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, 2017

☐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 August 3, 2017 there were 34,434,009 shares of the registrant’s Common Stock outstanding.

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended June 30, 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	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

PART II: OTHER INFORMATION		28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61

SIGNATURES		62

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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)


	June 30,		December 31,
	2017		2016
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	13,370	$	6,494
Short-term investments		90,420		89,268
Accounts receivable, net		16,702		14,305
Inventory, net		8,382		6,844
Prepaid expenses and other current assets		2,340		3,032
Restricted cash		-		80
Total current assets		131,214		120,023
Property and equipment, net		8,724		7,593
Intangible assets, net		5,029		6,567
Deposits and other assets		559		188
Total assets	$	145,526	$	134,371

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	5,974	$	2,967
Accrued liabilities		13,061		13,911
Deferred rent		89		60
Total current liabilities		19,124		16,938
Other liabilities		468		159
Total liabilities		19,592		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; 34,461 and 33,971 shares issued and 34,433 and 33,943 shares outstanding at June 30, 2017 and December 31, 2016, respectively		34		34
Additional paid-in capital		320,500		308,815
Accumulated other comprehensive income		46		648
Accumulated deficit		(194,514)		(192,091)
Less treasury stock (28 shares as of June 30, 2017 and December 31, 2016)		(132)		(132)
Total stockholders' equity		125,934		117,274
Total liabilities and stockholders' equity	$	145,526	$	134,371

See accompanying notes to condensed consolidated financial statements.

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Net sales	$	41,285	$	28,556	$	77,192	$	51,648
Cost of sales		5,522		4,359		10,702		7,480
Gross profit		35,763		24,197		66,490		44,168
Operating expenses:
Selling, general and administrative		24,675		15,120		46,156		27,408
In-process research and development		5,320		-		5,320		-
Research and development		9,633		6,955		18,575		14,017
Total operating expenses		39,628		22,075		70,051		41,425
(Loss) income from operations		(3,865)		2,122		(3,561)		2,743
Other income, net:
Interest and other income		598		286		1,234		621
Interest and other expense, net		(12)		(76)		(19)		(178)
Change in fair value of stock warrant liability		-		-		-		43
Total other income, net		586		210		1,215		486
(Loss) income before taxes		(3,279)		2,332		(2,346)		3,229
Provision for income taxes		22		-		77		-
Net (loss) income	$	(3,301)	$	2,332	$	(2,423)	$	3,229
Basic net (loss) income per share	$	(0.10)	$	0.07	$	(0.07)	$	0.10
Diluted net (loss) income per share	$	(0.10)	$	0.06	$	(0.07)	$	0.09
Weighted average shares used to compute basic net (loss) income per share		34,322		32,652		34,234		32,477
Weighted average shares used to compute diluted net (loss) income per share		34,322		36,182		34,234		35,975

See accompanying notes to condensed consolidated financial statements.

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Net (loss) income	$	(3,301)	$	2,332	$	(2,423)	$	3,229
Other comprehensive loss:
Foreign currency translation adjustments		(320)		(149)		(660)		(434)
Unrealized gain on short-term investments, net of tax		18		58		58		326
Other comprehensive loss		(302)		(91)		(602)		(108)
Total comprehensive (loss) income	$	(3,603)	$	2,241	$	(3,025)	$	3,121

See accompanying notes to condensed consolidated financial statements.

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Six Months Ended June 30,
	2017		2016
Operating Activities
Net (loss) income	$	(2,423)	$	3,229
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		2,428		2,255
Loss on disposal of fixed assets		5		-
Stock-based compensation		7,935		3,465
Unrealized foreign currency gains		(624)		(229)
Change in fair value of stock warrant liability		-		(43)
Amortization of premium on short-term investments		58		161
Deferred rent		338		2
Changes in operating assets and liabilities:
Accounts receivable, net		(2,289)		(4,051)
Inventory		(1,368)		(1,579)
Prepaid expenses and other current assets		721		(131)
Restricted cash		80		-
Accounts payable and accrued liabilities		2,145		2,028
Other assets		(368)		(5)
Net cash provided by operating activities		6,638		5,102
Investing activities
Purchases of short-term investments		(45,766)		(35,825)
Proceeds from sales and maturities of short-term investments		44,580		23,954
Purchases of property and equipment		(2,071)		(1,219)
Net cash used in investing activities		(3,257)		(13,090)
Financing activities
Proceeds from exercise of stock options		2,782		2,414
Proceeds from exercise of stock warrants		-		50
Payments of secured notes		-		(4,410)
Share purchases under Employee Stock Purchase Plan		968		793
Net cash provided by (used in) financing activities		3,750		(1,153)
Effect of exchange rate changes on cash and cash equivalents		(255)		(92)
Net increase (decrease) in cash and cash equivalents		6,876		(9,233)
Cash and cash equivalents at beginning of period		6,494		21,572
Cash and cash equivalents at end of period	$	13,370	$	12,339
Supplemental disclosures of cash flow information
Interest paid	$	-	$	197
Taxes paid	$	64	$	63
Supplemental schedule of noncash investing and financing activities
Reduction of liability upon vesting of stock options previously exercised for unvested stock	$	3	$	42

See accompanying notes to condensed consolidated financial statements.

Note 2. Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the six months ended June 30, 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 month periods ended June 30, 2017 and 2016, the Company reported losses from foreign currency translation adjustments of approximately $0.3 million and $0.1 million, respectively, and for the six month periods ended June 30, 2017 and 2016, the Company reported losses from foreign currency translation adjustments of approximately $0.7 million and $0.4 million, 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 month periods ended June 30, 2017 and 2016, the Company reported foreign currency transaction gains (losses) of $95,000 and $(38,000), respectively, and for the six month periods ended June 30, 2017 and 2016, the Company reported foreign currency transaction gains of $112,000 and $23,000, respectively.

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, including gains and losses on intercompany loans, are included in the condensed consolidated statements of operations. For the three month periods ended June 30, 2017 and 2016, the Company reported net foreign currency transaction gains of $0.4 million and $42,000, respectively, and for the six month periods ended June 30, 2017 and 2016, the Company reported net foreign currency transaction gains of $0.7 million and $0.3 million, 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 June 30, 2017 or 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.

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 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 June 30, 2017.

Net (loss) income per share

Basic net (loss) income per share is calculated by dividing the net (loss) income by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. In quarters when the Company realizes net income, diluted net income per share is calculated by dividing the net income by the weighted average number of common shares plus the sum of the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury stock method. Common stock equivalents are comprised of stock warrants and stock options outstanding under the Company’s stock option plans. In quarters when the Company realizes a net loss, no common stock equivalents are included in the calculation of weighted average number of dilutive common stock equivalents as the effect of applying the treasury stock method is considered anti-dilutive.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Numerator:
Net (loss) income - basic	$	(3,301)	$	2,332	$	(2,423)	$	3,229
Denominator:
Weighted average number of common shares outstanding - basic		34,322		32,652		34,234		32,477
Common stock equivalents from outstanding common stock options		-		3,510		-		3,485
Common stock equivalents for ESPP		-		20		-		12
Common stock equivalents from outstanding common stock warrants		-		-		-		1
Weighted average number of common shares outstanding - diluted		34,322		36,182		34,234		35,975

Basic net (loss) income per share	$	(0.10)	$	0.07	$	(0.07)	$	0.10

Diluted net (loss) income per share	$	(0.10)	$	0.06	$	(0.07)	$	0.09

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


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2017	2016	2017	2016
Stock options outstanding	5,737	2,151	5,805	2,157
ESPP	19	-	19	-
	5,756	2,151	5,824	2,157

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. The Company expects to complete its assessment process, including finalizing a transition method for adoption, by the end of the fourth quarter of 2017 and expects to complete its implementation process prior to the adoption of this ASU on January 1, 2018.

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.

Note 3. Balance Sheet Details

Short-term investments

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


	At June 30, 2017
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government bonds	1-3	$	1,799	$	-	$	(12)	$	1,787
U.S. government agency bonds	less than 3		3,697		-		(12)		3,685
Bank certificates of deposit	less than 1		15,450		8		-		15,458
Commercial paper	less than 1		8,327		1		-		8,328
Corporate notes	less than 3		53,435		20		(39)		53,416
Asset-backed securities	less than 2		7,747		1		(2)		7,746
		$	90,455	$	30	$	(65)	$	90,420

	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):


	June 30,		December 31,
	2017		2016
Accounts receivable	$	17,196	$	14,800
Less allowance for doubtful accounts		(494)		(495)
	$	16,702	$	14,305

Inventory, net

Inventory consisted of the following (in thousands):


	June 30,		December 31,
	2017		2016
Finished goods	$	3,047	$	2,014
Work in process		2,656		2,105
Raw material		2,679		2,725
	$	8,382	$	6,844

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):


	June 30,		December 31,
	2017		2016
Accrued contract payments (see Note 5)	$	1,025	$	823
Accrued sales commissions		382		1,641
Accrued clinical study payments		783		1,167
Accrued bonuses		4,863		6,122
Accrued vacation benefits		1,731		1,382
Accrued Employee Stock Purchase Plan deductions		491		4
Other accrued liabilities		3,786		2,772
	$	13,061	$	13,911

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, 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 June 30, 2017
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	June 30,		identical assets		inputs		inputs
	2017		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (i)	$	443	$	443	$	-	$	-
U.S. government agency bonds (ii)		3,686		-		3,686		-
U.S. government bonds (ii)		1,787		-		1,787		-
Bank certificates of deposit (ii)		15,458		-		15,458		-
Commercial paper (ii)		8,328		-		8,328		-
Corporate notes (ii)		53,416		-		53,416		-
Asset-backed securities (ii)		7,745		-		7,745		-
	$	90,863	$	443	$	90,420	$	-


			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.

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.

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

Note 5. Intangible Assets

GMP Vision Solutions intangible asset

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 exchange for 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 sub-licenses 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 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. For each of the three month periods ended June 30, 2017 and 2016, the Company recorded amortization expense of $0.9 million and for each of the six month periods ended June 30, 2017 and 2016, the Company recorded amortization expense of $1.8 million related to this intangible asset in cost of sales.

Other 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 June 30, 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 periods. For the three month periods ended June 30, 2017 and 2016, the Company recorded amortization expense related to the non-compete provisions of approximately $66,000 and $23,000, respectively, and for the six month periods ended June 30, 2017 and 2016, the Company recorded amortization expense related to the non-compete provisions of approximately $129,000 and $46,000, respectively.

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


	June 30,		December 31,
	2017		2016
GMP royalty buyout	$	17,500	$	17,500
Non-compete agreements		524		243
		18,024		17,743
Accumulated amortization		(12,995)		(11,176)
Total	$	5,029	$	6,567
Weighted average amortization period (in months)		60		60

Estimated amortization expense will be $3.8 million in 2017 and $3.1 million in 2018 related to the above mentioned intangible assets.

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 2015 Stock Plan permits grants of restricted stock units (RSUs). The Company has historically granted stock options, but the Company began to award RSU grants to certain employees during the three months ended June 30, 2017. RSU awards vest 25% on each of the first, second, third and fourth anniversaries of the grant date.

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



		Number of
		Shares
		Underlying
		Options/
		RSUs
Outstanding at December 31, 2016		5,911
Granted		1,877
Exercised		(453)
Canceled/forfeited/expired		(79)
Outstanding at June 30, 2017		7,256

Exercisable at June 30, 2017		3,334

The following table summarizes the allocation of stock-based compensation related to stock options and restricted stock units in the accompanying condensed consolidated statements of operations (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Cost of sales	$	141	$	44	$	270	$	82
Selling, general and administrative		3,470		1,391		5,784		2,503
Research and development		1,123		613		1,881		880
Total	$	4,734	$	2,048	$	7,935	$	3,465

Stock-based awards to employees and nonemployees

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

The fair value of stock option awards is estimated at the grant date using the Black-Scholes option pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line method. The determination of the fair value-based measurement of stock options on the date of grant using an option pricing model is affected by the determination of the fair value of the underlying stock as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s stock price volatility over the expected term of the grants, and actual and projected 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 option awards made to nonemployees are remeasured at each reporting period using the Black-Scholes option pricing model. Compensation expense for these stock option awards is determined by applying the remeasured fair values to the shares that have vested during a period.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Risk-free interest rate	2.01	%	1.45	%	2.13	%	1.58	%
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected volatility	46.6	%	53.2	%	46.6	%	52.8	%
Expected term (in years)	6.09		5.78		6.09		6.05

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

Note 7. Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate which is generally 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 annual 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 and six month periods ended June 30, 2017, the Company recorded a provision for income taxes of $22,000 and $77,000, respectively which was primarily comprised of federal alternative minimum tax and state income taxes. The Company recorded no provision for income taxes in the three and six month periods ended June 30, 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 each of the three and six month periods ended June 30, 2017 and 2016, 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.