GLAUKOS Corp - Quarter Report: 2018 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

☐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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company’’ and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

☒ Large accelerated filer

☐ Accelerated filer

☐ Non-accelerated filer
(Do not check if a smaller reporting
company)

☐ Smaller reporting company

☐ Emerging growth company

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

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

As of August 3, 2018, there were 35,255,010 shares of the registrant’s Common Stock outstanding.

Table of Contents

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended June 30, 2018

Table of Contents


		Page
PART I: FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Loss	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30

PART II: OTHER INFORMATION		32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 6.	Exhibits	66

SIGNATURES		67

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

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

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)


	June 30,		December 31,
	2018		2017
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	24,941	$	24,508
Short-term investments		95,207		94,506
Accounts receivable, net		17,089		16,656
Inventory, net		13,812		11,222
Prepaid expenses and other current assets		4,336		2,568
Total current assets		155,385		149,460
Property and equipment, net		12,057		11,794
Intangible assets, net		1,311		3,147
Deferred tax asset, net		235		235
Deposits and other assets		2,102		1,200
Total assets	$	171,090	$	165,836

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	3,611	$	6,244
Accrued liabilities		16,655		20,449
Deferred rent		105		95
Total current liabilities		20,371		26,788
Other liabilities		2,186		846
Total liabilities		22,557		27,634

Commitments and contingencies (Note 9)

Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding		-		-
Common stock, $0.001 par value; 150,000 shares authorized; 35,166 and 34,647 shares issued and 35,138 and 34,619 shares outstanding at June 30, 2018 and December 31, 2017, respectively		35		35
Additional paid-in capital		348,611		331,073
Accumulated other comprehensive income (loss)		311		(591)
Accumulated deficit		(200,292)		(192,183)
Less treasury stock (28 shares as of June 30, 2018 and December 31, 2017)		(132)		(132)
Total stockholders' equity		148,533		138,202
Total liabilities and stockholders' equity	$	171,090	$	165,836

See accompanying notes to condensed consolidated financial statements.

Table of Contents

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net sales	$	43,161	$	41,285	$	83,294	$	77,192
Cost of sales		6,160		5,522		11,946		10,702
Gross profit		37,001		35,763		71,348		66,490
Operating expenses:
Selling, general and administrative		28,638		24,675		55,793		46,156
In-process research and development		-		5,320		-		5,320
Research and development		12,611		9,633		23,517		18,575
Total operating expenses		41,249		39,628		79,310		70,051
Loss from operations		(4,248)		(3,865)		(7,962)		(3,561)
Non-operating (expense) income:
Interest income		505		311		978		603
Other (expense) income, net		(1,644)		275		(1,109)		612
Total non-operating (expense) income		(1,139)		586		(131)		1,215
Loss before taxes		(5,387)		(3,279)		(8,093)		(2,346)
Provision for income taxes		11		22		16		77
Net loss	$	(5,398)	$	(3,301)	$	(8,109)	$	(2,423)
Basic net loss per share	$	(0.15)	$	(0.10)	$	(0.23)	$	(0.07)
Diluted net loss per share	$	(0.15)	$	(0.10)	$	(0.23)	$	(0.07)
Weighted average shares used to compute basic net loss per share		34,942		34,322		34,778		34,234
Weighted average shares used to compute diluted net loss per share		34,942		34,322		34,778		34,234

See accompanying notes to condensed consolidated financial statements.

Table of Contents

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net loss	$	(5,398)	$	(3,301)	$	(8,109)	$	(2,423)
Other comprehensive gain (loss):
Foreign currency translation adjustments		1,541		(320)		1,047		(660)
Unrealized gain (loss) on short-term investments, net of tax		65		18		(145)		58
Other comprehensive gain (loss)		1,606		(302)		902		(602)
Total comprehensive loss	$	(3,792)	$	(3,603)	$	(7,207)	$	(3,025)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Six Months Ended June 30,
	2018		2017
Operating Activities
Net loss	$	(8,109)	$	(2,423)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		3,361		2,428
Loss on disposal of fixed assets		78		5
Stock-based compensation		11,863		7,935
Unrealized foreign currency losses (gains)		1,185		(624)
Amortization of (discount) premium on short-term investments		(135)		58
Deferred rent		1,350		338
Changes in operating assets and liabilities:
Accounts receivable, net		(644)		(2,289)
Inventory		(2,726)		(1,368)
Prepaid expenses and other current assets		(1,801)		721
Restricted cash		-		80
Accounts payable and accrued liabilities		(6,149)		2,145
Other assets		(899)		(368)
Net cash (used in) provided by operating activities		(2,626)		6,638
Investing activities
Purchases of short-term investments		(47,132)		(45,766)
Proceeds from sales and maturities of short-term investments		46,422		44,580
Purchases of property and equipment		(2,006)		(2,071)
Net cash used in investing activities		(2,716)		(3,257)
Financing activities
Proceeds from exercise of stock options		4,606		2,782
Share purchases under Employee Stock Purchase Plan		1,388		968
Payment of employee taxes related to vested restricted stock units		(318)		-
Net cash provided by financing activities		5,676		3,750
Effect of exchange rate changes on cash and cash equivalents		99		(255)
Net increase in cash, cash equivalents and restricted cash		433		6,876
Cash, cash equivalents and restricted cash at beginning of period		24,508		6,494
Cash, cash equivalents and restricted cash at end of period	$	24,941	$	13,370
Supplemental disclosures of cash flow information
Taxes paid	$	365	$	64
Supplemental schedule of noncash investing and financing activities
Reduction of liability upon vesting of stock options previously exercised for unvested stock	$	-	$	3

See accompanying notes to condensed consolidated financial statements.

Table of Contents

GLAUKOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization and Basis of Presentation

Organization and business

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

The accompanying condensed consolidated financial statements include the accounts of Glaukos and its wholly owned subsidiaries. All significant intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.

Basis of presentation

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

The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements. As permitted under those rules, certain footnotes and other financial information that are normally required by GAAP have been condensed or omitted. In the opinion of management, the unaudited interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for the fair presentation of the Company’s financial information contained herein. The condensed consolidated balance sheet at December 31, 2017 has been derived from audited financial statements at that date, but excludes disclosures required by GAAP for complete financial statements. These interim financial statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s financial statements and accompanying notes for the fiscal year ended December 31, 2017, which are contained in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on February 28, 2018. The results for the period ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period.

Acquisition of IOP Sensor System from DOSE Medical

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

The transaction was accounted for as an asset acquisition. Of the $5.5 million initial cash payment, $5.3 million was immediately charged to in-process research and development expense as management determined there was no alternative future use related to the assets purchased. Of the remaining $0.2 million, the majority was capitalized to fixed assets and is being depreciated over the corresponding asset’s useful life, and a small portion was recorded as a prepaid asset and is being amortized to general and administrative expense as the underlying amounts are utilized.

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

Table of Contents

variable interest entity in the financial statements. Thomas W. Burns, the Company’s President, Chief Executive and a member of its board of directors, and William J. Link, Ph.D., Chairman of the Company’s board of directors, currently serve on the board of directors of DOSE and certain members of the Company’s management and board of directors hold an equity interest in DOSE.

Note 2. Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the six months ended June 30, 2018, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 28, 2018, with the exception of the Company’s adoption of Accounting Standards Codification (ASC) 606, Revenue Recognition – Revenue from Contracts with Customers and its related amendments (ASC 606). See section below entitled “Revenue recognition” and Note 6, Revenue from Contracts with Customers for further discussion of the Company’s adoption of ASC 606 and related disclosures.

Use of estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions. Management considers many factors in selecting appropriate financial accounting policies and controls and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. The most significant estimates in the accompanying condensed consolidated financial statements relate to revenue recognition and stock‑based compensation expense. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, this process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements.

Foreign currency translation

The accompanying condensed consolidated financial statements are presented in U.S. dollars. The Company considers the local currency to be the functional currency for its international subsidiaries. Accordingly, their assets and liabilities are translated into U.S. dollars using the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing throughout the periods presented. As a result, currency translation adjustments arising from period to period are charged or credited to accumulated other comprehensive income (loss) in stockholders’ equity. For the three and six months ended June 30, 2018, the Company reported foreign currency translation gains of approximately $1.5 million and $1.0 million, respectively. For the three and six months ended June 30, 2017, the Company reported foreign currency translation losses of approximately $0.3 million and $0.7 million, respectively.

Realized gains and losses resulting from foreign currency transactions are included in selling, general and administrative expense in the condensed consolidated statements of operations. For the three and six months ended June 30, 2018, the Company reported foreign currency transaction losses of approximately $0.2 million and $0.3 million, respectively. For each of the three and six month periods ended June 30, 2017, the Company reported foreign currency transaction gains of approximately $0.1 million.

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) income, net. For the three and six months ended June 30, 2018, the Company reported net unrealized foreign currency transaction losses of $1.7 million and $1.2 million, respectively. For the three and six months ended June 30, 2017, the Company reported net unrealized foreign currency transaction gains of $0.3 million and $0.6 million, respectively.

Table of Contents

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 (loss) within stockholders’ equity.

The Company’s entire investment portfolio is considered to be available for use in current operations and, accordingly, all such investments are stated at fair value using quoted market prices and classified as current assets, although the stated maturity of individual investments may be one year or more beyond the balance sheet date. The Company did not have any trading securities or restricted investments at June 30, 2018 or December 31, 2017.

Realized gains and losses and declines in value, if any, judged to be other-than-temporary on available-for-sale securities are reported in other (expense) income, net. When securities are sold, any associated unrealized gain or loss previously reported as a separate component of stockholders’ equity is reclassified out of stockholders’ equity and recorded in the statements of operations in the period sold using the specific identification method. Accrued interest and dividends are included in other (expense) income, net. The Company periodically reviews its available-for-sale securities for other-than-temporary declines in fair value below the cost basis, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Fair value of financial instruments

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

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

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

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

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

Revenue recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. The Company adopted the standard by applying the modified retrospective method to contracts that were not complete as of the date of initial application. The Company’s accounting for revenue under ASC 606 is materially consistent with the accounting for revenue under ASC 605 and therefore the cumulative effect of adoption was immaterial. The reported results for the three and six months ended June 30, 2018 reflect the application of ASC 606 guidance while the reported results for periods prior to January 1, 2018 were prepared under the guidance of ASC 605.

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

Table of Contents

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

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

The Company concluded that one performance obligation exists for the majority of its contracts with customers which is to deliver products in accordance with the Company’s normal delivery times. Revenue is recognized when this performance obligation is satisfied at a point in time when the Company considers control of a product to have transferred to the customer. Revenue 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.

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 through June 30, 2018.

Table of Contents

Stock‑based compensation

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

The fair value of stock option awards is estimated at the grant date using the Black-Scholes option pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line method. The determination of the fair value-based measurement of stock options on the date of grant using an option pricing model is affected by the determination of the fair value of the underlying stock as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s stock price volatility over the expected term of the grants, and actual and projected employee stock option exercise behaviors. In the future, as additional empirical evidence regarding these estimates becomes available, the Company may change or refine its approach of deriving them, and these changes could impact the fair value-based measurement of stock options granted in the future. Changes in the fair value-based measurement of stock awards could materially impact the Company’s operating results.

The fair values of stock option awards made to nonemployees are re-measured at each reporting period using the Black-Scholes option pricing model. Compensation expense for these stock option awards is determined by applying the re-measured fair values to the shares that have vested during a period.

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

Net loss 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 and RSUs outstanding under the Company’s stock option plans and shares issuable under the Company’s Employee Stock Purchase Plan (ESPP).

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Numerator:
Net loss – basic and diluted	$	(5,398)	$	(3,301)	$	(8,109)	$	(2,423)
Denominator:
Weighted average number of common shares outstanding - basic		34,942		34,322		34,778		34,234
Weighted average number of common shares outstanding - diluted		34,942		34,322		34,778		34,234

Basic net loss per share	$	(0.15)	$	(0.10)	$	(0.23)	$	(0.07)

Diluted net loss per share	$	(0.15)	$	(0.10)	$	(0.23)	$	(0.07)

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 thousands):


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2018	2017	2018	2017
Stock options outstanding	5,819	5,632	5,937	5,700
Unvested restricted stock units	141	105	333	105
ESPP	31	19	27	19
	5,991	5,756	6,297	5,824

Table of Contents

Recently adopted accounting pronouncements

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASC 2016-18), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. ASU 2016-18 was effective for the Company beginning on January 1, 2018 and was required to be adopted retrospectively. Historically, the Company’s restricted cash balance has not been significant and the adoption of the guidance did not have a material impact on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01). The amendments are intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. When substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. This introduces an initial required screening that, if met, eliminates the need for further assessment. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. To be a business without outputs, there will need to be an organized workforce. The ASU also narrows the definition of the term “outputs” to be consistent with how it is described in ASC 606, Revenue Recognition - Revenue from Contracts with Customers. The amendments were effective for annual periods beginning after December 15, 2017, including interim periods within those periods with early adoption permitted. The Company adopted the guidance effective January 1, 2018 and the guidance did not have a material impact on its condensed consolidated financial statements; however, any prospective impact to the Company’s condensed consolidated financial statements will depend on the terms specified in any future transactions subject to the guidance in ASU 2017-01.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation - Scope of Modification Accounting (ASU 2017-09). The standard provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This standard does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The standard was effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods and early adoption was permitted. The Company adopted the guidance on a prospective basis effective January 1, 2018 and the adoption of ASU 2017-09 did not have a material impact on its condensed consolidated financial statements; however, any future impact to share-based compensation expense will depend on the terms specified in any new changes to share-based payment awards subsequent to the adoption.

Recently issued accounting pronouncements not yet adopted

In February 2016, the 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. Under the new guidance, a lessee will be required to recognize a lease liability and right-of-use asset for all leases with terms in excess of twelve months. The new guidance also modifies the classification criteria and accounting for sales-type and direct financing leases, and requires additional disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. Consistent with current 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. The accounting standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and must be applied using a modified retrospective approach. Early adoption is permitted. While the Company is continuing to assess all potential impacts of the standard, it expects that most of its lease commitments will be subject to the updated standard and recognized as lease liabilities and right-of-use assets upon adoption.

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 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 is effective for all companies for fiscal years beginning after December 15, 2018, and interim

Table of Contents

periods within those fiscal years. Early adoption is permitted. Entities 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, and the Company is assessing the potential impacts of the standard.

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 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and the Company is assessing the potential impacts of the standard.

Table of Contents

Note 3. Balance Sheet Details

Short-term investments

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


	At June 30, 2018
	Maturity	Amortized cost		Unrealized		Unrealized		Estimated
	(in years)	or cost		gains		losses		fair value
U.S. government bonds	less than 1	$	1,599	$	-	$	(13)	$	1,586
U.S. government agency bonds	less than 2		3,988		-		(22)		3,966
Bank certificates of deposit	less than 1		8,702		1		(7)		8,696
Commercial paper	less than 1		12,672		1		(2)		12,671
Corporate notes	less than 3		47,152		20		(209)		46,963
Asset-backed securities	less than 3		21,456		1		(132)		21,325
Total		$	95,569	$	23	$	(385)	$	95,207

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

Accounts receivable, net

Accounts receivable consisted of the following (in thousands):


	June 30,		December 31,
	2018		2017
Accounts receivable	$	17,626	$	17,248
Less allowance for doubtful accounts		(537)		(592)
	$	17,089	$	16,656

Inventory, net

Inventory consisted of the following (in thousands):


	June 30,		December 31,
	2018		2017
Finished goods	$	3,809	$	4,225
Work in process		3,094		2,368
Raw material		6,909		4,629
	$	13,812	$	11,222

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):


	June 30,		December 31,
	2018		2017
Accrued contract payments (see Note 9)	$	1,078	$	1,033
Accrued bonuses		4,894		9,106
Accrued vacation benefits		2,285		2,121
Accrued Employee Stock Purchase Plan liability		2,139		1,517
Other accrued liabilities		6,259		6,672
	$	16,655	$	20,449

Table of Contents

Note 4. Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands). The Company did not have any financial liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017.


			At June 30, 2018
			Quoted prices		Significant
			in active		other		Significant
			markets for		observable		unobservable
	June 30,		identical assets		inputs		inputs
	2018		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (i)	$	148	$	148	$	-	$	-
U.S. government agency bonds (ii)		3,966		-		3,966		-
U.S. government bonds (ii)		1,587		-		1,587		-
Bank certificates of deposit (ii) (iv)		10,195		-		10,195		-
Commercial paper (ii) (iii)		16,411		-		16,411		-
Corporate notes (ii)		46,963		-		46,963		-
Asset-backed securities (ii)		21,325		-		21,325		-
	$	100,595	$	148	$	100,447	$	-


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

⁽ⁱ⁾

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

⁽ⁱⁱ⁾

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

⁽ⁱⁱⁱ⁾

As of June 30, 2018 and December 31, 2017, commercial paper investments totaling $3,740 and $3,000 (in thousands), respectively, are included in cash and cash equivalents on the condensed consolidated balance sheets, as each of the investments has a maturity of three months or less from the date of purchase on the condensed consolidated balance sheets.

^(iv)

As of June 30, 2018, one bank certificate of deposit investment totaling $1,500 (in thousands) is included in cash and cash equivalents on the condensed consolidated balance sheets, as the investment has a maturity of three months or less from the date of purchase on the condensed consolidated balance sheets.

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

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

Table of Contents

markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

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

Note 5. Intangible Assets

GMP Vision Solutions intangible asset

In January 2007, the Company entered into an agreement (the Original GMP Agreement) with GMP Vision Solutions, Inc. (GMP) to acquire certain in‑process research and development in exchange for periodic royalty payments equal to a single‑digit percentage of revenues received for royalty‑bearing products and periodic royalty payments at a higher royalty rate applied to all amounts received in connection with the grant of licenses or sub-licenses of the related intellectual property.

In November 2013, the Company entered into an amended agreement with GMP in which remaining royalties payable to GMP (the Buyout Agreement) were canceled in exchange for the issuance of $17.5 million in promissory notes payable to GMP and a party related to GMP. The Company concluded that the $17.5 million transaction represented the purchase of an intangible asset. The Company estimated a useful life of five years over which the intangible asset is being amortized to cost of sales in the accompanying statements of operations, which amortization period was determined after consideration of the projected outgoing royalty payment stream had the Buyout Agreement not occurred, and the remaining life of the patents obtained in the Original GMP Agreement. After determining that the pattern of future cash flows associated with this intangible asset could not be reliably estimated with a high level of precision, the Company concluded that the intangible asset will be amortized on a straight‑line basis over the estimated useful life. For each of the three months ended June 30, 2018 and June 30, 2017, the Company recorded amortization expense of $0.9 million related to this intangible asset in cost of sales and for each of the six months ended June 30, 2018 and June 30, 2017, the Company recorded amortization expense of $1.8 million related to this intangible asset in cost of sales.

Other intangible assets

Prior to June 30, 2017, the Company entered into agreements with four international distributors pursuant to which their distribution rights with the Company were terminated. As part of the agreements, the distributors agreed to provide certain services to, and not compete with, the Company for one to two years in exchange for payments calculated based on single-digit percentages of the Company’s future revenues in those years in the respective countries that had comprised the distributors’ territories. Management recorded the estimated fair value of the non-compete provisions as intangible assets. As of June 30, 2018, two of these intangible assets were fully amortized, and the gross non-compete intangible assets for the remaining two agreements totaled $0.3 million and continue to be amortized on a straight-line basis to selling, general and administrative expense over the one to two year periods. For the three months ended June 30, 2018 and June 30, 2017, the Company recorded amortization expense related to the non-compete intangible assets of approximately $43,000 and $66,000, respectively, and for the six months ended June 30, 2018 and June 30, 2017, the Company recorded amortization expense related to the non-compete intangible assets of approximately $86,000 and $129,000, respectively.

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


	June 30,		December 31,
	2018		2017
GMP royalty buyout	$	17,500	$	17,500
Non-compete agreements		341		524
		17,841		18,024
Accumulated amortization		(16,530)		(14,877)
Total	$	1,311	$	3,147
Weighted average amortization period (in months)		60		60

The remaining amortization expense for 2018 is $1.3 million, after which point the above mentioned intangible assets will be fully amortized.

Table of Contents

Note 6. Revenue from Contracts with Customers

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

Disaggregation of revenue

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

Contract balances

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

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

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

During the three and six months ended June 30, 2018, the Company did not recognize any revenue related to changes in transaction prices related to its contracts with customers and did not recognize any changes in revenue related to amounts included in contract liabilities at the beginning of the period.

Table of Contents

Note 7. Stock-Based Compensation

The Company has four stock-based compensation plans (collectively, the Stock Plans)—the 2001 Stock Option Plan (the 2001 Stock Plan), the 2011 Stock Plan (the 2011 Stock Plan), the 2015 Omnibus Incentive Compensation Plan (the 2015 Stock Plan) and the 2015 ESPP. The 2015 Stock Plan permits grants of RSU awards. RSU awards vest 25% on each of the first, second, third and fourth anniversaries of the grant date.

Stock options

The following table summarizes stock option activity under the 2001 Stock Plan, 2011 Stock Plan and 2015 Stock Plan during the six months ended June 30, 2018 (in thousands):



				Weighted-
	Number of			Average
	Shares		Weighted-	Remaining		Aggregate
	Underlying	Average		Contractual		Intrinsic Value
	Options	Exercise Price		Life (in years)		(in thousands)
Outstanding at December 31, 2017	7,026	$	21.36	7.3	$	69,555
Granted	896		30.83
Exercised	(438)		10.49			11,319
Canceled/forfeited/expired	(177)		30.53
Outstanding at June 30, 2018	7,307	$	22.95	7.2	$	136,362
Vested and expected to vest at June 30, 2018	7,185	$	22.78	7.2	$	135,211
Exercisable at June 30, 2018	4,224	$	15.67	6.1	$	107,695

The weighted average estimated grant date fair value per share of stock options granted during the three and six months ended June 30, 2018 was $16.91 and $15.08, respectively, and the total fair value of stock options that vested during the three and six months ended June 30, 2018 was $6.4 million and $15.7 million, respectively.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Risk-free interest rate	2.65	%	2.01	%	2.67	%	2.13	%
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected volatility	44.8	%	46.6	%	44.9	%	46.6	%
Expected term (in years)	6.10		6.09		6.10		6.09

Restricted stock units

The following table summarizes the activity of unvested RSUs under the Stock Plans during the six months ended June 30, 2018 (in thousands):


			Weighted-
	Number of		average
	shares		grant date
	(in thousands)		fair value
Unvested at December 31, 2017	173	$	39.10
Granted	258		30.41
Vested	(26)		42.14
Canceled/forfeited	(9)		32.49
Unvested at June 30, 2018	396	$	33.39

Table of Contents

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

All share-based compensation arrangements

Additionally, as of June 30, 2018, total unamortized stock-based compensation expense was $57.2 million related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted-average vesting term of approximately 3.0 years. Stock-based compensation cost capitalized in inventory was not material for the three or six months ended June 30, 2018.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Cost of sales	$	177	$	141	$	351	$	270
Selling, general and administrative		4,864		3,470		8,880		5,784
Research and development		1,420		1,123		2,632		1,881
Total	$	6,461	$	4,734	$	11,863	$	7,935

Note 8. Income Taxes

The provision for income taxes is determined using an effective tax rate. For the three months ended June 30, 2018, the Company’s estimated annual effective tax rate of (0.4)% was lower than the U.S. federal statutory rate primarily due to various permanent items, the impact of the Company’s valuation allowance, and minimum state tax payments. The effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used to estimate the annual effective tax rate, including factors such as expected utilization of net operating loss carryforwards, changes in or the interpretation of tax laws in jurisdictions where the Company conducts business, the Company’s expansion into new states or foreign countries, and the amount of valuation allowances against deferred tax assets. For the three and six months ended June 30, 2018, the Company recorded a provision for income taxes of $11,000 and $16,000, respectively which was primarily comprised of state income taxes. For the three and six month periods ended June 30, 2017, the Company recorded a provision for income taxes of $22,000 and $77,000, respectively.

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryforwards. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. For the three and six months ended June 30, 2018, the Company has established a valuation allowance for all of the deferred tax assets, with the exception of known refundable federal credits. For the three and six months ended June 30, 2017, the Company had established a valuation allowance for all deferred tax assets.

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

The Tax Cuts and Jobs Act

The Act was enacted on December 22, 2017. Among other changes, the Act reduces the US federal corporate tax rate from 34% to 21% for federal tax purposes. In accordance with Staff Accounting Bulletin 118, as of June 30, 2018, the Company has not completed the accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on the existing deferred tax balances. In all cases, the Company will continue to make and refine calculations as additional analysis is completed. In addition, estimates may also be affected as the Company gains a more thorough understanding of the Act.

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are

Table of Contents

expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts based on information available at December 31, 2017. The provisional amount recorded related to the remeasurement of the deferred tax balance was $25.2 million, which was fully offset by a decrease in the valuation allowance. There were no significant changes to any of the balances recorded at December 31, 2017 as a result of the Act during the three and six months ended June 30, 2018.

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

Note 9. Commitments and Contingencies

The Company, from time to time, is involved in legal proceedings or regulatory encounters or other matters in the ordinary course of business that could result in unasserted or asserted claims or litigation. Management is not aware of any legal proceedings where the likelihood of a loss contingency is reasonably possible and the amount or range of reasonably possible losses is material to the Company’s results of operations, financial condition or cash flows.

Operating leases

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

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

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

The Company recorded deferred rent of $0.6 million and $0.3 million as of June 30, 2018 and December 31, 2017, respectively, in conjunction with its facilities lease agreements. For the three months ended June 30, 2018 and June 30, 2017, rent expense was $0.4 million and $0.3 million, respectively, and for the six months ended June 30, 2018 and June 30, 2017, rent expense was $0.8 million and $0.6 million, respectively.

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


Remainder of 2018	$	775
2019		1,539
2020		1,640
2021		1,644
2022		-
Thereafter		-
	$	5,598

Regents of the University of California

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

Table of Contents

currently expected to be in 2022. For the three months ended June 30, 2018 and June 30, 2017, the Company recorded approximately $1.1 million and $1.0 million, respectively, in cost of sales in connection with this product payment obligation and approximately $2.1 million and $1.9 million, respectively, in cost of sales in connection with this product payment obligation for the six month periods ended June 30, 2018 and June 30, 2017.

Executive Deferred Compensation Plan

Effective April 1, 2017, the Company established a deferred compensation plan (the Deferred Compensation Plan) for eligible senior level employees. The plan is designed to permit eligible employees to make elective deferrals of compensation to which he or she will become entitled in the future. The Company also established a rabbi trust that serves as an investment to shadow the Deferred Compensation Plan liability. The investments of the rabbi trust consist of company-owned life insurance policies (COLIs). The fair value of the Deferred Compensation Plan liability, included in other liabilities on the condensed consolidated balance sheets, was approximately $1.7 million and $0.6 million as of June 30, 2018 and December, 31, 2017, respectively, and the cash surrender value of the COLIs, included in deposits and other assets on the condensed consolidated balance sheets, which reflects the underlying assets at fair value, was approximately $1.7 million and $0.7 million as of June 30, 2018 and December 31, 2017, respectively.

Note 10. Business Segment Information

Operating segments are identified as components of an enterprise about which segment discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. The Company operates its business on the basis of one reportable segment—ophthalmic medical devices.


	Three months ended				Six months ended
	June 30,				June 30,
Geographic Net Sales Information (in thousands)	2018		2017		2018		2017
United States	$	36,311	$	37,075	$	69,924	$	68,952
International		6,850		4,210		13,370		8,240
Total net sales	$	43,161	$	41,285	$	83,294	$	77,192

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2017 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the U.S. Securities and Exchange Commission (SEC) on February 28, 2018.

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

Overview

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

Our iStent, a micro‑bypass stent that is designed to reduce intraocular pressure by restoring the natural physiologic pathways for aqueous humor, was the first commercially available MIGS treatment solution. Approved by the United States (U.S.) Food and Drug Administration (FDA) for insertion in combination with cataract surgery, the iStent procedure is currently reimbursed by Medicare and all major national private payors. Our next product, the iStent Inject, includes two stents pre‑loaded in an auto‑injection inserter that are also designed to lower intraocular pressure. The iStent Inject was commercially available in 2017 in certain European Union countries, Canada, Australia, Brazil and South Africa. In these markets, it is approved for use in conjunction with cataract surgery or as a standalone procedure, even though reimbursement may not be available for all such procedures. We received FDA approval to market the iStent Inject in the U.S. in conjunction with cataract surgery in June 2018.

We are developing three additional iStent pipeline products: the iStent Infinite, the iStent Supra and the iStent SA. We submitted an IDE application for the iStent Infinite, which includes three stents pre-loaded in an auto-injection inserter and is intended to lower intraocular pressure in refractory glaucoma patients. The iStent Supra is designed to access an alternative drainage space within the eye and is being evaluated in a U.S. pivotal IDE trial for implantation in connection with cataract surgery. We completed enrollment for the U.S. pivotal IDE trial for the iStent Supra in 2017. The iStent SA is designed for use as a standalone glaucoma procedure. Similar to the iStent Inject, the iStent SA is a two-stent product that is slightly wider than the iStent Inject and uses a different auto‑injection inserter designed for use in a standalone procedure.

We are also pursuing regulatory approval of our first sustained pharmaceutical therapy using our iDose drug delivery system. A U.S. investigational new drug (IND) Phase II study of our initial iDose platform product, iDose

Table of Contents

Travoprost, was completed in 2017 and we have commenced enrollment of the U.S. Phase III clinical trials for this product.

We are also conducting research and development activities to explore other potential drugs that may benefit from the use of the iDose drug delivery system. In addition, other proprietary research and development (R&D) efforts are underway on early-stage technologies, including, without limitation, an intraocular pressure sensor (IOP) system that is designed to capture and store a glaucoma patient’s short-interval IOP measurements over extended periods of time, and transmit data to the patient’s physician in order to enhance treatment decisions.

Our net sales increased to $43.2 million for the three months ended June 30, 2018 from $41.3 million for the three months ended June 30, 2017, and net sales increased to $83.3 million for the six months ended June 30, 2018 from $77.2 million for the six months ended June 30, 2017. We incurred net losses for the three and six month periods ended June 30, 2018 of $5.4 million and $8.1 million, respectively, and incurred net losses for the three and six month periods ended June 30, 2017 of $3.3 million and $2.4 million, respectively.

As of June 30, 2018 and December 31, 2017, we had an accumulated deficit of $200.3 million and $192.2 million, respectively.

We have made and expect to continue to make significant investments in our global sales force, marketing programs, research efforts and clinical studies. FDA‑approved IDE studies and new product development programs in our industry are expensive, and we have incurred a significant increase in administrative costs since we began operating as a public company. Accordingly, although we achieved profitability in 2016 and certain periods of 2017, we incurred losses in the first and second quarters of 2018 and there can be no assurance that we will be profitable in future quarters.

Components of results of operations

Net sales

We currently operate in one reportable segment, ophthalmic medical devices, and substantially all of our net sales are derived from sales of our iStent products, net of customer returns and allowances. Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those products or services.

We sell our products through a direct sales organization in the United States, and outside the United States we sell our products primarily through direct sales subsidiaries in sixteen countries and through independent distributors in certain countries in which we do not have a direct presence. The primary end‑user customers for our products are hospitals and surgery centers.

We anticipate our net sales will increase as we expand our global sales and marketing infrastructure and continue to increase awareness of our products by expanding our sales base and increasing our marketing efforts. We also expect that our net sales within a fiscal year may be impacted seasonally and reflect seasonality patterns generally consistent with U.S. cataract procedure volumes, which are typically softer in the first quarter and stronger in the fourth quarter of a given year. However, until recently, our iStent was the only MIGS device approved for sale in the United States by the FDA. Thus, we had for several years commercialized the iStent in the United States without any direct MIGS competitors. Other MIGS devices have now become available in the United States and globally, including our iStent Inject or are in development by third parties that have entered or could enter the market and which may affect adoption of or demand for our products. These new MIGS products could achieve greater commercial acceptance than our iStent, iStent Inject or our pipeline products under development, which may reduce demand for our products and reduce our net sales.

In 2017, the Australian Department of Health (ADOH) initiated a comprehensive review of its Medicare Benefits Schedule (MBS), a list of approximately 5,600 codes used to determine reimbursement. As part of this review, reimbursement of the surgeon fee code for implantation of iStent devices was suspended effective May 1, 2017. Prior to suspension of the code, the Company filed an application with the ADOH to obtain a new code for reimbursement of the surgeon fee. On May 4, 2017 the ADOH created a temporary MBS code for the implantation of iStent and iStent Inject, which is set to expire on December 31, 2018. In May 2018 the ADOH announced that a new permanent MBS code for the implantation of iStent and iStent Inject in conjunction with cataract surgery will be created effective November 2018.

Table of Contents

Cost of sales

Cost of sales reflects the aggregate costs to manufacture our products and includes raw material costs, labor costs, manufacturing overhead expenses and the effect of changes in the balance of reserves for excess and obsolete inventory. We manufacture our iStent products at our headquarters in San Clemente, California using components manufactured by third parties. Due to the relatively low production volumes of our iStent products, compared to our potential capacity for those products, a significant portion of our per-unit costs is comprised of manufacturing overhead expenses. These expenses include quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management.

Beginning in late 2013, cost of sales has included amortization of the $17.5 million intangible asset we recognized in connection with our royalty buyout agreement with GMP Vision Solutions, Inc. in November 2013. The amortization expense was $0.9 million in each of the three month periods ended June 30, 2018 and June 30, 2017, and was $1.8 million in each of the six month periods ended June 30, 2018 and June 30, 2017, and the remaining amortization expense for 2018 is $1.2 million, after which point the above mentioned intangible asset will be fully amortized.

Beginning in 2015, cost of sales includes a charge equal to a low single‑digit percentage of worldwide net sales of certain current and future products, including our iStent products, with a required minimum annual payment of $500,000, which amount became payable to the Regents of the University of California (the University) in connection with our December 2014 agreement with the University (the UC Agreement) related to a group of the Company’s U.S. patents (the Patent Rights). This ongoing product payment obligation will terminate on the date the last of the Patent Rights expires, which is currently expected to be in 2022.

Under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), the 2.3% federal medical device excise tax on U.S. sales of medical devices manufactured by us was suspended from January 1, 2016 to December 31, 2017, and, pursuant to HR 195 passed on January 22, 2018, was further suspended through December 31, 2019.

Our future gross profit as a percentage of net sales, or gross margin, will be impacted by numerous factors including commencement of sales of products in our pipeline, or any other future products, which may have higher product costs. Our gross margin will also be affected by manufacturing inefficiencies that we may experience as we attempt to manufacture our products on a larger scale, manufacture new products and change our manufacturing capacity or output. Additionally, our gross margin will continue to be affected by the aforementioned intangible asset amortization and expense related to the UC Agreement.

Selling, general and administrative

Our selling, general and administrative (SG&A) expenses primarily consist of personnel‑related expenses, including salaries, sales commissions, bonuses, fringe benefits and stock‑based compensation for our executive, financial, marketing, sales, and administrative functions. Other significant SG&A expenses include marketing programs, advertising, post-approval clinical studies, conferences and congresses, and travel expenses, as well as the costs associated with obtaining and maintaining our patent portfolio, professional fees for accounting, auditing, consulting and legal services, travel and allocated overhead expenses.

We expect SG&A expenses to continue to grow as we increase our sales and marketing infrastructure globally and our clinical education and general administration infrastructure in the United States. We also expect other nonemployee‑related costs, including sales and marketing program activities for new products, outside services and accounting and general legal costs to increase as our overall operations grow. The timing of these increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products, as well as on the timing of any new product launches and other potential business and operational activities. In addition, we are incurring increased SG&A expenses, now that, as of the end of fiscal year 2017, we are no longer able to rely on certain “emerging growth company” exemptions that we had been afforded under the Jumpstart Our Business Startups Act.

In-process research and development

Our IPR&D expense consists of the cost associated with purchasing the IOP Sensor System from DOSE on April 12, 2017. The DOSE IOP Sensor System features a micro-invasive ocular implant that is designed to capture and store a glaucoma patient’s short-interval IOP measurements over extended periods of time, and transmit data to the patient’s physician in order to enhance treatment decisions. The wireless system, which is designed for ab-interno

Table of Contents

insertion, incorporates a rechargeable battery that may allow the sensor to function for multiple years. The IOP Sensor System was in the development-stage at the time of purchase.

Research and development

Our R&D activities primarily consist of new product development projects, pre‑clinical studies, IDE studies, and other clinical trials. Our R&D expenses primarily consist of personnel‑related expenses, including salaries, fringe benefits and stock‑based compensation for our R&D employees; research materials; supplies and services; and the costs of conducting clinical studies, which include payments to investigational sites and investigators, clinical research organizations, consultants, and other outside technical services and the costs of materials, supplies and travel. We expense R&D costs as incurred. We expect our R&D expenses to increase as we initiate and advance our development programs, including our expanding pharmaceutical and IOP sensor development efforts, and clinical trials, the most costly of which are expected to be our iStent Supra, iDose Travoprost, iStent SA and iStent Infinite product candidates.

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

Non-operating (expense) income

Non-operating (expense) income primarily consists of interest income derived from our short-term investments. Also included are unrealized gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the U.S. dollar, primarily related to intercompany loans.

Income taxes

The provision for income taxes is determined using an estimated annual effective tax rate which is generally lower than the U.S. federal statutory rate primarily due to various permanent items, the impact of the Company’s valuation allowance, and minimum state tax payments. The annual effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used to estimate the annual effective tax rate, including factors such as expected utilization of net operating loss carryforwards, changes in or the interpretation of tax laws in jurisdictions where the we conduct business, our expansion into new states or foreign countries, and the amount of valuation allowances against deferred tax assets.

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. Among other changes, the Act reduces the US federal corporate tax rate from 34% to 21% for federal tax purposes. In accordance with Staff Accounting Bulletin 118, as of June 30, 2018, we have not completed the accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on the existing deferred tax balances. In all cases, we will continue to make and refine calculations as additional analysis is completed. In addition, estimates may also be affected as we gain a more thorough understanding of the Act.

We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts based on information available at December 31, 2017. The provisional amount recorded related to the remeasurement of the deferred tax balance was $25.2 million, which was fully offset by a decrease in the valuation allowance. There were no significant changes to any of the balances recorded at December 31, 2017 as a result of the Act during the three and six months ended June 30, 2018.

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

Table of Contents

Results of Operations

Comparison of Three Months Ended June 30, 2018 and 2017


	Three Months Ended
	June 30,				% Increase
(in thousands)	2018		2017		(decrease)
Statements of operations data:
Net sales	$	43,161	$	41,285	5%
Cost of sales		6,160		5,522	12%
Gross profit		37,001		35,763	3%
Operating expenses:
Selling, general and administrative		28,638		24,675	16%
In-process research and development		-		5,320	NM
Research and development		12,611		9,633	31%
Total operating expenses		41,249		39,628	4%
Loss from operations		(4,248)		(3,865)	10%
Total non-operating (expense) income		(1,139)		586	NM
Provision for income taxes		11		22	(50%)
Net loss	$	(5,398)	$	(3,301)	64%

NM = Not Meaningful

Net sales

Net sales for the three months ended June 30, 2018 and June 30, 2017 were $43.2 million and $41.3 million, respectively, reflecting an increase of $1.9 million or 5%. The increase in net sales resulted primarily from expansion of the Company’s direct sales operations into new international markets. Net sales in the United States represented $36.3 million and $37.1 million for the three months ended June 30, 2018 and June 30, 2017, respectively, decreasing by 2%, with average selling prices relatively stable compared to the prior period. International sales for the three months ended June 30, 2018 and June 30, 2017 were $6.9 million and $4.2 million, respectively, increasing by 63%. Net sales at our subsidiaries in Brazil, Germany, Japan, and the United Kingdom accounted for the majority of the increase internationally.

Cost of sales

Cost of sales for the three months ended June 30, 2018 and June 30, 2017 were $6.2 million and $5.5 million, respectively, reflecting an increase of $0.6 million or 12%. Our gross margin was 86% and 87% for the three months ended June 30, 2018 and June 30, 2017, respectively.

Selling, general and administrative expenses

SG&A expenses for the three months ended June 30, 2018 and June 30, 2017 were $28.6 million and $24.7 million, respectively, reflecting an increase of approximately $4.0 million or 16%. The increase in SG&A expenses was primarily the result of approximately $3.1 million in additional compensation and related employee expense associated with our growing number of domestic and international employees with the remaining increase comprised of other SG&A expenses such as consulting and professional services fees and non-employee related expenses incurred by our foreign subsidiaries.

In-process research and development expenses

IPR&D expenses for the three months ended June 30, 2018 and June 30, 2017 were zero and $5.3 million, respectively, given the purchase of the IOP Sensor System from DOSE occurred in the prior year.

Research and development expenses

R&D expenses for the three months ended June 30, 2018 and June 30, 2017 were $12.6 million and $9.6 million, respectively, reflecting an increase of $3.0 million or 31%. The increase in R&D expenses was primarily the result of approximately $1.7 million in additional compensation and related employee expenses as well as an overall increase in other core R&D and clinical expenses of approximately $1.3 million.

Table of Contents

Non-operating (expense) income

We had non-operating expense for the three months ended June 30, 2018 of $1.1 million and had non-operating income of $0.6 million for the three months ended June 30, 2017. The decrease in non-operating (expense) income primarily relates to the recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates.

Provision for income taxes

Our effective tax rate for the second quarter of 2018 was (0.2)%. For the three months ended June 30, 2018 and June 30, 2017, we recorded a provision for income taxes of $11,000 and $22,000, respectively, which were primarily comprised of state income taxes in both periods along with federal alternative minimum tax in the three months ended June 30, 2017.

Comparison of Six Months Ended June 30, 2018 and 2017


	Six Months Ended
	June 30,				% Increase
(dollars in thousands)	2018		2017		(decrease)
Statements of operations data:
Net sales	$	83,294	$	77,192	8%
Cost of sales		11,946		10,702	12%
Gross profit		71,348		66,490	7%
Operating expenses:
Selling, general and administrative		55,793		46,156	21%
In-process research and development		-		5,320	NM
Research and development		23,517		18,575	27%
Total operating expenses		79,310		70,051	13%
Loss from operations		(7,962)		(3,561)	124%
Total non-operating (expense) income		(131)		1,215	NM
Provision for income taxes		16		77	-79%
Net loss	$	(8,109)	$	(2,423)	235%

NM = Not Meaningful

Net sales

Net sales for the six months ended June 30, 2018 and June 30, 2017 were $83.3 million and $77.2 million, respectively, reflecting an increase of $6.1 million or 8%. The increase in net sales resulted primarily from expansion of the Company’s direct sales operations into new international markets. Net sales in the United States represented $69.9 million and $69.0 million for the six months ended June 30, 2018 and June 30, 2017, respectively, increasing by 1%. International sales for the six months ended June 30, 2018 and June 30, 2017 were $13.4 million and $8.2 million, respectively, increasing by 62%. Net sales at our subsidiaries in Brazil, Germany, Japan, and the United Kingdom accounted for the majority of the increase internationally.

Cost of sales

Cost of sales for the six months ended June 30, 2018 and June 30, 2017 were $11.9 million and $10.7 million, respectively, reflecting an increase of $1.2 million or 12%. Our gross margin was 86% for each of the six months ended June 30, 2018 and June 30, 2017.

Selling, general and administrative expenses

SG&A expenses for the six months ended June 30, 2018 and June 30, 2017 were $55.8 million and $46.2 million, respectively, reflecting an increase of approximately $9.6 million or 21%. The increase in SG&A expenses was primarily the result of approximately $7.7 million in additional compensation and related employee expense associated with our growing number of domestic and international employees, with the remaining increase comprised of other SG&A expenses such as consulting and professional services fees and non-employee related expenses incurred by our foreign subsidiaries.

Table of Contents

In-process research and development expenses

IPR&D expenses for the six months ended June 30, 2018 and June 30, 2017 were zero and $5.3 million, respectively, given the purchase of the IOP Sensor System from DOSE occurred in the prior year.

Research and development expenses

R&D expenses for the six months ended June 30, 2018 and June 30, 2017 were $23.5 million and $18.6 million, respectively, reflecting an increase of $4.9 million or 27%. The increase in R&D expenses was primarily the result of approximately $3.2 million in additional compensation and related employee expenses as well as an overall increase in other core R&D and clinical expenses of approximately $1.7 million.

Non-operating (expense) income

We had non-operating expense for the six months ended June 30, 2018 of $0.1 million and had non-operating income of $1.2 million for the six months ended June 30, 2017. The decrease in non-operating (expense) income primarily relates to the recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates.

Provision for income taxes

Our effective tax rate for the six months ended June 30, 2018 and 2017 was (0.2)% and (3.3)%, respectively. For the six months ended June 30, 2018 and June 30, 2017, we recorded a provision for income taxes of $16,000 and $77,000, respectively, which were primarily comprised of state income taxes in both periods along with federal alternative minimum tax in the six months ended June 30, 2017.

Liquidity and Capital Resources

For the six months ended June 30, 2018, we incurred a net loss of $8.1 million and we used cash from operations of approximately $2.6 million. As of June 30, 2018, we had an accumulated deficit of approximately $200.3 million. We have funded our operations to date from the sale of equity securities, including our June 2015 initial public offering (IPO), the issuance of notes payable, cash exercises of stock options and warrants to purchase equity securities and cash generated from operations. We have made and expect to continue to make significant investments in our global sales force, marketing programs, research and development activities and clinical studies. FDA‑approved IDE studies and new product development programs in our industry are expensive, and we have also incurred a significant increase in administrative costs since we began operating as a public company in 2015. Accordingly, although we were profitable in 2016 and certain periods in 2017, and have generated cash from operations in those years, there can be no assurance that we will continue to be profitable or continue to generate cash from operations.

At June 30, 2018, we had $120.1 million in cash, cash equivalents and short-term investments. We plan to fund our operations and capital funding needs using existing cash and investments and cash generated from operations, and we may seek to obtain additional financing in the future through debt or equity financings. There can be no assurance that we will be able to obtain additional financing on terms acceptable to us, or at all. We believe that our available cash, cash equivalents, investment balances and interest we earn on these balances and cash generated from operations will be sufficient to fund our operations and satisfy our liquidity requirements for at least the next 12 months from the date our condensed consolidated financial statements for the three and six months ended June 30, 2018 are made publicly available.

The following table summarizes our cash and cash equivalents, short-term investments and selected working capital data as of June 30, 2018 and December 31, 2017:


	June 30,		December 31,
	2018		2017
Cash and cash equivalents	$	24,941	$	24,508
Short-term investments		95,207		94,506
Accounts receivable, net		17,089		16,656
Accounts payable		3,611		6,244
Accrued liabilities		16,655		20,449
Working capital (1)		135,014		122,672

(1)

Working capital consists of total current assets less total current liabilities

Table of Contents

Cash Flows

Our historical cash outflows have primarily been associated with cash used for operating activities such as the purchase of and growth in inventory; expansion of our sales, marketing and R&D activities and other working capital needs; the acquisition of intellectual property; and expenditures related to equipment and improvements used to increase our manufacturing capacity, to improve our manufacturing efficiency and for overall facility expansion.

The following table is a condensed summary of our cash flows for the periods indicated:


	Six Months Ended
	June 30,
(in millions)	2018		2017
Net cash (used in) provided by:
Operating activities	$	(2.6)	$	6.6
Investing activities		(2.7)		(3.3)
Financing activities		5.7		3.8
Exchange rate changes		-		(0.2)
Net increase in cash, cash equivalents and restricted cash	$	0.4	$	6.9

At June 30, 2018, our cash and cash equivalents were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity.

Operating Activities

In the six months ended June 30, 2018, our operating activities used $2.6 million, whereas in the six months ended June 30, 2017, our operating activities provided $6.6 million.

For the six months ended June 30, 2018, the total net change in operating assets and liabilities reflected cash usage of $12.2 million due primarily to increases in inventory and prepaid expenses and other current assets of approximately $4.5 million and an increase in accounts payable and accrued liabilities of $6.1 million. More than offsetting this amount were all non-cash adjustments to reconcile net loss to net cash used in operating activities totaling $17.7 million, primarily consisting of stock-based compensation expense of $11.9 million, depreciation and amortization of $3.4 million and unrealized foreign currency losses of $1.2 million.

For the six months ended June 30, 2017, the total net change in operating assets and liabilities reflected cash usage of $1.1 million due primarily to increases in accounts receivable and inventory of approximately $3.7 million and an increase in accounts payable and accrued liabilities of $2.1 million, partially offset by a net decrease in prepaid expenses and other current assets of $0.7 million. More than offsetting this amount were all non-cash adjustments to reconcile net loss to net cash provided by operating activities totaling $10.1 million, primarily consisting of stock-based compensation expense of $7.9 million and depreciation and amortization of $2.4 million.

Investing Activities

In the six months ended June 30, 2018 and June 30, 2017, our investing activities used $2.7 million and $3.3 million of cash, respectively.

For the six months ended June 30, 2018, we used cash of approximately $47.1 million for purchases of short-term investments and we received cash of approximately $46.4 million from sales and maturities of short-term investments, for a combined net cash usage of $0.7 million related to short-term investments.

For the six months ended June 30, 2017, we used cash of approximately $45.8 million for purchases of short-term investments and we received cash of approximately $44.6 million from sales and maturities of short-term investments, for a combined net cash usage of $1.2 million related to short-term investments.

Additionally, during the six months ended June 30, 2018 and June 30, 2017, we used approximately $2.0 million and $2.1 million, respectively, for purchases of property and equipment.

Financing Activities

In the six months ended June 30, 2018 and June 30, 2017, financing activities provided $5.7 million and $3.8 million, respectively.

Table of Contents

For the six months ended June 30, 2018, we received cash from stock option exercises of $4.6 million and share purchases under our Employee Stock Purchase Plan of $1.4 million.

In the six months ended June 30, 2017, finance activities provided $3.8 million in cash comprised of proceeds from the exercise of stock options of $2.8 million and share purchases under the Employee Stock Purchase Plan of approximately $1.0 million.

Commitments

As of June 30, 2018, the Company had material commitments for capital expenditures of approximately $0.9 million. We plan to fund our capital expenditures with cash and cash equivalents.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose. However, from time to time we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims including in connection with certain real estate leases, and supply purchase agreements, and with directors and officers. The terms of such obligations vary by contract and in most instances a maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted, thus no liabilities have been recorded for these obligations on our balance sheets for any of the periods presented.

Critical Accounting Policies and Significant Estimates

Management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions and such differences could be material to our financial position and results of operations.

Our critical accounting policies and significant estimates that involve a higher degree of judgment and complexity are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates” included in Part II, Item 7 of our Annual Report on Form 10‑K for the year ended December 31, 2017. There have been no material changes to our critical accounting policies and estimates as disclosed therein, with the exception of the Company’s adoption of Accounting Standards Codification (ASC) 606, Revenue Recognition – Revenue from Contracts with Customers and its related amendments (ASC 606). See the section entitled “Revenue recognition” within the Company’s Summary of Significant Accounting Policies and Note 6, Revenue from Contracts with Customers for further discussion of the Company’s adoption of ASC 606 and related disclosures.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our exposure to market risk since December 31, 2017. Refer to Item 7A “Quantitative and Qualitative Disclosures about “Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2017 for further detail.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is

Table of Contents

accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting identified by management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during our second fiscal quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On April 14, 2018, the Company filed a patent infringement lawsuit against Ivantis, Inc. in the U.S. District Court for the Central District of California, Southern Division, alleging that Ivantis’ Hydrus Microstent device infringes the Company’s U.S. Patent Nos. 6,626,858 and 9,827,143. The lawsuit seeks unspecified monetary damages and injunctive relief. On May 21, 2018, Ivantis filed a motion to dismiss the complaint for failure to state a claim and lack of subject matter jurisdiction, which the Court vacated to allow the Company time to conduct limited discovery on the issues raised. Should Ivantis seek to file a renewed motion, it must do so by August 20, 2018. On May 23 and May 30, 2018, Ivantis also filed Inter Partes Review proceedings with the Patent Trial and Appeal Board (“PTAB”) on the patents asserted in the litigation. The Company has three months to file an optional preliminary response, and within six months, the PTAB will decide whether or not to institute the proceedings.

Item 1A. Risk Factors

The risks and uncertainties discussed below update and supersede the risks and uncertainties previously disclosed in Part I, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, which was filed with the SEC on May 9, 2018. With the exception of risks relating to the recent FDA approval of our iStent Inject product and the European Union’s General Data Protection Regulation taking effect, we do not believe any of the changes constitute material changes from the risk factors previously disclosed in such prior Annual Report on Form 10-K.

The risks discussed below are not the only ones facing our business but do represent those risks that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. Please read the cautionary notice regarding forward-looking statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Risks Related to Our Business

We have incurred significant losses since inception and there can be no guarantee that we reach sustained profitability.

Since the Company’s inception in July 1998, we have incurred significant operating losses. For the three and six months ended June 30, 2018, we incurred net losses of approximately $5.4 million and $8.1 million, respectively, and for the fiscal year ended December 31, 2017, we incurred a net loss of $0.1 million. As of June 30, 2018, we had an accumulated deficit of approximately $200.3 million. Losses have resulted principally from costs incurred in our clinical trial, research and development programs and from our general and administrative expenses. We have funded our operations to date from the sale of equity securities, including our June 2015 initial public offering (IPO), the issuance of notes payable, cash exercises of stock options and warrants to purchase equity securities and cash generated from operations. We have devoted substantially all of our resources to the research and development of our products, the commercial launch of the iStent and the recently FDA-approved iStent Inject, the development of our proprietary sales network, and the assembly of a management team to build our business.

To implement our global business strategies we need to, among other things, further grow our global sales and marketing infrastructure to increase global market acceptance of our products and any other products that receive FDA or equivalent foreign approval, fund ongoing research and development activities, expand our manufacturing capabilities, and obtain regulatory clearance or approval to commercialize our existing products in international markets or to commercialize those currently under development in the United States and internationally. As a result, we expect our expenses to increase significantly as we pursue these objectives. Our ability to reach sustained profitability is highly uncertain, especially given our limited commercial history selling our products globally and an increasingly competitive landscape, which makes forecasting our sales more difficult. In addition, we may experience transitory sales declines related to the commercial launch of our iStent Inject device, as customers deplete inventory in anticipation of the new product and as physicians participate in ordinary-course training for and sampling of the iStent Inject. We will need to generate significant additional net sales to reach and maintain profitability. We cannot be sure that we will reach sustained profitability for any substantial period of time. Our failure to sustain profitability could have an adverse effect on the value of our common stock.

Table of Contents

Substantially all of our net sales have been generated from sales of the iStent, which has an increasingly competitive landscape, and we are substantially dependent on its success. If competition or other factors slow the market acceptance or usage of the iStent, the recently-approved iStent Inject or our other products under development, our business will suffer.

Our primary sales‑generating commercial product has been the iStent, which we began selling in the United States in the third quarter of 2012. We rely heavily upon sales in the United States, which comprised 84% and 89% of our net sales for the six months ended June 30, 2018 and 2017, respectively. We expect to continue to derive a significant portion of our net sales from sales of the iStent, as well as the recently-approved iStent Inject, in the United States, even if we are successful in continuing to commercialize our iStent products outside the United States, or receive necessary approvals to commercialize the iStent Infinite, iStent Supra, iDose Travoprost, iStent SA and the IOP Sensor System in the United States and other countries. Accordingly, our ability to generate net sales is highly dependent on our ability to market and sell the iStent and the iStent Inject.

We developed MIGS to provide an alternative to the traditional glaucoma treatment and management paradigm. The iStent was our first MIGS device and we are developing other products to treat glaucoma, including the iStent Inject, which received FDA approval to be marketed in the U.S. in June 2018. MIGS and our MIGS devices may experience a slowdown of market acceptance among eye care professionals, patients, healthcare payors and the medical community. There are a number of other available therapies marketed for the treatment of glaucoma, including medication therapies that are well established and are widely accepted by the medical community. There are also other MIGS devices that are currently available in the United States and globally or are in development by third parties that have entered or could enter the market and which may affect adoption of or demand for our products. For example, Alcon, Inc. (which acquired Transcend Medical, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its CyPass® suprachoroidal implant, a competitive MIGS device, in 2016. The CyPass device is indicated for use in conjunction with cataract surgery for the reduction of IOP in adult patients with mild to moderate primary open-angle glaucoma. Also in 2016, Allergan plc (which acquired AqueSys, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its Xen® Glaucoma Treatment System, a competitive MIGS device, for use in the U.S. This Xen device is indicated for the management of refractory glaucoma, where previous surgical treatment has failed or in patients with primary open angle glaucoma, and pseudoexfoliative or pigmentary glaucoma with open angles that are unresponsive to maximum tolerated medical therapy. We are aware of several other companies, including Santen Pharmaceutical Co., Ltd. (which recently acquired InnFocus, Inc., a MIGS competitor), Istar Medical SA and Ivantis Inc. that are conducting FDA‑approved IDE clinical trials or have filed for regulatory approval of MIGS devices in preparation for commercialization of their products. If these MIGS products, or other products that may be developed, receive regulatory approval, we will have additional direct MIGS competitors. These new MIGS products could achieve greater commercial acceptance or demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our iStent or iStent Inject, or other products under development, which may reduce demand for our primary products, the iStent and the iStent Inject, as well as for our products in development.

Eye care professionals, patients, healthcare payors and the medical community globally may be slow or fail to adopt our products for a variety of reasons, including, among others:

lack of experience with our products;

lack of availability of adequate coverage and reimbursement for hospitals, ambulatory surgery centers and physicians;

our inability to convince key opinion leaders to provide recommendations regarding our products, or to convince eye care professionals, patients and healthcare payors that our products are attractive alternatives to other products and treatment solutions;

lack of evidence supporting cost benefits or cost‑effectiveness of our products over existing alternatives;

perception that our products are unproven, investigational or experimental;

the price of our products relative to competing treatment alternatives;

physician preference for competitive MIGS devices in the market;

liability risks generally associated with the use of new products and procedures; and

training required to use new products.

Table of Contents

Our growth depends on our ability to develop and commercialize additional products, including our recently FDA-approved iStent Inject and our pipeline products consisting of the iStent Infinite, the iStent Supra, the iDose Travoprost and the iStent SA. If we are not able to commercialize additional products, including any or each of our pipeline products, in a timely manner, our products may become obsolete over time, customers may not buy our products, our net sales and profitability may decline, and we may not experience growth in our business.

Demand for our products may change in ways we may not anticipate due to:

changing coverage and reimbursement, coding and payments;

changing customer needs;

the introduction of new products and technologies;

evolving surgical practices;

evolving industry standards; and

other unforeseen reasons.

As a result, it is important that we continue to build a more complete product offering. Developing additional products is expensive and time‑consuming, and could divert management’s attention away from expanding acceptance of the iStent and commercializing the iStent Inject and harm our business. Even if we are successful in developing our additional pipeline products, including those currently in development, the success of our new product offerings, if any, will depend on a variety of factors, including our ability to:

properly identify and anticipate customer needs;

commercialize new products in a cost‑effective and timely manner;

manufacture and deliver products in sufficient volumes on time;

obtain regulatory approval for new products;

receive adequate coverage and reimbursement for procedures performed with our products;

differentiate our offerings from competitors’ offerings;

achieve positive clinical outcomes;

satisfy the increased demands from healthcare payors, providers and patients for lower‑cost procedures;

innovate and develop new materials, product designs and surgical techniques; and

provide adequate medical and consumer education relating to new products and attract key ophthalmologists and other eye care professionals to advocate these new products.

Moreover, we will need to make a substantial investment in research and development before we can determine the commercial viability of any innovations, and we may not have the financial resources required to fund such research and development. In addition, even if we are able to successfully develop product enhancements or new products, these enhancements or new products may not produce net sales in excess of the costs of development, or they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying superior technologies or features.

Research programs to identify new products will require substantial technical, financial and human resources, whether or not any such products are ultimately identified. We may determine that one or more of our pre‑clinical programs does not have sufficient potential to warrant the allocation of such resources. Our research programs may initially show promise in identifying potential products, yet fail to yield product candidates for clinical development for many reasons, including the following:

the research methodology used may not be successful in identifying potential products;

competitors may develop alternatives that render our future products, if any, obsolete;

our products may not be deployed safely or effectively;

Table of Contents

our future products, if any, may, on further study, be shown to have harmful side effects or other characteristics that indicate they are unlikely to be effective;

our clinical trials may not be successful; and

we may not receive regulatory approval.

If we are not successful in obtaining market acceptance of our products globally, overall utilization of our products may fall below targeted levels. If we are unable to establish a global sales and marketing organization, we may not be able to effectively commercialize our products, which would adversely affect our business prospects, results of operations and financial condition.

Because of the numerous risks and uncertainties associated with our global commercialization efforts, our products may not obtain market acceptance outside of the United States, which would adversely impact the overall utilization of our products. International markets differ significantly from the U.S. market, including as a result of differences in payor systems, reimbursement, competitive dynamics, market size, regulations and patient treatment regimens. As a result of the differences in these markets, you should not compare our financial results in the U.S. market to any potential results in the international markets nor should you rely on our past results as an indication of our future performance.

In order to generate increased sales, we will need to establish a global sales organization. Our future success will depend largely on our ability to train, retain and motivate skilled regional sales managers and direct sales representatives and distributors around the world with significant technical knowledge of MIGS and the iStent and our other products. Because of the competition for their services, we cannot assure you we will be able to retain such representatives on favorable or commercially reasonable terms, if at all. If we are unable to establish a global sales and marketing organization, we may not be able to effectively commercialize our products globally, which would adversely affect our business prospects, results of operations and financial condition.

Our global growth strategy requires us to enter new foreign markets to increase international sales. If we fail to obtain and maintain the regulatory approvals or the favorable reimbursement coverage or payment levels necessary to market our products in foreign jurisdictions, our market penetration opportunities will be limited. Foreign governments tend to impose strict price controls, which could negatively impact our profitability. Additionally, our existing and new potential international operations subject us to certain operating risks, which could adversely impact our results of operations and financial condition.

To implement our global growth strategy, we must continue to market our iStent and other medical device products in the international jurisdictions in which we are currently authorized, as well as expand such operations into additional foreign countries. In order to market our products in the European Union, Asia or other foreign jurisdictions, we must obtain and maintain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies from country to country and can involve additional testing. The time required to obtain approval abroad may be longer than the time required to obtain FDA clearance or approval. Foreign regulatory approval processes include many of the risks associated with obtaining FDA clearance or approval and we may not obtain foreign regulatory approvals on a timely basis, if at all. FDA clearance or approval does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries. However, the failure to obtain clearance or approval in one jurisdiction may have a negative impact on our ability to obtain clearance or approval elsewhere. If we do not obtain or maintain necessary approvals to commercialize our products in markets outside the United States, it would negatively affect our overall market penetration.

Even when we receive the necessary approvals to market our products in a foreign jurisdiction, we face challenges to reaching or maintaining profitability. In some foreign countries, particularly in the European Union, the pricing of medical devices is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to supply data that compares the cost‑effectiveness of our products to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, it may not be profitable to sell our products in certain foreign countries, which could negatively affect the long‑term growth of our business.

Our existing foreign operations, as well as our planned international growth, expose us to additional uncertainty and risks beyond regulatory authorization and reimbursement levels. Outside the United States, we sell our products

Table of Contents

through direct sales organizations in 16 countries and a network of third-party distribution partners in other markets. These international operations expose us and our subsidiaries and third-party distributors to a variety of risks including, without limitation, the following:

compliance with foreign regulations and laws, as well as U.S. laws that apply to activities in foreign jurisdictions, the adherence to which can be costly. Such regulations and laws expose us to penalties for non-compliance. These laws and regulations include various anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act, the French Sunshine Act, as well as export control regulations. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities and exclusion or debarment from government contracting;

difficulties enforcing our intellectual property rights and defending against third-party threats and intellectual property enforcement actions against us, our distributors, or any of our third-party suppliers;

reduced or varied protection for intellectual property rights in some countries;

pricing pressure that we may experience internationally;

foreign currency exchange rate fluctuations;

a shortage of high-quality sales people and distributors, and the difficulties of managing foreign operations;

the availability and level of third-party coverage and reimbursement within prevailing foreign healthcare systems that may require some of the patients who would be good candidates for the iStent or our other products to directly absorb medical costs, the ability of those patients to elect to privately pay for the iStent or our other products, or the potential necessity to reduce the selling prices of our products;

relative disadvantages compared to competitors with more recognizable names, longer operating histories and better established distribution networks and customer relationships;

the imposition of additional U.S. and foreign governmental controls or regulations;

political and economic instability;

changes in duties and tariffs, license obligations and other non-tariff barriers to trade;

the imposition of restrictions on the activities of foreign agents, representatives and distributors;

scrutiny of foreign tax authorities that could result in significant fines, penalties and additional taxes being imposed on us;

laws and business practices favoring local companies;

longer sales and payment cycles;

difficulties in maintaining consistency with our internal guidelines;

difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;

the imposition of costly and lengthy new export licensing requirements and restrictions, particularly relating to technology;

international terrorism and anti-U.S. sentiment;

the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; and

the imposition of new trade restrictions.

If we experience any of these risks, our sales in non-U.S. jurisdictions may be harmed, our results of operations would suffer and our business prospects would be negatively impacted.

Table of Contents

We face manufacturing risks that may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affect our operating results.

Our business strategy depends on our ability to manufacture our current and proposed products in sufficient quantities and on a timely basis so as to meet customer demand, while adhering to product quality standards, complying with regulatory requirements and managing manufacturing costs.

Our corporate headquarters and our manufacturing operations are located in an approximately 86,000 square foot campus located in San Clemente, California, comprised of two main buildings. This location serves as our sole manufacturing location where we manufacture, inspect, package, release and ship nearly all of our final products pursuant to numerous U.S. and foreign regulatory approvals. If this facility suffers a crippling event, or a force majeure event, this could materially impact our ability to operate. If we are unable to continue to expand our manufacturing facility in compliance with regulatory requirements or to hire additional necessary manufacturing personnel, we may encounter operational interruptions, delays or additional costs in achieving our research, development and commercialization objectives, including in obtaining regulatory approvals of our product candidates and meeting customer demand, which could materially damage our business and financial position. As our business expands, we will require additional space, which could also result in a higher cost structure that could reduce our gross margin and negatively affect our operating results.

We are also subject to numerous other risks relating to our manufacturing capabilities, including:

quality and reliability of product components that we source from third‑party suppliers, including the risk of receiving contaminated heparin or sourcing quality heparin in quantities sufficient to coat our products;

our inability to secure product components in a timely manner, in sufficient quantities or on commercially reasonable terms;

our inability to maintain compliance with quality system requirements;

our failure to increase production capacity or volumes to meet demand;

our inability to design or modify production processes to enable us to produce efficiently future products or implement changes in current products in response to design or regulatory requirements; and

difficulty identifying and qualifying alternative suppliers for components in a timely manner.

As demand for our products increases, we will have to invest additional resources to purchase components, hire and train employees and enhance our manufacturing processes. If we fail to increase our production capacity efficiently, our sales may not increase in line with our expectations and our operating margins could fluctuate or decline. In addition, although we expect some of our products in development to share product features and components with the iStent, the manufacture of these products may require the modification of our current production processes or unique production processes, the hiring of specialized employees, the identification of new suppliers for specific components or the development of new manufacturing technologies. It may not be possible for us to manufacture these products at a cost or in quantities sufficient to make these products commercially viable or to maintain current operating margins.

We depend on a limited number of third‑party suppliers for certain components and pharmaceuticals, and the loss of any of these suppliers, or their inability to provide us with an adequate supply of materials, could harm our business.

We rely on a limited number of third‑party suppliers to supply components for the iStent, the iStent Inject and its unique injector system and our other pipeline products, as well as drugs for our iDose drug delivery system in development. Other than agreements with key suppliers, we generally do not enter into long‑term supply agreements with our suppliers, and we order most components and other products on a purchase order basis. In some cases, we have a sole supplier or a limited number of suppliers. For example, we rely on one machining company to manufacture the titanium iStent and iStent Inject implants and one pharmaceutical supplier for the heparin used in the iStent’s and the iStent Inject’s heparin coating. While we believe that there are at least several other vendors that could supply the titanium implant, and other pharmaceutical vendors that could supply heparin, we have not yet qualified any of these vendors, which could cause delay, thereby impairing our ability to meet the demand of our customers. Although we maintain inventory to mitigate supply interruptions, we are nevertheless exposed to risks, including limited control over costs, availability, quality and delivery schedules.

We have been and may continue to be required to make significant “last time” purchases of components that are being discontinued by the supplier to ensure supply continuity. In addition, given our limited experience with certain

Table of Contents

suppliers, it may be difficult for us to assess their ability to timely meet our demand in the future based on past performance. If any one or more of our suppliers cease to provide us with sufficient quantities of components or drugs in a timely manner or on terms acceptable to us, we would have to seek alternative sources of supply. Because of factors such as the proprietary nature of our products, our quality control standards and regulatory requirements, we cannot quickly engage additional or replacement suppliers for some of our critical components. Even if we are able to identify and qualify a suitable second source to replace one of our key suppliers, if necessary, that replacement supplier would not have access to our previous supplier’s proprietary processes and would therefore be required to develop its own, which could result in further delay.

Failure of any of our suppliers to deliver products at the level our business requires would limit our ability to meet our sales commitments, which could harm our reputation and could have a material adverse effect on our business. We may also have difficulty obtaining similar components or drugs from other suppliers that are acceptable to the FDA or other regulatory agencies, and the failure of our suppliers to comply with strictly enforced regulatory requirements could expose us to regulatory action including warning letters, product recalls, termination of distribution, product seizures or civil penalties. It could also require us to cease using the components or drugs, seek alternative components, drugs or technologies and modify our products to incorporate alternative components, drugs or technologies, which could result in a requirement to seek additional regulatory approvals. Our suppliers may also encounter financial or other hardships unrelated to our demand for their products, which could inhibit their ability to fulfill our orders and meet our requirements. Any disruption of this nature or increased expense could harm our commercialization efforts and adversely affect our operating results.

In addition, we rely on our suppliers to supply us with components and pharmaceuticals that comply with regulatory requirements, Current Good Manufacturing Practices and quality control standards, and meet agreed upon specifications at acceptable costs and on a timely basis. Although we expect our third‑party suppliers to act consistent with such standards, we do not control our suppliers, as they operate and oversee their own businesses. There is a risk that our suppliers will not always act consistent with our best interests, and may not always supply components that meet our needs. Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions. Accordingly, if we fail to obtain sufficient quantities of high‑quality components and pharmaceuticals to meet demand for our products on a timely basis, we could lose customer orders, our reputation may be harmed and our business could suffer.

We currently operate primarily at a facility in a single location and any crippling accident, natural disaster or other force majeure event or disruption at this facility could materially affect our ability to operate and produce saleable products and could shut down our manufacturing capacity for an extended period.

Our principal office and manufacturing facility is located in San Clemente, California, adjacent to U.S. Marine Corps Base Camp Pendleton and wilderness area susceptible to brushfires, earthquakes and other natural disasters. Thus, substantially all of our operations are conducted primarily at a single location, including our manufacturing processes, research and development activities, customer and technical support, and management and administrative functions. In addition, substantially all of our inventory of component supplies and finished goods are held at this single location. Despite our efforts to safeguard this facility, including acquiring insurance on commercially reasonable terms, adopting environmental health and safety protocols and utilizing off‑site storage of computer data, vandalism, terrorism or a natural or other disaster, such as an earthquake, fire or flood, could damage or destroy our manufacturing equipment or our inventory of component supplies or finished goods, cause substantial delays in our operations, result in the loss of key information, and cause us to incur additional expenses, including relocation expenses. Our insurance may not cover our losses in any particular case, or insurance may not be available on commercially reasonable terms to cover certain of these catastrophic events. In addition, regardless of the level of insurance coverage, damage to our facilities may have a material adverse effect on our business, financial condition and operating results.

Failure to secure and maintain adequate coverage or reimbursement by third‑party payors for procedures using the iStent, iStent Inject or our other products in development, or changes in current coverage or reimbursement, could materially impact our net sales and future growth.

We currently derive nearly all our net sales from sales of the iStent in the United States and expect this, along with sales of our recently FDA-approved iStent Inject, to continue for the next several years. Hospitals and ambulatory surgery centers that purchase the iStent typically bill various third‑party payors, including Medicare, Medicaid, private commercial insurance companies, health maintenance organizations and other healthcare‑related organizations, to cover all or a portion of the costs and fees associated with the MIGS procedures in which the iStent is used and bill patients for

Table of Contents

any applicable deductibles or co‑payments. Access to adequate coverage and reimbursement for the procedures using the iStent (and our other approved products and products in development) by third‑party payors is essential to the acceptance of our products by our customers.

Because there is generally no separate reimbursement for medical devices and other supplies used in such procedures, including the iStent and the iStent Inject, the additional cost associated with the use of our iStent devices could impact the profit margin of the hospital or surgery center where the cataract surgery is performed if the incremental facility fee payment is not sufficient. Additionally, the implantation of more than one stent in a single procedure (as is the case with our iStent Inject two-stent product) is considered by Medicare to be bundled with the first stent, and therefore there is no additional, incremental facility reimbursement available for implantation of a second stent. Some of our target customers may be unwilling to adopt our iStent or iStent Inject in light of the additional associated cost. Further, any decline in the amount payors are willing to reimburse our customers for MIGS procedures could make it difficult for existing customers to continue using, or new customers to adopt, our iStent devices and could create additional pricing pressure for us. If we are forced to lower the price we charge for our products, our gross margins would decrease, which would adversely affect our ability to invest in and grow our business.

In addition, a key component of our global expansion strategy is obtaining reimbursement for the iStent device and procedure by governmental or private payors within the foreign countries in which we are seeking to commercialize our products. The requirements and processes for obtaining approval for such reimbursement may vary significantly from country to country, entail prolonged delay, or be more difficult for foreign manufacturers with new, unfamiliar products and treatments. If we face one or more of these challenges as we pursue commercializing our products internationally, our business prospects will suffer.

Third‑party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medical device products and services exists among third‑party payors. Therefore, coverage and reimbursement for medical device products and services can differ significantly from payor to payor. In addition, payors continually review new technologies for possible coverage and can, without notice, deny coverage for these new products and procedures. As a result, the coverage determination process is often a time‑consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained, or maintained if obtained.

Many third‑party payors in the United States model their coverage policies and payment amounts after those determined by the Center for Medicare & Medicaid Services (CMS), the federal agency responsible for administering the Medicare program. CMS relies on an extensive network of Medicare Administrative Contractors (MACs) to develop coverage policies when no national coverage determination exists for a procedure. Because there currently is no Medicare national coverage determination for procedures using our iStent devices, we are required to provide scientific and clinical support for the use of the iStent (including the recently approved iStent Inject device and iStent Supra device, if approved) to each MAC separately, with no assurance that coverage and adequate reimbursement will be obtained. Although all MACs currently provide coverage and reimbursement for the MIGS procedure using the iStent, difficulties in processing reimbursement or regional differences or reductions in the reimbursement amount for the physician professional services could negatively impact iStent penetration or usage by customers. These differences in MAC reimbursement could also negatively impact the amount paid by private commercial insurance companies, further negatively affecting customer penetration or usage.

Third‑party payors, including CMS, regularly assess and propose changes to their coverage and reimbursement policies. Changes in these current policies impact the profit margin of the hospital or surgery center where the surgery is performed and increase costs to customers. For example, beginning in 2016, Medicare started to make a single, comprehensive payment for combination iStent insertion and cataract procedures performed in hospital outpatient departments (HOPDs), eliminating the separate payments that were available for the procedures in prior years and reducing the total reimbursement amount for the combination procedure in the HOPD. Further, any decline in the amount payors are willing to reimburse our customers for MIGS procedures could make it difficult for existing customers to continue using, or new customers to adopt, any of our iStent devices and could create additional pricing pressure for us. If we were forced to lower the price we charge for our products, our gross margins would decrease, which would adversely affect our ability to invest in and grow our business. Conversely, although the reimbursement payments from Medicare to surgery centers for the iStent procedure was increased effective January 1, 2017, there can be no assurance that this increase will remain in effect in future years or that the amount of reimbursement will not be decreased in future years. Any reduction in the amount of Medicare reimbursement payments will have a negative effect on our net sales.

Table of Contents

Some third‑party payors in the United States, including Medicaid and certain commercial payors, have developed policies that deny coverage for the MIGS procedure using the iStent. To support changes in these policies, we may need to conduct prospective, randomized controlled clinical trials and present data from such trials to these payors to demonstrate the medical necessity or cost‑effectiveness of the iStent or our other approved products or products in development. There can be no assurance that coverage for our products will be expanded. In addition, those private payors that do not follow the Medicare guidelines may adopt different coverage and reimbursement policies for MIGS procedures performed with the iStent or the iStent Inject, though we cannot predict whether coverage will be sufficient or if there will be coverage at all. Failure to obtain favorable payor policies could have a material adverse effect on our business and operations.

We believe that Medicare coverage and existing coverage by third‑party payors represents more than 90% of our target patient population. U.S. third‑party payors representing more than 90% of individuals covered by commercial insurance currently reimburse the iStent procedure. While we anticipate gaining coverage and reimbursement from additional third‑party payors, we cannot guarantee that we will be successful or that coverage and reimbursement will be at levels that support continued penetration and usage by our customers. Moreover, compliance with the administrative procedures and requirements of third‑party payors may result in delays in processing approvals by those third‑party payors for customers to obtain coverage and reimbursement for procedures using the iStent or the iStent Inject. Failure to secure or maintain adequate coverage or reimbursement for procedures using our iStent devices by third‑party payors, or delays in processing approvals by those payors, could result in the cancellations of procedures to insert the iStent or iStent Inject in combination with cataract surgery, resulting in the loss of net sales from these procedures. If these issues remain unresolved, they could have a material adverse effect on our business, financial condition and operating results.

Failure to secure or maintain adequate coverage or reimbursement for procedures using the iStent by third‑party payors, or delays in processing approvals by those payors, could result in the cancellations of procedures to insert the iStent in combination with cataract surgery, resulting in the loss of net sales from these procedures. If these issues remain unresolved, they could have a material adverse effect on our business, financial condition and operating results.

In addition, although we have obtained temporary Category III Current Procedural Terminology (CPT) codes for the MIGS procedures associated with the insertion of our iStent products, including a separate CPT code for the additional stent inserted with the iStent Inject product (for which there is no associated facility fee under Medicare), there is no guarantee that these billing codes or the payment amounts associated with such codes will not change in the future. Prior to expiration, there are two options: submit an application to convert to a permanent Category I code; or submit an application for a five-year extension of Category III status. If we are unable to maintain our existing codes or obtain new permanent Category I codes for procedures using our iStent products, or obtain new reimbursement codes for our other products in development, we will be subject to significant pricing pressure, which could harm our business, results of operations, financial condition and prospects. Additionally, if we do obtain a permanent Category I Code for procedures using our iStent products, certain national reimbursement levels for such procedures may be adjusted at that time. These fee reimbursement levels may be decreased or significantly decreased, which would have a material adverse effect on our business, financial condition and operating results.

Physicians are typically paid separately from the facility for surgical procedures involving the iStent. Unlike the facility payment amounts associated with the CPT codes that describe iStent and the additional iStent Inject insertion, there is no published Medicare payment schedule at the national level for physician payment amounts. The physician payment rate is left to the discretion of the individual MAC. In order to adopt a new procedure, one of the factors that the surgeon evaluates is whether or not payment for the procedure adequately covers the surgeon’s time. As with the facility payment, the incremental payment the physician receives for inserting the iStent device, or the additional iStent Inject stent, plays a role in a surgeon’s decision to adopt the technology. Accordingly, changes in the payment the physician receives could affect the extent to which physicians recommend the iStent or iStent Inject procedure to patients, which could have a material adverse effect on our business, financial condition and operating results.

Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in international markets. Coverage decisions may depend upon clinical and economic standards that disfavor new products when more established or lower cost therapeutic alternatives are already available or subsequently become available. Adequate coverage and reimbursement from governmental and commercial payors are critical to new product acceptance. Third‑party coverage and reimbursement for our products or any of our product candidates for which we may receive regulatory approval may not be available or adequate in either the United States or international markets.

Table of Contents

If our competitors are better able to develop and market products that are safer, more effective, less costly or otherwise more attractive than the iStent, iStent Inject or any new products that we may develop, our commercial opportunity may be reduced or eliminated.

The medical device industry is highly competitive and subject to rapid and profound technological, market and product-related changes. Our success depends, in part, upon our ability to maintain a competitive position in the development of MIGS products. Our competitors, medical companies, academic and research institutions or others could develop new drugs, therapies, medical devices or surgical procedures to treat glaucoma that could render our products obsolete.

Until recently, our iStent was the only MIGS device approved for sale in the United States by the FDA. Thus, we had for several years commercialized the iStent in the United States without any direct MIGS competitors. Alcon, Inc. (which acquired Transcend Medical, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its CyPass® suprachoroidal implant, a competitive MIGS device, in 2016. The CyPass device is indicated for use in conjunction with cataract surgery for the reduction of IOP in adult patients with mild to moderate primary open-angle glaucoma. Also in 2016, Allergan plc (which acquired AqueSys, Inc., a MIGS competitor) obtained FDA approval and commenced a commercial launch of its Xen® Glaucoma Treatment System, a competitive MIGS device, for use in the U.S. The Xen device is indicated for the management of refractory glaucoma, where previous surgical treatment has failed or in patients with primary open angle glaucoma, and pseudoexfoliative or pigmentary glaucoma with open angles that are unresponsive to maximum tolerated medical therapy. We are aware of several other companies, including Santen Pharmaceutical Co., Ltd. (which recently acquired InnFocus, Inc., a MIGS competitor), Istar Medical SA and Ivantis Inc. that are conducting FDA‑approved investigational device exemption (IDE) clinical trials or have filed for regulatory approval of MIGS devices in preparation for commercialization of their products. If these MIGS products, or other products that may be developed, receive regulatory approval, we will have additional direct MIGS competitors. These new MIGS products could achieve greater commercial acceptance or demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our iStent or other approved products or products under development, which may reduce demand for our approved products as well as for our products in development. Demand for the iStent, the iStent Inject or our future products may decline when such products and technologies are introduced, and our business may be harmed.

We also compete with the use of medication therapy for treating glaucoma and with manufacturers of medical devices used in surgical therapy procedures for treating glaucoma, including Alcon, Inc., Johnson & Johnson (through its acquisition of Abbott Medical Optics Inc.), Allergan plc, STAAR Surgical Company, Lumenis Ltd., NeoMedix, Inc., New World Medical, Inc., Iridex Corporation and Ellex Medical Lasers Limited. Alcon, Inc. and Johnson & Johnson (through its acquisition of Abbott Medical Optics Inc.) are the leading manufacturers of aqueous shunts, and Alcon, Inc. also markets the EX‑PRESS Glaucoma Filtration Device. Lumenis Ltd. is a leading manufacturer of selective laser trabeculoplasty equipment. Neomedix, Inc. markets an electrosurgical device. New World Medical, Inc. offers a surgical device. Iridex Corporation offers laser systems. And, Ellex Medical Lasers Limited markets a canaloplasty device that some physicians employ to lower intraocular pressure in glaucoma.

Many of our current and potential competitors (including MIGS competitors) are large publicly traded companies or divisions of publicly traded companies and have several competitive advantages, including:

greater financial and human resources for product development, sales and marketing and patent litigation;

significantly greater name recognition;

longer operating histories;

established relationships with healthcare professionals, customers and third‑party payors;

additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives;

more established sales and marketing programs and distribution networks; and

greater experience in conducting research and development, manufacturing, clinical trials, preparing regulatory submissions and obtaining regulatory clearance or approval for drug and device products and marketing approved products.

As discussed above, the Xen device is being marketed by Allergan plc, a publicly traded company, and the CyPass is being marketed by Alcon, Inc., which is a division of Novartis International AG, a publicly traded

Table of Contents

multinational pharmaceutical company. InnFocus, Inc. was acquired by Santen Pharmaceutical Co., Ltd., a publicly traded multinational pharmaceutical company dedicated to the ophthalmic field. As a result of these transactions, we are competing directly against other MIGS providers that have the efficiencies and advantages identified above.

The training required for surgeons to use our products could reduce the market acceptance of our products.

As with any new method or technique, ophthalmic surgeons must undergo a thorough training program before they are qualified to perform procedures using our products. Surgeons could experience difficulty with the technique necessary to successfully insert our products, including intraoperative gonioscopy, and not achieve the technical competency necessary to be qualified to insert our devices. Also, even after successfully completing the training program, the physicians could experience difficulty inserting our products and cease utilizing them or limit their use significantly in practice. Surgeons may also experience greater success or competency with a competitive MIGS product.

We could also experience difficulty meeting expected levels of ophthalmic surgeons who complete our training program. This could happen due to less demand than expected, preference for competitive MIGS products, the length of time necessary to train each surgeon being longer than expected, the capacity of our sales representatives to train surgeons being less than anticipated, or if we are unable to sufficiently increase our sales organization. All of these events would lead to fewer trained ophthalmic surgeons qualified to insert our products, which could negatively impact our operating and financial results.

Ophthalmic surgeons may not use our products if they do not believe they are safe, efficient, effective and preferable alternatives to other treatment solutions in the market. If subsequent or continuing patient studies on the iStent or the iStent Inject, or patient outcomes, demonstrate results that are inferior to or inconsistent with our existing data, our sales could be adversely impacted. Additionally, ophthalmic surgeons not completing the iStent device training program may nevertheless elect to perform iStent device procedures and experience inferior clinical outcomes.

We believe that ophthalmic surgeons will not use our products unless they conclude that our products provide a safe, efficient, effective and preferable alternative to currently available treatment options. If longer‑term patient studies or clinical experience indicate that treatment with our products is less effective, less efficient or less safe than our current data suggest, our sales would be harmed, and we could be subject to significant liability. Further, unsatisfactory patient outcomes or patient injury could cause negative publicity for our products, particularly in the early phases of product introduction for our products currently under development. In addition, physicians may be slow to adopt our products if they perceive liability risks arising from their use. It is also possible that as our products become more widely used, latent defects could be identified, creating negative publicity and liability problems for us and adversely affecting demand for our products. Physicians may also conclude that the products offered by our MIGS competitors have greater efficacy than our products, which could result in a decline in our sales.

Ophthalmic surgeons may also determine not to use our products due to other potential risks to patients. For example, the iStent is rated “MRI Conditional” by the American Society for Testing and Materials. This means that a patient implanted with the iStent can be scanned via magnetic resonance imaging (MRI) only under the following conditions specified on the product label: static magnetic field of 3‑Tesla or less, and maximum spatial magnetic field gradient of 4,000‑Gauss/cm or less. Therefore, it may not be safe for iStent recipients to undergo MRIs in environments that do not match these specified conditions. Physicians may choose not to implant iStents because of this limitation, which could have an adverse impact on our net sales growth and financial results.

Additionally, inferior patient outcomes, or patient injury, may result if untrained or unqualified ophthalmic surgeons elect to perform any iStent procedures. Although our sales representatives manage the training program for ophthalmic surgeons to become qualified to insert our iStent devices in combination with cataract surgery, once training is completed the surgeon and/or surgical facility that the surgeon utilizes are cleared to purchase and maintain an iStent or iStent Inject supply. There is a risk that untrained or unqualified ophthalmic surgeons could gain access to iStent devices from a facility’s inventory and conduct iStent procedures without having received qualified status from us. If performing iStent procedures by unqualified ophthalmic surgeons were to become pervasive, this could raise the risk of complications and inferior clinical outcomes, which could result in negative patient experiences or experiences being published and damaging our reputation and that of our iStent devices. This could result in lower penetration and utilization by ophthalmic surgeons and could have a material adverse effect on our net sales growth, expected operating results and financial condition.

If an increasing number of ophthalmic surgeons do not continue to adopt the use of our products, our operating and financial results will be negatively impacted.

Table of Contents

Product liability suits brought against us could cause us to incur substantial liabilities, limit sales of our existing products and limit commercialization of any products that we may develop.

If our product offerings, including the iStent and iStent Inject, are defectively designed or manufactured, contain defective components, or are used or deployed improperly, or if someone claims any of the foregoing, whether or not such claims are meritorious, we may become subject to substantial and costly litigation. Any product liability claims brought against us, with or without merit, could divert management’s attention from our business, be expensive to defend, result in sizable damage awards against us, damage our reputation, increase our product liability insurance rates, prevent us from securing continuing coverage, or prevent or interfere with commercialization of our products. In addition, we may not have sufficient insurance coverage for all future claims. Product liability claims brought against us in excess of our insurance coverage would likely be paid out of cash reserves, harming our financial condition and results of operations.

Operating results could be unpredictable and may fluctuate significantly from quarter to quarter, which could adversely affect our business, financial condition, results of operations and the trading price of our common stock.

Our net sales from the sale of our approved iStent devices may experience volatility due to a number of factors, many of which are beyond our control, including:

our ability to drive increased sales of our products;

our ability to establish and maintain an effective and dedicated sales organization;

fluctuations in the demand for our products;

pricing pressure applicable to our products, including adverse third‑party coverage and reimbursement outcomes and competitor pricing;

results of clinical research and trials on our products;

fluctuations in the number of cataract procedures performed by our customers, which could decrease significantly during holiday seasons and summer months, when significant numbers of physicians and patients may schedule vacations;

timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;

decisions by customers to defer orders in anticipation of the introduction of new products or product enhancements by us;

sampling by and additional training requirements for physicians upon the commercialization of a new product;

our ability to manage the risks associated with new product introductions, including, without limitation, managing product inventory levels to ensure we adequately meet product demands and avoid expenses and charges associated with product obsolescence, and shifts and changes in product demands and the associated impact on revenues and cost of goods sold;

regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;

interruption in the manufacturing or distribution of our products;

the ability of our suppliers to timely provide us with an adequate supply of product components;

the effect of competing technological, industry and market developments;

changes in our ability to obtain regulatory clearance or approval for our products or to obtain or maintain our CE Certificates of Conformity for our products;

variances in the sales terms, timing or volume of customer orders from period to period;

the length of our sales cycle, which varies and may be unpredictable; and

our ability to expand the geographic reach of our sales and marketing efforts.

Table of Contents

As a result, you should not rely on our results in any past period as an indication of future results and you should anticipate that fluctuations in our quarterly and annual operating results may continue and could generate volatility in the price of our common stock. We believe that quarterly comparisons of our financial results should not be relied upon as an indication of our future performance.

If we fail to manage our anticipated growth effectively, our business could suffer.

Since the commercial launch of the iStent in July 2012, we have seen significant period‑to‑period growth in our business. We anticipate that this growth will continue in the near term as the iStent continues to gain market acceptance, the iStent Inject is commercially launched and we develop and introduce new products. Not only do we expect this growth to continue, but we must continue to grow in order to meet our business and financial objectives. However, continued growth may create numerous challenges, including:

new and increased responsibilities for our management team;

increased pressure on our operating, financial and reporting systems;

increased pressure from our competitors;

increased pressure to anticipate and satisfy market demand;

additional manufacturing capacity requirements;

strain on our ability to source a larger supply of components that meet our required specifications on a timely basis;

management of an increasing number of relationships with our customers, suppliers and other third parties;

entry into new international territories with unfamiliar regulations and business approaches; and

the need to hire, train and manage additional qualified personnel.

If we fail to manage any of the above challenges effectively, our business may be harmed.

Our future growth depends on our ability to retain members of our senior management and other key employees. If we are unable to retain or recruit qualified personnel for growth, our business results could suffer.

We have benefited substantially from the leadership and performance of our senior management as well as certain key employees. For example, our chief executive officer, as well as other key members of our senior management, has experience successfully developing novel technologies and scaling early‑stage medical device companies to achieve profitability. Our success will depend on our ability to retain our current management and key employees, and to attract and retain qualified personnel in the future. Competition for senior management and key employees in our industry is intense and we cannot guarantee that we will be able to retain our personnel or attract new, qualified personnel. The loss of services of certain members of our senior management or key employees could prevent or delay the implementation and completion of our strategic objectives, or divert management’s attention to seeking qualified replacements. Each member of senior management as well as our key employees may terminate employment without notice and without cause or good reason. The members of our senior management are not subject to non‑competition agreements. Accordingly, the adverse effect resulting from the loss of certain members of senior management could be compounded by our inability to prevent them from competing with us.

In addition to competing for market share for our products, we also compete against our competitors for personnel, including qualified sales representatives that are necessary to grow our business. Also, we compete with universities and research institutions for scientific and clinical personnel that are important to our research and development efforts.

We also rely on consultants and advisors in our research, operations, clinical and commercial efforts to implement our business strategies. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

Our strategic plan requires us to continue growing our sales, marketing, clinical and operational infrastructure in order to generate, and meet, the demand for our products. If we fail to retain or attract these key personnel, we could fail to take advantage of the market for our iStent technologies and our business, financial condition and operating results could be adversely affected.

Table of Contents

Our iDose implant will be regulated as a drug and be subject to a different regulatory approval process than our other products in development. iDose is in early stages of development and may never be commercialized.

As a drug delivery implant, iDose will be subject to a regulatory approval process similar to that for pharmaceuticals. This process is often a more lengthy, costly and complex process than obtaining regulatory approval for a medical device. The future success of our iDose product depends on our ability to complete clinical trials, and will require significant development activities, clinical trials, regulatory approvals, and substantial additional investment.

This development program may not lead to a commercially viable product for several reasons. For example, we may fail to demonstrate safety and efficacy in pre‑clinical tests or clinical trials, or we may have inadequate financial or other resources to pursue drug development efforts. From time to time, we may establish and announce certain development goals for our iDose product candidate; however, it is difficult to predict accurately if and when we will achieve these goals. We may be unsuccessful in advancing this drug delivery implant into clinical testing or in obtaining FDA approval, and our long‑term business prospects could be harmed.

Our business requires substantial capital and operating expenditures to operate and grow.

Although we raised net proceeds of approximately $113.6 million from our IPO and generate net sales from our approved products, we may nevertheless need to raise substantial additional capital in the future to:

expand our sales and marketing organization in the United States and internationally;

fund our operations, clinical trials and commercialization efforts for new products, if any such products receive regulatory approval for commercial sale;

scale‑up our manufacturing operations;

pursue additional research and development;

enforce or defend, in litigation or otherwise, our patent or other intellectual property rights against infringement, misappropriation or other violation by third parties or any claims that we infringe or have otherwise violated third‑party patent or other intellectual property rights; and

acquire companies or in‑license products or intellectual property.

We believe that our available cash, cash equivalents, investment balances and interest we earn on these balances and cash generated from operations will be sufficient to fund our operations and satisfy our liquidity requirements for at least the next 12 months from the date our condensed consolidated financial statements for the six months ended June 30, 2018 are made publicly available. However, our future funding requirements will depend on many factors, including:

the scope, rate of progress and cost of our clinical trials and other research and development activities;

the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;

the cost of asserting or defending, in litigation or otherwise, our patent or other intellectual property rights against infringement, misappropriation or other violation by third parties or any claims that we infringe or have otherwise violated third‑party patent or other intellectual property rights;

the terms and timing of any collaborative, licensing and other arrangements that we may establish;

the cost and timing of regulatory approvals;

the cost and timing of establishing sales, marketing and distribution capabilities;

the cost of establishing clinical and commercial supplies of our products and any products that we may develop;

the effect of competing technological and market developments;

licensing technologies for future development; and

the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

Table of Contents

If we raise additional funds through further issuances of equity or issuances of convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing obtained by us in the future would likely be senior to our common stock, would likely cause us to incur interest expense, and could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may increase our expenses and make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may also be required to secure any such debt obligations with some or all of our assets.

We cannot assure you that we will be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may even have to scale back our operations. In addition, the Company maintains cash balances in excess of amounts insured by the Federal Deposit Insurance Commission.

We may enter into acquisitions, collaborations, in‑licensing agreements, joint ventures, alliances or partnerships with third parties that fail to result in a commercial product or net sales.

We may enter into acquisitions, collaborations, in‑licensing agreements, joint ventures, alliances, partnerships or undertake one or more of these transactions in order to retain our competitive position within the marketplace or to expand into new markets. However, we cannot assure you that we would be able to successfully complete any acquisition we choose to pursue, or that we would be able to successfully integrate any acquired business, product or technology in a cost‑effective and non‑disruptive manner. If we were unable to integrate any acquired businesses, products or technologies effectively, our business would likely suffer.

Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt our operations and adversely affect our business and operating results.

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage sales and marketing data, accounting and financial functions, inventory management, product development tasks, clinical data, customer service and technical support functions. Our information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, cyber-based attacks, attacks by computer viruses or hackers, power losses, computer system or data network failures, security breaches and data corruption. Federal, state and international laws and regulations, such as the European Union’s General Data Protection Regulation (GDPR), which took effect in May 2018, can expose us to enforcement actions and investigations by regulatory authorities, and potentially result in regulatory penalties and significant legal liability, if our information technology security efforts fail. In addition, a variety of our software systems are cloud‑based data management applications, hosted by third‑party service providers whose security and information technology systems are subject to similar risks.

The failure of either our or our service providers’ information technology could disrupt our entire operation or result in decreased sales, increased overhead costs and product shortages, all of which could have a material adverse effect on our reputation, business, financial condition and operating results.

We cannot be certain that our net operating loss tax carryforwards will be available to offset future taxable income.

As of December 31, 2017, we had net operating loss carryforwards of approximately $125.7 million for U.S. federal income tax purposes, approximately $94.2 million of net operating loss carryforwards for state income tax purposes and approximately $18.0 million of net operating loss carryforwards for foreign purposes. The federal net operating loss carryforwards begin to expire in 2018 and $2.5 million of the state net operating loss carryforwards expired in 2017 and the remainder will begin to expire in 2028. The foreign net operating loss carryforwards will begin to expire no earlier than 2023, if not utilized sooner. At December 31, 2017, we had federal and state research and development carryforwards of approximately $7.5 million and $7.0 million, respectively, which begin to expire in 2021 for federal purposes and carry over indefinitely for state purposes. We have recorded a full valuation allowance against these tax attributes because we believe that uncertainty exists with respect to the future realization of the tax attributes as well as with respect to the amount of the tax attributes that will be available in future periods. To the extent available, we intend to use these net operating loss carryforwards to offset future taxable income associated with our operations. There

Table of Contents

can be no assurance that we will generate sufficient taxable income in the carryforward period to utilize any remaining net operating loss carryforwards before they expire.

In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the Code) contains rules that limit for U.S. federal income tax purposes the ability of a corporation that undergoes an “ownership change” to utilize its net operating losses (and certain other tax attributes) existing as of the date of such ownership change. Under these rules, a corporation is treated as having had an “ownership change” if there is more than a 50% increase in stock ownership by one or more “five percent shareholders,” within the meaning of Section 382 of the Code, during a rolling three‑year period. We believe a portion of our existing net operating losses are subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize our net operating losses to offset future taxable income could be further limited, which could have a negative effect on our liquidity. For these reasons, we may not be able to utilize a material portion of our net operating losses, even if we continue to achieve profitability.

Risks Related to the Regulatory Environment

Our failure to obtain and maintain regulatory clearances or approvals on a timely basis, or at all, could prevent us from commercializing our current or pipeline products in the U.S., which could severely impede our ability to grow our business and/or harm our business, financial condition and operating results.

The iStent and the iStent Inject are classified as medical devices. As a result, we are subject to extensive government regulation in the United States by the FDA and state regulatory authorities and by foreign regulatory authorities in the countries in which we conduct business. These regulations relate to, among other things, research and development, design, testing, clinical trials, manufacturing, clearance or approval, environmental controls, safety and efficacy, labeling, advertising, promotion, pricing, recordkeeping, reporting, import and export, post‑approval studies and the sale and distribution of the iStent, the iStent Inject and our other products in development.

In the United States, before we can market a new medical device, or a new use of, new claim for, or significant modification to, an existing product, we must first receive either clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (FDCA) or approval of a premarket approval application (PMA) from the FDA, unless an exemption applies. The process of obtaining PMA approval, which was required for the iStent and the iStent Inject, is much more costly and uncertain than the 510(k) clearance process. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, in order to clear the proposed device for marketing. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA approval process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre‑clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices for which the 510(k) process cannot be used and that are deemed to pose the greatest risk.

To the extent clinical data are required to support a 510(k) clearance or PMA approval process, clinical testing must be conducted in compliance with FDA requirements pertaining to human research. Depending on the risk posed by a device, we may be required to obtain an IDE from the FDA prior to beginning any clinical trial; similar notifications are required in other countries. Among other requirements, we must obtain approval from an independent Institutional Review Board (IRB) before such studies may begin. We may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the United States for any new devices we intend to market in the United States. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. We must also comply with other FDA requirements such as obtaining informed consent, monitoring, record-keeping, reporting and the submission of information regarding certain clinical trials to a public database maintained by the National Institutes of Health. Compliance with these requirements can require significant time and resources and if the FDA determines that we have not complied with such requirements, it may refuse to consider the data to support our applications or initiate enforcement actions.

Modifications to products that are approved through a PMA application generally need FDA approval. Similarly, some modifications made to products cleared through a 510(k) may require a new 510(k). The FDA’s 510(k) clearance process usually takes from three to 12 months, but may last longer. The process of obtaining a PMA generally takes from one to three years, or even longer, from the time the PMA is submitted to the FDA until an approval is

Table of Contents

obtained. Any delay or failure to obtain necessary regulatory approvals would have a material adverse effect on our business, financial condition and prospects.

The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that our products are safe or effective for their intended uses;

the disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our clinical trials or the interpretation of data from pre‑clinical studies or clinical trials;

failure of clinical sites to conduct the clinical trial in accordance with applicable regulatory requirements or our clinical protocols;

serious and unexpected adverse effects experienced by participants in our clinical trials;

the data from our pre‑clinical studies and clinical trials may be insufficient to support clearance or approval, where required;

our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;

the manufacturing process or facilities we use may not meet applicable requirements; and

the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval.

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug products is also subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. We are not permitted to market any drug product candidate in the United States until we receive FDA approval of a new drug application (NDA) or other appropriate drug product application. Prior to submitting a marketing application, human clinical studies are required. In order for clinical studies of a new drug to commence in the United States, an Investigational New Drug (IND) application must be filed with the FDA; similar notifications are required in other countries. Informed consent also must be obtained from study participants. In general, studies may begin in the United States without specific approval by the FDA after a 30‑day review period has passed. However, the FDA may prevent studies from moving forward, and may suspend or terminate studies once initiated. Studies are also subject to review by an independent Institutional Review Board (IRB) responsible for overseeing studies at particular sites and protecting human research study subjects. An IRB may prevent a study from beginning or suspend or terminate a study once initiated. Furthermore, the FDA may suggest amendments to any study protocol that may be necessary for the results to support approval. These amendments and the associated discussions with the FDA may further delay study initiation and, as a result, approval of our drug product. Generally, studies also may not commence until after receiving approval by an independent IRB. The IRB is responsible for overseeing studies at particular sites and protecting human research study subjects. An IRB may disapprove a study or suspend or terminate an approved study once initiated.

The FDA or other applicable foreign regulatory bodies can delay, limit or deny approval of a drug candidate for many reasons, including, but not limited to, the following:

our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that the drug candidate is safe and effective for the requested indication;

the FDA’s or the applicable foreign regulatory body’s disagreement with design or implementation of our clinical trials or the interpretation of data from preclinical studies or clinical trials;

serious and unexpected drug‑related side effects experienced by participants in our clinical trials or by individuals using drugs similar to our product candidates;

our inability to demonstrate that the clinical and other benefits of the drug candidate outweigh any safety or other perceived risks;

the FDA’s or the applicable foreign regulatory body’s requirement for additional preclinical or clinical studies;

Table of Contents

the FDA’s or the applicable foreign regulatory body’s non‑approval of the drug candidate’s chemistry, manufacturing or controls or labeling;

the FDA’s or the applicable foreign regulatory body’s failure to approve the manufacturing processes or facilities of third‑party manufacturers; or

Further, we are subject to laws directed at preventing fraud and abuse, which subject our marketing, training and other practices to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, government agencies or their contractors often conduct routine audits and request customer records and other documents to support claims submitted for payment of services rendered. Government agencies or their contractors also periodically open investigations and obtain information from healthcare providers. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including debarment, suspension or exclusion from Medicare, Medicaid and other government reimbursement programs, any of which would have a material adverse effect on our business.

Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably.

In the United States and in certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the regulatory and healthcare systems in ways that could impact our ability to sell our products profitably, if at all. In the United States in recent years, new legislation has been proposed and adopted at the federal and state levels that is effecting major changes in the healthcare system. In addition, new regulations and interpretations of existing healthcare statutes and regulations are frequently adopted.

For example, in 2011, the FDA announced a Plan of Action to modernize and improve the FDA’s premarket review of medical devices, and has implemented, and continues to implement, reforms intended to improve the timeliness and predictability of the premarket review process. In addition, as part of the Food and Drug Administration Safety and Innovation Act of 2012, Congress enacted several reforms entitled the Medical Device Regulatory Improvements and additional miscellaneous provisions that will further affect medical device regulation both pre‑and post‑approval.

Further, in December 2016, Congress enacted the 21st Century Cures Act (Cures Act), which contained several provisions related to the review and approval of new medical technologies. Along with other changes, the Cures Act established a statutory program for “breakthrough” devices. The FDA will apply additional resources to help speed the approval or clearance of devices that are designated as breakthrough devices. The Cures Act also included provisions related to the “least burdensome” principle with respect to demonstrating substantial equivalence or reasonable assurance of safety and effectiveness and expanded the number of patients that could be treated by a device approved under a Humanitarian Device Exemption, among other provisions.

Similarly, in August 2017, Congress enacted the FDA Reauthorization Act of 2017 (FDARA). FDARA reauthorized the FDA to collect device user fees, including a new user fee for de novo classification requests, and contained substantive amendments to the device provisions of the FDCA. Among other changes, FDARA required that the FDA update and revise its processes for scheduling inspections of device establishments, communicating about those inspections with manufacturers and providing feedback on the manufacturer’s responses to Form 483s. The statute also required that the FDA study the impact of device servicing, including third party servicers, and creates a new process for device sponsors to request classification of accessory devices as part of the PMA application for the parent device or to request a separate classification of accessory devices.

If, as a result of legislative or regulatory healthcare reform, we cannot sell the iStent (or our other products in development, if approved) profitably, our business would be harmed. In addition, any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products.

In March 2010, the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (ACA) was signed into law. While the goal of health care reform is to expand coverage to more individuals, it also involves increased government price controls, additional regulatory mandates and other measures designed to constrain medical costs. The ACA substantially changes the way healthcare is financed by both governmental and private insurers,

Table of Contents

encourages improvements in the quality of healthcare items and services and significantly impacts the medical device industry. Among other things, the ACA:

imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions (described in more detail below), which, under the PATH Act, was suspended from January 1, 2016 to December 31, 2017, and, pursuant to HR 195 passed on January 22, 2018, was further suspended through December 31, 2019;

establishes a new Patient‑Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research;

implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and

creates an independent payment advisory board that will submit recommendations to Congress to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislation, will remain in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. On April 16, 2015, President Obama signed into law the Medicare Access and CHIP Reauthorization Act of 2015, which, among other things, repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments scheduled to begin in 2019 that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations.

The medical device excise tax moratorium imposed by the PATH Act for 2016 and 2017 favorably impacted our gross profit margin in 2017, and will continue to do so through 2019, based upon its recent extension. However, this impact will not continue in 2020 when the tax is automatically reinstated, absent further legislation, as the iStent was subject to this excise tax prior to the moratorium our recently-approved product and products in our pipeline potentially will be subject to this tax. There are no assurances that our business will not be materially adversely affected by the current, or possible future additional tax, provisions implemented under healthcare reform or appropriate legislation. It is also possible that legislation may be introduced and passed by Congress repealing the ACA in whole or in part and signed into law by President Trump. Because of the continued uncertainty about the likelihood or extent of a potential repeal of that legislation, we cannot quantify or predict with any certainty the likely impact of a repeal of ACA on our business model, prospects, financial condition or results of operations.

Additional state and federal healthcare reform measures may be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or product candidates or additional pricing pressures.

In May 2017, the EU adopted a new Medical Devices Regulation (EU) 2017/745 (MDR), which will repeal and replace the Medical Device Directive (MDD). The MDR will take effect beginning May 25, 2020. The MDR does not set out a substantially different regulatory system, but provides for stricter controls of medical devices, including, among other things, strengthening of conformity assessment procedures, increased requirements as regards clinical data for devices and pre-market regulatory review of high-risk devices. The MDR also provides for greater control over conformity assessment notified bodies and their standards, increased transparency, more robust device vigilance requirements and clarification of the rules for clinical investigations. Under provisions that govern the transition period until the MDR takes effect, medical devices with notified body certificates issued under the MDD prior to May 26, 2020 may continue to be marketed and sold as long as those certificates are valid, until May 27, 2024 at the latest. After the expiration of any applicable transitional period, only devices that have been CE marked under the MDR may be placed on the market in the EU. If, as a result of these regulatory changes, we cannot obtain or maintain the approvals necessary to sell our iStent products (including pipeline products, if approved) in the EU, our business would be harmed.

Table of Contents

The clinical trial process required to obtain regulatory approvals is lengthy and expensive with uncertain outcomes, and could result in delays in new product introductions.

Because of the indication we chose to pursue for the iStent, the FDA required that we seek PMA approval rather than clearance under the 510(k) process. In order to obtain PMA and FDA approval for a product, the sponsor must conduct well‑controlled clinical trials designed to assess the safety and efficacy of the product candidate. We also will be required to conduct clinical trials to obtain approval of products using the iDose drug delivery system, new indications for the iStent or new product candidates. Conducting clinical trials is a complex and expensive process, can take many years, and outcomes are inherently uncertain. We incur substantial expense for, and devote significant time to, clinical trials but cannot be certain that the trials will ever result in commercial sales. We may suffer significant setbacks in clinical trials, even after earlier clinical trials showed promising results, and failure can occur at any time during the clinical trial process. Any of our products may malfunction or may produce undesirable adverse effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials. We, the clinical trial investigators, the reviewing IRB, the FDA, or another regulatory authority may suspend or terminate clinical trials at any time to avoid exposing trial participants to unacceptable health risks.

Successful results of pre‑clinical studies are not necessarily indicative of future clinical trial results, and predecessor clinical trial results may not be replicated in subsequent clinical trials. Additionally, the FDA may disagree with our interpretation of the data from our pre‑clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to prove safety or efficacy, and may require us to pursue additional pre‑clinical studies or clinical trials, which could further delay the clearance or approval of our products. The data we collect from our pre‑ clinical studies and clinical trials may not be sufficient to support FDA clearance or approval, and if we are unable to demonstrate the safety and efficacy of our future products in our clinical trials, we will be unable to obtain regulatory clearance or approval to market our products.

In addition, we may estimate and publicly announce the anticipated timing of the accomplishment of various clinical, regulatory and other product development goals, which are often referred to as milestones. These milestones could include the right to affix the CE Mark in the European Union; the submission to the FDA of an IDE application, or an IND application, to commence a clinical trial for a new product candidate; the enrollment of patients in clinical trials; the release of data from clinical trials; and other clinical and regulatory events. The actual timing of these milestones could vary dramatically compared to our estimates, in some cases for reasons beyond our control. We cannot assure you that we will meet our projected milestones and if we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and, as a result, our stock price may decline.

Clinical trials are necessary to support PMA applications for our device product candidates and may be necessary to support PMA supplements for modified versions of our marketed device products. This would require the enrollment of large numbers of suitable subjects, which may be difficult to identify, recruit and maintain as participants in the clinical trial. The clinical trials supporting the PMA application for the iStent Inject involved 505 randomized patients who were monitored for twenty-four months. Monitoring of these patients will continue for up to 36 additional months under a post-approval study for the iStent Inject, and a second iStent Inject post-approval study will involve 358 patients who will be followed for three years. The clinical trials supporting the PMA application for the iStent involved 289 patients. We conducted an extended iStent follow-up post-approval study with 108 patients from the pivotal study, and are currently conducting a post-approval study of 180 patients who are being monitored for three years. If the FDA were to require us to submit data on a greater number of patients or a longer follow‑up period, we would incur additional expenses that could be significant. Adverse outcomes in the post‑approval studies could also result in restrictions or withdrawal of approval of the PMA.

Before we can obtain regulatory approval for any drug product candidate, such as our iDose drug delivery implant, we must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the FDA and other regulatory agencies. Clinical trials of drug product candidates are expensive and take years to complete, and the outcome of such trials is uncertain. We completed a U.S. IND Phase II clinical trial of iDose Travoprost in 2017 and we commenced U.S. Phase III clinical trials in 2018, in which we plan to enroll a total of 1,100 patients. Our ability to conduct additional iDose clinical trials depends on many factors, including the data obtained in the Phase III clinical trials.

Delays in the commencement or completion of clinical trials or testing could significantly affect our product development costs. We do not know whether planned clinical trials will begin on time, need to be redesigned, enroll an

Table of Contents

adequate number of patients in a timely manner or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed or terminated for a number of reasons, including delays or failures related to:

the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our clinical studies;

obtaining regulatory approval to commence a clinical trial;

reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

manufacturing sufficient quantities of a product candidate for use in clinical trials;

obtaining IRB or ethics committees approval to conduct a clinical trial at each prospective site;

recruiting and enrolling patients and maintaining their participation in clinical trials;

having clinical sites observe trial protocol or continue to participate in a trial;

addressing any patient safety concerns that arise during the course of a clinical trial;

addressing any conflicts with new or existing laws or regulations; and

adding a sufficient number of clinical trial sites.

Patient enrollment in clinical trials and completion of patient follow‑up depend on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, patient compliance, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product being studied in relation to other available therapies, including any new treatments that may be approved for the indications we are investigating. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post‑treatment procedures or follow‑up to assess the safety and efficacy of a product candidate, or they may be persuaded to participate in contemporaneous clinical trials of a competitor’s product candidate. In addition, patients participating in our clinical trials may drop out before completion of the trial or suffer adverse medical events unrelated to our products. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may delay commencement or completion of the clinical trial, cause an increase in the costs of the clinical trial and delays, or result in the failure of the clinical trial.

We could also encounter delays if the FDA concluded that our financial relationships with our principal investigators resulted in a perceived or actual conflict of interest that may have affected the interpretation of a study, the integrity of the data generated at the applicable clinical trial site or the utility of the clinical trial itself. Principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash compensation and/or stock options in connection with such services. If these relationships and any related compensation to or ownership interest by the clinical investigator carrying out the study result in perceived or actual conflicts of interest, or the FDA concludes that the financial relationship may have affected interpretation of the study, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of our marketing application by the FDA. Any such delay or rejection could prevent us from commercializing any of our products currently in development.

Further, clinical trials may also be delayed as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRB overseeing the clinical trial at issue, the Data Safety Monitoring Board for such trial, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of factors, including:

failure to conduct the clinical trial in accordance with applicable regulatory requirements or our clinical protocols;

inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

inability of a clinical investigator or clinical trial site to continue to participate in the clinical trial;

unforeseen safety issues or adverse side effects;

Table of Contents

failure to demonstrate a benefit from using the product candidate; and

lack of adequate funding to continue the clinical trial.

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenues from these product candidates will be delayed or not realized at all. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of a clinical trial may also ultimately lead to the denial of regulatory approval of the subject product candidate.

If the FDA does not conclude that the iDose drug delivery implant satisfies the requirements for the Section 505(b)(2) regulatory approval pathway, or if the requirements for approval of the iDose drug delivery implant under Section 505(b)(2) are not as we expect, the approval pathway will likely take significantly longer, cost significantly more and encounter significantly more complications and risks than anticipated, and in any case may not be successful.

We intend to seek FDA approval of an NDA under Section 505(b)(2) of the FDCA for our drug delivery implant, iDose. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch‑Waxman Act, added Section 505(b)(2) to the FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant.

If the FDA does not allow us to pursue the 505(b)(2) regulatory pathway for iDose as anticipated, we may need to conduct additional clinical trials, provide additional data and information and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval would likely substantially increase. Moreover, the inability to pursue the 505(b)(2) regulatory pathway could result in new competitive products reaching the market faster than our product candidate, which could materially adversely impact our competitive position and prospects. In addition, circumstances could change that would render a 505(b)(2) application for the product no longer appropriate. Even if we are allowed to pursue the 505(b)(2) regulatory pathway for iDose, we cannot assure you that we will receive the requisite or timely approvals for commercialization of this product candidate.

We and our suppliers are subject to extensive post‑marketing regulatory requirements and failure to comply with applicable requirements could subject us to enforcement actions, including substantial penalties, and might require us to recall or withdraw a product from the market.

Once a medical device is approved, a manufacturer must notify the FDA of any modifications to the device. Any modification to a device that has received FDA clearance or approval that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires premarket clearance or approval from the FDA pursuant to a new 510(k) clearance or approval of a PMA supplement. The FDA requires every manufacturer to make the determination in the first instance regarding whether a modification to a cleared or approved device necessitates the filing of a new 510(k) notification or PMA supplement. The FDA may review any manufacturer’s decision and can disagree. If the FDA disagrees with any future determination by us that a new clearance or approval is not required, we may need to cease marketing or to recall the modified product until and unless we obtain clearance or approval. In addition, we could also be subject to significant regulatory fines or penalties. Any of these outcomes could harm our business.

A manufacturer must also submit periodic reports to the FDA as a condition of PMA approval. These reports include safety and effectiveness information about the device after its approval. Failure to submit such reports, or failure to submit the reports in a timely manner, could result in enforcement action by the FDA. Following its review of the periodic reports, the FDA might ask for additional information or initiate further investigation.

The PMA approvals for the iStent and the iStent Inject are subject to several conditions of approval, including postmarket study and registry study requirements. Failure to comply with the conditions of approval could result in the withdrawal of PMA approval, and the inability to continue to market these devices. Failure to conduct the required studies in accordance with IRB and informed consent requirements could also be grounds for withdrawal of approval of the PMA.

Table of Contents

Medical devices are also subject to other postmarket requirements including establishment registration and device listing, quality system requirements, reporting of adverse events and device malfunctions, reporting of corrections and removals, labeling requirements, and promotional restrictions. The regulations to which we are subject are complex and have become more stringent over time. Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities, which may include any of the following sanctions:

untitled letters or warning letters;

fines, injunctions, consent decrees and civil penalties;

recalls, termination of distribution, administrative detention, or seizure of our products;

customer notifications or repair, replacement or refunds;

operating restrictions or partial suspension or total shutdown of production;

delays in or refusal to grant our requests for future 510(k) clearances, PMA approvals or foreign regulatory approvals of new products, new intended uses, or modifications to existing products;

withdrawals or suspensions of current 510(k) clearances or PMAs or foreign regulatory approvals, resulting in prohibitions on sales of our products;

FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and

criminal prosecution.

Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, results of operations and financial condition.

We must continually monitor the performance of our products once approved and marketed for signs that their use may elicit serious and unexpected adverse effects. Any recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products that leads to corrective actions, could have a significant adverse impact on us.

Our ability to achieve our strategic objectives will depend, among other things, on the long‑term clinical performance of the iStent and the iStent Inject for lowering intraocular pressure in mild‑to‑moderate open‑angle glaucoma patients undergoing cataract surgery. Our original PMA approvals for the iStent and the iStent Inject included several post‑marketing study requirements and future approvals may be subject to similar requirements. Failure to conduct required post‑marketing studies in a timely manner could result in the revocation of the clearance or approval for the product that is subject to such a requirement and could also result in the recall or withdrawal of the product, which would prevent us from generating sales from that product in the United States.

Although we believe follow‑up at three years with respect to the iStent and two year with respect to the iStent Inject continues to support efficacy and safety of these products for lowering intraocular pressure in mild‑to‑moderate open‑angle glaucoma patients undergoing cataract surgery, in the future, longer term study outcomes could demonstrate conflicting clinical effectiveness, a reduction of effectiveness, no clinical effectiveness or longer term safety issues with these iStent products. This type of differing data could have a detrimental effect on the market penetration and usage of the iStent devices by customers treating mild‑to‑moderate open‑angle glaucoma and/or the risk/benefit profile of using the iStent devices to treat mild‑to‑moderate open‑angle glaucoma in combination with cataract surgery. As a result, our sales may decline or expected growth would be negatively impacted. This could put pressure on our ability to execute key components of our business strategy and/or negatively impact our operating condition and financial results.

More generally, all medical devices, such as the iStent and the iStent Inject, can experience performance problems that require review and possible corrective action by us or a component supplier. We cannot provide assurance that component failures, manufacturing errors, noncompliance with quality system requirements or good manufacturing practices, design defects and/or labeling inadequacies in any device or drug products that could result in an unsafe condition or injury to the patient will not occur. The FDA and similar foreign governmental authorities have the

Table of Contents

authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. Manufacturers may also, under their own initiative, stop shipment or recall a product if any material deficiency is found, take corrective action with respect to product in the field, or withdraw a product to improve device performance or for other reasons. A government‑mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, noncompliance with good manufacturing practices or quality system requirements, design or labeling defects or other deficiencies and issues. Similar regulatory agencies in other countries have similar authority to recall products because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could cause the price of our stock to decline and expose us to product liability or other claims and harm our reputation with customers. A recall involving our products could be particularly harmful to our business, financial and operating results.

The FDA requires that certain corrections or removals be reported to the FDA within 10 working days after the recall is initiated. Notice to the FDA of a correction or removal is required when undertaken to reduce a risk to health, including when there is a reasonable probability that the product will cause serious adverse health consequences or death, or when use of the device may cause temporary or medically reversible adverse health consequences or an outcome where the probability of serious adverse health consequences is remote. In addition, companies are required to maintain certain records of corrections and removal, even if they are not reportable to the FDA or similar foreign governmental authorities. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA or foreign governmental authorities. If the FDA or foreign governmental authorities disagree with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA or a foreign governmental authority could take enforcement action for failing to report the recalls when they were conducted.

Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or applicable foreign regulatory authority may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, civil penalties or criminal fines. We may also be required to bear other costs or take other actions that may have a negative impact on our sales as well as face significant adverse publicity or regulatory consequences, which could harm our business, including our ability to market our products in the future.

In addition, under the FDA’s medical device reporting regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. Repeated product malfunctions may result in a voluntary or involuntary product recall. We are subject to similar obligations in the EEA and other countries in which we market our products.

Any adverse event involving our products, whether in the United States or abroad, could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall, orders of repair, replacement or refund or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.

If we or our component manufacturers fail to comply with the FDA’s Quality System Regulation or Good Manufacturing Practice regulations, our manufacturing operations could be interrupted, and our product sales and operating results could suffer.

We and some of our component manufacturers are required to comply with regulatory requirements known as the FDA’s Quality System Regulation (QSR), which covers the procedures and documentation of the design, testing, production, control, quality assurance, inspection, complaint handling, recordkeeping, management review, labeling, packaging, sterilization, storage and shipping of our device products. The FDA’s Current Good Manufacturing Practices (cGMPs) also apply to the manufacture of our products. The FDA audits compliance with these regulatory requirements through periodic announced and unannounced inspections of manufacturing and other facilities. The FDA may conduct inspections or audits at any time, and we and some of our component suppliers are subject to such inspections. Although we believe our manufacturing facilities and those of our critical component suppliers are in material compliance with the QSR requirements and with applicable cGMPs, we cannot provide assurance that any future inspection will not result in adverse findings. If our manufacturing facilities or those of any of our component suppliers are found to be in violation

Table of Contents

of applicable laws and regulations, or we or our suppliers have significant noncompliance issues or fail to timely and adequately respond to any adverse inspectional observations or product safety issues, or if any corrective action plan that we or our suppliers propose in response to observed deficiencies is not sufficient, the FDA could take enforcement action, including any of the following sanctions:

untitled letters or warning letters;

fines, injunctions, consent decrees and civil penalties;

customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;

operating restrictions or partial suspension or total shutdown of production;

refusing or delaying our requests for clearance or approval of new products or modified products;

withdrawing clearances or approvals that have already been granted;

refusal to grant export approval for our products; or

criminal prosecution.

Any of these sanctions could adversely affect our business, financial conditions and operating results.

Outside the United States, our products and operations are also often required to comply with standards set by industrial standards bodies, such as the International Organization for Standardization. Foreign regulatory bodies may evaluate our products or the testing that our products undergo against these standards. The specific standards, types of evaluation and scope of review differ among foreign regulatory bodies. If we fail to adequately comply with any of these standards, a foreign regulatory body may take adverse actions similar to those within the power of the FDA. Any such action may harm our reputation and could have an adverse effect on our business, results of operations and financial condition.

We may be subject to fines, penalties, injunctions or other enforcement actions if we are determined to be promoting the use of our products for unapproved or “off‑label” uses, resulting in damage to our reputation and business.

Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of a drug or medical device for a use that has not been cleared or approved by the FDA. Use of a drug or device outside of its cleared or approved indications is known as “off‑label” use. Physicians may use our products off‑label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that our promotional materials or training constitutes promotion of an off‑label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of warning letters, untitled letters, fines, penalties, consent decrees, injunctions, or seizures, which could have an adverse impact on our reputation and financial results. We could also be subject to enforcement action under other federal or state laws, including the federal False Claims Act (FCA). While we may request additional indications for our products, the FDA may deny those requests, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared or approved product as a condition of clearance or approval.

In addition to promoting our products in a manner consistent with our clearances, we must have adequate substantiation for the claims we make for our products. If any of our claims are determined to be false, misleading or deceptive, our products could be considered to be misbranded under the FDCA or to violate the Federal Trade Commission Act. We could also face lawsuits from our competitors under the Lanham Act alleging that our marketing materials are false or misleading.

Failure to comply with the Federal Health Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and Clinical Health Act, the European Union’s General Data Protection Regulation, and implementing regulations affecting the transmission, security and privacy of health and other proprietary and personal information could result in significant penalties.

Numerous federal, and state and international laws and regulations, including the Federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Health Information Technology for Economic and Clinical Health Act (HITECH Act), and the European Union’s General Data Protection Regulation (GDPR) govern the collection, dissemination, security, use, disclosure and confidentiality of patient‑identifiable health and other proprietary

Table of Contents

and personally-identifiable information. HIPAA, the HITECH Act and the GDPR may require us to comply with standards for the use and disclosure of patient-identifiable health and other types of personal information. The Privacy Standards and Security Standards under HIPAA establish a set of basic national privacy and security standards for the protection of patient-identifiable health information by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. Notably, whereas HIPAA previously directly regulated only these covered entities, the HITECH Act makes certain of HIPAA’s privacy and security standards also directly applicable to covered entities’ business associates. As a result, both covered entities and business associates are now subject to significant civil and criminal penalties for failure to comply with the Privacy Standards and Security Standards.

HIPAA and the HITECH Act also include standards for common healthcare electronic transactions and code sets, such as claims information, plan eligibility and payment information. Covered entities, such as healthcare providers, are required to conform to such transaction set standards pursuant to HIPAA.

HIPAA requires covered entities to develop and maintain policies and procedures with respect to the use and disclosure of patient-identifiable health information and the adoption of administrative, physical and technical safeguards to protect such information. The HITECH Act expands the notification requirement for breaches of patient‑identifiable health information, restricts certain disclosures and sales of patient‑identifiable health information and provides a tiered system for civil monetary penalties for HIPAA violations. The HITECH Act also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA.

The GDPR, which took effect in Europe in May 2018, creates a range of new compliance obligations and increases financial penalties for non-compliance and extends the scope of the European Union data protection law to all companies processing data of European Union residents, regardless of the company’s location. The GDPR and other privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. Any failure to comply with GDPR or other data privacy laws could lead to government enforcement actions and significant penalties. Further, any perceived privacy right violation could result in reputational harm, third-party claims, lawsuits or investigations. Such regulations increase our compliance and administrative burden significantly.

If we do not comply with applicable existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions. New data privacy standards, whether implemented pursuant to HIPAA, the HITECH Act, the GDPR, congressional action or otherwise, could have a significant effect on the manner in which we handle healthcare‑related and other personal data and the cost of complying with these standards could be significant.

The 2013 final HITECH Act omnibus rule modified the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches. Any liability from a failure to comply with the applicable requirements of HIPAA, the HITECH Act or the GDPR could adversely affect our financial condition. The costs of complying with privacy and security‑related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of operations. These provisions, as modified, will be subject to interpretation by various U.S. and international courts and other governmental authorities, thus creating potentially complex compliance issues for us, as well as our clients and strategic partners. In addition, we are unable to predict what changes to these various privacy and security standards might be made in the future or how those changes could affect our business. Any new legislation or regulation in the area of privacy and security of personal information, including personal health information, could also adversely affect our business operations.

If we fail to comply with state and federal healthcare regulatory laws, we could face substantial penalties, damages, fines, disgorgement, exclusion from participation in governmental healthcare programs, and the curtailment of our operations, any of which could adversely affect our business, operations, and financial condition.

Although we do not provide healthcare services, submit claims for third‑party reimbursement, or receive payments directly from Medicare, Medicaid or other third‑party payors for our products, we are subject to healthcare fraud, abuse and transparency regulation and enforcement by federal and state governments, which could significantly impact our business. To ensure compliance with Medicare, Medicaid and other regulations, government agencies or their contractors often conduct routine audits and request customer records and other documents to support claims submitted

Table of Contents

for payment of services rendered. Government agencies or their contractors also periodically open investigations and obtain information from healthcare providers. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including debarment, suspension or exclusion from Medicare, Medicaid and other government reimbursement programs, any of which would have a material adverse effect on our business.

The laws that may affect our ability to operate include, but are not limited to:

the federal Anti‑Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering, or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of this statute or specific intent to violate it;

the civil FCA, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal payors that are false or fraudulent; knowingly making, using, or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; or knowingly making, using, or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government;

the criminal FCA, which imposes criminal fines or imprisonment against individuals or entities who make or present a claim to the government knowing such claim to be false, fictitious or fraudulent;

HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

the federal civil monetary penalties statute, which prohibits, among other things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of items or services reimbursable by a Federal or state governmental program;

the federal Physician Payments Sunshine Act under ACA, which requires certain manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members. Manufacturers must submit such reports by the 90th day of each subsequent calendar year; and

state law equivalents of each of the above federal laws, such as anti‑kickback and false claims laws that may apply to items or services reimbursed by any third‑party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the device industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures.

Further, the ACA, among other things, amended the intent requirements of the federal Anti‑Kickback Statute and certain criminal statutes governing healthcare fraud. A person or entity can now be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate it. In addition, ACA provided that the government may assert that a claim including items or services resulting from a violation of the federal Anti‑Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA.

While we do not submit claims and our customers make the ultimate decision on how to submit claims, from time to time, we may provide reimbursement guidance to our customers. If a government authority were to conclude that we provided improper advice to our customers or encouraged the submission of false claims for reimbursement, we could face action against us by government authorities. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition.

We have entered into consulting and scientific advisory board arrangements with physicians and other healthcare providers, including some who influence the ordering of and use of our products in procedures they perform.

Table of Contents

Compensation for some of these arrangements includes the provision of stock options. In addition, in connection with our clinical trial recruitment activities, we have entered into compensation arrangements with some of the physicians who recruit subjects to our clinical trials. While we believe we are in material compliance with applicable laws, because of the complex and far‑reaching nature of these laws, regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or that affect our ability to use all of the data from the clinical trial to support our marketing applications, or for which we could be subject to other significant penalties. We could be adversely affected if regulatory agencies interpret our financial relationships with providers who influence the ordering of and use our products to be in violation of applicable laws.

The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies scrutinize interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time‑ and resource‑consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.

If our operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in federal and state healthcare programs and the curtailment or restricting of our operations, any of which could harm our ability to operate our business and our financial results.

Our operations involve hazardous materials, and we must comply with environmental laws and regulations, which can be expensive.

We are subject to a variety of federal, state and local regulations relating to the use, handling, storage and disposal of, and human exposure to, hazardous and toxic materials. We could incur costs, fines, and civil and criminal sanctions, third‑party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Compliance with current or future environmental and safety laws and regulations could restrict our ability to expand our facilities, impair our research, development or production efforts, or require us to incur other significant expenses. There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the inability to obtain permits, human error, accident, equipment failure or other causes.

Risks Related to Our Intellectual Property

If we are unable to adequately protect our intellectual property, our competitors and other third parties could develop and commercialize products similar or identical to ours, which would substantially impair our ability to compete.

Our success and ability to compete depends significantly upon our ability to maintain and protect our proprietary rights to the technologies and inventions used in or embodied by our products. We rely on a combination of patents and trademark rights, and to a lesser extent on trade secrets and copyrights, together with licenses and nondisclosure agreements to protect our intellectual property. These legal means, however, afford only limited protection and may not adequately protect our intellectual property rights. We also have not pursued or maintained, and may not pursue or maintain in the future, patent protection for our products in every country or territory in which we sell or will in the future sell our products. In addition, we cannot be sure that any of our pending patent applications or pending trademark applications will issue or that, if issued, they will issue in a form that will be advantageous to us. The United States Patent and Trademark Office (USPTO) or other foreign patent offices may deny or significantly narrow claims made under our patent applications and our issued patents may be successfully challenged, may be designed around, or may otherwise be of insufficient scope to provide us with any meaningful protection for our present or future commercial products. Further, the USPTO or other foreign trademark offices may deny our trademark applications and, even if published or registered, these trademarks may be ineffective in protecting our brand and goodwill and may be successfully opposed or challenged.

The patent prosecution process itself is expensive and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. The patent prosecution process requires compliance with complex laws, rules and regulations imposed by patent authorities. Failure to comply with these laws, rules and regulations may derive, among other bases, from various defects of form in the preparation or filing of our patents or patent applications, which may include defects that relate to our making proper priority claims

Table of Contents

and inventorship determinations. If any such defects are identified, we may need to take corrective action. For example, we have filed petitions with the USPTO to request in part that Dr. Richard Hill, one of our consultants, be added as an inventor on patents related to our iStent, iStent Inject, iStent SA, iStent Infinite and iStent Supra product candidate that were developed during Dr. Hill’s consultancy. Dr. Hill has assigned his rights in these patents and certain other patent applications to us pursuant to the terms of his consulting agreement. Because Dr. Hill was employed as an Associate Professor at the University of California, Irvine, (the University), during the period when these patents and patent applications were developed in December 2014, we entered into an agreement with the University pursuant to which the University agreed not to challenge our ownership of these patents and patent applications. In addition, if any material defects are found in the form or preparation of any of our patents or patent applications, such patents or applications may be invalid and unenforceable. Any of these outcomes could impair our ability to prevent competition from third parties, which could harm our business. Moreover, the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. Noncompliance with these requirements can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we fail to maintain the patents and patent applications covering our products or procedures, we may not be able to stop a competitor from marketing products that are the same as or similar to our products, which would have a material adverse effect on our business. In addition, patents are limited in term. Once all of the patents covering a particular product of ours in a particular jurisdiction have expired, we will no longer be able to stop competitors from marketing a product that is the same as or similar to our product in that jurisdiction, which could have a material adverse effect on our business.

The patent position of medical device companies is generally highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation and administrative proceedings, such as post-grant or inter partes review proceedings at the USPTO. In the United States and in many foreign jurisdictions, policies regarding the breadth of claims allowed in patents can be inconsistent. The U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain patents. Future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage, which could adversely affect our business, financial condition and results of operations.

Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy‑Smith America Invents Act, or the Leahy‑Smith Act, was signed into law. The Leahy‑Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, affect patent litigation or administrative proceedings at the USPTO, and switch the U.S. patent system from a “first‑to‑invent” system to a “first‑to‑file” system. Under a “first‑to‑file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The USPTO developed new regulations and procedures to govern administration of the Leahy‑Smith Act, and many of the substantive changes to patent law associated with the Leahy‑Smith Act, and in particular, the first‑to‑file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy‑Smith Act will have on the operation of our business. However, the Leahy‑Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition. In addition, patent reform legislation may pass in the future, in the U.S. or elsewhere, that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement, and defense of our patents and applications.

We may be subject to a third‑party pre-issuance submission of prior art to the USPTO or to another foreign patent office, or become involved in opposition, interference, derivation, reexamination, inter partes review, post‑grant review, or other patent office proceedings or litigation, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete

Table of Contents

directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third‑party patent rights.

We have a number of foreign patents and patent applications, and expect to pursue patent protection in the most significant markets in which we do business. The laws of other countries in which our product offerings are or may be sold may not protect our product offerings and intellectual property to the same extent as U.S. laws, if at all. Many companies have encountered significant difficulties in obtaining, protecting and defending such rights in such markets. In addition, many countries limit the enforceability of patents against other parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, and certain countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to other parties. We also may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in these jurisdictions, our business, financial condition and results of operations could be substantially harmed.

Despite our efforts to safeguard our intellectual property rights, we may not be successful in doing so, or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our products, technology or other information that we regard as proprietary. Moreover, our competitors may independently develop equivalent knowledge, methods and know‑how. Competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. Our inability to adequately protect our intellectual property could allow our competitors and other third parties to produce products based on our patented or proprietary technology and other intellectual property rights, which could substantially impair our ability to compete.

We may not be able to accurately estimate or control our future operating expenses in relation to obtaining, enforcing and/or defending intellectual property, which could lead to cash shortfalls. Our operating expenses may fluctuate significantly in the future as a result of the costs of preparing, filing, prosecuting, defending and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation or costs associated with administrative proceedings and the results of such proceedings.

We have been and may in the future become involved in patent and other intellectual property litigation or administrative proceedings to enforce or defend our intellectual property rights, which could be costly, time consuming and unsuccessful and could interfere with our ability to successfully commercialize our products.

We have asserted and may in the future need to assert claims of infringement against third parties to protect our intellectual property. For example, on April 14, 2018, the Company filed a patent infringement lawsuit against Ivantis, Inc. in the U.S. District Court for the Central District of California, Southern Division, alleging that Ivantis’ Hydrus Microstent device infringes the Company’s U.S. Patent Nos. 6,626,858 and 9,827,143. The lawsuit seeks unspecified monetary damages and injunctive relief.

Regardless of the final outcome, any litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable and could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition and results of operations. Any claims we assert or have asserted against alleged infringers could provoke these third parties to assert counterclaims against us alleging that we infringe their own intellectual property rights, or that our rights are invalid or unenforceable. A court could hold that some or all of our asserted intellectual property rights are not infringed, or could invalidate our rights, hold our rights unenforceable, or substantially narrow the scope of protection. Any such adverse result would undermine our competitive position. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could hurt the price of our common stock. Such litigation proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities.

We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from selling our products, require us to obtain licenses from third parties, require us to develop non‑infringing alternatives and/or subject us to substantial monetary damages and injunctive relief.

The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Third parties could assert infringement or misappropriation claims against us with respect to our current or future commercial products. Moreover, because patent applications can take

Table of Contents

many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that materially and adversely affect our business. Our competitors or other interested parties could also pursue additional patent protection related to their earlier patent disclosures with the intent to cover our products. Whether or not any such claims are valid, we cannot be certain that we have not infringed and will not in the future infringe the intellectual property rights of such third parties or others. Additionally, for business reasons, we have challenged and may in the future seek to invalidate or challenge the intellectual property rights of a third party, including those rights owned by our competitors, before any infringement assertion is made. This action could include seeking a declaration or decision from a court or patent office that one or more of our products do not infringe one or more patents or other intellectual property rights owned by third parties and/or that one or more patents owned by one or more third parties are invalid.

Any infringement or misappropriation claim or validity or infringement challenge could result in significant costs, substantial damages and our inability to manufacture, market or sell our existing or future products that are found to infringe. Even if we were to prevail in any such action, the litigation or administrative proceeding could result in substantial cost and diversion of resources that could materially and adversely affect our business. If a court determined, or if we independently discovered, that our product offerings violated third‑party proprietary rights, there can be no assurance that we would be able to re‑engineer our products to avoid those rights or to obtain a license under those rights on commercially reasonable terms, if at all. As a result, we could be prohibited from selling products that are found to infringe, or we could elect not to sell or to stop selling products that we believe have a substantial probability of infringing a third‑party’s intellectual property rights. Even if obtaining a license were feasible, it may be costly and time‑consuming. A court could also enter orders that temporarily, preliminarily or permanently enjoin us or our customers from making, using, selling, offering to sell, distributing, exporting or importing the iStent or future products, such as the iStent Inject, iStent SA, iStent Infinite, iStent Supra or iDose Travoprost, or could enter orders mandating that we undertake certain remedial activities. A court could also order us to pay compensatory damages for such infringement, plus prejudgment interest, and if we are found to have willfully infringed third‑party rights, could in addition treble the compensatory damages and award attorneys’ fees. These damages could be substantial and could harm our reputation, business, financial condition and results of operations.

Even if resolved in our favor, litigation or other legal or administrative proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could hurt the price of our common stock. Such litigation or administrative proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or administrative proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or administrative proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace.

If any of our employees, consultants or others breach their proprietary information agreements, our competitive position could be harmed.

We protect our proprietary technology, in part, through proprietary information and inventions agreements with employees, consultants and other parties. These agreements with employees and consultants generally contain standard provisions requiring those individuals to assign to us, without additional consideration, inventions conceived or reduced to practice by them while employed or retained by us, subject to customary exceptions. Although it is our policy to require each of our employees, consultants and any other parties who may be involved in the development of intellectual property on our behalf to execute such agreements, we may be unsuccessful in doing so with each party who in fact develops intellectual property that we regard as our own. The relevant assignment provisions may not be self‑executing or may be breached. As a result, our competitors may learn our trade secrets or we may be required to pursue litigation in order to determine the ownership of the intellectual property rights at issue.

Even if we file suit to prevent or stop such disclosure, there is a risk that a court could find we have not adequately protected the information as a trade secret and allow use of the disclosed information by our competitors. Additionally, we may need to file suit to force the employee, consultant or other party in breach to assign his, her or its rights to us, or we may need to pay additional compensation to such employee, consultant or other party in order to quiet or obtain legal title to the intellectual property rights at issue.

Table of Contents

We may be subject to claims that we or our employees have misappropriated the intellectual property of a third party, including trade secrets or know‑how, or are in breach of non‑competition or non‑solicitation agreements with our competitors and third parties may claim an ownership interest in intellectual property we regard as our own.

Many of our employees and consultants were previously employed at or engaged by other medical device, biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, consultants and contractors, may have executed proprietary rights, non‑disclosure and non‑competition agreements in connection with such previous employment. Although we try to ensure that our employees and consultants do not use the intellectual property, proprietary information, know‑how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, misappropriated the intellectual property or disclosed the alleged trade secrets or other proprietary information, of these former employers or competitors. Additionally, we may be subject to claims from third parties challenging our ownership interest in intellectual property we regard as our own, based on claims that our employees or consultants have breached an obligation to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or features that are important or essential to our products could have a material adverse effect on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could have an adverse effect on our business, results of operations and financial condition.

Risks Related to Being a Public Company

If we experience material weaknesses in, or otherwise fail to maintain an effective system of, internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

The Sarbanes‑Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, Section 404(a) of the Sarbanes‑Oxley Act requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting. We are no longer an “emerging growth company” as of December 31, 2017, and consequently, Section 404(b) of the Sarbanes‑Oxley Act requires our independent registered public accounting firm to annually attest to the effectiveness of our internal control over financial reporting commencing with the year ended December 31, 2017.

Investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of our stock. Regardless of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an adverse opinion on our internal controls from our independent registered public accounting firm.

Risks Related to our Common Stock and Ownership of Our Common Stock

We expect that the price of our common stock may fluctuate substantially.

The market price for our common stock may fluctuate depending upon many factors, including, but not limited to:

the depth and liquidity of the market for our common stock;

volume, timing and nature of orders for our products;

developments generally affecting medical device companies;

Table of Contents

actual or anticipated quarterly variation in our results of operations or the results of our competitors;

the announcements by us or our competitors of new products or product enhancements, significant contracts, commercial relationships or capital commitments;

developments or disputes concerning our intellectual property or other proprietary rights;

issuance of new or changes in earnings estimates or recommendations or reports by securities analysts;

investor perceptions of us and our business, including changes in market valuations of medical device companies;

actions by institutional or other large stockholders;

commencement of, or our involvement in, litigation;

failure to achieve significant sales;

manufacturing disruptions that could occur if we were unable to successfully expand our production in our current or an alternative facility;

any future sales of our common stock or other securities;

any major change to the composition of our board of directors or management;

our results of operations and financial performance; and

general economic, industry and market conditions.

In addition, the market price of the stocks of medical device, medical technology, pharmaceutical, biotechnology and other life science companies have experienced significant volatility that often does not relate to the operating performance of the companies represented by the stock. Further, there has been particular volatility in the market price of securities of early‑stage and development‑stage life science and medical device companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.

If securities or industry analysts publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

Our officers, directors and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.

Our executive officers, directors and stockholders holding more than 5% of our outstanding common stock currently collectively own or control a significant amount of our outstanding common stock. As a result, our executive officers, directors and stockholders holding more than 5% of our outstanding common stock, acting as a group, have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders may also have the effect of delaying or preventing a change in control of us, even if such a change of control would benefit our other stockholders. This significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Table of Contents

Two members of our board of directors are directors of DOSE Medical Corporation (DOSE). In addition, there is significant overlap between our current stockholders and the stockholders of DOSE. Their interests may conflict with those of our other stockholders.

Two of our current directors, Thomas W. Burns and William J. Link, Ph.D., serve as the only two members of the board of directors of DOSE. This could result in conflicts of interest between their obligations to our company and DOSE. In addition, there is significant overlap between our stockholders and the stockholders of DOSE. DOSE’s interests and the interests of its stockholders may be different from ours or those of our other stockholders and this could result in conflicts. The resolution of any of these conflicts may not always be in our or your best interest.

Anti‑takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and restated bylaws include provisions that:

authorize our board of directors to issue, without further action by the stockholders, up to 5,000,000 shares of undesignated preferred stock;

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

specify that special meetings of our stockholders may be called only by our board of directors, the chairman of the board of directors, the chief executive officer or the president;

establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered three year terms;

provide that our directors may be removed only for cause by a supermajority vote of our stockholders;

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

specify that no stockholder is permitted to cumulate votes at any election of directors; and

require a supermajority vote of the stockholders and a majority vote of the board to amend certain of the above‑mentioned provisions and our bylaws.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.

We have never paid dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Accordingly, you may have to sell some or all of your shares of our common stock in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell shares and you may lose the entire amount of the investment.

Table of Contents

Item 6. Exhibits


		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit	Filing Date
2.1*	IOP System Purchase Agreement, dated as of April 12, 2017, by and between Glaukos Corporation and DOSE Medical Corporation	8-K	1-37463	2.1	4/12/2017
3.1	Restated Certificate of Incorporation of the Registrant	8-K	1-37463	3.1	06/30/2015
10.1+	Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Agreement under the 2015 Omnibus Incentive Compensation Plan (Bonus Election)
3.2	Amended and Restated Bylaws of the Registrant	8-K	1-37463	3.2	06/30/2015
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Schema Linkbase Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Taxonomy Definition Linkbase Document
101.LAB	XBRL Taxonomy Labels Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document

+ Indicates a management contract or compensatory plan or arrangement.

* Schedules and exhibits are omitted pursuant to Regulation S-K, Item 601(b)(2). The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Clemente, State of California, on August 6, 2018.

GLAUKOS CORPORATION

By:	/s/ THOMAS W. BURNS
Thomas W. Burns
Chief Executive Officer and President

By:	/s/ JOSEPH E. GILLIAM
Joseph E. Gilliam
Chief Financial Officer and Sr. Vice President, Corporate Development (Principal Accounting and Financial Officer)