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, 2020

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 4, 2020, there were 44,961,417 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended September 30, 2020

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	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
PART II: OTHER INFORMATION		42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 6.	Exhibits	62
SIGNATURES		63

We use Glaukos, our logo, iStent, iStent inject, iStent inject W, iStent Infinite, iStent SA, iPrism, iDose, iLink, MIGS, Avedro, Photrexa, KXL, Mosaic 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.

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

	September 30,		December 31,
	2020		2019
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	80,994	$	62,430
Short-term investments		307,441		111,553
Accounts receivable, net		32,885		38,417
Inventory, net		19,890		42,578
Prepaid expenses and other current assets		13,235		7,900
Total current assets		454,445		262,878
Restricted cash		9,326		9,326
Property and equipment, net		23,408		22,056
Operating lease right-of-use asset		18,760		15,704
Finance lease right-of-use asset		51,975		54,048
Intangible assets, net		363,921		382,605
Goodwill		66,134		66,134
Deposits and other assets		6,545		5,649
Total assets	$	994,514	$	818,400
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	6,774	$	5,781
Accrued liabilities		39,919		51,919
Total current liabilities		46,693		57,700
Convertible senior notes		186,676		-
Operating lease liability		18,734		14,195
Finance lease liability		60,702		58,435
Deferred tax liability, net		14,164		9,632
Other liabilities		5,982		5,166
Total liabilities		332,951		145,128
Commitments and contingencies (Note 12)
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; 44,855 and 43,530 shares issued and 44,827 and 43,502 shares outstanding as of September 30, 2020 and December 31, 2019, respectively		45		44
Additional paid-in capital		959,186		861,740
Accumulated other comprehensive income		1,874		1,330
Accumulated deficit		(299,410)		(189,710)
Less treasury stock (28 shares as of September 30, 2020 and December 31, 2019)		(132)		(132)
Total stockholders' equity		661,563		673,272
Total liabilities and stockholders' equity	$	994,514	$	818,400

See accompanying notes to condensed consolidated financial statements.

3

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Net sales	$	64,831	$	58,509	$	151,725	$	171,135
Cost of sales		17,932		7,703		72,129		22,684
Gross profit		46,899		50,806		79,596		148,451
Operating expenses:
Selling, general and administrative		38,947		44,443		127,609		117,024
Research and development		20,304		17,278		64,148		48,277
In-process research and development		-		1,500		-		3,745
Total operating expenses		59,251		63,221		191,757		169,046
Loss from operations		(12,352)		(12,415)		(112,161)		(20,595)
Non-operating (expense) income:
Interest income		595		780		1,881		2,368
Interest expense		(5,732)		(1,028)		(8,485)		(2,041)
Other income (expense), net		852		(656)		342		(508)
Total non-operating expense		(4,285)		(904)		(6,262)		(181)
Loss before taxes		(16,637)		(13,319)		(118,423)		(20,776)
Income tax (benefit) provision		(889)		187		(8,723)		381
Net loss	$	(15,748)	$	(13,506)	$	(109,700)	$	(21,157)
Basic and diluted net loss per share	$	(0.35)	$	(0.37)	$	(2.48)	$	(0.58)
Weighted average shares used to compute basic and diluted net loss per share		44,706		36,831		44,302		36,507

See accompanying notes to condensed consolidated financial statements.

4

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Net loss	$	(15,748)	$	(13,506)	$	(109,700)	$	(21,157)
Other comprehensive (loss) income:
Foreign currency translation (loss) gain		(423)		530		141		364
Unrealized (loss) gain on short-term investments		(170)		74		403		735
Other comprehensive (loss) income		(593)		604		544		1,099
Total comprehensive loss	$	(16,341)	$	(12,902)	$	(109,156)	$	(20,058)

See accompanying notes to condensed consolidated financial statements.

5

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 (loss)		deficit		Shares	Amount		equity
Balance at December 31, 2019	43,530	$	44	$	861,740	$	1,330	$	(189,710)	(28)	$	(132)	$	673,272
Common stock issued under stock plans	589		—		4,220		—		—	—		—		4,220
Stock-based compensation	—		—		17,176		—		—	—		—		17,176
Other comprehensive income	—		—		—		689		—	—		—		689
Net loss	—		—		—		—		(54,058)	—		—		(54,058)
Balance at March 31, 2020	44,119	$	44	$	883,136	$	2,019	$	(243,768)	(28)	$	(132)	$	641,299
Common stock issued under stock plans	459		1		1,633		—		—	—		—		1,634
Stock-based compensation	—		—		13,062		—		—	—		—		13,062
Equity component of convertible senior notes, net of transaction costs of $3,267 and taxes of $12,891	—		—		81,554		—		—	—		—		81,554
Purchase of capped calls related to issuance of convertible senior notes	—		—		(35,679)		—		—	—		—		(35,679)
Other comprehensive income	—		—		—		448		—	—		—		448
Net loss	—		—		—		—		(39,894)	—		—		(39,894)
Balance at June 30, 2020	44,578	$	45	$	943,706	$	2,467	$	(283,662)	(28)	$	(132)	$	662,424
Common stock issued under stock plans	277		—		5,821		—		—	—		—		5,821
Stock-based compensation			—		9,659		—		—	—		—		9,659
Other comprehensive loss			—		—		(593)		—	—		—		(593)
Net loss			—		—		—		(15,748)	—		—		(15,748)
Balance at September 30, 2020	44,855	$	45	$	959,186	$	1,874	$	(299,410)	(28)	$	(132)	$	661,563

						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

See accompanying notes to condensed consolidated financial statements.

6

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Nine Months Ended September 30,
	2020		2019
Operating Activities
Net loss	$	(109,700)	$	(21,157)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		21,981		2,674
Amortization of lease right-of-use assets		3,836		2,405
Amortization of debt discount and issuance costs		3,234		-
Deferred income tax benefit		(9,340)		-
Loss on disposal of fixed assets		287		26
Stock-based compensation		37,733		23,923
Change in fair value of cash settled stock options		(3,172)		-
Unrealized foreign currency losses		22		469
Amortization of discount on short-term investments		229		(298)
Other liabilities		3,343		3,666
Changes in operating assets and liabilities:
Accounts receivable, net		5,629		(5,828)
Inventory, net		22,578		414
Prepaid expenses and other current assets		(4,329)		(2,326)
Accounts payable and accrued liabilities		(6,141)		(60)
Other assets		218		(86)
Net cash (used in) provided by operating activities		(33,592)		3,822
Investing activities
Purchases of short-term investments		(273,798)		(63,556)
Proceeds from sales and maturities of short-term investments		78,084		61,870
Purchases of property and equipment		(4,790)		(3,530)
Investment in company-owned life insurance		(1,097)		(1,170)
Net cash used in investing activities		(201,601)		(6,386)
Financing activities
Proceeds from convertible senior notes		287,500		-
Payment of convertible senior notes transaction costs		(9,614)		-
Purchase of capped calls related to issuance of convertible senior notes		(35,679)		-
Proceeds from exercise of stock options		10,258		14,005
Proceeds from share purchases under Employee Stock Purchase Plan		4,025		3,388
Payment of employee taxes related to vested restricted stock units		(2,607)		(5,002)
Net cash provided by financing activities		253,883		12,391
Effect of exchange rate changes on cash and cash equivalents		(126)		(8)
Net increase in cash, cash equivalents and restricted cash		18,564		9,819
Cash, cash equivalents and restricted cash at beginning of period		71,756		38,596
Cash, cash equivalents and restricted cash at end of period	$	90,320	$	48,415
Supplemental disclosures of cash flow information
Taxes paid	$	418	$	96

See accompanying notes to condensed consolidated financial statements.

7

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 developing novel therapies for the treatment of glaucoma, corneal disorders, and retinal disease. The Company developed Micro-Invasive Glaucoma Surgery (MIGS) to serve as an alternative to the traditional glaucoma treatment paradigm and launched its first MIGS device commercially in 2012. The Company also offers commercially a proprietary bio-activated pharmaceutical therapy for the treatment of a corneal disorder, keratoconus, that was approved by the U.S. Food and Drug Administration in 2016 and is developing a pipeline of surgical devices, sustained pharmaceutical therapies, and implantable biosensors intended to treat glaucoma progression, corneal disorders such as keratoconus, dry eye and refractive vision correction, and retinal diseases such as neovascular age-related macular degeneration and diabetic macular edema.

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, 2019 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, 2019, which are contained in the Company’s Annual Report on Form 10-K filed with the United States (U.S.) Securities and Exchange Commission (SEC) on March 2, 2020. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period.

Recent Developments

Convertible Senior Notes

In June 2020 the Company issued $287.5 million in aggregate principal amount of 2.75% Convertible Senior Notes due in 2027 (Convertible Notes) pursuant to an indenture dated June 11, 2020. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 2.75% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The Convertible Notes will mature on June 15, 2027, unless earlier converted, redeemed or repurchased. The Convertible Notes are convertible into cash, shares of the Company’s common stock, or a combination of cash and shares, at the Company’s election. In connection with issuing the Convertible Notes, the Company received $242.2 million in proceeds, after deducting fees and offering expenses and paying the cost of certain capped call transactions. The Company may not redeem the Convertible Notes prior to June 20, 2024 and no sinking fund is provided for the Convertible Notes.

See Note 9, Convertible Senior Notes for additional details of the Convertible Notes.

8

Acquisition of Avedro, Inc.

On August 7, 2019, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Atlantic Merger Sub, Inc. (Merger Sub) and Avedro, Inc. (Avedro), pursuant to which Merger Sub would merge with and into Avedro, with Avedro continuing as the surviving corporation and a wholly owned subsidiary of the Company (the Avedro Merger). Avedro is a hybrid ophthalmic pharmaceutical and medical technology company focused on developing therapies designed to treat corneal diseases and disorders and correct refractive conditions.

On November 21, 2019, the Avedro Merger was consummated in a stock-for-stock transaction for total consideration of $437.8 million (Merger Consideration). The total Merger Consideration consisted of Glaukos shares worth $406.8 million issued to replace Avedro common stock, Glaukos shares worth $0.2 million to replace the certain vested Avedro warrants, and $30.8 million of value attributable to the pre-combination services associated with replacement of all Avedro outstanding and unexercised stock option awards and all outstanding restricted stock units (Replacement Awards).

See Note 4, Fair Value Measurements, Note 6, Business Combinations, Note 7, Intangible Assets and Goodwill and Note 10, Stock-Based Compensation for additional details regarding the impact of the Avedro Merger on the Company’s condensed consolidated financial statements.

Note 2.  Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the nine months ended September 30, 2020, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020, including the Company’s adoption of the accounting pronouncements noted below in the sub-heading “Recently Adopted Accounting Pronouncements” with the exception of the inclusion of the Company’s accounting policy for its Convertible Notes that were issued in June 2020.

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 fair value of the liability component of the Convertible Notes, the incremental borrowing rate related to the Company’s leased assets, stock-based compensation expense and the valuation of certain intangible assets related to the Company’s acquisition of Avedro. 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.

In March 2020, the World Health Organization declared the outbreak caused by the novel strain of coronavirus (COVID-19) to be a global pandemic. While COVID-19 continues to evolve daily and its ultimate outcome is uncertain, it has caused significant disruption to individuals, governments, businesses, and financial markets. The Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2020 reflect the Company’s estimates of the impact of the COVID-19 outbreak. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are uncertain, including the duration and severity of the COVID-19 outbreak, any future surges in the COVID-19 outbreak, and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. As a result, there may be changes to the Company’s estimates regarding the impact of COVID-19 in future periods.

9

Cash, Cash Equivalents and Restricted Cash

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 months ended September 30, 2020 (in thousands):

	September 30,		December 31,
	2020		2019
Cash and cash equivalents	$	80,994	$	62,430
Restricted cash		9,326		9,326
Cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows	$	90,320	$	71,756

Accounts Receivable

The Company sells its products directly to ambulatory surgery centers, hospitals, and physician private practices, with distributors being used in certain international locations where the Company does not have a direct commercial presence and the Company is exposed to credit losses primarily through sales of its products.

The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and periodic evaluation of customers’ receivables balances. Management estimates the adequacy of the allowance by using relevant available information, from internal and external sources, relating to past events, current conditions and forecasts. Historical credit loss experience provides the basis for estimation of expected credit losses and are adjusted as necessary using the relevant information available. The allowance for credit losses is measured on a collective basis when similar risk characteristic exists. The Company has identified one portfolio segment based on evaluation of the following risk characteristics: geographic regions, product lines, default rates and customer specific factors.

Additionally, specific allowance amounts may be established to record the appropriate provision for customers that have a higher probability of non-payment. The Company charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The allowance for credit losses represents management’s best estimate of the amount of current expected credit losses and totaled approximately $1.4 million and $1.2 million as of September 30, 2020 and December 31, 2019, respectively, and there were immaterial bad-debt write offs charged during the nine months ended September 30, 2020.

As of September 30, 2020, the Company evaluated the current and expected future economic and market conditions surrounding the COVID-19 pandemic as it relates to collectability of its accounts receivable and determined the estimate of expected credit losses was not materially impacted. The Company will continue to re-evaluate the estimate of credit losses related to COVID-19 in conjunction with its assessment of expected credit losses in subsequent quarters.

Additionally, no customer accounted for more than 10% of net accounts receivable as of September 30, 2020 or December 31, 2019.

Inventory

Except for inventory acquired in connection with the Avedro Merger, further described in Note 6, Business Combinations, inventory is valued at the lower of cost and net realizable value with cost being determined by the first-in, first-out method.

Management evaluates inventory for excess quantities and obsolescence and records an allowance to reduce the carrying value of inventory as determined necessary. During the nine months ended September 30, 2020, the Company recorded inventory write-off charges and COVID-19 related excess and obsolete reserves, a portion of which included the associated fair-value step up of acquired Avedro inventory, totaling a net $4.3 million.

10

Convertible Senior Notes

The Company evaluates embedded conversion features within convertible debt under Accounting Standards Codification (ASC) 815, Derivatives and Hedging to determine whether the embedded conversion features should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20, Debt with Conversion and Other Options.

The carrying amount of the liability component is calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the par value of the convertible notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (i.e., debt discount) will be amortized to interest expense over the term of the convertible notes.

The Company may record debt issuance costs and/or debt discounts in connection with raising funds through the issuance of convertible debt.  These costs may be paid in the form of cash or equity (such as warrants). These costs are allocated between debt and equity, with the portion allocated to debt amortized to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

Income Taxes

Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at the applicable tax rates, along with net operating loss (NOL) and tax credit carryovers. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. Management has considered estimated taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Based upon the weight of available evidence, which includes the Company’s historical operating performance and limited potential to utilize tax credit carryforwards, the Company has determined that a portion of its deferred tax assets should be offset by a valuation allowance. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes increases or decreases, respectively, in the period such determination is made.

The Company is required to file federal and state income tax returns in the United States and various other state jurisdictions. The Company also files income tax returns in the foreign countries in which its subsidiaries operate. The preparation of these income tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid.

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 condensed consolidated financial statements of tax positions taken or expected to be taken in a tax return.

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

Interest Expense

Interest expense includes cash and non-cash components. The cash component of the interest expense represents the contractual interest charges for the Convertible Notes. The non-cash component of the interest expense represents the amortization of the debt discount and associated issuance costs for the Convertible Notes, and the interest expense associated with the Company’s financing lease.

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,
	2020	2019	2020	2019
Stock options outstanding	4,490	3,602	4,579	3,636
Unvested restricted stock units	519	232	499	364
Employee stock purchase plan	14	1	14	5
	5,023	3,835	5,092	4,005

The Convertible Notes did not have an impact on the Company’s diluted share count as the average stock price of the Company’s common stock did not exceed $56.10 during the periods presented.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU0 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 that may result in the earlier recognition of allowances for losses. 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 adopted ASU 2016-13 as of January 1, 2020 using the modified retrospective approach, which replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. Upon adoption, there were no adjustments made to opening retained earnings as of January 1, 2020. As a result of implementing ASU 2016-13, the Company did not recognize any material changes to its allowance for credit losses during the three and nine months ended September 30, 2020.

Additionally, for available-for-sale debt securities with unrealized losses, ASU 2016-13 now requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. Given the composition of the Company’s available-for-sale securities, adoption of ASU 2016-13 did not have a material impact on the condensed consolidated financial statements as of September 30, 2020.

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In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): 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. The Company adopted ASU 2017-04 as of January 1, 2020 and the adoption did not have a material impact on the Company’s condensed 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. The Company adopted ASU 2018-13 as of January 1, 2020. Upon adoption and for the three and nine months ended September 30, 2020, given the Company does not currently have, and has not historically had transfers between Level 1 and Level 2 instruments, and the Company does not have any Level 3 fair value measurements, the adoption did not have a material impact on the Company’s condensed consolidated financial statement disclosures.

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, and requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as fixed assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract are amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The Company adopted ASU 2018-15 on a prospective basis as of January 1, 2020 and as a result, capitalized certain costs related to its global enterprise systems implementation of approximately $1.6 million, which is further discussed in Note 12, Commitments and Contingencies.

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. The Company adopted ASU 2018-18 as of January 1, 2020 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.  ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.  ASU 2019-12 is effective in 2021 and interim periods within that year and permits for early adoption. The Company elected to early adopt ASU 2019-12 effective December 31, 2019 and the adoption did not have a material impact to the Company’s condensed consolidated financial statements. 

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for the Company for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s annual fiscal year. The Company may adopt ASU 2020-06 effective January 1, 2021 and is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

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Note 3.  Balance Sheet Details

Short-term Investments

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

	At September 30, 2020
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government agency bonds	less than 3		206,294		137		(51)		206,380
Bank certificates of deposit	less than 1		16,900		25		—		16,925
Commercial paper	less than 1		2,997		3		—		3,000
Corporate notes	less than 3		62,828		417		(1)		63,244
Asset-backed securities	less than 5		17,627		265		—		17,892
Total		$	306,646	$	847	$	(52)	$	307,441
	At December 31, 2019
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
Bank certificates of deposit	less than 1		12,999		7		—		13,006
Commercial paper	less than 1		7,475		8		—		7,483
Corporate notes	less than 3		65,354		295		(10)		65,639
Asset-backed securities	less than 3		25,333