Glaukos 10Q 2021 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, 2021

☐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 3, 2021, there were 46,890,175 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

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GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended September 30, 2021

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We use Glaukos, our logo, iStent, iStent inject, iStent inject W, iStent Infinite, iStent SA, iPrism, iDose, Avedro, Photrexa, iLink, KXL, Mosaic 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,
	2021		2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	113,131	$	96,596
Short-term investments		315,834		307,772
Accounts receivable, net		35,236		36,059
Inventory, net		19,720		15,809
Prepaid expenses and other current assets		17,887		13,206
Total current assets		501,808		469,442
Restricted cash		9,416		9,566
Property and equipment, net		60,800		24,008
Operating lease right-of-use asset		28,734		20,009
Finance lease right-of-use asset		49,627		51,443
Intangible assets, net		339,009		357,693
Goodwill		66,134		66,134
Deposits and other assets		8,601		7,207
Total assets	$	1,064,129	$	1,005,502

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	8,459	$	4,371
Accrued liabilities		54,991		45,331
Total current liabilities		63,450		49,702
Convertible senior notes		279,683		189,416
Operating lease liability		29,889		20,704
Finance lease liability		72,803		60,690
Deferred tax liability, net		8,274		10,512
Other liabilities		8,981		7,029
Total liabilities		463,080		338,053

Commitments and contingencies (Note 12)

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; 46,892 and 45,275 shares issued and 46,864 and 45,247 shares outstanding as of September 30, 2021 and December 31, 2020 respectively		47		45
Additional paid-in capital		943,486		976,590
Accumulated other comprehensive income		987		1,004
Accumulated deficit		(343,339)		(310,058)
Less treasury stock (28 shares as of September 30, 2021 and December 31, 2020)		(132)		(132)
Total stockholders' equity		601,049		667,449
Total liabilities and stockholders' equity	$	1,064,129	$	1,005,502

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,
	2021		2020		2021		2020
Net sales	$	74,710	$	64,831	$	220,771	$	151,725
Cost of sales		15,370		17,932		49,762		72,129
Gross profit		59,340		46,899		171,009		79,596
Operating expenses:
Selling, general and administrative		44,470		38,947		131,691		127,609
Research and development		28,846		20,304		74,321		64,148
In-process research and development		5,000		-		10,000		-
Litigation-related settlement		(30,000)		-		(30,000)		-
Total operating expenses		48,316		59,251		186,012		191,757
Income (loss) from operations		11,024		(12,352)		(15,003)		(112,161)
Non-operating expense:
Interest income		291		595		1,016		1,881
Interest expense		(3,413)		(5,732)		(9,948)		(8,485)
Other (expense) income, net		(1,470)		852		(3,097)		342
Total non-operating expense		(4,592)		(4,285)		(12,029)		(6,262)
Income (loss) before taxes		6,432		(16,637)		(27,032)		(118,423)
Income tax provision (benefit)		202		(889)		689		(8,723)
Net income (loss)	$	6,230	$	(15,748)	$	(27,721)	$	(109,700)
Basic net income (loss) per share	$	0.13	$	(0.35)	$	(0.60)	$	(2.48)
Diluted net income (loss) per share	$	0.13	$	(0.35)	$	(0.60)	$	(2.48)
Weighted average shares used to compute basic net income (loss) per share		46,737		44,706		46,255		44,302
Weighted average shares used to compute diluted net income (loss) per share		49,320		44,706		46,255		44,302

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,
	2021		2020		2021		2020
Net income (loss)	$	6,230	$	(15,748)	$	(27,721)	$	(109,700)
Other comprehensive income (loss):
Foreign currency translation gain (loss)		369		(423)		548		141
Unrealized (loss) gain on short-term investments		(34)		(170)		(565)		403
Other comprehensive income (loss)		335		(593)		(17)		544
Total comprehensive income (loss)	$	6,565	$	(16,341)	$	(27,738)	$	(109,156)

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, 2020	45,275	$	45	$	976,590	$	1,004	$	(310,058)	(28)	$	(132)	$	667,449
Effect of adoption of ASU 2020-06	—		—		(81,553)		—		(5,560)	—		—		(87,113)
Common stock issued under stock plans	741		1		17,034		—		—	—		—		17,035
Stock-based compensation	—		—		8,748		—		—	—		—		8,748
Other comprehensive income	—		—		—		124		—	—		—		124
Net loss	—		—		—		—		(16,469)	—		—		(16,469)
Balance at March 31, 2021	46,016	$	46	$	920,819	$	1,128	$	(332,087)	(28)	$	(132)	$	589,774
Common stock issued under stock plans	481		—		4,525		—		—	—		—		4,525
Stock-based compensation	—		—		7,984		—		—	—		—		7,984
Other comprehensive loss	—		—		—		(476)		—	—		—		(476)
Net loss	—		—		—		—		(17,482)	—		—		(17,482)
Balance at June 30, 2021	46,497	$	46	$	933,328	$	652	$	(349,569)	(28)	$	(132)	$	584,325
Common stock issued under stock plans	395		1		3,969		—		—	—		—		3,970
Stock-based compensation			—		6,189		—		—	—		—		6,189
Other comprehensive loss			—		—		335		—	—		—		335
Net income			—		—		—		6,230	—		—		6,230
Balance at September 30, 2021	46,892	$	47	$	943,486	$	987	$	(343,339)	(28)	$	(132)	$	601,049


						Accumulated
				Additional		other
	Common stock			paid-in		comprehensive		Accumulated		Treasury stock			Total
	Shares	Amount		capital		income		deficit		Shares	Amount		equity
Balance at December 31, 2019	43,530	$	44	$	861,740	$	1,330	$	(189,710)	(28)	$	(132)	$	673,272
Common stock issued under stock plans	589		—		4,220		—		—	—		—		4,220
Stock-based compensation	—		—		17,176		—		—	—		—		17,176
Other comprehensive income	—		—		—		689		—	—		—		689
Net loss	—		—		—		—		(54,058)	—		—		(54,058)
Balance at March 31, 2020	44,119	$	44	$	883,136	$	2,019	$	(243,768)	(28)	$	(132)	$	641,299
Common stock issued under stock plans	459		1		1,633		—		—	—		—		1,634
Stock-based compensation	—		—		13,062		—		—	—		—		13,062
Equity component of convertible senior notes, net of transaction costs of $3,267 and taxes of $12,891	—		—		81,554		—		—	—		—		81,554
Purchase of capped calls related to issuance of convertible senior notes	—		—		(35,679)		—		—	—		—		(35,679)
Other comprehensive income	—		—		—		448		—	—		—		448
Net loss	—		—		—		—		(39,894)	—		—		(39,894)
Balance at June 30, 2020	44,578	$	45	$	943,706	$	2,467	$	(283,662)	(28)	$	(132)	$	662,424
Common stock issued under stock plans	277		—		5,821		—		—	—		—		5,821
Stock-based compensation	—		—		9,659		—		—	—		—		9,659
Other comprehensive income	—		—		—		(593)		—	—		—		(593)
Net loss	—		—		—		—		(15,748)	—		—		(15,748)
Balance at September 30, 2020	44,855	$	45	$	959,186	$	1,874	$	(299,410)	(28)	$	(132)	$	661,563

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,
	2021		2020
Operating Activities
Net loss	$	(27,721)	$	(109,700)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		3,475		3,297
Amortization of intangible assets		18,684		18,684
Amortization of lease right-of-use assets		3,519		3,836
Amortization of debt issuance costs		1,030		3,234
Deferred income tax benefit		(72)		(9,340)
(Gain) loss on disposal of fixed assets		(3)		287
Stock-based compensation		22,921		37,733
Change in fair value of cash settled stock options		-		(3,172)
Unrealized foreign currency losses		1,836		22
Amortization of premium on short-term investments		773		229
Other liabilities		1,951		3,343
Changes in operating assets and liabilities:
Accounts receivable, net		494		5,629
Inventory, net		(4,257)		22,578
Prepaid expenses and other current assets		(5,039)		(4,329)
Accounts payable and accrued liabilities		11,666		(6,141)
Other assets		102		218
Net cash provided by (used in) operating activities		29,359		(33,592)
Investing activities
Purchases of short-term investments		(191,756)		(273,798)
Proceeds from sales and maturities of short-term investments		182,356		78,084
Purchases of property and equipment		(38,458)		(4,790)
Proceeds from disposal of property and equipment		3		-
Investment in company-owned life insurance		(1,505)		(1,097)
Net cash used in investing activities		(49,360)		(201,601)
Financing activities
Proceeds from convertible senior notes		-		287,500
Payment of convertible senior notes transaction costs		-		(9,614)
Purchase of capped calls related to issuance of convertible senior notes		-		(35,679)
Proceeds from exercise of stock options		24,383		10,258
Proceeds from share purchases under Employee Stock Purchase Plan		4,817		4,025
Payment of employee taxes related to vested restricted stock units		(3,670)		(2,607)
Principal paid on finance lease		(555)		-
Proceeds from tenant improvement allowance		12,668		-
Net cash provided by financing activities		37,643		253,883
Effect of exchange rate changes on cash and cash equivalents		(1,257)		(126)
Net increase in cash, cash equivalents and restricted cash		16,385		18,564
Cash, cash equivalents and restricted cash at beginning of period		106,162		71,756
Cash, cash equivalents and restricted cash at end of period	$	122,547	$	90,320
Supplemental disclosures of cash flow information
Taxes paid	$	307	$	418

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 developing novel therapies for the treatment of glaucoma, corneal disorders, and retinal disease. The Company developed Micro-Invasive Glaucoma Surgery (MIGS) to serve as an alternative to the traditional glaucoma treatment paradigm and launched its first MIGS device commercially in 2012. The Company also offers commercially a proprietary bio-activated pharmaceutical therapy for the treatment of a corneal disorder, keratoconus, that was approved by the U.S. Food and Drug Administration (FDA) in 2016 and is developing a pipeline of surgical devices, sustained pharmaceutical therapies, and implantable biosensors intended to treat glaucoma progression, corneal disorders such as keratoconus, dry eye and refractive vision correction, and retinal diseases such as neovascular age-related macular degeneration, diabetic macular edema and retinal vein occlusion.

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 (GAAP) in the United States of America (U.S.) 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 necessary for the fair presentation of the Company’s financial information contained herein. All such adjustments are of a normal and recurring nature. The condensed consolidated balance sheet as of December 31, 2020 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, 2020, which are contained in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) on March 1, 2021. The Company’s results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any other interim period.

Recent Developments

Acquisition of Avedro, Inc.

On November 21, 2019, the Company acquired Avedro, Inc. (Avedro), a hybrid ophthalmic pharmaceutical and medical technology company focused on developing therapies designed to treat corneal diseases and disorders and correct refractive conditions, in a stock-for-stock transaction (Avedro Merger). Avedro developed novel bio-activated drug formulations used in combination with proprietary systems for the treatment of progressive keratoconus and corneal ectasia following refractive surgery. The therapy is the first and only minimally invasive anterior segment product offering approved by the FDA shown to halt the progression of keratoconus.

2022 reimbursement rates

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with cataract surgery, while the facility fee schedule related to reimbursement for surgeries that include implantation of trabecular bypass stents, such as the Company’s iStent family of products, in conjunction with cataract surgery, would slightly decrease reimbursements to an ambulatory surgery center and increase reimbursements to a hospital. These CMS reimbursement rates will take effect January 1, 2022, subject to any updates or corrections by CMS.

Settlement of Patent Litigation

On September 14, 2021, the Company entered into a Settlement Agreement (Settlement Agreement) with Ivantis, Inc. (Ivantis), pursuant to which the Company and Ivantis agreed to terminate the patent infringement lawsuit the Company had filed against Ivantis on April 14, 2018 in the U.S. District Court for the Central District of California, Southern Division (the Lawsuit). In the Lawsuit, the Company alleged that Ivantis’ Hydrus® Microstent device infringes the Company’s U.S. Patent Nos. 6,626,858 and 9,827,143. Pursuant to the terms of the Settlement Agreement, Ivantis will pay Glaukos a cash payment of $60.0 million, $30.0 million of which was paid to Glaukos in the quarter ended September 30, 2021, and $30.0 million of which will be paid by December 31, 2022. The $30.0 million cash payment received during the quarter ended September 30, 2021 is included in litigation-related settlement as a reduction of operating expenses on the condensed consolidated income statement.

Additionally, Ivantis will make quarterly royalty payments to the Company in the amount of 10% of Ivantis’ Hydrus Microstent U.S. sales and any international sales supplied out of the U.S. beginning in the fourth quarter of 2021 through April 26, 2025, subject to a per-unit minimum payment. Glaukos and Ivantis have dismissed with prejudice all of their claims against each other in the Lawsuit, which was scheduled for trial beginning on or around September 28, 2021, and in related lawsuits in other forums and jurisdictions. The parties also have agreed to mutual licenses and covenants not to sue the other party for patent infringement relating to Ivantis’ Hydrus Microstent or Glaukos’ micro-stent devices.

Attillaps License Agreement

On September 20, 2021, the Company announced that it entered into a licensing agreement (Attillaps License Agreement) with Attillaps Holdings, Inc. (Attillaps) under which Attillaps granted Glaukos a global exclusive license to Attillaps’ proprietary library of investigational pharmaceutical compounds that target the eradication of Demodex mites, which are the root cause of Demodex blepharitis and often associated with meibomian gland dysfunction and related ophthalmic diseases. Under the Attillaps License Agreement, the Company has the exclusive global right to research, develop, manufacture and commercialize products using certain acetylcholinesterase inhibitors for the treatment of ophthalmic diseases caused by Demodex mites. The Company paid $5.0 million upon the signing of the Attillaps License Agreement, which is included in in-process research and development expenses within the condensed consolidated statement of operations. The Company will have ongoing milestone and royalty payment obligations depending on the success of the development, approval and commercialization of the compounds.

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, 2021, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 1, 2021, including in connection with the Company’s adoption of the accounting pronouncements noted below in the sub-heading “Recently Adopted Accounting Pronouncements” with the exception of the adoption of Accounting Standards Update (ASU) No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06). See Recently Adopted Accounting Pronouncements and Note 9. Convertible Senior Notes for more detail.

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

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condensed consolidated financial statements relate to revenue recognition, the fair value of the liability component of the Company’s 2.75% convertible notes due 2027 (Convertible Notes), the incremental borrowing rate related to the Company’s leased assets, stock-based compensation expense and the valuation of certain intangible assets related to the Company’s acquisition of Avedro. 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.

The Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021 reflect the Company’s estimates of the impact of the ongoing COVID-19 pandemic. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are uncertain, including the duration and severity of the COVID-19 outbreak, the severity and transmission rates of new and more contagious and/or vaccine-resistant variants of COVID-19, and the actions taken to contain it or treat COVID-19, including the availability, distribution, rate of public acceptance and efficacy of vaccines for COVID-19, as well as the economic impact on local, regional, national and international customers and markets. As a result, there may be changes to the Company’s estimates regarding the impact of COVID-19 in future periods.

Cash, Cash Equivalents and Restricted Cash

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 months ended September 30, 2021 (in thousands):


	September 30,		December 31,
	2021		2020
Cash and cash equivalents	$	113,131	$	96,596
Restricted cash		9,416		9,566
Cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows	$	122,547	$	106,162

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-06, which simplifies accounting for convertible instruments. The embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASU 2020-06, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to compute diluted earnings per share to be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective adoption approach. The cumulative effect of the change was recognized as an adjustment to the opening balance of retained earnings at the date of adoption. The comparative prior year information has not been restated and continues to be presented according to accounting standards in effect for those periods.

The adoption of ASU 2020-06 resulted in an increase to accumulated deficit of $5.5 million, a decrease to additional paid-in capital of $81.6 million, a decrease in the deferred tax liability of $2.2 million and an increase to convertible notes, net of $89.2 million. Interest expense recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. Lastly, the Company derecognized deferred income taxes associated with the Convertible Notes and adjusted the deferred tax liability associated with the embedded conversion feature and corresponding change in the valuation allowance.

Recently Issued Accounting Pronouncements Not Yet Adopted

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The Company reviewed recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the condensed consolidated financial statements.

Note 3. Balance Sheet Details

Short-term Investments

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


	At September 30, 2021
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government bonds	less than 2	$	74,764	$	13	$	(9)	$	74,768
U.S. government agency bonds	less than 3		123,916		62		(36)		123,942
Bank certificates of deposit	less than 2		20,800		4		(3)		20,801
Commercial paper	less than 1		2,996		1		—		2,997
Corporate notes	less than 3		59,408		114		(26)		59,496
Asset-backed securities	less than 2		14,488		74		(2)		14,560
Municipal bonds	less than 3		19,271		20		(21)		19,270
Total		$	315,643	$	288	$	(97)	$	315,834

	At December 31, 2020
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government agency bonds	less than 3		206,704		223		(3)		206,924
Bank certificates of deposit	less than 1		20,700		8		-		20,708
Commercial paper	less than 1		1,500		-		-		1,500
Corporate notes	less than 3		54,866		308		(1)		55,173
Asset-backed securities	less than 2		13,290		205		-		13,495
Municipal bonds	less than 3		9,954		21		(3)		9,972
Total		$	307,014	$	765	$	(7)	$	307,772

Accounts Receivable, Net

Accounts receivable consisted of the following (in thousands):


	September 30,		December 31,
	2021		2020
Accounts receivable	$	36,654	$	37,729
Allowance for credit losses		(1,418)		(1,670)
	$	35,236	$	36,059

The Company’s allowance for credit losses represents management’s estimate of current expected credit losses and there were immaterial bad-debt write offs charged during the three and nine months ended September 30, 2021.

As of September 30, 2021, the Company evaluated the current and expected future economic and market conditions surrounding the COVID-19 pandemic as it relates to collectability of its accounts receivable and determined the estimate of expected credit losses was not materially impacted. The Company will continue to re-evaluate the estimate of credit losses related to COVID-19 in conjunction with its assessment of expected credit losses in subsequent quarters.

Additionally, no customers accounted for more than 10% of net accounts receivable as of September 30, 2021 or December 31, 2020.

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Inventory, Net

Inventory, net consisted of the following (in thousands):


	September 30,		December 31,
	2021		2020
Finished goods	$	5,966	$	5,346
Work in process		5,695		3,584
Raw material		8,059		6,879
	$	19,720	$	15,809

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	September 30,		December 31,
	2021		2020
Accrued bonuses	$	10,955	$	10,815
Accrued vacation benefits		4,355		3,728
Accrued payroll taxes		6,908		3,198
Other accrued liabilities		32,773		27,590
	$	54,991	$	45,331

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 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).

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The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):


			At September 30, 2021
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	September 30,		identical assets		inputs		inputs
	2021		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents:
Money market funds ⁽ⁱ⁾	$	2,554	$	2,554	$	-	$	-
Available for sale securities:
U.S. government agency bonds ⁽ⁱⁱ⁾		123,942		-		123,942		-
U.S. government bonds ⁽ⁱⁱ⁾		74,768		-		74,768		-
Bank certificates of deposit ⁽ⁱⁱ⁾		20,801		-		20,801		-
Commercial paper ⁽ⁱⁱ⁾		2,997		-		2,997		-
Corporate notes ⁽ⁱⁱ⁾		59,496		-		59,496		-
Asset-backed securities ⁽ⁱⁱ⁾		14,560		-		14,560		-
Municipal bonds ⁽ⁱⁱ⁾		19,270		-		19,270		-
Investments held for deferred compensation plans		6,836		-		6,836		-
Total Assets	$	325,224	$	2,554	$	322,670	$	-
Liabilities
Deferred compensation plans	$	6,859	$	-	$	6,859	$	-
Total Liabilities	$	6,859		-	$	6,859	$	-


			At December 31, 2020
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	December 31,		identical assets		inputs		inputs
	2020		(Level 1)		(Level 2)		(Level 3)
Assets

Cash equivalents:
Money market funds ⁽ⁱ⁾	$	5,169	$	5,169	$	-	$	-
Available for sale securities:
U.S. government agency bonds ⁽ⁱⁱ⁾		206,924		-		206,924		-
Bank certificates of deposit ^{(ii) (iii)}		25,708		-		25,708		-
Commercial paper ⁽ⁱⁱ⁾		1,500		-		1,500		-
Corporate notes ⁽ⁱⁱ⁾		55,173		-		55,173		-
Asset-backed securities ⁽ⁱⁱ⁾		13,495		-		13,495		-
Municipal bonds ⁽ⁱⁱ⁾		9,972		-		9,972		-
Investments held for deferred compensation plans		5,331				5,331		-
Total Assets	$	323,272	$	5,169	$	318,103	$	-
Liabilities
Deferred compensation plans	$	5,232		-	$	5,232		-
Total Liabilities	$	5,232	$	-	$	5,232	$	-

(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 December 31, 2020, a bank certificate of deposit totaling $5,000 (in thousands) is included in cash and cash equivalents on the condensed consolidated balance sheets, as the investment had a maturity of three months or less from the date of purchase on the condensed consolidated balance sheets.

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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, municipal bonds, 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. Pursuant to the Company’s deferred compensation plan (the Deferred Compensation Plan), 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 and Deferred Compensation Plan liability consist of company-owned life insurance policies (COLIs) and the pricing on these investments can be independently evaluated. 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.

The Company did 0t have any assets or liabilities measured at fair value on a recurring basis within Level 3 fair value measurements as of September 30, 2021 and December 31, 2020.

Convertible Senior Notes

As of September 30, 2021, the fair value of the Convertible Notes was $346.1 million. The fair value was determined on the basis of the market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. See Note 9, Convertible Senior Notes for additional information.

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 operating leases is recognized on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Accounting Standards Codification (ASC) 842, the Company combines lease and non-lease components.

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.

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 in the first quarter of 2022. 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 $12.7 million, upon the Company providing the necessary documentation evidencing the costs of the allowable leasehold improvements. All of the aforementioned tenant improvement allowances were utilized by the end of the quarter ended June 30, 2021 and during and as of the nine months ended September 30, 2021 the Company received $12.7 million in reimbursements.

The Company also leases 2 adjacent facilities located in San Clemente, California and a facility in Burlington, Massachusetts. The total leased square footage of the San Clemente facilities equals approximately 98,000. On July 2, 2020, the Company extended the term of the San Clemente facilities by five years, both of which now expire on May 31, 2030. Each San Clemente facility lease contains an option to extend the lease for 1 additional five-year period at market rates. The total leased square footage of the Burlington facility is approximately 60,000 square feet, and the lease expires on July 31, 2033. The Burlington facility lease contains an option to extend the lease for 1 additional five-year period at market rates.

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The Company currently intends to maintain its manufacturing facilities at its San Clemente and Burlington locations for the foreseeable future. The Company leases approximately 27,000 square feet of office and laboratory space in Waltham, Massachusetts, pursuant to a lease agreement that expires in 2023.

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 maturity of the Company’s operating and finance lease liabilities as of September 30, 2021:


Maturity of Lease Liabilities	Operating		Finance
(in thousands)	Leases ^(a)		Leases ^(b)
Remainder of 2021	$	548	$	—
2022		3,879		—
2023		3,513		11,115
2024		3,290		5,184
2025		3,274		5,340
2026		3,359		5,500
Thereafter		36,630		107,533
Total lease payments	$	54,493	$	134,672
Less: imputed interest		23,428		61,869
Total lease liabilities	$	31,065	$	72,803

(a)	Operating lease payments include $20.6 million related to options to extend lease terms that are reasonably certain of being exercised.

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

Note 6. Intangible Assets and Goodwill

Avedro intangible assets

As part of the Avedro Merger on November 21, 2019, the Company acquired identifiable intangible assets for (i) developed technology related to Photrexa, a bio-activated pharmaceutical therapy for the corneal cross-linking treatment of keratoconus, which is being amortized to cost of sales over a weighted-average estimated useful life of approximately 11 years, and (ii) customer relationships, which will be amortized to selling, general and administrative expense over an estimated useful life of five years. The Company also acquired in-process research and development (IPR&D) related to other applications of Avedro’s corneal remodeling platform, which will not be amortized until technological feasibility is met, but will be assessed for impairment annually, or more frequently if indicators of impairment become present.

The fair value of developed technology and IPR&D assets were determined using an excess earnings methodology. Significant assumptions used in the valuation include: (i) the period in which material net cash inflows are expected to commence, which was estimated to be 2021 for developed technology and 2023 for IPR&D assets, and (ii) the risk-adjusted discount rate of 11.5% for developed technology and 13% for IPR&D assets.

For the three months ended September 30, 2021 and September 30, 2020, amortization expense related to the above finite-lived intangible assets was approximately $5.5 million and $0.7 million, recorded in cost of sales and selling, general and administrative expenses, respectively, in the condensed consolidated statement of operations. For the nine months ended September 30, 2021 and September 30, 2020, amortization expense related to the above finite-lived intangible assets was approximately $16.6 million and $2.1 million, recorded in cost of sales and selling, general and administrative expenses, respectively, in the condensed consolidated statement of operations.

The Company evaluated its indefinite-lived intangible assets for impairment, including any considerations specific to the COVID-19 pandemic utilizing the methodology pursuant to the adoption of ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) and concluded these intangible assets were not impaired as of September 30, 2021.

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Goodwill

The assessment of goodwill by reporting unit is performed annually, in the fourth quarter, or more frequently if events or circumstances indicate the carrying value may no longer be recoverable and that an impairment loss may have occurred. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on the Company’s reporting unit. Based on interim assessments, the Company did not identify any “triggering” events, as described in ASC 350-20, which would indicate an impairment of goodwill is more likely than not as of September 30, 2021.

The following table presents the composition of the Company’s intangible assets and goodwill (in thousands):


	Estimated	As of September 30, 2021						As of December 31, 2020
	Useful	Gross						Gross
	Life	Carrying		Accumulated		Net		Carrying		Accumulated		Net
	(in years)	Amount		Amortization		Amount		Amount		Amortization		Amount
Developed technology	11.4	$	252,200		(40,962)		211,238		252,200		(24,393)		227,807
Customer relationships	5.0		14,100		(5,229)		8,871		14,100		(3,114)		10,986
Intangible assets subject to amortization			266,300		(46,191)		220,109		266,300		(27,507)		238,793

In-process research and development	Indefinite	$	118,900		—		118,900		118,900		—		118,900

Goodwill	Indefinite	$	66,134		—		66,134		66,134		—		66,134

Total		$	451,334	$	(46,191)	$	405,143	$	451,334	$	(27,507)	$	423,827

As of September 30, 2021, expected amortization expense for unamortized finite-lived intangible assets for the next five years and thereafter is as follows (in thousands):


	Amortization Expense
Remainder of 2021	$	6,228
2022		24,912
2023		24,912
2024		24,618
2025		22,092
Thereafter		117,347
Total amortization	$	220,109

Actual amortization expense to be reported in future periods could differ from these estimates as a result of asset impairments, acquisitions, or other facts and circumstances.

Note 7. Revenue from Contracts with Customers

The Company’s net sales are generated primarily from sales of iStent products to customers and sales of Photrexa and associated drug formulations as well as KXL and Mosaic systems. Customers are primarily comprised of ambulatory surgery centers, hospitals and physician private practices, with distributors being used in certain international locations where the Company currently does not have a direct commercial presence.

Revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services, and all of the Company’s net sales are considered revenue from contracts with customers.

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Disaggregation of Revenue

The Company’s revenues disaggregated by product category and geography for the three and nine months ended September 30, 2021 and September 30, 2020 were as follows (in thousands):


	Three Months Ended
	September 30,
	United States				International				Total
	2021		2020		2021		2020		2021		2020

Glaucoma	$	43,381	$	39,164	$	15,099	$	12,762	$	58,480	$	51,926
Corneal Health		13,381		11,435		2,849		1,470		16,230		12,905
Total	$	56,762	$	50,599	$	17,948	$	14,232	$	74,710	$	64,831


	Nine Months Ended
	September 30,
	United States				International				Total
	2021		2020		2021		2020		2021		2020

Glaucoma	$	129,583	$	89,992	$	45,320	$	31,015	$	174,903	$	121,007
Corneal Health		38,654		26,160		7,214		4,558		45,868		30,718
Total	$	168,237	$	116,152	$	52,534	$	35,573	$	220,771	$	151,725

Contract Balances

Contract Assets

Amounts are recorded as accounts receivable when the Company’s right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days for glaucoma and corneal health products, though extended payment terms on corneal health products may be offered. However, 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, 2021 and December 31, 2020, all amounts included in accounts receivable, net on the condensed consolidated balance sheets are related to contracts with customers.

Sales commissions earned on U.S. sales of KXL systems are capitalized as the commissions represent costs to obtain a contract and the amortization period is deemed greater than one year. These costs are deferred in other assets on the Company’s condensed consolidated balance sheets, net of the short term portion included in prepaid assets and other current assets, and are amortized as a sales and marketing expense on a straight-line basis over the expected period of benefit. Capitalized sales commissions and the related amortization expense included in the condensed consolidated financial statements were immaterial as of September 30, 2021 and December 31, 2020.

Aside from the aforementioned contract assets, the Company does not have any contract assets given that the Company does not have any unbilled receivables and sales commissions on other products 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

Contract liabilities reflect consideration received from customers’ purchases allocated to the Company’s future performance obligations.

The Company has a 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.

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Additionally, in the U.S. the Company has a performance obligation related to its customers’ right to a future discount on single dose pharmaceutical purchases, and, to a lesser extent, extended warranty service contracts. The amount allocated to the customers’ right to a future discount is expected to be recognized when the customer elects to utilize the discount, which is generally within one year. As of September 30, 2021 and December 31, 2020, this amount was immaterial as was the amount allocated to extended warranty service contracts.

During the three and nine months ended September 30, 2021 and September 30, 2020, the Company did not recognize any revenue related to material 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.

The Company’s net sales within a fiscal year may be impacted seasonally, as demand for U.S. ophthalmic procedures is typically softer in the first quarter and stronger in the fourth quarter of a given year. However, the Company has not experienced the same seasonality pattern in 2020 and 2021 due to the COVID-19 pandemic.

Note 8. Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing the net income (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 restricted stock units (RSUs) under the Company’s incentive compensation plans, and shares issuable under the Company’s Employee Stock Purchase Plan (ESPP).

The Company’s computation of net income (loss) per share is as follows (in thousands except for per share amounts):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Numerator:
Net income (loss) – basic and diluted	$	6,230	$	(15,748)	$	(27,721)	$	(109,700)
Denominator:
Weighted average number of common shares outstanding - basic		46,737		44,706		46,255		44,302
Common stock equivalents from outstanding common stock options		2,210		-		-		-
Common stock equivalents from unvested restricted stock units		365		-		-		-
Common stock equivalents for ESPP		8
Weighted average number of common shares outstanding - diluted		49,320		44,706		46,255		44,302

Basic net income (loss) per share	$	0.13	$	(0.35)	$	(0.60)	$	(2.48)

Diluted net income (loss) per share	$	0.13	$	(0.35)	$	(0.60)	$	(2.48)

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Potentially dilutive securities not included in the calculation of diluted net income (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,
	2021	2020	2021	2020
Convertible senior notes	5,125	-	5,125	-
Stock options outstanding	218	4,490	3,222	4,579
Unvested restricted stock units	456	519	752	499
Employee stock purchase plan	-	14	5	14
	5,799	5,023	9,104	5,092

The Shares underlying the Convertible Notes did not have an impact on the Company’s diluted share count for the quarter ended September 30, 2021 pursuant to the Company’s adoption of ASU 2020-06 as to do so would have been considered anti-dilutive. See “Recently Adopted Accounting Pronouncements” and Note 9. Convertible Senior Notes for additional detail.

Note 9. Convertible Senior Notes

In June 2020, the Company issued $287.5 million in aggregate principal amount of Convertible Notes pursuant to an indenture dated June 11, 2020, between the Company and Wells Fargo Bank, National Association, as trustee (the Indenture), in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. The Convertible Notes are senior unsecured obligations of the Company and bear interest at a rate of 2.75% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The Convertible Notes will mature on June 15, 2027, unless earlier converted, redeemed or repurchased in accordance with their terms. In connection with issuing the Convertible Notes, the Company received $242.2 million in proceeds, after deducting fees and offering expenses and paying the cost of the capped call transactions described below.

The Convertible Notes may be converted at the option of the holders at any time prior to the close of business on the business day immediately preceding March 15, 2027, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ended on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 business day period immediately after any ten consecutive trading day period (the Measurement Period) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Convertible Notes for each trading day of the Measurement Period was less than 98% of the product of (i) the last reported sale price of the Company’s common stock and (ii) the conversion rate in effect on each such trading day; (3) with respect to any Convertible Notes the Company calls for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date, even if the Convertible Notes are not otherwise convertible at such time; or (4) upon the occurrence of specified corporate events. On or after March 15, 2027 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the Indenture.

During the quarter ended September 30, 2021, the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter was not greater than or equal to 130% of the conversion price on each applicable trading day, and therefore the Convertible Notes may not be converted at the option of the holders during the quarter ending December 31, 2021. Consequently, the Convertible Notes were classified within long-term liabilities on the condensed consolidated balance sheet as of September 30, 2021.

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The conversion rate for the Convertible Notes is initially 17.8269 shares of the Company’s common stock per $1,000 principal amount of the Convertible Notes (equivalent to an initial conversion price of approximately $56.10 per share of the Company’s common stock). The conversion rate is subject to adjustment in some events in accordance with the terms of the Indenture but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event or notice of redemption, as the case may be.

The Company may not redeem the Convertible Notes prior to June 20, 2024. The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after June 20, 2024 but before the 45th scheduled trading day immediately preceding the maturity date, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect on (i) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption and (ii) the trading day immediately preceding the date the Company sends such notice, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes.

If the Company undergoes a fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Prior to the adoption of ASU 2020-06, the Company allocated the gross proceeds of the Convertible Notes between the liability and equity components of the Convertible Notes. The initial carrying amount of the liability component was $189.8 million, which was calculated by using a discount rate of 9.5%, which was estimated to be the Company’s borrowing rate on the issuance date for a similar debt instrument without the conversion feature. The carrying amount of the equity component was $97.7 million, which represents the conversion option, and was determined by deducting the fair value of the liability component from the par value of the Convertible Notes.

After the adoption of ASU 2020-06, the Convertible Notes are no longer bifurcated into separate liability and equity components in the Company’s condensed consolidated balance sheet as of September 30, 2021. Rather, the $287.5 million principal amount of the Convertible Notes, less $7.8 million in unamortized debt issuance costs, was classified as a current liability in the condensed consolidated balance sheet as of September 30, 2021.

Total transaction costs for the issuance of the Convertible Notes were $9.6 million, consisting of the initial purchasers’ discount, commissions, and other issuance costs. Prior to the adoption of ASU 2020-06, the Company allocated the total transaction costs proportionally to the liability and equity components. The transaction costs attributed to the liability component were $6.3 million, which were recorded as debt issuance costs (presented as contra debt in the Company’s condensed consolidated balance sheets) and are amortized to interest expense in the condensed consolidated statements of operations over the term of the Convertible Notes. The transaction costs attributed to the equity component were $3.3 million, which were included in additional paid-in capital.

After the adoption of ASU 2020-06, the Company recorded an adjustment to the liability and equity components under the same premise (i.e., as if debt issuance costs had always been treated as a contra-liability only). As of September 30, 2021, the unamortized debt issuance costs on the Convertible Notes was $7.8 million and is amortized using the effective interest rate method over the term of the Convertible Notes, for the next 5.7 years.

Interest expense relating to the Convertible Notes in the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 are summarized as follows (in thousands):


	Three months ended		Nine Months Ended
	September 30,		September 30,
	2021		2021
Contractual interest expense	$	1,977	$	5,930
Amortization of debt issuance costs		343		1,030
Total interest expense	$	2,320	$	6,960

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The effective interest rate for the three and nine months ended September 30, 2021 was 3.23%.

As of September 30, 2021, the Convertible Senior Notes on the condensed consolidated balance sheets represented the carrying amount of the Convertible Notes, net of unamortized debt issuance costs, which are summarized as follows (in thousands):



	As of
	September 30,
	2021
Convertible Notes	$	287,500
Less: Unamortized debt issuance costs		(7,817)
Carrying amount of Convertible Notes	$	279,683

Capped Call Transactions

In connection with the offering of the Convertible Notes, in June 2020 the Company entered into privately negotiated capped call transactions with certain financial institutions (the Option Counterparties) and used an aggregate $35.7 million of the net proceeds from the Convertible Notes to pay the cost of the capped call transactions. The capped call transactions are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of the Convertible Notes or at the Company’s election (subject to certain conditions) offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted Convertible Notes, as the case may be, with such reduction or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $86.30 per share, which represents a premium of 100% over the last reported sale price of the Company’s common stock on June 8, 2020, and is subject to certain adjustments under the terms of the capped call transactions. The capped calls have an initial strike price of approximately $56.10 per share, subject to certain adjustments, which corresponds to the conversion option strike price in the Convertible Notes. The capped call transactions cover, subject to customary adjustments, the number of shares of common stock initially underlying the Convertible Notes (or approximately 5.1 million shares of the Company’s common stock).

The capped call transactions are separate transactions that the Company entered into with the Option Counterparties, are not part of the terms of the Convertible Notes and will not change the holders’ rights under the Convertible Notes. As the capped call transactions meet certain accounting criteria, the cost of the capped call transactions of $35.7 million was recorded as a reduction in additional paid-in capital in the condensed consolidated balance sheets and will not be remeasured to fair value as long as the accounting criteria continue to be met. As of September 30, 2021, the Company had not purchased any shares under the capped call transactions.

Note 10. 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 Stock Plans is to provide incentives to employees, directors and nonemployee consultants. The Company no longer grants any awards under the 2001 Stock Plan and 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.

The Compensation Committee has 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 determination that pre-defined Company operational goals were satisfied.

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

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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.

The Company has 5,000,000 shares of authorized preferred stock issuable, and there was 0 preferred stock outstanding as of September 30, 2021 and December 31, 2020. Each share of common stock is entitled to 1 vote.

On November 21, 2019, in connection with the Avedro Merger, the Company granted the following awards (the Replacement Awards) to employees of Avedro: (i) approximately 0.2 million cash-settled stock options to certain executives, which became fully vested on December 31, 2019, (ii) approximately 0.1 million stock options and approximately 5,500 RSUs to members of Avedro’s board of directors, which were granted with no post-combination vesting requirements, and (iii) approximately 0.7 million stock options and approximately 0.1 million RSUs, which are subject to time-based vesting requirements. Approximately $30.8 million of the fair value of the Replacement Awards was attributable to pre-combination service and was included in the purchase price of Avedro. The remaining value of the Replacement Awards of $26.0 million will be recognized as post-combination expense over the remaining requisite service period for the time-vesting awards.

All share-based compensation arrangements

The following table summarizes the allocation of stock-based compensation related to stock options and RSUs and includes Replacement Awards, as well as cash-settled stock options in the accompanying condensed consolidated statements of operations (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Cost of sales	$	469	$	1,029	$	1,341	$	2,001
Selling, general and administrative		4,135		6,814		16,527		25,460
Research and development		1,585		1,816		5,053		7,100
Total	$	6,189	$	9,659	$	22,921	$	34,561

Of the total stock-based compensation of $34.6 million for the nine months ended September 30, 2020, a $(3.2) million fair value adjustment was recorded during the nine months ended September 30, 2020 related to cash-settled options.

For the three and nine months ended September 30, 2021, $0.8 million and $1.8 million was expensed related to the Replacement Awards, respectively and for the three and nine months ended September 30, 2020, $2.4 million and $11.7 million was expensed related to the Replacement Awards, respectively.

At September 30, 2021, the total unamortized stock-based compensation expense was approximately $59.0 million of which $9.9 million was attributable to stock options and is to be recognized over the stock options’ remaining vesting terms of approximately 4.0 years (1.8 years on a weighted average basis). The remaining $49.1 million was attributable to RSUs and is to be recognized over the RSUs’ vesting terms of approximately 4.0 years (2.5 years on a weighted-average basis). Of the total unamortized stock-based compensation expense as of September 30, 2021, approximately $1.6 million relates to Replacement Awards, which will be fully amortized by the end of 2023.

The total stock-based compensation cost capitalized in inventory was not material for the three and nine month periods ended September 30, 2021 and September 30, 2020.

Note 11. Income Taxes

The provision for income taxes is determined using an effective tax rate. For the three and nine months ended September 30, 2021, the Company’s estimated effective tax rate of 3.14% and (2.55)%, respectively, was lower than the U.S. federal statutory rate primarily due to the generation of U.S. NOL carryforwards, which are partially offset by a 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 effective tax rate, including factors such as expected utilization of NOL 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, 2021, the Company recorded a provision for income taxes of $0.2 million and $0.7 million, respectively, which was primarily comprised of state and foreign income taxes. For the three and nine months ended September 30, 2020, the

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Company recorded a benefit for income taxes of $0.9 million and $8.7 million, respectively, which was primarily comprised of U.S. federal, state, and foreign income taxes because intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings.

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 NOL 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, 2021, the Company has recorded a valuation allowance against the portion of its deferred tax asset which are not more likely than not to be realized.

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, 2021 and December 31, 2020, the Company had gross unrecognized tax benefits of $25.0 million and $22.8 million, respectively.

Note 12. Commitments and Contingencies

Patent Litigation

On September 14, 2021, the Company entered into the Settlement Agreement with Ivantis, pursuant to which the Company and Ivantis agreed to terminate the Lawsuit. The Lawsuit was previously disclosed by the Company in a Report on Form 8-K filed with the U.S. Securities and Exchange Commission on April 16, 2018. In the Lawsuit, the Company alleged that Ivantis’ Hydrus® Microstent device infringes the Company’s U.S. Patent Nos. 6,626,858 and 9,827,143. Pursuant to the terms of the Settlement Agreement, Ivantis will pay Glaukos a cash payment of $60.0 million, $30.0 million of which was paid to Glaukos in the quarter ended September 30, 2021, and $30.0 million of which will be paid by December 31, 2022. The $30.0 million cash payment received during the quarter ended September 30, 2021 is included in litigation-related settlement as a reduction of operating expenses on the condensed consolidated income statement.

Additionally, Ivantis will make quarterly royalty payments to the Company in the amount of 10% of Ivantis’ Hydrus® Microstent U.S. sales and any international sales supplied out of the U.S. beginning in the fourth quarter of 2021 through April 26, 2025, subject to a per-unit minimum payment. Glaukos and Ivantis have dismissed with prejudice all of their claims against each other in the Lawsuit, which was scheduled for trial beginning on or around September 28, 2021, and in related lawsuits in other forums and jurisdictions. The parties also have agreed to mutual licenses and covenants not to sue the other party for patent infringement relating to Ivantis’ Hydrus® Microstent or Glaukos’ micro-stent devices.

Secured Letters 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 $8.8 million as of September 30, 2021 and December 31, 2020. Beginning as of the first day of the NaNth 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.

The Company has 1 other irrevocable standby letters of credit secured with approximately $0.6 million of cash in a restricted account related to its office lease agreements.

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 obligation will change as patent coverage on certain products begins to

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lapse, and will terminate entirely on the date the last of the Patent Rights expires, which is currently expected to be in the fourth quarter of 2022. For the three months ended September 30, 2021 and September 30, 2020, the Company recorded approximately $1.1 million and $1.3 million, respectively, in cost of sales in connection with the product payment. For the nine months ended September 30, 2021 and September 30, 2020, the Company recorded approximately $3.2 million and $3.0 million, respectively, in cost of sales in connection with the product payment.

GMP Visions Solutions, Inc.

In November 2013, the Company entered into an amended agreement (the Buyout Agreement) with GMP Vision Solutions, Inc. (GMP) pursuant to which the Company agreed to buyout any remaining royalty obligations related to the transfer and assignment of certain intellectual property from GMP to the Company. Pursuant to the Buyout Agreement, in the event of a Company sale as defined therein, the Company would be required to pay GMP a percentage of the sale consideration above a certain threshold, with such payment not to exceed $2.0 million.

Executive Deferred Compensation Plan

Pursuant to the Company’s 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 COLIs. The fair value of the Deferred Compensation Plan liability, included in other liabilities on the condensed consolidated balance sheets, was approximately $6.9 million and $5.2 million as of September 30, 2021 and December 31, 2020, 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 $6.8 million and $5.3 million as of September 30, 2021 and December 31, 2020, respectively.

Note 13. Business Segment Information

The Company has 1 business activity: the development and commercialization of therapies designed to treat glaucoma, corneal disorders and retinal diseases, and operates as 1 operating segment. The Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company’s revenues disaggregated by revenue and product category are included in Note 7, Revenue from Contracts with Customers. The Company’s chief operating decision-maker, its Chief Executive Officer, reviews its consolidated operating results for the purpose of allocating resources and evaluating financial performance.

Note 14. Subsequent Events

On November 2, 2021, CMS published its Final Rules for 2022 Medicare physician fee payment rates and 2022 Medicare facility fee payment rates for services furnished in both the hospital outpatient and ambulatory surgery center settings. For additional information, please see the Recent Developments section of Note 1, “Organization and Basis of Presentation.”

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, 2020 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission (SEC) on March 1, 2021.

This report contains forward-looking statements that are based on management's beliefs and assumptions and on information currently available to management. All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. 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 are based on management’s current expectations, assumptions, estimates and beliefs and involve risks, uncertainties and other factors that may cause actual

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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 developing novel therapies for the treatment of glaucoma, corneal disorders, and retinal disease. We developed Micro-Invasive Glaucoma Surgery (MIGS) to serve as an alternative to the traditional glaucoma treatment paradigm and launched our first MIGS device commercially in 2012. We have also developed a proprietary bio-activated pharmaceutical therapy for the treatment of a corneal disorder, keratoconus, that was approved by the U.S. Food and Drug Administration (FDA) in 2016 and we are developing a pipeline of surgical devices, sustained pharmaceutical therapies, and implantable biosensors intended to treat glaucoma progression, corneal disorders such as keratoconus, dry eye and refractive vision correction, and retinal diseases such as neovascular age-related macular degeneration and diabetic macular edema.

Impact of COVID-19 Pandemic and Current Economic Environment

While the COVID-19 pandemic and subsequent economic slowdown materially impacted the global demand for our products starting March 2020 we began to see an early recovery toward more normalized levels for cataract and keratoconus procedures as early as May 2020, a trend that has generally continued, with periodic volatility in certain geographies in which we operate, through October 31, 2021.

We continue to actively assess the impact of COVID-19 on our clinical trials and other pipeline products. The closure of ophthalmic practices and deferral of elective procedures beginning in the first quarter of 2020 in response to COVID-19 disrupted new patient enrollment in our ongoing clinical trials. In particular, patient enrollment for our iDose clinical trials slowed significantly due to the COVID-19 pandemic, which delayed our estimated iDose approval timeline. Patient enrollment for our iDose clinical trials was completed in June 2021 and we now expect potential FDA approval of this product in 2023.

Additionally, some of our vendors are experiencing supply challenges, both in the acquisition of raw materials as well as due to limited headcount resources. These challenges have led to delays and partial or unfulfilled deliveries of certain components needed for the manufacture of our products, in some cases requiring us to find second sources for materials. If these delays and partial or unfulfilled deliveries persist, they could impact our ability to ship some of our products to our customers, or bring some of our pipeline products to market, in a timely manner. We believe that much of these supply challenges stem from the ongoing obstacles presented by COVID-19.

The ultimate impact of the COVID-19 pandemic on our operations going forward is unknown and will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the COVID-19 outbreak, the status of health and safety actions taken to contain its spread, the severity and transmission rates of new variants of COVID-19 such as the Delta strain, the availability, distribution, and efficacy of vaccines for COVID-19, any additional preventative and protective actions that governments, or we, may take, any future surges of COVID-19 that may occur, the dynamics associated with the rollout of the COVID-19 vaccines, and how quickly and to what extent economic and operating conditions normalize within the markets in which we operate. For additional information, see the section titled Risks Related to Our Business within Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.

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Financial Overview

Our net sales increased to $74.7 million for the three months ended September 30, 2021 from $64.8 million for the three months ended September 30, 2020. Our net sales increased to $220.8 million for the nine months ended September 30, 2021 from $151.7 million for the nine months ended September 30, 2020. We generated net income of $6.2 million for the three months ended September 30, 2021 and incurred a net loss of $15.7 million for the three months ended September 30, 2020. We incurred net losses of $27.7 million and $109.7 million for the nine months ended September 30, 2021 and September 30, 2020 respectively. As discussed above, the COVID-19 pandemic impacted our net sales for the three and nine months ended September 30, 2021 and September 30, 2020.

As of September 30, 2021, we had cash, cash equivalents, short-term investments, and restricted cash of approximately $438.4 million, compared to $413.9 million as of December 31, 2020. As of September 30, 2021, we had an accumulated deficit of $343.3 million.

Material Changes and Transactions

Acquisition of Avedro, Inc.

On November 21, 2019, we acquired Avedro, Inc. (Avedro), a hybrid ophthalmic pharmaceutical and medical technology company focused on developing therapies designed to treat corneal diseases and disorders and correct refractive conditions, in a stock-for-stock transaction (Avedro Merger). Avedro developed novel bio-activated drug formulations used in combination with proprietary systems for the treatment of progressive keratoconus and corneal ectasia following refractive surgery. The therapy is the first and only minimally invasive anterior segment product offering approved by the FDA shown to halt the progression of keratoconus. In connection with the Avedro Merger, we granted various stock option and restricted stock awards (the Replacement Awards) to employees of Avedro.

Recent Developments

2022 reimbursement rates

On November 2, 2021, the Centers for Medicare & Medicaid Services (CMS) published its Final Rules for 2022 Medicare physician fee payment rates and 2022 Medicare facility fee payment rates for services furnished in both the hospital outpatient and ambulatory surgery center settings. These Final Rules supercede the proposed rates that were issued by CMS in July 2021. Compared to the current reimbursement rates, the Final Rules contain a new, significantly lower physician fee related to the implantation of trabecular bypass stents, such as our iStent family of products, in conjunction with cataract surgery, while the facility fee schedule related to reimbursement for surgeries that include implantation of trabecular bypass stents, such as our iStent family of products, in conjunction with cataract surgery, would slightly decrease reimbursements to an ambulatory surgery center and increase reimbursements to a hospital. We estimate that approximately 80% of procedures utilizing our trabecular micro-bypass technologies in the U.S. are performed in the ambulatory surgery center setting and the remaining estimated 20% of procedures are performed in the hospital. Additionally, the Final Rules establish facility fee payment rates that are lower than anticipated for standalone insertion of an aqueous drainage device in the ambulatory surgery center and hospital setting, which would be the procedure that such facilities will use with our iStent infinite product, which is not yet approved by the U.S. Food & Drug Administration. These CMS reimbursement rates will take effect January 1, 2022, subject to any updates or corrections by CMS.

The proposed reduction in reimbursement rates itself has impacted U.S. Glaucoma volumes during our third and fourth quarter of 2021 as typical customer ordering patterns have been disrupted and trialing of competitive products has increased in anticipation of potential physician and facility fee reimbursement rate decreases that would be effective in 2022 if the rule as proposed was finalized. As confirmed in the Final Rules, the reduction of the physician fee may have an adverse impact on procedural iStent family product volumes, in conjunction with cataract surgery, in 2022, as well as on our U.S. combo-cataract Glaucoma revenues, gross profit, and net income, the full extent of which is not known at this time.

Settlement of Patent Litigation

On September 14, 2021, we entered into a Settlement Agreement (Settlement Agreement) with Ivantis, Inc. (Ivantis), pursuant to which we and Ivantis agreed to terminate the patent infringement lawsuit we had filed against Ivantis on April 14, 2018 in the U.S. District Court for the Central District of California, Southern Division (the

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Lawsuit). In the Lawsuit, we alleged that Ivantis’ Hydrus® Microstent device infringes our U.S. Patent Nos. 6,626,858 and 9,827,143. Pursuant to the terms of the Settlement Agreement, Ivantis will pay us a cash payment of $60.0 million, $30.0 million of which was paid to us in the quarter ended September 30, 2021, and $30.0 million of which will be paid by December 31, 2022. The $30.0 million cash payment received during the quarter ended September 30, 2021 is included in litigation-related settlement as a reduction of operating expenses on the condensed consolidated income statement.

Additionally, Ivantis will make quarterly royalty payments to us in the amount of 10% of Ivantis’ Hydrus Microstent U.S. sales and any international sales supplied out of the U.S. beginning in the fourth quarter of 2021 through April 26, 2025, subject to a per-unit minimum payment. We and Ivantis have dismissed with prejudice all of our claims against each other in the Lawsuit, which was scheduled for trial beginning on or around September 28, 2021, and in related lawsuits in other forums and jurisdictions. The parties also have agreed to mutual licenses and covenants not to sue the other party for patent infringement relating to Ivantis’ Hydrus Microstent or our micro-stent devices.

Attillaps License Agreement

On September 20, 2021, we announced that we had entered into a licensing agreement (Attillaps License Agreement) with Attillaps Holdings, Inc. (Attillaps) under which Attillaps granted us a global exclusive license to Attillaps’ proprietary library of investigational pharmaceutical compounds that target the eradication of Demodex mites, which are the root cause of Demodex blepharitis and often associated with meibomian gland dysfunction and related ophthalmic diseases. Under the Attilaps Licensing Agreement, we have the exclusive global right to research, develop, manufacture and commercialize products using certain acetylcholinesterase inhibitors for the treatment of ophthalmic diseases caused by Demodex mites. We paid $5.0 million upon the signing of the Attillaps License Agreement and will have ongoing milestone and royalty payment obligations depending on the success of the development, approval and commercialization of the compounds.

Factors Affecting Our Performance

In addition to the disruption resulting from COVID-19 as discussed above, the full effects of which at this time are difficult to predict, our operations to date have been, and we believe our future growth will be, impacted by the following:

●

the coverage and reimbursement rates set by government programs and third-party commercial payors for the procedures using our products, including the reduction by CMS of the Medicare payment rates for certain of our products and related services as described above, which take effect January 1, 2022;

●

the rate at which we expand our global sales and marketing infrastructure, and the speed at which we can continue increasing awareness of our products to patients and physicians;

●

the highly competitive nature of our industry, which is 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 new products for the treatment of chronic eye diseases;

●

publications of clinical results by us, our competitors and other third parties can have a significant influence on whether, and the degree to which, our products are used by physicians and the procedures and treatments those physicians choose to administer to their patients;

●

the physicians who use our products may not perform procedures during certain times of the year, due to seasonality patterns typical for certain of our procedures, or when they are away from their practices for various reasons;

●

the success of clinical trials of, and receipt of timely regulatory approvals for, our and our partners’ pipeline products; and

●

most of our sales outside of the U.S. are denominated in the local currency of the country in which we sell our products. As a result, our revenue from international sales is impacted by fluctuations in foreign currency exchange rates.

Further, 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 investigational device exemption (IDE) or investigational new drug (IND) studies and new product development programs in our industry are expensive. We also expect to incur additional construction costs related to our facilities in Aliso Viejo and San Clemente, California as well as Burlington, Massachusetts.

Additionally, the success of clinical trials of, and receipt of timely regulatory approvals for, our and our partners’ pipeline products could impact our performance. For example, as the exclusive U.S. distributor for Santen’s

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PreserFlo MicroShunt, we are currently engaged in ongoing discussions with the FDA regarding the premarket approval (PMA) submission for that product. Currently, the FDA is obtaining additional input from glaucoma surgeons to ensure a complete evaluation of the clinical data submitted in the PMA, which will likely extend the timing of the approval and U.S. commercial launch of this device. Following an initial review of our PMA supplement submission for iStent infinite, the FDA requested that we instead submit our application as a 510(k) premarketing submission. We estimate the impact of this request to be a potential delay of the FDA clearance until the first half of 2022.

We expect our revenues for the remainder of 2021 and near-term performance to reflect CMS payment rate-related and associated competitive dynamics and the continuing impacts resulting from COVID-19, the full effects of which at this time are difficult to predict, and which vary based upon the specific COVID-19 dynamics in the geographies in which we operate. Further, the reduction of the physician fee in the 2022 Final Rules issued by CMS may have an adverse impact on the U.S. volumes and pricing of our iStent product family, in conjunction with cataract surgery, for the remainder of 2021 and 2022. The effect of this reimbursement change may lead to a reduction in our U.S. combo-cataract Glaucoma revenues, gross profit, and net income, the full extent of which is not known at this time.

Although we have been profitable for certain periods in our operating history, there can be no assurance that we will be profitable or generate cash from operations in the future.

Components of Results of Operations

Net Sales

We currently operate in one reportable segment and net sales are generated primarily from sales of iStent products and sales of Photrexa and other associated drug formulations, as well as our proprietary bioactivation systems, to customers. 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 or maintain a modest commercial presence. The primary end-user customers for our products are surgery centers, hospitals and physician private practices.

While net sales may 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, historically our net sales within a fiscal year have been impacted seasonally, as demand for U.S. ophthalmic procedures is typically softer in the first quarter and stronger in the fourth quarter of a given year. However, we have not experienced the same seasonality pattern in 2020 and 2021 due to the COVID-19 pandemic, and we expect our commercial performance to continue to be impacted by COVID-19 in future reporting periods, including from the possible impact of our vendors’ supply challenges. Additionally, for several years we had commercialized our products in the U.S. with few or no direct competitors. Other products have now become available in the U.S. 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. These other products could achieve greater commercial acceptance or demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our products, which could adversely impact our net sales, as well as the CMS reimbursement decreases mentioned above.

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. We manufacture our KXL and Mosaic systems at our manufacturing facilities in Burlington, Massachusetts and we contract with third-party manufacturers in the U.S. and Germany to produce our Photrexa and other associated drug formulations.

Due to the relatively low production volumes of our iStent products and our KXL and Mosaic systems 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.

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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). This ongoing product payment obligation will change as patent coverage on certain products being to lapse and will terminate entirely on the date the last of the Patent Rights expires, which is currently expected to be in the fourth quarter of 2022.

Cost of sales has included amortization of the $252.2 million developed technology intangible asset recognized in connection with the Avedro Merger. For the three and nine months ended September 30, 2021, the amortization expense was $5.5 million and $16.6 million, respectively. Additionally, cost of sales included amortization of the fair market value inventory adjustment recorded in connection with the Avedro Merger, which for the three and nine months ended September 30, 2020 was $5.4 million and $24.7 million, respectively, and was fully amortized as of December 31, 2020.

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 or supply chain 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. Factors adversely affecting our net sales in future periods, including the impact of the COVID-19 pandemic and any related supply chain issues and the impact of reductions by CMS in 2022 Medicare payment rates for certain of our products and related services may also impact our gross profit margins in future periods.

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 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.

Research and Development

Our R&D activities primarily consist of new product development projects, pre-clinical studies, IDE and IND 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 continue to increase as we initiate and advance our development programs, including our expanding surgical, pharmaceutical and IOP sensor development efforts and clinical trials across glaucoma, retinal disease and corneal health.

Completion dates and costs for our clinical development programs include seeking regulatory approvals and our research programs 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. We are not currently able to fully track expenses by product candidate.

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In-process Research and Development

Our in-process research and development (IPR&D) expenses relate to the amendment of our exclusive licensing agreement with Intratus, Inc. and our Attillaps License Agreement. Upfront payments of $5.0 million were made in connection with each of these agreements and were expensed to IPR&D as management determined there were no alternative future uses for the technology acquired.

Litigation-related Settlement

Pursuant to the terms of the Settlement Agreement, Ivantis paid us $30.0 million in the quarter ended September 30, 2021. The $30.0 million cash payment received during the quarter ended September 30, 2021 is included in litigation-related settlement as a reduction of operating expenses on the condensed consolidated income statement.

Non-Operating Expense, Net

Non-operating expense, net primarily consists of interest expense associated with our finance lease for our Aliso Viejo, California facility and for our 2.75% convertible notes due 2027 (Convertible Notes), 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 state and foreign income taxes. Our net deferred tax liability of $8.3 million at September 30, 2021 represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets. We continue to provide a full valuation allowance against our other net deferred tax assets.

We record reserves for uncertain tax positions where we believe the ability to sustain the tax position does not reach the more likely than not threshold.

Results of Operations

Comparison of Three Months Ended September 30, 2021 and September 30, 2020 (in thousands):


	Three Months Ended
	September 30,				% Increase
(dollars in thousands)	2021		2020		(decrease)
Statements of operations data:
Net sales	$	74,710	$	64,831	15	%
Cost of sales		15,370		17,932	(14)	%
Gross profit		59,340		46,899	27	%
Operating expenses:
Selling, general and administrative		44,470		38,947	14	%
Research and development		28,846		20,304	42	%
In-process research and development		5,000		-	NM
Litigation-related settlement		(30,000)		-	NM
Total operating expenses		48,316		59,251	(18)	%
Income (loss) from operations		11,024		(12,352)	NM
Total non-operating expense, net		(4,592)		(4,285)	7	%
Income tax provision (benefit)		202		(889)	NM
Net income (loss)	$	6,230	$	(15,748)	(140)	%

NM = Not Meaningful

Net Sales

Net sales for the three months ended September 30, 2021 and September 30, 2020 were $74.7 million and $64.8 million, respectively, reflecting an increase of $9.9 million or 15%.

Net sales of glaucoma products in the United States were $43.4 million and $39.2 million for the three months ended September 30, 2021 and September 30, 2020, respectively, increasing by 11% primarily due to the demand for combined cataract and glaucoma procedures increasing in the third quarter of 2021 as compared to the third quarter of

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2020 given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that has generally continued, with periodic demand volatility in certain geographies in which we operate. We also believe the CMS physician fee and facility fee rate decreases that were proposed in July 2021 have disrupted traditional customer ordering patterns and has resulted in our customers’ trialing of competitive products.

International sales of glaucoma products for the three months ended September 30, 2021 and September 30, 2020 were $15.1 million and $12.8 million, respectively, increasing by 18%. The increase in international sales reflects growing demand in many key international markets for combined cataract and glaucoma procedures during the quarter ended September 30, 2021 as compared to the quarter ended September 30, 2020 given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that has generally continued, with periodic demand volatility in certain international geographies in which we operate, and favorable foreign exchange rates compared to the prior year.

Net sales of corneal health products were $16.2 million and $12.9 million for the quarter ended September 30, 2021 and September 30, 2020, respectively, increasing by 26%. The $3.3 million increase in net sales generated from our corneal health products was comprised of an increase of approximately $1.9 million in U.S. sales, using direct sales operations, including an increase of $2.4 million of Photrexa net sales offset by reductions of $0.5 million in U.S. capital equipment sales, and an increase of $1.4 million internationally where we utilize distributors given we do not have a direct commercial presence, due to these distributors returning to their more stabilized pre-COVID ordering patterns. Sales of corneal health products in the third quarter of 2020 were negatively impacted by disruption resulting from COVID-19. Demand for corneal health products increased in the third quarter of 2021 given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that has generally continued, with periodic demand volatility in certain geographies in which we operate. Additionally, corneal health sales for the quarter ended September 30, 2021 were impacted by higher realized average sales prices.

Cost of Sales

Cost of sales for the three months ended September 30, 2021 and September 30, 2020 were $15.4 million and $17.9 million, respectively, reflecting a decrease of $2.6 million. The decrease was primarily due to approximately $2.3 million, net related to the acquisition fair market value inventory adjustment rollout recorded during the third quarter of 2020 in connection with the Avedro Merger that was fully amortized during 2020 as well as a higher allocation to R&D expenses for certain of our pipeline products during the third quarter 2021, partially offset by normal increases in cost of sales due to higher net sales for the three months ended September 30, 2021 as compared to the same quarter of 2020 which was negatively impacted by the COVID-19 pandemic. Our gross margin was 79% for the three months ended September 30, 2021 and 72% for the three months ended September 30, 2020. The increased gross margin resulted primarily from the increased net sales during the quarter ended September 30, 2021 relative to the reduced net sales as a result of the COVID-19 pandemic in the third quarter of 2020, the aforementioned accounting adjustment and, to a lesser extent, changes in product mix, most notably the inclusion of modestly lower margin products related to international market sales.

Selling, General and Administrative Expenses

SG&A expenses for the three months ended September 30, 2021 and September 30, 2020 were $44.5 million and $38.9 million, respectively, reflecting an increase of approximately $5.5 million or 14%.

We incurred approximately $27.7 million of commercial personnel and discretionary spending during the three months ended September 30, 2021 related primarily to existing sales infrastructure in glaucoma and corneal health. We also incurred approximately $16.8 million of general and administrative personnel and discretionary spending associated with our ongoing administrative functions and amortization of our right-of-use asset related to our long-term lease in Aliso Viejo, California.

The above increase in SG&A expenses for the three months ended September 30, 2021 was due to a return toward more normalized levels of spending to support increased demand for glaucoma and keratoconus procedures in certain key geographic markets in which we operate, relative to the three months ended September 30, 2020, when we incurred temporary reductions in compensation and related employee expenses for our executive team, senior leadership, and many others throughout the company, and reduced professional services expenses as part of cost-savings measures in response to the COVID-19 pandemic. These increases in SG&A expenses during the three months ended September

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30, 2021 compared to the three months ended September 30, 2020 were partially offset by approximately $0.4 million in decreased stock-based compensation associated with the Replacement Awards and a decrease of approximately $0.3 million for costs incurred for restructuring expenses related to the Avedro Merger.

Research and Development Expenses

R&D expenses for the three months ended September 30, 2021 and September 30, 2020 were $28.8 million and $20.3 million, respectively, reflecting an increase of $8.5 million or 42%.

We incurred $19.7 million in core R&D expenses and $9.1 million in clinical expenses, comprised of $12.9 million in compensation and related employee expenses with the remaining $6.8 million spent on the continued research and development, clinical studies, regulatory activities, quality assurance, clinical inventory and supplies for surgical glaucoma product candidates and pharmaceutical projects, such as a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (often referred to as “epi-on”), iDose and our earlier stage programs for dry eye, presbyopia, retina and other therapeutic investments.

In-process Research and Development

IPR&D expenses for the three months ended September 30, 2021 were $5.0 million related to the Attillaps License Agreement. There were no IPR&D expenses for the three months ended September 30, 2020.

Litigation-related Settlement

The $30.0 million cash payment from the Settlement Agreement received during the quarter ended September 30, 2021 is included in litigation-related settlement as a reduction of operating expenses on the condensed consolidated income statement.

Non-Operating Expense, Net

We had non-operating expense, net of $4.6 million and $4.3 million for the three months ended September 30, 2021 and September 30, 2020, respectively. The increase in non-operating expense, net primarily relates to interest expense recognized related to the Convertible Notes and to the finance lease for our Aliso Viejo facility, as well as recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates.

Income Tax Provision

Our effective tax rate for the third quarter of 2021 was 3.14%. For the three months ended September 30, 2021 and September 30, 2020, we recorded a provision/(benefit) for income taxes of $0.2 million and $(0.9) million, respectively, which were primarily comprised of state and foreign income taxes for the third quarter of 2021, and the deferred tax benefit recorded in conjunction with the Convertible Notes partially offset by current state and foreign income taxes for the third quarter of 2020.

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Comparison of Nine Months Ended September 30, 2021 and September 30, 2020 (in thousands):


	Nine Months Ended
	September 30,				% Increase
(dollars in thousands)	2021		2020		(decrease)
Statements of operations data:
Net sales	$	220,771	$	151,725	46	%
Cost of sales		49,762		72,129	(31)	%
Gross profit		171,009		79,596	115	%
Operating expenses:
Selling, general and administrative		131,691		127,609	3	%
Research and development		74,321		64,148	16	%
In-process research and development		10,000		-	NM
Litigation-related settlement		(30,000)		-	NM
Total operating expenses		186,012		191,757	(3)	%
Loss from operations		(15,003)		(112,161)	(87)	%
Total non-operating expense, net		(12,029)		(6,262)	92	%
Income tax provision (benefit)		689		(8,723)	NM
Net loss	$	(27,721)	$	(109,700)	(75)	%

Net Sales

Net sales for the nine months ended September 30, 2021 and September 30, 2020 were $220.8 million and $151.7 million, respectively, reflecting an increase of $69.0 million or 46%.

Net sales of glaucoma products in the United States were $129.6 million and $90.0 million for the nine months ended September 30, 2021 and September 30, 2020, respectively, increasing by 44% primarily due to the demand for combined cataract and glaucoma procedures increasing in the nine months ended September 30, 2021 given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that has generally continued, with periodic demand volatility in certain geographies in which we operate. The decrease in demand due to COVID-19 in the nine months ended September 30, 2020 was felt most significantly through May 2020, at which point we began to see an early recovery toward more normalized levels for cataract and keratoconus procedures, a trend that has generally continued, with periodic volatility in certain geographies in which we operate. We believe competition also increased entering into 2020, the impact of which is difficult to assess given the COVID-19 dynamics. We also believe the CMS physician fee and facility fee rate decreases that were proposed in July 2021 have disrupted traditional customer ordering patterns and has resulted in our customers’ trialing of competitive products.

International sales of glaucoma products for the nine months ended September 30, 2021 and September 30, 2020 were $45.3 million and $31.0 million, respectively, increasing by 46%. The increase in international sales reflects growing demand in many key international markets for combined cataract and glaucoma procedures in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that has generally continued, with periodic demand volatility in certain international geographies in which we operate and favorable foreign exchange rates compared to the prior year, offset by a one-time catch-up provision associated with historical government rebates owed in France following the establishment of a formal reimbursement program in late 2018.

Net sales of corneal health products were $45.9 million and $30.7 million for the nine months ended September 30, 2021 and September 30, 2020 respectively, increasing by 49%. The $15.2 million increase in net sales generated from our corneal health products was comprised of an increase of approximately $12.5 million in U.S. sales, including an increase of $13.7 million of Photrexa net sales partially offset by reductions of $1.2 million in U.S. capital equipment sales using our direct sales operations, and an increase of $2.7 million internationally where we utilize distributors given we do not have a direct commercial presence. Sales of corneal health products in the nine months ended September 30, 2020 were negatively impacted by disruption resulting from COVID-19. Demand for corneal health products increased in the nine months ended September 30, 2020 given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that has generally continued, with periodic demand volatility in certain geographies in which we operate. Additionally, corneal health sales for the nine months ended September 30, 2021 were impacted by higher realized average sales prices.

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Cost of Sales

Cost of sales for the nine months ended September 30, 2021 and September 30, 2020 were $49.8 million and $72.1 million, respectively, reflecting a decrease of $22.4 million. The decrease in cost of sales was primarily due to approximately $24.7 million related to the acquisition fair market value inventory adjustment rollout during the nine months ended September 30, 2020 in connection with the Avedro Merger that was fully amortized during 2020, partially offset by normal increases in cost of sales due to higher net sales for the nine months ended September 30, 2021 as compared to the same nine months ended September 30, 2020 which was negatively impacted by the COVID-19 pandemic. Our gross margin was 77% for the nine months ended September 30, 2021 and 52% for the nine months ended September 30, 2020. The increased gross margin resulted primarily from the impact of the increased net sales during the nine months ended September 30, 2021, the aforementioned accounting adjustment and, to a lesser extent, changes in product mix, most notably the inclusion of modestly lower margin products related to international market sales.

Selling, General and Administrative Expenses

SG&A expenses for the nine months ended September 30, 2021 and September 30, 2020 were $131.7 million and $127.6 million, respectively, reflecting an increase of approximately $4.1 million or 3%.

We incurred approximately $82.2 million of commercial personnel and discretionary spending during the nine months ended September 30, 2021 related primarily to existing sales infrastructure in glaucoma and corneal health. We also incurred approximately $49.5 million of general and administrative personnel and discretionary spending associated with our ongoing administrative functions and amortization of our right-of-use asset related to our long-term lease in Aliso Viejo, California.

The above increase in SG&A expenses for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 primarily consisted of increased SG&A expenses due to a return toward more normalized levels of spending to support increased demand for glaucoma and keratoconus procedures in certain key geographic markets in which we operate, relative to the nine months ended September 30, 2020, when we initiated temporary reductions in compensation and related employee expenses for our executive team, senior leadership, and many others throughout the company, and reduced professional services expense as a part of cost-savings measures implemented in response to the COVID-19 pandemic. This increase was mostly offset by approximately $5.4 million in reduced stock-based compensation associated with the Replacement Awards, a decrease of $1.6 million in integration and restructuring expenses related to our Avedro Merger and a decrease of approximately $1.4 million for costs incurred in the prior year period related to our previously-disclosed patent litigation.

Research and Development Expenses

R&D expenses for the nine months ended September 30, 2021 and September 30, 2020 were $74.3 million and $64.1 million, respectively, reflecting an increase of $10.2 million or 16%.

We incurred $49.6 million in core R&D expenses and $24.8 million in clinical expenses, comprised of $36.2 million in compensation and related employee expenses with the remaining $38.2 million spent on the continued research and development, clinical studies, regulatory activities, quality assurance, clinical inventory and supplies for surgical glaucoma product candidates and pharmaceutical projects, such as a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (often referred to as “epi-on”), iDose and our earlier stage programs for dry eye, presbyopia, retina and other therapeutic investments.

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In-process Research and Development

IPR&D expenses for the nine months ended September 30, 2021 related to the amendment of our exclusive licensing agreement with Intratus and our Attillaps License Agreement. We paid $5.0 million upon signing each of these agreements. There were no IPR&D expenses during the nine months ended September 30, 2020.

Litigation-related Settlement

The $30.0 million cash payment from the Settlement Agreement received during the nine months ended September 30, 2021 is included in litigation-related settlement as a reduction of operating expenses on the condensed consolidated income statement.

Non-Operating Expense, Net

We had non-operating expense, net of $12.0 million and $6.3 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The increase in non-operating expense, net primarily relates to interest expense recognized related to the Convertible Notes and to the finance lease for our Aliso Viejo facility, as well as recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates.

Income Tax Provision

Our effective tax rate for the nine months ended September 30, 2021 was (2.55)%. For the nine months ended September 30, 2021 and September 30, 2020, we recorded a provision/(benefit) for income taxes of $0.7 million and $(8.7) million, respectively, which were primarily comprised of state and foreign income taxes for the nine months ended September 30, 2021, and the deferred tax benefit recorded in conjunction with the Convertible Notes partially offset by current state and foreign income taxes for the nine months ended September 30, 2020.

Liquidity and Capital Resources

For the nine months ended September 30, 2021, we incurred a net loss of $27.7 million and generated cash from operations of $29.4 million. As of September 30, 2021, we had an accumulated deficit of approximately $343.3 million. 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 and IND studies and new product development programs in our industry are expensive. We also expect to incur additional construction costs related to our new facility in Aliso Viejo, California.

Our Convertible Notes may be converted at the option of the holders at the times and under the circumstances and at the conversion rate described in Note 9, Convertible Senior Notes. As of September 30, 2021, none of the conditions allowing holders of the Convertible Notes to convert had been met. If our trading price is above 130% of the conversion price for at least 20 trading days during the 30 consecutive trading-day period ending on, and including, December 31, 2021, holders of the Convertible Notes would have the right to convert their Convertible Notes during the calendar quarter ending March 31, 2022. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the Indenture.

We plan to fund our operations, capital funding and other liquidity needs using existing cash and investments and, to the extent available, cash generated from commercial operations. Our existing cash and investments include the remaining net proceeds from the Convertible Notes issued in June 2020 (after payment for the related capped call transactions), and the $30.0 million paid to us by Ivantis in September 2021 pursuant to the terms of the Settlement Agreement, which we are using for working capital and general corporate purposes. In addition, pursuant to the terms of the Settlement Agreement, Ivantis will pay us an additional $30.0 million by December 31, 2022, as well as ongoing royalty payments as described in greater detail above in the Material Changes and Transaction section of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Although we have been profitable for certain periods in our operating history, there can be no assurance that we will be profitable or generate cash from operations. We may seek to obtain additional financing in the future through other 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 any cash generated from commercial operations will be sufficient to fund our operations and satisfy our liquidity

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requirements for at least the next 12 months from the date our condensed consolidated financial statements for the nine months ended September 30, 2021 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, 2021 and December 31, 2020 (in thousands):


	September 30,		December 31,
	2021		2020
Cash and cash equivalents	$	113,131	$	96,596
Short-term investments		315,834		307,772
Accounts receivable, net		35,236		36,059
Inventory, net		19,720		15,809
Accounts payable		8,459		4,371
Accrued liabilities		54,991		45,331
Working capital (1)		438,358		419,740

(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)	2021		2020
Net cash provided by (used in):
Operating activities	$	29,359	$	(33,592)
Investing activities		(49,360)		(201,601)
Financing activities		37,643		253,883
Exchange rate changes		(1,257)		(126)
Net increase in cash, cash equivalents and restricted cash	$	16,385	$	18,564

At September 30, 2021, 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, 2021, our operating activities provided $29.4 million in net cash and in the nine months ended September 30, 2020 our operating activities used $33.6 million of net cash.

For the nine months ended September 30, 2021, our net cash provided by operating activities reflected our net loss of $27.7 million, adjusted for non-cash items of $54.1 million, primarily consisting of stock-based compensation expense of $22.9 million, depreciation of $3.5 million, amortization of intangible assets of $18.7 million, and amortization of lease right-of-use assets of $3.5 million. Additionally, changes in operating assets and liabilities were $3.0 million, which resulted primarily from increases in accounts payable and accrued liabilities of $11.7 million and an increase in accounts receivable of $0.5 million, partially offset by increases in inventory of $4.3 million, and an increase in prepaid expenses and other current assets of $5.0 million.

For the nine months ended September 30, 2020, our net cash used in operating activities reflected our net loss of $109.7 million, adjusted for non-cash items of $58.2 million, primarily consisting of stock-based compensation expense of $37.7 million, depreciation and amortization of $22.0 million, amortization of lease right-of-use assets of $3.8 million and the change in the fair value of cash-settled stock options of $(3.2) million. These items were partially offset by changes in operating assets and liabilities of $18.0 million, which resulted primarily from decreases in accounts

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receivable and inventory of $28.2 million, offset by decreases in prepaid expenses and other current assets of $4.3 million and decreases in accounts payable and accrued liabilities of $6.1 million.

Investing Activities

In the nine months ended September 30, 2021 and September 30, 2020, our investing activities used $49.4 million and $201.6 million of net cash, respectively.

For the nine months ended September 30, 2021, we used cash of approximately $191.8 million for purchases of short-term investments, approximately $38.5 million for purchases of property and equipment, primarily related to our Aliso Facility, and approximately $1.5 million related to investments in company-owned life insurance, and we received cash of approximately $182.4 million from sales and maturities of short-term investments.

For the nine months ended September 30, 2020, we used cash of approximately $273.8 million for purchases of short-term investments, approximately $4.8 million for purchases of property and equipment and approximately $1.1 million related to investments in company-owned life insurance, and we received cash of approximately $78.1 million from sales and maturities of short-term investments.

We expect to continue our increased 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 discussed above.

Financing Activities

In the nine months ended September 30, 2021 and September 30, 2020, our financing activities provided $37.6 million and $253.9 million of net cash, respectively.

For the nine months ended September 30, 2021, we received $29.2 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $3.7 million for payment of employee taxes related to restricted stock unit vestings. Additionally, we received $12.7 million in proceeds from our tenant improvement allowances for our Aliso Facility and paid $0.6 million in principal on our finance lease.

For the nine months ended September 30, 2020, we received net cash proceeds of approximately $287.5 million related to our Convertible Notes, used $9.6 million for transaction costs related to the Convertible Notes and used $35.7 million on payment of the capped call transaction related to the Convertible Notes. We received $14.3 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $2.6 million for payment of employee taxes related to restricted stock unit vestings.

Commitments

There have been no material changes to our contractual obligations and commitments as of September 30, 2021 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 1, 2021 for the year ended December 31, 2020.

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.

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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 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, 2020, filed with the SEC on March 1, 2021. There have been no material changes to our critical accounting policies and estimates as disclosed therein, during the nine months ended September 30, 2021, as compared with those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 1, 2021, with the exception of the adoption of Accounting Standards Update (ASU) No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06).

In August 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-06, which simplifies accounting for convertible instruments. The embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASU 2020-06, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021, we early adopted ASU 2020-06 using the modified retrospective adoption approach. The cumulative effect of the change was recognized as an adjustment to the opening balance of retained earnings at the date of adoption. The comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our exposure to market risk since December 31, 2020. 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, 2020 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

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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 2021 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 12, Commitments and Contingencies of Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

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, 2021, which was filed with the SEC on August 5, 2021. 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.”

With the exception of the risk factors relating to COVID-19, the supply and manufacture of our products and changes to reimbursement rates, we do not believe any of the changes constitute material changes from the risk factors previously disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, which was filed with the SEC on August 5, 2021.

Risks Related to Our Business

The reduced reimbursement rates established by CMS for 2022 have, and may continue to, materially and adversely impact our business operations and financial results.

On November 2, 2021, the Centers for Medicare & Medicaid Services (CMS) published its Final Rules for 2022 Medicare physician fee payment rates and 2022 Medicare facility fee payment rates for services furnished in both the hospital outpatient and ambulatory surgery center settings. These Final Rules supercede the proposed rates that were issued by CMS in July 2021. Compared to the current reimbursement rates, the Final Rules contain a new, significantly lower physician fee related to the implantation of trabecular bypass stents, such as our iStent family of products, in conjunction with cataract surgery, while the facility fee schedule related to reimbursement for surgeries that include implantation of trabecular bypass stents, such as our iStent family of products, in conjunction with cataract surgery, would slightly decrease reimbursements to an ambulatory surgery center and increase reimbursements to a hospital. We believe the CMS physician fee and facility fee rate decreases that were proposed in July 2021 have disrupted traditional customer ordering patterns and have resulted in our customers’ trialing of competitive products, causing reduced U.S. Glaucoma volumes during our third and fourth quarter of 2021. As confirmed in the Final Rules, the reduction of the physician fee may continue to have an adverse impact on procedural iStent family product volumes, in conjunction with cataract surgery, in 2022, as well as on our U.S. combo-cataract Glaucoma revenues, gross profit, and net income, the full extent of which is not known at this time.

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Additionally, the Final Rules establish facility fee payment rates that are lower than anticipated for standalone insertion of an aqueous drainage device in the ASC and hospital setting, which would be the procedure that such facilities will use with Glaukos’ iStent infinite product, which is not yet approved by the U.S. Food & Drug Administration. The physician fee payment rate for this procedure will be set by the multi-state, regional contractors, or Medicare Administrative Contractors (MACs), responsible for administering Medicare claims, and is unknown at this time. This physician fee payment rate, alone or in combination with the standalone facility fee payment rate, may result in inadequate reimbursement and impact the use of this product, if and when approved.

The COVID-19 pandemic has adversely affected, and could continue to materially and adversely affect, our business, results of operations, financial condition, liquidity, and cash flows.

While the impacts of COVID-19 have had, and may continue to have, an adverse effect on our business, results of operations, financial condition, liquidity and cash flows, we are unable to predict the extent or nature of these impacts at this time.

To protect our employees and adhere to the guidance and orders of various governmental authorities, beginning in the first quarter of 2020 and continuing through the date hereof, we shifted the majority of our workforce to remote operations and implemented changes to our manufacturing and distribution operations to include the use of personal protective equipment and ensure social distancing. Further, in an effort to identify, and avoid further infection from, asymptomatic cases, we have offered periodic voluntary COVID-19 viral testing to on-site employees and require that any onsite individuals adhere to social distancing and masking requirements. Additionally, the return-to-work strategies we adopt, which may include masking, testing, vaccination or other requirements, may have an unanticipated impact on our employees that could be disruptive to our business and adversely impact our financial and operational results.

As government restrictions and advisories on elective procedures and therapies ease, cataract and keratoconus procedures continued to return toward more normalized levels through the quarter ended September 30, 2021. However, we cannot predict the timing and full impact of the pandemic on our future financial and operating results given the continued uncertainties associated with the situation, including the possibility of future surges of COVID-19, uncertainties about the severity and transmission rates of new more contagious and/or vaccine-resistant variants of COVID-19, the availability, distribution, public acceptance rate and efficacy of vaccines and therapeutics for COVID-19 and patient reluctance to seek primary care from optometrists and ophthalmologists or undergo medical procedures during or following the pandemic. Restrictions on elective procedures and therapies and the closures of ophthalmic practices in an effort to halt the spread of COVID-19 have also impacted the progress of our pipeline products. For example, new patient enrollment in our iDose clinical trial slowed significantly but was completed in June 2021, which has delayed the iDose approval timeline. Any further prolonged economic slowdown or reinstitution of stay-at-home or similar orders may cause additional delays in the progress of our pipeline products, including those in clinical trials.

We continue to carefully manage our discretionary spending, which may slow the growth trajectory of the Company or require us to delay projects that could have benefitted the Company. In addition to the cost saving measures, we issued $287.5 million in aggregate principal amount of 2.75% convertible notes due 2027 (the Convertible Notes) in June 2020, the proceeds of which are expected to be used for working capital and general corporate purposes.

Our supply chain and development partners have experienced delays due to COVID-19 disruptions, including availability of headcount resources and some raw materials, impacting some of our suppliers and third-party partners. It is possible our suppliers or third-party partners could incur further challenges supplying the materials needed for the manufacture of our products in some cases requiring us to find second sources for materials. If these delays and partial or unfilled deliveries persist, they could impact our ability to ship some of our products to our customers, or bring some of our pipeline products to market, in a timely manner.

Additionally, we have experienced a number of COVID-19 cases among our workforce, and we could experience a wider-spread outbreak of COVID-19 in our manufacturing facilities, which could require us to temporarily shut down manufacturing operations and/or cause a disruption to, or shortage in, our workforce. If a widespread outbreak were to occur, we may experience delays in our responses to our customers and possible delays in shipments of our products, which could harm our customer relations and adversely impact our competitive positioning and sales. We have also experienced restrictions on the ability of our personnel to travel and access customers and clinical sites for

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training and support. Other potential disruptions include delays in approvals by regulatory bodies; delays in product development efforts; and further challenges to our capacity to manufacture, sell and support the use of our products.

We have incurred significant losses since inception and our business requires substantial capital and operating expenditures to operate and grow. There can be no guarantee that we reach sustained profitability.

Since the Company’s inception in 1998, we have incurred significant operating losses. As of September 30, 2021, we had an accumulated deficit of approximately $343.3 million, 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, including our June 2015 initial public offering (IPO), the issuance of notes payable, cash exercises of stock options and warrants to purchase equity securities, cash generated from commercial operations and the issuance of the Convertible Notes. To implement our global business strategies we need to, among other things, fund ongoing research and development activities, expand our manufacturing capabilities, grow our sales and marketing organization, enforce or defend our intellectual property rights, acquire companies or in-license products or intellectual property, and obtain regulatory clearance or approval to commercialize our existing products in international markets or to commercialize those currently under development in the U.S. and internationally. As a result, we expect our expenses to continue to increase as we pursue these objectives. While we believe we have sufficient cash to fund our operations for at least the next 12 months from the date our condensed consolidated financial statements for the quarter ended September 30, 2021 are made publicly available, our ability to reach sustained profitability is highly uncertain, especially given our increasingly competitive landscape, which makes forecasting our sales more difficult.

Our success depends on our ability to continue to generate sales of our commercialized products and develop and commercialize additional products, which we may not be able to accomplish.

Our primary sales-generating commercial products have been the iStent, which we began selling in the U.S. in 2012, the iStent inject, which we began selling in the U.S. in the second half of 2018, and its successor, the iStent inject W, launched in the second half of 2020, as well as our Photrexa therapies, which we acquired in connection with our acquisition of Avedro, Inc. (Avedro) in November 2019. We expect to continue to derive a significant portion of our net sales from the iStent, the iStent inject models and the Photrexa therapies.

It is important that we continue to build a more complete product offering. Developing additional products is expensive and time-consuming. Even if we are successful in developing our additional pipeline products, including those currently in development, the success of our new product offerings is inherently uncertain and there can be no assurance that our products will produce net sales in excess of the costs of development. Any current or new products could also quickly be rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying superior technologies, features or better product safety, quality or efficacy. Our competitors include large publicly traded companies or divisions of publicly traded companies and have more resources, greater name recognition, longer operating histories, more established relationships with healthcare professionals, customers and third-party payors, broader products lines that provide rebate and bundling opportunities, more established sales and marketing programs and distribution networks, and greater experience in obtaining regulatory clearance or approval. Additionally, our research programs, which are expensive and time-intensive, may initially show promise in identifying potential products, yet fail to yield product candidates for clinical development. If we are unable to successfully commercialize additional products, our business prospects would be materially affected.

As our growth strategy turns increasingly global, we are, and will continue to be, subject to a variety of risks associated with our international operations, which could adversely impact our results of operations and financial condition.

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 U.S., we sell our products 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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different, and in some cases more exacting and lengthy, regulatory approval processes, regulations and laws, and pricing and reimbursement systems;

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reduced or varied protection for intellectual property rights or 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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pricing pressure or longer sales and payment cycles;

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different competitive dynamics, including smaller market sizes, which we may not be able to fully appreciate before entering certain foreign markets;

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a shortage of high-quality regional sales managers, direct sales representatives and distributors, and the difficulties of managing foreign operations;

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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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political and economic instability, international terrorism and anti-U.S. sentiment, or the imposition of U.S. or international sanctions that could restrict or prohibit continued business;

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

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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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different cultural norms which may impact how business is conducted;

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laws and business practices favoring local companies;

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difficulties in maintaining consistency with our internal guidelines;

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

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failures by our third-party partners to properly comply with applicable anti-corruption laws or assist us with local guidance on operations, financial and other reporting, accounting, tax, payroll, legal and regulatory matters; and

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

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.

If the supply and/or manufacture of our principal revenue-producing products, the iStent, the iStent inject models and our Photrexa therapies, is materially disrupted, it may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affect our operating results.

Our corporate headquarters and the manufacturing operations for our iStent products are currently located in an approximately 98,000 square foot campus located in San Clemente, California. This location serves as our sole manufacturing location where we manufacture, inspect, package, release and ship nearly all of our iStent and iStent inject products. This is also the location where we currently conduct substantially all of our research and development (R&D) activities, customer and technical support, and management and administrative functions. We intend to relocate our corporate administrative headquarters, along with certain laboratory, R&D and warehouse space, to a new facility located in Aliso Viejo, California by the first quarter of 2022. If our San Clemente facility or our future facility in Aliso Viejo suffers a crippling event, or a force majeure event such as an earthquake, fire or flood, this could materially impact our ability to operate.

Additionally, we rely on a limited number of third-party suppliers, in some cases sole suppliers, to supply components for the iStent, the iStent inject models and our other pipeline products. As discussed above in the risk factor related to COVID-19, some of our suppliers have experienced challenges providing products in a timely manner, or at all, due to limited headcount resources and lack of availability of raw materials. Any prolonged supply challenges could materially impact our ability to operate successfully. We have experienced the inability of one or more of our suppliers to provide us with sufficient quantities of components or drugs in a timely manner or on terms acceptable to us, and have had to seek alternative sources of supply, and this may occur again in the future if such supply challenges continue. Because of factors such as the proprietary nature of our products, our domestic and international quality control standards and regulatory requirements including FDA’s Quality System Regulation (QSR) and Current Good Manufacturing Practices (cGMPs) regulations, we may from time to time be unable to obtain components if our component suppliers are found to be in violation of such standards and we may have difficulty quickly engaging additional or replacement suppliers for some of our critical components, which could delay or impact our business, including the regulatory approval timelines as has happened with iLink epi-on. 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 fail to adequately remediate any issues discovered during an audit, the FDA or other notified bodies could take

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enforcement action. 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. Despite our efforts to maintain an adequate supply of inventory, 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. Any disruption of this nature or increased expense could harm our commercialization efforts and adversely affect our operating results.

Our corneal health Photrexa therapies are produced by a small number of contract manufacturing organizations. The systems that bio-activate our Photrexa therapies are primarily manufactured in Burlington, Massachusetts. Any material disruption to the manufacture of our corneal health products, either our pharmaceuticals or their bio-activation systems, could also adversely affect our operating results and clinical efforts.

If the quality or delivery of our products does not meet our customers’ expectations, our reputation could suffer and ultimately our sales and operating earnings could be negatively impacted.

In the course of conducting our business, we have had to and must continue to adequately address quality issues associated with our products, including in our engineering, design, manufacturing and delivery processes, as well as issues in third-party components included in our products. Because our products are highly complex, the occurrence of performance issues may increase as we continue to introduce new products and as we rapidly scale up manufacturing to meet increased demand for our products. Although we have established internal procedures to minimize risks that may arise from product quality issues, there can be no assurance that we will be able to eliminate or mitigate occurrences of these issues and associated liabilities. In addition, identifying the root cause of performance or quality issues, particularly those affecting third-party components, may be difficult, which increases the time needed to address quality issues as they arise and increases the risk that similar problems could recur. Finding solutions to quality issues can be expensive and we may incur significant costs or lost revenue in connection with, for example, shipment holds, product recalls and warranty or other service obligations. In addition, quality issues can impair our relationships with new or existing customers or result in product liability suits against us, which may be expensive to defend or resolve and could impact the reimbursement coverage of our products, our product liability insurance rates and/or our cash reserves in the event our existing insurance coverage is insufficient. The occurrence of any of the foregoing could adversely affect our reputation as a producer of high quality products, which could adversely affect our business, financial condition or results of operations.

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 or may use our products without being adequately trained, which could result in 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 ophthalmic surgeons determine that any of our products are not sufficiently effective, efficient or safe, whether based on longer-term patient studies or clinical experience or unsatisfactory patient outcomes or patient injury, our sales would be harmed. Surgeons may base such determination on patient outcomes that are the result of untrained or unqualified surgeons performing procedures for which they haven’t been trained. 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. 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.

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.

In addition to the impact of the COVID-19 pandemic, our net sales may experience volatility due to a number of factors, many of which are beyond our control, including, among other things, fluctuating demand, pricing pressures applicable to our products, Medicare payment rates established by CMS, commercialization of our new and existing products and the marketing of competitive products, results of clinical research and trials, regulatory approvals and legislative changes affecting our products, variances in the sales terms, supply chain and inventory management, timing or volume of customer orders and the length of our sales cycle, which varies and may be unpredictable. 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

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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, 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 2012, we have seen significant growth in our business, both organically and through transactions, and we must continue to grow in order to meet our business and financial objectives. However, continued growth may create numerous challenges, including, among others, new and increased responsibilities for our management team; increased competition; increased product demand which could strain our manufacturing capacity; the management of an increasing number of customer, supplier and other relationships; increased pressure on our operating, financial and reporting systems; entry into new international territories with unfamiliar regulations and business approaches; and the need to hire, train and manage additional qualified personnel. If we fail to manage any of these challenges effectively, our business may be harmed.

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 and pharmaceutical companies to achieve profitability. We also rely on our qualified sales representatives and on consultants and advisors in our research, operations, clinical and commercial efforts to grow our business, develop and commercialize new products and implement our business strategies. Our success will depend on our ability to retain our current management, key employees and consultants and advisors, and to attract and retain qualified personnel in the future, including by providing competitive compensation and benefit programs, career advancement prospects and sufficient opportunities to develop leadership, managerial and other valuable skills. The loss of services of these personnel, which could occur without notice and without cause or good reason, could prevent or delay our growth plans and the implementation and completion of our strategic objectives, or divert management’s attention to seeking qualified replacements. Our employees, including members of our senior management, are not subject to non-competition agreements. Accordingly, the adverse effect resulting from the loss of key personnel could be compounded by our inability to prevent them from competing with us.

We have entered and may continue to enter into acquisitions, collaborations, in-licensing agreements, joint ventures, alliances or partnerships with third parties that could fail.

We have entered and may continue to enter into acquisitions, collaborations, in-licensing agreements, joint ventures, alliances, 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. Examples include our acquisitions of DOSE and Avedro, as well as our licensing of Santen’s PreserFlo MicroShunt, the Intratus drug delivery platform and the Attillaps pharmaceutical compounds. However, we cannot assure you that we will be able to successfully complete any future acquisition we choose to pursue, or that we will be able to successfully integrate any acquired business, product or technology in a cost-effective and non-disruptive manner. Our future successes will depend, in part, on our ability to manage an expanded business, which may pose substantial challenges for our 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 we will realize the expected economies of scale, synergies and other benefits currently anticipated from recent or future acquisitions or strategic transactions. Additionally, some of these collaborations, joint ventures, alliances and partnerships may fail to materialize into commercialized product, including due to delays in or failures to obtain regulatory approvals, such as the approval delays with respect to the PreserFlo MicroShunt, and could require us to invest a substantial amount of resources only to ultimately fail. These arrangements may be terminated before we are able to realize net sales to sufficiently cover the costs associated therewith, which could materially impact our business. We cannot assure you that any such transaction would result in the benefits expected from the transaction, including revenue growth, increased profitability or an enhancement in our business prospects. Further, pursuing acquisitions, collaborations, in licensing agreements, joint ventures, alliances or partnerships with third parties, whether or not completed, is costly and time-consuming and could distract Company management from the operation of the business, which could negatively impact our operating results.

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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, data corruption and security breaches or other cyber-based attacks, which we have experienced and continue to monitor. Cyber-based attacks can include ransomware, computer denial-of-service attacks, worms, and other malicious software programs introduced to our computers and networks, including intrusions that are disguised and evade detection for an extended period of time, phishing attacks, 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 or fraud by third parties and sabotage. 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 to protect either our or our service providers’ information technology infrastructure 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.

Failure to comply with data privacy and security laws could have a material adverse effect on our business.

We are subject to state, federal and foreign laws relating to data privacy and security in the conduct of our business, including state breach notification laws, the Health Insurance Portability and Accountability Act (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH), the European Union’s (EU) General Data Protection Regulation (GDPR), and the California Consumer Privacy Act (CCPA). These laws affect how we collect and use data of our employees, consultants, customers and other parties. Furthermore, these laws impose substantial requirements that require the expenditure of significant funds and employee time to comply, and additional states and countries are enacting new data privacy and security laws, which will require future expansion of our compliance efforts. We also rely on third parties to host or otherwise process some of this data. In some instances, these third parties have experienced immaterial failures to protect data privacy. Any failure by a third party to prevent security breaches could have adverse consequences for us. We will need to expend additional resources and make significant investments to comply with data privacy and security laws. Our failure to comply with these laws or prevent security breaches of such data could result in significant liability under applicable laws, cause disruption to our business, harm our reputation and have a material adverse effect on our business.

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

At December 31, 2020, we had approximately $439.4 million, $297.6 million and $13.4 million of net operating loss (NOL) carryforwards for federal, state and foreign purposes, respectively, available to offset future taxable income. The federal NOL carryforwards incurred prior to 2018 begin to expire in 2021, while a federal NOL carryforward of $186.6 million will not expire. The state NOL carryforwards begin to expire in 2021. The foreign NOL carryforwards begin to expire in 2022. At December 31, 2020, we had federal and state R&D credit carryforwards of approximately $32.3 million and $15.7 million, respectively. Federal credits begin to expire in 2021, state credits of $3.4 million begin to expire in 2023, and state credits of $12.2 million carry over indefinitely. We continue to provide a valuation allowance against a portion of these tax attributes because we believe that uncertainty exists with respect to their future realization, as well as with respect to the amount of the tax attributes that will be available in future periods. Utilization of these tax attributes may be subject to annual limitations under the Internal Revenue Code of 1986 Section 382 and Section 383 if the Company experiences an ownership change. To the extent available, we intend to use these NOL and credit carryforwards to offset future taxable income and/or income tax liabilities associated with our operations. There can be no assurance that we will generate sufficient taxable income in the carryforward period to utilize the remaining tax attributes before they expire.

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Risks Related to Indebtedness

The requirement that we service our indebtedness could limit the cash flow available for our operations and have other consequences that could adversely affect our business, and we may not have sufficient cash flow from our business to pay our debt obligations.

As of September 30, 2021, we had $287.5 million in principal amount of indebtedness as a result of the issuance of the Convertible Notes. We may also incur additional indebtedness to meet future financing needs. Interest payments, fees, covenants and restrictions under agreements governing our current or future indebtedness, including the indenture governing the Convertible Notes, could have important consequences, including the following: impairing our ability to successfully continue to commercialize our current or future products; limiting our ability to obtain additional financing on satisfactory terms; increasing our vulnerability to general economic downturns, competition and industry conditions; requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness; inhibiting our flexibility to plan for, or react to, changes in our business; and diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of the Convertible Notes. The occurrence of any one of these events could have an adverse effect on our business, financial condition, operating results or cash flows and ability to satisfy our obligations under the indenture governing the Convertible Notes and any other indebtedness.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance the amounts payable under our current or future indebtedness, including the Convertible Notes, will depend on our operating and financial performance, which may be subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary investments in our business, and our cash needs may increase in the future. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

We may not have the ability to raise the funds necessary to settle conversions of the Convertible Notes in cash or to repurchase the Convertible Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Notes.

Noteholders may require us to repurchase their Convertible Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the aggregate principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, upon conversion of the Convertible Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Convertible Notes surrendered therefor or Convertible Notes being converted. In addition, our ability to repurchase the Convertible Notes or to pay cash upon conversions of the Convertible Notes may be limited by law, by regulatory authority and by agreements governing our future indebtedness. Our failure to repurchase Convertible Notes at a time when the repurchase is required by the indenture governing the Convertible Notes or to pay any cash payable on future conversions of the Convertible Notes as required by the indenture governing the Convertible Notes would constitute a default under the indenture governing the Convertible Notes. A default under the indenture governing the Convertible Notes or the occurrence of the fundamental change itself may lead to a default under any future credit facility or other agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Notes or make cash payments upon conversions thereof.

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The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the Convertible Notes is triggered, holders of the Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of the Convertible Notes do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

The capped call transactions may affect the value of our common stock.

In connection with the issuance of the Convertible Notes, we entered into capped call transactions with certain option counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of common stock initially underlying the Convertible Notes. The capped call transactions are expected generally to reduce the potential dilution of our common stock upon any conversion of the Convertible Notes or at our election (subject to certain conditions) and offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Notes, as the case may be, with such reduction or offset subject to a cap.

We have been advised that, in connection with establishing their initial hedges of the capped call transactions, the option counterparties or their respective affiliates purchased shares of our common stock and/or entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Convertible Notes. In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Convertible Notes (and are likely to do so on each exercise date of the capped call transactions, which are expected to occur during the 40 trading day period beginning on the 41st scheduled trading day prior to the maturity date of the Convertible Notes, or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption or early conversion of the Convertible Notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock.

We are subject to counterparty risk with respect to the capped call transactions.

The option counterparties to the capped call transactions are financial institutions, and we are subject to the risk that any or all of them might default under the capped call transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. Past global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the capped call transactions with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price subject to the cap and in the volatility of our common stock.

In addition, upon a default by an option counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.

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Risks Related to the Regulatory Environment

Our business, products and processes are subject to extensive regulation both in the U.S. and abroad and it can be costly to comply with these regulations. Any failure to adhere to applicable regulations could harm our business, financial condition and operating results.

Our medical devices, drugs, drug/device combination products or other products are subject to extensive government regulation in the U.S. by the FDA, state regulatory authorities and 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 our products. See Item 1, Business, “Government Regulation -- Regulation & Reimbursement in the U.S.” and “Regulation & Reimbursement outside the U.S.” contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2021 for additional information.

The process of obtaining clearances or approvals to market our products can be expensive and lengthy, and we cannot guarantee that our current products will receive approval for additional indications or that our future products will receive clearance or approval on a timely basis, if at all. Before we can obtain regulatory approval for any product candidate, we may be required to undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the FDA and other regulatory agencies, including outside the U.S. We have experienced in the past, and could experience in the future, delays in the commencement or completion of clinical trials or testing that 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 adequate number of patients in a timely manner or be completed on schedule, if at all. 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, even if we believe the results from such trials are positive. 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 medical device products may malfunction and any of our products 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 independent review board responsible for overseeing the trial, the FDA, or another regulatory authority may suspend or terminate clinical trials at any time due to a number of factors, including failure to conduct the clinical trial in accordance with applicable regulatory requirements or trial protocols, failure to demonstrate a benefit from using the product, lack of sufficient funding, or to avoid exposing trial participants to unacceptable health risks. Any delay or failure in clinical trials would delay or prevent our ability to obtain necessary regulatory approvals, which would have a material adverse effect on our business, financial condition and prospects.

In some instances we or our partners have pursued, and may in the future pursue, a regulatory clearance or approval that has proven or proves unsuccessful, such as the delays experienced by the PreserFlo and the change in regulatory pathway undertaken with respect to the iStent infinite, which in the past has, and in the future would, substantially increase the time and financial resources required to obtain FDA or other regulatory approval or could result in new competitive products reaching the market faster than our product candidate, which could materially adversely impact our competitive position and prospects. We cannot assure you that we will receive the requisite or timely approvals for commercialization of our product candidates.

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. We may also be required to seek additional regulatory approvals to modify our approved products or their manufacturing processes, which may entail significant time and expense. 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 product approval withdrawals. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. Other post-market requirements that may regulate our products include establishment registration and device listing, quality system and good manufacturing requirements, reporting of adverse events and device malfunctions, reporting of corrections and removals (recalls), labeling requirements, and promotional restrictions. Our products could malfunction, cause unexpected adverse events, or experience performance problems that require review and possible corrective action by us or a component supplier, including a recall or market withdrawal. Failure to conduct any required post-marketing studies for our approved products in a timely manner could result in the revocation of the approval for the product that is subject to such a requirement and could also result in the

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recall or withdrawal of the product. Any recall or product withdrawal, whether required by the FDA or another regulatory authority or initiated by us, could harm our reputation with customers and negatively affect our sales.

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, among other things, warning letters, fines, injunctions, recalls, refusals to grant or delays in granting requests, civil fines and penalties, operating restrictions, withdrawal of approvals and even criminal prosecution.

In addition, 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, also known as an “off-label” use. Physicians may use our products off-label, as the FDA does not restrict or regulate a physician's choice of treatment 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.

We are subject to healthcare fraud and abuse, anti-kickback, false claims and transparency laws and regulations, among others, which are enforced by federal and state governments with respect to our marketing, training, customer arrangements, financial arrangements with physicians, patient assistance programs, reimbursement support services, and other practices. See Item 1, Business, “Government Regulation -- Regulation & Reimbursement in the U.S.” and “Regulation & Reimbursement outside the U.S.” contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2021 for additional information about the laws and regulations which apply to us. In the foreign markets in which we operate, different pricing and reimbursement systems, which could result in lower reimbursement, could harm our ability to operate our business.

The scope and enforcement of each of the laws applicable to our business and products is uncertain and subject to rapid change in the current environment of healthcare reform. If our operations are found to be in violation of any of the 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. The U.S. Department of Justice has increased its scrutiny of interactions between manufacturers and healthcare providers, as well as various patient and product support programs, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. We have built and maintained a compliance program to adhere to the various compliance and reporting requirements in multiple jurisdictions, but these laws and regulations are subject to evolving interpretation. Although we try to structure our arrangements within available safe harbors whenever possible, we may nevertheless become subject to government scrutiny or investigation. Responding to a government investigation is time and resource intensive, and may cause harm to our business and reputation even if we are able to successfully defend against it. Additionally, resolution of any such investigation may require agreement to onerous corporate integrity agreements or other compliance or reporting requirements, which may negatively affect our business.

Legislative or regulatory reform of the healthcare system could hinder or prevent our products’ commercial success.

In the U.S. and in certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare systems in ways that could impact our ability to sell our products profitably, if at all. In the U.S. 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 and we may not be able to comply with the changed laws, they could increase the cost of manufacturing, marketing or selling our product, could make approvals of pipeline products more difficult or prevent us from selling at all. We expect there will continue to be a number of legislative and regulatory changes to the U.S. health care system that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof and may impose additional costs or lengthen review times of planned or future products. It is also difficult to predict whether and how the policies and priorities of a new administration could materially impact the regulation governing our products.

We may from time to time increase the prices of our products, as was recently done with our Photrexa therapies. Drug pricing by pharmaceutical manufacturers is currently, and is expected to continue to be, under close scrutiny, including with respect to manufacturers that increase the price of products after acquiring those products from

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other companies. In some cases, such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturers’ patient support programs, and reform government program reimbursement methodologies for products. Although our price increases have been based upon third party studies of the projected economic value of our products to the healthcare system, we cannot be certain they would not be subject to such scrutiny.

In May 2017, the EU adopted Medical Devices Regulation 2017/745 (MDR), which will repeal and replace the Medical Device Directive (MDD). MDR was set to take effect beginning May 26, 2020; however, the effective date of MDR has been postponed a year and took effect on May 26, 2021. Although MDR does not set out a substantially different regulatory system, it provides for stricter controls of medical devices. Under MDR, medical devices with notified body certificates issued under the MDD prior to May 26, 2021 may continue to be marketed and sold as long as those certificates are valid (up to a maximum of five years from the date of issue) or until May 27, 2024 at the latest. After the expiration of any applicable transitional period, only devices that have been CE marked under MDR may be placed on the market in the EU.

Broader legislative changes may also impact our operations. The United Kingdom (U.K.) held a referendum on June 23, 2016 in which voters approved withdrawal from the EU (commonly referred to as Brexit). On January 31, 2020, the U.K. withdrew from the EU and the transition period ended on December 31, 2020. The U.K. and EU reached agreement regarding their future relationship on December 24, 2020. As a result of Brexit, there may be greater restrictions on imports and exports into and out of the U.K. and EU countries and regulatory complexities that could adversely impact the Company.

If, as a result of legislative or regulatory healthcare reform, we cannot sell our products profitably, whether due to our own inability to comply with, or the inability of other economic operators in our supply chain to qualify under, any legislative reform, 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.

Changes to the reimbursement rates for our products may adversely impact our business.

Our ability to successfully commercialize and achieve market acceptance of our products depends in significant part on adequate financial coverage and reimbursement from third party payors, including governmental payors (such as the Medicare and Medicaid programs in the U.S.), managed care organizations and private health insurers. See Item 1, Business, “Government Regulation -- Regulation & Reimbursement in the U.S.” and “Regulation & Reimbursement outside the U.S.” contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2021 for additional information. Payors continually review the clinical evidence for new technologies and can change their coverage policies without notice or deny payment if the product was not used in accordance with the payor’s coverage policy. Therefore, coverage for our products 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 products and procedures. As a result, the coverage determination process is often time-consuming and costly and requires us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage will be obtained or will be maintained once it is obtained.

In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement levels. Without sufficient reimbursement from governmental programs or third party commercial payors, patients may not be able to access our products. The demand for, and the profitability of, our products could be materially harmed if the Medicaid program, Medicare program, other healthcare programs in the U.S. or elsewhere, or third party commercial payors in the U.S. or elsewhere deny reimbursement for our products, limit the indications for which our products will be reimbursed, or provide reimbursement only on unfavorable terms. Also, when procedures associated with our products transition from temporary Current Procedural Terminology (CPT) Category III codes to permanent CPT Category I codes, the physician and facility reimbursement levels associated with the procedures using these products could be decreased, such as the decreased payment rates for procedures using our iStent-related products, in conjunction with cataract surgery, established by CMS for 2022, as discussed earlier in these Risk Factors under the heading “Risks Related to Our Business.” Even when a permanent billing code has been assigned to a product, there is no guarantee that coverage will be provided. MACs have in the past, and may in the future, change coverage terms, which could result in inadequate reimbursement and impact the use of our products. If we are unable to maintain our existing codes or obtain

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new permanent codes for procedures using our products, or obtain new reimbursement codes for our other products in development, we will be subject to significant pricing pressure, which would likely harm our business, results of operations, financial condition and prospects.

We cannot predict to what extent the evolving effects of the COVID-19 pandemic may disrupt global healthcare systems and access to our products or result in a widespread loss of individual health insurance coverage due to unemployment, a shift from commercial payor coverage to government payor coverage, or an increase in demand for patient assistance and/or free drug programs, any of which could adversely affect net revenue. In addition, payers consistently engage in cost containment efforts, which could include efforts to decrease reimbursement levels for prescription drugs and the imposition of prior authorization for the use of our products. We cannot predict actions that third party payors may take, or whether they will limit the access and level of reimbursement for our products or refuse to provide any approvals or coverage.

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 obtain, maintain and protect our proprietary rights and licensed intellectual property 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 technologies. These legal means, however, afford only limited protection and may not adequately protect our business. 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.

Despite our efforts to protect our proprietary rights, we cannot guarantee that we will be able to adequately protect these rights, which could substantially impair our ability to compete. Our patents may be challenged and held invalid or we may be unable to extend the protection on products with expiring patents. 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. Further, 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 proprietary information and inventions 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, resulting in ownership disputes and/or litigation.

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 international 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.

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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 relating to our intellectual property rights, which could be costly, time consuming and unsuccessful and could interfere with our ability to successfully commercialize our products.

Intellectual property rights are essential to our business. We have asserted and may in the future need to assert claims of infringement against third parties to protect our rights, or to invalidate or challenge the intellectual property rights of a third party, including those rights owned by our competitors. Additionally, third parties could assert infringement or misappropriation claims against us with respect to our current or future commercial products and seek to invalidate one or more of our patents or trademarks. Intellectual property disputes often involve complex legal and factual questions, and 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. Such claims could arise in situations where certain employees, consultants or contractors were previously, or are currently, employed by other medical device, biotechnology or pharmaceutical companies, including our competitors or potential competitors. 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.

There is no guarantee that we would be successful enforcing or defending our intellectual property rights in court. 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. Further, we could be prohibited from selling our products or a court could order us to pay compensatory damages as well as other penalties and fines. Any such adverse result would undermine our competitive position. 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.

Risks Related to Being a Public Company and Our Common Stock

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.

On May 6, 2020, we implemented a company-wide ERP system to upgrade certain existing business, operational, and financial processes, and continue to refine the system on an ongoing basis, which has been a complex and time-consuming project. 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 higher costs than we had anticipated 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 internal financial controls may fail, which 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 that we have a material weakness 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

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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.

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 affected 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.

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.

The exclusive forum provisions in our organizational documents could limit our stockholders' ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or its directors, officers or other employees.

Our Restated Certificate of Incorporation (the Glaukos Charter) and our Bylaws provide 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 (the Delaware Exclusive Forum Provision). Further, in November 2020, we amended our Bylaws to provide that the federal district courts of the United States of America will, to the fullest extent permitted by law, be the exclusive forum for resolving any complaint asserting a cause of action under the Securities Act (the Federal Forum Provision). Our decision to adopt the Federal Forum Provision followed a decision by the Supreme Court of the State of Delaware holding that such provisions are facially valid under Delaware law and means that suits brought by stockholders to enforce any duty or liability created under the Securities Act must be brought in federal court and cannot be brought in state court.

The Delaware 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 the Securities Act, or any other claim for which the federal courts have exclusive jurisdiction. In addition, the Federal Forum Provision is intended to apply to claims arising under the Securities Act and would not apply to claims brought pursuant to the Exchange Act. The exclusive forum provisions in the Glaukos Charter and our Bylaws will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder and, accordingly, actions by our stockholders to enforce any duty or

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liability created by the Exchange Act or the rules and regulations thereunder must be brought in federal courts. Our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.

The exclusive forum provisions in the Glaukos Charter and our Bylaws may limit a stockholder's ability to bring a claim in a judicial forum of its choosing for disputes with the 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 pursuant to the Delaware Exclusive Forum Provision could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The court in the designated forum under our exclusive forum provisions 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. Further, the enforceability of similar exclusive forum provisions in other companies’ organizational documents has been challenged in legal proceedings, and it is possible that a court could find any of our exclusive forum provisions 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 all or any part of our exclusive forum provisions 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	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	3.1	11/20/2020
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 document

* Filed Herewith.

** Furnished Herewith.

Table of Contents

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 8, 2021.

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-Q2021 Q3 Quarterly report

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