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 March 31, 2017

Or

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

(949) 367-9600

(Registrant’s telephone number, including area code)

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, smaller reporting company or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company’’ and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

As of May 2, 2017 there were 34,286,934 shares of the registrant’s Common Stock outstanding.

1

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended March 31, 2017

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	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	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II:  OTHER INFORMATION		26
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60
SIGNATURES		61

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

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

2

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

	March 31,		December 31,
	2017		2016
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	8,621	$	6,494
Short-term investments		90,590		89,268
Accounts receivable, net		14,434		14,305
Inventory, net		7,485		6,844
Prepaid expenses and other current assets		2,579		3,032
Restricted cash		30		80
Total current assets		123,739		120,023
Property and equipment, net		7,839		7,593
Intangible assets, net		5,970		6,567
Deposits and other assets		354		188
Total assets	$	137,902	$	134,371
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	3,934	$	2,967
Accrued liabilities		10,623		13,911
Deferred rent		85		60
Total current liabilities		14,642		16,938
Other liabilities		307		159
Total liabilities		14,949		17,097
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding		-		-
Common stock, $0.001 par value; 150,000 shares authorized;34,308 and 33,971 shares issued and 34,280 and 33,943 shares outstanding at March 31, 2017 and December 31, 2016, respectively		34		34
Additional paid-in capital		313,916		308,815
Accumulated other comprehensive income		348		648
Accumulated deficit		(191,213)		(192,091)
Less treasury stock (28 shares as of March 31, 2017 and December 31, 2016)		(132)		(132)
Total stockholders' equity		122,953		117,274
Total liabilities and stockholders' equity	$	137,902	$	134,371

See accompanying notes to condensed consolidated financial statements.

3

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended
	March 31,
	2017		2016
Net sales	$	35,907	$	23,092
Cost of sales		5,180		3,121
Gross profit		30,727		19,971
Operating expenses:
Selling, general and administrative		21,481		12,288
Research and development		8,942		7,062
Total operating expenses		30,423		19,350
Income from operations		304		621
Other income, net
Interest and other income		636		335
Interest and other expense, net		(7)		(102)
Change in fair value of stock warrant liability		-		43
Total other income, net		629		276
Income before taxes		933		897
Provision for income taxes		55		-
Net income	$	878	$	897
Basic net income per share	$	0.03	$	0.03
Diluted net income per share	$	0.02	$	0.03
Weighted average shares used to compute basic net income per share		34,146		32,317
Weighted average shares used to compute diluted net income per share		37,742		35,724

See accompanying notes to condensed consolidated financial statements.

4

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

	Three Months Ended
	March 31,
	2017		2016
Net income	$	878	$	897
Other comprehensive loss:
Foreign currency translation adjustments		(340)		(285)
Unrealized gain on short-term investments, net of tax		40		268
Other comprehensive loss		(300)		(17)
Total comprehensive income	$	578	$	880

See accompanying notes to condensed consolidated financial statements.

5

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Three Months Ended March 31,
	2017		2016
Operating Activities
Net income	$	878	$	897
Adjustments to reconcile net income to net cash provided by (used in)operating activities:
Depreciation and amortization		1,009		1,122
Stock-based compensation		3,202		1,417
Unrealized foreign currency gains		(342)		(149)
Change in fair value of stock warrant liability		-		(43)
Amortization of premium on short-term investments		27		82
Deferred rent		173		19
Changes in operating assets and liabilities:
Accounts receivable, net		(81)		(1,982)
Inventory		(538)		(1,129)
Prepaid expenses and other current assets		478		(355)
Restricted cash		49		-
Accounts payable and accrued liabilities		(2,316)		(816)
Other assets		(163)		-
Net cash provided by (used in) operating activities		2,376		(937)
Investing activities
Purchases of short-term investments		(26,599)		(23,710)
Proceeds from sales and maturities of short-term investments		25,257		15,600
Purchases of property and equipment		(760)		(377)
Net cash used in investing activities		(2,102)		(8,487)
Financing activities
Proceeds from exercise of stock options		1,970		438
Proceeds from exercise of stock warrants		-		50
Payments of secured notes		-		(2,191)
Net cash provided by (used in) financing activities		1,970		(1,703)
Effect of exchange rate changes on cash and cash equivalents		(117)		(53)
Net increase (decrease) in cash and cash equivalents		2,127		(11,180)
Cash and cash equivalents at beginning of period		6,494		21,572
Cash and cash equivalents at end of period	$	8,621	$	10,392
Supplemental disclosures of cash flow information
Interest paid	$	-	$	112
Taxes paid	$	1	$	62
Supplemental schedule of noncash investing and financing activities
Reduction of liability upon vesting of stock options previously exercised for unvested stock	$	3	$	21

See accompanying notes to condensed consolidated financial statements.

6

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. All significant intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.

Basis of presentation

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

The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements. As permitted under those rules, certain footnotes and other financial information that are normally required by GAAP have been condensed or omitted.  In the opinion of management, the unaudited interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for the fair presentation of the Company’s financial information, contained herein.  The condensed consolidated balance sheet at December 31, 2016 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, 2016, 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, 2017. The results for the period ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ended December 31, 2017 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 three months ended March 31, 2017, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 15, 2017.

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 income in stockholders’ equity. For the three months ended March 31, 2017 and 2016, the Company reported losses from foreign

7

currency translation adjustments in each of those periods of approximately $0.3 million.  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 March 31, 2017 and 2016, the Company reported foreign currency transaction gains of $17,000 and $61,000, respectively.

Cash, cash equivalents and short-term investments

The Company invests its excess cash in marketable securities, including money market funds, money market securities, corporate bonds, 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. Investments are stated at fair value as determined by quoted market prices. Investments are considered available-for-sale and, accordingly, unrealized gains and losses are included in accumulated other comprehensive income within stockholders’ equity.

The Company’s entire investment portfolio, except for restricted cash, is considered to be available for use in current operations and, accordingly, all such investments are stated at fair value using quoted market prices and classified as current assets, although the stated maturity of individual investments may be one year or more beyond the balance sheet date. The Company did not have any trading securities or restricted investments at March 31, 2017 and December 31, 2016.

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 using the specific identification method. 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 of financial instruments

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

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

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

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

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

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

8

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 that provide for fees based upon the quantities of subjects enrolled and clinical evaluation visits that occur over the life of the study. The cost estimates are determined based upon a review of the agreements and data collected by internal and external clinical personnel as to the status of enrollment and subject visits, and are based upon the facts and circumstances known to the Company at each financial reporting date. If the actual performance of activities varies from the assumptions used in the cost estimates, the accruals are adjusted accordingly. There have been no material adjustments to the Company’s prior period accrued estimates for clinical trial activities through March 31, 2017.

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 per share

Basic net income per share is calculated by dividing the net income by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. Diluted net income per share is calculated by dividing the net income by the weighted average number of common shares plus the sum of the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury stock method. Common stock equivalents are comprised of stock warrants and stock options outstanding under the Company’s stock option plans.

9

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

	Three Months Ended
	March 31,
	2017		2016
Numerator:
Net income - basic	$	878	$	897
Denominator:
Weighted average number of common shares outstanding - basic		34,146		32,317
Common stock equivalents from outstanding common stock options		3,577		3,394
Common stock equivalents for ESPP		19		11
Common stock equivalents from outstanding common stock warrants		-		2
Weighted average number of common shares outstanding - diluted		37,742		35,724
Basic net income per share	$	0.03	$	0.03
Diluted net income per share	$	0.02	$	0.03

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

	Three Months Ended
	March 31,
	2017	2016
Stock options outstanding	1,828	1,988
ESPP	-	18
	1,828	2,006

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance in Accounting Standards Update (ASU) 2014-09 which was codified in Accounting Standards Codification (ASC) 606, Revenue Recognition – Revenue from Contracts with Customers (ASC 606). ASC 606 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, and is principles-based, such 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. 

ASU 2015-14 deferred the effective date of ASC 606 to annual reporting periods beginning after December 15, 2017 (including interim periods within those periods) and while early adoption is permitted, the Company plans to adopt ASC 606 on January 1, 2018. Companies are required to apply ASC 606 retrospectively; however, companies may use either a full retrospective or a modified retrospective approach when adopting the standard. The Company intends to adopt using the modified retrospective approach, with a cumulative catch-up adjustment to the opening balance sheet of retained earnings at the effective date.

The Company has performed a preliminary analysis and does not believe adoption of the standard will have a material impact on its consolidated financial statements. In the preliminary analysis, the Company has concluded it generally has one performance obligation, the transaction price is not impacted by any variable consideration or other factors noted in ASC 606, and the Company’s performance obligations are generally satisfied when products are shipped. The Company will continue to review variable consideration, potential disclosures, and the method of adoption in order to complete the evaluation of the impact on the consolidated financial statements. In addition, the Company will continue to monitor additional changes, modifications, clarifications or interpretations undertaken by the FASB, which may impact the current conclusions.

10

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires management to recognize almost all leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments.  The new standard must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements; however, the Company anticipates recognition of additional assets and corresponding liabilities on its condensed 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 (ASU 2016-09), which modifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards, and classification in the statement of cash flows.  The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods and the Company adopted ASU 2016-09 in its first quarter 2017. As a result of the prospective adoption of ASU 2016-09 on January 1, 2017, excess tax benefits of $13.1 million were recorded to the Company’s net operating loss carryover resulting in an increase in the Company’s deferred tax assets with an identical increase in the associated valuation allowance.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASC 2016-18), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. ASU 2016-18 will be effective for the Company starting in the first quarter of 2018.  Currently, the Company's restricted cash balance is not significant and the Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), clarifying the definition of a business. The amendments are intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. When substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. This introduces an initial required screening that, if met, eliminates the need for further assessment. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. To be a business without outputs, there will need to be an organized workforce. The ASU also narrows the definition of the term “outputs” to be consistent with how it is described in ASC 606, Revenue Recognition - Revenue from Contracts with Customers.  The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements.

11

Note 3.  Balance Sheet Details

Short-term investments

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

	At March 31, 2017
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government bonds	1-3	$	1,799	$	-	$	(11)	$	1,788
U.S. government agency bonds	less than 3		5,715		-		(12)		5,703
Bank certificates of deposit	less than 1		17,851		17		(6)		17,862
Commercial paper	less than 1		6,527		1		(1)		6,527
Corporate notes	less than 3		53,363		9		(52)		53,320
Asset-backed securities	less than 2		5,388		2		-		5,390
		$	90,643	$	29	$	(82)	$	90,590
	At December 31, 2016
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government agency bonds	1-3	$	9,535	$	2	$	(22)	$	9,515
Bank certificates of deposit	less than 2		11,101		13		(1)		11,113
Commercial paper	less than 1		17,011		1		(2)		17,010
Corporate notes	less than 3		45,178		7		(61)		45,124
Asset-backed securities	less than 2		6,503		3		—		6,506
		$	89,328	$	26	$	(86)	$	89,268

Accounts receivable, net

Accounts receivable consisted of the following (in thousands):

	March 31,		December 31,
	2017		2016
Accounts receivable	$	14,755	$	14,800
Less allowance for doubtful accounts		(321)		(495)
	$	14,434	$	14,305

Inventory, net

Inventory consisted of the following (in thousands):

	March 31,		December 31,
	2017		2016
Finished goods	$	2,351	$	2,014
Work in process		1,890		2,105
Raw material		3,244		2,725
	$	7,485	$	6,844

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):

	March 31,		December 31,
	2017		2016
Accrued contract payments (see Note 5)	$	891	$	823
Accrued sales commissions		439		1,641
Accrued clinical study payments		733		1,167
Accrued  bonuses		2,298		6,122
Accrued vacation benefits		1,660		1,382
Accrued Employee Stock Purchase Plan deductions		1,013		4
Other accrued liabilities		3,589		2,772
	$	10,623	$	13,911

12

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 March 31, 2017 and December 31, 2016, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

			At March 31, 2017
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	March 31,		identical assets		inputs		inputs
	2017		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (i)	$	1,953	$	1,953	$	-	$	-
U.S. government agency bonds (ii)		5,703		-		5,703		-
U.S. government bonds (ii)		1,788		-		1,788		-
Bank certificates of deposit (ii)		17,862		-		17,862		-
Commercial paper (ii) (iii)		8,525		-		8,525		-
Corporate notes (ii)		53,320		-		53,320		-
Asset-backed securities (ii)		5,390		-		5,390		-
	$	94,541	$	1,953	$	92,588	$	-

			At December 31, 2016
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	December 31,		identical assets		inputs		inputs
	2016		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (i)	$	80	$	80	$	-	$	-
U.S. government agency bonds (ii)		9,515		-		9,515		-
Bank certificates of deposit (ii)		11,113		-		11,113		-
Commercial paper (ii)		17,010		-		17,010		-
Corporate notes (ii)		45,124		-		45,124		-
Asset-backed securities (ii)		6,506		-		6,506		-
	$	89,348	$	80	$	89,268	$	-

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

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

⁽ⁱⁱⁱ⁾ One commercial paper investment totaling $1,998 (in thousands) is included in cash and cash equivalents on the condensed consolidated balance sheets, as the investment has a maturity of three months or less from the date of purchase on the condensed consolidated balance sheets.

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

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

13

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

Note 5.  Long-Term Debt and Intangible Assets

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 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 were collateralized by all of the Company’s assets, excluding intellectual property. The promissory notes carried 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 ended on December 31, 2016. The notes were paid off in full as of December 31, 2016. 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 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.

Intangible assets

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.  In 2016 and 2017, the Company entered into agreements with two additional international distributors pursuant to which their distribution rights with the Company were terminated effective as of January 1, 2017 and March 31, 2017, respectively.  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 respective countries that had comprised their territories.  Management recorded the estimated fair value of the non-compete provisions as intangible assets.  As of March 31, 2017, the non-compete intangible assets totaled $0.5 million and 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):

	March 31,		December 31,
	2017		2016
GMP royalty buyout	$	17,500	$	17,500
Non-compete agreements		524		243
		18,024		17,743
Accumulated amortization		(12,054)		(11,176)
Total	$	5,970	$	6,567
Weighted average amortization period (in months)		60		60

In each of the three month periods ended March 31, 2017 and 2016, the Company recorded amortization expense of $0.9 million related to intangible assets in cost of sales. Estimated amortization expense will be $3.8 million in 2017 and $3.1 million in 2018.

14

Note 6.  Stock-Based Compensation

The Company has four stock-based compensation plans (collectively, the Stock Plans)—the 2001 Stock Option Plan (the 2001 Stock Plan), the 2011 Stock Plan (the 2011 Stock Plan), the 2015 Omnibus Incentive Compensation Plan (the 2015 Stock Plan) and the 2015 Employee Stock Purchase Plan (the ESPP).

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, 2016	5,911
Granted	1,404
Exercised	(337)
Canceled/forfeited/expired	(9)
Outstanding at March 31, 2017	6,969
Exercisable at March 31, 2017	3,126

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

	Three Months Ended
	March 31,
	2017		2016
Cost of sales	$	130	$	38
Selling, general and administrative		2,314		1,112
Research and development		758		267
Total	$	3,202	$	1,417

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
	March 31,
	2017		2016
Risk-free interest rate	2.17	%	1.60	%
Expected dividend yield	0.0	%	0.0	%
Expected volatility	46.6	%	52.7	%
Expected term (in years)	6.09		6.09

The

Note 7.  Income Taxes

The provision for income taxes is determined using an effective tax rate. For the three months ended March 31, 2017, the Company’s estimated annual effective tax rate of 2.6% was lower than the U.S. federal statutory rate primarily due to the utilization of net operating loss carryforwards, the benefit of which had not previously been recognized due to the Company’s full valuation allowance.  The effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used to estimate the annual effective tax rate, including factors such as expected utilization of net operating loss carryforwards, changes in or the interpretation of tax laws in jurisdictions where the Company conducts business, the Company’s expansion into new states or foreign countries, and the amount of valuation allowances against deferred tax assets.  For the three months ended March 31, 2017, the Company recorded a provision for income taxes of $55,000, which was primarily comprised of federal alternative

15

minimum tax and state income taxes. The Company recorded no provision for income taxes in the three months ended March 31, 2016.

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryforwards. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount it believes is more likely than not to be realized.  When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made.  For the periods ended March 31, 2017 and 2016, respectively, the Company had established a valuation allowance for all deferred tax assets.

Additionally, the Company follows an accounting standard addressing the accounting for uncertainty in income taxes that prescribes rules for recognition, measurement and classification in the financial statements of tax positions taken or expected to be taken in a tax return.

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. Management is not aware of any legal proceedings where the likelihood of a loss contingency is reasonably possible and the amount or range of reasonably possible losses is material to the Company’s results of operations, financial condition or cash flows.

Operating leases

The Company leases its main headquarters and manufacturing facility and facilities for its foreign subsidiaries.  Certain of the Company’s leases contain renewal options, rent escalation clauses, and/or landlord incentives.  Rent expense for noncancelable operating leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term beginning with the lease commencement date, or the date the Company takes control of the leased space, whichever is sooner.  The excess of straight-line rent expense over scheduled payment amounts and landlord incentives is recorded as a deferred rent liability. 

The Company leases a 37,700 square foot facility located in San Clemente, California under a sublease that was effective September 1, 2015, followed by a five-year lease for the facility that was effective on January 1, 2017 upon expiration of the sublease. This facility is the Company’s main headquarters and manufacturing facility.  Rent under the direct lease began on January 1, 2017 at approximately $42,000 per month, with rent for the second and third months abated, and the rent payments increase annually beginning on January 1, 2018 at percentages ranging from 2.5% to 3.5%.  The direct lease agreement contains an option to extend the lease for up to two additional three-year periods at market rates.  The direct lease landlord agreed to provide the Company with a tenant improvement allowance after January 1, 2017 in the amount of the cost of any leasehold improvements, not to exceed approximately $264,000 upon the Company providing the necessary documentation evidencing the costs of the allowable leasehold improvements.

In January 2017, the Company entered into an additional lease for an approximately 39,300 square foot facility located adjacent to the Company’s San Clemente, California headquarters.  The new lease became effective April 1, 2017 and expires on December 31, 2021 and will not have a material effect on the Company’s condensed consolidated financial statements.

The Company’s foreign subsidiaries lease office space totaling less than 2,000 square feet.

The Company recorded deferred rent of $282,000 and $219,000 as of March 31, 2017 and December 31, 2016, respectively, in conjunction with its facilities lease agreements. Rent expense was $0.3 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively.

16

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

Remainder of 2017	$	670
2018		700
2019		656
2020		643
2021		659
Thereafter		-
	$	3,328

Purchase Commitments

The Company is a party to various purchase arrangements related to components used in production and research and development activities. As of March 31, 2017 and December 31, 2016, the Company had non-cancelable, firm purchase commitments with certain vendors totaling approximately $1.9 million and $3.7 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 UC Agreement) with the Regents of the University of California (the University) to correct inventorship in connection with a group of the Company’s U.S. patents (the Patent Rights) and to obtain from the University a covenant that it did not and would not claim any right or title to the Patent Rights and will not challenge or assist any others in challenging the Patent Rights. In connection with the UC Agreement, Glaukos agreed to pay to the University a low single-digit percentage of worldwide net sales of certain current and future products, including the Company’s iStent products, with a required minimum annual payment of $0.5 million. This ongoing product payment terminates on the date that the last of the Patent Rights expires, which is currently expected to be in 2022. In the three months ended March 31, 2017 and 2016, the Company recorded approximately $0.9 million and $0.6 million, respectively, in cost of sales in connection with this product payment obligation.

Note 9.  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
	March 31,
Geographic Net Sales Information (in thousands)	2017		2016
United States	$	31,877	$	21,542
International		4,030		1,550
Total net sales	$	35,907	$	23,092

Note 10.  Subsequent Event

On April 12, 2017, the Company entered into an IOP System Purchase Agreement (the Purchase Agreement), between the Company and DOSE Medical Corporation (DOSE), to purchase from DOSE its intraocular pressure (IOP) sensor system, including all patents, license rights and tangible assets, and to assume certain liabilities related thereto (collectively, the IOP Sensor System), for consideration consisting of an initial cash payment of $5.5 million, plus performance-based consideration of up to $9.5 million upon achievement of certain development, clinical and regulatory milestones.  The Company completed the purchase of the IOP Sensor System concurrent with the execution of the Purchase Agreement.

DOSE was previously a wholly-owned subsidiary of the Company.  In 2010, it was spun-out as a standalone entity and in 2015, the Company acquired the iDose product line and related assets from DOSE. Thomas W. Burns, the Company’s President, Chief Executive and a member of its board of directors, and William J. Link, Ph.D., Chairman of the Company’s board of directors, currently serve on the board of directors of DOSE and certain members of the Company’s management and board of directors hold an equity interest in DOSE.  

17

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, 2016 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016  filed with the U.S. Securities and Exchange Commission (SEC) on March 15, 2017.

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

Overview

We are an ophthalmic medical technology company focused on the development and commercialization of products and procedures designed to treat glaucoma, one of the world’s leading causes of blindness. We developed Micro‑Invasive Glaucoma Surgery (MIGS) to serve as an alternative to 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 developing additional products designed to treat glaucoma.

The iStent was the first commercially available MIGS treatment solution. Food and Drug Administration (FDA)‑approved for insertion in combination with cataract surgery, the iStent procedure is currently reimbursed by Medicare and a majority of commercial payors.

We are developing three additional 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 (IDE) pivotal trial; and the second is currently being studied in an initial U.S. IDE study as a standalone treatment for lowering intraocular pressure. The iStent Supra is designed to access an alternative drainage space within the eye and is now in a U.S. pivotal IDE trial.  iDose is a drug delivery system that is designed to be implanted in the eye to continuously deliver therapeutic levels of medication for extended periods of time to lower intraocular pressure in glaucoma patients. A U.S. investigational new drug (IND) Phase II study of our Travoprost Intraocular Implant using the iDose delivery system is currently underway.

Prior to 2016, we had never been profitable and had incurred operating losses in each year since our inception. Our net sales increased to $35.9 million for the three months ended March 31, 2017 from $23.1 million for the three months ended March 31, 2016.  Our net income was approximately $0.9 million for each of the three month periods ended March 31, 2017 and March 31, 2016. As of March 31, 2017 and December 31, 2016, we had an accumulated deficit of $191.2 million and $192.1 million, respectively.

We have made and expect to continue to make significant investments in our global sales force, marketing programs and clinical studies. FDA‑approved IDE studies and new product development programs in our industry are expensive, and we have incurred a significant increase in administrative costs since we began operating as a public

18

company. Accordingly, although we achieved profitability in 2016 and for the three months ended March 31, 2017, there can be no assurance that we will continue to be profitable.

Recent developments

On April 12, 2017, we purchased from DOSE Medical Corporation (DOSE) its intraocular pressure (IOP) sensor system, including all patents, license rights and tangible assets, and to assume certain liabilities related thereto (collectively, the IOP Sensor System), for consideration consisting of an initial cash payment of $5.5 million, plus performance-based consideration of up to $9.5 million upon achievement of certain development, clinical and regulatory milestones.  See Note 10 - Subsequent Event to the condensed consolidated financial statements for further information.

Components of results of operations

Net sales

We operate in one reportable segment, ophthalmic medical devices, and substantially all of our net sales are derived from sales of our iStent products, net of customer returns and allowances. 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 sell our products through a direct sales organization in the United States, and outside the United States we sell our products primarily through direct sales subsidiaries in fourteen countries and through independent distributors in certain countries in which we do not have a direct presence. The primary end‑user customers for our products are hospitals and surgery centers.

     We anticipate our net sales will increase as we expand our global sales and marketing infrastructure and continue to increase awareness of our products by expanding our sales base and increasing our marketing efforts. We also expect that our net sales within a fiscal year may be impacted seasonally and reflect seasonality patterns generally consistent with U.S. cataract procedure volumes, which are typically softer in the first quarter and stronger in the fourth quarter of a given year. Additionally, we expect our net sales in 2017 to benefit from higher average selling prices to ambulatory surgery centers (ASCs) in the United States as a result of an increase in reimbursement payments from Medicare to ASCs for the iStent procedure effective January 1, 2017.

      As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, the Australian Department of Health (ADOH) recently initiated a comprehensive review of its Medicare Benefits Schedule (MBS), a list of approximately 5,600 codes used to determine reimbursement.  As part of this review, reimbursement of the surgeon fee code for implantation of iStent devices was suspended effective May 1, 2017. Prior to suspension of the code, the Company filed an application with the ADOH to obtain a new code for reimbursement of the surgeon fee. Effective as of May 1, 2017, the ADOH issued an interim MBS code for the balance of 2017 which will provide for continued iStent device reimbursement in connection with cataract surgery while the application for the new surgeon fee code is pending.

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

Beginning in late 2013, cost of sales 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 $0.9 million in each of the three month periods ended March 31, 2017 and 2016, and is estimated to be $3.5 million in 2017 and $3.0 million in 2018.

19

Beginning in 2015, cost of sales includes a charge equal to a low single‑digit percentage of worldwide net sales of certain current and future products, including our iStent products, with a required minimum annual payment of $500,000, which amount became payable to the Regents of the University of California (University) in connection with our December 2014 agreement with the University (the UC Agreement). This ongoing product payment obligation will terminate on the date the last of the Patent Rights expires, which is currently expected to be in 2022. Under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) the 2.3% federal medical device excise tax on U.S. sales of medical devices manufactured by us has been suspended from January 1, 2016 to December 31, 2017, and, absent further legislative action, will be reinstated starting January 1, 2018.

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 and expense related to the UC Agreement.

Selling, general and administrative

Our selling, general and administrative (SG&A) expenses primarily consist of personnel‑related expenses, including salaries, sales commissions, bonuses, fringe benefits and stock‑based compensation for our executive, financial, marketing, sales, 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.

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

Research and development

Our research and development (R&D) activities primarily consist of new product development projects, pre‑clinical studies, IDE studies, and other clinical trials. Our R&D expenses primarily consist of personnel‑related expenses, including salaries, fringe benefits and stock‑based compensation for our R&D employees; research materials; supplies and services; and the costs of conducting clinical studies, which include payments to investigational sites and investigators, clinical research organizations, consultants, and other outside technical services and the costs of materials, supplies and travel. We expense R&D costs as incurred. We expect our R&D expenses to increase as we initiate and advance our development programs, the most costly of which are expected to be our iStent Inject,  iStent Supra and iDose product candidates.  Additionally, we expect our R&D expenses to increase as we incur developmental spend on the IOP Sensor System product line we purchased from DOSE in April 2017.

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

Other income, net

Other income, net primarily consists of interest income derived from our short-term investments, interest expense on our secured notes payable and, until the final warrants were exercised during the first three months of 2016,

20

changes in the fair value of our stock warrant liability.

Results of Operations

Comparison of Three Months Ended March 31, 2017 and 2016

	Three Months Ended
	March 31,				% Increase
(in thousands)	2017		2016		(decrease)
Statements of operations data:
Net sales	$	35,907	$	23,092	55%
Cost of sales		5,180		3,121	66%
Gross profit		30,727		19,971	54%
Operating expenses:
Selling, general and administrative		21,481		12,288	75%
Research and development		8,942