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 ~~June~~September 30, 2020

☐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 ~~August 6,~~November 4, 2020, there were ~~44,674,910~~44,961,417 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

Table of Contents

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended ~~June~~September 30, 2020

Table of Contents

We use Glaukos, our logo, iStent, iStent inject, iStent injectW, iStent Infinite, iStent SA, iPrism, iDose, iLink, MIGS, Avedro, Photrexa, 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.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)


	June 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019
	(unaudited)				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	266,974	$	62,430	$	80,994	$	62,430
Short-term investments		127,966		111,553		307,441		111,553
Accounts receivable, net		26,730		38,417		32,885		38,417
Inventory, net		21,088		42,578		19,890		42,578
Prepaid expenses and other current assets		10,464		7,900		13,235		7,900
Total current assets		453,222		262,878		454,445		262,878
Restricted cash		9,326		9,326		9,326		9,326
Property and equipment, net		23,210		22,056		23,408		22,056
Operating lease right-of-use asset		14,328		15,704		18,760		15,704
Finance lease right-of-use asset		52,833		54,048		51,975		54,048
Intangible assets, net		370,149		382,605		363,921		382,605
Goodwill		66,134		66,134		66,134		66,134
Deposits and other assets		6,531		5,649		6,545		5,649
Total assets	$	995,733	$	818,400	$	994,514	$	818,400

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	9,233	$	5,781	$	6,774	$	5,781
Accrued liabilities		45,598		51,919		39,919		51,919
Total current liabilities		54,831		57,700		46,693		57,700
Long-term debt		183,999		-
Convertible senior notes						186,676		-
Operating lease liability		13,305		14,195		18,734		14,195
Finance lease liability		60,435		58,435		60,702		58,435
Deferred tax liability, net		15,250		9,632		14,164		9,632
Other liabilities		5,489		5,166		5,982		5,166
Total liabilities		333,309		145,128		332,951		145,128

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; 44,578 and 43,530 shares issued and 44,550 and 43,502 shares outstanding as of June 30, 2020 and December 31, 2019, respectively		45		44
Common stock, $0.001 par value; 150,000 shares authorized; 44,855 and 43,530 shares issued and 44,827 and 43,502 shares outstanding as of September 30, 2020 and December 31, 2019, respectively						45		44
Additional paid-in capital		943,706		861,740		959,186		861,740
Accumulated other comprehensive income		2,467		1,330		1,874		1,330
Accumulated deficit		(283,662)		(189,710)		(299,410)		(189,710)
Less treasury stock (28 shares as of June 30, 2020 and December 31, 2019)		(132)		(132)
Less treasury stock (28 shares as of September 30, 2020 and December 31, 2019)						(132)		(132)
Total stockholders' equity		662,424		673,272		661,563		673,272
Total liabilities and stockholders' equity	$	995,733	$	818,400	$	994,514	$	818,400

See accompanying notes to condensed consolidated financial statements.

Table of Contents

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Net sales	$	31,558	$	58,600	$	86,894	$	112,626	$	64,831	$	58,509	$	151,725	$	171,135
Cost of sales		21,668		7,870		54,197		14,981		17,932		7,703		72,129		22,684
Gross profit		9,890		50,730		32,697		97,645		46,899		50,806		79,596		148,451
Operating expenses:
Selling, general and administrative		38,116		37,656		88,662		72,581		38,947		44,443		127,609		117,024
Research and development		18,971		17,069		43,844		30,999		20,304		17,278		64,148		48,277
In-process research and development		-		2,245		-		2,245		-		1,500		-		3,745
Total operating expenses		57,087		56,970		132,506		105,825		59,251		63,221		191,757		169,046
Loss from operations		(47,197)		(6,240)		(99,809)		(8,180)		(12,352)		(12,415)		(112,161)		(20,595)
Non-operating (expense) income:
Interest income		590		800		1,286		1,588		595		780		1,881		2,368
Interest expense		(1,872)		(1,013)		(2,753)		(1,013)		(5,732)		(1,028)		(8,485)		(2,041)
Other income (expense), net		1,201		216		(510)		148		852		(656)		342		(508)
Total non-operating (expense) income		(81)		3		(1,977)		723
Total non-operating expense										(4,285)		(904)		(6,262)		(181)
Loss before taxes		(47,278)		(6,237)		(101,786)		(7,457)		(16,637)		(13,319)		(118,423)		(20,776)
Income tax (benefit) provision		(7,384)		72		(7,834)		194		(889)		187		(8,723)		381
Net loss	$	(39,894)	$	(6,309)	$	(93,952)	$	(7,651)	$	(15,748)	$	(13,506)	$	(109,700)	$	(21,157)
Basic and diluted net loss per share	$	(0.90)	$	(0.17)	$	(2.13)	$	(0.21)	$	(0.35)	$	(0.37)	$	(2.48)	$	(0.58)
Weighted average shares used to compute basic and diluted net loss per share		44,335		36,470		44,078		36,338		44,706		36,831		44,302		36,507

See accompanying notes to condensed consolidated financial statements.

Table of Contents

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands)


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Net loss	$	(39,894)	$	(6,309)	$	(93,952)	$	(7,651)	$	(15,748)	$	(13,506)	$	(109,700)	$	(21,157)
Other comprehensive income:
Other comprehensive (loss) income:
Foreign currency translation (loss) gain		(605)		(230)		564		(166)		(423)		530		141		364
Unrealized gain on short-term investments		1,053		289		573		661
Other comprehensive income		448		59		1,137		495
Unrealized (loss) gain on short-term investments										(170)		74		403		735
Other comprehensive (loss) income										(593)		604		544		1,099
Total comprehensive loss	$	(39,446)	$	(6,250)	$	(92,815)	$	(7,156)	$	(16,341)	$	(12,902)	$	(109,156)	$	(20,058)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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, 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


						Accumulated
				Additional		other
	Common stock			paid-in		comprehensive			Accumulated		Treasury stock			Total
	Shares	Amount		capital		income (loss)			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 loss			—		—		(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

Accumulated

Additional

other

Common stock

paid-in

comprehensive

Accumulated

Treasury stock

Total


Shares

Amount

capital

income

deficit

Shares

Amount

equity
Balance at December 31, 2018

36,135

$
36

$
378,352

$
738

$
(205,134)

(28)

$
(132)

$
173,860
Common stock issued under stock plans

226

—

5,406

—

—

—

—

5,406
Stock-based compensation

—

—

7,129

—

—

—

—

7,129
Other comprehensive income

—

—

—

436

—

—

—

436
Net loss

—

—

—

—

(1,342)

—

—

(1,342)
Balance at March 31, 2019

36,361

$
36

$
390,887

$
1,174

$
(206,476)

(28)

$
(132)

$
185,489
Common stock issued under stock plans

305

1

318

—

—

—

—

319
Stock-based compensation

—

—

8,247

—

—

—

—

8,247
Other comprehensive income

—

—

—

59

—

—

—

59
Net loss

—

—

—

—

(6,309)

—

—

(6,309)
Balance at June 30, 2019

36,666

$
37

$
399,452

$
1,233

$
(212,785)

(28)

$
(132)

$
187,805


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

See accompanying notes to condensed consolidated financial statements.

Table of Contents

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Six Months Ended June 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Operating Activities
Net loss	$	(93,952)	$	(7,651)	$	(109,700)	$	(21,157)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		14,644		1,728		21,981		2,674
Amortization of lease right-of-use assets		2,577		1,396		3,836		2,405
Amortization of debt discount and issuance costs		557		-		3,234		-
Deferred income tax benefit		(8,254)		-		(9,340)		-
Loss on disposal of fixed assets		15		7		287		26
Stock-based compensation		28,073		15,376		37,733		23,923
Change in fair value of cash settled stock options		(3,172)		-		(3,172)		-
Unrealized foreign currency losses		-		(204)		22		469
Amortization of discount on short-term investments		33		(221)		229		(298)
Other liabilities		2,324		2,090		3,343		3,666
Changes in operating assets and liabilities:
Accounts receivable, net		11,556		(3,353)		5,629		(5,828)
Inventory, net		21,396		(752)		22,578		414
Prepaid expenses and other current assets		(1,606)		462		(4,329)		(2,326)
Accounts payable and accrued liabilities		1,998		(2,011)		(6,141)		(60)
Other assets		(211)		(57)		218		(86)
Net cash (used in) provided by operating activities		(24,022)		6,810		(33,592)		3,822
Investing activities
Purchases of short-term investments		(60,883)		(39,896)		(273,798)		(63,556)
Proceeds from sales and maturities of short-term investments		45,011		41,069		78,084		61,870
Purchases of property and equipment		(3,509)		(2,523)		(4,790)		(3,530)
Investment in company-owned life insurance		(658)		(962)		(1,097)		(1,170)
Net cash used in investing activities		(20,039)		(2,312)		(201,601)		(6,386)
Financing activities
Proceeds from convertible senior notes		287,500		-		287,500		-
Payment of convertible senior notes transaction costs		(9,614)		-		(9,614)		-
Purchase of capped calls related to issuance of convertible senior notes		(35,679)		-		(35,679)		-
Proceeds from exercise of stock options		6,590		9,171		10,258		14,005
Proceeds from share purchases under Employee Stock Purchase Plan		1,278		902		4,025		3,388
Payment of employee taxes related to vested restricted stock units		(2,013)		(4,348)		(2,607)		(5,002)
Net cash provided by financing activities		248,062		5,725		253,883		12,391
Effect of exchange rate changes on cash and cash equivalents		543		21		(126)		(8)
Net increase in cash, cash equivalents and restricted cash		204,544		10,244		18,564		9,819
Cash, cash equivalents and restricted cash at beginning of period		71,756		38,596		71,756		38,596
Cash, cash equivalents and restricted cash at end of period	$	276,300	$	48,840	$	90,320	$	48,415
Supplemental disclosures of cash flow information
Taxes paid	$	294	$	91	$	418	$	96

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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 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 and diabetic macular edema.

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

Basis of presentation

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

The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements. As permitted under those rules, certain footnotes and other financial information that are normally required by GAAP have been condensed or omitted. In the opinion of management, the unaudited interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for the fair presentation of the Company’s financial information contained herein. The condensed consolidated balance sheet as of December 31, 2019 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, 2019, which are contained in the Company’s Annual Report on Form 10-K filed with the United States (U.S.) Securities and Exchange Commission (SEC) on March 2, 2020. The results for the three and ~~six~~nine months ended ~~June~~September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period.

Recent Developments

Convertible Senior Notes

In June 2020 the Company issued $287.5 million in aggregate principal amount of 2.75% Convertible Senior Notes due in 2027 (Convertible Notes) pursuant to an indenture dated June 11, 2020. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 2.75% per year, payable semiannually 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. The Convertible Notes are convertible into cash, shares of the Company’s common stock, or a combination of cash and shares, at the Company’s election. 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 certain capped call transactions. The Company may not redeem the Convertible Notes prior to June 20, 2024 and no sinking fund is provided for the Convertible Notes.

See Note 9, Convertible Senior Notes for additional details of the Convertible Notes.

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Acquisition of Avedro, Inc.

On August 7, 2019, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Atlantic Merger Sub, Inc. (Merger Sub) and Avedro, Inc. (Avedro), pursuant to which Merger Sub would merge with and into Avedro, with Avedro continuing as the surviving corporation and a wholly owned subsidiary of the Company (the Avedro Merger). Avedro is a hybrid ophthalmic pharmaceutical and medical technology company focused on developing therapies designed to treat corneal diseases and disorders and correct refractive conditions.

~~Under the terms of the Merger Agreement, e~~ach share of Avedro common stock and certain vested Avedro warrants that were issued and outstanding immediately prior to the effective time of the Avedro Merger were automatically cancelled and converted into the right to receive 0.365 of a share of common stock of Glaukos. Also, subject to certain exceptions, each option and its associated exercise price previously granted by Avedro that was outstanding and unexercised immediately prior to the effective time of the Avedro Merger, was assumed by the Company and converted using the same 0.365 ratio noted above, into a stock option exercisable for ~~common stock of Glaukos~~. Lastly, each restricted stock unit award previously granted by Avedro that was outstanding immediately prior to the effective time of the merger, subject to certain exceptions, was assumed by Glaukos and was converted using the same 0.365 ratio noted above, into a restricted stock unit award with respect to ~~common stock of Glaukos~~.

On November 21, 2019, the Avedro Merger was consummated in a stock-for-stock transaction for total consideration of $437.8 million (Merger Consideration). The total ~~consideration~~Merger Consideration consisted of Glaukos shares worth $406.8 million issued to replace Avedro common stock, Glaukos shares worth $0.2 million to replace the certain vested Avedro warrants, and $30.8 million of value attributable to the pre-combination services associated with replacement of all Avedro outstanding and unexercised stock option awards and all outstanding restricted stock units (Replacement Awards).

~~Immediately following the Avedro Merger closing, the Company used approximately $22.5 million for payment of debt assumed as a result of the Avedro Merger.~~

See Note 4, Fair Value Measurements, Note 6, Business Combinations, Note 7, Intangible Assets and Goodwill and Note 10, Stock-Based Compensation for additional details regarding the impact of the Avedro Merger on the Company’s condensed consolidated financial statements.

Note 2. Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the ~~six~~nine months ended ~~June~~September 30, 2020, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020, including the Company’s adoption of the accounting pronouncements noted below in the sub-heading “Recently Adopted Accounting Pronouncements” with the exception of the inclusion of the Company’s accounting policy for its Convertible Notes that were issued in June 2020.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions. Management considers many factors in selecting appropriate financial accounting policies and controls and in developing the estimates and assumptions that are used in the preparation of these condensed consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. The most significant estimates in the accompanying condensed consolidated financial statements relate to revenue recognition, the fair value of the liability component of the 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.

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In March 2020, the World Health Organization declared the outbreak caused by the novel strain of coronavirus (COVID-19) to be a global pandemic. While COVID-19 continues to evolve daily and its ultimate outcome is uncertain, it has caused significant disruption to individuals, governments, businesses, and financial markets. The Company’s condensed consolidated financial statements as of and for the three and ~~six~~nine months ended ~~June~~September 30, 2020 reflect the Company’s estimates of the impact of the COVID-19 outbreak. 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 ~~highly~~ uncertain, including the duration and severity of the COVID-19 outbreak, any future surges in the COVID-19 outbreak, and the actions taken to contain it or treat 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.

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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 ~~six~~nine months ended ~~June~~September 30, 2020 (in thousands):


	June 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019
Cash and cash equivalents	$	266,974	$	62,430	$	80,994	$	62,430
Restricted cash		9,326		9,326		9,326		9,326
Cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows	$	276,300	$	71,756	$	90,320	$	71,756

Accounts Receivable

The Company sells its products directly to ambulatory surgery centers, hospitals, and physician private practices, with distributors being used in certain international locations where the Company does not have a direct commercial presence and the Company is exposed to credit losses primarily through sales of its products.

The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and periodic evaluation of customers’ receivables balances. Management estimates the adequacy of the allowance by using relevant available information, from internal and external sources, relating to past events, current conditions and forecasts. Historical credit loss experience provides the basis for estimation of expected credit losses and are adjusted as necessary using the relevant information available. The allowance for credit losses is measured on a collective basis when similar risk characteristic exists. The Company has identified one portfolio segment based on evaluation of the following risk characteristics: geographic regions, product lines, default rates and customer specific factors.

Additionally, specific allowance amounts may be established to record the appropriate provision for customers that have a higher probability of non-payment. The Company charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The allowance for credit losses represents management’s best estimate of the amount of current expected credit losses and totaled approximately ~~$1.8~~$1.4 million and $1.2 million as of ~~June~~September 30, 2020 and December 31, 2019, respectively, and there were 0immaterial bad-debt write offs charged during the ~~six~~nine months ended ~~June~~September 30, 2020.

As of ~~June~~September 30, 2020, 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 customer accounted for more than 10% of net accounts receivable as of ~~June~~September 30, 2020 or December 31, 2019.

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Inventory

Except for inventory acquired in connection with the Avedro Merger, further described in Note 6, Business Combinations, inventory is valued at the lower of cost and net realizable value with cost being determined by the first-in, first-out method.

Management evaluates inventory for excess quantities and obsolescence and records an allowance to reduce the carrying value of inventory as determined necessary. ~~As of June~~During the nine months ended September 30, 2020, the Company recorded inventory write-off charges and COVID-19 related excess and obsolete reserves, a portion of which included the associated fair-value step up of acquired Avedro inventory, totaling ~~$7.4~~a net $4.3 million.

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Convertible ~~Debt~~Senior Notes

The Company evaluates embedded conversion features within convertible debt under ~~ASC~~Accounting Standards Codification (ASC) 815, Derivatives and Hedging to determine whether the embedded conversion features should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20, Debt with Conversion and Other Options.

The carrying amount of the liability component is calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the par value of the convertible notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (i.e., debt discount) will be amortized to interest expense over the term of the convertible notes.

The Company may record debt issuance costs and/or debt discounts in connection with raising funds through the issuance of convertible debt. These costs may be paid in the form of cash or equity (such as warrants). These costs are allocated between debt and equity, with the portion allocated to debt amortized to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

Income Taxes

Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at the applicable tax rates, along with net operating loss (NOL) and tax credit carryovers. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. Management has considered estimated taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Based upon the weight of available evidence, which includes the Company’s historical operating performance and limited potential to utilize tax credit carryforwards, the Company has determined that a portion of its deferred tax assets should be offset by a valuation allowance. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes increases or decreases, respectively, in the period such determination is made.

The Company is required to file federal and state income tax returns in the United States and various other state jurisdictions. The Company also files income tax returns in the foreign countries in which its subsidiaries operate. The preparation of these income tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid.

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 condensed consolidated financial statements of tax positions taken or expected to be taken in a tax return.

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Stock-Based Compensation

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

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

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

Interest Expense

Interest expense includes cash and non-cash components. The cash component of the interest expense represents the contractual interest charges for the Convertible Notes. The non-cash component of the interest expense represents the amortization of the debt discount and associated issuance costs for the Convertible Notes, and the interest expense associated with the Company’s financing lease.

Net Loss per Share

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

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


	Three Months Ended		Six Months Ended		Three Months Ended		Nine Months Ended
	June 30,		June 30,		September 30,		September 30,
	2020	2019	2020	2019	2020	2019	2020	2019
Stock options outstanding	5,336	3,750	4,585	3,648	4,490	3,602	4,579	3,636
Unvested restricted stock units	516	380	493	363	519	232	499	364
Employee stock purchase plan	-	20	-	18	14	1	14	5
	5,852	4,150	5,078	4,029	5,023	3,835	5,092	4,005

The Convertible Notes did not have an impact on the Company’s diluted share count as the average stock price of the Company’s common stock did not exceed $56.10 during the periods presented.

Recently Adopted Accounting Pronouncements

In June 2016, the ~~FASB~~Financial Accounting Standards Board (FASB) issued ~~ASU~~Accounting Standards Update (ASU0 No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables that may result in the earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to

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Topic 326, Financial Instruments—Credit Losses, which provided additional implementation guidance on the previously issued guidance. The Company adopted ASU 2016-13 as of January 1, 2020 using the modified retrospective approach, which replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. Upon adoption, there were 0 adjustments made to opening retained earnings as of January 1, 2020. As a result of implementing ASU 2016-13, the Company did not recognize any material changes to its allowance for credit losses during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Additionally, for available-for-sale debt securities with unrealized losses, ASU 2016-13 now requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. Given the composition of the Company’s available-for-sale securities, adoption of ASU 2016-13 did not have a material impact on the condensed consolidated financial statements as of ~~June~~September 30, 2020.

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In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which removes the second step of the impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of the reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This updated guidance does not amend the optional qualitative assessment of goodwill impairment. The Company adopted ASU 2017-04 as of January 1, 2020 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (ASU 2018-13), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The guidance expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The Company adopted ASU 2018-13 as of January 1, 2020. Upon adoption and for the three and ~~six~~nine months ended ~~June~~September 30, 2020, given the Company does not currently have, and has not historically had transfers between Level 1 and Level 2 instruments, and the Company does not have any Level 3 fair value measurements, the adoption did not have a material impact on the Company’s condensed consolidated financial statement disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15), which clarifies the accounting for implementation costs in cloud computing arrangements, and requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as fixed assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract are amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The Company adopted ASU 2018-15 on a prospective basis as of January 1, 2020 and as a result, capitalized certain costs related to its global enterprise systems implementation of approximately $1.6 million, which is further discussed in Note 12, Commitments and Contingencies.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606 (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer and precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The Company adopted ASU 2018-18 as of January 1, 2020 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating ~~incomes~~income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective in 2021 and interim periods within that year and permits for early adoption. The Company elected to early adopt ASU 2019-12 effective December 31, 2019 and the adoption did not have a material impact to the Company’s condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2020, the FASB issued 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), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for the Company for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s annual fiscal year. The Company may adopt ASU 2020-06 effective January 1, 2021 and is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

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Note 3. Balance Sheet Details

Short-term Investments

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


	At June 30, 2020									At September 30, 2020
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated		Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value		(in years)	or cost		gains		losses		fair value
U.S. government agency bonds	less than 4		14,500		2		(4)		14,498	less than 3		206,294		137		(51)		206,380
Bank certificates of deposit	less than 1		16,900		45		(1)		16,944	less than 1		16,900		25		—		16,925
Commercial paper	less than 1		8,488		11		—		8,499	less than 1		2,997		3		—		3,000
Corporate notes	less than 3		67,347		597		(10)		67,934	less than 3		62,828		417		(1)		63,244
Asset-backed securities	less than 5		19,766		325		—		20,091	less than 5		17,627		265		—		17,892
Total		$	127,001	$	980	$	(15)	$	127,966		$	306,646	$	847	$	(52)	$	307,441

	At December 31, 2019									At December 31, 2019
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated		Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value		(in years)	or cost		gains		losses		fair value
Bank certificates of deposit	less than 1		12,999		7		—		13,006	less than 1		12,999		7		—		13,006
Commercial paper	less than 1		7,475		8		—		7,483	less than 1		7,475		8		—		7,483
Corporate notes	less than 3		65,354		295		(10)		65,639	less than 3		65,354		295		(10)		65,639
Asset-backed securities	less than 3		25,333		99		(7)		25,425	less than 3		25,333		99		(7)		25,425
Total		$	111,161	$	409	$	(17)	$	111,553		$	111,161	$	409	$	(17)	$	111,553

Accounts Receivable, Net

Accounts receivable consisted of the following (in thousands):


	June 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019
Accounts receivable	$	28,501	$	39,657	$	34,267	$	39,657
Allowance for credit losses		(1,771)		(1,240)		(1,382)		(1,240)
	$	26,730	$	38,417	$	32,885	$	38,417

Inventory, Net

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

June 30,

December 31,


2020

2019

Finished goods

$
8,328

$
32,108

Work in process

3,471

3,884

Raw material

9,289

6,586

$
21,088

$
42,578

~~Accrued Liabilities~~

~~Accrued liabilities consisted of the following (in thousands):~~

June 30,

December 31,

2020

2019
Accrued bonuses

$
7,320

$
13,525
Accrued vacation benefits

3,369

2,784
Accrued legal expenses

5,547

3,957
Accrued Employee Stock Purchase Plan liability

3,084

-
Accrued payroll taxes

7,765

1,133
Other accrued liabilities

18,513

30,520

$
45,598

$
51,919


	September 30,		December 31,
	2020		2019
Finished goods	$	6,305	$	32,108
Work in process		4,316		3,884
Raw material		9,269		6,586
	$	19,890	$	42,578

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Included in the finished goods amount for the periods ended September 30, 2020 and December 31, 2019 is the applicable remaining portion of the original fair market value inventory adjustment that was recorded as part of the acquisition of Avedro. This adjustment is being amortized to cost of sales over the inventory’s expected turnover period. See also Note 6, Business Combinations.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	September 30,		December 31,
	2020		2019
Accrued bonuses	$	9,655	$	13,525
Accrued vacation benefits		3,693		2,784
Accrued payroll taxes		3,406		1,133
Accrued interest		2,394		-
Other accrued liabilities		20,771		34,477
	$	39,919	$	51,919

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).

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

At June 30, 2020

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

June 30,

identical assets

inputs

inputs


2020

(Level 1)

(Level 2)

(Level 3)
Assets

Cash equivalents:

Money market funds ⁽ⁱ⁾

$
189,126

$
189,126

$
-

$
-
Available for sale securities:

U.S. government agency bonds ⁽ⁱⁱ⁾

14,498

-

14,498

-
Bank certificates of deposit ⁽ⁱⁱ⁾

16,944

-

16,944

-
Commercial paper ⁽ⁱⁱ⁾

8,499

-

8,499

-
Corporate notes ⁽ⁱⁱ⁾

67,934

-

67,934

-
Asset-backed securities ⁽ⁱⁱ⁾

20,091

-

20,091

-
Total Assets

$
317,092

$
189,126

$
127,966

$
-

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At December 31, 2019

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

December 31,

identical assets

inputs

inputs


2019

(Level 1)

(Level 2)

(Level 3)
Assets

Cash equivalents:

Money market funds ⁽ⁱ⁾

$
2,530

$
2,530

$
-

$
-
Available for sale securities:

Bank certificates of deposit ^{(ii) (iii)}

14,208

-

14,208

-
Commercial paper ⁽ⁱⁱ⁾

7,484

-

7,484

-
Corporate notes ⁽ⁱⁱ⁾

65,638

-

65,638

-
Asset-backed securities ⁽ⁱⁱ⁾

25,424

-

25,424

-
Total Assets

$
115,284

$
2,530

$
112,754

$
-
Liabilities

Cash-settled stock options

$
6,685

-

6,685

-
Total Liabilities

$
6,685

$
-

$
6,685

$
-

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, 2020 and December 31, 2019 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):


			At September 30, 2020
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	September 30,		identical assets		inputs		inputs
	2020		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents:
Money market funds ⁽ⁱ⁾	$	7,936	$	7,936	$	-	$	-
Available for sale securities:
U.S. government agency bonds ⁽ⁱⁱ⁾		206,380		-		206,380		-
Bank certificates of deposit ^(ii)(iii)		18,925		-		18,925		-
Commercial paper ⁽ⁱⁱ⁾		3,000		-		3,000		-
Corporate notes ⁽ⁱⁱ⁾		63,244		-		63,244		-
Asset-backed securities ⁽ⁱⁱ⁾		17,892		-		17,892		-
Investments held for deferred compensation plans		4,608				4,608
Total Assets	$	321,985	$	7,936	$	314,049	$	-
Liabilities
Deferred compensation plans	$	4,530	$	-	$	4,530	$	-
Total Liabilities	$	4,530		-	$	4,530	$	-


			At December 31, 2019
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	December 31,		identical assets		inputs		inputs
	2019		(Level 1)		(Level 2)		(Level 3)
Assets

Cash equivalents:
Money market funds ⁽ⁱ⁾	$	2,530	$	2,530	$	-	$	-
Available for sale securities:
Bank certificates of deposit ^{(ii) (iii)}		14,208		-		14,208		-
Commercial paper ⁽ⁱⁱ⁾		7,484		-		7,484		-
Corporate notes ⁽ⁱⁱ⁾		65,638		-		65,638		-
Asset-backed securities ⁽ⁱⁱ⁾		25,424		-		25,424		-
Investments held for deferred compensation plans		3,511				3,511
Total Assets	$	118,795	$	2,530	$	116,265	$	-
Liabilities
Cash-settled stock options	$	6,685		-		6,685		-
Deferred compensation plans		3,669		-		3,669		-
Total Liabilities	$	10,354	$	-	$	10,354	$	-

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

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

(iii)

As of September 30, 2020 and December 31, 2019, a bank certificate of deposit totaling $2,000 and $1,201 (in thousands), respectively, is included in cash and cash equivalents on the condensed consolidated balance sheets, as the investment has a maturity of three months or less from the date of purchase on the condensed consolidated balance sheets.

Money market funds and currency are highly liquid investments and are actively traded. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date.

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U.S. government agency bonds, U.S. government bonds, bank certificates of deposit, commercial paper, corporate notes and asset-backed securities are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. 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.

The fair value of cash-settled stock options is based on the Black-Scholes option valuation model utilizing the Company’s stock price, the cash-settled options’ remaining term, expected stock price volatility, and the risk-free interest rate as of the measurement date. The changes in the fair value are reflected in compensation expense within selling, general and administrative expense on the consolidated income statement. See Note 10, Stock-Based Compensation for further details regarding these cash-settled stock options, as these were modified to be equity-settled during the ~~three~~nine months ended ~~June~~September 30, 2020.

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

Convertible Senior Notes

As of ~~June~~September 30, 2020, the fair value of the ~~2.75% convertible senior notes due 2027~~Convertible Notes was ~~$277.9~~$331.0 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.

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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 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.

The Company leases 2 adjacent facilities located in San Clemente, California. Each agreement contains an option to extend the lease for 1 additional five year period at market rates. The total leased square footage of these facilities equals approximately 98,000.

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 currently intends to relocate its corporate administrative headquarters, along with certain laboratory, research and development and warehouse space, to the Aliso Facility in 2021. 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 $12.6 million, upon the Company providing the necessary documentation evidencing the costs of the allowable leasehold improvements.

The Company leases 2 adjacent facilities located in San Clemente, California. In July 2020, the Company extended the term of each of the leases for its 2 San Clemente, California headquarters facilities by five years and five months. Each of these leases now expires on May 31, 2030, and each contains an option to extend the lease for 1 additional five year period at market rates. In conjunction with these extensions, each of the lease landlords agreed to provide the Company with a tenant improvement allowance in the amount of the cost of certain leasehold improvements, upon the Company providing the necessary documentation evidencing the costs of the allowable leasehold improvements, and rent abatement totaling approximately $0.8 million in the aggregate. The Company’s San Clemente locations will continue to serve as its main manufacturing locations through 2030.

~~The Company currently intends to maintain its manufacturing facilities at its San Clemente location for the foreseeable future.~~17

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As a result of the Avedro Merger, 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 also currently occupies approximately 19,000 square feet of leased manufacturing space in Burlington, Massachusetts ~~pursuant to a lease agreement that expires in 2023 and contains an option to extend the lease for a~~ ~~five-year period at market rates.~~(Burlington Lease).

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

The current portion of the Company’s operating lease liability is included in accrued liabilities on the condensed consolidated balance sheets. The following table presents the maturity of the Company’s operating and finance lease liabilities as of ~~June~~September 30, 2020:


Maturity of Lease Liabilities	Operating		Finance			Operating		Finance
(in thousands)	Leases ^(a)		Leases ^(b)		��	Leases ^(a)		Leases ^(b)
Remainder of 2020	$	1,527	$	—		$	577	$	—
2021		3,197		—			2,700		—
2022		3,123		—			3,245		—
2023		2,230		3,543			2,230		3,156
2024		2,023		5,184			2,023		5,184
2025		2,052		5,340			2,050		5,340
2026		2,112		5,500			2,110		5,500
Thereafter		2,112		107,521			18,521		107,522
Total lease payments	$	18,376	$	127,088		$	33,456	$	126,702
Less: imputed interest		3,041		66,878			13,207		66,000
Total lease liabilities	$	15,335	$	60,210		$	20,249	$	60,702

(a)	Operating lease payments include ~~$12.0~~$11.9 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.

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Note 6. Business Combinations

As a result of the Avedro Merger ~~previously~~ discussed in Note 1, Organization and Basis of Presentation, effective November 21, 2019, Avedro is a wholly-owned subsidiary of the Company and the Avedro Merger expanded the Company’s portfolio of pipeline products beyond the treatment of glaucoma to include pharmaceutical therapies for the treatment of corneal ~~disorders as part of~~disorders. This expansion dovetails with the Company’s strategic objective to build a portfolio of micro-scale surgical and pharmaceutical therapies in corneal health and retinal disease.

The fair value of the Merger Consideration transferred at closing was $437.8 million, and consisted of Glaukos common stock worth $406.8 million issued to replace Avedro common stock, Glaukos common stock worth $0.2 million to replace certain vested Avedro warrants, and $30.8 million of value attributable to the pre-combination services associated with Replacement Awards. See Note 10, Stock-based Compensation for further details regarding the Replacement Awards. The following table summarizes the components of the Merger Consideration as of November 21, 2019 (in thousands, except shares and stock closing price):



Avedro shares of common stock outstanding at closing		17,670,003
Exchange Ratio		0.365
Right to receive shares of Glaukos		6,449,551
Glaukos closing stock price on November 21, 2019	$	63.07

Fair value of Glaukos common stock issued in the Avedro Merger, plus an immaterial amount of cash paid for fractional shares	$	406,776
Fair value of Glaukos common stock issued to replace certain vested Avedro warrants	$	189
Fair value of Replacement Awards attributable to pre-combination services	$	30,786
Total Merger Consideration	$	437,751

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The Company performed a valuation analysis of the fair market value of Avedro’s assets and liabilities as of closing of the Avedro Merger. The following table sets forth a preliminary allocation of the Merger Consideration to the identifiable tangible and intangible assets acquired and liabilities assumed, with the excess recorded to goodwill. This allocation of the Merger Consideration as of November 21, 2019 may be subject to revision if new facts and circumstances arise over the measurement period, which may extend up to one year from closing (in thousands):



Assets Acquired:
Cash	$	49,101
Accounts receivable		13,113
Inventory		33,339
Prepaid expenses and other current assets		2,522
Restricted cash		551
Property and equipment		1,489
Intangible assets		385,200
Goodwill		66,134
Liabilities Assumed:
Accounts payable		7,056
Accrued liabilities		6,776
Deferred revenue		1,389
Debt		22,496
Deferred revenue, non-current		43
Deferred tax liability		75,938
Fair value of net assets acquired	$	437,751

Goodwill represents the excess of the Merger Consideration over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at Avedro and expected synergies, and is not deductible for tax purposes.

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Additionally, the fair market value inventory adjustment totaled approximately $29.0 million and is being amortized to cost of sales over the inventory’s expected turnover period.

The fair value and estimated useful lives of the Avedro intangible assets are as follows (in thousands, except where noted):


			Estimated
	Fair		Useful Life
	Value		(in years)
Intangible assets subject to amortization:
Developed technology	$	252,200	11.4
Customer relationships		14,100	5
Total	$	266,300
Intangible assets not subject to amortization:
In-process research and development (IPR&D)	$	118,900	Indefinite
Total intangible assets	$	385,200

Note 7. Intangible Assets and Goodwill

Avedro intangible assets

As part of the Avedro Merger on November 21, 2019, the Company acquired identifiable intangible assets for (1) developed technology related to Photrexa, a bio-activated pharmaceutical therapy for the corneal cross-linking treatment of keratoconus, which will be amortized to cost of sales over a weighted-average estimated useful life of approximately 11 years, and (2) customer relationships, which will be amortized to selling, general and administrative expense over an estimated useful life of five years. The Company also acquired 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.

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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% for developed technology and 13% for IPR&D assets.

For the three months ended ~~June~~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 ~~six~~nine months ended ~~June~~September 30, 2020, amortization expense related to the above finite-lived intangible assets was approximately ~~$11.0~~$16.6 million and ~~$1.4~~$2.1 million, recorded in cost of sales and selling, general and administrative expenses, respectively, in the condensed consolidated statement of operations. There was 0 amortization expense related to these intangible assets during the three and ~~six~~nine months ended ~~June~~September 30, 2019.

The Company evaluated its indefinite-lived intangible assets for impairment in connection with the COVID-19 pandemic utilizing the methodology pursuant to the adoption of ASU 2017-04 and concluded these intangible assets were not impaired as of ~~June~~September 30, 2020.

Goodwill

As a result of the Avedro Merger, $66.1 million in goodwill was recorded as of December 31, 2019. For additional details, refer to Note 6, Business Combinations. The annual assessment of goodwill by reporting unit is performed annually 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 first annual assessment of goodwill by reporting unit will be performed in the fourth quarter of the year ending December 31, 2020. 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 ~~June~~September 30, 2020.

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

Estimated

As of June 30, 2020

As of December 31, 2019

Useful

Gross

Gross

Life

Carrying

Accumulated

Net

Carrying

Accumulated

Net


(in years)

Amount

Amortization

Amount

Amount

Amortization

Amount
Developed technology

11.4

$
252,200


(13,347)


238,853


252,200


(2,301)


249,899
Customer relationships

5.0

14,100

(1,704)

12,396

14,100

(294)

13,806
Intangible assets subject to amortization

266,300

(15,051)

251,249

266,300

(2,595)

263,705

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

$
(15,051)

$
436,283

$
451,334

$
(2,595)

$
448,739


	Estimated	As of September 30, 2020						As of December 31, 2019
	Useful	Gross						Gross
	Life	Carrying		Accumulated		Net		Carrying		Accumulated		Net
	(in years)	Amount		Amortization		Amount		Amount		Amortization		Amount
Developed technology	11.4	$	252,200		(18,870)		233,330		252,200		(2,301)		249,899
Customer relationships	5.0		14,100		(2,409)		11,691		14,100		(294)		13,806
Intangible assets subject to amortization			266,300		(21,279)		245,021		266,300		(2,595)		263,705

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	$	(21,279)	$	430,055	$	451,334	$	(2,595)	$	448,739

As of ~~June~~September 30, 2020, expected amortization expense for unamortized finite-lived intangible assets for the next five years and thereafter is as follows (in thousands):


	Amortization Expense		Amortization Expense
Remainder of 2020	$	12,456	$	6,228
2021		24,912		24,912
2022		24,912		24,912
2023		24,912		24,912
2024		24,619		24,619
Thereafter		139,438		139,438
Total amortization	$	251,249	$	245,021

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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 8. Revenue from Contracts with Customers

The Company’s net sales are generated primarily from sales of iStent products to customers, and following the Avedro Merger on November 21, 2019, 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.

Disaggregation of Revenue

The Company’s revenues disaggregated by product category, for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 was as follows (in thousands):


	Three months ended					Six months ended				Three months ended				Nine months ended
	June 30,					June 30,				September 30,				September 30,
	2020		2019			2020		2019		2020		2019		2020		2019

Glaucoma	$	24,948	$	58,600		$	69,081	$	112,626	$	51,926	$	58,509	$	121,007	$	171,135
Corneal Health		6,610		—			17,813		—		12,905		—		30,718		—
Total	$	31,558	$	58,600	��	$	86,894	$	112,626	$	64,831	$	58,509	$	151,725	$	171,135

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The following table presents the Company’s revenues disaggregated by geography for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 (in thousands):


	Three months ended				Six months ended				Three months ended				Nine months ended
	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
United States	$	24,169	$	48,088	$	65,553	$	92,305	$	50,599	$	47,588	$	116,152	$	139,893
International		7,389		10,512		21,341		20,321		14,232		10,921		35,573		31,242
Total net sales	$	31,558	$	58,600	$	86,894	$	112,626	$	64,831	$	58,509	$	151,725	$	171,135

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 ~~June~~September 30, 2020 and December 31, 2019, 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 sheet, 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 ~~June~~September 30, 2020 and December 31, 2019.

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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.

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 ~~June~~September 30, 2020 and December 31, 2019, this amount was immaterial as was the amount allocated to extended warranty service contracts.

During the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, 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.

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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.

Note 9. Convertible Senior Notes

In June 2020, the Company issued $287.5 million in aggregate principal amount of ~~2.75%~~ Convertible ~~Senior~~ Notes ~~due 2027 (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 ending 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

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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. The Company’s current intent is to settle the principal amount of the Convertible Notes in cash upon conversion, with any remaining conversion value being delivered in shares of our common stock.

The conversion rate for the Convertible Notes ~~will~~is initially be 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��~~$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

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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.

In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The 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. The equity component of the Convertible Notes is included in additional paid-in capital in the condensed consolidated balance sheets and will not be subsequently remeasured as long as it continues to meet the conditions for equity classification. The difference between the principal amount of the Convertible Notes and the liability component (the debt discount) is amortized to interest expense in the condensed consolidated statements of operations using the effective interest method over the term of the Convertible Notes.

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. 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.

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Interest expense relating to the Convertible Notes in the condensed consolidated statements of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2020 are summarized as follows (in thousands):

June 30,

2020
Contractual interest expense

$
417
Amortization of debt discount ⁽ⁱ⁾

523
Amortization of debt issuance costs ⁽ⁱⁱ⁾

34
Total interest expense

$
974


	Three months ended		Nine months ended
	September 30,		September 30,
	2020		2020
Contractual interest expense	$	1,977	$	2,394
Amortization of debt discount ⁽ⁱ⁾		2,514		3,037
Amortization of debt issuance costs ⁽ⁱⁱ⁾		163		197
Total interest expense	$	4,654	$	5,628

(i)

The effective interest rate on the liability component of the 2027 Notes was 9.5% for the three and ~~six~~nine months ended ~~June~~September 30, 2020. As of ~~June~~September 30, 2020, the unamortized debt discount was ~~$97.2~~$94.7 million and will be amortized over ~~6.9~~6.7 years.

(ii)

As of ~~June~~September 30, 2020, the unamortized debt issuance cost for the Convertible Notes was ~~$6.3~~$6.1 million.

As of ~~June~~September 30, 2020, the convertible senior notes on the condensed consolidated balance sheets represented the carrying amount of the liability component of the Convertible Notes, net of unamortized debt discounts and debt issuance costs, which are summarized as follows (in thousands):

June 30,

2020
Convertible Notes

$
287,500
Less: Unamortized debt discount and debt issuance costs

(103,501)
Carrying amount of Convertible Notes

$
183,999






Convertible Notes	$	287,500
Less: Unamortized debt discount and debt issuance costs		(100,824)
Carrying amount of Convertible Notes	$	186,676

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 ~~institution~~institutions (the Option Counterparties) and used an aggregate ~~$35.7~~$35.7 million of the net pr~~oceeds~~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 ~~will~~is initially be $86.30 per share, which represents a premium of 100% over the last reported sale price of

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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 ~~June~~September 30, 2020, 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.

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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 a 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 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.

On November 21, 2019, in connection with the Avedro Merger, the Company granted the following 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 restricted stock units 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 restricted stock units, 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 (see Note 6, Business Combinations). 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.

During the second quarter of 2020, the cash-settled options granted to certain former Avedro executives were modified to be equity-settled and to extend the expiration date of certain tranches to December 31, 2020. A liability of $2.2 million related to the cash-settled options that was previously included in accrued liabilities was, as a result of the modification, reclassified to additional paid-in capital.

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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				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Cost of sales	$	511	$	270	$	972	$	493	$	1,029	$	259	$	2,001	$	752
Selling, general and administrative		8,389		6,340		18,646		11,837		6,814		6,727		25,460		18,555
Research and development		1,997		1,637		5,284		3,046		1,816		1,561		7,100		4,616
Total	$	10,897	$	8,247	$	24,902	$	15,376	$	9,659	$	8,547	$	34,561	$	23,923

At ~~June~~September 30, 2020, the total unamortized stock-based compensation expense was approximately ~~$62.9~~$54.8 million of which ~~$27.5~~$22.8 million was attributable to stock options and is to be recognized over the stock options’ remaining vesting terms of approximately 4.0 years ~~(2.1~~(2.0 years on a weighted average basis). The remaining ~~$35.4~~$32.0 million was attributable to RSUs and is to be recognized over the restricted stock units’ vesting terms of approximately 4.0 years ~~(3.0~~(2.8 years on a weighted-average basis).

The total stock-based compensation cost capitalized in inventory was not material for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019.

Note 11. Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company’s estimated effective tax rate of ~~15.6%~~5.3% and ~~7.7%~~7.4%, respectively, was

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lower than the U.S. federal statutory rate primarily due to the generation of U.S. NOL carryforwards, which were 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.

Intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings. As a result, for the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company recorded a benefit for income taxes of ~~$7.4~~$0.9 million and ~~$7.8~~$8.7 million, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2019, the Company recorded a provision for income taxes of ~~$72,000~~$0.2 million and ~~$0.2~~$0.4 million, respectively, which was primarily comprised of state and foreign income taxes.

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities, along with 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 ~~six~~nine months ended ~~June~~September 30, 2020, the Company has recorded a valuation allowance against its deferred tax asset which are 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 ~~June~~September 30, 2020 and ~~June~~September 30, 2019, the Company had gross unrecognized tax benefits of ~~$18.7~~$19.2 million and ~~$13.6~~$13.8 million, respectively.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act is an emergency economic stimulus package that includes spending and tax relief measures to strengthen the United States economy and fund a nationwide effort to curtail the effects of COVID-19. Some of the more significant provisions which are expected to impact the Company’s condensed consolidated financial statements include increasing the NOL carryback period for certain losses to five years, which, prior to the CARES Act, the impacted NOLs were not eligible for carryback due to the Tax Cuts and Jobs Act, and accelerating the refund of alternative minimum tax

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credits. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company has recorded a U.S. federal benefit for income taxes of $0.4 million for the estimated impact of the CARES Act on its tax provision. While the Company does not expect future material impacts from the CARES Act, due to the recent enactment date, the Company will continue to analyze its impact in subsequent quarters.

Note 12. Commitments and Contingencies

Patent Litigation

On April 14, 2018, the Company filed a patent infringement lawsuit against Ivantis, Inc. (Ivantis) in the U.S. District Court for the Central District of California, Southern Division (the Court), alleging that Ivantis’ Hydrus^© Microstent device infringes the Company’s U.S. Patent Nos. 6,626,858 and 9,827,143. In August 2018, Ivantis filed counterclaims alleging that the Company’s iStent inject infringes 3 patents which Ivantis acquired after the start of the litigation (Acquired Patents). On March 18, 2019, the Court granted the Company’s early motion for summary judgment, finding that the Company does not infringe the Acquired Patents. Fact discovery on the Company’s claims against Ivantis closed in September 2019, and trial is scheduled to begin on or around March 9, 2021. Additionally, Ivantis filed 5 Inter Partes Review (IPR) petitions with the Patent Trial and Appeal Board (PTAB) on the patents the Company has asserted in the litigation. The PTAB denied institution of all 5 petitions. Discovery closed in early 2020, after which, the parties filed and the Court ruled on a series of motions seeking to limit the issues for trial. For example, Ivantis agreed not to contest infringement of several claims of the ‘143 patent under the Court’s claim constructions and the Court granted the Company’s motion for summary judgment regarding the validity of 1 such claim (claim 30). Although positive for the Company, following the trial Ivantis will have the option of appealing the decisions. With respect to the matters described above, the Company is currently unable to predict the ultimate outcome of the matters or reasonably estimate a possible loss or range of loss, and thus, 0 amounts have been accrued in the condensed consolidated financial statements.

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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 ~~June~~September 30, 2020 and December 31, 2019. 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.

As a result of the Avedro Merger, the Company has 2 other irrevocable standby letters of credit secured with approximately $0.4 million of cash in a restricted account related to its office lease agreements. Lastly, the Company maintains $0.2 million in restricted cash which is held to collateralize a credit card program.

Corporate Restructuring Costs

Following the Avedro Merger, the Company initiated a restructuring plan that includes an estimated headcount reduction of 40 employees and a reallocation of responsibilities primarily within the selling, general and administrative functions. The Company measured and accrued the liabilities associated with employee separation costs at fair value as of the date the plan was announced and terminations were communicated to employees, which primarily includes severance pay and other separation costs such as benefit continuation.

As of ~~June~~September 30, 2020 the Company has accrued ~~$0.8~~$1.1 million of restructuring plan costs, has paid approximately ~~$4.1~~$4.9 million in separation costs since the inception of the plan, and expects to incur a total of approximately $5.3 million in restructuring charges upon completion of the plan, which is expected to be completed in 2021. The recognition of restructuring charges requires that the Company make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned reductions of workforce. At the end of each reporting period, the Company will evaluate the remaining accrued balance to ensure appropriateness with the Company’s restructuring plans.

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A reconciliation of the beginning and ending balance of the restructuring reserve, included in accrued liabilities on the condensed consolidated balance sheet, is as follows (in thousands):


		Six months ended		Nine months ended
	June 30, 2020		September 30, 2020

Balance at beginning of period	$	4,096	$	4,096
Total restructuring accrual charges		796		1,131
Employee separation payments		(4,085)		(4,921)
Balance at end of period	$	807	$	306

Regents of the University of California

On December 30, 2014, the Company executed an agreement (the UC Agreement) with the Regents of the University of California (the University) to correct inventorship in connection with a group of the Company’s U.S. patents (the Patent Rights) and to obtain from the University a covenant that it did not and would not claim any right or title to the Patent Rights and will not challenge or assist any others in challenging the Patent Rights. In connection with the UC Agreement, Glaukos agreed to pay to the University a low single-digit percentage of worldwide net sales of certain current and future products, including the Company’s iStent products, with a required minimum annual payment of $0.5 million. This ongoing product payment terminates on the date that the last of the Patent Rights expires, which is currently expected to be in 2022. For the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, the Company recorded approximately ~~$0.6~~$1.3 million and $1.5 million, respectively, in cost of sales in connection with the product payment. For the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, the Company recorded approximately ~~$1.7~~$3.0 million and ~~$2.8~~$4.2 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

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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 ~~$4.1~~$4.5 million and $3.7 million as of ~~June~~September 30, 2020 and December 31, 2019, 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 ~~$4.2~~$4.6 million and $3.5 million as of ~~June~~September 30, 2020 and December 31, 2019, respectively.

Global ~~enterprise systems implementation~~Enterprise Systems Implementation

In the first quarter of 2019, the Company began implementing new enterprise systems and other technology optimizations and facilities infrastructure globally. The Company’s new enterprise system went live in May 2020; therefore, software services costs along with any associated implementation costs after May 1, 2020 are being capitalized in accordance with the Company’s policy. As of ~~June~~September 30, 2020, the Company has firm purchase commitments related to software costs and these systems implementations of approximately $~~5.4~~3.8 million.

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 8, Revenue from Contracts with Customers. The

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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.

l~~Note 14. Subsequent Event~~

~~In July 2020, the Company extended the term of each of the leases for its 2 San Clemente, California headquarters facilities by~~ five years and five months. Each of these leases now expires on May 31, 2030, and each contains an option to extend the lease for 1 additional five year period at market rates. In conjunction with these extensions, each of the lease landlords agreed to provide the Company with a tenant improvement allowance in the amount of the cost of certain leasehold improvements, upon the Company providing the necessary documentation evidencing the costs of the allowable leasehold improvements, and rent abatement totaling approximately $0.8 million in the aggregate.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (SEC) on March 2, 2020.

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

Overview

We are an ophthalmic medical technology and pharmaceutical company focused on 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

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. The World Health Organization declared COVID-19 to be a “pandemic,” spreading across the globe and impacting worldwide economic activity. In the U.S., certain federal, state and local governmental authorities ~~have~~ issued stay-at-home and other orders, proclamations and/or directives, including restrictions on elective procedures and therapies, aimed at minimizing the spread of COVID-19. Although some of these governmental restrictions have since been lifted or scaled back, recent and future surges of COVID-19 may result in restrictions being re-implemented in response to efforts to reduce the spread of COVID-19. The COVID-19 pandemic and subsequent economic slowdown has materially impacted and, ~~is expected to~~in the event of future surges of cases and/or the reinstitution of stay-at-home orders, could continue to materially impact global demand for our products, which are used in procedures and therapies that are considered elective. This decrease in demand was most significantly felt in the latter part of the quarter ended March 31, 2020 and the earlier part of the quarter ended June 30, 2020. Beginning in May 2020, we began to see ~~a return~~an early recovery toward more normalized levels for cataract and keratoconus procedures, a trend that continued through the quarter ended September 30, 2020 and ~~we expect this trend to continue~~ into ~~later 2020, provided that the lifting of restrictions on elective procedures and therapies continues and such restrictions are not reimposed.~~early October 2020. 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 and any additional preventative and protective actions that governments, or we, may direct, any ~~resurgence~~future surges of COVID-19 that may occur and how quickly and to what extent economic and operating conditions normalize within the markets in which we operate.

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We are also actively assessing 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. This disruptionhas continued ~~into July 2020~~ even as facilities ~~begin to reopen and~~have reopened as doctors prioritize ~~clearing~~ their ~~patient backlog~~standard procedures over clinical trial enrollment. In particular, patient enrollment for our iDose clinical trials remains impacted, which could ultimately delay the iDose approval timeline, although we continue to analyze enrollment trends and our timeline expectations for a potential FDA approval of this product in 2022.

We have taken a number of steps aimed at minimizing the spread of COVID-19 and protecting our employees, including shifting the majority of our workforce to remote ~~operations.~~operations, which continues through the date hereof. We have maintained streamlined manufacturing and assembly processes in order to consistently provide product to our customers who depend on us. In addition to other health and safety protocols that follow applicable guidance and regulations, employees involved in such operation-critical processes have been organized into a number of small shifts designed to minimize the time any one individual is required to be onsite. 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.

We have also sought to preserve our cash position by instituting a number of cost saving initiatives, including temporary reductions in discretionary spending and capital expenditures, as well as a temporary salary reduction for our executive team, senior leadership, and many others throughout the company. We currently anticipate restoring full salaries for our impacted employees in the third quarter of 2020 with the restoration of senior management’s full salaries in the fourth quarter of 2020.expenditures. These actions were designed to preserve jobs and core research and development programs. We also temporarily deferred a significant portion of our planned 2020 capital expenditures, particularly those related to facilities expansion and consolidation plans, although we have started to reinstitute our plans to move forward with the planned capital expenditures as state and local governments ~~begin~~began to authorize ~~reopenings.~~re-openings. Further, in June 2020, we issued an aggregate principal amount of $287.5 million of 2.75% convertible notes due 2027 (the Convertible Notes), the proceeds of which ~~are expected to~~will be used for working capital and general corporate purposes. As of ~~June~~September 30, 2020, we had cash, cash equivalents, short-term investments, and restricted cash of approximately ~~$404.3~~$397.8 million, compared to $183.3 million as of December 31, 2019.

While we expect that the impact of COVID-19 on our sales and operations was the most severe in the second quarter ended June 30, 2020, the extent of the impact of the COVID-19 pandemic on our business and financial results will depend on future developments, including the duration and extent of the severity and spread of the pandemic, any further health and safety actions taken to contain its spread, any ~~possible resurgence~~future surges of COVID-19 that may occur and how quickly and to what extent normal economic and operating conditions can resume within the markets in which we operate, each of which are ~~highly~~ uncertain at this time and outside of our control. 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.

Financial Overview

Our net sales ~~decreased~~increased to ~~$31.6~~$64.8 million for the three months ended ~~June~~September 30, 2020 from ~~$58.6~~$58.5 million for the three months ended ~~June~~September 30, 2019. Net sales decreased to ~~$86.9~~$151.7 million for the ~~six~~nine months ended ~~June~~September 30, 2020 from ~~$112.6~~$171.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019. We incurred net losses of ~~$39.9~~$15.7 million and ~~$6.3~~$13.5 million for the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 respectively, and incurred net losses of ~~$94.0~~$109.7 million and ~~$7.7~~$21.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 respectively. The COVID-19 pandemic and measures intended to reduce its spread had a material impact on our net sales for the three and ~~six~~nine months ended ~~June~~September 30, 2020.

As of ~~June~~September 30, 2020, we had an accumulated deficit of ~~$283.7~~$299.4 million.

Material Changes and Transactions

Convertible Senior Notes

In June 2020, we issued $287.5 million in aggregate principal amount of 2.75% Convertible Senior Notes due in 2027 (Convertible Notes) pursuant to an indenture, dated June 11, 2020, between us 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 ours 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, we

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received $242.2 million in proceeds, after deducting fees and offering expenses and paying the cost of certain capped call transactions. These proceeds will be used for working capital and general corporate purposes.

For additional information, see Note 9, Convertible Senior Notes to the condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

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.

Total consideration for the Avedro Merger was $437.8 million. The consideration consisted of Glaukos common stock valued at $406.8 million issued to replace Avedro common stock, Glaukos shares valued at $0.2 million to replace certain vested Avedro warrants, and $30.8 million of value attributable to the pre-combination services associated with replacement of all Avedro outstanding and unexercised stock option awards and all unvested restricted stock units (Replacement Awards). See Note 2, Note 4, Note 6 and Note 7 to the condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information on our Avedro Merger.

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 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;

●

our industry is highly competitive and subject to rapid and profound technological, market and product-related changes. Our success depends, in part, upon our ability to maintain a competitive position in the development of 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;

●

our ability to successfully integrate the Avedro business into our operations and expand our sales into the corneal health market; 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, subject to our temporary costs saving initiatives and spending deferrals due to COVID-19, 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 have incurred a significant increase in administrative costs since we began operating as a public company. Our operating expenses have increased significantly following our acquisition of Avedro, and we also expect to incur additional construction costs related to our new facility in Aliso Viejo, California.

We expect our ~~near-term~~fourth quarter of 2020 revenues and near-term performance to reflect competitive dynamics and the continuing disruption resulting from COVID-19, the full effects of which at this time are difficult to predict.

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.

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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, following the Avedro Merger on November 21, 2019, 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. 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, ~~we also expect that~~historically our net sales within a fiscal year ~~may be~~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 due to the COVID-19 pandemic, and its effect on our commercial performance may continue into future reporting periods. 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. ~~The current COVID-19 pandemic may impact our commercial performance and trends in future reporting periods.~~

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, with some limited manufacturing operations in Dublin, Ireland, 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.

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 terminate on the date the last of the Patent Rights expires, which is currently expected to be in 2022.

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

Beginning in the fourth quarter of 2019, cost of sales has included amortization of the $252.2 million developed technology intangible assets recognized in connection with the Avedro Merger. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the amortization expense was $5.5 million and ~~$11.0~~$16.6 million, respectively. Additionally beginning in the fourth quarter of 2019, cost of sales has included amortization of the fair market value inventory adjustment recorded in connection with the Avedro Merger, which for the three and ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$9.7~~$5.4 million and ~~$19.3~~$24.7 million, respectively.

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Our future gross profit as a percentage of net sales, or gross margin, will be impacted by numerous factors including commencement of sales of products in our pipeline, or any other future products, which may have higher product costs. Our gross margin will also be affected by manufacturing inefficiencies that we may experience as we attempt to manufacture our products on a larger scale, manufacture new products and change our manufacturing capacity or output. Additionally, our gross margin will continue to be affected by the aforementioned expense related to the UC Agreement and the acquisition fair market value inventory adjustment rollout related to the Avedro Merger. See Note 6, Business Combinations in the condensed consolidated financial statements of Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information on our Avedro Merger. The current COVID-19 pandemic may impact our gross profit margins given the potential impact to net sales 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.

The Avedro Merger has resulted in additional integration expenses and personnel-related expenses, primarily stock-based compensation and restructuring expenses during the ~~six~~nine months ended ~~June~~September 30, 2020. Additionally, SG&A will be impacted by the amortization of certain finite-lived intangible assets acquired as a result of the Avedro Merger, along with Avedro’s normal and recurring SG&A expenses.

We expect SG&A expenses to continue to grow as a result of the Avedro Merger as we increase our global sales and marketing infrastructure and general administration infrastructure in the United States; however, as ~~previously noted~~discussed above under “Impact of COVID-19 Pandemic and Current Economic Environment,” we have sought to preserve our cash position by instituting a number of cost saving initiatives, including ~~substantial~~temporary reductions in discretionary spending, including variable expense associated with salesperson commissions and marketing, capital expenditures, as well as a temporary salary reduction for many of our employees,. which as of the date hereof, have all been reinstated. We ~~currently anticipate restoring full salaries for our impacted employees beginning in the third quarter, and we~~ have started to reinstitute our plans to move forward with the planned capital expenditures as state and local governments begin to authorize ~~reopenings.~~re-openings. 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. However as previously noted we have sought to preserve our cash position by instituting a number of cost saving initiatives, including ~~substantial~~temporary reductions in discretionary spending associated with earlier stage development programs many of which we ~~plan~~have begun to allocate funding beginning in the third quarter and going into the fourth quarter.

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, subject to our temporary COVID-19 costs saving initiatives, 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

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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.

~~In-process research~~In-Process Research and ~~development~~Development

Our in-process research and development (IPR&D) expenses relate to the acquisition of DOSE Medical Corporation (DOSE) in which DOSE became a wholly-owned subsidiary of the Company. DOSE is developing multiple micro-invasive, sustained-released, bioerodible drug delivery platforms designed to be used in the treatment of various retinal diseases, including age-related macular degeneration and diabetic macular edema. Certain DOSE assets were in the development-stage at the time of purchase and were determined to have no alternative future use.

Non-Operating (Expense) Income, Net

Non-operating (expense) income, net primarily consists of interest expense associated with our finance lease for our Aliso Viejo, California facility and for our 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 U.S. federal and state income and franchise taxes as well as foreign income taxes. Our net deferred tax liability of ~~$15.3~~$14.1 million at ~~June~~September 30, 2020 represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets, as well as deferred tax liabilities recorded to additional paid-in capital within the condensed consolidated statement of stockholders’ equity which were not available to offset our 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 ~~June~~September 30, 2020 and ~~June~~September 30, 2019 (in thousands):


	Three Months Ended						Three Months Ended
	June 30,				% Increase		September 30,				% Increase
(dollars in thousands)	2020		2019		(decrease)		2020		2019		(decrease)
Statements of operations data:
Net sales	$	31,558	$	58,600	(46)	%	$	64,831	$	58,509	11	%
Cost of sales		21,668		7,870	175	%		17,932		7,703	133	%
Gross profit		9,890		50,730	(81)	%		46,899		50,806	(8)	%
Operating expenses:
Selling, general and administrative		38,116		37,656	1	%		38,947		44,443	(12)	%
Research and development		18,971		17,069	11	%		20,304		17,278	18	%
In-process research and development		-		2,245	NM			-		1,500	NM
Total operating expenses		57,087		56,970	-	%		59,251		63,221	(6)	%
Loss from operations		(47,197)		(6,240)	NM			(12,352)		(12,415)	(1)	%
Total non-operating (expense) income, net		(81)		3	NM
Total non-operating expense, net								(4,285)		(904)	NM
Income tax (benefit) provision		(7,384)		72	NM			(889)		187	NM
Net loss	$	(39,894)	$	(6,309)	NM		$	(15,748)	$	(13,506)	17	%

NM = Not Meaningful

Net Sales

Net sales for the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$31.6~~$64.8 million and ~~$58.6~~$58.5 million, respectively, reflecting ~~a decrease~~an increase of ~~$27.0~~$6.3 million or ~~46%~~11%.

Net sales of glaucoma products in the United States were ~~$18.3~~$39.2 million and ~~$48.1~~$47.6 million for the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively, decreasing by ~~62%~~18% primarily due to the disruption ~~resulting from~~

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resulting from COVID-19 and competitive dynamics. International sales of glaucoma products for the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$6.7~~$12.8 million and ~~$10.5~~$10.9 million, respectively, ~~decreasing~~increasing by ~~36%~~17%. The ~~decrease~~increase in net sales internationally was due to sales expansion into certain of our existing international markets, partially offset by the disruption resulting from COVID-19. Additionally, in the quarter ended September 30, 2020, we launched our next generation iStent inject product, the iStent injectW.

The decrease in net sales of glaucoma products was ~~partially~~ offset by a ~~$6.6~~$12.9 million increase in net sales generated from our corneal health products as a result of our Avedro Merger on November 21, 2019, which was comprised of approximately ~~$5.9~~$11.4 million in U.S. sales, including ~~$5.2~~$10.4 million of Photrexa sales, using our direct sales operations and approximately ~~$0.7~~$1.5 million in net sales with distributors being used in certain international locations where we do not have a direct commercial presence. Sales of corneal health products were negatively impacted by disruption resulting from COVID-19.

Pricing for our products was not a significant contributing factor to the change in net sales for the three months ended ~~June~~September 30, 2020.

Cost of ~~sales~~Sales

Cost of sales for the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$21.7~~$17.9 million and ~~$7.9~~$7.7 million, respectively, reflecting an increase of ~~$13.8~~$10.2 million. The increase was primarily comprised of approximately ~~$9.7~~$2.3 million, net related to the acquisition fair market value inventory adjustment rollout, $5.5 million related to amortization of certain finite-lived intangible assets acquired, both of which are related to the Avedro Merger. Our gross margin was ~~31%~~72% for the three months ended ~~June~~September 30, 2020 and 87% for the three months ended ~~June~~September 30, 2019. The decreased gross margin resulted primarily from the impact of the aforementioned accounting adjustments related to the Avedro Merger ~~reduced net sales as a result of the COVID-19 pandemic,~~ and changes in product mix, most notably the inclusion of lower margin products related to the Avedro Merger.

Selling, General and Administrative Expenses

SG&A expenses for the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$38.1~~$38.9 million and ~~$37.7~~$44.4 million, respectively, reflecting ~~an increase~~a decrease of approximately ~~$0.5~~$5.5 million or 1%12%.

The acquisition of Avedro resulted in an increase in SG&A expenses of $2.6 million that were not present in our results for the three months ended June 30, 2019. These expenses were primarily comprised of $1.9 million due to stock-based compensation resulting from post-combination services associated with the Replacement Awards and amortization of finite-lived intangible assets acquired of approximately $0.7 million. In connection with the Avedro Merger, we implemented a restructuring plan in December 2019 that includes an estimated headcount reduction of 40 employees and a reallocation of responsibilities primarily within the SG&A functions. As of June 30, 2020 we have accrued $0.8 million of restructuring plan costs, having previously incurred approximately $4.1 million in restructuring costs and we expect to incur a total of approximately $5.3 million in restructuring charges upon completion of the plan, which we expect to be completed in 2021.

We ~~also~~ incurred ~~$4.6~~$5.7 million in normal and recurring Avedro SG&A expenses during the three months ended ~~June~~September 30, 2020 that were not in our 2019 results primarily comprised of commercial personnel and discretionary spending of ~~$3.5~~$4.4 million and general and administrative personnel and discretionary spending of ~~$1.1~~$1.3 million.

The above increase in expenses was ~~primarily~~ offset by reductions in SG&A expenses for the three months ended ~~June~~September 30, 2020 primarily consisting of approximately ~~$1.9~~$7.2 million in reduced compensation and related employee expenses as a result of cost-saving measures implemented in response to the COVID-19 pandemic through temporary salary reductions for our executive team, senior leadership, and many others throughout the company,professional services, which includes a decrease of approximately ~~$2.3~~$3.3 million in professional services and software systems costs related to our global enterprise systems implementation, a decrease of $2.4 million in transaction expenses related to our acquisition of Avedro and a decrease of approximately ~~$0.4~~$2.1 million related to our previously-disclosed patent litigation.

Research and Development Expenses

R&D expenses for the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$19.0~~$20.3 million and ~~$17.1~~$17.3 million, respectively, reflecting an increase of ~~$1.9~~$3.0 million or ~~11%~~18%.

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The acquisition of Avedro resulted in an increase in R&D expenses of $0.3 million that were not in our results for the three months ended June 30, 2019, primarily comprised of stock-based compensation resulting from post-combination services associated with the Replacement Awards.

We incurred $5.1 million in normal and recurring Avedro R&D expenses during the quarter ended ~~June~~September 30, 2020 that were not in our 2019 results primarily comprised of ~~$1.9~~$2.3 million in compensation and related employee expenses with the remaining ~~$3.2~~$2.8 million spent on the continued development of a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (often referred to as “epi-on”), as well as projects for presbyopia and earlier stage technology and therapeutic investments.

We also incurred any additional $1.0 million in compensation and related employee expenses. The ~~remaining change in R&D expenses was primarily due to an overall~~above increases are partially offset by a decrease of approximately ~~$3.6~~$3.1 million in other core R&D and clinical expenses, including ~~a reduction of $1.6 million~~expenses associated with inventory and supplies for iDose and future iStent product candidates. ~~Additionally, there was a decrease~~

Table of approximately $0.3 million resulting from reduced compensation and related employee expenses as a result of cost-saving measures implemented in response to the COVID-19 pandemic through temporary salary reductions for our executive team, senior leadership, and many others throughout the company.Contents

~~In-process research~~In-Process Research and ~~development expenses~~Development Expenses

IPR&D expenses for the three months ended ~~June~~September 30, 2019 were ~~$2.2~~$1.5 million related to the purchase of certain DOSE assets. There were no IPR&D expenses for the three months ended ~~June~~September 30, 2020.

Non-Operating (Expense) Income, Net

We had non-operating expense, net of ~~$0.1~~$4.3 million and $0.9 million for the three months ended ~~June~~September 30, 2020 and ~~non-operating income, net of $3,000 June~~September 30, ~~2019.~~2019, respectively. The ~~change to~~increase in non-operating expense, net primarily relates to interest expense recognized related to the Convertible Notes ~~offset by~~and recognition of unrealized foreign currency ~~gains~~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 ~~second~~third quarter of 2020 was ~~15.6%~~5.3%. For the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, we recorded a (benefit)/provision for income taxes of ~~$(7.4)~~$(0.9) million and ~~$72,000,~~$0.2 million respectively. The tax benefit for the ~~second~~third quarter of 2020 was primarily the result of the deferred tax liability recorded in conjunction with the Convertible Notes as a source of taxable income to benefit current year losses, partially offset by current U.S. state and foreign income taxes. The tax provision recorded for the ~~second~~third quarter of 2019 primarily related to current U.S. state and foreign income taxes.

Comparison of ~~Six~~Nine Months Ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 (in thousands):


	Six Months Ended						Nine Months Ended
	June 30,				% Increase		September 30,				% Increase
(dollars in thousands)	2020		2019		(decrease)		2020		2019		(decrease)
Statements of operations data:
Net sales	$	86,894	$	112,626	(23)	%	$	151,725	$	171,135	(11)	%
Cost of sales		54,197		14,981	NM			72,129		22,684	NM
Gross profit		32,697		97,645	(67)	%		79,596		148,451	(46)	%
Operating expenses:
Selling, general and administrative		88,662		72,581	22	%		127,609		117,024	9	%
Research and development		43,844		30,999	41	%		64,148		48,277	33	%
In-process research and development		-		2,245	NM			-		3,745	NM
Total operating expenses		132,506		105,825	25	%		191,757		169,046	13	%
Loss from operations		(99,809)		(8,180)	NM			(112,161)		(20,595)	NM
Total non-operating (expense) income, net		(1,977)		723	NM
Total non-operating expense, net								(6,262)		(181)	NM
Income tax (benefit) provision		(7,834)		194	NM			(8,723)		381	NM
Net loss	$	(93,952)	$	(7,651)	NM		$	(109,700)	$	(21,157)	NM

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Net Sales

Net sales for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$86.9~~$151.7 million and ~~$112.6~~$171.1 million, respectively, reflecting a decrease of ~~$25.7~~$19.4 million or ~~23%~~11%.

Net sales of glaucoma products in the United States were ~~$50.8~~$90.0 million and ~~$92.3~~$139.9 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively, decreasing by ~~45%~~36% primarily due to the disruption resulting from COVID-19, the first quarter impact of promotional activities relating to sales of iStent products near the end of 2019, and the impact of integration activities relating to the Avedro Merger, and competitive dynamics. International sales of glaucoma products for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$18.2~~$31.0 million and ~~$20.3~~$31.2 million, respectively, decreasing by ~~10%~~1%. The decrease in international net sales primarily related to the disruption resulting from COVID-19, ~~partially~~mostly offset by sales expansion into certain of our existing international markets.

The decrease in net sales of glaucoma products was partially offset by ~~an $17.8~~a $30.7 million increase in corneal health products as a result of our Avedro Merger on November 21, 2019, which was comprised of approximately ~~$14.7~~$26.2 million

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in U.S. sales using our direct sales operations and approximately ~~$3.1~~$4.6 million in net sales with distributors being used in certain international locations where we do not have a direct commercial presence. Sales of corneal health products were negatively impacted by integration activities related to the Avedro Merger and disruption resulting from COVID-19. Additionally, in the quarter ended September 30, 2020, we launched our next generation iStent inject product, the iStent injectW.

Pricing for our products was not a significant contributing factor to the change in net sales for the ~~six~~nine months ended ~~June~~September 30, 2020.

Cost of ~~sales~~Sales

Cost of sales for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$54.2~~$72.1 million and ~~$15.0~~$22.7 million, respectively, reflecting an increase of ~~$39.2~~$49.4 million. The increase was primarily comprised of approximately ~~$19.3~~$24.7 million, net related to the acquisition fair market value inventory adjustment rollout, ~~$11.0~~$16.6 million related to amortization of certain finite-lived intangible assets acquired, both of which are related to the Avedro Merger, and ~~$7.4~~$4.3 million, net related to inventory write-off charges and COVID-19 related excess and obsolete inventory reserves. Our gross margin was ~~38%~~52% for the ~~six~~nine months ended ~~June~~September 30, 2020 and 87% for the ~~six~~nine months ended ~~June~~September 30, 2019. The decreased gross margin resulted primarily from decreased sales as a result of the COVID-19 pandemic, the impact of the aforementioned accounting adjustments related to the acquisition of Avedro, as well as inventory write-off charges and COVID-19 related excess and obsolete inventory reserves, and changes in product mix, most notably the inclusion of lower margin products related to the Avedro Merger.

Selling, General and Administrative Expenses

SG&A expenses for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$88.7~~$127.6 million and ~~$72.6~~$117.0 million, respectively, reflecting an increase of approximately ~~$16.1~~$10.6 million or ~~22%~~9%.

The acquisition of Avedro resulted in an increase in SG&A expenses of ~~$8.7~~$9.4 million that were not present in our results for the ~~six~~nine months ended ~~June~~September 30, 2019. These expenses were primarily comprised of ~~$6.1~~$6.5 million due to stock-based compensation resulting from post-combination services associated with the Replacement Awards ~~$0.8 million related to legal, financial advisory and other transaction costs associated with the acquisition,~~ and amortization of finite-lived intangible assets acquired of approximately ~~$1.4~~$2.1 million.

We also incurred ~~$10.6~~$16.5 million in normal and recurring Avedro SG&A expenses during the ~~six~~nine months ended ~~June~~September 30, 2020 that were not in our 2019 results, primarily comprised of ~~$6.2~~$9.3 million in compensation and related employee expenses and approximately ~~$1.2~~$2.2 million in consulting and professional services and marketing.

The above increases in SG&A expenses for the ~~six~~nine months ended ~~June~~September 30, 2020 were partially offset primarily by decreases of approximately ~~$3.2~~$7.6 million in professional services and software systems costs related to our global enterprise systems implementation, ~~and~~decreased transaction expenses of approximately ~~$0.7~~$2.4 million ~~in compensation and related employee expenses associated with our cost-saving measures~~ as a result of the ~~COVID-19 pandemic. For~~acquisition of Avedro during the ~~six month~~nine months ended ~~June~~September 30, ~~2020, there was an increase~~2019, a decrease of approximately ~~$0.4~~$1.7 million related to our previously-disclosed patent litigation.

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Research and Development Expenses

R&D expenses for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$43.8~~$64.1 million and ~~$31.0~~$48.3 million, respectively, reflecting an increase of ~~$12.8~~$15.9 million or ~~41%~~33%.

The acquisition of Avedro resulted in an increase in R&D expenses of ~~$2.1~~$2.4 million that were not in our results for the ~~six~~nine months ended ~~June~~September 30, 2019, primarily comprised of stock-based compensation resulting from post-combination services associated with the Replacement Awards.

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We incurred ~~$10.7~~$15.7 million in normal and recurring Avedro R&D expenses during the ~~six months~~nine ended ~~June~~September 30, 2020 that were not in our 2019 results primarily comprised of ~~$4.4~~$6.7 million in compensation and related employee expenses with the remaining ~~$6.3~~$9.0 million primarily spent on the continued development of a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (often referred to as “epi-on”), as well as projects for presbyopia and earlier stage technology and therapeutic investments.

The remaining change in R&D expenses was primarily due to approximately $0.5 million in increased compensation and related employee expenses as well as an overall decrease of approximately ~~$1.6~~$3.6 million in other core R&D and clinical expenses, ~~primarily related to a reduction of $1.0 million for~~including expenses associated with inventory and supplies for iDose and future iStent product candidates.

~~In-process research~~In-Process Research and ~~development expenses~~Development Expenses

IPR&D expenses for the ~~six~~nine months ended ~~June~~September 30, 2019 were $3.7 million, comprised of $2.2 million related to the purchase of certain DOSE ~~assets.~~assets and $1.5 million related to the upfront payment for our exclusive global licensing agreement with Intratus. There were no IPR&D expenses for the ~~six~~nine months ended ~~June~~September 30, 2020.

Non-Operating (Expense) Income, Net

We had non-operating expense, net of ~~$2.0~~$6.3 million and ~~non-operating income, net of $0.7~~$0.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively. The ~~change from net non-operating income to net~~increase in non-operating expense, net primarily relates to interest expense associated with the financing lease for our Aliso Viejo, California facility, ~~and~~ our Convertible Notes and 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 ~~six~~nine months ended ~~June~~September 30, 2020 was ~~7.7%~~7.4%. For the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, we recorded a (benefit)/provision for income taxes of ~~$(7.8)~~$(8.7) million and ~~$0.2~~$0.4 million, respectively. The tax benefit for the ~~six~~nine months ended ~~June~~September 30, 2020 was primarily the result of the deferred tax liability recorded in conjunction with the Convertible Notes as a source of taxable income to benefit current year losses, partially offset by current U.S. state and foreign income taxes. The tax provision recorded for the ~~six~~nine months ended ~~June~~September 30, 2019 primarily related to current U.S. state and foreign income taxes.

Liquidity and Capital Resources

For the ~~six~~nine months ended ~~June~~September 30, 2020, we incurred a net loss of ~~$94.0~~$109.7 million and used cash from operations of ~~$24.0~~$33.6 million. As of ~~June~~September 30, 2020, we had an accumulated deficit of approximately ~~$283.7~~$299.4 million. We fund our operations from cash generated from commercial operations and proceeds from exercises of stock options, in addition to utilizing funds from the June 2020 issuance of the Convertible Notes. 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. However, due to the COVID-19 economic slowdown, as ~~previously mentioned,~~disclosed above under “Impact of COVID-19 Pandemic and Current Economic Environment”, we have also sought to preserve our cash position by instituting a number of cost saving initiatives, including substantial reductions in discretionary spending and capital expenditures, as well as a temporary salary reduction for many of our ~~executive team, senior leadership, and many others throughout~~employees, which as of the ~~Company, although we currently anticipate restoring full salaries for our impacted employees beginning in the third quarter of 2020.~~date hereof, have all been reinstated.

We have incurred a significant increase in administrative costs since we began operating as a public company. Our operating expenses have increased significantly following our acquisition of Avedro, and we also expect to incur additional construction costs related to our new facility in Aliso Viejo, California. Accordingly, although we have been

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

We plan to fund our operations and capital funding needs using existing cash and investments and, to the extent available, cash generated from commercial operations. The net proceeds from the Convertible Notes issued in June 2020 (after payment for the related capped call transactions) will be used for working capital and general corporate purposes. 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

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from commercial operations will be sufficient to fund our operations and satisfy our liquidity requirements for at least the next 12 months from the date our condensed consolidated financial statements for the three and ~~six~~nine months ended ~~June~~September 30, 2020 are made publicly available.

The following table summarizes our cash and cash equivalents, short-term investments and selected working capital data as of ~~June~~September 30, 2020 and December 31, 2019 (in thousands):


	June 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019
Cash and cash equivalents	$	266,974	$	62,430	$	80,994	$	62,430
Short-term investments		127,966		111,553		307,441		111,553
Accounts receivable, net		26,730		38,417		32,885		38,417
Accounts payable		9,233		5,781		6,774		5,781
Accrued liabilities		45,598		51,919		39,919		51,919
Working capital ⁽¹⁾		398,391		205,178		407,752		205,178

(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:


	Six Months Ended				Nine Months Ended
	June 30,				September 30,
(in thousands)	2020		2019		2020		2019
Net cash (used in) provided by:
Operating activities	$	(24,022)	$	6,810	$	(33,592)	$	3,822
Investing activities		(20,039)		(2,312)		(201,601)		(6,386)
Financing activities		248,062		5,725		253,883		12,391
Exchange rate changes		543		21		(126)		(8)
Net increase in cash, cash equivalents and restricted cash	$	204,544	$	10,244	$	18,564	$	9,819

At ~~June~~September 30, 2020, 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 ~~six~~nine months ended ~~June~~September 30, 2020 our operating activities used ~~$24.0~~$33.6 million and ~~June~~in the nine months ended September 30, 2019 our operating activities generated ~~$6.8~~$3.8 million of net cash.

For the ~~six~~nine months ended ~~June~~September 30, 2020, our net cash used in operating activities reflected our net loss of ~~$94.0~~$109.7 million, adjusted for non-cash items of ~~$36.8~~$58.2 million, primarily consisting of stock-based compensation expense of ~~$28.1~~$37.7 million, depreciation and amortization of ~~$14.6~~$22.0 million, amortization of lease right-of-use assets of ~~$2.6~~$3.8 million and the change in the fair value of cash-settled stock options of $(3.2) million. This was partially offset by changes in operating assets and liabilities of ~~$33.1~~$18.0 million, which resulted primarily from decreases in accounts receivable and inventory of ~~$33.0 million and an increase in accounts payable and accrued liabilities of $2.0~~$28.2 million, offset by decreases in prepaid expenses and other current assets of $4.3 million and ~~other assets~~decreases in accounts payable and accrued liabilities of ~~$1.8~~$6.1 million.

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For the ~~six~~nine months ended ~~June~~September 30, 2019, net cash provided by operating activities ~~included~~reflected our net loss of $21.2 million, adjusted for non-cash items of ~~$20.2~~$32.9 million, primarily consisting of stock-based compensation expense of ~~$15.4~~$23.9 million, depreciation and amortization of ~~$1.7~~$2.7 million and amortization of lease right-of-use assets of ~~$1.4~~$2.4 million. ~~In addition to the net loss of $7.7 million, these noncash items were~~This was partially offset by changes in operating assets and liabilities of ~~$5.7~~$7.9 million, the majority of which resulted from increases in accounts receivable and ~~accounts payable~~prepaid expenses and ~~accrued liabilities.~~other current assets.

Investing Activities

In the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, our investing activities used ~~$20.0~~$201.6 million and ~~$2.3~~$6.4 million of net cash, respectively.

For the ~~six~~nine months ended ~~June~~September 30, 2020, we used cash of approximately ~~$60.9~~$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.

For the nine months ended September 30, 2019, we used cash of approximately $63.6 million for purchases of short-term investments, approximately $3.5 million for purchases of property and equipment and approximately ~~$0.7~~$1.2 million related to investments in company-owned life insurance, ~~and we~~which was partially offset by cash received ~~cash~~ of approximately ~~$45.0 million from sales and maturities of short-term investments.~~

For the six months ended June 30, 2019, we used cash of approximately $39.9 million for purchases of short-term investments, approximately $2.5 million for purchases of property and equipment and approximately $1.0 million related to investments in company-owned life insurance, and we received cash of approximately $41.1$61.9 million from sales and maturities of short-term investments.

Subject to our near-term deferral of certain capital expenditures due to the COVID-19 pandemic, we expect to increase our investment in property and equipment in the future as we expand our manufacturing capacity for current and new products, improve our manufacturing efficiency and for overall facility expansion, as ~~previously~~ discussed above.

Financing Activities

In the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, our financing activities provided ~~$248.1~~$253.9 million and ~~$5.7~~$12.4 million of net cash, respectively.

For the ~~six~~nine months ended ~~June~~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 $7.9~~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 ~~$2.0~~$2.6 million for payment of employee taxes related to restricted stock unit vestings.

For the ~~six~~nine months ended ~~June~~September 30, 2019, we received net cash proceeds of approximately ~~$10.1~~$17.4 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used ~~$4.3~~$5.0 million for payment of employee taxes related to restricted stock unit vestings.

Commitments

As of ~~June~~September 30, 2020, the Company had material commitments for capital expenditures of approximately $0.6 million and had material commitments related to our global enterprise systems implementation and software costs of approximately ~~$5.4~~$3.8 million. We plan to fund these commitments with our cash and cash equivalents.

Off-balance sheet arrangements

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

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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, 2019, filed with the SEC on March 2, 2020. There have been no material changes to our critical accounting policies and estimates as disclosed therein, during the three and ~~six~~nine months ended ~~June~~September 30, 2020, as compared with those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020, with the exception of the inclusion of an accounting policy for our Convertible Notes that were issued in June 2020.

. However, we adopted ASC 326 on January 1, 2020, which requires us to estimate the allowance for credit losses using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for estimation of expected credit losses and is adjusted as necessary using the relevant information available.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our exposure to market risk since December 31, 2019. 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, 2019 for further detail.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting identified by management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during our ~~second~~third fiscal quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting with the exception of the modification of certain existing internal controls over financial reporting and implementation of new control activities and business processes resulting from the May 2020 implementation of our new enterprise resource planning (ERP) system.reporting.

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We believe that the new ERP system and related changes to internal controls and business processes will enhance our internal control over financial reporting while providing us the ability to scale our business. We have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during the second fiscal quarter of 2020 and will continue to evaluate the operating effectiveness of related key controls in subsequent periods.

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 ~~March 31,~~June 30, 2020, which was filed with the SEC on ~~May~~August 7, 2020. 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 our issuance of the Convertible Notes (as defined below) under “Risks Related to Indebtedness” and the risk factors~~factor relating to the COVID-19 pandemic, ~~and the implementation of our ERP system,~~ 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 ~~March 31,~~June 30, 2020, which was filed with the SEC on ~~May~~August 7, 2020.

Risks Related to Our Business

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.

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. The World Health Organization has declared COVID-19 to be a “pandemic,” spreading across the globe and impacting worldwide economic activity. While the impacts of COVID-19 have had, and we expect them to 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.

COVID-19 infections have been reported throughout the United States, including a small number of cases among our workforce. In response, certain federal, state and local governmental authorities have issued stay-at-home and other orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Although some of these governmental restrictions have since been lifted or scaled back, a recent surge of COVID-19 has resulted in the re-imposition of certain restrictions and future surge of cases may lead to other restrictions being re-implemented in response to efforts to reduce the spread of COVID-19. In an effort to protect our employees and adhere to the guidance and orders of these 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 ~~have~~ 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.

Additionally, government restrictions and advisories on elective procedures and therapies were implemented beginning in the first quarter in many parts of the world. In the latter part of the first quarter and the early part of the second quarter, these restrictions led to the increasing deferral of cataract and keratoconus procedures and a material decrease in demand for our products versus levels achieved prior to the COVID-19 outbreak. This decrease in demand was most significantly felt in the latter part of the quarter ended March 31, 2020 and the earlier part of the quarter ended June 30, 2020. Beginning in May 2020, we began to see a return toward more normalized levels for cataract and keratoconus ~~procedures and we expect this trend to continue into later 2020, provided that the lifting of restrictions on elective procedures and therapies continues and such restrictions are not reimposed.~~procedures. However, we cannot predict the timing and full impact of the pandemic on our future financial and operating results given the continued uncertainties

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associated with the situation, including the possibility of ~~a resurgence~~future surges of COVID-19 after the current outbreak subsides and patient reluctance to seek primary care from optometrists and ophthalmologists or undergo medical procedures during 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 ~~has~~ slowed significantly which ~~we expect~~ may delay the iDose approval timeline. While we believe our other products currently in clinical trials remain on track to receive approval as previously anticipated, any prolonged economic slowdown or reinstitution of stay-at-home orders may cause additional delays in the progress of our pipeline products, including those in clinical trials.

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We have implemented significant cost saving initiatives in order to preserve jobs globally and protect core research and development programs. These initiatives included substantial reductions in discretionary spending and capital expenditures, as well as a temporary salary reduction for many of our ~~employees. However, we currently anticipate restoring full salaries for our impacted~~ employees, inwhich as of the ~~third quarter of 2020 with the restoration of senior management’s salaries in the fourth quarter of 2020~~. date hereof, have all been reinstated. Decreasing discretionary spending and capital expenditures may slow the growth trajectory of the Company or require us to delay projects that could have benefitted the Company. Additionally, salary reductions and other cash preservation measures could result in difficulties retaining key employees or recruiting qualified personnel necessary for growth. In addition to these 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.

While we have not experienced any significant disruptions to our supply chain to date, it is possible our suppliers will incur challenges supplying the materials needed for the manufacture of our products. Additionally, we have experienced a small 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. Other potential disruptions include restrictions on the ability of our personnel to travel and access customers and clinical sites for training and support; delays in approvals by regulatory bodies; delays in product development efforts; and additional government requirements to stay-at-home or other incremental mitigation efforts that may further impact our capacity to manufacture, sell and support the use of our products.

The ultimate impact of the COVID-19 pandemic on our operations 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, any additional preventative and protective actions that governments, or we, may direct, any ~~resurgence~~future surges of COVID-19 that may occur and how quickly and to what extent economic and operating conditions normalize within the markets in which we operate. These developments may result in an extended period of continued business disruption, decreased demand for our products and reduced operations. COVID-19 and the measures taken by local, state and national governments to date have impacted our business for the fiscal ~~second~~third quarter and potentially beyond, as we have seen, but the significance of the impact of the COVID-19 outbreak on our business and the duration for which it may have an impact cannot be determined at this time.

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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 July 1998, we have incurred significant operating losses. As of ~~June~~September 30, 2020, we had an accumulated deficit of approximately ~~$283.7~~$299.4 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 three months ended ~~June~~September 30, 2020 are made publicly available, our ability to fund our operations is uncertain. In addition, our ability to reach sustained profitability is highly uncertain, especially given our limited commercial history selling our products globally and an increasingly competitive landscape, which makes forecasting our sales more difficult.

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 the third quarter of 2012, the iStent inject, which we began selling in the U.S. in the second half of 2018, and our Photrexa therapies, which we acquired in connection our acquisition of Avedro, Inc. (Avedro) in November 2019. Additionally, in the quarter ended September 30, 2020, we launched our next generation iStent inject product, the iStent injectW. We expect to continue to derive a significant portion of our net sales from the iStent, the iStent inject models and the Photrexa therapies.

As a result, 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 or features. 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.

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If we are not able to obtain market acceptance of our products globally or effectively grow our global sales and marketing organization, our business prospects, results of operations and financial condition could be adversely affected.

Because of the numerous risks and uncertainties associated with our global commercialization efforts, our products may not obtain wide-spread market acceptance outside of the United States, which would adversely impact the overall utilization of our products. International markets differ significantly from the U.S. market, including as a result of differences in payor systems, reimbursement, competitive dynamics, market size, regulations and patient treatment regimens. Additionally, our future success will depend largely on our ability to train, retain and motivate skilled regional sales managers and direct sales representatives and distributors around the world with significant technical knowledge of our products. Because of the competition for their services, we may not be able to retain such representatives on favorable or commercially reasonable terms, if at all. If we are unable to grow our global sales and marketing organization, we may not be able to effectively commercialize our products globally, which would adversely affect our business prospects, results of operations and financial condition.

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. Disruptions to our other commercialized products could also materially impact our business.

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, currently anticipated to occur in 2021. 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. If any one or more of our suppliers cease to provide us with sufficient quantities of components or drugs in a timely manner or on terms acceptable to us, we would have to seek alternative sources of supply. Because of factors such as the proprietary nature of our products, our quality control standards and regulatory requirements, we may have difficulty quickly engaging additional or replacement suppliers for some of our critical components. 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. 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. 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.~~results and clinical efforts.

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We and some of our component manufacturers and contract facilities are required to comply with U.S. and international regulatory requirements, ~~known as~~including the FDA’s Quality System Regulation (QSR), which covers the procedures and documentation of the design, testing, production, control, quality assurance, inspection, complaint handling, recordkeeping, management review, labeling, packaging, sterilization, storage and shipping of our device products. The FDA’s Current Good Manufacturing Practices (cGMPs) regulations also apply to the manufacture of our products. The FDA ~~audits~~and other international notified bodies audit compliance with these regulatory requirements through periodic announced and unannounced inspections of manufacturing and other ~~facilities.~~facilities, and make observations and findings during such audits that we or our component manufacturers are required to timely remediate. 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 such notified bodies could take enforcement action. Additionally, in the event we must obtain a replacement manufacturer, it may be difficult for us to identify and qualify a manufacturer that complies with QSR and cGMPs, which would adversely impact our ~~operations.~~operations 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 and adversely affect our reputation as a producer of high quality products could suffer, which could adversely affect our business, financial condition or results of operations.

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

Ambulatory surgery centers, hospitals and physician private practices that purchase our products typically bill various third-party payors, such as government programs, private insurance plans and managed care programs, to cover all or a portion of the costs and fees associated with the therapeutics or procedures in which our products are used and bill patients for any applicable deductibles or co-payments. Access to adequate coverage and reimbursement by third-party payors for the procedures using our products is essential to the acceptance of our products by our customers, who may not adopt products for which there is limited or no third-party reimbursement. The requirements and processes for obtaining approval for such reimbursement may vary significantly from country to country, entail prolonged delay, or be more difficult for foreign manufacturers with new, unfamiliar products and treatments. Third-party coverage and reimbursement for our products or any of our product candidates may not be available or adequate in either the U.S. or international markets.

In the U.S., physicians are typically paid separately from the facility for surgical procedures involving our products; however, there is no published Medicare payment schedule at the national level for physician payment amounts. The physician payment rate is left to the discretion of the regional Medicare Administrative Contractors (MACs), with each MAC separately determining coverage and no assurance that coverage and adequate reimbursement will be obtained from, or maintained by, the MACs. In order to adopt a new procedure, one of the factors that the surgeon evaluates is whether or not payment for the procedure adequately covers the surgeon’s time. As with the facility payment, the incremental payment the physician receives could play a role in a surgeon’s decision to adopt our products. Accordingly, changes in the payment the physician receives could affect the extent to which physicians recommend procedures using our products to patients, which could have a material adverse effect on our business, financial condition and operating results.

Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the U.S., no uniform policy of coverage and

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reimbursement exists among third-party payors; coverage and reimbursement can differ significantly from payor to payor. In addition, payors continually review new products for possible coverage and can, without notice, deny coverage. As a result, the coverage determination process is often time-consuming and costly; requiring us to provide

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scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained, or maintained if obtained. Coverage decisions may depend upon clinical and economic standards that disfavor new products when more established or lower cost therapeutic alternatives are already available or subsequently become available. Any decline in the amount payors are willing to reimburse our customers for procedures using our products, including the amount payors are willing to pay the physicians performing the procedures, which is separately evaluated, could make it difficult for existing customers to continue using, or new customers to adopt, any of our products and could create additional pricing pressure for us. If we were forced to lower the price we charge for our products, our gross margins would decrease, which would adversely affect our ability to invest and grow our business. Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the U.S. and in international markets.

One key aspect of reimbursement in the U.S. is the use of coding. Coding refers to distinct numeric and alphanumeric billing codes that are used by healthcare providers to report the provision of medical procedures and the use of supplies for specific patients to payors. There are different categories of Current Procedural Terminology (CPT) codes (Category I, II and III) based on the procedure or supply. Although we have received a permanent healthcare common procedure coding system J code for our Photrexa pharmaceutical therapies, we have only obtained temporary Category III CPT codes for the professional fees associated with CXL and iStent-related procedures. There is no guarantee that these billing codes or the payment amounts associated with such codes will not change in the future. Prior to expiration, there are two options: submit an application to convert a temporary code to a permanent code or submit an application for a five-year extension of the temporary code. Further, 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 new permanent codes for procedures using our products, or obtain new reimbursement codes for our other products in development, we may be subject to significant pricing pressure, which could harm our business, results of operations, financial condition and prospects. Additionally, if we do obtain a permanent Category I CPT code for procedures using our products, certain national reimbursement levels for such procedures may be adjusted at that time. These fee reimbursement levels may be decreased and could have a material adverse effect on our business, financial condition and operating results.

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

Our industry is highly competitive and subject to rapid and profound technological, market and product-related changes. Our success depends, in part, upon our ability to maintain a competitive position in the development of new products for the treatment of chronic eye diseases. Our competitors, medical companies, academic and research institutions or others could develop new drugs, therapies, medical devices or surgical procedures that could render our products obsolete. If such other products demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our products, it may reduce demand for our products, and our business may be harmed.

Many of our current and potential competitors are 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. If we are unable to effectively compete, it could adversely affect our business.

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. It is also possible that as our products become more widely used, latent defects could be identified, creating negative publicity and

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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.

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Additionally, inferior patient outcomes, or patient injury, may result if untrained or unqualified ophthalmic surgeons elect to perform procedures using our products. After an ophthalmic surgeon is trained by our sales representatives, the surgeon and/or surgical facility that the surgeon utilizes are cleared to purchase, and administer procedures using, our products. There is a risk that untrained or unqualified ophthalmic surgeons could gain access to our products from a facility’s inventory and conduct procedures without having received qualified status from us. If performing procedures by unqualified ophthalmic surgeons were to become pervasive, this could raise the risk of complications and inferior clinical outcomes, which could result in negative patient experiences or experiences being published and damaging our reputation and that of our products. This could result in lower penetration and utilization by ophthalmic surgeons and could have a material adverse effect on our net sales growth, expected operating results and financial condition.

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

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

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

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:

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our ability to drive increased sales of our products;

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

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fluctuations in the demand for our products;

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

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

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

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

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

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our ability to manage the risks associated with introducing new products, including inventory management;

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

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interruption in the manufacturing or distribution of our products;

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

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the effect of competing technological, industry and market developments;

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changes in our ability to obtain regulatory clearance or approval for our products;

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

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

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

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

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

Since the commercial launch of the iStent in July 2012, we have seen significant period-to-period growth in our business, 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:

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new and increased responsibilities for our management team;

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increased pressure on our operating, financial and reporting systems;

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increased competition;

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increased pressure to anticipate and satisfy market demand;

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additional manufacturing capacity requirements;

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

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

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

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

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

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

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

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management are not subject to non-competition agreements. Accordingly, the adverse effect resulting from the loss of certain members of senior management could be compounded by our inability to prevent them from competing with us.

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In addition to competing for market share for our products, we also compete against our competitors for personnel, including qualified sales representatives that are necessary to grow our business. Universities and research institutions also compete with us for scientific and clinical personnel that are important to our research and development efforts. We also rely on consultants and advisors in our research, operations, clinical and commercial efforts to implement our business strategies. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. Our strategic plan requires us to continue growing our sales, marketing, clinical and operational infrastructure in order to generate, and meet, the demand for our products. If we fail to retain or attract these key personnel, we could fail to take advantage of the market for our products, adversely affecting our business, financial condition and operating results.

As we expand our product offerings, some of our products are, and others will be, regulated as drugs and be subject to different regulatory requirements.

As we have expanded our product offerings through organic growth and acquisitions, certain of our products are, and others will be, subject to the regulatory approval process for pharmaceuticals. This process is often a more lengthy, costly and complex process than obtaining regulatory approval for a medical device. The future success of our pharmaceutical and hybrid device and pharmaceutical products depends on our ability to complete clinical trials, and will require significant development activities, regulatory approvals, and substantial additional investment.

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

We have 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 and the Intratus drug delivery platform. 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. In addition, if we are unable to integrate any acquired businesses, products or technologies effectively, our business will likely suffer. Additionally, some of these collaborations, joint ventures, alliances and partnerships require us to invest a substantial amount of resources. 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. Achieving the benefits of any acquisition, including the DOSE and Avedro transactions, will depend, in part, on our ability to integrate the business, operations and products of the acquired entities successfully and efficiently with our business, which we may not be able to accomplish. 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, security breaches, data corruption and cyber-based attacks, including malicious software programs, phishing attacks or other attacks, which we have ~~been attempted against us in the past.~~experienced and continue to monitor. 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, 2019, we had approximately $356.6 million, $144.0 million and $13.3 million of 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 2022, while a federal NOL carryforward of $103.1 million will not expire. The state NOL carryforwards begin to expire in 2021. The foreign NOLs begin to expire in 2023. At December 31, 2019, we had federal and state research and development carryforwards of approximately $28.9 million and $12.8 million, respectively. Federal credits begin to expire in 2021, and state credits of $2.9 million begin to expire in 2023. The remaining state credits of $9.8 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 (IRC) Section 382 and Section 383 if the Company experiences an ownership change. To the extent available, we intend to use these tax attributes to offset future taxable income associated with our operations. There can be no assurance that we will generate sufficient taxable income in the carryforward period to utilize any remaining 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 ~~June~~September 30, 2020, 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:

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impairing our ability to successfully continue to commercialize our current or future products;

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limiting our ability to obtain additional financing on satisfactory terms;

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increasing our vulnerability to general economic downturns, competition and industry conditions;

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requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness;

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inhibiting our flexibility to plan for, or react to, changes in our business; and

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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 is 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) 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 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 products are subject to extensive government regulation in the U.S. by the U.S. Food and Drug Administration (FDA) and state regulatory authorities and by foreign regulatory authorities in the countries in which we

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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.” in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 2, 2020 for additional information.

The process of obtaining clearance or approvals to market a medical device, drug or other product 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. Delays in the commencement or completion of clinical trials or testing could significantly affect our product development costs. We do not know whether planned clinical trials will begin on time, need to be redesigned, enroll an 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. We may suffer significant setbacks in clinical trials, even after earlier clinical trials showed promising results, and failure can occur at any time during the clinical trial process. Any of our products may malfunction or may produce undesirable adverse effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials. We, the clinical trial investigators, the independent review board responsible for overseeing the trial, the FDA, or another regulatory authority may suspend or terminate clinical trials at any time to avoid exposing trial participants to unacceptable health risks. Any delay or failure to obtain necessary regulatory approvals would have a material adverse effect on our business, financial condition and prospects.

In some instances, we may pursue a regulatory approval pathway that proves unsuccessful. For example, we intend to seek FDA approval of a new drug application (NDA) under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act (FDCA) for our drug delivery implant, iDose. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant. If the FDA does not allow us to pursue the 505(b)(2) regulatory approval pathway for iDose as anticipated, we may need to conduct additional clinical trials, provide additional data and information and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval would likely substantially increase. Moreover, the inability to pursue the 505(b)(2) regulatory approval pathway could result in new competitive products reaching the market faster than our product candidate, which could materially adversely impact our competitive position and prospects. 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 and our suppliers are subject to extensive post-marketing regulatory requirements and failure to comply with applicable requirements could subject us to enforcement actions. Other post-market requirements that may regulate our products include registration and device listing, quality system requirements, reporting of adverse events and device malfunctions, reporting of corrections and removals, labeling requirements, and promotional restrictions. Our products could experience performance problems that require review and possible corrective action by us or a component supplier. Any recall, 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 or our suppliers’ failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities, which may include any of the following sanctions:

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untitled letters or warning letters;

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fines, injunctions, consent decrees and civil penalties;

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

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customer notifications or repair, replacement or refunds;

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operating restrictions or partial suspension or total shutdown of production;

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

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delays in the commencement or completion of clinical trials;

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

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

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criminal prosecution.

Although we do not currently provide healthcare services, submit claims for third-party reimbursement, or receive payments directly from Medicare, Medicaid or other third-party payors for our products, we are subject to healthcare fraud, abuse and transparency regulations and enforcement by federal and state governments, including with respect to our marketing, training and other practices, which could significantly impact our business. To ensure compliance with Medicare, Medicaid and other regulations, government agencies or their contractors often conduct routine audits and request customer records and other documents to support claims submitted for payment of services rendered. Government agencies or their contractors also periodically open investigations and obtain information from healthcare providers.

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.

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

In the U.S. and in certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the regulatory and healthcare systems in ways that could impact our ability to sell our products profitably, if at all. In the 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.

In March 2010, the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (ACA) was signed into law. The ACA substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in the quality of healthcare items and services and significantly impacts the medical device industry.

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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 is now anticipated to take effect beginning May 26, 2021. Although MDR does not set out a substantially different regulatory system, it provides for stricter controls of medical devices. Under provisions that govern the transition period until MDR takes effect, medical devices with notified body certificates issued under the MDD prior to May 26, 2020 may continue to be marketed and sold as long as those certificates are valid, until May 27, 2024 at the latest. After the expiration of any applicable transitional period, only devices that have been CE marked under MDR may be placed on the market in the EU.

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 such as MDR, 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.

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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:

●

different, and in some cases more exacting and lengthy, regulatory approval processes and pricing and reimbursement systems;

●

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

●

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;

●

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

●

pricing pressure that we may experience internationally;

●

foreign currency exchange rate fluctuations;

●

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

●

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

●

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;

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

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

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

●

laws and business practices favoring local companies;

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longer sales and payment cycles;

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difficulties in maintaining consistency with our internal guidelines;

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

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

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international terrorism and anti-U.S. sentiment; and

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

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.

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. The future relationship between the U.K. and the EU remains uncertain as the U.K. and the EU work through the transition period that provides time for them to negotiate the details of their future relationship. The transition period maintains all existing trading arrangements. The transition period is currently expected to end on December 31, 2020, and, if no agreement is reached, the default scenario would be a “no-deal” Brexit. In the event of a no-deal Brexit, the U.K. will leave the EU with no agreements in place beyond any temporary arrangements that have or may be put in place by the EU or individual EU member states, and the U.K. as part of no-deal contingency efforts and those conferred by mutual membership of the World Trade Organization. It is possible that as a result of Brexit there will 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.

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

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

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Risks Related to Our Intellectual Property

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

Our success and ability to compete depends significantly upon our ability to 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.

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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.

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.

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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. For example, see Note 1112, Commitments and Contingencies, of our notes to consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for a description of our legal proceedings. 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 previous, 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. Our ERP implementation is a complex and time-consuming project. Our results of operations could be adversely affected if we experience time delays or cost overruns during the ERP implementation process, or if the ERP system or associated process changes do not give rise to the benefits that we expect. This project has required and may continue to require investment of capital and

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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 financial controls may fail. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If our independent registered public accounting firm determines 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 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.

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The price of our common stock may fluctuate substantially.

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

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

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volume, timing and nature of orders for our products;

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developments generally affecting our industry;

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

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

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

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

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

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actions by institutional or other large stockholders;

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commencement of, or our involvement in, litigation;

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failure to achieve significant sales;

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

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any future sales of our common stock or other securities;

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

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our results of operations and financial performance, including any failure to achieve publicly disclosed forecasts or guidance; and

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general economic, industry and market and other conditions, including the COVID-19 pandemic.

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

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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:

●

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;

●

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

●

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.

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

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

This exclusive forum provision may limit a stockholder's ability to bring a claim in a judicial forum of its choosing for disputes with the combined company or its directors, officers or other employees, which may discourage lawsuits against the Company and its directors, officers and other employees. In addition, stockholders who do bring a claim in the Court of Chancery of the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery of the State of Delaware may also reach

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different judgments or results than would other courts, including courts where a stockholder would otherwise choose to bring the action, and such judgments or results may be more favorable to the Company than to our stockholders. However, the enforceability of similar exclusive forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find this type of provision to be inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings. If a court were to find the exclusive forum provision contained in the Glaukos Charter to be inapplicable or unenforceable in an action, we might incur additional costs associated with resolving such action in other jurisdictions.

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Item 5. Other Information

In July 2020, the Company extended the term of its lease, dated as of June 8, 2015, between 229 Fabricante, LLC and the Company for its San Clemente, California headquarters building by five years and five months. The lease now expires on May 31, 2030, and contains an option to extend the lease for one additional five year period at market rates. In conjunction with this extension, the lease landlord agreed to provide the Company with a tenant improvement allowance in the amount of the cost of certain leasehold improvements, upon the Company providing the necessary documentation evidencing the costs of the allowable leasehold improvements, and five months of rent abatement, totaling approximately $0.3 million in the aggregate.None.

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

3.2

06/30/2015
4.1

Indenture, dated as of June 11, 2020, between Glaukos Corporation and Wells Fargo Bank, National Association, as trustee.

8-K

1-37463

4.1

6/12/2020
4.2

Form of 2.75% Convertible Senior Notes due 2027 (included in Exhibit 4.1).

8-K

1-37463

4.2

6/12/2020
10.1

Form of Voting Agreement between Glaukos Corporation and certain stockholders of Avedro, Inc.

8-K

1-37463

10.1

8/7/2019
10.2

Form of Capped Call Confirmation.

8-K

1-37463

10.1

6/12/2020
10.3*

First Amendment to Lease dated as of December 21, 2018 between 229 Avenida Fabricante, LLC and Glaukos Corporation

10.4*†

Second Amendment to Lease dated as of July 2, 2020 between 229 Avenida Fabricante, LLC and Glaukos Corporation

10.5*

First Amendment to Office Building Lease dated as of December 12, 2018 between CIP 2014/SG Aliso Owner, LLC and Glaukos Corporation

10.6*†

Second Amendment to Office Building Lease dated as of May 20, 2020, between CIP 2014 SG Aliso Owner, LLC and Glaukos Corporation

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

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		~~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~~
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		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	3.2	06/30/2015
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
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* Filed herewith.

~~† Schedules and exhibits are omitted pursuant to Item 601(b)(2) of Regulation~~ ~~S-K. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the U.S. Securities and Exchange Commission upon request.~~

6362

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Clemente, State of California, on ~~August 7,~~November 5, 2020.

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)

6463


		Page
PART I: FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Loss	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41

PART II: OTHER INFORMATION		42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 6.	Exhibits	62

SIGNATURES		6463


	Estimated	As of June 30, 2020						As of December 31, 2019
	Useful	Gross						Gross
	Life	Carrying		Accumulated		Net		Carrying		Accumulated		Net
	(in years)	Amount		Amortization		Amount		Amount		Amortization		Amount
Developed technology	11.4	$	252,200		(13,347)		238,853		252,200		(2,301)		249,899
Customer relationships	5.0		14,100		(1,704)		12,396		14,100		(294)		13,806
Intangible assets subject to amortization			266,300		(15,051)		251,249		266,300		(2,595)		263,705

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	$	(15,051)	$	436,283	$	451,334	$	(2,595)	$	448,739