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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 September 30, 2020

Or

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

Commission file number: 001-37463 

GLAUKOS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

33-0945406

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

229 Avenida Fabricante

San Clemente, California

92672

(Address of registrant’s principal executive offices)

(Zip Code)

(949) 367-9600

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

GKOS

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

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

Table of Contents

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended September 30, 2020

Table of Contents

Page

PART I: FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

4

Condensed Consolidated Statements of Comprehensive Loss

5

Condensed Consolidated Statements of Stockholders’ Equity

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

41

PART II: OTHER INFORMATION

42

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 6.

Exhibits

62

SIGNATURES

63

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

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

2

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

September 30, 

December 31, 

2020

2019

    

(unaudited)

    

 

Assets

Current assets:

Cash and cash equivalents

$

80,994

$

62,430

Short-term investments

307,441

111,553

Accounts receivable, net

32,885

38,417

Inventory, net

19,890

42,578

Prepaid expenses and other current assets

13,235

7,900

Total current assets

454,445

262,878

Restricted cash

9,326

9,326

Property and equipment, net

23,408

22,056

Operating lease right-of-use asset

18,760

15,704

Finance lease right-of-use asset

51,975

54,048

Intangible assets, net

363,921

382,605

Goodwill

66,134

66,134

Deposits and other assets

6,545

5,649

Total assets

$

994,514

$

818,400

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

6,774

$

5,781

Accrued liabilities

39,919

51,919

Total current liabilities

46,693

57,700

Convertible senior notes

186,676

-

Operating lease liability

18,734

14,195

Finance lease liability

60,702

58,435

Deferred tax liability, net

14,164

9,632

Other liabilities

5,982

5,166

Total liabilities

332,951

145,128

Commitments and contingencies (Note 12)

Stockholders' equity:

Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding

-

-

Common stock, $0.001 par value; 150,000 shares authorized; 44,855 and 43,530 shares issued and 44,827 and 43,502 shares outstanding as of September 30, 2020 and December 31, 2019, respectively

45

44

Additional paid-in capital

959,186

861,740

Accumulated other comprehensive income

1,874

1,330

Accumulated deficit

(299,410)

(189,710)

Less treasury stock (28 shares as of September 30, 2020 and December 31, 2019)

(132)

(132)

Total stockholders' equity

661,563

673,272

Total liabilities and stockholders' equity

$

994,514

$

818,400

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

 

Net sales

$

64,831

$

58,509

$

151,725

$

171,135

Cost of sales

17,932

7,703

72,129

22,684

Gross profit

46,899

50,806

79,596

148,451

Operating expenses:

Selling, general and administrative

38,947

44,443

127,609

117,024

Research and development

20,304

17,278

64,148

48,277

In-process research and development

-

1,500

-

3,745

Total operating expenses

59,251

63,221

191,757

169,046

Loss from operations

(12,352)

(12,415)

(112,161)

(20,595)

Non-operating (expense) income:

Interest income

595

780

1,881

2,368

Interest expense

(5,732)

(1,028)

(8,485)

(2,041)

Other income (expense), net

852

(656)

342

(508)

Total non-operating expense

(4,285)

(904)

(6,262)

(181)

Loss before taxes

(16,637)

(13,319)

(118,423)

(20,776)

Income tax (benefit) provision

(889)

187

(8,723)

381

Net loss

$

(15,748)

$

(13,506)

$

(109,700)

$

(21,157)

Basic and diluted net loss per share

$

(0.35)

$

(0.37)

$

(2.48)

$

(0.58)

Weighted average shares used to compute basic and diluted net loss per share

44,706

36,831

44,302

36,507

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

 

Net loss

$

(15,748)

$

(13,506)

$

(109,700)

$

(21,157)

Other comprehensive (loss) income:

Foreign currency translation (loss) gain

(423)

530

141

364

Unrealized (loss) gain on short-term investments

(170)

74

403

735

Other comprehensive (loss) income

(593)

604

544

1,099

Total comprehensive loss

$

(16,341)

$

(12,902)

$

(109,156)

$

(20,058)

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

Accumulated

Additional

other

Common stock

paid-in

comprehensive

Accumulated

Treasury stock

Total

    

Shares

    

Amount

    

capital

    

income (loss)

    

deficit

    

Shares

    

Amount

    

equity

Balance at December 31, 2019

43,530

$

44

$

861,740

$

1,330

$

(189,710)

 

(28)

$

(132)

$

673,272

Common stock issued under stock plans

589

4,220

4,220

Stock-based compensation

17,176

17,176

Other comprehensive income

689

689

Net loss

(54,058)

(54,058)

Balance at March 31, 2020

44,119

$

44

$

883,136

$

2,019

$

(243,768)

 

(28)

$

(132)

$

641,299

Common stock issued under stock plans

459

 

1

 

1,633

 

 

 

 

 

1,634

Stock-based compensation

 

 

13,062

 

 

 

 

 

13,062

Equity component of convertible senior notes, net of transaction costs of $3,267 and taxes of $12,891

81,554

81,554

Purchase of capped calls related to issuance of convertible senior notes

(35,679)

(35,679)

Other comprehensive income

 

 

 

448

 

 

 

 

448

Net loss

 

 

 

 

(39,894)

 

 

 

(39,894)

Balance at June 30, 2020

44,578

$

45

$

943,706

$

2,467

$

(283,662)

(28)

$

(132)

$

662,424

Common stock issued under stock plans

277

5,821

5,821

Stock-based compensation

9,659

9,659

Other comprehensive loss

(593)

(593)

Net loss

(15,748)

(15,748)

Balance at September 30, 2020

44,855

$

45

$

959,186

$

1,874

$

(299,410)

(28)

$

(132)

$

661,563

Accumulated

Additional

other

Common stock

paid-in

comprehensive

Accumulated

Treasury stock

Total

    

Shares

    

Amount

    

capital

    

income

    

deficit

    

Shares

    

Amount

    

equity

Balance at December 31, 2018

36,135

$

36

$

378,352

$

738

$

(205,134)

 

(28)

$

(132)

$

173,860

Common stock issued under stock plans

226

5,406

5,406

Stock-based compensation

7,129

7,129

Other comprehensive income

436

436

Net loss

(1,342)

(1,342)

Balance at March 31, 2019

36,361

$

36

$

390,887

$

1,174

$

(206,476)

 

(28)

$

(132)

$

185,489

Common stock issued under stock plans

305

 

1

 

318

 

 

 

 

 

319

Stock-based compensation

 

 

8,247

 

 

 

 

 

8,247

Other comprehensive income

 

 

 

59

 

 

 

 

59

Net loss

 

 

 

 

(6,309)

 

 

 

(6,309)

Balance at June 30, 2019

36,666

$

37

$

399,452

$

1,233

$

(212,785)

(28)

$

(132)

$

187,805

Common stock issued under stock plans

279

 

 

6,666

 

 

 

 

 

6,666

Stock-based compensation

 

 

8,547

 

 

 

 

 

8,547

Other comprehensive income

 

 

 

604

 

 

 

 

604

Net loss

 

 

 

 

(13,506)

 

 

 

(13,506)

Balance at September 30, 2019

36,945

$

37

$

414,665

$

1,837

$

(226,291)

(28)

$

(132)

$

190,116

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Nine Months Ended September 30, 

    

2020

    

2019

 

Operating Activities

Net loss

$

(109,700)

$

(21,157)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Depreciation and amortization

21,981

2,674

Amortization of lease right-of-use assets

3,836

2,405

Amortization of debt discount and issuance costs

3,234

-

Deferred income tax benefit

(9,340)

-

Loss on disposal of fixed assets

287

26

Stock-based compensation

37,733

23,923

Change in fair value of cash settled stock options

(3,172)

-

Unrealized foreign currency losses

22

469

Amortization of discount on short-term investments

229

(298)

Other liabilities

3,343

3,666

Changes in operating assets and liabilities:

Accounts receivable, net

5,629

(5,828)

Inventory, net

22,578

414

Prepaid expenses and other current assets

(4,329)

(2,326)

Accounts payable and accrued liabilities

(6,141)

(60)

Other assets

218

(86)

Net cash (used in) provided by operating activities

(33,592)

3,822

Investing activities

Purchases of short-term investments

(273,798)

(63,556)

Proceeds from sales and maturities of short-term investments

78,084

61,870

Purchases of property and equipment

(4,790)

(3,530)

Investment in company-owned life insurance

(1,097)

(1,170)

Net cash used in investing activities

(201,601)

(6,386)

Financing activities

Proceeds from convertible senior notes

287,500

-

Payment of convertible senior notes transaction costs

(9,614)

-

Purchase of capped calls related to issuance of convertible senior notes

(35,679)

-

Proceeds from exercise of stock options

10,258

14,005

Proceeds from share purchases under Employee Stock Purchase Plan

4,025

3,388

Payment of employee taxes related to vested restricted stock units

(2,607)

(5,002)

Net cash provided by financing activities

253,883

12,391

Effect of exchange rate changes on cash and cash equivalents

(126)

(8)

Net increase in cash, cash equivalents and restricted cash

18,564

9,819

Cash, cash equivalents and restricted cash at beginning of period

71,756

38,596

Cash, cash equivalents and restricted cash at end of period

$

90,320

$

48,415

Supplemental disclosures of cash flow information

Taxes paid

$

418

$

96

See accompanying notes to condensed consolidated financial statements.

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GLAUKOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1.  Organization and Basis of Presentation

Organization and business

Glaukos Corporation (Glaukos or the Company), incorporated in Delaware on July 14, 1998, is an ophthalmic medical technology and pharmaceutical company focused on developing novel therapies for the treatment of glaucoma, corneal disorders, and retinal disease. The Company developed Micro-Invasive Glaucoma Surgery (MIGS) to serve as an alternative to the traditional glaucoma treatment paradigm and launched its first MIGS device commercially in 2012. The Company also offers commercially a proprietary bio-activated pharmaceutical therapy for the treatment of a corneal disorder, keratoconus, that was approved by the U.S. Food and Drug Administration in 2016 and is developing a pipeline of surgical devices, sustained pharmaceutical therapies, and implantable biosensors intended to treat glaucoma progression, corneal disorders such as keratoconus, dry eye and refractive vision correction, and retinal diseases such as neovascular age-related macular degeneration and diabetic macular edema.

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

Basis of presentation

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

The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements. As permitted under those rules, certain footnotes and other financial information that are normally required by GAAP have been condensed or omitted. In the opinion of management, the unaudited interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for the fair presentation of the Company’s financial information contained herein. The condensed consolidated balance sheet as of December 31, 2019 has been derived from audited financial statements at that date, but excludes disclosures required by GAAP for complete financial statements. These interim financial statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s financial statements and accompanying notes for the fiscal year ended December 31, 2019, which are contained in the Company’s Annual Report on Form 10-K filed with the United States (U.S.) Securities and Exchange Commission (SEC) on March 2, 2020. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period.

Recent Developments

Convertible Senior Notes

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

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

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Acquisition of Avedro, Inc.

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

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

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

Note 2.  Summary of Significant Accounting Policies

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

Use of Estimates

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

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

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Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that equate to the amount reported in the condensed consolidated statement of cash flows as of the beginning and end of the nine months ended September 30, 2020 (in thousands):

September 30, 

December 31, 

2020

2019

Cash and cash equivalents

$

80,994

$

62,430

Restricted cash

9,326

9,326

Cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows

$

90,320

$

71,756

Accounts Receivable

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

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

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

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

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

Inventory

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

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

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Convertible Senior Notes

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

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

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

Income Taxes

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

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

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

Stock-Based Compensation

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

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

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

Interest Expense

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

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents. For periods when the Company realizes a net loss, no common stock equivalents are included in the calculation of weighted average number of dilutive common stock equivalents as the effect of applying the treasury stock method is considered anti-dilutive. For periods when the Company realizes net income, diluted net income per share is calculated by dividing the net income by the weighted average number of common shares plus the sum of the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury stock method. Common stock equivalents are comprised of stock options outstanding and unvested RSUs under the Company’s incentive compensation plans, and shares issuable under the Company’s Employee Stock Purchase Plan (ESPP).

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

  

    

2020

    

2019

    

2020

    

2019

Stock options outstanding

4,490

3,602

4,579

3,636

Unvested restricted stock units

519

232

499

364

Employee stock purchase plan

14

1

14

5

5,023

3,835

5,092

4,005

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

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU0 No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables that may result in the earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which provided additional implementation guidance on the previously issued guidance. The Company adopted ASU 2016-13 as of January 1, 2020 using the modified retrospective approach, which replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. Upon adoption, there were no adjustments made to opening retained earnings as of January 1, 2020. As a result of implementing ASU 2016-13, the Company did not recognize any material changes to its allowance for credit losses during the three and nine months ended September 30, 2020.

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

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In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which removes the second step of the impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of the reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This updated guidance does not amend the optional qualitative assessment of goodwill impairment. The Company adopted ASU 2017-04 as of January 1, 2020 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (ASU 2018-13), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The guidance expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The Company adopted ASU 2018-13 as of January 1, 2020. Upon adoption and for the three and nine months ended September 30, 2020, given the Company does not currently have, and has not historically had transfers between Level 1 and Level 2 instruments, and the Company does not have any Level 3 fair value measurements, the adoption did not have a material impact on the Company’s condensed consolidated financial statement disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15), which clarifies the accounting for implementation costs in cloud computing arrangements, and requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as fixed assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract are amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The Company adopted ASU 2018-15 on a prospective basis as of January 1, 2020 and as a result, capitalized certain costs related to its global enterprise systems implementation of approximately $1.6 million, which is further discussed in Note 12, Commitments and Contingencies.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606 (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer and precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The Company adopted ASU 2018-18 as of January 1, 2020 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

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

Recently Issued Accounting Pronouncements Not Yet Adopted

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

13

Table of Contents

Note 3.  Balance Sheet Details

Short-term Investments

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

At September 30, 2020

 

Maturity

Amortized cost

Unrealized

Unrealized

Estimated

 

    

(in years)

    

or cost

    

gains

    

losses

    

fair value

  

U.S. government agency bonds

less than 3

206,294

137

(51)

206,380

Bank certificates of deposit

less than 1

16,900

25

16,925

Commercial paper

less than 1

 

2,997

 

3

 

 

3,000

Corporate notes

less than 3

 

62,828

 

417

 

(1)

 

63,244

Asset-backed securities

less than 5

 

17,627

 

265

 

 

17,892

Total

$

306,646

$

847

$

(52)

$

307,441

At December 31, 2019

 

Maturity

Amortized cost

Unrealized

Unrealized

Estimated

 

    

(in years)

    

or cost

    

gains

    

losses

    

fair value

 

Bank certificates of deposit

less than 1

12,999

7

13,006

Commercial paper

less than 1

 

7,475

 

8

 

 

7,483

Corporate notes

less than 3

 

65,354

 

295

 

(10)

 

65,639

Asset-backed securities

less than 3

 

25,333

 

99

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