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 March 31, 2018

☐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 7, 2018 there were 34,906,021 shares of the registrant’s Common Stock outstanding.

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended March 31, 2018

Table of Contents


		Page
PART I: FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive (Loss) 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	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28

PART II: OTHER INFORMATION		29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63

SIGNATURES		64

We use Glaukos, our logo, iStent, iStent Inject, iStent Infinite, iStent SA, 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)


	March 31,		December 31,
	2018		2017
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	15,587	$	24,508
Short-term investments		98,177		94,506
Accounts receivable, net		17,549		16,656
Inventory, net		12,782		11,222
Prepaid expenses and other current assets		3,278		2,568
Total current assets		147,373		149,460
Property and equipment, net		12,069		11,794
Intangible assets, net		2,229		3,147
Deferred tax asset, net		235		235
Deposits and other assets		1,448		1,200
Total assets	$	163,354	$	165,836

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	4,841	$	6,244
Accrued liabilities		13,705		20,449
Deferred rent		100		95
Total current liabilities		18,646		26,788
Other liabilities		1,680		846
Total liabilities		20,326		27,634

Commitments and contingencies (Note 9)

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; 34,855 and 34,647 shares issued and 34,827 and 34,619 shares outstanding at March 31, 2018 and December 31, 2017, respectively		35		35
Additional paid-in capital		339,314		331,073
Accumulated other comprehensive loss		(1,295)		(591)
Accumulated deficit		(194,894)		(192,183)
Less treasury stock (28 shares as of March 31, 2018 and December 31, 2017)		(132)		(132)
Total stockholders' equity		143,028		138,202
Total liabilities and stockholders' equity	$	163,354	$	165,836

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
	March 31,
	2018		2017
Net sales	$	40,133	$	35,907
Cost of sales		5,786		5,180
Gross profit		34,347		30,727
Operating expenses:
Selling, general and administrative		27,155		21,481
Research and development		10,906		8,942
Total operating expenses		38,061		30,423
(Loss) income from operations		(3,714)		304
Other income, net:
Interest and other income		1,016		636
Interest and other expense, net		(8)		(7)
Total other income, net		1,008		629
(Loss) income before taxes		(2,706)		933
Provision for income taxes		5		55
Net (loss) income	$	(2,711)	$	878
Basic net (loss) income per share	$	(0.08)	$	0.03
Diluted net (loss) income per share	$	(0.08)	$	0.02
Weighted average shares used to compute basic net (loss) income per share		34,677		34,146
Weighted average shares used to compute diluted net (loss) income per share		34,677		37,742

See accompanying notes to condensed consolidated financial statements.

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Three Months Ended March 31,
	2018		2017
Operating Activities
Net (loss) income	$	(2,711)	$	878
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		1,665		1,009
Loss on disposal of fixed assets		1		-
Stock-based compensation		5,402		3,202
Unrealized foreign currency gains		(499)		(342)
Amortization of premium on short-term investments		(58)		27
Deferred rent		839		173
Changes in operating assets and liabilities:
Accounts receivable, net		(863)		(81)
Inventory		(1,490)		(538)
Prepaid expenses and other current assets		(708)		477
Accounts payable and accrued liabilities		(8,056)		(2,316)
Other assets		(160)		(163)
Net cash (used in) provided by operating activities		(6,638)		2,326
Investing activities
Purchases of short-term investments		(27,919)		(26,599)
Proceeds from sales and maturities of short-term investments		24,097		25,257
Purchases of property and equipment		(1,246)		(760)
Net cash used in investing activities		(5,068)		(2,102)
Financing activities
Proceeds from exercise of stock options		1,452		1,970
Share purchases under Employee Stock Purchase Plan		1,388		-
Net cash provided by financing activities		2,840		1,970
Effect of exchange rate changes on cash and cash equivalents		(55)		(117)
Net (decrease) increase in cash, cash equivalents and restricted cash		(8,921)		2,077
Cash, cash equivalents and restricted cash at beginning of period		24,508		6,574
Cash, cash equivalents and restricted cash at end of period	$	15,587	$	8,651
Supplemental disclosures of cash flow information
Interest paid	$	-	$	-
Taxes paid	$	3	$	1
Supplemental schedule of noncash investing and financing activities
Reduction of liability upon vesting of stock options previously exercised for unvested stock	$	-	$	3

See accompanying notes to condensed consolidated financial statements.

GLAUKOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization and Basis of Presentation

Organization and business

Glaukos Corporation (Glaukos or the Company), incorporated in Delaware on July 14, 1998, is an ophthalmic medical technology and pharmaceutical company focused on the development and commercialization of novel surgical devices and sustained pharmaceutical therapies designed to treat glaucoma, one of the world’s leading causes of blindness. The Company developed Micro‑Invasive Glaucoma Surgery (MIGS) to serve as an alternative to the traditional glaucoma treatment and management paradigms. MIGS procedures involve the insertion of a micro‑scale device or drug delivery system from within the eye’s anterior chamber through a small corneal incision. The Company’s MIGS devices are designed to reduce intraocular pressure by restoring the natural outflow pathways for aqueous humor. The Company’s MIGS drug delivery systems are designed to reduce intraocular pressure by continuously eluting a glaucoma drug from within the eye, potentially providing sustained pharmaceutical therapy for extended periods of time.

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, 2017 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, 2017, which are contained in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on February 28, 2018. The results for the period ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 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, 2018, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 28, 2018, with the exception of the Company’s adoption of Accounting Standards Codification (ASC) 606, Revenue Recognition – Revenue from Contracts with Customers and its related amendments (ASC 606). See section below entitled “Revenue recognition” and Note 6, Revenue from Contracts with Customers for further discussion of the Company’s adoption of ASC 606 and related disclosures.

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 and stock‑based compensation expense. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, this process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements.

Foreign currency translation

The accompanying condensed consolidated financial statements are presented in U.S. dollars. The Company considers the local currency to be the functional currency for its international subsidiaries. Accordingly, their assets and liabilities are translated into U.S. dollars using the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing throughout the periods presented. Currency translation adjustments arising from period to period are charged or credited to accumulated other comprehensive loss in stockholders’ equity. For the three months ended March 31, 2018 and 2017, the Company reported foreign currency translation losses of approximately $0.5 million and $0.3 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 months ended March 31, 2018, the Company reported a foreign currency transaction loss of $48,000 and for the three months ended March 31, 2017, the Company reported a foreign currency transaction gain of $17,000.

Unrealized gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, primarily gains and losses on intercompany loans, are included in the condensed consolidated statements of operations as a component of other income, net. For the three months ended March 31, 2018 and 2017, the Company reported net unrealized foreign currency transaction gains of $0.5 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, bank certificates of deposits, corporate bonds, corporate commercial paper, U.S. government bonds and U.S. government agency bonds. For financial reporting purposes, liquid investment instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents are recorded at face value or cost, which approximates fair market value. 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 (loss) income within stockholders’ equity.

The Company’s entire investment portfolio 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, 2018 or December 31, 2017.

Realized gains and losses and declines in value, if any, judged to be other-than-temporary on available-for-sale securities are reported in other income, 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 other income, net. 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

Effective January 1, 2018, the Company adopted Accounting Standards Concepts (ASC) 606, Revenue from Contracts with Customers. The Company adopted the standard using the modified retrospective method to contracts that were not complete as of the date of initial application. The Company’s accounting for revenue under ASC 606 is materially consistent with the accounting for revenue under ASC 605 and therefore the cumulative effect of adoption was immaterial. The reported results for the three months ended March 31, 2018 reflect the application of ASC 606 guidance while the reported results for periods prior to January 1, 2018 were prepared under the guidance of ASC 605.

The Company accounts for revenue in accordance with ASC 606 and applies the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

As part of the Company's adoption of ASC 606, the Company elected to use the following practical expedients: (i) to exclude disclosures of transaction prices allocated to remaining performance obligations and when the Company expects to recognize such revenue within one year; (ii) to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less, which mainly includes the Company's internal sales force compensation program; (iii) to account for shipping and handling costs as fulfillment costs (i.e., as an expense) rather than promised service (i.e., a revenue element); and (iv) to exclude from revenue the taxes collected from customers relating to product sales which are remitted to governmental authorities.

The Company derives its revenue from sales of its products in the United States and internationally. Customers are primarily comprised of ambulatory surgery centers (ASCs) and hospitals, with distributors being used in certain international locations where the Company does not have a direct commercial presence.

The Company concluded that one performance obligation exists for the majority of its contracts with customers which is to deliver products in accordance with the Company’s normal delivery times. Revenue is recognized when this performance obligation is satisfied at a point in time when the Company considers control of a product to have transferred to the customer. Revenue reflects the consideration to which the Company expects to be entitled in exchange for those products or services. The Company has determined the transaction price to be the invoice price, net of adjustments, which includes estimates of variable consideration for product returns.

The Company offers volume-based rebate agreements to certain customers, and in these instances, the Company provides a rebate (in the form of a credit memo) at the contract’s conclusion, if earned by the customer. In such cases, the transaction price is allocated between the Company’s delivery of product and the issuance of a rebate at the contract’s conclusion for the customer to utilize on prospective purchases. The performance obligation to issue a customer’s rebate, if earned, is transferred over time and the Company’s method of measuring progress is the output method, whereby, the progress is measured by the estimated rebate earned to date over the total rebate estimated to be earned over the contract period. The provision for volume-based rebates is estimated based on customers' contracted rebate programs and the customers’ projected sales levels. The Company periodically monitors its customer rebate programs to ensure the rebate allowance is fairly stated. The Company’s rebate allowance is included in accrued liabilities in the condensed consolidated balance sheets and estimated rebates accrued were not material during the periods presented.

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. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates which would affect net product revenue and earnings in the period such variances become known.

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 for the three months ended March 31, 2018.

Stock‑based compensation

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

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

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

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. For periods when the Company realizes a net loss, no common stock equivalents are included in the calculation of weighted average number of dilutive common stock equivalents as the effect of applying the treasury stock method is considered anti-dilutive. For periods when the Company realizes net income, diluted net income per share is calculated by dividing the net income by the weighted average number of common shares plus the sum of the weighted average

number of dilutive common stock equivalents outstanding for the period determined using the treasury stock method. Common stock equivalents are comprised of stock options and RSUs outstanding under the Company’s stock option plans and shares issuable under the Company’s Employee Stock Purchase Plan (ESPP).

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


	Three Months Ended
	March 31,
	2018		2017
Numerator:
Net (loss) income – basic	$	(2,711)	$	878
Denominator:
Weighted average number of common shares outstanding - basic		34,677		34,146
Common stock equivalents from outstanding common stock options		-		3,577
Common stock equivalents for ESPP		-		19
Weighted average number of common shares outstanding - diluted		34,677		37,742

Basic net (loss) income per share	$	(0.08)	$	0.03

Diluted net (loss) income per share	$	(0.08)	$	0.02

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
	March 31,
	2018	2017
Stock options outstanding	6,131	1,828
ESPP	22	-
	6,153	1,828

Recently adopted accounting pronouncements

In November 2016, the Financial Accounting Standards Board (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 was effective for the Company beginning on January 1, 2018 and was required to be adopted retrospectively. Historically, the Company’s restricted cash balance has not been significant and the adoption of the guidance did not have a material impact 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). 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 were effective for annual periods beginning after December 15, 2017, including interim periods within those periods with early adoption permitted. The Company adopted the guidance effective January 1, 2018 and the guidance did not have a

Note 3. Balance Sheet Details

Short-term investments

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


	At March 31, 2018
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government bonds	less than 2	$	1,799	$	-	$	(16)	$	1,783
U.S. government agency bonds	less than 2		4,185		-		(24)		4,161
Bank certificates of deposit	less than 1		11,800		-		(8)		11,792
Commercial paper	less than 1		16,178		-		(6)		16,172
Corporate notes	less than 3		46,381		2		(243)		46,140
Asset-backed securities	less than 3		18,262		-		(133)		18,129
Total		$	98,605	$	2	$	(430)	$	98,177

	At December 31, 2017
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government bonds	less than 2	$	1,799	$	-	$	(17)	$	1,782
U.S. government agency bonds	less than 2		2,698		-		(17)		2,681
Bank certificates of deposit	less than 1		10,300		1		(3)		10,298
Commercial paper	less than 1		11,598		-		(5)		11,593
Corporate notes	less than 3		51,532		6		(121)		51,417
Asset-backed securities	less than 3		16,796		-		(61)		16,735
Total		$	94,723	$	7	$	(224)	$	94,506

Accounts receivable, net

Accounts receivable consisted of the following (in thousands):


	March 31,		December 31,
	2018		2017
Accounts receivable	$	18,198	$	17,248
Less allowance for doubtful accounts		(649)		(592)
	$	17,549	$	16,656

Inventory, net

Inventory consisted of the following (in thousands):


	March 31,		December 31,
	2018		2017
Finished goods	$	3,516	$	4,225
Work in process		3,391		2,368
Raw material		5,875		4,629
	$	12,782	$	11,222

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):


	March 31,		December 31,
	2018		2017
Accrued contract payments (see Note 9)	$	999	$	1,033
Accrued bonuses		3,168		9,106
Accrued vacation benefits		2,211		2,121
Accrued Employee Stock Purchase Plan liability		1,384		1,517
Other accrued liabilities		5,943		6,672
	$	13,705	$	20,449

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 measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands). The Company did not have any financial liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017.


			At March 31, 2018
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	March 31,		identical assets		inputs		inputs
	2018		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (i)	$	391	$	391	$	-	$	-
U.S. government agency bonds (ii)		4,161		-		4,161		-
U.S. government bonds (ii)		1,783		-		1,783		-
Bank certificates of deposit (ii)		11,792		-		11,792		-
Commercial paper (ii) (iii)		17,672		-		17,672		-
Corporate notes (ii)		46,140		-		46,140		-
Asset-backed securities (ii)		18,129		-		18,129		-
	$	100,068	$	391	$	99,677	$	-


			At December 31, 2017
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	December 31,		identical assets		inputs		inputs
	2017		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (i)	$	2,370	$	2,370	$	-	$	-
U.S. government agency bonds (ii)		2,681		-		2,681		-
U.S. government bonds (ii)		1,782		-		1,782
Bank certificates of deposit (ii)		10,298		-		10,298		-
Commercial paper (ii) (iii)		14,593		-		14,593		-
Corporate notes (ii)		51,417		-		51,417		-
Asset-backed securities (ii)		16,735		-		16,735		-
	$	99,876	$	2,370	$	97,506	$	-

⁽ⁱ⁾

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

⁽ⁱⁱ⁾

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

⁽ⁱⁱⁱ⁾

As of March 31, 2018 and December 31, 2017, one commercial paper investment totaling $1,500 and $3,000 (in thousands), respectively, is included in cash and cash equivalents on the condensed consolidated balance sheets, as each of the investments have a maturity of three months or less from the date of purchase on the condensed consolidated balance sheets.

Money market funds and currency are highly liquid investments and are actively traded. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. 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. 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 months ended March 31, 2018 and 2017, the Company recorded amortization expense of $0.9 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 the distributors’ territories. Management recorded the estimated fair value of the non-compete provisions as intangible assets. As of March 31, 2018, two of these intangible assets were fully amortized, and the gross non-compete intangible assets for the remaining two agreements totaled $0.3 million and continue to be amortized on a straight-line basis to selling, general and administrative expense over the one to two year periods. For the three months ended March 31, 2018 and 2017, the Company recorded amortization expense related to the non-compete intangible assets of approximately $43,000 and $63,000, respectively.

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


	March 31,		December 31,
	2018		2017
GMP royalty buyout	$	17,500	$	17,500
Non-compete agreements		341		524
		17,841		18,024
Accumulated amortization		(15,612)		(14,877)
Total	$	2,229	$	3,147
Weighted average amortization period (in months)		60		60

The remaining amortization expense for 2018 is $2.2 million, after which point the above mentioned intangible assets will be fully amortized.

Note 6. Revenue from Contracts with Customers

The Company’s net sales are generated primarily from sales of iStent products to customers. Customers are primarily comprised of ASCs and hospitals, with distributors being used in certain international locations where the Company currently does not have a direct commercial presence.

Disaggregation of revenue

The Company’s disaggregation of revenue is consistent with its operating segments disclosed in Note 10, Business Segment Information and all of the Company’s net sales are considered revenue from contracts with customers.

Contract balances

Amounts are recorded as accounts receivable when the Company’s right to consideration becomes unconditional. As payment terms on invoiced amounts are typically 30 days, consistent with ASC 606 guidance, the Company does not consider any significant financing components in customer contracts given the expected time between transfer of the promised products and the payment of the associated consideration is less than one year. As of March 31, 2018 and December 31, 2017, all amounts included in accounts receivable, net on the condensed consolidated balance sheets are related to contracts with customers.

The Company does not have any contract assets given that the Company does not have any unbilled receivables and sales commissions are expensed when incurred as any incremental cost of obtaining contracts with customers would have an amortization period of less than one year.

Contract liabilities reflect consideration received from customers’ purchases allocated to the Company’s performance obligation to issue a rebate to customers who may be eligible for a rebate at the conclusion of their contract term. This performance obligation is transferred over time and the Company’s method of measuring progress is the output method, whereby the progress is measured by the estimated rebate earned to date over the total rebate estimated to be earned over the contract period. The Company’s rebate allowance is included in accrued liabilities in the condensed consolidated balance sheets and estimated rebates accrued were not material during the periods presented.

During the three months ended March 31, 2018, the Company did not recognize any revenue related to changes in transaction prices related to its contracts with customers and did not recognize any changes in revenue related to amounts included in contract liabilities at the beginning of the period.

Note 7. 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 ESPP. The 2015 Stock Plan permits grants of restricted stock units (RSU) awards. RSU awards vest 25% on each of the first, second, third and fourth anniversaries of the grant date.

Stock options

The following table summarizes stock option activity under the 2001 Stock Plan, 2011 Stock Plan and 2015 Stock Plan during the three months ended March 31, 2018 (in thousands):




	Number of
	Shares		Weighted-
	Underlying	Average
	Options	Exercise Price
Outstanding at December 31, 2017	7,026	$	21.36
Granted	743		30.92
Exercised	(144)		10.14
Canceled/forfeited/expired	(146)		29.03
Outstanding at March 31, 2018	7,479	$	22.37
Vested and expected to vest at March 31, 2018	7,324	$	22.16
Exercisable at March 31, 2018	4,083	$	13.88

The weighted average estimated grant date fair value per share of stock options granted during the three months ended March 31, 2018 was $14.46 and the total fair value of stock options that vested during the three months ended

March 31, 2018 was $9.3 million. Additionally, as of March 31, 2018, total unamortized stock-based compensation expense was $53.7 million related to unvested share-based compensation arrangements which is expected to be recognized over a weighted-average vesting term of approximately 3.0 years.

Stock-based compensation cost capitalized in inventory was not material for the three months ended March 31, 2018.

Restricted stock units

The following table summarizes the activity of unvested RSUs under the Stock Plans during the three months ended March 31, 2018 (in thousands):


			Weighted-
	Number of		average
	shares		grant date
	(in thousands)		fair value
Unvested at December 31, 2017	173	$	39.10
Granted	26		27.08
Vested	-		-
Canceled/forfeited	(7)		33.45
Unvested at March 31, 2018	192	$	37.69

No RSUs vested during the three months ended March 31, 2018.

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.

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


	Three Months Ended
	March 31,
	2018		2017
Cost of sales	$	174	$	130
Selling, general and administrative		4,016		2,314
Research and development		1,212		758
Total	$	5,402	$	3,202

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,
	2018		2017
Risk-free interest rate	2.67	%	2.17	%
Expected dividend yield	0.0	%	0.0	%
Expected volatility	44.9	%	46.6	%
Expected term (in years)	6.10		6.09

Note 8. Income Taxes

The provision for income taxes is determined using an effective tax rate. For the three months ended March 31, 2018, the Company’s estimated annual effective tax rate of (0.5)% 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, 2018, the Company recorded a provision for income taxes of $5,000, which was primarily comprised of state income taxes.

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with 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 period ended March 31, 2018, the Company has established a valuation allowance for all of the deferred tax assets, with the exception of known refundable federal credits. For the period ended March 31, 2017, the Company had established a valuation 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.

The Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. Among other changes, the Act reduces the US federal corporate tax rate from 34 percent to 21 percent for federal tax purposes. In accordance with Staff Accounting Bulletin 118, as of March 31, 2018, the Company has not completed the accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on the existing deferred tax balances. In all cases, the Company will continue to make and refine calculations as additional analysis is completed. In addition, estimates may also be affected as the Company gains a more thorough understanding of the Act.

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts based on information available at December 31, 2017. The provisional amount recorded related to the remeasurement of the deferred tax balance was $25.2 million, which was fully offset by a decrease in the valuation allowance. There were no significant changes to any of the balances recorded at December 31, 2017 as a result of the Act during the three months ended March 31, 2018.

Due to uncertainties which currently exist in the interpretation of the provisions of the Act regarding Internal Revenue Code (IRC) Section 162(m), the Company is still evaluating the potential impacts of IRC Section 162(m) as amended by the Act.

Note 9. 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 some of 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 two adjacent facilities located in San Clemente, California, both of which are subject to leases that expire on December 31, 2021. The agreements each contain an option to extend the leases for up to two additional three-year periods at market rates. The total square footage of both facilities equals approximately 77,000, and during the three months ended March 31, 2018, the Company entered into an agreement to increase the leased square footage by approximately 21,000 square feet, effective January 1, 2019.

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

The Company recorded deferred rent of $0.3 million as of March 31, 2018 and December 31, 2017, in conjunction with its facilities lease agreements. For each of the three months ended March 31, 2018 and 2017, rent expense was $0.4 million.

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


Remainder of 2018	$	1,193
2019		1,543
2020		1,641
2021		1,644
2022		-
Thereafter		-
	$	6,021

Regents of the University of California

On December 30, 2014, the Company executed an agreement (the UC Agreement) with the Regents of the University of California (the University) to correct inventorship in connection with a group of the Company’s U.S. patents (the Patent Rights) and to obtain from the University a covenant that it did not and would not claim any right or title to the Patent Rights and will not challenge or assist any others in challenging the Patent Rights. In connection with the UC Agreement, Glaukos agreed to pay to the University a low single-digit percentage of worldwide net sales of certain current and future products, including the Company’s iStent products, with a required minimum annual payment of $0.5 million. This ongoing product payment terminates on the date that the last of the Patent Rights expires, which is currently expected to be in 2022. For the three months ended March 31, 2018 and 2017, the Company recorded approximately $1.0 million and $0.9 million, respectively, in cost of sales in connection with this product payment obligation.

Executive Deferred Compensation Plan

Effective April 1, 2017, the Company established a deferred compensation plan (the Deferred Compensation Plan) for eligible senior level employees. The plan is designed to permit eligible employees to make elective deferrals of compensation to which he or she will become entitled in the future. The Company also established a rabbi trust that serves as an investment to shadow the Deferred Compensation Plan liability. The investments of the rabbi trust consist of company-owned life insurance policies (COLIs). The fair value of the Deferred Compensation Plan liability, included in other liabilities on the condensed consolidated balance sheets, was approximately $1.5 million as of March 31, 2018 and the cash surrender value of the COLIs, included in deposits and other assets on the condensed consolidated balance sheets, which reflects the underlying assets at fair value, was approximately $0.9 million of March 31, 2018.

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, 2017 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the U.S. Securities and Exchange Commission (SEC) on February 28, 2018.

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

Overview

We are an ophthalmic medical technology and pharmaceutical company focused on the development and commercialization of surgical devices and sustained pharmaceutical therapies 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 paradigms. MIGS procedures involve the insertion of a micro‑scale device or drug delivery system from within the eye’s anterior chamber through a small corneal incision. Our MIGS devices are designed to reduce intraocular pressure by restoring the natural outflow pathways for aqueous humor. Our MIGS drug delivery systems are designed to reduce intraocular pressure by continuously eluting a glaucoma drug from within the eye, potentially providing sustained pharmaceutical therapy for extended periods of time.

Our iStent, a micro‑bypass stent that is designed to reduce intraocular pressure by restoring the natural physiologic pathways for aqueous humor, was the first commercially available MIGS treatment solution. Approved by the United States (U.S.) Food and Drug Administration (FDA) for insertion in combination with cataract surgery, the iStent procedure is currently reimbursed by Medicare and all major national private payors. Our next product, the iStent Inject, includes two stents pre‑loaded in an auto‑injection inserter that are also designed to lower intraocular pressure. The iStent Inject was commercially available in 2017 in certain European Union countries, Canada, Australia, Brazil and South Africa. In these markets, it is approved for use in conjunction with cataract surgery or as a standalone procedure, even though reimbursement may not be available for all such procedures. We are currently seeking FDA approval to market the iStent Inject in the U.S.

We are developing four additional iStent pipeline products: the iStent Inject (in the U.S.), the iStent SA, the iStent Infinite and the iStent Supra. In an effort to obtain approval to market the iStent Inject in the U.S. in conjunction with cataract surgery, we completed a U.S. investigational device exemption (IDE) pivotal trial and submitted a premarket approval application (PMA) for the iStent Inject in 2017. The iStent SA is designed for use as a standalone glaucoma procedure. Similar to the iStent Inject, the iStent SA is a two-stent product that is slightly wider than the iStent Inject and uses a different auto‑injection inserter designed for use in a standalone procedure. The iStent SA is currently being studied in a U.S. pivotal IDE study as a standalone treatment for lowering intraocular pressure in pseudophakic glaucoma patients. We recently submitted an IDE application for the iStent Infinite, which includes three stents pre-loaded in an auto-injection inserter and is intended to lower intraocular pressure in refractory glaucoma patients. The iStent Supra is designed to access an alternative drainage space within the eye and is being evaluated in a U.S. pivotal


	Three Months Ended
	March 31,
	2018		2017
Net (loss) income	$	(2,711)	$	878
Other comprehensive loss:
Foreign currency translation adjustments		(494)		(340)
Unrealized (loss) gain on short-term investments, net of tax		(210)		40
Other comprehensive loss		(704)		(300)
Total comprehensive (loss) income	$	(3,415)	$	578


	Three months ended
	March 31,
Geographic Net Sales Information (in thousands)	2018		2017
United States	$	33,613	$	31,877
International		6,520		4,030
Total net sales	$	40,133	$	35,907