gkos_Current folio

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended June 30, 2015

Table of Contents


		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 Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31

Part II: Other Information		33
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66

Signatures		67

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

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)


	December 31,		June 30,
	2014		2015
			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,304	$	104,144
Accounts receivable, net		5,398		6,502
Inventory		2,258		2,908
Prepaid expenses and other current assets		534		701
Restricted cash		60		80
Total current assets		10,554		114,335
Property and equipment, net		1,950		1,859
Intangible asset, net		13,475		11,725
Deposits and other assets		42		253
Total assets	$	26,021	$	128,172

Liabilities, convertible preferred stock and (deficit) equity
Current liabilities:
Accounts payable	$	3,298	$	5,264
Accrued liabilities		6,462		6,866
Line of credit		1,850		-
Long-term debt, current portion		8,532		9,294
Deferred rent		45		36
Total current liabilities		20,187		21,460
Long-term debt, less current portion		8,968		11,638
Stock warrant liability		379		273
Other liabilities		12		10
Total liabilities		29,546		33,381

Commitments and contingencies

Convertible preferred stock (see Note 6)		157,379		-

Stockholders' (deficit) equity:
Preferred stock, $0.001 par value; 0 and 5,000 shares authorized at December 31, 2014 and June 30, 2015, respectively; no shares issued and outstanding at December 31, 2014 and June 30, 2015, respectively		-		-
Common stock, $0.001 par value; 77,000 and 150,000 shares authorized at December 31, 2014 and June 30, 2015, respectively; 2,470 and 31,976 shares issued and 2,422 and 31,948 shares outstanding at December 31, 2014 and June 30, 2015, respectively		6		32
Additional paid-in capital		8,155		287,074
Accumulated other comprehensive income		44		83
Accumulated deficit		(159,372)		(192,266)
		(151,167)		94,923
Less treasury stock		(132)		(132)
Total stockholders' (deficit) equity		(151,299)		94,791
Noncontrolling interest		(9,605)		-
Total (deficit) equity		(160,904)		94,791
Total liabilities, convertible preferred stock and (deficit) equity	$	26,021	$	128,172

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2015		2014		2015
Net sales	$	11,099	$	17,754	$	19,348	$	32,420
Cost of sales		2,339		3,281		4,283		6,075
Gross profit		8,760		14,473		15,065		26,345
Operating expenses:
Selling, general and administrative		6,582		12,516		12,531		20,332
Research and development		4,422		7,339		8,804		12,579
Total operating expenses		11,004		19,855		21,335		32,911
Loss from operations		(2,244)		(5,382)		(6,270)		(6,566)
Other income (expense), net
Interest income		1		-		2		-
Loss on deconsolidation of DOSE		-		(25,685)		-		(25,685)
Interest and other expense, net		(219)		(293)		(437)		(562)
Change in fair value of stock warrants		(32)		(1,152)		(126)		(1,161)
Total other income (expense), net		(250)		(27,130)		(561)		(27,408)
Loss before taxes		(2,494)		(32,512)		(6,831)		(33,974)
Provision for income taxes		-		-		2		-
Net loss		(2,494)		(32,512)		(6,833)		(33,974)
Net loss attributable to noncontrolling interest		(420)		(584)		(802)		(1,080)
Net loss attributable to Glaukos Corporation	$	(2,074)	$	(31,928)	$	(6,031)	$	(32,894)
Net loss per share, basic and diluted, attributable to Glaukos Corporation common stockholders	$	(0.90)	$	(10.96)	$	(2.70)	$	(12.35)
Weighted average shares used to compute basic and diluted net loss per share attributable to Glaukos Corporation common stockholders		2,302		2,912		2,236		2,663

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2015		2014		2015
Net loss	$	(2,494)	$	(32,512)	$	(6,833)	$	(33,974)
Other comprehensive income:
Foreign currency translation adjustments		4		39		22		39
Other comprehensive income		4		39		22		39
Total comprehensive loss		(2,490)		(32,473)		(6,811)		(33,935)
Comprehensive loss attributable to noncontrolling interest		(420)		(584)		(802)		(1,080)
Comprehensive loss attributable to Glaukos Corporation	$	(2,070)	$	(31,889)	$	(6,009)	$	(32,855)

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Six Months Ended June 30,
	2014		2015
Operating Activities
Net loss	$	(6,833)	$	(33,974)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,108		2,143
Stock-based compensation		738		4,779
Loss on deconsolidation of DOSE		-		25,685
Change in fair value of stock warrant liability		126		1,161
Amortization of debt discount and deferred financing costs		-		15
Deferred rent		(15)		(11)
Changes in operating assets and liabilities:
Accounts receivable, net		(1,558)		(1,112)
Inventory		(477)		(657)
Prepaid expenses and other current assets		(130)		(167)
Accounts payable and accrued liabilities		303		1,187
Other assets		(79)		(110)
Net cash used in operating activities		(5,817)		(1,061)
Investing activities
Purchase of iDOSE product line and related assets from DOSE Medical		-		(15,000)
Purchases of property and equipment		(309)		(319)
Net cash used in investing activities		(309)		(15,319)
Financing activities
Proceeds from initial public offering, net of issuance costs		-		114,932
Net proceeds from senior secured term and draw-to term loans		-		6,852
Net payments of revolving line of credit		-		(1,850)
Payments of subordinated notes		-		(3,503)
Proceeds from exercise of stock options		652		1,364
Proceeds from exercise of stock warrants		839		378
Net cash provided by financing activities		1,491		118,173
Effect of exchange rate changes on cash and cash equivalents		23		47
Net (decrease) increase in cash and cash equivalents		(4,612)		101,840
Cash and cash equivalents at beginning of period		6,728		2,304
Cash and cash equivalents at end of period	$	2,116	$	104,144
Supplemental disclosures of cash flow information
Interest paid	$	438	$	499
Taxes paid	$	7	$	11
Supplemental schedule of noncash investing and financing activities
Issuance costs associated with initial public offering in accounts payable and accrued liabilities	$	-	$	1,251
Reduction of liability upon vesting of stock options previously exercised for unvested stock	$	4	$	44

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GLAUKOS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Organization and Basis of Presentation

Organization and Basis of Presentation

Glaukos Corporation (Glaukos or the Company), incorporated in Delaware on July 14, 1998, is a developer, manufacturer and marketer of medical devices for the treatment of glaucoma. The accompanying consolidated financial statements include the accounts of Glaukos, its wholly-owned subsidiaries Glaukos Europe GmbH and Glaukos Japan GK and affiliated entity DOSE Medical Corporation (see Note 9). All significant intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.

Reverse Stock Split

On June 11, 2015, the Company effected a 1 for 2.5 share reverse stock split of the Company’s common stock and convertible preferred stock. Neither the par value nor the authorized number of shares was adjusted as a result of the reverse stock split. All issued and outstanding common stock, shares of common stock held in treasury, convertible preferred stock, warrants, and per share amounts contained in the accompanying financial statements and notes to the financial statements have been retroactively adjusted to give effect to the reverse stock split for all periods presented.

Initial Public Offering

On June 30, 2015, the Company completed an initial public offering (IPO), selling 6.9 million newly issued shares of common stock at a price of $18.00 per share. The IPO generated net cash proceeds of $113.7 million, after deducting underwriting commissions of approximately $8.7 million and other related expenses of $1.8 million. The underwriting commissions and offering costs were reflected as a reduction to the IPO proceeds received in additional paid-in capital.

Immediately prior to the closing of the IPO, all unexercised warrants to purchase shares of Series D convertible preferred stock were net exercised at the IPO price per share, and then all outstanding shares of convertible preferred stock automatically converted into 21.7 million shares of common stock. Following the closing of the IPO, there were no shares of preferred stock and no warrants to purchase shares of Series D convertible preferred stock outstanding. An additional 4.5 million shares of common stock were reserved for the Company’s 2015 Omnibus Incentive Compensation Plan and 450,000 shares of common stock were reserved for the Company’s 2015 Employee Stock Purchase Plan.

Acquisition of certain DOSE Medical Corporation Assets

On June 30, 2015, the Company acquired certain assets from DOSE, including the iDose product line, in exchange for a cash payment of $15.0 million and the elimination of all amounts owed by DOSE to the Company. In addition to an asset purchase, the parties agreed to an amended and restated patent license agreement and an amended and restated transition services agreement that provides for limited support from the Company for a period of up to three years (see Note 9).

Note 2. Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the three and six months ended June 30, 2015 as compared with those disclosed in its audited annual financial statements included in its prospectus filed with the Securities and Exchange Commission (SEC) pursuant to rule 424(b)(4) on June 25, 2015.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ materially from those estimates. 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 financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates,

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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 potentially 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, clinical trial expense accruals, collectability reserves, inventory reserves, fair value of the stock warrant liability and stock-based compensation expense. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, this process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements and following the requirements of the United States Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by GAAP can be 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 position as of June 30, 2015 and its results of operations, comprehensive loss and cash flows for the periods presented. 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, 2014, which are contained in the Company’s final prospectus filed by the Company with the SEC pursuant to Rule 424(b)(4) on June 25, 2015 relating to the Company’s Registration Statement on Form S-1/A (File No. 333-204091) for the Company’s initial public offering. The results for the periods ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ended December 31, 2015 or for any other interim period.

Foreign Currency Translation

The accompanying condensed consolidated financial statements are presented in U.S. dollars. The Company considers the local currency to be the functional currency for its international subsidiaries - the Euro for Glaukos Europe GmbH and the Yen for Glaukos Japan GK. Accordingly, their assets and liabilities are translated into U.S. dollars using the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing throughout the periods presented. Currency translation adjustments arising from period to period are charged or credited to accumulated other comprehensive income in stockholders’ (deficit) equity. For the three months ended June 30, 2014 and 2015, the Company reported income from foreign currency translation adjustments of approximately $4,000 and $39,000. For the six months ended June 30, 2014 and 2015, the Company reported income from foreign currency translation adjustments of approximately $22,000 and $39,000. Realized gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations. For the three months ended June 30, 2014, the Company reported a foreign currency transaction gain of approximately $2,000, and for the three months ended June 30, 2015, the Company reported a foreign currency transaction loss of approximately $32,000. For the six months ended June 30, 2014 and 2015, the Company reported foreign currency transaction losses of approximately $14,000 and $85,000.

Cash and Cash Equivalents

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

The Company’s entire investment portfolio, except for restricted cash, is considered to be available for use in current operations and, accordingly, all such investments are stated at fair value using quoted market prices and classified as current assets, although the stated maturity of individual investments may be one year or more beyond the balance sheet date. The Company did not have any trading securities or restricted investments at December 31, 2014 and June 30, 2015.

Realized gains and losses and declines in value, if any, judged to be other-than-temporary or available-for-sale

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

Fair Value Measurements

Assets and liabilities are measured using quoted prices in active markets and total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are valued by reference to similar assets or liabilities, adjusted for contract restrictions and other terms specific to that asset or liability. For these items, a significant portion of fair value is derived by reference to quoted prices of similar assets or liabilities in active markets. For all remaining assets and liabilities, fair value is derived using a fair value model, such as a discounted cash flow model or Black-Scholes model.

Fair Value of Financial Instruments

The carrying amounts of 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. Based on the borrowing rates currently available to the Company for loans with similar terms, the Company believes that the fair value of long-term debt approximates its carrying value. The carrying amount of the warrant liability and non-controlling interest represent their fair values.

The valuation of assets and liabilities are subject to fair value measurements using a three-tiered approach and fair value measurement is 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).

Revenue Recognition

The Company recognizes revenue from product sales when the following criteria are met: goods are shipped, title and risk of loss has transferred to its customers, persuasive evidence of an arrangement exists and collectability is reasonably assured. Persuasive evidence of an arrangement exists when there is a contractual arrangement in place with the customer. Delivery has occurred when a product is shipped. If persuasive evidence of an arrangement exists and delivery has occurred, the Company determines whether the invoiced amount is fixed or determinable and collectability of the invoiced amount is reasonably assured. The Company assesses whether the invoiced amount is fixed or determinable based on the existing arrangement with the customer, including whether the Company has sufficient history with a customer to reliably estimate the customer’s payment patterns. The Company assesses collectability by evaluating historical cash receipts and individual customer outstanding balances. To the extent all criteria set forth above are not satisfied at the time of shipment, revenue is recognized when cash is received from the customer.

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

Stock Warrants

The Company has issued freestanding warrants to purchase shares of its common stock which are accounted for as a liability because they contain a down-round protection provision which is outside the control of the Company. The warrants are recorded on the Company’s balance sheet at their fair value on the date of issuance and are revalued at each subsequent balance sheet date, with fair value changes recognized as other income or expense in the accompanying

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condensed consolidated statements of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants. The Company estimates the fair value of the liability using option pricing models and assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date, including assumptions for expected volatility, expected life, yield, and risk-free interest rate.

Research and Development Expenses

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

At each financial reporting date, the Company accrues the estimated costs of clinical study activities performed by third party clinical sites with whom the Company has agreements that provide for fees based upon the quantities of subjects enrolled and clinical evaluation visits that occur over the life of the study. The estimates are determined based upon a review of the agreements and data collected by internal and external clinical personnel as to the status of enrollment and subject visits, and are based upon the facts and circumstances known to the Company at each financial reporting date. If the actual performance of activities varies from the assumptions used in the estimates, the accruals are adjusted accordingly. There have been no material adjustments to the Company’s prior period accrued estimates for clinical trial activities through December 31, 2014 and June 30, 2015.

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-based awards made to employees 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 employee 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. The fair values of stock-based awards made to nonemployees are remeasured at each reporting period using the Black-Scholes option-pricing model. Compensation expense for these stock-based awards is determined by applying the remeasured fair values to the shares that have vested during a period.

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. Diluted net loss per share is calculated by dividing the net loss by the sum of the weighted- average number of dilutive common share equivalents outstanding for the period determined using the treasury-stock method. Common stock equivalents are comprised of convertible preferred stock, preferred stock warrants, and stock options outstanding under the Company’s stock option plans. The calculation of diluted net loss per share requires that, to the extent the average fair value of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to net loss per share for the period, adjustments to net loss used in the calculation are required to remove the change in fair value of the warrants for the period. Likewise, adjustments to the denominator are required to reflect the related dilutive shares. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position and preferred stock warrants being anti-dilutive.

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


	As of June 30,
	2014	2015
Convertible preferred stock outstanding1	21,637	21,691
Preferred stock warrants outstanding1	132	78
Common stock warrants outstanding	-	11
Stock options outstanding	4,311	5,339
	26,080	27,119

(1)

2015 amounts are before the automatic net exercise of all outstanding warrants and the automatic conversion of all outstanding convertible preferred stock which occurred immediately prior to the closing of the IPO.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting standards update that raises the threshold for disposals to qualify as discontinued operations and allows companies to have significant continuing involvement with and continuing cash flows from or to the discontinued operation. It also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This guidance was effective for fiscal years beginning after December 15, 2014, which will be the Company’s fiscal year 2015, with early adoption permitted. The Company does not expect the adoption of the guidance to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued guidance codified in ASC 606, Revenue Recognition — Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition, ), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim periods within those periods). The Company is currently evaluating the impact of the provisions of ASC 606 on its financial statements.

In June 2014, the FASB issued an accounting standards update that requires a performance target that affects vesting of a share-based payment award and that could be achieved after the requisite service period to be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. Compensation cost should be recognized over the required service period if it is probable that the performance target will be achieved. This guidance will be effective for fiscal years beginning after December 15, 2015, which will be the Company’s fiscal year 2016, with early adoption permitted. The Company does not expect the adoption of the guidance to have material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU introduces an explicit requirement for management to assess if there is substantial doubt about an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management must assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Disclosures are required if conditions give rise to substantial doubt. ASU 2014-15 is effective for all entities in the first annual period ending after December 15, 2016. The Company is currently assessing the potential effects of this ASU on the consolidated financial statements.

In February 2015, the FASB issued Accounting Standards Update (ASU) 2015-02, Amendments to the Consolidation Analysis, which eliminates the deferral of FAS 167, which allows reporting entities with interests in certain investment funds to follow the consolidation guidance in FIN 46(R), and make other changes to both the variable interest model and the voting model. The ASU is effective for annual periods beginning after December 15, 2015 and

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interim periods therein, with early adoption permitted. During the quarter ended June 30, 2015, the Company early adopted the provisions of the ASU effective January 1, 2015. Based on the asset purchase transaction with DOSE on June 30, 2015 and the Company’s evaluation of the modified relationship with DOSE, management determined that after the transaction DOSE is no longer a VIE requiring consolidation (See Note 9).

Note 3. Balance Sheet Details

Accounts Receivable, Net

Accounts receivable consisted of the following (in thousands):


	December 31,		June 30,
	2014		2015
Accounts receivable	$	5,448	$	6,577
Less allowance for doubtful accounts		(50)		(75)
	$	5,398	$	6,502

Inventory

Inventory consisted of the following (in thousands):


	December 31,		June 30,
	2014		2015
Finished goods	$	962	$	1,077
Work in process		194		153
Raw material		1,102		1,678
	$	2,258	$	2,908

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	December 31,		June 30,
	2014		2015
Accrued contract payments (see Note 8)	$	2,604	$	2,090
Accrued bonuses		1,695		1,907
Accrued vacation benefits		746		940
Accrued clinical study expenses		490		638
Other accrued liabilities		927		1,291
	$	6,462	$	6,866

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.

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The following tables present information about the Company's financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2014 and June 30, 2015, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):


			At December 31, 2014
	December 31, 2014		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	-	$	-	$	-	$	-
Total assets	$	-	$	-	$	-	$	-

Liabilities
Stock warrant liabilities	$	379	$	-	$	-	$	379
Total liabilities	$	379	$	-	$	-	$	379

			At June 30, 2015
	June 30, 2015		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	-	$	-	$	-	$	-
Total assets	$	-	$	-	$	-	$	-

Liabilities
Stock warrant liabilities	$	273	$	-	$	-	$	273
Total liabilities	$	273	$	-	$	-	$	273

The stock warrant liabilities are recorded at fair value using the Black-Scholes option pricing model, which requires inputs such as the expected term of the warrants, volatility and risk-free interest rate. Some of these inputs are subjective and generally require significant analysis and judgment to develop. There were no transfers between levels within the fair value hierarchy during the periods presented.

In conjunction with the February 2015 Amended and Restated Revolving Credit and Term Loan Agreement as more fully described in Note 5, the Company issued warrants to the lenders to purchase 11,298 shares of common stock at an exercise price of $8.85 per share. For the six months ended 2015, the Company recorded other expense of $0.3 million related to changes in the fair value of the warrants. The fair value of the warrants as of the issuance date was estimated to be $53,000 using an option pricing framework, considering multiple exit scenarios and the probability of a down-round financing, with the following assumptions deemed by the Company to be significant unobservable inputs: risk-free interest rate of 1.9%; dividend yield of 0.0%; expected volatility of 70.0%; and an expected life of 7 years. The fair value of the warrants as of June 30, 2015 was estimated to be $273,000 using the Black-Scholes valuation model with the following assumptions deemed by the Company to be significant unobservable inputs: risk-free interest rate of 2.0%; dividend yield of 0.0%; expected volatility of 70.0%; and an expected life of 6.7 years. If the value of the underlying shares were to decrease by 10%, the fair value of the warrants would decrease by approximately the same amount.

In conjunction with loans in 2010 from certain holders of the Company's preferred stock, which were converted into preferred stock in 2011, the Company issued warrants to purchase 156,860 shares of Series D convertible preferred stock at $7.65 per share. Warrants to purchase 29,333 shares were exercised in 2014. Warrants to purchase 127,526 shares were exercised in 2015; 49,410 warrant shares were exercised with cash payment and 78,116 warrant shares were net exercised into 44,914 shares of common stock immediately prior to the IPO at the IPO price per share. For the years ended December 31, 2013 and 2014, the Company recorded other income of approximately $0.3 million and $5,000, respectively, and for the six months ended June 30, 2014 and 2015, the Company recorded other expense of $0.1 million and $0.9 million, respectively, related to changes in the fair value of the warrants. The fair value of the warrants as of December 31, 2014, was estimated to be $0.4 million using the Black-Scholes valuation model with the following assumptions deemed by the Company to be significant unobservable inputs: risk-free interest rate of 1.0%; dividend yield of 0.0%; expected volatility of 48.5%; and an expected life of 2.7 years.

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis (in thousands):

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	Stock Warrant Liability

Balance at December 31, 2014	$	379
Issuance of common stock warrants		53
Change in the fair value of stock warrants		1,161
Issuance of Series D convertible preferred stock in connection with exercises of preferred stock warrants		(1,320)
Balance at June 30, 2015	$	273

Note 5. Long-Term Debt

Bank Loan Facility

In June 2013, the Company entered into a Loan and Security Agreement (the Agreement) with the Company’s primary bank, under which the bank agreed to extend to the Company a revolving loan in the maximum principal amount of $6.0 million. Advances under the loan were limited to the lesser of (i) $6.0 million or (ii) 77% of the sum of cash, cash equivalents and eligible domestic accounts receivable. The entire unpaid principal amount plus any accrued but unpaid interest were to become due and payable in full on June 5, 2015. Obligations under the Agreement bore interest on the outstanding daily balance thereof at the bank’s prime rate plus 0.5% (3.75% at December 31, 2014). Amounts owed are secured by a first priority security interest in all of the Company’s assets, excluding intellectual property. The Agreement is subject to certain reporting and financial covenants which, if not met, could constitute an event of default. As of December 31, 2014, the balance outstanding on the line of credit was $1.9 million. In February 2015, the Agreement was amended and restated, at which time the balance outstanding on the line of credit was $2.1 million.

In February 2015, the Company and its primary bank executed an Amended and Restated Revolving Credit and Term Loan Agreement (the Amended Agreement) which provides for a $5.0 million senior secured term loan, a $5.0 million senior secured draw-to term loan and an $8.0 million senior secured revolving credit facility. Amounts owed under the Amended Agreement are secured by a first priority security interest in all of the Company’s assets, excluding intellectual property. The Agreement is subject to certain reporting and financial covenants which, if not met, could constitute an event of default.

On the closing date, the Company received $5.0 million cash under the senior secured term loan and immediately paid off the $2.1 million balance outstanding on the line of credit. This loan requires quarterly principal payments of $0.4 million over a three-year period beginning May 1, 2016. The senior secured draw-to term loan was available through February 23, 2016 for advances up to an aggregate of $5.0 million, and it required quarterly principal payments equal to 1/12 of the aggregate principal amount over a three-year period beginning May 1, 2016. As of June 30, 2015, the Company had drawn $2.0 million under the draw-to term loan. The senior secured term loan and draw-to term loan mature and were required to be fully paid by February 23, 2019. Advances under the revolving line of credit were limited to the lesser of (i) $8.0 million or (ii) a calculated borrowing base consisting of (a) 80% of eligible accounts receivable plus (b) the lesser of 30% of eligible inventory or $1.5 million. The entire unpaid principal amount plus any accrued but unpaid interest under the revolving line of credit was due and payable in full on February 23, 2017. The Company incurred loan origination fees of $41,000 which was recorded as a loan discount and debt issuance costs of $132,000 which was recorded as a deferred asset. The Company is permitted to make voluntary prepayments of the term and draw-to term loans without prepayment penalty.

Outstanding balances under the senior secured term loan and senior secured draw-to term loan bore interest on the outstanding daily balance at an annual percentage rate equal to the bank’s prime rate plus 2% (5.25% at June 30, 2015). At the Company’s option all or a portion of the amounts owed under any of the senior secured term loan and draw-to term loan may have been converted into Eurodollar-based advances at an annual percentage rate equal to LIBOR plus 3%. Outstanding balances under the revolving credit facility bore interest on the outstanding daily balance thereof at an annual percentage rate equal to the bank’s prime rate plus 1.75%. At the Company’s option all or a portion of the amounts owed under the revolving credit facility may have been converted into Eurodollar-based advances at an annual percentage rate equal to LIBOR plus 2.75%.

In connection with the execution of the Amended Agreement, the Company issued warrants to purchase an aggregate of 11,298 shares of common stock at an exercise price of $8.85 per share (See Note 4).

The Company accounted for the debt discount and deferred asset utilizing the effective interest method.

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Amortization of debt discount and the deferred asset to interest expense amounted to $11,000 and $15,000 for the three months and six months ended June 30, 2015, respectively.

On July 31, 2015, the Company paid off and fully retired the agreement with its primary bank with payment of $7.0 million in principal plus all interest and fees payable through the payoff date. Accordingly, this facility is no longer outstanding and available to the Company.

The Company’s debt balances, including current portions, were as follows (in thousands):


	December 31,		June 30,
	2014		2015
Senior secured term loan	$	-	$	5,000
Senior secured draw-to term loan		-		2,000
Subordinated notes payable		17,500		13,996
Unamortized debt discount		-		(64)
Total debt		17,500		20,932
Less current portion of long-term debt		(8,532)		(9,294)
Total long-term debt	$	8,968	$	11,638

Subordinated Notes Payable in Connection with GMP Vision Solutions

In January 2007, the Company entered into an agreement (the Original Agreement) with GMP Vision Solutions, Inc. (GMP) to acquire certain in-process research and development. In connection with the agreement, the Company was obligated to make periodic royalty payments equal to a single-digit percentage of revenues received for royalty-bearing products and periodic royalty payments at a higher royalty rate applied to all amounts received in connection with the grant of licenses or sublicenses of the related intellectual property. There was no related royalty expense recorded in cost of sales in the periods ended June 30, 2014 and 2015.

In December 2012, the Company entered into an agreement with GMP in which it paid GMP $1.0 million for a 90-day option to buy out all remaining royalties payable to GMP. In April 2013, the option expired unexercised, and as provided in the agreement, the $1.0 million payment satisfied the obligation to pay the first $1.0 million in royalties earned beginning on January 1, 2013. The $1.0 million payment was recorded in cost of sales in the year ended December 31, 2012.

In November 2013, the Company entered into an amended agreement with GMP in which remaining royalties payable to GMP (the Buyout Agreement) were canceled in exchange for the issuance of $17.5 million in promissory notes payable to GMP and a party related to GMP (together, the GMP Note Parties). The GMP notes are collateralized by all of the Company’s assets, excluding intellectual property. However, in connection with the Buyout Agreement, the GMP Note Parties entered into agreements with the Company’s primary bank pursuant to which any collateralized interests, liens, rights of payment or ability to initiate any enforcement actions in the event of an event of default are subordinate to the rights of the Company’s primary bank under the Revolving Line of Credit.

The Buyout Agreement also calls for a payment of up to $2.0 million in the event of a sale of the Company meeting certain criteria. The promissory notes carry an interest rate of 5% per annum and required monthly interest only payments from November 30, 2013 through December 31, 2014 of $72,900, followed by 24 equal monthly principal and interest payments of $767,700, which began on January 31, 2015, and end on December 31, 2016.

The Company concluded that the $17.5 million transaction represented the purchase of an intangible asset. The Company estimated a useful life of five years over which the intangible asset will be amortized to cost of sales in the statements of operations, which amortization period was determined after consideration of the projected outgoing royalty payment stream had the agreement not occurred, and the remaining life of the patents obtained in the Original Agreement. After determining that the pattern of future cash flows associated with this intangible asset could not be reliably estimated with a high level of precision, the Company concluded that the intangible asset will be amortized on a straight-line basis over the useful life.

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The following reflects the composition of intangible assets, net (in thousands):


	December 31,		June 30,
	2014		2015
Gross amount	$	17,500	$	17,500
Accumulated amortization		(4,025)		(5,775)
Total	$	13,475	$	11,725
Weighted average amortization period (in months)		60		60

The Company recorded related amortization expense in cost of sales of $0.9 million, $0.9 million in the three months ended June 30, 2014 and 2015, respectively, and $1.8 million and $1.8 million in the six months ended June 30, 2014 and 2015, respectively. Estimated amortization expense will be $3.5 million in each of 2015, 2016 and 2017 and $3.0 million in 2018.

Note 6. Convertible Preferred Stock

Immediately prior to the completion of the IPO, and after all unexercised warrants to purchase shares of Series D convertible preferred stock were net exercised at the IPO price per share, the Company had outstanding 21,736,367 shares of convertible preferred stock which automatically converted into 21,736,367 shares of the Company’s common stock. The related carrying value of $159.1 million was reclassified to additional paid-in capital in the periods ending June 30, 2015, and no shares of convertible preferred stock were outstanding as of June 30, 2015.

The following reflects the composition of convertible preferred stock as of December 31, 2014 (in thousands, except per share amounts):


Series A convertible preferred stock, $0.001 par value; 3,000 shares authorized and 1,200 shares issued and outstanding at December 31, 2014; liquidation preference of $3,000 at December 31, 2014	$	3,000
Series B convertible preferred stock, $0.001 par value; 5,805 shares authorized and 2,322 shares issued and outstanding at December 31 2014; liquidation preference of $12,538 at December 31, 2014		12,547
Series C convertible preferred stock, $0.001 par value; 14,750 shares authorized and 5,819 shares issued and outstanding at December 31, 2014; liquidation preference of $40,731 at December 31, 2014		40,836
Series D convertible preferred stock, $0.001 par value; 13,844 shares authorized and 5,410 shares issued and outstanding at December 31, 2014; liquidation preference of $41,387 at December 31, 2014		41,496
Series E convertible preferred stock, $0.001 par value; 8,754 shares authorized and 3,501 shares issued and outstanding at December 31, 2014; liquidation preference of $29,500 at December 31, 2014		29,500
Series F convertible preferred stock, $0.001 par value; 8,474 shares authorized and 3,390 shares issued and outstanding at December 31, 2014; liquidation preference of $30,000 at December 31, 2014		30,000
Total	$	157,379

Note 7. Stock-Based Compensation

The Company has four stock-based compensation plans (the Stock Plans)—the 2001 Stock Option Plan (the 2001 Stock Plan), the 2011 Stock Plan, the 2015 Omnibus Incentive Compensation Plan (the 2015 Stock Plan) and the 2015 Employee Stock Purchase Plan (the ESPP). The purpose of these plans is to provide incentives to employees, directors and nonemployee consultants. The Company will no longer grant 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. The 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. The Company reserved an aggregate of 4.5 million shares of common stock for issuance under the 2015 Stock Plan, and 450,000 shares of common stock for issuance under the ESPP. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

Stock options granted pursuant to the 2001 Stock Plan and 2011 Stock Plan generally permit optionees to elect to exercise unvested options in exchange for restricted common stock. All unvested shares issued upon the early exercise of stock options, so long as they remain unvested, are subject to the Company's right of repurchase at the optionee's original exercise price for a 90-day period beginning on the date that an optionee's service with the Company voluntarily or involuntarily terminates. Consistent with authoritative guidance, early exercises are not considered exercises for accounting purposes. Cash received for the exercise of unvested options is recorded as a liability, which liability is released to equity at each reporting date as the shares vest. During the years ended December 31, 2013 and 2014 and the

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six months ended June 30, 2014 and 2015, employees exercised options for 0, 55,908, 55,908 and 337 unvested shares, respectively. As of December 31, 2013 and 2014 and June 30, 2015, 4,001, 38,678 and 27,551 shares, respectively, remained subject to a repurchase right. As of December 31, 2013 and 2014 and June 30, 2015, the related liability, which is included in other accrued liabilities in the accompanying consolidated balance sheets, was approximately $15,000, $0.15 million and $0.11 million, respectively.

The following table summarizes stock option activity under the 2001 Stock Plan, 2011 Stock Plan and 2015 Stock Plan (in thousands):



		Number of
		Shares
		Underlying
		Options
Outstanding at December 31, 2014		5,657
Granted		585
Exercised		(870)
Canceled/forfeited/expired		(33)
Outstanding at June 30, 2015		5,339

Exercisable at June 30, 2015		2,857

The following table summarizes the allocation of stock-based compensation in the accompanying consolidated statements of operations (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2015		2014		2015
Cost of sales	$	9	$	144	$	15	$	158
Selling, general & administrative		263		3,199		529		3,477
Research and development		92		1,063		194		1,144
Total	$	364	$	4,406	$	738	$	4,779

Stock-Based Awards to Employees

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2015		2014		2015
Risk-free interest rate	2.03	%	1.82	%	1.98	%	1.78	%
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected volatility	56.6	%	58.7	%	56.6	%	58.2	%
Expected term (in years)	6.08		6.09		6.08		6.08

In July 2014, the Company granted stock options to purchase an aggregate of 1.2 million shares of common stock, which options contain a performance condition such that they would only become exercisable in the event that the Company’s common stock was listed on a national securities exchange within one year from the date of grant. In accordance with authoritative guidance, the Company did not record any compensation expense associated with the grants until the performance condition was satisfied in the three month period ended June 30, 2015. Upon the completion of the IPO on June 30, 2015, the Company immediately recognized cumulative compensation cost of $3.8 million for the grants as if the method had been applied since the date of grant using the required graded accelerated attribution method, and the Company will record compensation expense over the remainder of the four-year vesting period using this method. Stock options granted subsequent to July 2014 do not contain a performance condition.

Note 8. Commitments and Contingencies

The Company, from time to time, is involved in legal proceedings or regulatory encounters or other matters in the ordinary course of business that could result in unasserted or asserted claims or litigation. At December 31, 2014 and June 30, 2015, there were no matters for which the negative outcome was considered probable or estimable, and, as a

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result, no amounts have been accrued at either date.

Operating leases

The Company leases office, research and production facilities, and certain office equipment under operating lease agreements that expire at various dates through 2017.

The facilities lease for 20,800 square feet expires on March 31, 2016, and contains an option for the Company to extend the lease for an additional two years at market rates. On January 1, 2014, the Company commenced a year-to-year lease of 750 square feet of office space in Karlsruhe, Germany.

In June 2015, the Company entered into a sublease for an approximately 37,700 square foot facility located in San Clemente, California effective September 1, 2015, as well as a five-year lease for these premises that takes effect January 1, 2017 upon expiration of the sublease.

The Company recorded deferred rent of $57,000 and $46,000 as of December 31, 2014 and June 30, 2015, respectively, in conjunction with its facilities lease agreement. Rent expense was $0.1 million for each of the three months ended June 30, 2014 and 2015 and $0.2 for the six months ended June 30, 2014 and 2015.

Future minimum payments under the aforementioned noncancelable operating leases for each of the five succeeding years are as follows (in thousands):


2015	$	464
2016		455
2017		422
2018		521
2019		539
Thereafter		1,118
	$	3,519

Purchase Commitments

The Company is a party to various purchase arrangements related to components used in production and research and development activities. As of December 31, 2014 and June 30, 2015, the Company had noncancelable, firm purchase commitments with certain vendors totaling approximately $0.8 million and $1.7 million, respectively, due within one year. There are no material purchase commitments due beyond one year.

Regents of the University of California

On December 30, 2014, the Company executed an agreement (the Agreement) with the Regents of the University of California (the Regents) to correct inventorship in connection with a group of the Company’s U.S. patents (the Patent Rights) and to obtain from the Regents 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 Agreement, Glaukos agreed to pay to the Regents the sum of $2.7 million via five payments during the course of 2015, and, beginning with sales on or after January 1, 2015, to pay 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 $500,000, which obligation shall end on the date that the last of the Patent Rights expires, which is currently expected to be in 2022. The $2.7 million obligation, net of imputed interest of $0.1 million, was accrued as of December 31, 2014 and charged to cost of sales in the year ended December 31, 2014. Under the terms of the agreement, the payments comprising the $2.7 million obligation are due within 60 days of the IPO, and therefore the Company must pay the remaining balance due of $1,825,000 on or before August 29, 2015.

Note 9. Variable Interest Entity

In October 2009, the Company formed a wholly-owned subsidiary, DOSE Medical Corporation and in April 2010, the Company distributed all of its shares of common stock of DOSE via a stock dividend to the Company’s stockholders of record as of the close of business on March 31, 2010. Since its formation, the Company had provided DOSE with a small number of leased employees, management services and space, all of which had been charged to DOSE and pursuant to written agreements between the parties. Additionally, the Company had provided DOSE the cash required to fund its operations that, together with accrued interest and charges for the aforementioned services, the Company had recorded in an intercompany receivable account. Up until the aforementioned transaction, the Company had accounted for DOSE as a variable interest entity in which it had a variable interest in all reporting periods since the formation of

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DOSE. Accordingly, the Company’s consolidated financial statements include the accounts of DOSE, with all intercompany balances eliminated and with the deficit balance of DOSE's net assets reflected as noncontrolling interest, up to but excluding June 30, 2015.

On June 30, 2015, the Company completed a transaction initially executed in July 2014, the closing of which was contingent upon the successful completion of an IPO. Pursuant to the terms of the asset purchase agreement, the Company acquired from DOSE certain assets, including the iDose product line, in exchange for payment of $15 million in cash and the elimination of the $10.9 million intercompany receivable owed by DOSE to the Company as of the transaction date. The Company determined the valuation for DOSE based in part on the results of a valuation conducted by an independent third-party, and both the Company’s stockholders and the stockholders of DOSE approved the terms of the asset purchase agreement. In addition to the asset purchase agreement, the parties agreed to an amended and restated patent license agreement and an amended and restated transition services agreement that provides for limited support from the Company to DOSE for a period of up to three years. Either party can terminate the transition services agreement upon adequate written notice. Two members of the Company’s board of directors currently serve on the board of directors of DOSE.

The Company has reconsidered its relationship with DOSE as a result of the transaction and has determined that the Company is no longer considered to be the primary beneficiary with the power to direct operations and the right to receive benefits/absorb losses of DOSE; therefore, upon the close of the transaction, the Company derecognized DOSE and will no longer consider it a consolidated entity in its financial statements. Accordingly, in the three months ended June 30, 2015, the Company recorded a charge to other expense in the amount of $25.7 million to reflect the deconsolidation of DOSE’ non-glaucoma related assets and noncontrolling interest.

The carrying amount and classification of DOSE’s assets and liabilities at December 31, 2014 that are included in the accompanying consolidated balance sheets are as follows (in thousands):


Cash and cash equivalents	$	9
Prepaid expenses		16
Property and equipment, net		255
Total assets of DOSE	$	280

Accounts payable and accrued liabilities	$	160
Liability to Glaukos Corporation		9,720
Total liabilities of DOSE	$	9,880

Consolidation of DOSE’s results of operations included the following (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2015		2014		2015
Selling, general and administrative	$	61	$	52	$	120	$	105
Research and development		327		486		618		890
Interest expense		38		44		75		85
Income tax provision		-		-		1		-
Net loss of DOSE	$	426	$	582	$	814	$	1,080

Consolidation of DOSE’s cash flows included the following (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2015		2014		2015
Cash used in operating activities	$	(201)	$	(838)	$	(428)	$	(1,134)
Cash used in investing activities		-		(33)		-		(33)
Cash provided by financing activities		200		862		428		1,158
Decrease in cash and cash equivalents of DOSE	$	(1)	$	(9)	$	-	$	(9)

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Note 10. Business Segment Information

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


	Three months ended				Six months ended
	June 30,				June 30,
Geographic Net Sales Information (in thousands)	2014		2015		2014		2015
United States	$	10,504	$	16,655	$	18,383	$	30,271
International		595		1,099		965		2,149
Total net sales	$	11,099	$	17,754	$	19,348	$	32,420

Note 11. Subsequent Events

On July 31, 2015, the Company paid off and fully retired the Amended and Restated Revolving Credit and Term Loan Agreement with its primary bank with payment of $7.0 million in principal plus all interest and fees payable through the payoff date.

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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, 2014 included in our Prospectus filed with the U.S. Securities and Exchange Commission on June 25, 2015.

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. In addition, you should refer to the "Risk Factors" section of this report for a discussion of other 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 company focused on the development and commercialization of breakthrough products and procedures designed to transform the treatment of glaucoma, one of the world’s leading causes of blindness. We have pioneered Micro-Invasive Glaucoma Surgery, or MIGS, to revolutionize the traditional glaucoma treatment and management paradigm. We launched the iStent, our first MIGS device, in the United States in July 2012 and we are leveraging our platform technology to build a comprehensive and proprietary portfolio of micro-scale injectable therapies designed to address the complete range of glaucoma disease states and progression.

The iStent is the first commercially available MIGS treatment solution. FDA-approved for insertion in combination with cataract surgery, the iStent has been shown to lower intraocular pressure in adult patients with mild-to-moderate open-angle glaucoma, which represents the majority of glaucoma cases. The iStent procedure is currently reimbursed by Medicare and a majority of commercial payors.

We are building a broad portfolio of micro-scale injectable therapies designed to address the complete range of glaucoma disease states and progression, including three innovative pipeline products: the iStent Inject, the iStent Supra and iDose. The iStent Inject includes two stents pre-loaded in an auto-injection inserter. We are developing two versions of this product: the first is currently being studied for lowering intraocular pressure in conjunction with cataract surgery in a U.S. investigational device exemption, or IDE, pivotal trial; the second is currently being studied in an initial U.S. IDE study as a standalone treatment for lowering intraocular pressure. This second version is also capable of making its own self-sealing corneal penetration, potentially offering patient treatment in a minor surgical suite or an in-office setting. The iStent Supra is designed to access an alternative drainage space within the eye where we estimate 20% of aqueous humor outflow occurs, and is now in a U.S. pivotal IDE trial. iDose is an implant that is designed to provide a sustained release of a prostaglandin drug to lower intraocular pressure in glaucoma patients. To validate the safety and efficacy of our iStent products, we are currently conducting 19 prospective clinical trials, including two Phase IV post-approval studies.

We have never been profitable and have incurred operating losses in each year since our inception. For the six months ended June 30, 2015, our net sales were $32.4 million compared to $19.3 million in the same period in 2014, and our net loss increased to $34.0 million from $6.8 million in the same period. As of June 30, 2015, we had an accumulated deficit of $192.3 million.

We have made and expect to continue to make significant investments in our sales force and marketing programs.

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Costs for FDA-approved IDE studies in our industry are expensive as are the costs to develop new products, and we expect to incur a significant increase in administrative costs as we begin operating as a public company. While the gross profits from our growing net sales will help offset some of these costs, we expect to invest significantly more resources into our business using proceeds from the initial public offering, or IPO, that we completed on June 30, 2015. Accordingly, we expect to continue to experience net losses for the foreseeable future.

On June 30, 2015, we completed our initial public offering (IPO), selling 6.9 million newly issued shares of common stock at a price of $18.00 per shares, pursuant to a Registration Statement on Form S-1 that was declared effective on June 24, 2015. The IPO generated net proceeds of $113.7 million, after deducting underwriting commissions of $8.7 million and other related expenses of $1.8 million. The underwriting commissions and offering costs were reflected as a reduction to the IPO proceeds received in additional paid-in capital. At June 30, 2015, we had cash and cash equivalents of $104.1 million. We may seek to obtain additional financing in the future through the issuance of our common stock, through other equity or debt financings, through collaborations or partnerships with other companies or through non-dilutive financing. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could materially harm our business, results of operations and future business prospects, including our ability to continue as a going concern. We believe that our existing cash and cash equivalents, including the net proceeds from our IPO, will be sufficient to fund our operations for at least the next two years.

Factors Affecting Future Results

In January 2007 we entered into an agreement with GMP Vision Solutions, or GMP, to acquire certain in-process research and development and therein agreed to make periodic royalty payments. In December 2012, we paid GMP $1.0 million for a 90-day option to buy out all of the remaining royalties payable to GMP under the January 2007 agreement. We did not exercise the option, which expired in April 2013.

In November 2013, we amended the agreement and entered into a royalty buyout agreement with GMP pursuant to which we bought out all of the remaining royalties payable to GMP in exchange for the issuance of an aggregate of $17.5 million in secured promissory notes payable to GMP and a party related to GMP, which notes we refer to as our subordinated debt. In connection with this buyout agreement, we recognized an intangible asset valued at $17.5 million, which is being amortized to cost of sales on a straight-line basis by year as follows: $0.5 million in 2013, $3.5 million in each of 2014, 2015, 2016 and 2017 and $3.0 million in 2018. The subordinated debt required monthly interest only payments through December 31, 2014, followed by 24 equal monthly principal and interest payments of $0.8 million, which we began paying on January 31, 2015 and will pay through December 31, 2016. Accordingly, our cost of sales will be impacted through 2018 as a result of the amortization and our cash flows will be adversely affected by the debt service costs, primarily in 2015 and 2016 when principal payments are required in addition to interest. The terms of the subordinated notes are more fully described below under ‘‘—Liquidity and Capital Resources— Indebtedness.’’

In December 2014, we entered into an agreement with the Regents of the University of California to correct inventorship in connection with a group of our U.S. patent rights and to obtain from the Regents a covenant that it did not and would not claim any right or title to such patent rights and will not challenge or assist any others in challenging such patent rights. In connection with the agreement, we agreed to pay to the Regents the sum of $2.7 million in five payments during 2015 as follows: $500,000 by January 30, 2015; $125,000 by March 31, 2015; $250,000 by June 30, 2015; $250,000 by September 30, 2015; and $1,575,000 by December 31, 2015. Under the terms of the agreement, the payments are due within 60 days of our IPO, and therefore we must pay the balance due of $1,825,000 on or before August 29, 2015. In addition, beginning with sales on or after January 1, 2015, we agreed to pay the Regents a payment equal to a low-single digit percentage of worldwide net sales of certain current and future products, including our iStent products, which obligation terminates on the date that the last of the patent rights expires, which is currently expected to be in 2022. We accrued the $2.7 million obligation, net of imputed interest of $0.1 million, as of December 31, 2014 and charged it to cost of sales in the year ended December 31, 2014.

In February 2015, we and our primary bank executed an Amended and Restated Revolving Credit and Term Loan Agreement which provides for a $5.0 million senior secured term loan, a $5.0 million senior secured draw-to term loan and an $8.0 million senior secured revolving credit facility. The senior secured term loan and draw-to term loan mature and are required to be fully paid by February 23, 2019. On the closing date, we received $5.0 million cash under the senior secured term loan. The entire unpaid principal amount plus any accrued but unpaid interest under the revolving line of credit is due and payable in full on February 23, 2017. As of June 30, 2015 we had drawn $2.0 million under the draw-to term loan. On July 31, 2015, we paid off and fully retired the Amended and Restated Revolving Credit and Term Loan Agreement with our primary bank with payment of $7.0 million in principal plus all interest and fees payable

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through the payoff date. The agreements with our primary bank are more fully described under ‘‘—Liquidity and Capital Resources—Indebtedness.’’

Basis of Presentation

Net Sales

We operate in one reportable segment and substantially all of our net sales are derived from sales of our iStent products, net of customer returns and allowances. We recognize net sales when goods are shipped, title and risk of loss transfer to our customers, persuasive evidence of an arrangement exists and collectability is reasonably assured.

We commenced commercial sales of the iStent in the United States in the third quarter of 2012 following FDA approval. Prior to FDA approval, our net sales were derived from sales of the iStent in Europe and Canada. In 2014 we commenced a controlled commercial launch of the iStent Inject in Germany. We sell our products through a direct sales organization in the United States, and outside the United States we sell our products primarily through independent distributors, with the exception of a direct sales subsidiary in Germany. The primary end-user customers for our products are hospitals and surgery centers.

We anticipate our net sales will increase as we expand our sales and marketing infrastructure and continue to increase awareness of our products by expanding our sales base and increasing our marketing efforts. We also expect that our net sales within a fiscal year may be impacted seasonally, as elective surgery is often lower during summer months because of vacations and in winter months in certain parts of the world because of weather conditions. Accordingly, we expect that sequential growth of sales from the third quarter to the fourth quarter may be somewhat higher than for other sequential quarters, and we also expect that net sales in a first quarter may sometimes be less than the immediately preceding quarter.

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 headquarters in Laguna Hills, California using components manufactured by third parties. Due to the relatively low production volumes of our iStent products, compared to our potential capacity for those products, a significant portion of our per unit costs is comprised of manufacturing overhead expenses. These expenses include quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management.

Beginning in late 2013, cost of sales has included amortization of the $17.5 million intangible asset we recognized in connection with our royalty buyout agreement with GMP in November 2013. The amortization expense was $1.8 million and $1.8 million in the six months ended June 30, 2014 and 2015, respectively, and is estimated to be $3.5 million in each of 2015, 2016 and 2017, and $3.0 million in 2018. Beginning in 2015, cost of sales will include 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 $500,000, which amount will be payable to the Regents in connection with our December 2014 agreement. This obligation will expire upon the expiration of the last to expire of the patent rights that are the subject of the December 2014 agreement.

Additionally, as a medical device manufacturer, we are required to pay the 2.3% federal medical device excise tax on U.S. sales of medical devices manufactured by us. The medical device excise tax is included in our cost of sales.

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 intangible asset amortization, expense related to our agreement with the Regents, and medical device excise tax.

Selling, General and Administrative

Our selling, general and administrative, or 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, business development and administrative functions. Other significant SG&A expenses include marketing programs, advertising, conferences and congresses, and travel expenses, as well as the costs associated with obtaining and maintaining our patent portfolio, professional fees for accounting, auditing, consulting and legal services, travel and allocated overhead expenses.

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We expect SG&A expenses to continue to grow as we increase our sales, marketing, clinical education and general administration infrastructure in the United States. We also expect other nonemployee-related costs, including sales and marketing program activities for new products, outside services and accounting and general legal costs to increase as our overall operations grow. The timing of these increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products, as well as on the timing of any new product launches. In addition, we have begun to incur increased SG&A expenses resulting from becoming a public company, which may further increase when we are no longer able to rely on certain ‘‘emerging growth company’’ exemptions we are afforded under the Jumpstart Our Business Startups Act, or the JOBS Act.


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

26051 Merit Circle, Suite 103 Laguna Hills, California	92653
(Address of registrant’s principal executive offices)	(Zip Code)


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