our requests for future 510(k) clearances, PMA approvals or foreign regulatory approvals of new products, new intended uses, or modifications to existing products;

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withdrawals or suspensions of current 510(k) clearances or PMAs or foreign regulatory approvals, resulting in prohibitions on sales of our products;

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FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and

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criminal prosecution.

Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, results of operations and financial condition.

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We must continually monitor the performance of our products once approved and marketed for signs that their use may elicit serious and unexpected adverse effects. Any recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products that leads to corrective actions, could have a significant adverse impact on us.

Our ability to achieve our strategic objectives will depend, among other things, on the long-term clinical performance of the iStent and the iStent inject for lowering intraocular pressure in mild-to-moderate open-angle glaucoma patients undergoing cataract surgery. Our original PMA approvals for the iStent and the iStent inject included several post-marketing study requirements and future approvals may be subject to similar requirements.

Although we believe follow-up at three years with respect to the iStent and two years with respect to the iStent inject continues to support efficacy and safety of these products for lowering intraocular pressure in mild-to-moderate open-angle glaucoma patients undergoing cataract surgery, in the future, longer term study outcomes could demonstrate conflicting clinical effectiveness, a reduction of effectiveness, no clinical effectiveness or longer term safety issues with these iStent products. This type of differing data could have a detrimental effect on the market penetration and usage of the iStent devices by customers treating mild-to-moderate open-angle glaucoma and/or the risk/benefit profile of using the iStent devices to treat mild-to-moderate open-angle glaucoma in combination with cataract surgery. As a result, our sales may decline or expected growth would be negatively impacted. This could put pressure on our ability to execute key components of our business strategy and/or negatively impact our operating condition and financial results.

More generally, all medical devices, such as the iStent and the iStent inject, can experience performance problems that require review and possible corrective action by us or a component supplier. We cannot provide assurance that component failures, manufacturing errors, noncompliance with quality system requirements or good manufacturing practices, design defects and/or labeling inadequacies in any device or drug products that could result in an unsafe condition or injury to the patient will not occur. The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. Manufacturers may also, under their own initiative, stop shipment or recall a product if any material deficiency is found, take corrective action with respect to product in the field, or withdraw a product to improve device performance or for other reasons. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, noncompliance with good manufacturing practices or quality system requirements, design or labeling defects or other deficiencies and issues. Similar regulatory agencies in other countries have similar authority to recall products because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could cause the price of our stock to decline and expose us to product liability or other claims and harm our reputation with customers. A recall involving our products could be particularly harmful to our business, financial and operating results.

The FDA requires that certain corrections or removals be reported to the FDA within 10 working days after the recall is initiated. Notice to the FDA of a correction or removal is required when undertaken to reduce a risk to health, including when there is a reasonable probability that the product will cause serious adverse health consequences or death, or when use of the device may cause temporary or medically reversible adverse health consequences or an outcome where the probability of serious adverse health consequences is remote. In addition, companies are required to maintain certain records of corrections and removal, even if they are not reportable to the FDA or similar foreign governmental authorities. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA or foreign governmental authorities. If the FDA or foreign governmental authorities disagree with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA or a foreign governmental authority could take enforcement action for failing to report the recalls when they were conducted.

Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or applicable foreign regulatory authority may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, civil penalties or criminal fines. We may also be required to bear other costs or take other actions that may have a negative impact on our sales as well as face significant adverse publicity or regulatory consequences, which could harm our business, including our ability to market our products in the future.

In addition, under the FDA’s medical device reporting regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product

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malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. Repeated product malfunctions may result in a voluntary or involuntary product recall. We are subject to similar obligations in the EEA and other countries in which we market our products.

Any adverse event involving our products, whether in the United States or abroad, could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall, orders of repair, replacement or refund or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.

If we or our component manufacturers and contract facilities fail to comply with the FDA’s Quality System Regulation or Current Good Manufacturing Practice regulations, our manufacturing operations could be interrupted, and our product sales and operating results could suffer.

We and some of our component manufacturers and contract facilities are required to comply with regulatory requirements known as the FDA’s Quality System Regulation (QSR), which covers the procedures and documentation of the design, testing, production, control, quality assurance, inspection, complaint handling, recordkeeping, management review, labeling, packaging, sterilization, storage and shipping of our device products. The FDA’s Current Good Manufacturing Practices (cGMPs) regulations also apply to the manufacture of our products. The FDA audits compliance with these regulatory requirements through periodic announced and unannounced inspections of manufacturing and other facilities. The FDA may conduct inspections or audits at any time, and we and some of our component suppliers and contract facilities are subject to such inspections. Although we believe our manufacturing facilities and those of our critical component suppliers are in material compliance with the QSR requirements and with applicable cGMPs, we cannot provide assurance that any future inspection will not result in adverse findings. If our manufacturing facilities or those of any of our component suppliers or contract facilities are found to be in violation of applicable laws and regulations, or we or our suppliers have significant noncompliance issues or fail to timely and adequately respond to any adverse inspectional observations or product safety issues, or if any corrective action plan that we or our suppliers propose in response to observed deficiencies is not sufficient, the FDA could take enforcement action, including any of the following sanctions:

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untitled letters or warning letters;

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fines, injunctions, consent decrees and civil penalties;

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customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;

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operating restrictions or partial suspension or total shutdown of production;

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refusing or delaying our requests for clearance or approval of new products or modified products;

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withdrawing clearances or approvals that have already been granted;

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refusal to grant export approval for our products; or

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criminal prosecution.

Any of these sanctions could adversely affect our business, financial conditions and operating results.

Outside the United States, our products and operations are also often required to comply with standards set by industrial standards bodies, such as the International Organization for Standardization. Foreign regulatory bodies may evaluate our products or the testing that our products undergo against these standards and regulations. The specific standards, regulations, types of evaluation and scope of review differ among foreign regulatory bodies. If we fail to adequately comply with any of these standards, a foreign regulatory body may take adverse actions similar to those within the power of the FDA. Any such action may harm our reputation and could have an adverse effect on our business, results of operations and financial condition.

We may be subject to fines, penalties, injunctions or other enforcement actions if we are determined to be promoting the use of our products for unapproved or “off-label” uses, resulting in damage to our reputation and business.

Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of a drug or medical device for a use that has not been cleared or approved by the FDA. Use of a drug or device outside of its cleared or approved indications is known as “off-label” use. Physicians may use our products off-label, as the FDA does not restrict or regulate a physician’s choice of treatment

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within the practice of medicine. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of warning letters, untitled letters, fines, penalties, consent decrees, injunctions, or seizures, which could have an adverse impact on our reputation and financial results. We could also be subject to enforcement action under other federal or state laws, including the federal False Claims Act (FCA). While we may request additional indications for our products, the FDA may deny those requests, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared or approved product as a condition of clearance or approval.

In addition to promoting our products in a manner consistent with our clearances, we must have adequate substantiation for the claims we make for our products. If any of our claims are determined to be false, misleading or deceptive, our products could be considered to be misbranded under the FDCA or to violate the Federal Trade Commission Act. We could also face lawsuits from our competitors under the Lanham Act alleging that our marketing materials are false or misleading.

Failure to comply with the Federal Health Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and Clinical Health Act, the European Union’s General Data Protection Regulation, and implementing regulations affecting the transmission, security and privacy of health and other proprietary and personal information could result in significant penalties.

Numerous federal, and state and international laws and regulations, including the Federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Health Information Technology for Economic and Clinical Health Act (HITECH Act), and the GDPR govern the collection, dissemination, security, use, disclosure and confidentiality of patient-identifiable health and other proprietary and personally-identifiable information. HIPAA, the HITECH Act and the GDPR may require us to comply with standards for the use and disclosure of patient-identifiable health and other types of personal information. The Privacy Standards and Security Standards under HIPAA establish a set of basic national privacy and security standards for the protection of patient-identifiable health information by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. Notably, whereas HIPAA previously directly regulated only these covered entities, the HITECH Act makes certain of HIPAA’s privacy and security standards also directly applicable to covered entities’ business associates. As a result, both covered entities and business associates are now subject to significant civil and criminal penalties for failure to comply with the Privacy Standards and Security Standards.

HIPAA and the HITECH Act also include standards for common healthcare electronic transactions and code sets, such as claims information, plan eligibility and payment information. Covered entities, such as healthcare providers, are required to conform to such transaction set standards pursuant to HIPAA.

HIPAA requires covered entities to develop and maintain policies and procedures with respect to the use and disclosure of patient-identifiable health information and the adoption of administrative, physical and technical safeguards to protect such information. The HITECH Act expands the notification requirement for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information and provides a tiered system for civil monetary penalties for HIPAA violations. The HITECH Act also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA.

The GDPR, which took effect in Europe in May 2018, creates a range of new compliance obligations and increases financial penalties for non-compliance and extends the scope of the European Union data protection law to all companies processing data of European Union residents, regardless of the company’s location. The GDPR and other privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. Any failure to comply with GDPR or other data privacy laws could lead to government enforcement actions and significant penalties. Further, any perceived privacy right violation could result in reputational harm, third-party claims, lawsuits or investigations. Such regulations increase our compliance and administrative burden significantly.

If we do not comply with applicable existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions. New data privacy standards, whether implemented pursuant to

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HIPAA, the HITECH Act, the GDPR, congressional action or otherwise, could have a significant effect on the manner in which we handle healthcare-related and other personal data and the cost of complying with these standards could be significant.

The 2013 final HITECH Act omnibus rule modified the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches. Any liability from a failure to comply with the applicable requirements of HIPAA, the HITECH Act or the GDPR could adversely affect our financial condition. The costs of complying with privacy and security-related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of operations. These provisions, as modified, will be subject to interpretation by various U.S. and international courts and other governmental authorities, thus creating potentially complex compliance issues for us, as well as our clients and strategic partners. In addition, we are unable to predict what changes to these various privacy and security standards might be made in the future or how those changes could affect our business. Any new legislation or regulation in the area of privacy and security of personal information, including personal health information, could also adversely affect our business operations.

If we fail to comply with state and federal healthcare regulatory laws, we could face substantial penalties, damages, fines, disgorgement, exclusion from participation in governmental healthcare programs, and the curtailment of our operations, any of which could adversely affect our business, operations, and financial condition.

Although we do not provide healthcare services, submit claims for third-party reimbursement, or receive payments directly from Medicare, Medicaid or other third-party payors for our products, we are subject to healthcare fraud, abuse and transparency regulation and enforcement by federal and state governments, which could significantly impact our business. To ensure compliance with Medicare, Medicaid and other regulations, government agencies or their contractors often conduct routine audits and request customer records and other documents to support claims submitted for payment of services rendered. Government agencies or their contractors also periodically open investigations and obtain information from healthcare providers. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including debarment, suspension or exclusion from Medicare, Medicaid and other government reimbursement programs, any of which would have a material adverse effect on our business.

The laws that may affect our ability to operate include, but are not limited to:

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the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering, or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of this statute or specific intent to violate it;

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the civil FCA, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal payors that are false or fraudulent; knowingly making, using, or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; or knowingly making, using, or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government;

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the criminal FCA, which imposes criminal fines or imprisonment against individuals or entities who make or present a claim to the government knowing such claim to be false, fictitious or fraudulent;

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HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

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the federal civil monetary penalties statute, which prohibits, among other things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of items or services reimbursable by a Federal or state governmental program;

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the federal Physician Payments Sunshine Act under ACA, which requires certain manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members. Manufacturers must submit such reports by the 90th day of each subsequent calendar year; and

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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the device industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures.

Further, the ACA, among other things, amended the intent requirements of the federal Anti-Kickback Statute and certain criminal statutes governing healthcare fraud. A person or entity can now be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate it. In addition, ACA provided that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA.

While we do not submit claims and our customers make the ultimate decision on how to submit claims, from time to time, we may provide reimbursement guidance to our customers. If a government authority were to conclude that we provided improper advice to our customers or encouraged the submission of false claims for reimbursement, we could face action against us by government authorities. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition.

We have entered into consulting and scientific advisory board arrangements with physicians and other healthcare providers, including some who influence the ordering of and use of our products in procedures they perform. Compensation for some of these arrangements includes the provision of stock options. In addition, in connection with our clinical trial recruitment activities, we have entered into compensation arrangements with some of the physicians who recruit subjects to our clinical trials. While we believe we are in material compliance with applicable laws, because of the complex and far-reaching nature of these laws, regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or that affect our ability to use all of the data from the clinical trial to support our marketing applications, or for which we could be subject to other significant penalties. We could be adversely affected if regulatory agencies interpret our financial relationships with providers who influence the ordering of and use our products to be in violation of applicable laws.

The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies scrutinize interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time- and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.

If our operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in federal and state healthcare programs and the curtailment or restricting of our operations, any of which could harm our ability to operate our business and our financial results.

Our operations involve hazardous materials, and we must comply with environmental laws and regulations, which can be expensive.

We are subject to a variety of federal, state and local regulations relating to the use, handling, storage and disposal of, and human exposure to, hazardous and toxic materials. We could incur costs, fines, and civil and criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Compliance with current or future environmental and safety laws and regulations could restrict our ability to expand our facilities, impair our research, development or production efforts, or require us to incur other significant expenses. There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the inability to obtain permits, human error, accident, equipment failure or other causes.

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Risks Related to Our Intellectual Property

If we are unable to adequately protect our intellectual property, our competitors and other third parties could develop and commercialize products similar or identical to ours, which would substantially impair our ability to compete.

Our success and ability to compete depends significantly upon our ability to maintain and protect our proprietary rights to the technologies and inventions used in or embodied by our products. We rely on a combination of patents and trademark rights, and to a lesser extent on trade secrets and copyrights, together with licenses and nondisclosure agreements to protect our intellectual property. These legal means, however, afford only limited protection and may not adequately protect our intellectual property rights. We also have not pursued or maintained, and may not pursue or maintain in the future, patent protection for our products in every country or territory in which we sell or will in the future sell our products. In addition, we cannot be sure that any of our pending patent applications or pending trademark applications will issue or that, if issued, they will issue in a form that will be advantageous to us. The United States Patent and Trademark Office (USPTO) or other foreign patent offices may deny or significantly narrow claims made under our patent applications and our issued patents may be successfully challenged, may be designed around, or may otherwise be of insufficient scope to provide us with any meaningful protection for our present or future commercial products. Further, the USPTO or other foreign trademark offices may deny our trademark applications and, even if published or registered, these trademarks may be ineffective in protecting our brand and goodwill and may be successfully opposed or challenged.

The patent prosecution process itself is expensive and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. The patent prosecution process requires compliance with complex laws, rules and regulations imposed by patent authorities. Failure to comply with these laws, rules and regulations may derive, among other bases, from various defects of form in the preparation or filing of our patents or patent applications, which may include defects that relate to our making proper priority claims and inventorship determinations. If any such defects are identified, we may need to take corrective action. For example, we have filed petitions with the USPTO to request in part that Dr. Richard Hill, one of our consultants, be added as an inventor on patents related to the iStent, iStent inject, iStent SA, iStent Infinite and iStent Supra. Dr. Hill has assigned his rights in these patents and certain other patent applications to us pursuant to the terms of his consulting agreement. Because Dr. Hill was employed as an Associate Professor at the University of California, Irvine (the University) during the period when these patents and patent applications were developed in December 2014, we entered into an agreement with the University pursuant to which the University agreed not to challenge our ownership of these patents and patent applications. In addition, if any material defects are found in the form or preparation of any of our patents or patent applications, such patents or applications may be invalid and unenforceable. Any of these outcomes could impair our ability to prevent competition from third parties, which could harm our business. Moreover, the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. Noncompliance with these requirements can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we fail to maintain the patents and patent applications covering our products or procedures, we may not be able to stop a competitor from marketing products that are the same as or similar to our products, which would have a material adverse effect on our business. In addition, patents are limited in term. Once all of the patents covering a particular product of ours in a particular jurisdiction have expired, we will no longer be able to stop competitors from marketing a product that is the same as or similar to our product in that jurisdiction, which could have a material adverse effect on our business.

The patent position of global medical technology, device and pharmaceutical companies is generally highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation and administrative proceedings, such as post-grant or inter partes review proceedings at the USPTO. In the United States and in many foreign jurisdictions, policies regarding the breadth of claims allowed in patents can be inconsistent. The U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain patents. Future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage, which could adversely affect our business, financial condition and results of operations.

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Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, affect patent litigation or administrative proceedings at the USPTO, and switch the U.S. patent system from a “first-to-invent” system to a “first-to-file” system. Under a “first-to-file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The USPTO developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first-to-file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition. In addition, patent reform legislation may pass in the future, in the U.S. or elsewhere, that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement, and defense of our patents and applications.

We may be subject to a third-party pre-issuance submission of prior art to the USPTO or to another foreign patent office, or become involved in opposition, interference, derivation, reexamination, inter partes review, post-grant review, or other patent office proceedings or litigation, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.

We have a number of foreign patents and patent applications, and expect to pursue patent protection in the most significant markets in which we do business. The laws of other countries in which our product offerings are or may be sold may not protect our product offerings and intellectual property to the same extent as U.S. laws, if at all. Many companies have encountered significant difficulties in obtaining, protecting and defending such rights in such markets. In addition, many countries limit the enforceability of patents against other parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, and certain countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to other parties. We also may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in these jurisdictions, our business, financial condition and results of operations could be substantially harmed.

Despite our efforts to safeguard our intellectual property rights, we may not be successful in doing so, or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our products, technology or other information that we regard as proprietary. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. Our inability to adequately protect our intellectual property could allow our competitors and other third parties to produce products based on our patented or proprietary technology and other intellectual property rights, which could substantially impair our ability to compete.

We may not be able to accurately estimate or control our future operating expenses in relation to obtaining, enforcing and/or defending intellectual property, which could lead to cash shortfalls. Our operating expenses may fluctuate significantly in the future as a result of the costs of preparing, filing, prosecuting, defending and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation or costs associated with administrative proceedings and the results of such proceedings.

We have been and may in the future become involved in patent and other intellectual property litigation or administrative proceedings to enforce or defend our intellectual property rights, which could be costly, time consuming and unsuccessful and could interfere with our ability to successfully commercialize our products.

We have asserted and may in the future need to assert claims of infringement against third parties to protect our intellectual property. For example, on April 14, 2018, we filed a patent infringement lawsuit against Ivantis, Inc. in the U.S. District Court for the Central District of California, Southern Division, alleging that Ivantis’ Hydrus Microstent

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device infringes certain of our U.S. patents. For more information on this lawsuit, please see Item 1 – Legal Proceedings above.

Regardless of the final outcome, any litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable and could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition and results of operations. Any claims we assert or have asserted against alleged infringers could provoke these third parties to assert counterclaims against us alleging that we infringe their own intellectual property rights, or that our rights are invalid or unenforceable. A court could hold that some or all of our asserted intellectual property rights are not infringed, or could invalidate our rights, hold our rights unenforceable, or substantially narrow the scope of protection. Any such adverse result would undermine our competitive position. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could hurt the price of our common stock. Such litigation proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities.

We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from selling our products, require us to obtain licenses from third parties, require us to develop non-infringing alternatives and/or subject us to substantial monetary damages and injunctive relief.

The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Third parties could assert infringement or misappropriation claims against us with respect to our current or future commercial products, such as the counterclaims filed by Ivantis in 2018, as described above. Moreover, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that materially and adversely affect our business. Our competitors or other interested parties could also pursue additional patent protection related to their earlier patent disclosures with the intent to cover our products. Whether or not any such claims are valid, we cannot be certain that we have not infringed and will not in the future infringe the intellectual property rights of such third parties or others. Additionally, for business reasons, we have challenged and may in the future seek to invalidate or challenge the intellectual property rights of a third party, including those rights owned by our competitors, before any infringement assertion is made. This action could include seeking a declaration or decision from a court or patent office that one or more of our products do not infringe one or more patents or other intellectual property rights owned by third parties and/or that one or more patents owned by one or more third parties are invalid.

Any infringement or misappropriation claim or validity or infringement challenge could result in significant costs, substantial damages and our inability to manufacture, market or sell our existing or future products that are found to infringe. Even if we were to prevail in any such action, the litigation or administrative proceeding could result in substantial cost and diversion of resources that could materially and adversely affect our business. If a court determined, or if we independently discovered, that our product offerings violated third-party proprietary rights, there can be no assurance that we would be able to re-engineer our products to avoid those rights or to obtain a license under those rights on commercially reasonable terms, if at all. As a result, we could be prohibited from selling products that are found to infringe, or we could elect not to sell or to stop selling products that we believe have a substantial probability of infringing a third-party’s intellectual property rights. Even if obtaining a license were feasible, it may be costly and time-consuming. A court could also enter orders that temporarily, preliminarily or permanently enjoin us or our customers from making, using, selling, offering to sell, distributing, exporting or importing the iStent or iStent inject, or our products in development, or could enter orders mandating that we undertake certain remedial activities. A court could also order us to pay compensatory damages for such infringement, plus prejudgment interest, and if we are found to have willfully infringed third-party rights, could in addition treble the compensatory damages and award attorneys’ fees. These damages could be substantial and could harm our reputation, business, financial condition and results of operations.

Even if resolved in our favor, litigation or other legal or administrative proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could hurt the price of our common stock. Such litigation or administrative proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or administrative proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or administrative proceedings more effectively than we can because of their greater financial resources. Uncertainties

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resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace.

If any of our employees, consultants or others breach their proprietary information agreements, our competitive position could be harmed.

We protect our proprietary technology, in part, through proprietary information and inventions agreements with employees, consultants and other parties. These agreements with employees and consultants generally contain standard provisions requiring those individuals to assign to us, without additional consideration, inventions conceived or reduced to practice by them while employed or retained by us, subject to customary exceptions. Although it is our policy to require each of our employees, consultants and any other parties who may be involved in the development of intellectual property on our behalf to execute such agreements, we may be unsuccessful in doing so with each party who in fact develops intellectual property that we regard as our own. The relevant assignment provisions may not be self-executing or may be breached. As a result, our competitors may learn our trade secrets or we may be required to pursue litigation in order to determine the ownership of the intellectual property rights at issue.

Even if we file suit to prevent or stop such disclosure, there is a risk that a court could find we have not adequately protected the information as a trade secret and allow use of the disclosed information by our competitors. Additionally, we may need to file suit to force the employee, consultant or other party in breach to assign his, her or its rights to us, or we may need to pay additional compensation to such employee, consultant or other party in order to quiet or obtain legal title to the intellectual property rights at issue.

We may be subject to claims that we or our employees have misappropriated the intellectual property of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors and third parties may claim an ownership interest in intellectual property we regard as our own.

Many of our employees and consultants were previously employed at or engaged by other medical device, biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, consultants and contractors, may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees and consultants do not use the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, misappropriated the intellectual property or disclosed the alleged trade secrets or other proprietary information, of these former employers or competitors. Additionally, we may be subject to claims from third parties challenging our ownership interest in intellectual property we regard as our own, based on claims that our employees or consultants have breached an obligation to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or features that are important or essential to our products could have a material adverse effect on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could have an adverse effect on our business, results of operations and financial condition.

Risks Related to Being a Public Company

If we experience material weaknesses in, or otherwise fail to maintain an effective system of, internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, Section 404(a) of the Sarbanes-Oxley Act requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over

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financial reporting. Section 404(b) of the Sarbanes-Oxley Act requires our independent registered public accounting firm to annually attest to the effectiveness of our internal control over financial reporting.

As a public company, we are required to provide an annual management report on the effectiveness of our internal control over financial reporting and our independent registered public accounting firm is required to audit the effectiveness of our internal control over financial reporting. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be adversely affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources

Risks generally associated with a company-wide implementation of an enterprise resource planning (ERP) system may adversely affect our business and results of operations or the effectiveness of our internal controls over financial reporting.

We are in the process of implementing a company-wide ERP system to upgrade certain existing business, operational, and financial processes. Our ERP implementation is a complex and time-consuming project. Our results of operations could be adversely affected if we experience time delays or cost overruns during the ERP implementation process, or if the ERP system or associated process changes do not give rise to the benefits that we expect. This project has required and may continue to require investment of capital and human resources, the re-engineering of processes of our business, and the attention of many employees who would otherwise be focused on other aspects of our business. Any deficiencies in the design and implementation of the new ERP system could result in potentially much higher costs than we had incurred and could adversely affect our ability to develop and launch solutions, provide services, fulfill contractual obligations, file reports with the SEC in a timely manner, operate our business or otherwise affect our controls environment. Any of these consequences could have an adverse effect on our results of operations and financial condition. In addition, because the ERP is a new system and we have no prior experience with it, there is an increased risk that one or more of our financial controls may fail. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the New York Stock Exchange, the SEC, or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

Risks Related to our Common Stock and Ownership of Our Common Stock

We expect that the price of our common stock may fluctuate substantially.

The market price for our common stock may fluctuate depending upon many factors, including, but not limited to:

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the depth and liquidity of the market for our common stock;

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volume, timing and nature of orders for our products;

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developments generally affecting medical device companies;

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actual or anticipated quarterly variation in our results of operations or the results of our competitors;

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the announcements by us or our competitors of new products or product enhancements, significant contracts, commercial relationships or capital commitments;

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developments or disputes concerning our intellectual property or other proprietary rights;

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issuance of new or changes in earnings estimates or recommendations or reports by securities analysts;

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investor perceptions of us and our business, including changes in market valuations of medical device companies;

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actions by institutional or other large stockholders;

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commencement of, or our involvement in, litigation;

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failure to achieve significant sales;

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manufacturing disruptions that could occur if we were unable to successfully expand our production in our current or an alternative facility;

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any future sales of our common stock or other securities;

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any major change to the composition of our board of directors or management;

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our results of operations and financial performance; and

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general economic, industry and market conditions.

In addition, the market price of the stocks of medical device, medical technology, pharmaceutical, biotechnology and other life science companies have experienced significant volatility that often does not relate to the operating performance of the companies represented by the stock. Further, there has been particular volatility in the market price of securities of early-stage and development-stage life science and medical device companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.

If securities or industry analysts publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and restated bylaws include provisions that:

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authorize our board of directors to issue, without further action by the stockholders, up to 5,000,000 shares of undesignated preferred stock;

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require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

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specify that special meetings of our stockholders may be called only by our board of directors, the chairman of the board of directors, the chief executive officer or the president;

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establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

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establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered three year terms;

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provide that our directors may be removed only for cause by a supermajority vote of our stockholders;

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provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

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specify that no stockholder is permitted to cumulate votes at any election of directors; and

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require a supermajority vote of the stockholders and a majority vote of the board to amend certain of the above-mentioned provisions and our bylaws.

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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.

We have never paid dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Accordingly, investors may have to sell some or all of their shares of our common stock in order to generate cash flow from their investment. Investors may not receive a gain on their investment when they sell shares and may lose the entire amount of the investment.

Our charter provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between the Company and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers or other employees.

The Restated Certificate of Incorporation of Glaukos (the Glaukos Charter) provides that, unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company or its stockholders, (iii) any action or proceeding asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, the Glaukos Charter or our bylaws, or (iv) any action or proceeding asserting a claim governed by the internal affairs doctrine. This exclusive forum provision is intended to apply to claims arising under Delaware state law and would not apply to claims brought pursuant to the Exchange Act or Securities Act of 1933, as amended, or any other claim for which the federal courts have exclusive jurisdiction. The exclusive forum provision in the Glaukos Charter will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.

This exclusive forum provision may limit a stockholder's ability to bring a claim in a judicial forum of its choosing for disputes with the combined company or its directors, officers or other employees, which may discourage lawsuits against the Company and its directors, officers and other employees. In addition, stockholders who do bring a claim in the Court of Chancery of the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder would otherwise choose to bring the action, and such judgments or results may be more favorable to the Company than to our stockholders. However, the enforceability of similar exclusive forum provisions in other companies' certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find this type of provision to be inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings. If a court were to find the exclusive forum provision contained in the Glaukos Charter to be inapplicable or unenforceable in an action, we might incur additional costs associated with resolving such action in other jurisdictions.

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Item 6. Exhibits


		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit	Filing Date
2.1	IOP System Purchase Agreement, dated as of April 12, 2017, by and between Glaukos Corporation and DOSE Medical Corporation	8-K	1-37463	2.1	4/12/2017
2.2	Agreement and Plan of Merger, dated as of August 7, 2019, by and between Glaukos Corporation and Avedro, Inc.	8-K	1-37463	2.1	8/7/2019
3.1	Restated Certificate of Incorporation of the Registrant	8-K	1-37463	3.1	06/30/2015
3.2	Amended and Restated Bylaws of the Registrant	8-K	1-37463	3.2	06/30/2015
10.1	Form of Voting Agreement between Glaukos Corporation and certain stockholders of Avedro, Inc.	8-K	1-37463	10.1	8/7/2019
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	XBRL Taxonomy Schema Linkbase Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Taxonomy Definition Linkbase Document
101.LAB	XBRL Taxonomy Labels Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document
104	Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL

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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, in the City of San Clemente, State of California, on November 6, 2019.

GLAUKOS CORPORATION

By:	/s/ THOMAS W. BURNS
Thomas W. Burns
Chief Executive Officer and President (Principal Executive Officer)

By:	/s/ JOSEPH E. GILLIAM
Joseph E. Gilliam
Chief Financial Officer and Sr. Vice President, Corporate Development (Principal Accounting and Financial Officer)

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Glaukos (GKOS) 10-Q2019 Q3 Quarterly report

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