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 September 30, 2019

Or

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	GKOS	New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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:

☒ Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer
​ ☐ 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 November 5, 2019, there were 36,927,816 shares of the registrant’s Common Stock outstanding.

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended September 30, 2019

Table of Contents

		Page
PART I: FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Loss	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II: OTHER INFORMATION		36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	37
Item 6.	Exhibits	75
SIGNATURES		76

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,” the “Company,” or “Glaukos” refer to Glaukos Corporation and its consolidated subsidiaries.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

	September 30,		December 31,
	2019		2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	39,534	$	29,821
Short-term investments		113,385		110,667
Accounts receivable, net		24,345		18,673
Inventory, net		12,801		13,282
Prepaid expenses and other current assets		19,223		4,124
Total current assets		209,288		176,567
Restricted cash		8,881		8,775
Property and equipment, net		20,038		19,153
Operating lease right-of-use asset		12,146		-
Finance lease right-of-use asset		53,343		-
Income tax receivable		213		213
Deposits and other assets		3,527		2,262
Total assets	$	307,436	$	206,970
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	3,501	$	6,286
Accrued liabilities		29,602		23,964
Deferred rent		-		115
Total current liabilities		33,103		30,365
Operating lease liability		11,406		-
Finance lease liability		68,851		-
Other liabilities		3,960		2,745
Total liabilities		117,320		33,110
Commitments and contingencies (Note 10)
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; 36,945 and 36,135 shares issued and 36,917 and 36,107 shares outstanding as of September 30, 2019 and December 31, 2018, respectively		37		36
Additional paid-in capital		414,665		378,352
Accumulated other comprehensive income		1,837		738
Accumulated deficit		(226,291)		(205,134)
Less treasury stock (28 shares as of September 30, 2019 and December 31, 2018)		(132)		(132)
Total stockholders' equity		190,116		173,860
Total liabilities and stockholders' equity	$	307,436	$	206,970

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net sales	$	58,509	$	43,908	$	171,135	$	127,202
Cost of sales		7,703		6,011		22,684		17,957
Gross profit		50,806		37,897		148,451		109,245
Operating expenses:
Selling, general and administrative		44,443		31,632		117,024		87,425
Research and development		17,278		13,202		48,277		36,719
In-process research and development (Note 1)		1,500		-		3,745		-
Total operating expenses		63,221		44,834		169,046		124,144
Loss from operations		(12,415)		(6,937)		(20,595)		(14,899)
Non-operating income (expense):
Interest income		780		583		2,368		1,568
Interest expense		(1,028)		-		(2,041)		-
Other expense, net		(656)		(230)		(508)		(1,346)
Total non-operating (expense) income		(904)		353		(181)		222
Loss before taxes		(13,319)		(6,584)		(20,776)		(14,677)
Provision for income taxes		187		37		381		53
Net loss	$	(13,506)	$	(6,621)	$	(21,157)	$	(14,730)
Basic and diluted net loss per share	$	(0.37)	$	(0.19)	$	(0.58)	$	(0.42)
Weighted average shares used to compute basic and diluted net loss per share		36,831		35,541		36,507		35,075

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net loss	$	(13,506)	$	(6,621)	$	(21,157)	$	(14,730)
Other comprehensive income:
Foreign currency translation gain		530		322		364		1,369
Unrealized gain (loss) on short-term investments, net of tax		74		74		735		(71)
Other comprehensive income		604		396		1,099		1,298
Total comprehensive loss	$	(12,902)	$	(6,225)	$	(20,058)	$	(13,432)

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

						Accumulated
				Additional		other
	Common stock			paid-in		comprehensive		Accumulated		Treasury stock			Total
	Shares	Amount		capital		income		deficit		Shares	Amount		equity
Balance at December 31, 2018	36,135	$	36	$	378,352	$	738	$	(205,134)	(28)	$	(132)	$	173,860
Common stock issued under stock plans	226		—		5,406		—		—	—		—		5,406
Stock-based compensation	—		—		7,129		—		—	—		—		7,129
Other comprehensive income	—		—		—		436		—	—		—		436
Net loss	—		—		—		—		(1,342)	—		—		(1,342)
Balance at March 31, 2019	36,361	$	36	$	390,887	$	1,174	$	(206,476)	(28)	$	(132)	$	185,489
Common stock issued under stock plans	305		1		318		—		—	—		—		319
Stock-based compensation	—		—		8,247		—		—	—		—		8,247
Other comprehensive income	—		—		—		59		—	—		—		59
Net loss	—		—		—		—		(6,309)	—		—		(6,309)
Balance at June 30, 2019	36,666	$	37	$	399,452	$	1,233	$	(212,785)	(28)	$	(132)	$	187,805
Common stock issued under stock plans	279		—		6,666		—		—	—		—		6,666
Stock-based compensation	—		—		8,547		—		—	—		—		8,547
Other comprehensive income	—		—		—		604		—	—		—		604
Net loss	—		—		—		—		(13,506)	—		—		(13,506)
Balance at September 30, 2019	36,945	$	37	$	414,665	$	1,837	$	(226,291)	(28)	$	(132)	$	190,116

						Accumulated
				Additional		other
	Common stock			paid-in		comprehensive		Accumulated		Treasury stock			Total
	Shares	Amount		capital		(loss) income		deficit		Shares	Amount		equity
Balance at December 31, 2017	34,647	$	35	$	331,073	$	(591)	$	(192,183)	(28)	$	(132)	$	138,202
Common stock issued under stock plans	208		—		2,839		—		—	—		—		2,839
Stock-based compensation	—		—		5,402		—		—	—		—		5,402
Other comprehensive loss	—		—		—		(704)		—	—		—		(704)
Net loss	—		—		—		—		(2,711)	—		—		(2,711)
Balance at March 31, 2018	34,855	$	35	$	339,314	$	(1,295)	$	(194,894)	(28)	$	(132)	$	143,028
Common stock issued under stock plans	311		—		2,836		—		—	—		—		2,836
Stock-based compensation	—		—		6,461		—		—	—		—		6,461
Other comprehensive income	—		—		—		1,606		—	—		—		1,606
Net loss	—		—		—		—		(5,398)	—		—		(5,398)
Balance at June 30, 2018	35,166	$	35	$	348,611	$	311	$	(200,292)	(28)	$	(132)	$	148,533
Common stock issued under stock plans	829		1		13,925		—		—	—		—		13,926
Stock-based compensation	—		—		7,173		—		—	—		—		7,173
Other comprehensive income	—		—		—		396		—	—		—		396
Net loss	—		—		—		—		(6,621)	—		—		(6,621)
Balance at September 30, 2018	35,995	$	36	$	369,709	$	707	$	(206,913)	(28)	$	(132)	$	163,407

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Nine Months Ended September 30,
	2019		2018
Operating Activities
Net loss	$	(21,157)	$	(14,730)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		2,674		5,063
Amortization of lease right-of-use assets		2,405		-
Loss on disposal of fixed assets		26		83
Stock-based compensation		23,923		19,036
Unrealized foreign currency losses		469		1,541
Amortization of discount on short-term investments		(298)		(205)
Deferred rent and other liabilities		3,666		1,491
Changes in operating assets and liabilities:
Accounts receivable, net		(5,828)		(3,209)
Inventory, net		414		(2,511)
Prepaid expenses and other current assets		(2,326)		(1,695)
Accounts payable and accrued liabilities		(60)		(2,000)
Other assets		(86)		(1,128)
Net cash provided by operating activities		3,822		1,736
Investing activities
Purchases of short-term investments		(64,726)		(70,100)
Proceeds from sales and maturities of short-term investments		61,870		64,185
Purchases of property and equipment		(3,530)		(2,733)
Net cash used in investing activities		(6,386)		(8,648)
Financing activities
Proceeds from exercise of stock options		14,005		16,418
Proceeds from share purchases under Employee Stock Purchase Plan		3,388		3,509
Payment of employee taxes related to vested restricted stock units		(5,002)		(325)
Net cash provided by financing activities		12,391		19,602
Effect of exchange rate changes on cash and cash equivalents		(8)		80
Net increase in cash, cash equivalents and restricted cash		9,819		12,770
Cash, cash equivalents and restricted cash at beginning of period		38,596		24,508
Cash, cash equivalents and restricted cash at end of period	$	48,415	$	37,278
Supplemental disclosures of cash flow information
Taxes paid	$	96	$	13

See accompanying notes to condensed consolidated financial statements.

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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 therapies designed to treat glaucoma, corneal disorders and retinal diseases. The Company initially developed Micro-Invasive Glaucoma Surgery (MIGS) to address the shortcomings of traditional glaucoma treatment options. 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 (IOP) by restoring the natural outflow pathways for aqueous humor. The Company’s MIGS drug delivery systems are designed to reduce IOP by continuously eluting a glaucoma drug from within the eye, potentially providing sustained pharmaceutical therapy for extended periods of time. Glaukos intends to leverage its capabilities to build a portfolio of micro-scale surgical and pharmaceutical therapies in corneal health and retinal disease as well.

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 as of December 31, 2018 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, 2018, 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, 2019. The results for the period ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period.

Proposed Acquisition of Avedro, Inc.

On August 7, 2019, the Company entered into an Agreement and Plan of Merger by and among Glaukos, Atlantic Merger Sub, Inc. (Merger Sub) and Avedro, Inc. (Avedro), pursuant to which Merger Sub will merge with and into Avedro, with Avedro continuing as the surviving corporation and a wholly owned subsidiary of the Company (the Merger). The Merger is subject to certain closing conditions, including but not limited to, the adoption of the Agreement and Plan of Merger by holders of a majority of the outstanding common stock of Avedro entitled to vote which is expected to occur on November 19, 2019. The closing of the Merger was also subject to the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act); however, early termination under the HSR Act was granted on August 28, 2019. If all remaining conditions are satisfied, upon the closing of the Merger, all issued and outstanding shares of Avedro common stock will be automatically cancelled and converted into the right to receive a number of shares of Glaukos common stock equal to the product of the number of shares of Avedro common stock multiplied by 0.365. The Company filed a Registration Statement on Form S-4 with the SEC on September 17, 2019 (the Registration Statement) to register the issuance of shares of Glaukos common stock to Avedro stockholders upon closing of the Merger, which was declared effective by the SEC on October 17, 2019. The Merger is expected to close in the fourth quarter of 2019. Following the Merger,

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existing Glaukos stockholders are expected to own approximately 85% of the combined company, with the former Avedro stockholders expected to own the remaining 15%, on a fully diluted basis.

Avedro provides several corneal strengthening solutions, including Photrexa, a bio-activated pharmaceutical therapy for the corneal cross-linking treatment of keratoconus. Through 2018, over 400,000 procedures have been performed globally with Avedro’s products, including more than 18,000 procedures performed in the United States alone.

The Merger is intended to expand the Company’s portfolio of pipeline products beyond the treatment of glaucoma to include pharmaceutical therapies for the treatment of corneal disorders as part of the Company’s strategic objective to build a portfolio of micro-scale surgical and pharmaceutical therapies in corneal health and retinal disease.

Licensing Arrangement with Intratus, Inc.

On July 22, 2019, the Company entered into a global licensing agreement with Intratus, Inc. (Intratus) for $1.5 million in cash, plus future performance-based consideration upon achievement of certain development, regulatory approvals and commercial milestones and royalties on commercial sales, pursuant to which the Company obtained an exclusive, royalty-bearing license to research, develop, manufacture and commercialize Intratus’ patented, non-invasive drug delivery platform designed for use in the treatment of dry eye disease, glaucoma and other corneal disorders such as blepharitis, conjunctivitis and related conditions.

The $1.5 million payment was immediately expensed to in-process research and development (IPR&D) as management determined there were no alternative future uses for the technology acquired.

Acquisition of DOSE Medical

On June 19, 2019, the Company entered into a definitive agreement and plan of merger to acquire DOSE Medical Corporation (DOSE) for $2.5 million in cash, plus potential future performance-based consideration upon achievement of certain regulatory approvals and commercial milestones and royalties on commercial sales (the DOSE Merger). If certain DOSE products receive United States Food and Drug Administration (FDA) approval within ten years following the closing of the DOSE Merger, the Company will pay the DOSE shareholders amounts between $5.0 million and $22.5 million, depending on the type of DOSE product approved. The Company will pay additional performance-based payments to DOSE shareholders if within ten years of closing of the DOSE Merger, such DOSE products receive approval from the EU European Medicines Agency, in which case the Company will pay the DOSE shareholders either $1.25 million and/or $2.5 million, depending on the type of DOSE product approved. Following FDA approval of such DOSE products, the Company will pay the DOSE shareholders quarterly royalty payments equal to 5% of net sales of such DOSE products for a period of ten years. The Company will also pay the DOSE shareholders additional performance-based payments of $7.5 million and $20.0 million upon the achievement of certain net sales milestones with respect to such DOSE products. Finally, under the terms of the DOSE Merger, the Company may elect to buyout the additional milestone and royalty payments described above by paying former DOSE shareholders between $10.0 and $55.0 million, depending on the type of DOSE product involved.

On June 27, 2019, the Company completed its acquisition of DOSE and DOSE became a wholly-owned subsidiary of the Company. The transaction was accounted for as an asset acquisition. Of the $2.5 million initial cash payment, $2.2 million was immediately charged to IPR&D expense as management determined there was no alternative future use related to the single group of identifiable assets purchased. The remaining $0.3 million of upfront consideration was capitalized as property & equipment, net and is being depreciated over the corresponding asset’s useful life. Management will account for the payment of the future performance-based consideration if and when earned.

DOSE was previously a wholly-owned subsidiary of the Company. In 2010, it was spun-out as a standalone entity and was accounted for as a consolidated variable interest entity. In 2015, the Company acquired the iDose product line and related assets from DOSE and upon the acquisition, the Company derecognized DOSE as a consolidated variable interest entity in the financial statements, and in 2017 the Company acquired DOSE’s IOP sensor system. Thomas W. Burns, the Company’s President, Chief Executive and a member of its board of directors, and William J. Link, Ph.D., Chairman of the Company’s board of directors, served on the board of directors of DOSE and certain members of the Company’s management and board of directors held an equity interest in DOSE prior to being acquired by the Company.

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Note 2.  Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the nine months ended September 30, 2019, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019, with the exception of the Company’s adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (Accounting Standards Codification (ASC) 842). See section below entitled “Leases” and Note 5, Leases for further discussion of the Company’s adoption of ASC 842 and related disclosures.

Use of estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated 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 condensed consolidated 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 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, the incremental borrowing rate related to the Company’s leased assets 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 condensed consolidated financial statements.

Foreign currency translation

The accompanying condensed consolidated financial statements are presented in United States (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. As a result, currency translation adjustments arising from period to period are charged or credited to accumulated other comprehensive income in stockholders’ equity. For the three and nine months ended September 30, 2019, the Company reported foreign currency translation gains of approximately $0.5 million and $0.4 million, respectively. For the three and nine months ended September 30, 2018, the Company reported foreign currency translation gains of approximately $0.3 million and $1.4 million, respectively.

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 expense, net. For the three and nine months ended September 30, 2019 the Company reported net unrealized foreign currency transaction losses of $0.6 million and $0.5 million, respectively. For the three and nine months ended September 30, 2018, the Company reported net unrealized foreign currency transaction losses of $0.4 million and $1.5 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 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

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balance sheet date. The Company did not have any trading securities or restricted investments at September 30, 2019 or December 31, 2018.

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 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 from investments are included in other expense, 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.

Restricted cash

The Company had a bank issue a letter of credit in the amount of $8.8 million related to its Aliso Viejo, California office building lease, which commenced on April 1, 2019. The letter of credit is secured with an amount of cash held in a restricted account of $8.9 million and $8.8 million as of September 30, 2019 and December 31, 2018, respectively. Beginning on the first day of the thirty-seventh month of the lease term, and on each twelve month anniversary thereafter, the letter of credit will be reduced by 20% until the letter of credit amount has been reduced to $2.0 million. See Note 10, Commitments and Contingencies for additional information related to the Aliso Viejo, California office building lease and associated letter of credit commitment.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that equate to the amount reported in the condensed consolidated statement of cash flows as of the beginning and end of the nine month period ended September 30, 2019 (in thousands):

		September 30,		December 31,
		2019		2018
Cash and cash equivalents	$	39,534	$	29,821
Restricted cash		8,881		8,775
Cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows	$	48,415	$	38,596

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).

Leases

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. In September 2017, the FASB issued ASU No. 2017-13, which provides additional clarification and implementation guidance on the previously issued ASU No. 2016-02 (collectively, (ASC 842)). Under the new guidance, a lessee is required to recognize a lease liability and a right-of-use asset for all leases with terms in excess of 12 months.

Consistent with historical guidance, a lessee’s recognition, measurement, and presentation of expenses and cash flows arising from a lease will continue to depend primarily on its classification. ASC 842 was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted the requirements of ASC 842 effective January 1, 2019 and elected the modified retrospective method for all lease

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arrangements at the beginning of the period of adoption. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840, Leases.

For leases that commenced before the effective date of ASC 842, the Company elected the transition package of three practical expedients permitted within ASC 842, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs.

The Company did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e., leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. As a result of adopting ASC 842 as of January 1, 2019, the Company recorded an operating lease right-of-use asset of $12.8 million and related operating lease liability of $13.4 million, respectively, primarily related to facilities and certain equipment, based on the present value of the future lease payments on the date of adoption. Adopting ASC 842 did not have a material impact on the Company’s condensed consolidated statements of operations and cash flows. See Note 5, Leases for further discussion of the Company’s adoption of ASC 842 and related disclosures.

The Company determines if an arrangement is a lease at inception. As a lessee, right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company does not have any outstanding debt or committed credit facilities, the Company estimates the incremental borrowing rate based on prevailing financial market conditions, peer company credit analyses, and management judgment. Operating lease right-of-use assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The lease terms used to calculate the right-of-use asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition.

As of April 1, 2019, the Company recorded a finance lease right-of-use asset of $54.5 million and related finance lease liability of $67.2 million with respect to the commencement of its lease in Aliso Viejo, California based on the present value of the future lease payments on the date of commencement. As of September 30, 2019, the finance lease right-of-use asset excludes lease incentives totaling $12.7 million included in prepaid expenses and other current assets on the condensed consolidated balance sheets.

Revenue recognition

The Company accounts for revenue in accordance with ASC 606, Revenue Recognition – Revenue from Contracts with Customers and its related amendments (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.

The Company derives its revenue from sales of its products in the United States and internationally. Customers are primarily comprised of ambulatory surgery centers 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, which is the point in time when the Company considers control of a product to have

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transferred to the customer. Revenue recognized 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 as IPR&D.

At each financial reporting date, the Company accrues the estimated unpaid costs of clinical study activities performed during a period 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 during the three and nine months ended September 30, 2019.

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 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.

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

Software costs

The Company currently expenses software service costs along with any associated implementation costs as services are provided and implementation costs are incurred.

Comprehensive loss

All components of comprehensive loss, including net loss, are reported in the condensed consolidated financial statements in the period in which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities and foreign currency translation adjustments.

Net loss per share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. 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 outstanding and unvested RSUs under the Company’s incentive compensation plans, and shares issuable under the Company’s Employee Stock Purchase Plan (ESPP).

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

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2019	2018	2019	2018
Stock options outstanding	3,602	4,781	3,636	5,707
Unvested restricted stock units	232	196	364	355
Employee stock purchase plan	1	15	5	42
	3,835	4,992	4,005	6,104

Recently adopted accounting pronouncements

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02) that gives entities the option to reclassify to retained earnings tax effects related to items that have been stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (the Act). A company that elects to reclassify these amounts must reclassify stranded tax effects related to the Act’s change in U.S. federal tax rate for all items accounted for in other comprehensive income. Companies can also elect to reclassify other stranded effects that relate to the Act but do not directly relate to the change in the federal rate. Companies can choose whether to apply the amendments retrospectively to each period in which the effect of the Act is recognized or to apply the amendments in the period of adoption. The guidance was effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted ASU 2018-02 effective January 1, 2019 and the adoption did not have a material impact to the Company’s condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered, or the service has been rendered, and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The accounting standard was effective for fiscal years beginning after December 15,

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2018, including interim periods within those fiscal years. The Company adopted the guidance effective January 1, 2019 and the guidance did not have a material impact to the Company’s condensed consolidated financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification (the SEC Release), to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of GAAP or other regulatory requirements. Among other changes, the SEC Release expanded the disclosure requirements related to the analysis of stockholders’ equity within a Company’s interim condensed consolidated financial statements. Presentation of the changes in each caption of stockholders’ equity presented on the condensed consolidated balance sheets must be provided in a note or separate statement, and the Company has elected to include a separate statement (the Condensed Consolidated Statements of Stockholders’ Equity above) to present quarterly activity during the nine months ended September 30, 2019 and September 30, 2018.

See above under “Leases” for a discussion of ASC 842, which was adopted effective January 1, 2019.

Recently issued accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which provided additional implementation guidance on the previously issued guidance. The Company is assessing the potential impacts of these standards; however, it does not believe there will be a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 250): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which removes the second step of the impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of the reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This updated guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is assessing the potential impacts of the standard; however, it does not believe there will be a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (ASU 2018-13), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The guidance expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income (loss). ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is assessing the potential impacts of the standard; however, it does not believe there will be a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which amends current guidance to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 is effective for the Company for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. The Company is assessing the potential impacts of the standard; however, it does not believe there will be a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15) which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company is assessing the potential impacts of the standard on its consolidated financial statements.

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In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606 (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer and precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. For the Company, these amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted, including adoption in any interim period, for entities that have adopted ASC 606. The Company is assessing the potential impacts of the standard on its consolidated financial statements.

Note 3.  Balance Sheet Details

Short-term investments

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

	At September 30, 2019
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government agency bonds	less than 1		500		—		—		500
Bank certificates of deposit	less than 1		10,500		12		—		10,512
Commercial paper	less than 1		9,442		12		—		9,454
Corporate notes	less than 3		66,697		331		(2)		67,026
Asset-backed securities	less than 3		25,777		124		(8)		25,893
Total		$	112,916	$	479	$	(10)	$	113,385
	At December 31, 2018
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government bonds	less than 1	$	1,300	$	-	$	(3)	$	1,297
U.S. government agency bonds	less than 1		1,994		-		(12)		1,982
Bank certificates of deposit	less than 2		15,201		2		(3)		15,200
Commercial paper	less than 1		9,597		1		(5)		9,593
Corporate notes	less than 3		60,923		24		(194)		60,753
Asset-backed securities	less than 3		21,918		18		(94)		21,842
Total		$	110,933	$	45	$	(311)	$	110,667

Accounts receivable, net

Accounts receivable consisted of the following (in thousands):

	September 30,		December 31,
	2019		2018
Accounts receivable	$	25,085	$	19,333
Allowance for doubtful accounts		(740)		(660)
	$	24,345	$	18,673

Inventory, net

Inventory consisted of the following (in thousands):

	September 30,		December 31,
	2019		2018
Finished goods	$	4,260	$	4,256
Work in process		4,404		3,197
Raw material		4,137		5,829
	$	12,801	$	13,282

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Accrued liabilities

Accrued liabilities consisted of the following (in thousands):

	September 30,		December 31,
	2019		2018
Accrued bonuses	$	6,714	$	8,604
Accrued vacation benefits		2,696		2,446
Accrued legal expenses		4,604		2,466
Other accrued liabilities		15,588		10,448
	$	29,602	$	23,964