gkos_Current folio

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 30, 2016

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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.)

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

(949) 367-9600

(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. (Check one):


☐ Large accelerated filer	☐ Accelerated filer	☒ Non-accelerated filer (Do not check if a smaller reporting company)	☐ Smaller reporting company

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 July 31, 2016 there were 33,024,340 shares of the registrant’s Common Stock outstanding.

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended June 30, 2016

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 Income (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	30
Item 4.	Controls and Procedures	30

Part II: Other Information		31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64

Signatures		65

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.

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)


	June 30,		December 31,
	2016		2015
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	12,339	$	21,572
Short-term investments		81,588		69,552
Accounts receivable, net		11,617		7,549
Inventory		5,511		4,097
Prepaid expenses and other current assets		1,430		1,290
Restricted cash		80		80
Total current assets		112,565		104,140
Property and equipment, net		2,985		2,154
Intangible assets, net		8,392		10,218
Deposits and other assets		156		149
Total assets	$	124,098	$	116,661

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	4,614	$	3,626
Accrued liabilities		8,808		7,793
Long-term debt, current portion		5,286		8,931
Deferred rent		21		12
Total current liabilities		18,729		20,362
Long-term debt, less current portion		-		765
Stock warrant liability		-		105
Other liabilities		231		238
Total liabilities		18,960		21,470

Commitments and contingencies (see Note 7)

Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized at June 30, 2016 and December 31, 2015; no shares issued and outstanding at June 30, 2016 and December 31, 2015		-		-
Common stock, $0.001 par value; 150,000 shares authorized at June 30, 2016 and December 31, 2015; 32,947 and 32,209 shares issued and 32,919 and 32,181 shares outstanding at June 30, 2016 and December 31, 2015, respectively		33		32
Additional paid-in capital		298,678		291,853
Accumulated other comprehensive (loss) income		(57)		51
Accumulated deficit		(193,384)		(196,613)
		105,270		95,323
Less treasury stock (28 shares as of June 30, 2016 and December 31, 2015)		(132)		(132)
Total stockholders' equity		105,138		95,191
Total liabilities and stockholders' equity	$	124,098	$	116,661

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Net sales	$	28,556	$	17,754	$	51,648	$	32,420
Cost of sales		4,359		3,281		7,480		6,075
Gross profit		24,197		14,473		44,168		26,345
Operating expenses:
Selling, general and administrative		15,120		12,516		27,408		20,332
Research and development		6,955		7,339		14,017		12,579
Total operating expenses		22,075		19,855		41,425		32,911
Income (loss) from operations		2,122		(5,382)		2,743		(6,566)
Other income (expense), net
Interest and other income		286		-		621		-
Loss on deconsolidation of DOSE		-		(25,685)		-		(25,685)
Interest and other expense, net		(76)		(293)		(178)		(562)
Change in fair value of stock warrant liability		-		(1,152)		43		(1,161)
Total other income (expense), net		210		(27,130)		486		(27,408)
Income (loss) before taxes		2,332		(32,512)		3,229		(33,974)
Provision for income taxes		-		-		-		-
Net income (loss)		2,332		(32,512)		3,229		(33,974)
Net loss attributable to noncontrolling interest		-		(584)		-		(1,080)
Net income (loss) attributable to Glaukos Corporation	$	2,332	$	(31,928)	$	3,229	$	(32,894)
Basic net income (loss) per share attributable to Glaukos Corporation stockholders	$	0.07	$	(10.96)	$	0.10	$	(12.35)
Diluted net income (loss) per share attributable to Glaukos Corporation stockholders	$	0.06	$	(10.96)	$	0.09	$	(12.35)
Weighted average shares used to compute basic net income (loss) per share attributable to Glaukos Corporation stockholders		32,652		2,912		32,477		2,663
Weighted average shares used to compute diluted net income (loss) per share attributable to Glaukos Corporation stockholders		36,182		2,912		35,975		2,663

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Net income (loss)	$	2,332	$	(32,512)	$	3,229	$	(33,974)
Other comprehensive (loss) gain:
Unrealized gain on short-term investments, net of tax		58		-		326		-
Foreign currency translation adjustments		(149)		39		(434)		39
Other comprehensive (loss) gain		(91)		39		(108)		39
Total comprehensive income (loss)		2,241		(32,473)		3,121		(33,935)
Comprehensive loss attributable to noncontrolling interest		-		(584)		-		(1,080)
Comprehensive income (loss) attributable to Glaukos Corporation	$	2,241	$	(31,889)	$	3,121	$	(32,855)

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Six Months Ended June 30,
	2016		2015
Operating Activities
Net income (loss)	$	3,229	$	(33,974)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		2,255		2,143
Stock-based compensation		3,465		4,779
Unrealized gains on intercompany loans		(229)		-
Loss on deconsolidation of DOSE		-		25,685
Change in fair value of stock warrant liability		(43)		1,161
Amortization of debt discount and deferred financing costs		-		15
Amortization of premium on short-term investments		161		-
Deferred rent		2		(11)
Changes in operating assets and liabilities:
Accounts receivable, net		(4,051)		(1,112)
Inventory		(1,579)		(657)
Prepaid expenses and other current assets		(131)		(167)
Accounts payable and accrued liabilities		2,028		1,187
Other assets		(5)		(110)
Net cash provided by (used in) operating activities		5,102		(1,061)
Investing activities
Proceeds from sales and maturities of short-term investments		23,954		-
Purchases of short-term investments		(35,825)		-
Purchase of iDOSE product line and related assets from DOSE Medical		-		(15,000)
Purchases of property and equipment		(1,219)		(319)
Net cash used in investing activities		(13,090)		(15,319)
Financing activities
Proceeds from public offering, net of issuance costs		-		114,932
Proceeds from senior secured term and draw-to term loans		-		6,852
Payments of line of credit		-		(1,850)
Payments of secured notes		(4,410)		(3,503)
Proceeds from exercise of stock options		2,414		1,364
Share purchases under Employee Stock Purchase Plan		793		-
Proceeds from exercise of stock warrants		50		378
Net cash (used in) provided by financing activities		(1,153)		118,173
Effect of exchange rate changes on cash and cash equivalents		(92)		47
Net (decrease) increase in cash and cash equivalents		(9,233)		101,840
Cash and cash equivalents at beginning of period		21,572		2,304
Cash and cash equivalents at end of period	$	12,339	$	104,144
Supplemental disclosures of cash flow information
Interest paid	$	197	$	499
Taxes paid	$	63	$	11
Supplemental schedule of noncash investing and financing activities
Reduction of liability upon vesting of stock options previously exercised for unvested stock	$	42	$	44

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 a developer, manufacturer and marketer of medical devices for the treatment of glaucoma. The accompanying condensed consolidated financial statements include the accounts of Glaukos and its wholly-owned subsidiaries and, through June 30, 2015, affiliated entity DOSE Medical Corporation (DOSE) (see Note 8). All significant intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.

Initial public offering

On June 30, 2015, the Company completed its 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 approximately $113.6 million, after deducting underwriting discounts and commissions of approximately $8.7 million and other related expenses of approximately $1.9 million. The underwriting discounts and commissions and offering costs were recorded as a reduction to the IPO proceeds included 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 approximately 21.7 million shares of common stock. Following the completion 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 issuance under 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 to DOSE for a period of up to three years (see Note 8).

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 at December 31, 2015 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, 2015, which are contained in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on March 15, 2016. The results for the period ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ended December 31, 2016 or for any other interim period.

Note 2. Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the six months ended June 30, 2016, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 15, 2016.

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 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 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 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, inventory reserves 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.

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. 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 (loss) income in stockholders’ equity. For the three months ended June 30, 2016 and 2015 and the six months ended June 30, 2016 and 2015, the Company reported gains (losses) from foreign currency translation adjustments of approximately $(149,000), $39,000, $(434,000) and $39,000, respectively. Realized gains and losses resulting from foreign currency transactions are included in selling, general and administrative expense in the condensed consolidated statements of operations. For the three months ended June 30, 2016 and 2015 and the six months ended June 30, 2016 and 2015, the Company reported foreign currency transaction gains (losses) of $(38,000), $(32,000), $23,000 and $(85,000).

Cash, cash equivalents and short-term investments

The Company invests its excess cash in marketable securities, including money market funds, asset-backed securities, bank certificates of deposit, corporate bonds, and corporate commercial paper, U.S. government bonds and U.S. government agency bonds. For financial reporting purposes, liquid investment instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents are recorded at face value or cost, which approximates fair market value. 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 (loss) income within stockholders’ equity.

The Company’s entire investment portfolio, except for restricted cash, is considered to be available for use in current operations and, accordingly, all such investments are stated at fair value using quoted market prices and classified as current assets, although the stated maturity of individual investments may be one year or more beyond the balance sheet date. The Company did not have any trading securities or restricted investments at June 30, 2016 and December 31, 2015.

Realized gains and losses and declines in value, if any, judged to be other-than-temporary on available-for-sale 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. The Company has a credit card facility with its primary operating bank which is collateralized by certificates of deposit maintained at the bank.

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 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. Based on the borrowing rates for loans 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 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).

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.

Research and development expenses

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

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 providing for fees based upon the quantities of subjects enrolled and clinical evaluation visits that occur over the life of the study. The cost estimates are determined based upon a review of the agreements and data collected by internal and external clinical personnel as to the status of enrollment and subject visits, and are based upon the facts and circumstances known to the Company at each financial

reporting date. If the actual performance of activities varies from the assumptions used in the cost estimates, the accruals are adjusted accordingly. There have been no material adjustments to the Company’s prior period accrued estimates for clinical trial activities through June 30, 2016.

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 income (loss) per share

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. Diluted net income (loss) per share is calculated by dividing the net income 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 stock options and warrants outstanding. Diluted 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, as their inclusion would be anti-dilutive.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Numerator:
Net income (loss) attributable to Glaukos Corporation - basic and diluted	$	2,332	$	(31,928)	$	3,229	$	(32,894)
Denominator:
Weighted average number of common shares outstanding - basic		32,652		2,912		32,477		2,663
Common stock equivalents from outstanding common stock options		3,510		-		3,485		-
Common stock equivalents from outstanding common stock warrants		-		-		1		-
Common stock equivalents for ESPP		20		-		12		-
Weighted average number of common shares outstanding - diluted		36,182		2,912		35,975		2,663

Basic net income (loss) per share attributable to Glaukos Corporation common stockholders	$	0.07	$	(10.96)	$	0.10	$	(12.35)

Diluted net income (loss) per share attributable to Glaukos Corporation common stockholders	$	0.06	$	(10.96)	$	0.09	$	(12.35)

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):


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2016	2015	2016	2015
Convertible preferred stock outstanding	-	21,691	-	21,691
Preferred stock warrants outstanding	-	78	-	78
Common stock warrants outstanding	-	11	-	11
Stock options outstanding	2,151	5,339	2,157	5,339
	2,151	27,119	2,157	27,119

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance codified in Accounting Standard Codification 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 August 2015, the FASB issued ASU 2015-14, which deferred the effective date to 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 consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance became effective for the Company on January 1, 2016 and the adoption had no impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires management to recognize on the balance sheet lease assets and lease liabilities by lessees for all operating leases. The ASU is effective for periods ending on December 15, 2018 and interim periods therein on a modified retrospective basis. The Company is currently evaluating the impact adoption of this guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

In April 2016, the FASB issued Accounting Standards Update ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. ASU 2016-10 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

Note 3. Balance Sheet Details

Short-term investments

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


	At June 30, 2016
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government bonds	1-3	$	498	$	4	$	-	$	502
U.S. government agency bonds	less than 3		11,084		26		-		11,110
Bank certificates of deposit	less than 1		250		-		-		250
Commercial paper	less than 1		7,473		1		-		7,474
Corporate notes	less than 3		55,327		113		(5)		55,435
Asset-backed securities	less than 3		6,778		39		-		6,817
Total		$	81,410	$	183	$	(5)	$	81,588

	At December 31, 2015
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government agency bonds	1-3	$	5,513	$	-	$	(10)	$	5,503
Commercial paper	less than 1		12,342		-		(2)		12,340
Corporate notes	1-3		45,051		-		(110)		44,941
Asset-backed securities	1-3		6,794		-		(26)		6,768
Total		$	69,700	$	-	$	(148)	$	69,552

Accounts receivable, net

Accounts receivable consisted of the following (in thousands):


	June 30,		December 31,
	2016		2015
Accounts receivable	$	11,767	$	7,632
Less allowance for doubtful accounts		(150)		(83)
	$	11,617	$	7,549

Inventory

Inventory consisted of the following (in thousands):


	June 30,		December 31,
	2016		2015
Finished goods	$	1,983	$	953
Work in process		419		503
Raw material		3,109		2,641
	$	5,511	$	4,097

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):


	June 30,		December 31,
	2016		2015
Accrued bonuses and sales commissions	$	3,481	$	4,057
Accrued vacation benefits		1,299		1,007
Accrued contract payments (see Note 7)		709		504
Other accrued liabilities		3,319		2,225
	$	8,808	$	7,793

Note 4. Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a

liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

The following tables present information about the Company's financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):



			At June 30, 2016
	June 30,		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
	2016		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (i)	$	572	$	572	$	-	$	-
U.S. government bonds		502		-		502		-
U.S. government agency bonds		11,110		-		11,110		-
Bank certificates of deposit		250		-		250		-
Commercial paper (ii)		9,423		-		9,423		-
Corporate notes		55,435		-		55,435		-
Asset-backed securities		6,817		-		6,817		-
Total assets	$	84,109	$	572	$	83,537	$	-

Liabilities
Stock warrant liability	$	-	$	-	$	-	$	-
Total liabilities	$	-	$	-	$	-	$	-


			At December 31, 2015
	December 31,		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
	2015		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (i)	$	13,922	$	13,922	$	-	$	-
U.S. government agency bonds		5,523		-		5,523		-
Commercial paper (ii)		15,340		-		15,340		-
Corporate notes (ii)		45,159		-		45,159		-
Asset-backed securities (ii)		6,775		-		6,775		-
Total assets	$	86,719	$	13,922	$	72,797	$	-

Liabilities
Stock warrant liability	$	105	$	-	$	-	$	105
Total liabilities	$	105	$	-	$	-	$	105

⁽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 cash and cash equivalents or short-term investments on the condensed consolidated balance sheets.

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

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

fair value hierarchy.

The stock warrant liability is recorded at fair value using the Black Scholes option pricing model, which requires inputs such as the expected term of the warrant, volatility and risk free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop, and are therefore considered Level 3 inputs.

In conjunction with the Company’s 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. 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. The following assumptions were 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. One warrant to purchase 5,649 shares of common stock was exercised by one of the lenders in September 2015. The fair value of the warrants to purchase the remaining 5,649 shares of common stock as of December 31, 2015 was estimated to be $0.1 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 1.9%; dividend yield of 0.0%; expected volatility of 54.8%; and an expected life of 6.2 years. In February 2016, the other lender exercised the remaining warrant to purchase 5,649 shares of common stock. For the three months ended June 30, 2016 and 2015 and the six months ended June 30, 2016 and 2015, the Company recorded other income (expense) of $0, $(1.2 million), $43,000 and $(1.2 million), respectively, related to changes in the fair value of the warrants.

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


	Warrant Liability

Balance at December 31, 2015	$	105
Change in the fair value of stock warrants		(43)
Issuance of common stock in connection with exercise of common stock warrant		(62)
Balance at June 30, 2016	$	-

There were no transfers between levels within the fair value hierarchy during the periods presented.

Note 5. Long-Term Debt

Notes payable in connection with GMP Vision Solutions

In January 2007, the Company entered into an agreement (the Original GMP Agreement) with GMP Vision Solutions, Inc. (GMP) to acquire certain in-process research and development. In connection with the Original GMP 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.

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 Company’s 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 were subordinate to the rights of the Company’s primary bank under the Credit Agreement (and subsequently, the Amended Credit Agreement) which was paid off in full on July 31, 2015.

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 is being amortized to cost of sales in the accompanying statements of operations, which amortization period was determined after consideration of the projected outgoing royalty payment stream had the Buyout Agreement not occurred, and the remaining life of the patents obtained in the Original GMP Agreement. After determining that the pattern of future cash flows associated with this intangible asset could not be reliably estimated with a high level of precision, the Company concluded that the intangible asset will be amortized on a straight-line basis over the estimated useful life.

Bank loan facility

In June 2013, the Company entered into a Loan and Security Agreement (the Credit Agreement) with the Company’s primary bank, under which the bank agreed to extend to the Company a line of credit in the maximum principal amount of $6.0 million. Advances under the line of credit 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 Credit 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 were secured by a first priority security interest in all of the Company’s assets, excluding intellectual property. The Credit Agreement included certain reporting and financial covenants which, if not met, could have constituted an event of default under the Credit Agreement. In February 2015, the Credit 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, or the Amended Credit Agreement, which provided 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 would have matured and would have been required to be fully paid by February 23, 2019. On the closing date, the Company 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 was due to become payable in full on February 23, 2017. As of July 31, 2015, the Company had drawn $2.0 million under the draw-to term loan. On July 31, 2015, the Company paid off all amounts outstanding under the Amended Credit Agreement with the payment of $7.0 million in principal plus all interest and fees payable through the payoff date, and recorded a loss on extinguishment of debt in the amount of $0.2 million. The Amended Credit Agreement and all related security interests were terminated on July 31, 2015.

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%. 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 Credit Agreement, the Company issued warrants to the lenders to purchase an aggregate of 11,298 shares of common stock at an exercise price of $8.85 per share as more fully described in Note 4. One lender exercised its warrant to purchase 5,649 shares of common stock in September 2015, and the other lender exercised its warrant to purchase 5,649 shares of common stock in February 2016. As of June 30, 2016, no warrants remain outstanding.

The Company accounted for the debt discount and deferred asset utilizing the effective interest method. Amortization of debt discount and the deferred asset to interest expense amounted to $0 and $11,000 for the three months ended June 30, 2016 and 2015, respectively, and $0 and $15,000 for the six months ended June 30, 2016 and 2015, respectively.

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


	June 30,		December 31,
	2016		2015
Notes payable	$	5,286	$	9,696
Total debt		5,286		9,696
Less current portion of long-term debt		(5,286)		(8,931)
Total long-term debt	$	-	$	765

In 2015, the Company entered into agreements with two international distributors pursuant to which their distribution rights with the Company were terminated effective as of December 31, 2015. As part of the agreements the distributors agreed to provide certain services to, and not compete with, the Company for one-to-two years in exchange for payments calculated based on single-digit percentages of the Company’s future revenues in those years in the countries that had comprised their territories. Management recorded the estimated fair value of the non-compete provisions as an intangible asset of approximately $0.3 million, which will be amortized on a straight-line basis to selling, general and administrative expense over the one-to-two year period.

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


	June 30,		December 31,
	2016		2015
GMP royalty buyout	$	17,500	$	17,500
Non-compete agreements		243		243
		17,743		17,743
Accumulated amortization		(9,351)		(7,525)
Total	$	8,392	$	10,218
Weighted average amortization period (in months)		60		60

In the three months ended June 30, 2016 and 2015 and the six months ended June 30, 2016 and 2015, the Company recorded related amortization expense of $0.9 million, $0.9 million, $1.8 million and $1.8 million, respectively, in cost of sales. Estimated amortization expense will be $3.7 million in 2016, $3.6 million in 2017 and $3.0 million in 2018.



		Number of
		Shares
		Underlying
		Options
Outstanding at December 31, 2015		5,701
Granted		1,601
Exercised		(683)
Canceled/forfeited/expired		(71)
Outstanding at June 30, 2016		6,548