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(Mark one)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
For the transition period from: to
Commission File No. 001-37463
GLAUKOS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
33-0945406
(I.R.S. Employer Identification No.)
229 Avenida Fabricante
San Clemente, California
(Address of principal executive office)
92672
(Zip Code)
(949) 367-9600
(Registrant’s telephone number, including area code)
26051 Merit Circle, Suite 103, Laguna Hills, California
(Former address of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share
(Title of each class)
New York Stock Exchange
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. (See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2016, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of common stock held by non-affiliates of the registrant,
based on the closing sales price for the registrant’s common stock as reported on The New York Stock Exchange, was $679.0 million.
The number of shares of the Registrant’s common stock outstanding as of March 13, 2017 (latest practicable date) was 34,232,881 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent
stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of the registrant's fiscal year ended December 31, 2016.
Table of Contents
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions and Director Independence.
Principal Accounting Fees and Services.
Exhibits, Financial Statement Schedules.
Form 10-K Summary
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We use Glaukos , our logo, iStent , iStent Inject , 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.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Annual Report on Form 10-K contains forward‑looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These statements are based
on management’s beliefs and assumptions and on information currently available to management. Some of the statements under Item 1 -
“Business,” Item 1A - “Risk Factors,” Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and elsewhere in this Annual Report on Form 10-K contain forward‑looking statements. 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.
In addition, you should refer to the “Risk Factors” section of this report for a discussion of other 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.
This Annual Report on Form 10-K contains market data and industry forecasts that were obtained from industry publications.
These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such information.
Although we believe that the industry publications on which the market and industry statements are based are reliable and we are not
aware of any misstatements regarding any market data or industry forecasts presented herein, we have not independently verified any of
the third party information. Statements in this Annual Report on Form 10-K regarding our market position, market opportunity, market
size and our general expectations involve risks and uncertainties and are subject to change based on various factors, including those
discussed under Item 1A - “Risk Factors” and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this Annual Report on Form 10-K.
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ITEM 1. BUSINESS
Overview
PART I
We are an ophthalmic medical technology company focused on the development and commercialization of products and
procedures 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 paradigm. We launched the iStent , our first
MIGS device, in the United States in July 2012 and we are developing additional products designed to treat glaucoma.
Glaucoma is a group of eye diseases characterized by progressive, irreversible and largely asymptomatic vision loss caused by
optic nerve damage, which is most commonly associated with elevated levels of pressure within the eye, or intraocular pressure. Elevated
intraocular pressure often occurs when aqueous humor, the thin watery fluid that fills the front part of the eye, is not circulating normally
and draining properly. Glaucoma is a chronic condition that progresses slowly over long periods of time and can have a devastating
impact on a patient’s vision and quality of life.
Reducing intraocular pressure is the only proven treatment for glaucoma. Glaucoma has traditionally been treated through a
range of approaches that often require patients to use multiple types of prescription eye drops for the rest of their lives, and sometimes
undergo complex and invasive eye surgery. Unfortunately, these medications can be ineffective over time due to patient noncompliance
and other factors. Complex and invasive glaucoma surgical options are typically reserved for more advanced glaucoma and have remained
largely unchanged since the 1970’s.
We developed MIGS to address the shortcomings of traditional glaucoma treatment options. MIGS procedures involve the
insertion of a micro‑scale device from within the eye’s anterior chamber through a small corneal incision. MIGS devices are designed to
reduce intraocular pressure by restoring the natural outflow pathways for aqueous humor.
The iStent was the first commercially available MIGS treatment solution. FDA‑approved for insertion in combination with
cataract surgery, the iStent procedure is currently reimbursed by Medicare and a majority of commercial payors.
We are developing three additional pipeline products: the iStent Inject , the iStent Supra and iDose . The iStent Inject includes
two stents pre‑loaded in an auto‑injection inserter. We are developing two versions of this product: the first is currently being studied for
lowering intraocular pressure in conjunction with cataract surgery in a U.S. investigational device exemption (IDE) pivotal trial; and the
second is currently being studied in an initial U.S. IDE study as a standalone treatment for lowering intraocular pressure. The iStent Supra
is designed to access an alternative drainage space within the eye and is now in a U.S. pivotal IDE trial. iDose is a drug delivery system
that is designed to be implanted in the eye to continuously deliver therapeutic levels of medication for extended periods of time to lower
intraocular pressure in glaucoma patients. A U.S. investigational new drug (IND) Phase II study of our Travoprost Intraocular Implant
using the iDose delivery system is currently underway.
Our corporate headquarters and production facilities are located in San Clemente, California, and as of December 31, 2016, we
had 264 employees. We have built and are continuing to grow our commercial organization, which includes a direct sales force in the
United States and 12 other countries, as well as distribution partners in regions of Europe, Asia Pacific, Latin America and other targeted
international geographies. Information about geographic revenue is set forth in Note 12 of our notes to consolidated financial statements
included in Part II, Item 8 of this Annual Report on Form 10-K.
Our net sales increased to $114.4 million in 2016 from $71.7 million in 2015 and $45.6 million in 2014, and we achieved net
income of $4.5 million for the year ended December 31, 2016, compared with net losses of $38.3 million and $14.1 million for the years
ended December 31, 2015 and 2014, respectively.
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Glaucoma Treatment Overview and Limitations
Glaucoma and the eye’s drainage system
Glaucoma is a group of eye diseases characterized by progressive, irreversible and largely asymptomatic vision loss in which
elevated levels of intraocular pressure are often associated with optic nerve damage. While some glaucoma patients do not experience an
increase in intraocular pressure, it is widely considered a major risk factor in glaucoma’s progression and reduction in intraocular pressure
is the only clinically proven treatment. Elevated intraocular pressure occurs when aqueous humor is not circulating normally and properly
draining from the front part of the eye. Normally, this fluid flows through the trabecular meshwork, an area of spongy mesh‑like tissue in
the eye located around the base of the cornea, and into Schlemm’s canal, a circular channel in the eye that collects the aqueous humor and
delivers it back into the bloodstream. This trabecular meshwork pathway is also known as the conventional outflow pathway.
A second outflow pathway is located in the suprachoroidal space, which lies between the sclera and the choroid, where we
estimate 20% of the eye’s total aqueous humor outflow occurs. This pathway is also known as the unconventional or uveoscleral pathway.
The suprachoroidal space is characterized as an area of less venous resistance to aqueous humor outflow than Schlemm’s canal.
The following image depicts the blockage of aqueous humor outflow in an eye with open‑angle glaucoma.
Open‑angle glaucoma is the most common type of glaucoma. In open‑angle glaucoma, structures of the eye may appear normal,
but aqueous humor outflow through the trabecular meshwork and into Schlemm’s canal is reduced due to gradual degeneration and
obstruction. Direct causes of this blockage are unknown, but the disease is linked to age, ethnicity and hereditary factors. Loss of aqueous
humor drainage leads to increased resistance and thus a chronic, painless buildup of pressure in the eye.
Glaucoma is a progressive disease that can be categorized based by severity levels ranging from ocular hypertension (or
pre‑glaucoma) to severe glaucoma, as shown in the chart below. An eye doctor usually diagnoses glaucoma as part of a comprehensive
exam that includes measuring intraocular pressure and corneal thickness, evaluating optic nerve damage and testing visual fields.
Intraocular pressure is measured in millimeters of mercury (mm Hg), with normal eye pressures ranging from 10 to 21 mm Hg. Glaucoma
is typically characterized by an intraocular pressure greater than 21 mm Hg.
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An eye doctor will monitor optic nerve damage by tracking the cup to disc (C:D) ratio. This exam measures the diameter of the
optic disc (the round area in back of the eye where retinal nerve fiber layers collect to form the optic nerve) relative to the diameter of the
optic cup (the center of the optic disc). Expansion and deepening of this optic cup indicates damage. Visual field, or perimetry, tests are
used to check for peripheral vision impairment in one or more quadrants. Once diagnosed, the treatment goal in all cases is to control
intraocular pressure. Glaucoma progression stages are described in the following chart.
Stage
Ocular Hypertension
Intraocular pressure
20 ‑ 30 mm Hg
Mild Glaucoma
20 ‑ 35 mm Hg
Moderate Glaucoma
> 30 mm Hg
Optic nerve damage
No measurable or
observable change
Minor; C:D ≤ 0.8 with
documented expansion
and deepening of cup
Significant; C:D ≤ 0.8
with documented
expansion and deepening
of cup
Severe Glaucoma
Intraocular pressure
uncontrolled
Severe; C:D > 0.8 with
severe expansion and
deepening of cup
Intraocular pressure
treatment target
20% reduction in
baseline: ≤ 18 mm Hg
25% reduction in
baseline; ≤ 18 mm Hg
30% reduction in
baseline; ≤ 15 mm Hg
< 15 mm Hg
Visual field
Visual function
intact
Some visual
field loss
Expanded visual
field loss in up
to two
quadrants;
peripheral
progressing to
central loss
Significant
visual field loss
in up to three
quadrants;
central loss
Glaucoma treatment overview
The traditional treatment of glaucoma encompasses a variety of medication regimens, laser and surgical methods to lower
intraocular pressure.
Multiple clinical trials have shown that medications can reduce intraocular pressures to baseline targets that can minimize vision
loss. However, poor adherence to and lack of persistence with glaucoma medication regimens have been documented in numerous
independent studies, which often place the incidence of patient noncompliance up to or above 50%, particularly in patients on two or more
prescription eye drops. Even daily glaucoma single medication use has been associated with noncompliance rates as high as 75%.
Because glaucoma progresses slowly and with few symptoms, patients often do not adhere to their medication regimens as
prescribed until the disease has progressed to the point of significant vision loss. As a result, despite the availability of medication
therapies to combat glaucoma, progressive visual loss and blindness still occur.
Laser treatments have been developed to provide an alternative to lifelong medication treatments. Laser procedures are typically
performed at an outpatient surgical center and involve the use of lasers to create changes in eye tissue and improve aqueous humor
outflow. Ophthalmic surgeons may perform laser procedures as initial treatment, or for patients who are noncompliant with prescription
eye drops or whose intraocular pressure is not well controlled by medications. According to Market Scope, selective laser trabeculoplasty
(SLT) is the most frequently performed glaucoma laser procedure in the United States. Although SLT can help to lower intraocular
pressure, the procedure’s effectiveness often wears off within one to five years, according to the Glaucoma Research Foundation. While a
second procedure can be performed, the results of repeated laser surgeries are less predictable and less effective than those of the first
surgery. Additionally, medication therapy may still be required post‑treatment.
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Where medication therapy and laser treatment are unsuccessful in managing glaucoma, invasive surgical procedures such as
trabeculectomies or implantation of tube shunts are performed, usually as outpatient procedures. In a trabeculectomy, the surgeon cuts
open the conjunctiva and sclera to create flaps, and removes a plug of scleral tissue and sometimes a portion of the trabecular meshwork to
create an opening into the anterior chamber. The conjunctiva and scleral flaps are sutured back down and a small blister, or bleb, is created
between the conjunctiva and sclera. The surgery results in a new drainage channel that allows increased outflow of aqueous humor into
the bleb. While some patients experience significant reductions in intraocular pressure, trabeculectomy failure rates can approach 50%
according to published research. A common complication is scarring, which can prevent fluid drainage from the eye and interfere with the
proper function of the bleb. If the bleb doesn’t work properly, more surgery may be needed. Among the other complications associated
with trabeculectomies are blurred vision, bleeding in the eye, bleb leaks, low intraocular pressure, or hypotony, infection, persistent
corneal edema, choroidal detachment and cataract development. Implantations of tube shunts, devices that divert the aqueous humor from
the anterior chamber, are generally reserved for eyes in which a trabeculectomy has failed or has a poor likelihood of success. A tube
shunt surgery is similar to a trabeculectomy, except that the device’s tube is inserted through the scleral channel to maintain the channel,
and the device’s reservoir end is placed deep under the conjunctiva to maintain the drainage space. While invasive glaucoma surgery often
leads to significant reductions in intraocular pressure, it is associated with high long‑term failure rates, long recovery times and significant
complication risks. Additionally, as with laser treatment, the effects may dissipate over time, requiring additional procedures, and
medication therapy may still be required post‑treatment.
We believe that because of the limitations of medications and laser and the morbidity associated with invasive surgical therapies,
a clear unmet medical need exists in the management of open‑angle glaucoma patients.
Our Products
We pioneered the development of MIGS in order to address the shortcomings of current pharmaceutical and surgical options.
In contrast to invasive surgical approaches, MIGS procedures access the anterior chamber of the eye through small corneal
incisions or penetrations. MIGS procedures are designed to reduce intraocular pressure by restoring the natural physiologic pathways for
aqueous humor outflow while preserving more eye tissue and allowing for faster recovery times and fewer complications than invasive
glaucoma surgical options.
We launched our first micro‑scale MIGS treatment solution, the iStent , in the United States following FDA approval in June
2012. The iStent was the first FDA‑approved surgical device available for insertion in conjunction with cataract surgery for the reduction
of intraocular pressure in adult patients with mild‑to‑moderate open‑angle glaucoma. The iStent is a micro‑bypass stent made of
surgical‑grade non‑ferromagnetic titanium that is coated with heparin and is 1.0 mm long and 0.33 mm wide. Packaged in a sterile,
pre‑loaded configuration, the iStent is inserted through the small corneal incision made during cataract surgery and placed into Schlemm’s
canal, a circular channel in the eye that collects aqueous humor and delivers it back into the bloodstream. Once inserted, the iStent is
designed to improve aqueous humor outflow while fitting naturally within Schlemm’s canal. The ergonomic rail design protects and
accesses underlying collector channels while the iStent ’s three retention arches help ensure secure placement. The iStent is currently
approved only for insertion in conjunction with cataract surgery because this was the product usage in the U.S. IDE clinical trial
information that was included in the premarket approval (PMA).
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) 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. Following implantation of an iStent ,
the surgeon is instructed to provide to the patient a wallet‑sized patient identification card citing the model and serial number of the
device, implant date, and surgeon’s name along with the aforementioned MRI conditions. The surgeon is also instructed to advise the
patient that the patient identification card contains important information related to the iStent and that the card should be shown to their
current and future health care providers.
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The image below left shows a gloved hand holding the pre‑loaded iStent inserter; the image below center is a magnified view of
the insertion tip and iStent device; the image below right shows an iStent on the tip of a finger (inside circle).
The following series of graphics illustrates the insertion of an iStent into the eye: (left) the pre‑loaded iStent inserter enters the
anterior chamber through a small corneal incision made during cataract surgery; (center) a gonioscope is used to visualize Schlemm’s
canal; (right) the iStent is inserted into Schlemm’s canal.
The following series of graphics illustrates the effect of iStent in the eye: (left) after placement of the iStent , aqueous humor
outflow is restored; (right) close‑up illustration of iStent placement in Schlemm’s canal.
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Our Pipeline
We are developing three additional pipeline products: the iStent Inject , the iStent Supra and iDose .
iStent Inject trabecular micro‑‑bypass stent. The iStent Inject is approximately one‑third the size of the iStent and relies on a
similar fluidic method of action to improve aqueous humor outflow into Schlemm’s canal and reduce intraocular pressure. Packaged in a
two‑stent, preloaded, auto‑inject mechanism, the iStent Inject is designed to allow the surgeon to inject these stents into multiple
trabecular meshwork locations through a single corneal entry with the goal of achieving greater intraocular pressure reduction. We are
developing two versions of this product. One version of the iStent Inject is currently being evaluated in a pivotal U.S. IDE clinical trial for
the reduction of intraocular pressure in mild‑to‑moderate open‑angle glaucoma in combination with cataract surgery. A second version of
the iStent Inject is designed to make its own self‑sealing corneal needle penetration to achieve insertion without an incision. An initial
U.S. IDE study is currently underway to evaluate this second version of the device as a standalone procedure in glaucoma patients who are
not undergoing concurrent cataract surgery. The iStent Inject has been approved for marketing in the European Union, Canada, Brazil and
certain other countries, primarily in the Middle East. In these markets, it is approved for use in conjunction with cataract surgery or as a
standalone procedure. It is also approved in Australia in combination with cataract surgery. In 2016, the iStent Inject was commercially
available in Germany, Canada, Australia and South Africa.
The image below left is the iStent Inject injection system, pre‑loaded with two iStent Inject devices; the image below center is a
magnified view of two iStent Inject devices; the image below right shows two iStent Inject devices on a penny (inside circle).
iStent Supra suprachoroidal micro‑‑bypass stent. The iStent Supra is designed to reduce intraocular pressure by accessing the
suprachoroidal space in the eye, an area that we estimate is responsible for 20% of its total aqueous outflow. A U.S. pivotal IDE trial for
the iStent Supra used in conjunction with cataract surgery to lower intraocular pressure is underway. The iStent Supra device has already
been approved for marketing in the European Union and certain other countries, primarily in the Middle East.
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The image below left is a magnified view of the iStent Supra ; the image below center illustrates the iStent Supra device
implanted into the suprachoroidal space of the eye; the image below right shows the iStent Supra device on the tip of a finger (inside
circle).
iDose. The iDose is a targeted injectable drug delivery system that is based on our micro‑scale platform. The iDose is an implant
that is designed to be pre‑loaded into a small gauge needle and injected into the eye via a self‑sealing corneal needle penetration, where it
is secured within the eye. Once secured in the eye, the iDose implant is designed to continuously deliver therapeutic levels of medication
from within the eye for extended periods of time. The titanium implant is similar in size to the Company’s other proprietary MIGS
devices. The implant is capped with a membrane that is designed for continuous controlled drug elution into the anterior chamber. When
depleted, the implant can be removed and replaced in a similar, subsequent procedure. Glaukos has designed the product to be an
alternative to chronic, daily prescription eye drop treatments, which may have high rates of patient noncompliance and cause long‑term
ocular surface damage to glaucomatous eyes.
In November 2015, the Company submitted an Investigational New Drug (IND) application to the FDA seeking authorization to
study the iDose delivery system for investigational use in the reduction of elevated intraocular pressure in patients with glaucoma. In
December 2015, the FDA notified the Company that it was allowing the Phase II IND clinical trial to proceed. In this Phase II clinical
trial, the iDose implant is filled with a special formulation of travoprost, a prostaglandin analog used to reduce elevated intraocular
pressure. In early 2016, the Company commenced the randomized, 12-week masked Phase II clinical trial, which is designed to assess the
safety and preliminary efficacy of two models of the iDose delivery system with different travoprost elution rates compared to topical
timolol maleate ophthalmic solution, 0.5%.
Research & Development
Our research and development efforts are focused primarily on continuous improvement of our iStent designs and injector
systems and improvements to our proprietary MIGS platform. Our research and development objectives are:
·
·
To advance glaucoma patient care through continuous improvement of the MIGS platform, to provide a viable MIGS
alternative to lifelong medication regimens and invasive surgical procedures for intraocular pressure management; and
To introduce micro‑scale injectable therapies—including our iStent Inject , iStent Supra and iDose pipeline products—that
can be performed in minor surgical suites or in‑office settings with topical anesthetic.
As of December 31, 2016, our research and development team consisted of 76 employees. Our research and development process
is supported by multiple clinical research programs and regulatory affairs activities. We currently have 21 prospective clinical trials
underway. Our research and development expenses were approximately $29.2 million, $25.0 million and $19.2 million in the years ended
December 31, 2016, 2015 and 2014, respectively. We expect our research and development expenditures to increase as we continue to
devote significant resources to clinical trials and regulatory approvals of our new products.
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Sales and Marketing
In the United States, we sell our products through a direct sales organization that, as of December 31, 2016, consisted of 76 sales
professionals, including regional business managers, sales directors, clinical relations personnel and reimbursement specialists. Our sales
organization is primarily responsible for training ophthalmic surgeons on the iStent procedure, helping these physicians integrate the
technology into their practices and providing resources to support reimbursement, while also identifying and supporting investigational
sites for clinical trials of our pipeline technologies. We continue to recruit experienced sales professionals with extensive sales and/or
clinical experience in ophthalmic medical technologies.
We invest significant time and expense to provide comprehensive training to our sales professionals so that they are proficient in
all aspects of our iStent technologies, including features and benefits, procedure techniques and reimbursement. In addition, we provide
technical education regarding the eye’s anatomy, glaucoma diagnosis, disease states and treatment, and cataract surgery.
Outside the United States, we sell our products through direct sales organizations in 12 countries and a network of distribution
partners in other markets. As of December 31, 2016, our direct sales organization outside the United States consisted of 42 sales
professionals. We continually monitor our international sales progress and consider conversion to a direct sales approach on a
country‑by‑country basis, depending on our assessment of market conditions, net sales and profitability trends, reimbursement coding and
coverage potential, and other factors. As of December 31, 2016, we had agreements with approximately 19 distributor organizations. No
single distributor accounted for more than 10% of our total net sales for the years ended December 31, 2016, 2015 or 2014.
Our global sales efforts and promotional activities are currently aimed at ophthalmic surgeons and other eye care professionals.
Our primary customers include ophthalmic surgeons, hospitals and ambulatory surgery centers (ASCs).
Reimbursement
United States reimbursement
Reimbursement for iStent procedure
There are three key aspects of reimbursement in the United States:
·
·
·
Coding refers to distinct numeric and alphanumeric billing codes that are used by healthcare providers to report the
provision of medical procedures and the use of supplies for specific patients to payors. There are different categories of
Current Procedural Terminology (CPT) codes (Category I, II and III) based on the procedure or supply.
Coverage refers to decisions made by individual payors as to whether or not to pay for a specific procedure and related
supplies and if so, under what conditions ( i.e. , for which specific diagnoses and clinical indications). Payors typically base
coverage decisions on reviews of the published medical literature.
Payment refers to the amount paid to providers for specific procedures and supplies. Payment is generally determined for
the specific billing code and, in addition, there may be separate numeric codes, under which the billing code is classified, to
establish a payment amount.
In 2008, in consultation with and with the approval of the American Academy of Ophthalmology, we applied for and received a
temporary Category III CPT code to describe insertion of devices such as the iStent using MIGS procedures.
Category III codes expire five years after the date they become effective. Prior to expiration, there are two options: submit an
application to convert to a Category I code; or submit an application for a five year extension of Category III status. CPT code 0191T,
which describes the insertion of the iStent and iStent Inject devices, first became effective in 2008. Prior to expiration, an application for a
five-year extension was approved in 2012 and was set to expire
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on December 31, 2018. Our application for another extension of the Category III status of code 0191T was approved in early 2017 and
expires on December 31, 2023.
We also applied for and obtained a temporary Category III CPT code 0253T, which describes the insertion of the iStent Supra
device, in 2011. An application for a five-year extension was approved at the same time as the application for the extension of CPT code
0191T. Our application for another extension of the Category III status of code 0253T was approved in early 2017 and expires on
December 31, 2023.
The iStent is approved by the FDA for reduction of intraocular pressure in adult patients with mild‑to‑moderate open‑angle
glaucoma undergoing cataract surgery who are currently treated with prescription eye drops. Based on data released by Centers for
Medicare & Medicaid Services (CMS) regarding total cataract surgery volume in the Medicare Fee for Service program and data
published by Market Scope, we estimate that Medicare pays for approximately 80% of all cataract surgeries performed in the United
States.
We estimate that 20% of patients who meet the FDA indication for iStent insertion are covered by private health insurance
companies, and we have secured positive coverage policies for iStent insertion with many of these private payors. As of December 31,
2016, we had secured reimbursement for the iStent insertion for more than 95% of individuals covered by private insurance. These include
United HealthCare, CIGNA, Aetna, Blue Cross and Blue Shield (BCBS), Anthem, Humana and Tricare. The positive coverage by the
BCBS plans is primarily a result of medical policy issued by the BCBS Association (national) in October 2013 stating that iStent insertion
is considered medically necessary for mild‑to‑moderate open‑angle glaucoma patients undergoing cataract surgery. While BCBS plans,
which are independent licensees, are not required to follow BCBS national guidelines, the majority of the plans do so. We continue to
work with private insurance providers in an effort to broaden coverage for the iStent procedure.
iStent insertion in the United States is almost always performed in an outpatient setting and virtually all U.S. iStent sales are to
ASCs and hospital outpatient departments (HOPDs). National payment rates by Medicare to ASCs and HOPDs are determined each year
through a complex formula, which takes into account reported costs for each claim submitted. When two procedures are performed in an
ASC on the same patient on the same day ( e.g. , iStent insertion and cataract surgery), Medicare reduces the payment of the
lower‑paying procedure by 50%. The ASC facility payment for cataract surgery is generally lower than the payment for iStent insertion.
Therefore, when these two procedures are performed together in an ASC, the payment for cataract surgery is reduced by 50%.
For iStent insertion and cataract procedures performed in HOPDs, the Medicare fee-for-service facility reimbursement is a
single, all‑inclusive payment. We estimate that approximately 25% of U.S. iStent procedures are currently performed in HOPDs and that a
majority of these procedures are reimbursed through traditional Medicare fee‑for‑service.
Physicians are paid separately from the facility for surgical procedures. Unlike the facility payment, for the CPT code that
describes iStent insertion, there is no published Medicare payment schedule at the national level, and the physician payment rate is left to
the discretion of the individual Medicare contractor. 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 in conjunction with cataract surgery over and above what he or she would receive for
performing cataract surgery alone plays a role in a surgeon’s decision to adopt the technology.
Unlike Medicare, commercial payors do not publish fee schedules. In general, based on selected feedback from facilities and
surgeons, payments for iStent insertion from the commercial payors who cover the procedure generally run somewhat higher than the
comparable local Medicare payment.
Reimbursement for future products
We have also filed and received approval of applications for CPT codes that describe our pipeline iStent devices. Our application
for a CPT code to describe insertion of the iStent Supra was approved by the American Medical Association, or AMA, in 2011 resulting
in the creation of a temporary Category III CPT code 0253T. Our application for another extension of the Category III status of code
0253T was approved in early 2017 and expires on December 31, 2023. Our application for a CPT code to describe the insertion of
additional trabecular meshwork stents (as with the
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iStent Inject procedure) was approved by the AMA in early 2014 resulting in the creation of Category III CPT code 0376T. While this
code was available beginning on January 1, 2015, for the reporting of procedures in which more than one iStent is inserted in the same
eye, it currently does not result in any incremental facility or professional fee payment from Medicare. In addition, it is unclear whether
any other third‑party payor will cover the insertion of a second stent or that payment for a second stent will be adequate. Our application
for an extension of the Category III status of code 0376T was approved in early 2017 and expires on December 31, 2023.
Reimbursement outside the United States
Outside the United States, reimbursement levels vary significantly by country, and by region within some countries. Reimbursement is
obtained from a variety of sources, including government-sponsored and private health insurance plans, and combinations of both. Some
countries will require us to gather additional clinical data before granting or expanding coverage and reimbursement for our products. It is
our intention to complete the requisite clinical studies and obtain coverage and reimbursement approval beyond what we have today in
countries where it makes economic sense to do so.
Reimbursement in Europe
In most of the developed European countries, healthcare is funded by the central government. In general, obtaining broad‑based
reimbursement and adequate payment for new technologies is more difficult in these markets than in the United States. As with the United
States, high‑quality, peer-reviewed published clinical data ( i.e. , randomized, controlled trials) is required to obtain coverage. However,
most of the developed European countries require new medical technologies to not only be safe and effective, but also to be able to
demonstrate clinical benefits that outweigh the costs when compared to the standard of care. We are in the early stages of
commercialization in Europe.
In Germany healthcare is a universal right, and approximately 90% of the population is covered under the Statutory Health
Insurance (SHI) or public plan and coverage decisions and payments are decentralized. Physicians who treat SHI patients must belong to
a Kassenärztliche Vereinigung (KV) or Physicians Association. There are 17 KVs in Germany, and the KVs are responsible for
negotiating the budget with the State Sickness Fund for physician and facility payments for outpatient procedures in their region. With
several KVs, an application must be made to the KV by a surgeon in that area who wishes to perform the procedure. In some cases, the
addition of a new outpatient procedure can create budget issues and there can be a delay while the KV negotiates additional funds with the
State Sickness Fund to cover payment for the new procedure.
Surgeons in each of the states continue to work to gain KV approval of the iStent and iStent Inject so that claims are processed
smoothly. While the majority of claims submitted to KVs in 2016 were processed and paid, some were denied. We are working with
reimbursement consultants in Germany who have a successful track record of securing adequate payment for new medical technologies.
In France, our application for a code to describe iStent insertion and our application to add the iStent to the list of devices
approved for pass through payment were denied in 2013. Following the publication of data on iStent Inject , we submitted new
applications for both devices in 2014. In November 2015, the French government approved the iStent application for reimbursement.
Unless there is a code and listing on the pass through list, the only opportunity for payment for the iStent in France would result from
successful negotiations at the individual hospital level. There can be no assurance that the French government will approve pass through
payment for iStent even though iStent has been approved for reimbursement.
In the United Kingdom, Spain and Italy, there are no codes that specifically describe the insertion of a trabecular stent. We do not
anticipate this changing in Spain and Italy in the near future. In addition, there is no mechanism to provide incremental payment for the
iStent when insertion is in conjunction with cataract surgery.
Reimbursement in other regions
In Australia, the iStent and iStent Inject were initially included on the Department of Health’s (ADOH) prosthesis listing, which
provided for a separate reimbursement payment for these devises. Recently, the Australian
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government began a comprehensive review of the approximate 5,600 items on the Medicare Benefits Schedule (MBS), including the
prosthesis listing, in an effort to ensure all MBS items can be aligned with contemporary clinical evidence and practice and improve health
outcomes for patients. In connection with this review, the Company was advised that effective May 1, 2017, the iStent and iStent Inject
would no longer be reimbursed under the current code. The ADOH is considering several other approaches for providing reimbursement
for the iStent and iStent Inject . It is unclear at this time what impact this change in MBS coding could have on Australian iStent and iStent
Inject sales. The Company is in active discussions with the ADOH regarding this change.
In New Zealand, the vast majority of the population is covered under a publicly‑funded, universal‑coverage health system, with
services provided by public, private and non‑governmental sectors. We have yet to achieve significant success with any of the public and
major private payors in New Zealand. In Canada, the iStent and iStent Inject are paid through individual hospital budgets for glaucoma
implants. We have yet to achieve a special funding pathway for iStent and iStent Inject in Canada and we will be subject to the limitations
of individual hospital budgets unless and until Canadian Provinces provide a special funding pathway for our products.
In Japan, iStent was awarded reimbursement approval in December 2016.
Competition
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 of its CyPass suprachoroidal implant, a MIGS device, in August 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. With this approval, Alcon commenced a commercial launch of its competitive MIGS device, the CyPass.
In November 2016, Allergan plc (which acquired AqueSys, Inc., a MIGS competitor) obtained FDA approval of its Xen Glaucoma
Treatment System for use in the U.S., which 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. With this approval, Allergan has entered the MIGS space and commenced a
commercial launch of its Xen device. We are aware of several other companies, Santen Pharmaceutical Co., Ltd. (which recently acquired
InnFocus, Inc., a MIGS competitor) and Ivantis Inc., that are conducting FDA‑approved investigational device exemption (IDE) clinical
trials or have filed for regulatory approval of MIGS devices. If these approved MIGS products or other products that may be developed
receive regulatory approval, we will have additional, new direct MIGS competitors. These new MIGS products could achieve greater
commercial acceptance, demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our iStent or our other
products under development, which may reduce demand for our primary product, the iStent , as well as for our products in development.
®
We also compete with the use of prescription eye drop therapies that currently dominate the glaucoma treatment marketplace.
We also compete with manufacturers of medical devices used in other surgical therapy procedures for treating glaucoma, including lasers
as well as more complex and invasive surgeries from companies including Alcon, Inc., Abbott Medical Optics Inc., Allergan plc, STAAR
Surgical Company, Lumenis Ltd., NeoMedix, Inc. and Ellex Medical Lasers Limited. Alcon, Inc. and Abbott Medical Optics Inc. are the
leading manufacturers of aqueous shunts, and Alcon, Inc. markets the EX‑PRESS Glaucoma Filtration Device. Lumenis Ltd. is a leading
manufacturer of selective laser trabeculoplasty equipment. Neomedix, Inc. markets an electrosurgical device, 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:
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greater financial and human resources for product development, sales and marketing and patent litigation;
significantly greater name recognition;
longer operating histories;
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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.
In addition to competing for market share for our products, we also compete against these companies for personnel, including
qualified sales representatives that are necessary to grow our business, as well as scientific and clinical personnel from universities and
research institutions that are important to our research and development efforts.
We believe the principal competitive factors in our market include:
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improved outcomes for glaucoma;
acceptance by ophthalmic surgeons;
ease of use and reliability;
product price and availability of reimbursement;
technical leadership;
effective marketing and distribution; and
speed to market.
Facilities, Manufacturing and Distribution
In September 2016, we relocated our corporate headquarters and a majority of our manufacturing operations to an approximately
37,700 square foot facility located in San Clemente, California pursuant to a lease that expires on December 31, 2021. Until the new
location receives all final regulatory approvals, a portion of our manufacturing operations relating primarily to products sold outside of the
United States will remain at our former Laguna Hills, California location, pursuant to a sublease of that space through the end of March
2017. Once we receive all final regulatory approvals, we plan to consolidate all of our manufacturing operations at the San Clemente
location. This new location serves as our primary manufacturing location where we manufacture, inspect, package, release and ship nearly
all of our final products. All of our headquarters‑based employees, including our manufacturing and distribution employees, work at these
facilities. While these facilities are sufficient for our current needs, we will require additional space as our business expands. Accordingly,
in January 2017, we entered into an additional lease for an approximately 39,300 square foot facility located adjacent to our San
Clemente, California corporate headquarters. This new lease will become effective on April 1, 2017 and expire on December 31, 2021.
Our international subsidiaries also lease facilities in Australia, Brazil, Canada, Germany, Japan and the United Kingdom.
We manufacture, inspect, package and ship finished products from our San Clemente and Laguna Hills facilities. We source
components used in our proprietary manufacturing process from outside vendors and we assemble them to produce iStent devices and
disposable insertion instruments. These components include both off‑the‑shelf materials and custom made parts. The iStent device and
some insertion instrument components are supplied by single vendors. While we believe that there are at least several other vendors that
could make any one of these items, we strive to maintain a minimum inventory of three to six months’ supply to help mitigate any supply
interruptions. We source the heparin used in our iStent heparin coating from one supplier. We maintain a stock of several years’ worth of
heparin material and have FDA approval to retest and extend the shelf life of the material indefinitely for U.S. product.
We have received International Standards Organization (ISO) 13485 certification, which includes design control requirements.
Our manufacturing processes have been validated as required by the FDA and other regulatory
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bodies. As a medical device manufacturer, our manufacturing facility and the facilities of our critical suppliers are subject to periodic
inspection by the FDA and other regulatory agencies.
Intellectual Property
We believe that the strength of our competitive position will depend substantially upon our ability to obtain and enforce
intellectual property rights protecting our technology. We file for patents for new patentable technologies relevant to our business and
utilize other forms of intellectual property protection to strategically protect our intellectual property.
Patents
As of December 31, 2016, we owned or exclusively licensed in certain fields of use 137 issued patents, of which we owned 55
that were issued in the United States and 69 that were issued outside of the United States, and 77 pending patent applications, of which we
owned 20 that were filed in the United States and 27 that were filed outside of the United States. We also granted to DOSE Medical
(DOSE) certain exclusive rights and licenses outside our licensed fields of use under certain of our owned patents and patent applications.
Our issued patents that protect our commercial products and current product pipeline will expire between 2020 and 2033. While we have
pursued and continue to pursue patent protection for our technologies, we may, from time to time, abandon certain patents and patent
applications for business reasons.
Our U.S. patents include a variety of claims related to devices and methods for treating glaucoma with ab‑interno surgical
procedures, which are procedures initiated from within the anterior chamber of the eye and accessed through an opening in the clear
corneal tissue. Our pending U.S. patent applications, if issued with their present claims, relate to the same field and potentially other fields
of use.
The ophthalmology industry in which we operate has been subject to a large number of patent filings and patent infringement
litigation. Whether we infringe any patent claim owned by a third party will not be known with certainty unless and until a court interprets
the patent claim in the context of litigation. If an infringement allegation is made against us, we may seek to invalidate the asserted patent
claim and may allege non‑infringement of the asserted patent claim. Also, for business reasons, we may take similar actions before any
such infringement allegation is made. In order for us to invalidate a U.S. patent claim, we would need to rebut the presumption of validity
afforded to issued patents in the United States with clear and convincing evidence of invalidity, which is a high burden of proof. Similar
or greater effort and proof may be required to invalidate foreign patents owned by third parties, including those owned by our competitors.
Trademarks
Glaukos, our logo, iStent , iStent Supra , iStent Inject and iPrism are registered trademarks of our company in the United States.
We also have pending trademark applications for iBrid , iDose , iDose TR , and iLute in the United States. Glaukos, iDose , iPrism ,
iStent and iStent Inject are registered or pending trademark applications in the following jurisdictions: Argentina, Australia, Brazil,
Canada, Columbia, European Union, Japan, Mexico and Switzerland. Glaukos, iDose , iStent and iStent Inject are registered or pending
trademark applications in Chile. iStent Supra is a registered trademark in the European Union. We also use MIGS as an unregistered
trademark.
Trade secrets
We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets can be difficult to
protect. We seek to protect our proprietary technology and manufacturing process in part by confidentiality and invention assignment
agreements with employees, under which they are bound to assign to us inventions made during the term of their employment unless
excluded pursuant to California Labor Code Section 2870. These agreements further prohibit our employees from using, disclosing, or
bringing onto the premises any proprietary information belonging to a third party. In addition, most of our consultants, scientific advisors
and contractors are required to sign agreements under which they must assign to us any inventions that relate to our business. These
agreements also prohibit these third parties from incorporating into any inventions the proprietary rights of third parties without informing
us. It is
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our policy to require all employees to document potential inventions and other intellectual property in laboratory notebooks and to
disclose inventions to patent counsel using invention disclosure forms.
We also rely on confidentiality restrictions and trade secret protection to protect our technology. We generally require our
consultants and other parties who may be exposed to our proprietary technology to sign non‑disclosure agreements that prohibit such
parties from disclosing or using our proprietary information except as may be authorized by us.
We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our
premises and physical and electronic security of our information technology systems. While we have confidence in these individuals,
organizations and systems, agreements or security measures may be breached and we may not have adequate remedies for any breach. In
addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our
consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights
in related or resulting know‑how and inventions.
Intellectual property agreements
In January 2007, we entered into an agreement with GMP Vision Solutions, Inc. (GMP) to acquire certain in‑process research
and development. In connection with the agreement, we agreed to make periodic royalty payments based on revenues received for
royalty‑bearing products and periodic royalty payments at a higher rate for all amounts received in connection with the grant of licenses or
sublicenses of the related intellectual property.
In November 2013, we entered into an agreement with GMP (the Buyout Agreement) pursuant to which we bought out all
remaining royalties payable to GMP in exchange for the issuance of $17.5 million in promissory notes payable to GMP and a party related
to GMP. The promissory notes were paid off in full as of December 31, 2016. The Buyout Agreement also calls for a payment of up to
$2.0 million in the event of a sale of the Company meeting certain criteria. For additional information relating to the terms of these notes,
see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—
Indebtedness.”
In December 2014, we entered into an agreement with The Regents of The University of California (the University) to quiet title
to our entire ownership of certain patents and patent applications, or the Patent Rights, to which Dr. Richard Hill contributed while he was
both a consultant for us and a faculty member at the University. In connection with the agreement, we agreed to pay to the University
$2.7 million in 2015 and to make periodic payments to the University equal to a low single‑digit percentage of worldwide net sales,
beginning in 2015, of certain current and future products, including our iStent products, with a required minimum annual payment of
$500,000 during the term of the agreement. The University has a security interest in all tangible assets owned by us. Our agreement with
the University will expire upon the expiration of the last to expire of the Patent Rights, which is currently expected to be in 2022.
On October 29, 2015, we entered into the settlement agreement with Transcend Medical, Inc. (Transcend, which was
subsequently acquired by Alcon, Inc., a division of Novartis International AG, which is a publicly traded multinational pharmaceutical
company based in Basel, Switzerland) whereby we granted Transcend a covenant not to sue for patent infringement in connection with
certain Transcend products and released Transcend from any and all liability for past infringement of our patents. Transcend granted us a
conditional covenant not to challenge the validity or enforceability of any of our patents, and agreed to make royalty payments equal to
1% of future net sales of certain Transcend products in countries where we have patent protection. Transcend’s royalty obligation
continues until April 8, 2022, or up to a maximum aggregate payment amount of $6.0 million, whichever occurs first. In connection with
entering into the settlement agreement, we agreed to pay the University 33% of any payments we receive from Transcend pursuant to the
settlement agreement.
Government Regulation
Our products and operations are subject to extensive and rigorous regulation by the FDA and other federal, state and local
authorities, as well as foreign regulatory authorities. The FDA regulates, among other things, the research, development, testing,
manufacturing, approval, labeling, storage, recordkeeping, advertising, promotion and marketing, distribution, post approval monitoring
and reporting and import and export of medical devices (such as iStent ), as well as
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combination drug/device products (such as iDose ) in the United States to assure the safety and effectiveness of medical products for their
intended use. The Federal Trade Commission also regulates the advertising of our products. Further, we are subject to laws directed at
preventing fraud and abuse, which subject our sales and marketing, training and other practices to government scrutiny.
U.S. government regulation—medical devices
Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the
United States will require either a premarket notification to the FDA requesting permission for commercial distribution under
Section 510(k) of the Federal Food, Drug and Cosmetic Act (FDCA) also referred to as a 510(k) clearance, or approval from the FDA of a
premarket approval (PMA) application. Both the 510(k) clearance and PMA processes can be expensive, and lengthy, and require
payment of significant user fees, unless an exemption is available.
Device classification
Under the FDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the
degree of risk associated with each medical device and the extent of control needed to provide reasonable assurances with respect to safety
and effectiveness.
Class I devices are those for which safety and effectiveness can be reasonably assured by adherence to a set of regulations,
referred to as General Controls, which require compliance with the applicable portions of the FDA’s Quality System Regulation (QSR),
facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non‑misleading
labeling and promotional materials. Some Class I devices, also called Class I reserved devices, also require premarket clearance by the
FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket
notification requirements.
Class II devices are those that are subject to the General Controls, as well as Special Controls, which can include performance
standards, guidelines and postmarket surveillance. Most Class II devices are subject to premarket review and clearance by the FDA.
Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process.
Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is
“substantially equivalent,” as defined in the statute, to either:
·
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a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device Amendments of 1976
were enacted, or
another commercially available, similar device that was cleared through the 510(k) process.
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 is sometimes required to support substantial equivalence.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would
constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, could require
a PMA application. If the FDA disagrees with a manufacturer’s determination regarding whether a new premarket submission is required
for the modification of an existing device, the FDA can require the manufacturer to cease marketing and/or recall the modified device
until 510(k) clearance or approval of a PMA application is obtained.
If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically
classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval
process, or seek reclassification of the device through the de novo process. Pursuant to amendments to the statute in 2012, a manufacturer
can also submit a petition for direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new
device or new use of the device presents a moderate or low risk.
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Class III devices include devices deemed by the FDA to pose the greatest risk such as life‑supporting or life‑sustaining devices,
or implantable devices, in addition to those deemed not substantially equivalent following the 510(k) process. These devices are subject to
the PMA application process, which is generally more costly and time consuming than the 510(k) process. Through the PMA application
process, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device
for its intended use to the FDA’s satisfaction. Accordingly, a PMA application typically includes, but is not limited to, extensive technical
information regarding device design and development, pre‑clinical and clinical trial data, manufacturing information, labeling and
financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific
evidence that demonstrates to the FDA’s satisfaction reasonable assurance of the safety and effectiveness of the device for its intended
use.
The investigational device process
In the United States, absent certain limited exceptions, human clinical trials intended to support medical device clearance or
approval require an IDE application. Some types of studies deemed to present “non‑significant risk” are deemed to have an approved IDE
once certain requirements are addressed and Institutional Review Board (IRB) approval is obtained. If the device presents a “significant
risk” to human health, as defined by the FDA, the sponsor must submit an IDE application to the FDA and obtain IDE approval prior to
commencing the human clinical trials. The IDE application must be supported by appropriate data, such as animal and laboratory testing
results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application must
be approved in advance by the FDA for a specified number of subjects. Generally, clinical trials for a significant risk device may begin
once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate institutional
review boards at the clinical trial sites. There can be no assurance that submission of an IDE will result in the ability to commence clinical
trials, and although the FDA’s approval of an IDE allows clinical testing to go forward for a specified number of subjects, it does not bind
the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if the trial meets its intended success
criteria.
All clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern investigational device labeling,
prohibit promotion and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study
investigators. Clinical trials must further comply with the FDA’s regulations for institutional review board approval and for informed
consent and other human subject protections. Required records and reports are subject to inspection by the FDA. The results of clinical
testing may be unfavorable, or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for
the FDA to grant marketing approval or clearance of a product. The commencement or completion of any clinical trial may be delayed or
halted, or be inadequate to support approval of a PMA application, for numerous reasons, including, but not limited to, the following:
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the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on
hold;
patients do not enroll in clinical trials at the rate expected;
patients do not comply with trial protocols;
patient follow‑up is not at the rate expected;
patients experience adverse events;
patients die during a clinical trial, even though their death may not be related to the products that are part of our trial;
device malfunctions occur with unexpected frequency or potential adverse consequences;
institutional review boards and third‑party clinical investigators may delay or reject the trial protocol;
third‑party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule or
consistent with the clinical trial protocol, good clinical practices or other FDA requirements;
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we or third‑party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or
consistent with the clinical trial protocol or investigational or statistical plans;
third‑party clinical investigators have significant financial interests related to us or our study such that the FDA deems the
study results unreliable, or we or investigators fail to disclose such interests;
regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to
undertake corrective action or suspend or terminate our clinical trials;
changes in government regulations or administrative actions;
the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; or
the FDA concludes that our trial design is inadequate to demonstrate safety and efficacy.
The PMA approval process
Following receipt of a PMA application, the FDA conducts an administrative review to determine whether the application is
sufficiently complete to permit a substantive review. If it is not, the agency will refuse to file the PMA. If it is, the FDA will accept the
application for filing and begin the review. The FDA, by statute and by regulation, has 180 days to review a filed PMA application,
although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA
may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to
the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. The FDA considers a PMA or PMA
supplement to have been voluntarily withdrawn if an applicant fails to respond to an FDA request for information ( e.g. , major deficiency
letter) within a total of 360 days. Before approving or denying a PMA, an FDA advisory committee may review the PMA at a public
meeting and provide the FDA with the committee’s recommendation on whether the FDA should approve the submission, approve it with
specific conditions, or not approve it. Prior to approval of a PMA, the FDA may conduct a bioresearch monitoring inspection of the
clinical trial data and clinical trial sites, and a QSR inspection of the manufacturing facility and processes. Overall, the FDA review of a
PMA application generally takes between one and three years, but may take significantly longer. The FDA can delay, limit or deny
approval of a PMA application for many reasons, including:
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the device may not be shown safe or effective to the FDA’s satisfaction;
the data from pre‑clinical studies and clinical trials may be insufficient to support approval;
the manufacturing process or facilities may not meet applicable requirements; and
changes in FDA approval policies or adoption of new regulations may require additional data.
If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, which usually
contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been
fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device,
subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application or
manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA also may
determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years
while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when the
data are available. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been
sought by other companies have never been approved by the FDA for marketing.
New PMA applications or PMA supplements may be required for modification to the manufacturing process, labeling, device
specifications, materials or design of a device that has been approved through the PMA process. PMA supplements often require
submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to
support any changes from the device covered by the approved PMA
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application and may or may not require as extensive technical or clinical data or the convening of an advisory panel, depending on the
nature of the proposed change.
In approving a PMA application, the FDA may also require some form of postmarket studies or postmarket surveillance,
whereby the applicant follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of
those patients when necessary to protect the public health or to provide additional safety and effectiveness data for the device. FDA may
also require postmarket surveillance for certain devices cleared under a 510(k) notification, such as implants or life‑supporting or
life‑sustaining devices used outside a device user facility. The FDA may also approve a PMA application with other post‑approval
conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion,
sale, distribution and use.
The FDA approved the iStent PMA on June 25, 2012, for the indication for use in combination with cataract surgery for the
reduction of intraocular pressure in adult patients with mild‑to‑moderate open‑ angle glaucoma currently treated with prescription eye
drops. The FDA imposed conditions of approval, including three postmarket studies, and a requirement that we implement a three‑part
training program for physicians who will use the iStent device.
We are required to file new PMA applications or PMA supplement applications for significant modifications to the
manufacturing process, labeling and design of a device for which we have received approval through the PMA approval process.
Post‑approval requirements
After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. These include, but are
not limited to:
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the registration and listing regulation, which requires manufacturers to register all manufacturing facilities and list all
medical devices placed into commercial distribution;
the QSR, which requires manufacturers, including third‑party manufacturers, to follow elaborate design, testing, production,
control, supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during the
manufacturing process;
labeling regulations and unique device identification requirements;
advertising and promotion requirements;
restrictions on sale, distribution or use of a device;
PMA annual reporting requirements;
the FDA’s general prohibition against promoting products for unapproved or “off‑label” uses;
the Medical Device Reporting, or MDR, regulation, which requires that manufacturers report to the FDA if their device may
have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a
death or serious injury if it were to reoccur;
· medical device correction and removal reporting regulations, which require that manufacturers report to the FDA field
corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a
violation of the FDCA that may present a risk to health;
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recall requirements, including a mandatory recall if there is a reasonable probability that the device would cause serious
adverse health consequences or death;
an order of repair, replacement or refund;
device tracking requirements; and
postapproval study and postmarket surveillance requirements.
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Our facilities, records and manufacturing processes are subject to periodic unscheduled inspections by the FDA. Failure to
comply with the applicable United States medical device regulatory requirements could result in, among other things, warning letters,
untitled letters, fines, injunctions, consent decrees, civil penalties, unanticipated expenditures, repairs, replacements, refunds, recalls or
seizures of products, operating restrictions, total or partial suspension of production, the FDA’s refusal to issue certificates to foreign
governments needed to export products for sale in other countries, the FDA’s refusal to grant future premarket clearances or approvals,
withdrawals or suspensions of current product clearances or approvals and criminal prosecution.
U.S. government regulation—drug delivery implant
In the United States, the FDA regulates drugs and combination drug/device products under the FDCA and related regulations.
Drugs are also subject to other federal, state and local statutes and regulations, which along with the FDCA govern, among other things,
the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, advertising, promotion and marketing,
distribution, post‑approval monitoring and reporting, and import and export of pharmaceutical products. Failure to comply with the
applicable U.S. regulatory requirements at any time during the drug product development process, approval process or post‑approval, may
subject an applicant to administrative or judicial sanctions, including refusal by the FDA to approve pending applications, withdrawal of
an approval, imposition of a clinical hold, issuance of warning letters and other types of letters, product recalls, product seizures, total or
partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or
civil or criminal investigations and penalties brought by FDA and the Department of Justice, or other governmental entities. Any agency
or judicial enforcement action could have a material adverse effect on us.
The steps required before a drug may be approved for marketing in the United States generally include:
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completion of preclinical laboratory tests and animal tests conducted in compliance with the FDA’s Good Laboratory
Practices;
the submission to the FDA of an investigational new drug application (IND) which must become effective before human
clinical trials commence in the United States;
approval by an IRB at each clinical trial site before each trial may be initiated;
obtaining informed consent from the participants in a clinical trial;
performance of adequate and well‑controlled human clinical trials to establish the safety and efficacy of the product for each
intended use and conducted in accordance with Good Clinical Practices (GCP);
the submission to the FDA of a new drug application (NDA) seeking marketing authorization for the drug product;
satisfactory completion of an FDA pre‑approval inspection of the facility or facilities at which the product is manufactured
to assess compliance with FDA’s current Good Manufacturing Practices (cGMPs) to assure that the facilities, methods and
controls are adequate to preserve the drug’s identity, strength, quality and purity;
satisfactory completion of a potential review by an FDA advisory committee, if applicable; and
FDA acceptance, review and approval of the NDA.
The investigational new drug process
An IND is a request for authorization from the FDA to administer an investigational drug to humans. Such authorization must be
obtained prior to administration to humans of any new drug or dosage form, including a new use of a previously approved drug, that is not
the subject of an approved NDA, except under limited circumstances.
To conduct a clinical study of an investigational new drug product, we are required to file an IND with the FDA. The IND
submission must include the general investigational plan and the protocol(s) for human studies, as well
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as results of animal studies or other human studies, as appropriate, analytical data and any available data or literature to support the use of
the investigational new drug. An IND must become effective before human clinical trials may begin. An IND will automatically become
effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to the proposed clinical
trials as outlined in the IND. If FDA raises questions, the IND may be placed on clinical hold and the IND sponsor and the FDA must
resolve any outstanding concerns or questions before clinical trials can begin. Accordingly, submission of an IND may or may not result
in the FDA allowing clinical trials to begin. A separate submission to an existing IND must also be made for each successive clinical trials
conducted during product development.
Clinical trials involve the administration of the investigational drug to patients under the supervision of qualified investigators in
accordance with GCPs. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, how the
study will be carried out, the parameters to be used in monitoring safety, and the efficacy criteria to be evaluated. A protocol for each
clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. Additionally, approval must also
be obtained from the IRB at each clinical site before the trials may be initiated. The IRB will consider, among other things, ethical factors,
the safety of human subjects and the possible liability of the institution. The IRB must also monitor the trial until completed. Either FDA
or an IRB may suspend or terminate an ongoing clinical trial at any time for a variety of reasons, including safety concerns or lack of
protection of patient rights. All participants in our clinical trials must provide their informed consent in writing. In addition, there are
requirements and industry guidelines that require the posting of ongoing clinical trials on public registries, and the disclosure of
designated clinical trial results. The IRB must also review and approve all clinical trial recruitment plans and materials.
The clinical investigation of an investigational drug product is generally divided into three phases. Although the phases are
usually conducted sequentially, they may overlap or be combined. The three phases of investigational new drug investigation are as
follows:
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Phase I. Phase I includes the initial introduction of an investigational new drug into humans. Phase I clinical trials are
typically closely monitored and may be conducted in patients with the target disease or condition or healthy volunteers.
These studies are designed to evaluate the safety, dosage tolerance, metabolism and pharmacologic actions of the
investigational drug product in humans, the side effects associated with increasing doses, and if possible, to gain early
evidence on effectiveness. During Phase I clinical trials, sufficient information about the investigational drug’s
pharmacokinetics and pharmacological effects may be obtained to permit the design of well‑controlled and scientifically
valid Phase II clinical trials. The total number of participants included in Phase I clinical trials varies, but is generally in the
range of 20 to 80.
Phase II. Phase II includes the controlled clinical trials conducted to preliminarily evaluate the effectiveness of the
investigational drug for a particular indication in patients with the disease or condition under study, to determine dosage
tolerance and optimal dosage, and to identify possible adverse side effects and safety risks associated with the drug product.
Phase II clinical trials are typically well‑controlled, closely monitored, and conducted in a limited patient population,
usually involving no more than several hundred participants.
Phase III. Phase III clinical trials are generally controlled clinical trials conducted in an expanded patient population
generally at multiple clinical trial sites. They are performed after preliminary evidence suggesting effectiveness of the drug
product has been obtained, and are intended to further evaluate dosage, clinical effectiveness and safety, to establish the
overall benefit‑risk profile of the investigational drug product, and to provide an adequate basis for product approval and
adequate information for product labeling. Phase III clinical trials usually involve several hundred to several thousand
participants. In most cases, the FDA requires two adequate and well‑controlled Phase III clinical trials to demonstrate the
efficacy of the drug. The FDA has the legal discretion to approve a drug on the basis of a single well‑controlled clinical trial
although this is less common and typically is subject to significant restrictions.
The FDA’s primary objectives in reviewing an IND are to assure the safety and rights of patients and to help assure that the
quality of the investigation will be adequate to permit an evaluation of the drug’s effectiveness and safety. The decision to terminate
development of an investigational drug product may be made by either the FDA, an IRB or
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ethics committee, or by the study sponsor for various reasons. Clinical trials may be overseen by an independent group of qualified
experts organized by the trial sponsor, known as a data safety monitoring board or committee. Data safety monitoring boards
provide review blinded study data at designated check points for safety risks. Suspension or termination of development during any phase
of clinical trials can occur if it is determined that the participants or patients are being exposed to an unacceptable risk to health. Other
reasons for suspension or termination may include changes in business objectives or the economic environment.
The NDA approval process
In order to obtain approval to market a drug product in the United States, a marketing application must be submitted to the FDA
that includes data to establish the safety and effectiveness of the new drug product for the proposed indication. The NDA includes all
relevant data available from pertinent preclinical and clinical trials, including negative or ambiguous results as well as positive findings,
together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling, among other things.
The NDA filing must also be accompanied by a substantial user fee, although there may be some instances in which the user fee is
waived.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the
agency’s threshold determination that it is sufficiently complete to permit substantive review. The FDA has substantial discretion in the
approval process and may refuse to accept any incomplete application. Incomplete applications must be resubmitted with any deficiencies
corrected and may be subject to an additional user fee.
Once the NDA has been accepted for filing, the FDA begins an in‑depth substantive review and sets a Prescription Drug User
Fee Act date that informs the applicant of the specific date by which the FDA intends to complete its review. The FDA has agreed to
certain performance goals in the review of NDAs through a two‑tiered classification system, Standard Review and Priority Review.
Priority Review designation is given to drugs that treat serious diseases or conditions that offer significant improvements over existing
therapies. The FDA endeavors to review applications subject to Standard Review within 10 to 12 months, whereas the FDA’s goal is to
review Priority Review applications within six to eight months, depending on whether the drug is a new molecular entity. The review
process is often extended by FDA requests for additional information or clarification. The FDA reviews NDAs to determine, among other
things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in
accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. Before approving an NDA, the FDA will
review the proposed product labeling and may request changes. FDA will also inspect the facilities at which the product is manufactured.
The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP
requirements and adequate to assure consistent production of the product within required specifications. In addition, before approving an
NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. If the FDA determines the application,
manufacturing process or manufacturing facilities are not acceptable, it will communicate the deficiencies to the applicant and often will
request additional testing or information, including new clinical trials. Even with the submission of additional information, the FDA
ultimately may decide that the application does not satisfy the regulatory standards for approval.
After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter
to indicate that the review cycle for an application is complete and that the application is not ready for approval. A complete response
letter generally outlines the deficiencies in the submission and may require substantial additional testing (including clinical testing), or
information, in order for the FDA to reconsider the application. Even with submission of this additional information, the FDA may
ultimately decide that an application does not satisfy the regulatory criteria for approval. If, or when, the deficiencies have been addressed
to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. An approval letter authorizes commercial
marketing of the drug with specific prescribing information for specific indications.
The clinical testing and drug approval process requires substantial time, effort and financial resources, and each may take several
years to complete. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations,
which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. Even if the FDA
approves a product, the agency may limit the approved indications for use, impose prominent warnings, or place other conditions on
approval that could restrict the commercial application
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of the products, such as special risk management measures through a Risk Evaluation and Mitigation Strategy. After approval, some types
of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to
further testing requirements and FDA review and pre-approval.
Section 505 of the FDCA describes three types of new drug applications: (1) an application that contains full reports of
investigations of safety and effectiveness (section 505(b)(1)); (2) an application that contains full reports of investigations of safety and
effectiveness but where at least some of the information required for approval comes from studies not conducted by or for the applicant
and for which the applicant has not obtained a right of reference (section 505(b)(2)); and (3) an application that contains information to
show that the proposed product has the same active ingredient, dosage form, strength, route of administration, labeling, quality,
performance characteristics, and intended use, among other things, to a previously approved product (section 505(j)).
Our iDose implant may be eligible for the Section 505(b)(2) application pathway if and when we are prepared to submit an
application for marketing to the FDA. Section 505(b)(2) expressly permits the FDA to rely, in approving a new drug application, on data
not developed by the applicant. Thus, if a 505(b)(2) applicant can establish that reliance on the FDA’s previous findings of safety and
effectiveness is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new product.
We are pursuing a Section 505(b)(2) NDA regulatory strategy for our iDose implant, which we expect will allow us to rely in our NDA
filing on certain nonclinical and clinical safety findings made by the FDA in previous approvals. For changes to a previously approved
drug product, an application may rely on the FDA’s finding of safety and effectiveness of the previously approved drug, coupled with the
information needed to support the change from the approved drug product. The additional information could be new studies conducted by
the applicant or published data. The FDA may approve the new product candidate for all, or some, of the label indications for which the
reference drug has been approved, as well as for any new indication sought by the 505(b)(2) applicant.
The filing or approval of a Section 505(b)(2) application may be delayed due to patent or exclusivity protections covering an
approved product. Section 505(b)(2) applications must include patent certifications and must provide notice of certain patent certifications
to the NDA holder and patent owner. A Section 505(b)(2) application may be granted three years of Hatch-Waxman data exclusivity if
one or more of the clinical investigations, other than bioavailability/bioequivalence studies, was essential to approval of the application
and was conducted or sponsored by the applicant. Such exclusivity would cover only the new condition of use that was supported by the
clinical trials that were essential to approval.
Circumstances could change that may cause a Section 505(b)(2) application for our product to no longer be an appropriate
pathway. For example, if an equivalent drug product were approved before our application is submitted, the applicable pathway for our
drug product might be an Abbreviated New Drug Application (ANDA). An ANDA seeks approval of a drug product that has the same
active ingredient(s), dosage form, strength, route of administration, and conditions of use (labeling) as a so‑called “reference listed drug”
approved under an NDA with full supporting data to establish safety and effectiveness. Limited exceptions exist to this ANDA sameness
requirement, including certain limited variations approved by the FDA through a special petition process. An ANDA must contain
certifications relating to patents for the reference listed drug. An ANDA also generally contains limited clinical data to demonstrate that
the product covered by the ANDA is absorbed in the body at the same rate and to the same extent as the reference listed drug, which is
known as bioequivalence. In addition, the ANDA must contain information regarding the manufacturing processes and facilities that will
be used to ensure product quality, and must contain certifications to patents listed with the FDA for the reference listed drug.
Post‑approval regulation
After regulatory approval of a drug or combination drug/device product is obtained under an NDA, we are required to comply
with pervasive and continuing regulation by the FDA, including, among other things, requirements relating to drug listing and registration,
recordkeeping, periodic reporting, product sampling and distribution, advertising, marketing and promotion and reporting of adverse
experiences with the product. For example, as a condition of approval of an NDA, the FDA may require post‑marketing testing, including
Phase IV clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization. In
addition, the holder of an approved NDA would be required to report, among other things, certain adverse events and production problems
to the FDA, and
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to provide updated safety and efficacy information to the FDA. Drugs may be marketed only for the approved indications and in
accordance with the provisions of the approved label, and even if the FDA approves a product, it may limit the approved indications for
use for the product or impose other conditions, including labeling or distribution restrictions or other risk‑management mechanisms. For a
combination drug/device product, such as our iDose implant, certain device reporting requirements might also apply, such as MDR
requirements and reports of corrections and removal.
Quality control and manufacturing procedures must continue to conform to cGMP after approval. In addition, medical device
quality system regulations would apply to the device component of a combination drug/device product, either all the QSR regulations or
particular QSR regulations supplementing the drug cGMP in accordance with FDA regulations in 21 C.F.R. Part 4. The FDA periodically
inspects manufacturing facilities to assess compliance with cGMP and QSR. In addition, changes to the manufacturing process are strictly
regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations
also require investigation and correction of any deviations from cGMP or QSR and impose reporting and documentation requirements
upon us and any third‑party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money
and effort in the area of production and quality control to maintain compliance with cGMP, QSR, and other aspects of regulatory
compliance.
After approval, most changes to the approved product, such as adding new indications or other labeling claims, as well as some
manufacturing and supplier changes, are subject to prior FDA review and approval of a new NDA or an NDA supplement. An NDA
supplement for a new indication typically requires clinical data and the FDA uses similar procedures in reviewing NDA supplements as it
does in reviewing NDAs. The manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment
user fees, as well as new application fees for certain supplemental applications.
Discovery of previously unknown problems with a product or the failure to comply with applicable requirements may result in
restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the product from the market or
other voluntary, FDA‑initiated or judicial action that could delay or prohibit further marketing. Other potential consequences include,
among other things:
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fines, warning letters or holds on post‑approval clinical trials;
refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of
product license approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the
addition of new warnings and contraindications, and also may require the implementation of other risk management measures and/or
additional clinical studies. In addition, the FDA strictly regulates marketing, labeling, advertising and promotion of products that are
placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved
label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off‑label uses, and a company
that is found to have improperly promoted off‑label uses may be subject to significant liability.
New government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may
change, which could delay or prevent regulatory approval of our products under development and/or could significantly impact the
requirements imposed on us after approval.
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Available special regulatory procedures
Formal meetings
In the United States, there are different types of official meetings that may occur between us and the FDA. Each meeting type is
subject to different procedures. Conclusions and agreements from each of these meetings are captured in the official final meeting minutes
issued by the FDA.
Advice from the FDA is typically provided based on questions concerning quality (chemistry, manufacturing and controls
testing), pre‑clinical testing and clinical studies, and pharmacovigilance plans and risk‑ management programs. Advice is not legally
binding with regard to any future marketing application for the drug product.
To obtain binding commitments from the FDA on the design and size of clinical trials intended to form the primary basis of an
effectiveness claim for a new drug product, Special Protocol Assessment (SPA) procedures are available. Where the FDA agrees to an
SPA, the agreement may not be changed by either the sponsor or the FDA except if the sponsor and the FDA agree to a change, or a senior
FDA official determines that a substantial scientific issue essential to determining the safety or effectiveness of the product was identified
after the testing began. An SPA is not binding if new circumstances arise, and there is no guarantee that a study will ultimately be
adequate to support an approval even if the study is conducted according to the terms of an SPA.
Pediatric development
In the United States, the FDCA provides for an additional six months of marketing exclusivity for a drug if reports are filed of
investigations studying the use of the drug product in a pediatric population in response to a written request from the FDA.
In addition, NDAs must contain data (or a proposal for post‑marketing activity) to assess the safety and effectiveness of an
investigational drug product for the claimed indications in all relevant pediatric populations in order to support dosing and administration
for each pediatric subpopulation for which the drug is safe and effective. The FDA may, on its own initiative or at the request of the
applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults or full or partial
waivers if certain criteria are met. Discussions about pediatric development plans can be discussed with the FDA at any time, but usually
occur any time between the end‑of‑Phase II meeting and submission of the NDA.
Other healthcare laws
We are also subject to healthcare regulation and enforcement by the federal government and the states and foreign governments
in which we conduct our business. These laws include, without limitation, state and federal anti‑kickback, fraud and abuse, false claims,
and physician sunshine laws and regulations.
The federal Anti‑Kickback Statute prohibits, among other things, the offer, receipt, or payment of remuneration in exchange for
or to induce the use of products or services that are paid for in whole or part by Medicare, Medicaid or other federal healthcare programs.
Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced price items
and services. The government has enforced the Anti‑Kickback Statute to reach large settlements with healthcare companies based on
sham research or consulting and other financial arrangements with physicians. Further, a person or entity does not need to have actual
knowledge of the statute or specific intent to violate it. In addition, 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 federal False
Claims Act (FCA). Many states have similar laws that apply to their state healthcare programs as well as private payors. Violations of the
Anti‑Kickback Statute can result in exclusion from federal healthcare programs and substantial civil and criminal penalties.
The FCA imposes civil liability on persons who, among other things, present or cause to be presented false or fraudulent claims
for payment by a federal healthcare program. The FCA has been used to prosecute persons submitting claims for payment that are
inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. Manufacturers can
be held liable under these laws if they are deemed to “cause” the submission
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of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product
off‑label. Actions under the FCA may be brought by the Attorney General or as a qui tam action by a private individual in the name of the
government. Violations of the FCA can result in significant monetary penalties and treble damages. The federal government is using the
FCA, and the accompanying threat of significant liability, in its investigation and prosecution of device companies throughout the country,
for example, in connection with the promotion of products for unapproved uses and other improper sales and marketing practices. The
government has obtained multi‑million and multi‑billion dollar settlements under the FCA. In addition, companies have been forced to
implement extensive corrective action plans, and have often become subject to consent decrees or corporate integrity agreements, severely
restricting the manner in which they conduct their business.
In addition, there has been a trend of increased federal and state regulation of payments made to physicians and other healthcare
providers. The Affordable Care Act (ACA), among other things, imposed new annual reporting requirements on certain device
manufacturers for payments made by them to physicians and teaching hospitals, as well as certain ownership and investment interests held
by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties of up to
$1 million. Certain states also mandate implementation of commercial compliance programs and/or require the tracking and reporting of
gifts, compensation and other remuneration to physicians.
The shifting commercial compliance environment and the need to build and maintain robust systems to comply with different
compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may violate one or
more of the requirements. If our operations are found to be in violation of any of such laws or any other governmental regulations that
apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or
restructuring of our operations, exclusion from participation in federal and state healthcare programs and imprisonment, any of which
could adversely affect our ability to operate our business and our financial results.
Regulation outside the United States
In addition to regulations in the United States, we are subject to a variety of regulations in other jurisdictions governing clinical
trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain
authorization before commencing clinical trials or obtain marketing authorization or approval of a product under the comparable
regulatory authorities of countries outside the United States before we can commence clinical trials or marketing of the product in those
countries. The approval process varies from country to country and the time may be longer or shorter than that required for FDA approval.
The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to
country.
In the European Economic Area (EEA) our iStent product is regulated as a medical device. Where a medical device is intended
to administer a drug, the medical device will ordinarily be regulated as a medical device, while the drug will be separately regulated as a
medicinal product. However, when a drug‑device combination product, such as iDose , is placed on the market as a single integral product
that is intended exclusively for use in the given combination and that is not reusable, the entire product will be regulated as a medicinal
product, although the device component will still need to comply with the so‑called essential requirements applicable to medical devices.
Regulation of medical devices in the EEA
There is currently no premarket government review of medical devices in the EEA unless the device also contains a medicine or
a blood derivative. However, all medical devices placed on the market in the EEA must meet the relevant essential requirements laid
down in Annex I to Directive 93/42/EEC concerning medical devices, or the Medical Devices Directive, including requirements relating
to the safety and performance of the device. The European Commission has adopted various standards applicable to medical devices.
These include standards governing common requirements, such as sterilization and safety of medical electrical equipment, and product
standards for certain types of medical devices. While not mandatory, compliance with these standards is viewed as the easiest way to
satisfy the essential requirements as a practical matter. Compliance with a standard developed to implement an essential requirement also
creates a rebuttable presumption that the device satisfies that essential requirement.
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To demonstrate compliance with the essential requirements, medical device manufacturers must undergo a conformity
assessment procedure, which varies according to the type of medical device and its classification. Except for low‑risk medical devices,
where the manufacturer can self‑declare the conformity of its products with the essential requirements, a conformity assessment procedure
requires the intervention of a notified body. Notified bodies are often private entities and are authorized or licensed to perform such
assessments by government authorities. The notified body would typically audit and examine products’ technical dossiers and the
manufacturers’ quality system. If satisfied that the relevant product conforms to the relevant essential requirements, the notified body
issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer may
then apply the CE mark to the device, which allows the device to be placed on the market throughout the EEA. Once the product has been
placed on the market in the EEA, the manufacturer must comply with requirements for reporting incidents and field safety corrective
actions associated with the medical device.
In order to demonstrate safety and efficacy for their medical devices, manufacturers must conduct clinical investigations in
accordance with the requirements of Annex X to the Medical Devices Directive and applicable European and ISO standards, as
implemented or adopted in the EEA member states. Clinical trials for medical devices usually require the approval of an ethics review
board and approval by or notification to the national regulatory authorities. Both regulators and ethics committees also require the
submission of adverse event reports during a study and may request a copy of the final study report.
In September 2012, the European Commission adopted a Proposal for a Regulation of the European Parliament and of the
Council on medical devices that will, if adopted, replace the existing Medical Devices Directive. After protracted negotiations, it is
expected that the new Regulation would be adopted sometime in 2017 and become applicable three years thereafter. In its current form it
would, among other things, impose additional reporting requirements on manufacturers of high risk medical devices, impose an obligation
on manufacturers to appoint an individual responsible for regulatory compliance, and provide for stricter clinical evidence requirements.
Regulation of medicinal products in the EEA
Medicinal Products require a marketing authorization before they may be placed on the market in the EEA. There are various
application procedures available, depending on the type of product involved. The centralized procedure gives rise to marketing
authorizations that are valid throughout the EEA. Applicants file marketing authorization applications with the European Medicines
Agency (EMA)where they are reviewed by a relevant scientific committee, in most cases the Committee for Medicinal Products for
Human Use (CHMP). The EMA forwards CHMP opinions to the European Commission, which uses them as the basis for deciding
whether to grant a marketing authorization. The centralized procedure is compulsory for medicinal products that (1) are derived from
specified biotechnology processes, (2) contain a new active substance (not yet approved on November 20, 2005) indicated for the
treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders, viral diseases or autoimmune diseases and
other immune dysfunctions, (3) are orphan medicinal products or (4) are advanced therapy medicinal products (such as gene therapy,
somatic cell therapy and tissue engineered products). For medicines that do not fall within these categories, an applicant may voluntarily
submit an application for a centralized marketing authorization to the EMA, as long as the CHMP agrees that (i) the medicine concerned
contains a new active substance (not yet approved on November 20, 2005), (ii) the medicine is a significant therapeutic, scientific, or
technical innovation, or (iii) if its authorization under the centralized procedure would be in the interest of public health. For those
medicinal products for which the centralized procedure is not available, the applicant must submit marketing authorization applications to
the national medicines regulators through one of three procedures: (1) a national procedure, which results in a marketing authorization in a
single EEA member state; (2) the decentralized procedure, in which applications are submitted simultaneously in two or more EEA
member states; and (3) the mutual recognition procedure, which must be used if the product has already been authorized in at least one
other EEA member state, and in which the EEA member states are required to grant an authorization recognizing the existing
authorization in the other EEA member state, unless they identify a serious risk to public health.
Marketing authorization applications must usually include the results of clinical trials. Clinical trials of medicinal products in the
EEA must be conducted in accordance with EEA and national regulations and the International Conference on Harmonization guidelines
on GCP. Prior to commencing a clinical trial in a particular EEA member state,
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the sponsor must obtain a clinical trial authorization from the competent authority and a positive opinion from an independent ethics
committee.
There is scope for applicants to omit some or all of the pre‑clinical and clinical trial data if the product falls within the definition
of a generic of a reference product for which regulatory data exclusivity protection has expired. If a marketing authorization is granted for
a medicinal product containing a new active substance, that product benefits from eight years of data exclusivity, during which generic
marketing authorization applications referring to the data of that product may not be accepted by the regulatory authorities, and a further
two years of market exclusivity, during which such generic products may not be placed on the market. The two‑year period may be
extended to three years if during the first eight years a new therapeutic indication with significant clinical benefit over existing therapies is
approved.
For generic applications, the marketing authorization underpinning the reference medicinal product must be based on a complete
dossier; a generic application referring to a generic dossier is not possible. Generic applicants may need to submit additional pre‑clinical
or clinical data if their product does not fall within the definition of a generic ( i.e. , where there are differences in active substances,
therapeutic indications, strength, pharmaceutical form or route of administration, in relation to the reference medicinal product, or where
bioequivalence cannot be demonstrated through standard bioavailability studies). In these cases, bridging data is required to demonstrate
that the differences do not affect the product’s relative safety and effectiveness inappropriately.
Pre‑clinical and clinical data can be omitted and replaced with references to scientific literature if the product has been in
well‑established medicinal use in the European Union for at least 10 years. An existing marketing authorization holder may also give
consent for a subsequent applicant to reference the pharmaceutical, pre‑clinical and clinical data on file for the original product.
In the EEA, companies developing a new medicinal product must agree a Paediatric Investigation Plan (PIP) with the EMA and
must conduct pediatric clinical trials in accordance with that PIP, unless a waiver applies, e.g. , because the relevant disease or condition
occurs only in adults. The marketing authorization application for the product must include the results of pediatric clinical trials conducted
in accordance with the PIP, unless a waiver applies, or a deferral has been granted, in which case the pediatric clinical trials must be
completed at a later date.
Medicinal products may only be manufactured in the EEA, or imported into the EEA from another country, by the holder of a
manufacturing authorization from the competent national authority. The product must have been manufactured in accordance with EU
standards of GMP before it can be released onto the EEA market. Manufacturing facilities are subject to periodic inspections by the
competent authorities for compliance with GMP.
The holders of marketing authorizations in the EEA are subject to various post‑approval controls and requirements. These
include the establishment of a pharmacovigilance system and reporting of adverse reactions. The regulatory authorities may impose
specific obligations as a condition of the marketing authorization, such as additional safety monitoring, or the conduct of additional
clinical trials or post‑authorization safety studies. There are also specific rules governing advertising and promotion of medicinal
products, including a requirement that all advertising and promotional activities for the product be consistent with the approved summary
of product characteristics, and a prohibition on direct‑to‑consumer advertising of prescription medicines.
Other
Our operations and many of the products we manufacture or sell are subject to extensive regulation by numerous other
governmental agencies, both within and outside the United States. In the United States, apart from the agencies discussed above, our
facilities, operations, employees, products (their manufacture, sale, import and export) and services are regulated by Environmental
Protection Agency, the Occupational Health & Safety Administration, the Department of Labor, Customs and Border Protection, the
Department of Commerce, the Department of Treasury, the Department of Justice and others. Furthermore, because we supply products
and services to healthcare providers that are reimbursed by federally funded programs such as Medicare, our activities are also subject to
regulation by the Centers for Medicare and Medicaid Services and enforcement by the Office of the Inspector General within the
Department of Health and Human Services. We are also required to report payments and other transfers of value to physicians and
teaching hospitals, among others. State agencies also regulate our facilities, operations, employees, products and services
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within their respective states. Government agencies outside the United States also regulate public health, product registration,
manufacturing, environmental conditions, labor, exports, imports and other aspects of our global operations.
Employees
As of December 31, 2016, we had 264 employees, with 138 in sales and marketing, 88 in research and development, clinical,
regulatory and quality assurance, 22 in general and administrative, and 16 in manufacturing and distribution. We often supplement our
research and development and clinical, regulatory and quality assurance departments with independent consultants on a project basis. We
believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. None of our
employees is represented by a labor union. We consider our relationship with our employees to be good.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports
filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available on our web site at www.glaukos.com, free of
charge, as soon as reasonably practicable after the electronic filing of these reports with, or furnishing of these reports to, the SEC. Any
materials we file with the Securities and Exchange Commission (SEC) are available at the SEC’s Public Reference Room at 100 F Street,
NE, Washington, DC 20549. Additional information about the operation of the Public Reference Room can also be obtained by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC, including us.
Item 1A. R isk Factors
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
While we were profitable in the most recently completed fiscal year, we have incurred significant losses since inception and there can
be no guarantee that we will be able to sustain profitability.
While we were profitable in our most recently completed fiscal year, since the Company’s inception in July 1998, we have
incurred significant operating losses. For the fiscal year ended December 31, 2016, we had net income of $4.5 million and for the fiscal
year ended December 31, 2015 we had a net loss of $38.3 million. As of December 31, 2016, we had an accumulated deficit of
approximately $192.1 million. Losses have resulted principally from costs incurred in our clinical trial, research and development
programs and from our general and administrative expenses. Additionally, in 2015, we recorded a charge of $25.7 million incurred with
the deconsolidation of the non‑glaucoma related assets of DOSE and elimination of the noncontrolling interest. To date, we have financed
our operations primarily through the sale of equity securities, debt financing, and cash generated from net sales. We have devoted
substantially all of our resources to the research and development of our products, the commercial launch of the iStent , 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 sustain profitability is highly uncertain, especially given our limited commercial history selling our products globally and an evolving
competitive landscape, which makes forecasting our sales more difficult. We will need to generate significant additional net sales to
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maintain profitability. We cannot be sure that we will remain profitable for any substantial period of time. Our failure to sustain
profitability could have an adverse effect on the value of our common stock.
Substantially all of our net sales are generated from sales of the iStent, which has an evolving competitive landscape, and we are
completely dependent on its success. If competition or other factors slow the market acceptance of the iStent or our other products
under development, our business will suffer.
Our primary sales‑generating commercial product is 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 92% and 94% of our net sales for the years ended December
31 , 2016 and 2015, respectively. We expect to continue to derive a significant portion of our net sales from sales of the iStent 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 Inject, iStent Supra and iDose . Accordingly, our ability to generate net sales is highly dependent
on our ability to market and sell the iStent .
We developed MIGS to provide an alternative to the traditional glaucoma treatment and management paradigm. The iStent is our
first MIGS device and we are developing other products to treat glaucoma. 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 available 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 of its CyPass suprachoroidal implant, a MIGS device, in August
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. With this approval, Alcon commenced a commercial launch of its competitive MIGS device, the
CyPass. In November 2016, Allergan plc (which acquired AqueSys, Inc., a MIGS competitor) obtained FDA approval of its Xen
Glaucoma Treatment System for use in the U.S., which 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. With this approval, Allergan has entered the MIGS space and commenced a
commercial launch of its Xen device. We are aware of several other companies, including Santen Pharmaceutical Co., Ltd. (which
recently acquired InnFocus, Inc., a MIGS competitor) and Ivantis Inc., that are conducting FDA‑approved investigational device
exemption (IDE) clinical trials or have filed for regulatory approval of MIGS devices. If these approved MIGS products or other products
that may be developed receive regulatory approval, we will have additional, new 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 products under development, which may reduce demand for our primary product, the iStent , as well as for our products
in development.
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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:
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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;
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the availability of 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.
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
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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 through direct sales organizations in 12
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:
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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;
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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.
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.
In September 2016, we relocated our corporate headquarters and a majority of our manufacturing operations to an approximately
37,700 square foot facility located in San Clemente, California pursuant to a lease that expires on December 31, 2021. Until this new
location receives all final regulatory approvals, a portion of our manufacturing operations relating primarily to products sold outside of the
United States will remain at our former Laguna Hills, California location, pursuant to a sublease of that space through the end of March
2017. Once we receive all final regulatory approvals, we will consolidate all of our manufacturing operations to the San Clemente
location. This new location serves as our primary manufacturing location where we manufacture, inspect, package, release and ship nearly
all of our final products. If this facility suffers a crippling event, or a force majeure event, this could materially impact our ability to
operate. Further, if we experience delays in the full relocation of our manufacturing facilities or fail to obtain the final regulatory
approvals related thereto, we may encounter operational interruptions or incur additional costs that would adversely affect our business,
results of operations and financial condition. 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. Our move to
our new corporate headquarters and further planned expansion 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:
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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
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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 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. Other than agreements with key suppliers, we generally do not enter into long‑term supply
agreements with our suppliers, and we order most components 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 implant and one
pharmaceutical supplier for the heparin used in the iStent’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 in the past been, and we may in the future 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 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 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 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, seek
alternative components or technologies and modify our products to incorporate alternative components 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 components, 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 that comply with regulatory requirements 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.
Accordingly, if we fail to obtain sufficient quantities of high‑quality components 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, force majeure event or disruption at this
facility (including delays in the full relocation of our operations from our former location to our new corporate headquarters) 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 was recently relocated to San Clemente, California. We continue to maintain some manufacturing
operations, relating primarily to products sold outside of the United States, at our former Laguna Hills, California facility, pursuant to a
sublease of that space through the end of March 2017. Until the new location receives
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all final regulatory approvals, a portion of our manufacturing operations will remain at our former Laguna Hills, California location.
Following the full relocation of all of our manufacturing operations to San Clemente, California, we will operate primarily in a single
location. Thus, substantially all of our operations will continue to be 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 will be held at a single location. Despite our efforts
to safeguard these facilities, including acquiring insurance, 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. 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. Further, if we experience delays in the full relocation of our
manufacturing facilities or fail to obtain the final regulatory approvals related thereto, we may encounter operational interruptions or incur
additional costs that could adversely affect our ability to operate and produce saleable products and could shut down our manufacturing
capacity for an extended period.
Failure to secure and maintain adequate coverage or reimbursement by third‑‑party payors for procedures using the iStent 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 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 any applicable deductibles or co‑payments. Access to adequate coverage and reimbursement for the procedures using the
iStent (and our other 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 , the additional cost associated with the use of our iStent device 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. Some of our target customers may be
unwilling to adopt our iStent 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
Centers for Medicare & Medicaid Services (CMS), the federal agency responsible for administering the
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Medicare program. CMS relies on a network of Medicare Administrative Contractors (MACs), which process nearly 4.9 million Medicare
claims each day and disburse more than $365 billion annually, 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 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 in the reimbursement amount for the physician professional services could negatively impact further 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, or 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, 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.
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 . 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 , 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 . 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 codes for the MIGS procedures
associated with the insertion of our iStent products, there is no guarantee that these billing codes or the payment amounts associated with
such codes will not change in the future. Category III codes expire five years after the date they become effective. 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.
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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.
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 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 of its CyPass suprachoroidal implant, a MIGS device, in August 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. With this approval, Alcon commenced a commercial launch of its competitive MIGS device, the CyPass.
In November 2016, Allergan plc (which acquired AqueSys, Inc., a MIGS competitor) obtained FDA approval of its Xen Glaucoma
Treatment System for use in the U.S., which 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. With this approval, Allergan has entered the MIGS space and commenced a
commercial launch of its Xen device. We are aware of several other companies, including Santen Pharmaceutical Co., Ltd. (which
recently acquired InnFocus, Inc., a MIGS competitor) and Ivantis Inc., that are conducting FDA‑approved investigational device
exemption (IDE) clinical trials or have filed for regulatory approval of MIGS devices. If these approved MIGS products or other products
that may be developed receive regulatory approval, we will have additional, new 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 products under development, which may reduce demand for our primary product, the iStent , as well as for our products
in development. Demand for the iStent 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., Abbott Medical Optics Inc., Allergan plc, STAAR Surgical
Company, Lumenis Ltd., NeoMedix,Inc. and Ellex Medical Lasers Limited. Alcon, Inc. and 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, 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:
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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;
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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
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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 multinational pharmaceutical company. And
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 competitors that have the
competitive advantages identified above.
The training required for surgeons to use the iStent 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 the iStent procedure. Surgeons could experience difficulty with the technique necessary to successfully insert the iStent ,
including, intraoperative gonioscopy, and not achieve the technical competency necessary to be qualified to insert our stents. 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 the iStent , 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 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 training program may nevertheless elect to perform iStent 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. As our MIGS competitors enter the market, physicians may conclude that the products offered by our MIGS
competitors have greater efficacy than our products, which could result in a decline in our sales.
Additionally, inferior patient outcomes, or patient injury, may result if untrained or unqualified ophthalmic surgeons elect to
perform iStent procedures. Although our sales representatives manage the training program for ophthalmic surgeons to become qualified
to insert the iStent 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 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 the iStent . This could result in lower penetration and utilization by ophthalmic
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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.
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 , 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 the iStent may experience volatility due to a number of factors, many of which are beyond our
control, including:
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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;
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;
deferrals of customer orders in anticipation of the introduction of new products or product enhancements by us;
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
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our ability to expand the geographic reach of our sales and marketing efforts.
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.
Our long‑‑term growth depends on our ability to develop and commercialize additional products using our iStent technologies. If we
are not able to commercialize products in development in a timely manner, our products may become obsolete over time, customers
may not buy our products and our net sales and profitability may decline.
Demand for our products may change in ways we may not anticipate due to:
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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 using our iStent technologies. Developing
additional products is expensive and time‑consuming, and could divert management’s attention away from expanding acceptance of the
iStent and harm our business. Even if we are successful in developing additional products, including those currently in development, the
success of our new product offerings, if any, will depend on several factors, including our ability to:
·
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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;
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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.
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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:
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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;
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 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 rapid growth will continue in the near term as the iStent continues to gain market acceptance. 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:
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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;
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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
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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.
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 first
FDA‑approved product, the iStent , we may nevertheless need to raise substantial additional capital in the future to:
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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 sales of our iStent products will be sufficient to fund our operations and satisfy our liquidity requirements for at least the
next 12 months from the date of issuance of our consolidated financial statements for the year ended December 31, 2016. However, our
future funding requirements will depend on many factors, including:
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the scope, rate of progress and cost of our clinical trials and other research and development activities;
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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.
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.
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. In addition, a variety of our
software systems are
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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, 2016, we had net operating loss carryforwards of approximately $136.8 million for U.S. federal income tax
purposes and approximately $104.1 million of net operating loss carryforwards for state income tax purposes. The federal net operating
loss carryforwards begin to expire in 2018 and $8.0 million of the state net operating loss carryforwards expired in 2016 and the
remainder will begin to expire in 2017. At December 31, 2016, we had federal and state research and development carryforwards of
approximately $5.9 million and $6.0 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 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, or 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
We and our suppliers are subject to extensive federal and state regulation, and if we fail to comply with applicable regulations, we
could suffer severe criminal or civil sanctions or be required to make significant changes to our operations that could adversely affect
our business, financial condition and operating results.
The iStent is classified as a medical device. 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 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 , 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 is
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.
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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 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:
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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;
serious and unexpected adverse device 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 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.
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:
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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;
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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
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 approval.
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.
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 Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation
Act, or PPACA, 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 PPACA
substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in the quality
of healthcare items and services and significantly impacts the medical device industry. Among other things, the PPACA:
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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 Protecting Americans from Tax
Hikes Act of 2015, or the PATH Act, is suspended from January 1, 2016 to December 31, 2017, and, absent further
legislative action, will be reinstated starting January 1, 2018;
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
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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 PPACA 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 2016 and will continue to do so in 2017. However, this impact will not continue in 2018 when the tax is automatically
reinstated, absent further legislation, as the iStent was subject to this excise tax prior to the moratorium and the other 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 will be introduced and passed by the Republican-controlled Congress repealing the PPACA in whole or in part and signed into
law by President Trump, consistent with statements made by him during his presidential campaign indicating his intention to do so within
a short time following his inauguration. 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 PPACA on our business model, prospects,
financial condition or results of operations.
We expect that additional state and federal healthcare reform measures will 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 September 2012, the European Commission published proposals for the revision of the EU regulatory framework for medical
devices. The proposal would replace the Medical Devices Directive and two related directives concerning active implantable medical
devices and in vitro diagnostic medical devices respectively with a new regulation concerning medical devices and another concerning in
vitro diagnostic medical devices. Unlike Directives that must be implemented into national laws, the regulations would be directly
applicable in all EEA Member States and so are intended to eliminate current national differences in regulation of medical devices.
In October 2013, the European Parliament approved a package of reforms to the European Commission’s proposals. Under the
revised proposals, only designated “special notified bodies” would be entitled to conduct conformity assessments of high‑risk devices.
These special notified bodies will need to notify the European Commission when they receive an application for a conformity assessment
for a new high‑risk device. The Commission will then forward the notification and the accompanying documents on the device to the
Medical Devices Coordination Group for an opinion. These new procedures may result in the re‑assessment of our existing medical
devices, or a longer or more burdensome assessment of our new products. We anticipate that further amendments to this proposal may be
agreed upon as a compromise among the various EU legislative bodies before the final regulation on medical devices is adopted, most
likely in 2017.
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
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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 iDose , our drug delivery implant, 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 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 obtainment of 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 involved 289 randomized patients. We conducted an extended follow-up post-approval study with 108 patients
from the pivotal study, and are currently conducting a post-approval study of 180 patients who will be implanted with the iStent in
combination with cataract surgery and then monitored for three years thereafter. 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 are currently conducting a Phase I clinical trial of iDose in Armenia and we commenced a Phase II clinical trial of iDose in the United
States in early 2016. Our ability to conduct additional iDose clinical trials depends on many factors, including the data obtained in the
Phase I and Phase II 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 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:
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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;
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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;
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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 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:
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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;
failure to demonstrate a benefit from using the product candidate; and
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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 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 through the 505(b)(2) regulatory pathway 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.
Failure to comply with post‑‑marketing regulatory 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 approval for the iStent is 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 the device. 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.
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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:
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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 for lowering intraocular pressure in mild‑to‑moderate open‑angle glaucoma patients undergoing cataract surgery. Our original
PMA approval for the iStent 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 continues to support efficacy and safety of the iStent 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 the
iStent . This type of differing data could have a detrimental effect on the market penetration and usage of the iStent by customers treating
mild‑to‑moderate open‑angle glaucoma and/or the risk/benefit profile of using the iStent 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 , 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
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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 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 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 classifications of recalls 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.
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.
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.
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) 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
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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 compliance with the QSR requirements, and with applicable
cGMPs for our iDose drug delivery implant, 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 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:
·
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·
·
·
·
·
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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 ISO. 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).
Failure to comply with the Federal Health Insurance Portability and Accountability Act of 1996, the Health Information Technology
for Economic and Clinical Health Act, and implementing regulations affecting the transmission, security and privacy of health
information could result in significant penalties.
Numerous federal and state laws and regulations, including the Federal Health Insurance Portability and Accountability Act of
1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, govern the collection,
dissemination, security, use and confidentiality of patient‑identifiable health information. HIPAA and the HITECH Act may require us to
comply with standards for the use and disclosure of health information within our company and with third parties. The Privacy Standards
and Security Standards under HIPAA establish a set of basic national privacy and security standards for the protection of individually
identifiable health information by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities,
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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, which was signed into law as part of the stimulus package in February 2009, 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 healthcare providers to develop and maintain policies and procedures with respect to protected health
information that is used or disclosed, including 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.
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 health information standards, whether implemented pursuant to HIPAA, the HITECH Act,
congressional action or otherwise, could have a significant effect on the manner in which we handle healthcare‑related 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 or the
HITECH Act 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 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 the HIPAA Privacy Standards 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. The laws that may affect our ability to
operate include, but are not limited to:
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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 third‑party 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
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to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal
government;
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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 PPACA, which require 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 PPACA, 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, PPACA 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.
Moreover, 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. 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 have
recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of
investigations, prosecutions, convictions and settlements in the
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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, disposal, 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, or 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 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 and iStent Inject products 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. We cannot assure you, however, that our petitions to the USPTO will be successful.
Dr. Hill was employed as an Associate Professor at the University of California, Irvine, or the University, during the period when these
patents and patent applications were developed. We engaged in discussions with the University to address whether it has any ownership
claim to these patents and patent applications as a result of
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Dr. Hill’s employment, and 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 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
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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.
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 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. Moreover, because patent applications can take 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. Additionally, our
competitors could later pursue additional patent protection related to their earlier patent disclosures, where such patent filings are prepared
with intent to cover our products. Third parties could also assert infringement or misappropriation claims against us with respect to our
products. Whether or not such claims are valid, we cannot be certain that we have not infringed the intellectual property rights of such
third parties
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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 Supra or iDose , 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.
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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. For example, Dr. Hill, one of our consultants, was also employed as an
Associate Professor at the University during the period when certain patents and patent applications to which Dr. Hill contributed 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 the patents and patent applications to which Dr. Hill contributed while he was both a consultant for us and a faculty
member at the University. Litigation may be necessary to defend against any other 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
We are incurring increased costs as a result of operating as a public company and our management is required to devote substantial
time to new compliance initiatives and corporate governance practices.
As a public company, we are incurring, and increasingly after we are no longer an “emerging growth company,” we will incur,
significant legal, accounting, administrative and other costs and expenses that we did not previously incur as a private company. We are
subject to the reporting requirements of the Exchange Act, which require, among other things, that we file with the SEC annual, quarterly
and current reports with respect to our business and financial condition. In addition, the Sarbanes‑Oxley Act of 2002 (Sarbanes‑Oxley
Act) and rules subsequently implemented by the SEC and the New York Stock Exchange (NYSE) impose numerous requirements on
public companies, including an annual assessment of internal control over financial reporting, establishment and maintenance of effective
disclosure and financial controls and corporate governance practices. Further, pursuant to the Dodd‑Frank Wall Street Reform and
Consumer Protection Act of 2010, the SEC has adopted additional rules and regulations in these areas, such as the attestation of the
effectiveness of our internal control over financial reporting by our independent registered public accounting firm and mandatory “say on
pay” voting requirements that will apply to us when we cease to be an emerging growth company. Stockholder activism, the current
political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations
and disclosure obligations, which may lead to additional compliance costs and may impact the manner in which we operate our business
in ways we cannot currently anticipate. Our management and other personnel need to devote a substantial amount of time to compliance
with these laws and regulations. These requirements have increased and will continue to increase our legal, accounting and financial
compliance costs and have made and will continue to make some activities more time consuming and costly. These rules and regulations
could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or
as executive officers.
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The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our
business or increase the prices of our products or services. We cannot predict or estimate the amount or timing of additional costs we may
incur to respond to these requirements.
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. And, in the future when we are no longer
an “emerging growth company,” Section 404(b) of the Sarbanes‑Oxley Act will require our independent registered public accounting firm
to attest to the effectiveness of our internal control over financial reporting.
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.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to such companies could make our
common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (JOBS Act), enacted in April
2012, and may remain an “emerging growth company” until the last day of the fiscal year following the fifth anniversary of the
completion of our IPO. However, if certain events occur prior to the end of such five‑year period, including if we become a “large
accelerated filer,” our annual gross revenues equals or exceeds $1.0 billion or we issue more than $1.0 billion of non‑convertible debt in
any three‑year period, we will cease to be an emerging growth company prior to the end of such five‑year period. For as long as we
remain an “emerging growth company,” we are permitted and intend to rely on exemptions from certain disclosure requirements that are
applicable to other public companies that are not “emerging growth companies.” These exemptions include:
·
·
·
·
being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim
financial statements, with correspondingly reduced “Management’s discussion and analysis of financial condition and
results of operations” disclosure;
not being required to comply with the auditor attestation requirements in the assessment of our internal control over
financial reporting;
reduced disclosure obligations regarding executive compensation; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder
approval of any golden parachute payments not previously approved.
If some investors find our common stock less attractive as a result of our decision to rely on these exemptions, there may be a
less active trading market for our common stock and our stock price may be reduced or become more volatile. In addition, the JOBS Act
provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised
accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected
not to avail ourselves of this exception and therefore will be subject to the same new or revised accounting standards as other public
companies that are not emerging growth companies.
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Risks Related to our Common Stock and Ownership of Our Common Stock
Our common stock has only been trading publicly since June 25, 2015, and we expect that the price of our common stock will fluctuate
substantially.
Before our IPO, there was no public market for our common stock. Although our common stock began trading on the NYSE in
June 2015, an active public trading market may not be sustained. The market price for our common stock will be affected by a number of
factors, including:
·
·
·
·
·
·
·
·
·
·
·
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;
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.
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We could be subject to securities class action litigation.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often
been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of
management’s attention and resources.
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.
Two members of our board of directors are directors of 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
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·
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2016, we leased or owned approximately 50,000 square feet of office and operations space in the U.S. This
space includes our corporate headquarters and production facilities in San Clemente, California and additional office and production space
in Laguna Hills, California. We also have smaller administrative offices and sales offices in the United States, Germany, Australia,
Canada, Brazil, Japan and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
Neither we nor any of our subsidiaries is a party to, and non of their respective property is the subject of, any material legal
proceeding, although we are from time to time party to legal proceedings that arise in the orginary course of our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our common stock began trading on the NYSE under the symbol “GKOS” on June 25, 2015. Prior to that date, there was no
public market for our common stock. Our initial public offering was priced at $18.00 per share on June 25, 2015. The table sets forth, for
the periods indicated below, the high and low intra‑day sales prices per share of our common stock as reported on the NYSE since
June 25, 2015.
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
Second Quarter
Third Quarter
Fourth Quarter
High
Low
25.97
30.01
39.82
39.02
High
31.95
33.92
27.64
$
$
$
$
$
$
$
14.25
16.26
28.26
28.72
Low
27.39
21.59
18.53
$
$
$
$
$
$
$
As of March 13, 2017, we had 34 holders of record of our common stock. The actual number of stockholders is greater than this
number of record holders, and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and
other nominees. The number of record holders also does not include stockholders whose shares may be held in trust by other entities.
Stock Performance Graph
The following performance graph shows the cumulative total stockholder return of an investment of $100 at the close of market
on June 25, 2015 (the first day of trading of our common stock on the NYSE) in (i) our common stock, (ii) the S&P Small Cap 600 index
and (iii) the S&P Small Cap 600 Healthcare index. The graph assumes that all
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dividends were reinvested. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
GKOS
S&P Small Cap 600 index
S&P Small Cap 600 Healthcare index
6/25/2015 12/31/2015 12/31/2016
109.87
$
116.47
$
100.89
$
100.00 $
100.00 $
100.00 $
79.08 $
92.03 $
98.73 $
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the
liabilities under that section and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of
1933, as amended, or the Exchange Act.
Dividend Policy
We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will
retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash
dividends in the foreseeable future. In addition, our ability to pay dividends may be restricted by the terms of any future credit agreement
or any future debt or preferred equity securities of us or of our subsidiaries Payment of future cash dividends, if any, will be at the
discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current
and anticipated cash needs, the requirements of then existing debt instruments and other factors our board of directors may deem relevant.
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ITEM 6. SELECTED FINANCIAL DAT A
The selected consolidated financial information set forth below for each of the years ended December 31, 2016, 2015, 2014 and
2013 has been derived from our audited consolidated financial statements. The information below should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial
statements and notes thereto included in Items 7 and 8, respectively, of this Annual Report on Form 10-K.
(amounts in thousands, except per share amounts)
Statements of Operations Data:
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Income (loss) from operations
Loss on deconsolidation of DOSE
Total other income (expense), net
Provision for income taxes
Net income (loss)
Net loss attributable to noncontrolling interest
Net income (loss) attributable to Glaukos Corporation
Basic net income (loss) per share attributable to Glaukos Corporation
stockholders
Diluted net income (loss) per share attributable to Glaukos Corporation
stockholders
Weighted average shares used to compute basic net income (loss) per share
attributable to Glaukos Corporation stockholders
Weighted average shares used to compute diluted net income (loss) per
share attributable to Glaukos Corporation stockholders
(amounts in thousands)
Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Net working capital (deficit)
Total assets
Total liabilities
Convertible preferred stock
Additional paid in capital
Total stockholders’ equity (deficit)
Noncontrolling interest
Total equity (deficit)
66
2016
2015
Year ended December 31,
2013
2014
$
114,397 $
16,177
98,220
71,700 $
12,988
58,712
45,587 $
11,418
34,169
20,946
2,535
18,411
$
$
$
$
$
64,756
29,223
93,979
4,241
—
324
43
4,522 $
—
4,522 $
43,961
25,047
69,008
(10,296)
(25,685)
(2,307)
33
(38,321) $
(1,080)
(37,241) $
28,135
19,205
47,340
(13,171)
—
(868)
18
(14,057) $
(1,931)
(12,126) $
0.14 $
(2.13) $
(5.29) $
0.12 $
(2.13) $
(5.29) $
32,928
36,459
17,474
2,294
17,474
2,294
17,098
15,511
32,609
(14,198)
—
(23)
6
(14,227)
(1,588)
(12,639)
(6.21)
(6.21)
2,036
2,036
2016
2015
As of December 31,
2013
2014
6,494 $
89,268
103,085
134,371
17,097
—
308,815
117,274
—
117,274
21,572
69,552
83,778
116,661
21,470
—
291,853
95,191
—
95,191
2,304 $
—
(9,633)
26,021
29,546
157,379
8,155
(151,299)
(9,605)
(160,904)
6,728
—
6,487
30,877
23,709
156,210
6,073
(141,298)
(7,744)
(149,042)
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ITEM 7. 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 together with
“Selected financial data” and our audited consolidated financial statements and related notes included in Items 6 and 8, respectively, of
this Annual Report on Form 10-K. This discussion and analysis and other parts of this Annual Report on Form 10-K contain forward
looking statements that reflect our current plans, expectations, estimates and beliefs that involve risks, uncertainties and assumptions,
such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected
events may differ materially from those discussed in these forward looking statements. You should carefully read Item 1A - “Risk
Factors” included in this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results
to differ materially from our forward looking statements. Please also see the section entitled “Special Note Regarding Forward Looking
Statements and Industry Data.”
Overview
We are an ophthalmic medical technology company focused on the development and commercialization of products and
procedures 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 paradigm. We launched the iStent , our first
MIGS device, in the United States in July 2012 and we are developing additional products designed to treat glaucoma.
The iStent was the first commercially available MIGS treatment solution. FDA‑approved for insertion in combination with
cataract surgery, the iStent procedure is currently reimbursed by Medicare and a majority of commercial payors.
We are developing three additional pipeline products: the iStent Inject , the iStent Supra and iDose . The iStent Inject includes
two stents pre‑loaded in an auto‑injection inserter. We are developing two versions of this product: the first is currently being studied for
lowering intraocular pressure in conjunction with cataract surgery in a U.S. investigational device exemption (IDE) pivotal trial; and the
second is currently being studied in an initial U.S. IDE study as a standalone treatment for lowering intraocular pressure. The iStent Supra
is designed to access an alternative drainage space within the eye and is now in a U.S. pivotal IDE trial. iDose is a drug delivery system
that is designed to be implanted in the eye to continuously deliver therapeutic levels of medication for extended periods of time to lower
intraocular pressure in glaucoma patients. A U.S. investigational new drug (IND) Phase II study of our Travoprost Intraocular Implant
using the iDose delivery system is currently underway.
Prior to 2016, we had never been profitable and had incurred operating losses in each year since our inception. Our net sales
increased to $114.4 million in 2016 from $71.7 million in 2015 and $45.6 million in 2014. Our net income was $4.5 million for the year
ended December 31, 2016 and net losses were $38.3 million and $14.1 million for the years ended December 31, 2015 and 2014,
respectively. As of December 31, 2016, we had an accumulated deficit of $192.1 million.
We have made and expect to continue to make significant investments in our global sales force, marketing programs and clinical
studies. Costs for FDA‑approved IDE studies in our industry are expensive as are the costs to develop new products, 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, there can be no assurance that we will continue to be profitable.
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Components of results of operations
Net sales
We 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. We recognize net sales when goods are shipped, title and risk of loss
transfer to our customers, persuasive evidence of an arrangement exists and collectability is reasonably assured.
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 eleven 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. Additionally, we expect our net sales in 2017 to
benefit from higher average selling prices to ambulatory surgery centers (ASCs) in the United States as a result of an increase in
reimbursement payments from Medicare to ASCs for the iStent procedure effective January 1, 2017.
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 primarily at our headquarters in San Clemente, California, with some manufacturing activities remaining at our Laguna Hills,
California location, 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 in November 2013. The amortization expense was $3.5 million for each of the years ended
December 31, 2016, 2015 and 2014 and is estimated to be $3.5 million in 2017 and $3.0 million in 2018.
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 University in connection with our December 2014 agreement. This obligation will expire upon the expiration of the last to expire of
the patent rights that are the subject of the December 2014 agreement, which is currently expected to be in 2022. Under the PATH Act,
the 2.3% federal medical device excise tax on U.S. sales of medical devices manufactured by us has been suspended from January 1, 2016
to December 31, 2017, and, absent further legislative action, will be reinstated starting January 1, 2018. The medical device excise tax is
included in our cost of sales in 2015 and 2014.
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 our agreement with the University. We also expect our gross
margin to be favorably impacted in 2017 by the PATH Act moratorium for 2017 on the medical device excise tax.
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Selling, general and administrative
Our selling, general and administrative, or 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, business
development and administrative functions. Other significant SG&A expenses include marketing programs, advertising, 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. In addition, we have incurred increased SG&A
expenses resulting from becoming a public company, which may further increase when we are no longer able to rely on certain “emerging
growth company” exemptions we are afforded under the Jumpstart Our Business Startups Act, or the JOBS Act.
Research and development
Our research and development, or 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, the most costly of which are expected to be our iStent Inject ,
iStent Supra and iDose product candidates.
Completion dates and costs for our clinical development programs including 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.
Other income (expense), net
Other income (expense), net primarily consists of interest income derived from our short-term investments, interest expense on
our secured notes payable, and until the common stock warrants were exercised during the first three months of 2016, changes in the fair
value of our stock warrant liability. On July 31, 2015, we paid off in full all amounts outstanding under the Amended and Restated
Revolving Credit and Term Loan Agreement (Amended Credit Agreement), terminated the agreement, and recorded a loss on
extinguishment of debt of $0.2 million in other income (expense). In 2015, other income (expense) also included the loss on
deconsolidation of DOSE.
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Results of operations
Comparison of years ended December 31, 2016 and 2015
(dollars in thousands)
Statements of operations data:
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Income (loss) from operations
Loss on deconsolidation of DOSE
Total other income (expense), net
Provision for income taxes
Net income (loss)
Net sales
Year ended
% Increase
(decrease)
2016
December 31,
2015
$
114,397 $
16,177
98,220
64,756
29,223
93,979
4,241
—
324
43
4,522 $
$
71,700
12,988
58,712
43,961
25,047
69,008
(10,296)
(25,685)
(2,307)
33
(38,321)
60 %
25 %
67 %
47 %
17 %
36 %
(141)%
NM
166 %
30 %
(112)%
Net sales for the years ended December 31, 2016 and 2015 were $114.4 million and $71.7 million, respectively, reflecting an
increase of $42.7 million or 60%. Net sales in the United States represented $105.0 million and $67.7 million of net sales, respectively,
increasing by 55% and accounting for 87% of the overall increase in net sales. Increases in both the number of customer facilities
purchasing our iStent products and the average utilization of iStent in our customers’ available MIGS-appropriate procedures accounted
for the growth in unit sales in the United States. International sales for the year ended December 31, 2016 and 2015 were $9.4 million and
$4.0 million, respectively, increasing by $5.4 million or 135%, and accounting for 13% of the Company’s worldwide net sales increase.
Net sales at our Australian and Canadian subsidiaries accounted for the majority of the increase internationally. Worldwide, i ncreased
unit volume due to increased iStent utilization across our expanding customer base was responsible for the majority of the increase in net
sales.
Cost of sales
Cost of sales for the years ended December 31, 2016 and 2015 were $16.2 million and $13.0 million, respectively, reflecting an
increase of $3.2 million or 25%. Our gross margin for the year ended December 31, 2016 was approximately 86% compared to
approximately 82% in 2015. The increased gross margin percentage reflects that our fixed costs within cost of sales, such as certain
manufacturing overhead costs and the intangible asset amortization in both the 2016 and 2015 periods, represent a smaller percentage of
the larger 2016 revenue amount. Also, there was no medical device excise tax in cost of sales for the year ended 2016 due to the
aforementioned suspension of the excise tax for 2016 and 2017.
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Selling, general and administrative expenses
SG&A expenses for the years ended December 31, 2016 and 2015 were $64.8 million and $44.0 million, respectively, reflecting an
increase of $20.8 million or 47%. The increase in SG&A expenses was primarily the result of an increase of approximately $6.5 million in
salary, commissions, bonuses, stock-based compensation, travel and other costs associated with our domestic sales force; an increase in
SG&A expenses incurred by our foreign subsidiaries of approximately $6.4 million; and an increase of approximately $5.3 million for
additional administrative and marketing personnel. Additionally, approximately $3.1 million of the increase resulted from increased
marketing expenses for industry meetings and marketing materials, corporate insurance and facilities rent and utility costs. Offsetting
these increases was a $3.3 million reduction in legal and professional services primarily associated with our patent litigation which settled
in October 2015.
Research and development expenses
R&D expenses for the years ended December 31, 2016 and 2015 were $29.2 million and $25.0 million, respectively, reflecting
an increase of $4.2 million or 17%. Most of the increase in R&D expenses resulted from the cost of additional personnel, primarily in our
clinical affairs function, required to manage the increased number of clinical studies and associated investigational sites and study
investigators. Also contributing to the increase in R&D expenses were higher clinical study costs, which included payments to
investigational sites and study investigators and consultants.
Other income (expense), net
We recorded other income, net for the year ended December 31, 2016 of $0.3 million and other expense, net for the year ended December
31, 2015 of approximately $28.0 million. The 2016 period primarily reflected interest income from our short-term investments of
approximately $0.9 million, offset by interest expense on our secured notes payable and changes in the fair value of our stock warrant
liability. The 2015 period includes a charge of $25.7 million incurred with the deconsolidation of the non‑glaucoma related assets of
DOSE and elimination of the noncontrolling interest.
Comparison of years ended December 31, 2015 and 2014
(dollars in thousands)
Statements of operations data:
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Loss from operations
Loss on deconsolidation of DOSE
Total other expense, net
Provision for income taxes
Net loss
Year ended
December 31, % Increase
2015
2014
(decrease)
$
$
71,700 $
12,988
58,712
43,961
25,047
69,008
(10,296)
(25,685)
(2,307)
33
(38,321) $
45,587
11,418
34,169
28,135
19,205
47,340
(13,171)
—
(868)
18
(14,057)
57 %
14 %
72 %
56 %
30 %
46 %
(22)%
NM
166 %
83 %
173 %
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Net sales
Net sales for the years ended December 31, 2015 and 2014 were $71.7 million and $45.6 million, respectively, reflecting an
increase of $26.1 million or 57%, with net sales in the United States representing $67.7 million and $42.9 million of net sales,
respectively, and accounting for 95% of the overall increase. Our average number of domestic sales representatives increased to 45 for the
year ended December 31, 2015 from 35 for the year ended December 31, 2014. The higher number of sales representatives helped
increase our customer base, leading to growth in unit sales. Increased unit volume was responsible for the majority of the increase in net
sales.
Cost of sales
Cost of sales for the years ended December 31, 2015 and 2014 were $13.0 million and $11.4 million, respectively, reflecting an
increase of $1.6 million or 14%. Our gross margin for the year ended December 31, 2015 was approximately 82% compared to
approximately 75% in 2014. In 2014, cost of sales included a charge of $2.6 million, or 6% of 2014 sales, associated with our December
2014 agreement with the University, which accounted for the majority of the improvement in our gross margin.
Selling, general and administrative expenses
SG&A expenses for the years ended December 31, 2015 and 2014 were $44.0 million and $28.1 million, respectively, reflecting
an increase of $15.9 million or 56%. Stock‑based compensation expense increased by $4.7 million, which included a charge of
$2.8 million for the recording of cumulative stock‑based compensation expense associated with stock options we granted in July 2014
containing a performance condition that was satisfied upon the completion of our IPO. The remaining increase in SG&A expenses was
primarily the result of an increase of approximately $4.6 million in personnel, travel and other costs associated with our expanding
domestic sales force; an increase of approximately $2.3 million for additional administrative and marketing personnel; an increase of
approximately $2.1 million in legal fees primarily associated with our patent litigation; and an increase in SG&A expenses incurred by our
foreign subsidiaries of approximately $1.2 million.
Research and development expenses
R&D expenses for the years ended December 31, 2015 and 2014 were $25.0 million and $19.2 million, respectively, reflecting
an increase of $5.8 million or 30%. Payroll and related expenses increased by approximately $3.2 million due to the cost of additional
personnel, primarily in our clinical affairs function, required to manage the increased number of clinical studies and associated
investigational sites and study investigators. Stock‑based compensation expense increased by $1.5 million, which included a charge of
$0.9 million for the recording of cumulative stock‑based compensation expense associated with stock options we granted in July 2014
containing a performance condition that was satisfied upon the completion of our IPO. The remaining increase in R&D expenses resulted
primarily from higher clinical study costs, which included payments to investigational sites and study investigators, consultants, and other
outside technical service providers and the costs of related materials, supplies and travel.
Other (expense) income, net
We recorded other expense, net for the years ended December 31, 2015 and 2014 of approximately $28.0 million and $0.9 million,
respectively, reflecting an increase of $27.1 million. The 2015 period includes a charge of $25.7 million incurred with the deconsolidation
of the non‑glaucoma related assets of DOSE and elimination of the noncontrolling interest.
Liquidity and capital resources
From our inception through 2015, we incurred losses and negative cash flow from our operations. For the year ended December
31, 2016, we had $4.5 million of net income and generated $12.3 million of cash from operations. As of December 31, 2016, we had an
accumulated deficit of approximately $192.1 million. We have funded our operations
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to date from the sale of equity securities, issuance of notes payable, cash exercises of stock options and warrants to purchase equity
securities and cash generated from net sales. On June 30, 2015, we completed our IPO, selling 6.9 million newly issued shares of common
stock at $18.00 per share, which raised net proceeds of approximately $113.6 million, after deducting underwriting discounts and
commissions of $8.7 million and other related expenses of approximately $1.9 million. We have made and expect to continue to make
significant investments in our global sales force, marketing programs and clinical studies. Costs for FDA‑approved IDE studies in our
industry are expensive as are the costs to develop new products, and we have incurred a significant increase in administrative costs since
we began operating as a public company in 2015. Accordingly, although we achieved profitability in 2016 and generated cash from
operations, there can be no assurance that we will continue to be profitable or continue to generate cash from operations.
At December 31, 2016, we had $95.8 million in cash, cash equivalents and short-term investments. We plan to fund our
operations and capital funding needs using existing cash and investment, cash generated from commercial operations, and through future
debt and 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 sales of our iStent products will be sufficient to fund our operations and satisfy our liquidity requirements for at least the next 12
months from the date our financial statements for the year ended December 31, 2016 are made publicly available.
Cash flows
Our historical cash outflows have primarily been associated with cash used for operating activities such as the purchase and
growth of inventory, expansion of our sales and 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 summary of our cash flows for the periods indicated:
(amounts in millions)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Exchange rate changes
Net (decrease) increase in cash and cash equivalents
2016
2015
Year ended
December 31,
2014
$
$
12.3 $
(26.1)
(1.7)
0.4
(15.1) $
(2.2) $
(85.6)
107.1
—
19.3 $
(7.1)
(0.9)
3.5
0.1
(4.4)
At December 31, 2016, our cash, cash equivalents and short-term investments 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 year ended December 31, 2016, our operating activities generated net cash of $12.3 million, and in the years ended
December 31, 2015 and 2014, our operating activities used $2.2 million and $7.1 million of net cash, respectively. The improvement in
net cash generation from operating activities primarily reflects an increase in cash generated from significantly higher net sales of our
iStent partially offset by increases in our total operating expenses. For the year ended December 31, 2016, the total net change in operating
assets and liabilities reflected cash usage of $6.3 million due to increases in accounts receivable and inventory of $9.7 million, partially
offset by an increase in accounts payable and accrued liabilities of $5.1 million. The remaining adjustments to reconcile net income to net
cash used in operating activities provided cash of $14.1 million, primarily consisting of stock‑based compensation expense of $8.8 million
and depreciation and amortization of $4.7 million. For the year ended December 31, 2015, the total net change in operating assets and
liabilities reflected cash usage of $3.4 million due to increases in accounts receivable and
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inventory, partially offset by an increase in accounts payable. All other adjustments to reconcile net loss to net cash used in operating
activities totaled $39.5 million, primarily consisting of the $25.7 million loss on the deconsolidation of DOSE. The remaining adjustments
primarily consisted of stock‑based compensation expense of $7.9 million and depreciation and amortization of $4.3 million. For the year
ended December 31, 2014, the total net change in operating assets and liabilities provided cash of $1.2 million, as growth in accounts
payable and accrued liabilities exceeded the combined growth in accounts receivable and inventory. Additionally, net non‑cash operating
costs totaled $5.7 million.
Investing activities
In the years ended December 31, 2016, 2015 and 2014, we used approximately $26.1 million, $85.6 million and $0.9 million,
respectively, of net cash in investing activities. Cash used for purchases of property and equipment was approximately $6.3 million, $0.9
million and $0.9 million, respectively. In the year ended December 31, 2016, we used approximately $75.2 million for purchases of short-
term investments, and received proceeds from sales and maturities of short-term investments of $55.4 million. In the year ended
December 31, 2015, we used approximately $69.8 million for purchases of short-term investments, and we used $15.0 million for the
purchase of the iDose product line from DOSE.
We expect to increase our investment in property and equipment in the future as we expand our manufacturing capacity for
current and new products, improve our manufacturing efficiency and for overall facility expansion.
Financing activities
In the year ended December 31, 2016, we used $1.7 million of net cash from financing activites, while for the years ended
December 2015 and 2014, cash of $107.1 million and $3.5 million, respectively, was provided from financing activities. In the year ended
December 31, 2016, we received net cash proceeds of approximately $8.0 million from the exercises of stock options and warrants and
purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan, and we used net cash of approximately $9.7
million for note payments.
In the year ended December 31, 2015, we received net cash proceeds of approximately $113.6 million from our IPO;
approximately $6.9 million in net proceeds from senior secured term and draw-to term loans; and approximately $3.3 million from the
exercises of stock options and warrants and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan.
In the year ended December 31, 2015, we used approximately $7.8 million for note payments; $7.0 million to pay off and fully retire the
senior secured term and draw-to term loans; and $1.9 million in net payments on the line of credit.
In the year ended December 31, 2014, we received net proceeds of $1.9 million under our line of credit and we received proceeds
of $0.8 million and $0.9 million from the exercises of stock options and preferred stock warrants, repectively.
Indebtedness
Notes payable to GMP Vision Solutions
In November 2013, we amended the agreement originally entered into with GMP in January 2007 and executed a royalty buyout
agreement with GMP pursuant to which we issued an aggregate of $17.5 million in secured promissory notes to GMP and a party related
to GMP in exchange for the cancellation of remaining royalties payable to GMP under the original agreement. These notes were secured
by all of our assets, excluding intellectual property, and were previously subordinate to the rights of our bank lender in connection with
our Amended Credit Agreement prior to the repayment in full of that facility in July 2015. The notes carried an interest rate of 5% per
annum and required monthly interest‑only payments from November 30, 2013 through December 31, 2014 of $72,900, followed by 24
equal monthly principal and interest payments of $0.8 million, which we began paying on January 31, 2015 and were fully paid as of
December 31, 2016. The buyout agreement also calls for payment of up to $2.0 million in the event of a sale of the Company that meets
certain criteria. In connection with this buyout agreement, we recognized an intangible asset valued at $17.5 million. After determining
that the pattern of future cash flows associated with this intangible asset could
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not be reliably estimated with a high level of precision, we concluded that the intangible asset would be amortized to cost of sales in our
statements of operations on a straight line basis over the estimated useful life of five years.
In each of the years ended December 31, 2016, 2015 and 2014, we recorded related amortization expense of $3.5 million in cost
of sales. Estimated amortization expense will be $3.5 million in 2017, and $3.0 million in 2018.
Amended and Restated Revolving Credit and Term Loan Agreement
In February 2015, we and our primary bank executed an Amended Credit Agreement, which provided for a $5.0 million senior
secured term loan, a $5.0 million senior secured draw‑to term loan and an $8.0 million senior secured revolving credit facility. Amounts
owed under the Amended Credit Agreement were secured by a first priority security interest in all of our assets, excluding intellectual
property.
On July 31, 2015, we paid off in full all amounts outstanding under the Amended Credit Agreement with the payment of
$7.0 million in principal plus all interest and fees payable through the payoff date and recorded a loss on extinguishment of debt in the
amount of $0.2 million. The Amended Credit Agreement and all related security interests were terminated on July 31, 2015. Accordingly,
this facility is no longer outstanding and available to us. See Note 5 of our notes to consolidated financial statements included in Part II,
Item 8 of this Annual Report on Form 10-K for additional information about the Amended Credit Agreement.
The Company had $0.2 million in commitments for capital expenditures as of December 31, 2016.
Contractual obligations
The following table summarizes our significant contractual obligations as of December 31, 2016 and the effect those obligations
are expected to have on our liquidity and cash flows in future periods.
Contractual obligations
(in millions)
Operating lease obligations
Firm purchase commitments
Total contractual obligations
Off‑‑balance sheet arrangements
$
$
Less than
1 year
Total
3,396 $
3,725
7,121 $
806 $
3,725
4,531 $
1,288 $
—
1,288 $
1 - 3 years
3 - 5 years
Payments due by period
More than
5 years
—
—
—
1,302 $
—
1,302 $
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 by 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.
Inflation
We may experience pressure on our iStent selling prices resulting from potential future reductions in reimbursement payments to
our customers, particularly from governmental payors such as Medicare or Medicaid but also from private payors. We could also be
impacted by rising costs for certain inflation‑sensitive operating expenses such as labor and employee benefits. However, we do not
believe that inflation has had a material effect on our business, financial condition or results of operations presented herein. If our costs
were to become subject to significant
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inflationary pressures, we may not be able to fully offset such higher costs through selling price increases. Our inability or failure to do so
could adversely affect our business, financial condition and results of operations.
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, or 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.
While our significant accounting policies are more fully described in the Notes to our consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical for fully
understanding and evaluating our financial condition and results of operations.
Revenue recognition
Our revenue is generated primarily from sales of our iStent products to customers in the United States and internationally. Our
customers are comprised of ambulatory surgery centers, hospitals and distributors in certain international locations where we currently do
not have a direct commercial presence. We recognize revenue from product sales when the following criteria are met: goods are shipped,
title and risk of loss has transferred to our customers, persuasive evidence of an arrangement exists and collectability is reasonably
assured. Persuasive evidence of an arrangement exists when we have a contractual arrangement in place with the customer. Delivery has
occurred when a product is shipped. If persuasive evidence of an arrangement exists and delivery has occurred, we determine whether the
invoiced amount is fixed or determinable and collectability of the invoiced amount is reasonably assured. We assess whether the invoiced
amount is fixed or determinable based on the existing arrangement with the customer, including whether we have sufficient history with a
customer to reliably estimate the customer’s payment patterns. We assess collectability by evaluating historical cash receipts and
individual customer outstanding balances. To the extent all criteria set forth above are not satisfied at the time of shipment, revenue is
recognized when cash is received from the customer.
We permit returns of product if such product is returned in good condition and from normal distribution channels, and we
provide a warranty on our products for one year from the date of shipment. Estimated allowances for sales returns and warranty
replacements are based upon the historical patterns of our product returns and warranty replacements matched against sales, and our
evaluation of specific factors that may increase the risk of product returns and warranty replacements. Product returns and warranty
replacements to date have been immaterial.
Clinical trial expense accruals
As part of our R&D expenses, we accrue at each balance sheet date the estimated costs of clinical study activities performed by
third‑party clinical sites with whom we have agreements providing for fees based upon the quantities of subjects enrolled and clinical
evaluation visits that occur over the life of the study. The 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 us at each financial reporting date. If the actual timing of performance of activities varies from the assumptions
used in the estimates, we adjust the accruals accordingly. There have been no material adjustments to our prior period accrued estimates
for clinical trial activities through December 31, 2016. If we underestimate or overestimate the activity or fees associated with a study or
service at a given point in time, adjustments to R&D expenses may be necessary in future periods. Subsequent changes in estimates may
result in a material change in our accruals. Nonrefundable advance payments for goods and services, including fees for process
development or manufacturing and distribution of clinical supplies that
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will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are
consumed or services are performed.
Inventory valuation
We value inventory at the lower of cost or market (net realizable value). Cost is determined by the first‑in, first‑out method. This
policy requires us to make estimates regarding the market value of our inventory, including an assessment of excess or obsolete inventory.
We evaluate inventory for excess quantities and obsolescence based on an estimate of the future demand for our product within a specified
time horizon, and record an allowance to reduce the carrying value of inventory as determined necessary. The estimates we use for
demand are also used for near‑term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our
actual demand is less than our forecast demand, we may be required to take additional excess inventory charges, which would decrease
gross margin and adversely impact net operating results in the future.
Stock‑‑based compensation expense
Stock‑based compensation expense is measured at the date of grant, based on the estimated fair value of the award using the
Black‑Scholes option pricing model. For awards subject to time‑based vesting conditions, we recognize stock‑based compensation
expense over the employee’s requisite service period on a straight‑line basis, net of estimated forfeitures. We account for stock‑based
compensation arrangements with non‑employees using a fair value approach. Stock options granted to non‑employees are subject to
periodic revaluation over their vesting terms.
The estimation of the fair value of each stock‑based grant or issuance on the date of grant involves numerous assumptions by
management. Although we calculate the fair value under the Black‑Scholes option pricing model, which is a standard option pricing
model, this model still requires the use of numerous assumptions, including, among others, the expected life (turnover), volatility of the
underlying equity security, a risk free interest rate and expected dividends. Because we have a limited operating history as a public
company, there is a lack of company‑specific historical and implied volatility data, and therefore we have estimated stock price volatility
based upon an index of the historical volatilities of a group of comparable publicly‑traded medical device peer companies. We will
continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes
available. We have estimated the expected term of our employee stock options using the “simplified” method, whereby the expected life
equals the average of the vesting term and the original contractual term of the option. The model and assumptions also attempt to account
for changing employee behavior as the stock price changes and capture the observed pattern of increasing rates of exercise as the stock
price increases. The use of different values by management in connection with these assumptions in the Black‑Scholes option pricing
model could produce substantially different results.
In July 2014, we granted stock options to purchase an aggregate of 1.2 million shares of common stock, which options contained
a performance condition such that they only become exercisable in the event that our common stock is listed on a national securities
exchange within one year from the date of grant. In accordance with authoritative guidance, we did not record any compensation expense
associated with the grants until the performance condition was satisfied in the three month period ended June 30, 2015. Upon the
completion of the IPO on June 30, 2015, we immediately recognized cumulative compensation cost of $3.8 million for the grants as if the
method had been applied since the date of grant using the required graded accelerated attribution method, and we will record
compensation expense over the remainder of the four‑year vesting period using this method. Stock options granted subsequent to July
2014 do not contain a performance condition.
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Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 of the notes to our consolidated financial statements included
in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. Our cash and cash equivalents include cash in readily
available checking and money market accounts, as well as a certificate of deposit. These securities are not dependent on interest rate
fluctuations that could cause the principal amount of these assets to fluctuate and thus do not pose any interest rate risk to the
Company. While we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the
future our investments will not be subject to adverse changes in market value.
In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess
of federally insured limits.
Foreign currency exchange risk
The financial statements of our foreign subsidiaries and their sales to customers, are denominated in the foreign subsidiaries’
respective functional currencies, and therefore we have exposure to foreign currency exchange rates. The remainder of our business is
primarily denominated in U.S. dollars. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables
and payables would not have been material for the periods presented. As our operations in countries outside of the United States grow, our
results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm
our business in the future. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the
future.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DAT A
Index to consolidated financial statements
Report of independent registered public accounting firm
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of comprehensive income (loss )
Consolidated statements of convertible preferred stock and stockholders’ equity (deficit)
Consolidated statements of cash flows
Notes to consolidated financial statements
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The Board of Directors and Stockholders of
Glaukos Corporation
Report of independent registered public accounting firm
We have audited the accompanying consolidated balance sheets of Glaukos Corporation as of December 31, 2016 and 2015, and the
related consolidated statements of operations, comprehensive income (loss), convertible preferred stock and stockholders’ equity (deficit),
and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Glaukos Corporation at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
March 15, 2017
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Glaukos Corporation
Consolidated balance sheets
(in thousands, except par values)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventory
Prepaid expenses and other current assets
Restricted cash
Total current assets
Property and equipment, net
Intangible assets, net
Deposits and other assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Accrued liabilities
Long-term debt, current portion
Deferred rent
Total current liabilities
Long-term debt, less current portion
Stock warrant liability
Other liabilities
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares and no shares authorized at December 31,
2016 and 2015, respectively; no shares issued and outstanding at December 31, 2016 and
2015
Common stock, $0.001 par value; 150,000 shares authorized at December 31, 2016 and
2015; 33,971 and 32,209 shares issued and 33,943 and 32,181 shares outstanding at
December 31, 2016 and 2015, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Less treasury stock (28 shares as of December 31, 2016 and 2015)
Total stockholders’ equity
Total liabilities and stockholders' equity
2016
December 31,
2015
6,494 $
89,268
14,305
6,844
3,032
80
120,023
7,593
6,567
188
134,371 $
2,967 $
13,911
—
60
16,938
—
—
159
17,097
21,572
69,552
7,549
4,097
1,290
80
104,140
2,154
10,218
149
116,661
3,626
7,793
8,931
12
20,362
765
105
238
21,470
—
—
34
308,815
648
(192,091)
(132)
117,274
134,371 $
32
291,853
51
(196,613)
(132)
95,191
116,661
$
$
$
$
See accompanying notes to consolidated financial statements.
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Glaukos Corporation
Consolidated statements of operations
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Income (loss) from operations
Other income (expense), net
Interest and other income
Loss on deconsolidation of DOSE
Loss on extinguishment of debt
Interest and other expense, net
Change in fair value of stock warrant liability
Total other income (expense), net
Income (loss) before taxes
Provision for income taxes
Net income (loss)
Net loss attributable to noncontrolling interest
Net income (loss) attributable to Glaukos Corporation
Basic net income (loss) per share, attributable to Glaukos
Corporation stockholders
Diluted net income (loss) per share, attributable to Glaukos
Corporation stockholders
Weighted-average shares used to compute basic net income (loss) per share
attributable to Glaukos Corporation stockholders
Weighted-average shares used to compute diluted net income (loss) per share
attributable to Glaukos Corporation stockholders
$
$
$
2016
2015
$
114,397 $
16,177
98,220
71,700 $
12,988
58,712
Year ended
December 31,
2014
45,587
11,418
34,169
28,135
19,205
47,340
(13,171)
3
—
—
(876)
5
(868)
(14,039)
18
(14,057)
(1,931)
(12,126)
(5.29)
(5.29)
2,294
2,294
64,756
29,223
93,979
4,241
889
—
—
(608)
43
324
4,565
43
4,522
—
4,522 $
0.14 $
0.12 $
32,928
36,459
43,961
25,047
69,008
(10,296)
82
(25,685)
(195)
(1,062)
(1,132)
(27,992)
(38,288)
33
(38,321)
(1,080)
(37,241) $
(2.13) $
(2.13) $
17,474
17,474
See accompanying notes to consolidated financial statements.
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Glaukos Corporation
Consolidated statements of comprehensive income (loss )
(in thousands)
Net income (loss)
Other comprehensive income:
Foreign currency translation adjustments
Unrealized gain (loss) on short-term investments, net of tax
Other comprehensive income
Total comprehensive income (loss)
Comprehensive loss attributable to noncontrolling interest
Comprehensive income (loss) attributable to Glaukos Corporation
2016
2015
Year ended
December 31,
2014
$
4,522 $
(38,321) $
(14,057)
542
55
597
5,119
—
5,119 $
155
(148)
7
(38,314)
(1,080)
(37,234) $
42
—
42
(14,015)
(1,931)
(12,084)
$
See accompanying notes to consolidated financial statements.
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Glaukos Corporation
Consolidated statements of convertible preferred stock and stockholders’ equity
(deficit)
(in thousands, except per share amounts)
Convertible
preferred stock
Amount
21,508 $ 156,210 2,122 $
Shares
Shares
Common stock
Amount
Additional
paid-in
capital
Accumulated
other
comprehensive
income
5 $
6,073 $
Accumulated
deficit
(147,246)
2 $
Treasury stock
Amount
Shares
(28) $
(132) $
Non-
controlling
interest
Total
equity
(deficit)
(7,744) $ (149,042)
—
—
—
—
—
—
—
Balance at December 31, 2013
Issuance of Series C convertible preferred stock
at $8.00 per share in connection with
exercises of preferred stock warrants
Issuance of Series D convertible preferred stock
at $11.38 per share in connection with
exercises of preferred stock warrants
Common stock issued under stock plans
Share-based compensation
Other comprehensive income
Net loss
Balance at December 31, 2014
Issuance of Series D convertible preferred stock
at $18.00 per share in connection with
exercises of preferred stock warrants
Conversion of preferred stock into common
stock
Issuance of common stock in initial public
offering
Common stock issued under stock plans
Exercise of common stock warrant
Share-based compensation
Other comprehensive income
Deconsolidation of DOSE
Net loss
Balance at December 31, 2015
Common stock issued under stock plans
Exercise of common stock warrant
Share-based compensation
Other comprehensive income
Net income
Balance at December 31, 2016
105
836
—
29
—
—
—
—
333
—
—
—
—
21,642 $ 157,379
—
348
—
—
—
2,470 $
—
—
1
—
—
—
6 $
—
552
1,530
—
—
8,155 $
94
1,698
—
—
—
(21,736)
(159,077)
21,736
17
159,060
—
—
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,900
1,097
6
—
—
—
—
32,209 $
1,756
6
—
—
—
33,971 $
113,582
2,979
188
7,889
—
—
—
7
2
—
—
—
—
—
32 $ 291,853 $
2
—
—
—
—
34 $ 308,815 $
8,064
112
8,786
—
—
—
—
—
42
—
44 $
—
—
—
—
—
—
7
—
—
51 $
—
—
—
597
—
648 $
—
—
—
—
(12,126)
(159,372)
—
—
—
—
—
(28) $
—
—
—
—
—
(132) $
—
—
623
70
1,530
—
42
—
(1,931)
(14,057)
(9,605) $ (160,904)
—
—
—
—
—
—
—
—
—
—
(37,241)
(196,613)
—
—
—
—
4,522
(192,091)
—
—
—
—
—
—
—
(28) $
—
—
—
—
—
(28) $
—
—
—
—
—
—
—
—
—
(132) $
—
—
—
—
—
(132) $
—
—
—
159,077
—
—
—
—
—
10,685
(1,080)
113,589
2,981
188
7,889
7
10,685
(38,321)
95,191
— $
8,066
—
112
—
8,786
—
597
—
4,522
—
— $ 117,274
See accompanying notes to consolidated financial statements.
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Glaukos Corporation
Consolidated statements of cash flow s
(in thousands)
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used) in operating
activities:
Depreciation and amortization
Loss on disposal of fixed assets
Stock-based compensation
Loss on deconsolidation of DOSE
Loss on extinguishment of debt
Change in fair value of stock warrant liability
Unrealized foreign currency losses
Amortization of premium on short-term investments
Amortization of debt discount and deferred financing costs
Deferred rent
Changes in operating assets and liabilities:
Accounts receivable, net
Inventory
Prepaid expenses and other current assets
Accounts payable and accrued liabilities
Other assets
Net cash provided by (used in) operating activities
Investing activities
Purchases of property and equipment
Purchase of iDOSE product line and related assets from DOSE Medical
Purchases of short-term investments
Proceeds from sales and maturities of short-term investments
Net cash used in investing activities
Financing activities
Proceeds from public offering, net of issuance costs
Proceeds from senior secured term and draw-to term loans
Payments of senior secured term and draw-to term loans
Proceeds from line of credit
Payments of line of credit
Payments of subordinated notes
Proceeds from exercise of stock options
Share purchases under Employee Stock Purchase Plan
Proceeds from exercise of stock warrants
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information
Interest paid
Taxes paid, net of refunds
Supplemental schedule of noncash investing and financing activities
Purchase of intangible assets in exchange for future payments
Conversion of preferred stock into common stock
Reduction of liability upon vesting of stock options previously exercised for unvested stock
$
$
$
$
$
$
2016
2015
Year ended
December 31,
2014
$
4,522
$
(38,321)
$
(14,057)
4,722
40
8,786
—
—
(43)
368
210
—
(31)
(6,791)
(2,935)
(1,762)
5,096
127
12,309
(6,278)
—
(75,192)
55,354
(26,116)
—
—
—
—
—
(9,696)
6,059
1,945
50
(1,642)
371
(15,078)
21,572
6,494
285
513
$
$
$
— $
— $
62
$
4,267
—
7,889
25,685
186
1,132
192
51
15
91
(2,163)
(1,848)
(755)
1,518
(127)
(2,188)
(877)
(15,000)
(69,751)
—
(85,628)
113,589
6,852
(7,000)
1,750
(3,600)
(7,804)
1,734
1,161
428
107,110
(26)
19,268
2,304
21,572
834
25
243
159,077
86
$
$
$
$
$
$
4,231
—
1,530
—
—
(5)
—
—
—
(33)
(2,514)
(413)
(108)
4,226
36
(7,107)
(868)
—
—
—
(868)
—
—
—
2,850
(1,000)
—
775
—
875
3,500
51
(4,424)
6,728
2,304
876
12
—
—
80
See accompanying notes to consolidated financial statements.
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Glaukos Corporation
Notes to consolidated financial statements
1. Organization and basis of presentation
Organization and business
Glaukos Corporation (Glaukos or the Company), incorporated in Delaware on July 14, 1998, is a developer, manufacturer and marketer of
medical devices for the treatment of glaucoma. The accompanying consolidated financial statements include the accounts of Glaukos, its
wholly owned subsidiaries and, through June 30, 2015, affiliated entity DOSE Medical Corporation (DOSE) (see Note 11). All significant
intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.
Liquidity
From inception through 2015, the Company was not profitable and incurred operating losses in each year. For the year ended December
31, 2016, the Company had net income of $4.5 million and generated $12.3 million of cash from operations. At December 31, 2016, the
Company had an accumulated deficit of $192.1 million. The Company has financed operations to date primarily through private
placements of equity securities, the issuance of common stock in the initial public offering (IPO) completed in June 2015, debt financings
and cash generated by its commercial operations. While the Company became profitable in 2016, it may not be able to sustain profitability
on a recurring basis in the future. The Company plans to fund its operations and capital funding needs using existing cash and
investments, cash generated from commercial operations, and through future debt and equity financings. There can be no assurance that
the Company will be able to obtain additional financing on terms acceptable to it, or at all. Any equity financing may result in dilution to
existing stockholders and any additional debt financing may include restrictive covenants. As of December 31, 2016, the Company had
cash, cash equivalents and short-term investments totaling $95.8 million and net working capital of $103.1 million. The Company adopted
Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements – Going Concern , effective December 31, 2016. The
Company has performed an analysis and concluded substantial doubt does not exist with respect to the Company being able to continue as
a going concern through one year from the date of issuance of the consolidated financial statements for the year ended December 31,
2016.
Initial public offering
On June 30, 2015, the Company completed its IPO, selling 6.9 million newly issued shares of common stock at a price of $18.00 per
share. The IPO generated net cash proceeds of approximately $113.6 million, after deducting underwriting discounts and commissions of
approximately $8.7 million and other related expenses of approximately $1.9 million. The underwriting discounts and commissions and
offering costs were recorded as a reduction to the IPO proceeds included in additional paid‑in capital.
Immediately prior to the closing of the IPO, all unexercised warrants to purchase shares of Series D convertible preferred stock were net
exercised at the IPO price per share, and then all outstanding shares of convertible preferred stock automatically converted into
approximately 21.7 million shares of common stock. Following the completion of the IPO, there were no shares of preferred stock and no
warrants to purchase shares of Series D convertible preferred stock outstanding. An additional 4.5 million shares of common stock were
reserved for issuance under the Company’s 2015 Omnibus Incentive Compensation Plan and 450,000 shares of common stock were
reserved for the Company’s 2015 Employee Stock Purchase Plan.
Acquisition of certain DOSE Medical Corporation assets
On June 30, 2015, the Company acquired certain assets from DOSE, including the iDose product line, in exchange for a cash payment of
$15.0 million and the elimination of all amounts owed by DOSE to the Company. In addition to an asset
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purchase, the parties agreed to an amended and restated patent license agreement and an amended and restated transition services
agreement that provides for limited support from the Company to DOSE for a period of up to three years (see Note 11).
2. Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP).
Use of estimates
The preparation of the financial statements in conformity with GAAP requires management to make informed 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 consolidated financial statements relate to revenue recognition, inventory reserves 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 consolidated financial statements are presented in U.S. dollars. The Company considers the local currency to be the
functional currency for its international subsidiaries. Accordingly, their assets and liabilities are translated into U.S. dollars using the
exchange rate in effect on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing throughout
the periods presented. Currency translation adjustments arising from period to period are charged or credited to accumulated other
comprehensive income (loss) in stockholders’ equity. For the years ended December 31, 2016, 2015 and 2014, the Company reported
income from foreign currency translation adjustments of approximately $542,000, $155,000 and $42,000, respectively. Realized gains and
losses resulting from foreign currency transactions are included in selling, general and administrative expense in the consolidated
statements of operations. For the years ended December 31, 2016, 2015 and 2014, the Company reported foreign currency transaction
losses of approximately $608,000, $287,000 and $38,000, respectively.
Cash, cash equivalents and short-term investments
The Company invests its excess cash in marketable securities, including money market funds, money market securities, bank certificates
of deposit, corporate bonds, and corporate commercial paper 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. From time to time, the Company maintains cash
balances in excess of amounts insured by the Federal Deposit Insurance Commission (FDIC). 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, except for restricted cash, is considered to be available for use in current operations and,
accordingly, all such investments are stated at fair value using quoted market prices and classified as current assets, although the stated
maturity of individual investments may be one year or more beyond the balance sheet date. The Company did not have any trading
securities or restricted investments at December 31, 2016, 2015 and 2014.
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Realized gains and losses and declines in value, if any, judged to be other‑than‑temporary on available‑for‑sale securities, are reported in
interest income or expense, net. When securities are sold, any associated unrealized gain or loss previously reported as a separate
component of stockholders’ equity is reclassified out of stockholders’ equity and recorded in the statements of operations in the period
sold using the specific identification method. Accrued interest and dividends are included in interest income. 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.
Concentration of credit risk and significant customers
Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash, cash
equivalents, short-term investments and accounts receivable. The Company maintains deposits in federally insured financial institutions in
excess of federally insured limits and management believes that the Company is not exposed to significant credit risk due to the financial
position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding
investment instruments and their maturities which are designed to maintain preservation of principal and liquidity. The Company believes
that the concentration of credit risk in its accounts receivable is mitigated by its credit evaluation process, relatively short collection terms
and the level of credit worthiness of its customers. During 2016, 2015 and 2014, none of the Company’s customers accounted for more
than 10% of revenues.
Restricted cash
The Company has a credit card facility with a bank which is collateralized by certificates of deposit maintained at the bank.
Accounts receivable
The Company sells its products directly to hospitals, surgery centers and distributors in the U.S. and internationally. The Company
periodically assesses the payment performance of these customers and establishes reserves for anticipated losses when necessary, which
losses historically have not been significant and have not exceeded management’s estimates. Accounts receivable are recorded at the
invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts based on historical collection
experience and expectations of future collection based on current market conditions. The allowance for doubtful accounts is
management’s best estimate of the amount of probable credit losses. Account balances are charged against the allowance when it is
probable the receivable will not be recovered. The Company’s allowance for bad debts was approximately $495,000 and $83,000 as of
December 31, 2016 and 2015, respectively, and no customers accounted for more than 10% of net accounts receivable as of either date.
The Company generally permits returns of product from customers if such product is returned in a timely manner and in good condition.
Estimated allowances for sales returns are based upon the Company’s historical patterns of product returns matched against sales, and
management’s evaluation of specific factors that may increase the risk of product returns.
Inventory
Inventory is valued at the lower of cost or market (net realizable value). Cost is 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.
Long lived assets
Property and equipment is recorded at cost. Depreciation of property and equipment is generally provided using the straight‑line method
over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized over their
estimated useful life or the related lease term, whichever is shorter. Maintenance and repairs are expensed as incurred.
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All long lived assets are reviewed for impairment in value when changes in circumstances dictate, based upon undiscounted future
operating cash flows, and appropriate losses are recognized and reflected in current earnings to the extent the carrying amount of an asset
exceeds its estimated fair value, determined by the use of appraisals, discounted cash flow analyses or comparable fair values of similar
assets. The Company recorded $14,000 of impairment charges during 2016 and none in 2015.
Intangible assets
Intangible assets are recorded at cost and are amortized over the estimated useful life. Intangible assets in the accompanying balance
sheets are currently comprised of the cost of the Company’s buyout of a royalty payment obligation and the value of non-compete
agreements entered into in 2015 with two former international distributors. See Note 5.
Fair value measurements
Assets and liabilities are measured using quoted prices in active markets and total fair value is the published market price per unit
multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant
other observable inputs are valued by reference to similar assets or liabilities, adjusted for contract restrictions and other terms specific to
that asset or liability. For these items, a significant portion of fair value is derived by reference to quoted prices of similar assets or
liabilities in active markets. For all remaining assets and liabilities, fair value is derived using a fair value model, such as a Black‑Scholes
model.
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 are 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
The Company recognizes revenue from product sales when the following criteria are met: goods are shipped, title and risk of loss has
transferred to its customers, persuasive evidence of an arrangement exists and collectability is reasonably assured. Persuasive evidence of
an arrangement exists when there is a contractual arrangement in place with the customer. Delivery has occurred when a product is
shipped. If persuasive evidence of an arrangement exists and delivery has occurred, the Company determines whether the invoiced amount
is fixed or determinable and collectability of the invoiced amount is reasonably assured. The Company assesses whether the invoiced
amount is fixed or determinable based on the existing arrangement with the customer, including whether the Company has sufficient
history with a customer to reliably estimate the customer’s payment patterns. The Company assesses collectability by evaluating historical
cash receipts and individual customer outstanding balances. To the extent all criteria set forth above are not satisfied at the time of
shipment, revenue is recognized when cash is received from the customer.
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
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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.
Shipping and handling costs
All shipping and handling costs are expensed as incurred and are charged to general and administrative expense. Charges to customers for
shipping and handling are credited to general and administrative expense.
Advertising costs
All advertising costs are expensed as incurred. Advertising costs incurred during the years ended December 31, 2016, 2015 and 2014 were
approximately $1.6 million, $0.8 million and $0.4 million, respectively.
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 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 total deferred tax assets should be fully offset by
a valuation allowance. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for
income taxes will increase or decrease, 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
preparation of these state 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 by us.
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.
Research and development expenses
Major components of research and development expense include personnel costs, preclinical studies, clinical trials and related clinical
product manufacturing, materials and supplies, and fees paid to consultants. Research and development costs are expensed as goods are
received or services are rendered. Costs to acquire technologies to be used in research and development that have not reached
technological feasibility and have no alternative future use are also expensed as incurred.
At each financial reporting date, the Company accrues the estimated costs of clinical study activities performed by third party clinical sites
with whom the Company has agreements that provide for fees based upon the quantities of subjects enrolled and clinical evaluation visits
that occur over the life of the study. The cost estimates are determined based upon a review of the agreements and data collected by
internal and external clinical personnel as to the status of enrollment and subject visits, and are based upon the facts and circumstances
known to the Company at each financial reporting date. If the actual performance of activities varies from the assumptions used in the cost
estimates, the accruals are adjusted accordingly. There have been no material adjustments to the Company’s prior period accrued
estimates for clinical trial activities through December 31, 2016.
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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‑based awards made to employees 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‑based awards made to
nonemployees are remeasured at each reporting period using the Black‑Scholes option‑pricing model. Compensation expense for these
stock‑based awards is determined by applying the remeasured fair values to the shares that have vested during a period.
Comprehensive income (loss)
All components of comprehensive income (loss), including net income (loss), are reported in the financial statements in the period in
which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other
events and circumstances from non‑owner sources, including unrealized gains and losses on marketable securities and foreign currency
translation adjustments.
Net income (loss) per share
Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares that
were outstanding for the period, without consideration for common stock equivalents. Diluted net income (loss) per share is calculated by
dividing the net income (loss) by the sum of the weighted average number of dilutive common share equivalents outstanding for the
period determined using the treasury stock method. Common stock equivalents are comprised of convertible preferred stock, stock
warrants, and stock options outstanding under the Company’s stock option plans.
Potentially dilutive securities not included in the calculation of diluted net income (loss) per share attributable to common stockholders
because to do so would be anti‑dilutive were as follows (in common stock equivalent shares, in thousands):
Stock options outstanding
Employee stock purchase plan
Common stock warrants outstanding
Convertible preferred stock outstanding
Preferred stock warrants outstanding
Recent accounting pronouncements
2016
2015
As of
December 31,
2014
1,099
—
—
—
—
1,099
5,701
89
6
—
—
5,796
5,657
—
—
21,642
128
27,427
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance in ASU 2014-09 which was codified in Accounting
Standards Codification (ASC) 606, Revenue Recognition – Revenue from Contracts with Customers (ASC 606). ASC 606 provides a
single comprehensive model for entities to use in accounting for revenue arising from
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contracts with customers, and is principles-based, such that revenue is recognized to depict the transfer of goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
ASU 2015-14 deferred the effective date of ASC 606 to annual reporting periods beginning after December 15, 2017 (including interim
periods within those periods) and while early adoption is permitted, the Company plans to adopt ASC 606 on January 1, 2018. Companies
are required to apply ASC 606 retrospectively; however, companies may use either a full retrospective or a modified retrospective
approach when adopting the standard. The Company intends to adopt using the modified retrospective approach, with a cumulative catch-
up adjustment to the opening balance sheet of retained earnings at the effective date.
The Company has performed a preliminary analysis and does not believe adoption of the standard will have a material impact on its
consolidated financial statements. In the preliminary analysis, the Company has concluded it generally has one performance obligation,
the transaction price is not impacted by any variable consideration or other factors noted in ASC 606, and the Company’s performance
obligations are generally satisfied when products are shipped.
The Company will continue to review variable consideration, potential disclosures, and the method of adoption in order to complete the
evaluation of the impact on the consolidated financial statements. In addition, the Company will continue to monitor additional changes,
modifications, clarifications or interpretations undertaken by the FASB, which may impact the current conclusions.
In June 2014, the FASB issued an ASU that requires a performance target that affects vesting of a share‑based payment award and that
could be achieved after the requisite service period to be treated as a performance condition. As such, the performance target should not be
reflected in estimating the grant date fair value of the award. Compensation cost should be recognized over the required service period if it
is probable that the performance target will be achieved. This guidance was effective for fiscal years beginning after December 15, 2015,
which was the Company’s year ended December 31, 2016. Adoption of the guidance did not have a material impact on the Company’s
consolidated financial statements.
In July 2015, the FASB issued ASU 2015‑11, Inventory (Topic 330), Simplifying the Measurement of Inventory , which changes the
measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015‑11 defines
net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The new guidance was effective for the Company on January 1, 2016 and the adoption had no impact on the
Company’s consolidated financial statements.
In November 2015, the FASB issued guidance on balance sheet classification of deferred taxes. Previously, GAAP required an entity to
separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To
simplify the presentation of deferred income taxes, the new guidance requires that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying
component of an entity be offset and presented as a single amount is not affected by this new guidance. The new guidance is effective for
fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all
entities as of the beginning of an interim or annual reporting period. For the year ended December 31, 2015, the Company elected to early
adopt this update and has presented all its deferred tax assets and liabilities as non-current for the years ended December 31, 2016 and
2015. The Company has applied the Standard on a prospective basis. Therefore, the classifications of deferred tax assets and liabilities in
periods prior to the year ended December 31, 2015 have not been changed from the original presentation.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires management to recognize almost all leases
with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease
payments. The new standard must be adopted using the modified retrospective approach and will be effective for the Company starting in
the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its
consolidated financial statements, however, the Company anticipates recognition of additional assets and corresponding liabilities on its
consolidated financial statements.
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In March 2016, the FASB issued ASU No. 2016-09 , Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting (ASU 2016-09), which modifies certain aspects of the accounting for share-based payment transactions,
including income taxes, classification of awards, and classification in the statement of cash flows. The amendments are intended to
improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their
employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax
consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The
amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods and the
Company will adopt ASU 2016-09 in its first quarter 2017. As of December 31, 2016, the Company has excess tax benefits related to
share-based compensation. As a result of the adoption of ASU 2016-09 on January 1, 2017, excess tax benefits of $13.1 million will be
recorded to our net operating loss carryover resulting in an increase in our deferred tax assets and associated valuation allowance.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASC 2016-18), which
enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. ASU 2016-18
will be effective for the Company starting in the first quarter of 2018. Currently, the Company's restricted cash balance is not significant
and the Company is currently evaluating the impact this guidance will have on its 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), clarifying the definition of a business. 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 Topic 606, Revenue from Contracts with Customers. The amendments are effective for annual periods beginning
after December 15, 2017, including interim periods within those periods with early adoption permitted. The Company is currently
evaluating the impact this guidance will have on its consolidated financial statements.
3. Balance sheet details
Short-term investments
Short-term investments consisted of the following (in thousands):
Maturity Amortized cost
Unrealized
Government agency bonds
Bank certificates of deposit
Commercial paper
Corporate notes
Asset-backed securities
Total
(in years)
1-3 $
less than 2
less than 1
less than 3
less than 2
$
or cost
9,535 $
11,101
17,011
45,178
6,503
89,328 $
gains
2 $
13
1
7
3
26 $
93
Unrealized
losses
At December 31, 2016
Estimated
fair value
9,515
11,113
17,010
45,124
6,506
89,268
(22) $
(1)
(2)
(61)
—
(86) $
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U.S. government agency bonds
Commercial paper
Corporate notes
Asset-backed securities
Total
Accounts receivable, net
Maturity Amortized cost
Unrealized
Unrealized
(in years)
1-3 $
less than
1
1-3
1-3
$
or cost
5,513 $
12,342
45,051
6,794
69,700 $
gains
— $
—
—
—
— $
At December 31, 2015
Estimated
fair value
5,503
(10) $
losses
(2)
(110)
(26)
(148) $
12,340
44,941
6,768
69,552
Accounts receivable consisted of the following (in thousands):
Accounts receivable
Less allowance for doubtful accounts
Inventory
Inventory consisted of the following (in thousands):
Finished goods
Work in process
Raw material
Property and equipment, net
Property and equipment consisted of the following (in thousands):
Buildings
Equipment
Furniture and fixtures
Leasehold improvements
Computer equipment and software
Construction in progress
Less accumulated depreciation and amortization
2016
December 31,
2015
$
$
14,800 $
(495)
14,305 $
7,632
(83)
7,549
2016
December 31,
2015
2,014 $
2,105
2,725
6,844 $
953
1,123
2,021
4,097
2016
December 31,
2015
874 $
5,342
639
3,474
1,239
1,320
12,888
(5,295)
7,593 $
—
4,597
387
999
836
12
6,831
(4,677)
2,154
$
$
$
$
Depreciation and amortization expense related to property and equipment was $1.1 million, $0.8 million and $0.7 million for the years
ended December 31, 2016, 2015 and 2014, respectively.
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Accrued liabilities
Accrued liabilities consisted of the following (in thousands):
Accrued contract payments (see Note 10)
Accrued sales commissions
Accrued clinical study payments
Accrued bonuses
Accrued vacation benefits
Other accrued liabilities
4. Fair value measurements
2016
December 31,
2015
$
$
823
1,641
1,167
6,122
1,382
2,776
13,911
$
$
504
335
654
3,721
1,007
1,572
7,793
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 and financial liabilities measured at fair value on a
recurring basis as of December 31, 2016 and 2015, and indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine such fair value (in thousands):
December 31,
2016
Quoted prices in
active markets for
identical assets
(Level 1)
At December 31, 2016
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
(i)
(ii)
Assets
—
Money market funds
—
U.S. government agency bonds
—
Bank certificates of deposit
—
Commercial paper
(ii)
—
Corporate notes
—
Asset-backed securities
—
Total assets
(i) Included in cash and cash equivalents with a maturity of three months or less from date of purchase on the consolidated balance sheets.
9,515
11,113
17,010
45,124
6,506
89,348 $
9,515
11,113
17,010
45,124
6,506
89,268 $
80 $
—
—
—
—
—
80 $
80 $
— $
$
$
(ii)
(ii)
(ii)
(ii)Included in short-term investments on the consolidated balance sheets.
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Quoted prices in
active markets for
identical assets
(Level 1)
December 31,
2015
At December 31, 2015
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
(i)
(ii)
(ii)
$
Assets
Money market funds
U.S. government agency bonds
Commercial paper
(ii)
Corporate notes
Asset-backed securities
Total assets
Liabilities
105
Stock warrant liability
105
Total liabilities
(i) Included in cash and cash equivalents with a maturity of three months or less from date of purchase on the consolidated balance sheets.
13,922 $
—
—
—
—
13,922 $
13,922 $
5,523
15,340
45,159
6,775
86,719 $
5,523
15,340
45,159
6,775
72,797 $
—
—
—
—
—
—
105 $
105 $
— $
— $
— $
— $
$
$
— $
$
(ii)
(ii)Included in short-term investments on the consolidated balance sheets.
Money market funds 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, bank cerificates of deposit, commercial paper, corporate notes and asset-backed securities are measured at
fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date.
When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market
inputs for similar securities obtained from third party data providers. These inputs represent quoted prices for similar assets in active
markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as
Level 2 of the fair value hierarchy.
The stock warrant liability is recorded at fair value using the Black Scholes option pricing model, which requires inputs such as the
expected term of the warrant, volatility and risk free interest rate. These inputs are subjective and generally require significant analysis and
judgment to develop, and are therefore considered Level 3 inputs.
There were no transfers between levels within the fair value hierarchy during the periods presented.
In conjunction with the Company’s February 2015 Amended and Restated Revolving Credit and Term Loan Agreement as more fully
described in Note 5, the Company issued warrants to the lenders to purchase 11,298 shares of common stock at an exercise price of $8.85
per share. Warrants to purchase 5,649 shares of common stock were exercised by the lenders in September 2015. For the year ended
December 31, 2015, the Company recorded other expense of $0.2 million related to changes in the fair value of the warrants. The fair
value of the warrants as of the issuance date was estimated to be $53,000 using an option pricing framework considering multiple exit
scenarios and the probability of a down‑round financing. The following assumptions were deemed by the Company to be significant
unobservable inputs: risk‑free interest rate of 1.9%; dividend yield of 0.0%; expected volatility of 70.0%; and an expected life of 7 years.
The fair value of the warrants to purchase the remaining 5,649 shares of common stock as of December 31, 2015 was estimated to be $0.1
million using the Black‑Scholes valuation model with the following assumptions deemed by the Company to be significant unobservable
inputs: risk‑free interest rate of 1.9%; dividend yield of 0.0%; expected volatility of 54.8%; and an expected life of 6.2 years. In February
2016, the other lender exercised the remaining warrant to purchase 5,649 shares of common stock. For the years ended December 31,
2016, 2015 and 2014, the Company recorded other income (expense) of approximately $43,000, ($0.2) million and $0, respectively,
related to changes in the fair value of these warrants.
In conjunction with loans to the Company in 2010 from certain holders of the Company’s then‑outstanding preferred stock, which shares
were subsequently converted into preferred stock in 2011, the Company issued warrants to such
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holders to purchase 156,860 shares of Series D convertible preferred stock at $7.65 per share. Warrants to purchase 29,334 shares were
exercised in 2014. Warrants to purchase 127,526 shares were exercised in 2015; 49,410 warrant shares were exercised with cash payment
and 78,116 warrant shares were net exercised into 44,914 shares of common stock immediately prior to the IPO at the IPO price per share
of $18.00 per share. For the years ended December 31, 2016, 2015 and 2014, the Company recorded other income (expense) of
approximately $0, ($0.9) million and $5,000, respectively, related to changes in the fair value of these warrants.
In conjunction with loans in 2006 from certain holders of the Company’s preferred stock, which were repaid in 2007, the Company issued
warrants to purchase 185,714 shares of Series C preferred stock at $7.00 per share. All of these warrants were exercised in January 2014.
For the years ended December 31, 2016, 2015 and 2014, the Company did not record any other income or expense related to changes in
the fair value of these warrants.
The following table provides a reconciliation of liabilities measured at fair value using level 3 significant unobservable inputs (Level 3) on
a recurring basis (in thousands):
Balance at December 31, 2014
Issuance of common stock warrants
Change in the fair value of stock warrants
Issuance of Series D convertible preferred stock in connection with exercises of preferred stock warrants
Issuance of common stock in connection with exercise of common stock warrant
Balance at December 31, 2015
Change in the fair value of stock warrants
Issuance of common stock in connection with exercise of common stock warrant
Balance at December 31, 2016
$
$
Warrant
liability
379
53
1,132
(1,320)
(139)
105
(43)
(62)
—
5. Long‑‑term debt and intangible assets
Notes payable in connection with GMP Vision Solutions
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 connection with the Original GMP Agreement, the Company was obligated to
make 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 sublicenses 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 (together, the GMP Note Parties). The GMP notes were collateralized by all of the Company’s assets, excluding intellectual
property. The promissory notes carried an interest rate of 5% per annum and required monthly interest only payments from November 30,
2013 through December 31, 2014 of $72,900, followed by 24 equal monthly principal and interest payments of $767,700, which began on
January 31, 2015, and ended on December 31, 2016. The notes were paid off in full as of December 31, 2016. The Buyout Agreement also
calls for a payment of up to $2.0 million in the event of a sale of the Company meeting certain criteria.
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.
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Bank loan facility
In February 2015, the Company and its primary bank executed an Amended and Restated Revolving Credit and Term Loan Agreement
(the Amended Credit Agreement) which provided for a $5.0 million senior secured term loan, a $5.0 million senior secured draw‑to term
loan and an $8.0 million senior secured revolving credit facility. Amounts owed under the Amended Credit Agreement were secured by a
first priority security interest in all of the Company’s assets, excluding intellectual property. The Amended Credit Agreement included
certain reporting and financial covenants which, if not met, could have constituted an event of default under the Amended Credit
Agreement.
On the closing date, the Company received $5.0 million cash under the senior secured term loan. The Company incurred loan origination
fees of $41,000 which was recorded as a loan discount, and debt issuance costs of $0.1 million which was recorded as a deferred asset. As
of July 31, 2015, the Company had drawn $2.0 million under the draw‑to term loan. The senior secured term loan and draw‑to term loan
would have matured and would have been required to be fully paid by February 23, 2019. The entire unpaid principal amount plus any
accrued but unpaid interest under the revolving line of credit were due to become payable in full on February 23, 2017.
Outstanding balances under the senior secured term loan and senior secured draw‑to term loan bore interest on the outstanding daily
balance at an annual percentage rate equal to the bank’s prime rate plus 2%. At the Company’s option all or a portion of the amounts owed
under any of the senior secured term loan and draw‑to term loan may have been converted into Eurodollar‑based advances at an annual
percentage rate equal to LIBOR plus 3%. Outstanding balances under the revolving credit facility bore interest on the outstanding daily
balance thereof at an annual percentage rate equal to the bank’s prime rate plus 1.75%. At the Company’s option all or a portion of the
amounts owed under the revolving credit facility may have been converted into Eurodollar‑based advances at an annual percentage rate
equal to LIBOR plus 2.75%.
On July 31, 2015, the Company paid off in full all amounts outstanding under the Amended Credit Agreement with the payment of
$7.0 million in principal plus all interest and fees payable through the payoff date, and recorded a loss on extinguishment of debt in the
amount of $0.2 million. Accordingly, this facility was terminated and is no longer outstanding and available to the Company.
In connection with the execution of the Amended Credit Agreement, the Company issued warrants to the lenders to purchase an aggregate
of 11,298 shares of common stock at an exercise price of $8.85 per share as more fully described in Note 4. Warrants to purchase 5,649
shares of common stock were exercised by the lenders in September 2015, and the other lender exercised its warrant to purchase 5,649
shares of common stock in February 2016. As of December 31, 2016, no warrants remain outstanding.
The Company accounted for the debt discount and deferred asset utilizing the effective interest method. Amortization of debt discount and
the deferred asset to interest expense amounted to $0 and $15,000 for the years ended December 31, 2016 and 2015, respectively.
The Company’s debt balances, including current portions, were as follows (in thousands):
Notes payable
Total debt
Less current portion of long-term debt
Total long-term debt
Intangible assets
2016
December 31,
2015
— $
—
—
— $
9,696
9,696
(8,931)
765
$
$
In 2015, the Company entered into agreements with two international distributors pursuant to which their distribution rights with the
Company were terminated effective as of December 31, 2015. 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 countries that had
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comprised their territories. Management recorded the estimated fair value of the non-compete provisions as an intangible asset of
approximately $0.2 million, which will be amortized on a straight-line basis to selling, general and administrative expense over the one-to-
two year period.
The following reflects the composition of intangible assets, net (in thousands):
GMP royalty buyout
Non-compete agreements
Accumulated amortization
Total
Weighted average amortization period (in months)
December 31,
2016
December 31,
2015
$
$
17,500 $
243
17,743
(11,176)
6,567 $
60
17,500
243
17,743
(7,525)
10,218
60
In the years ended December 31, 2016, 2015 and 2014, the Company recorded related amortization expense of $3.7 million, $3.5 million
and $3.5 million in cost of sales. Estimated amortization expense will be $3.6 million in 2017 and $3.0 million in 2018.
6. Convertible preferred stock and stockholders’ equity
Convertible preferred stock
Immediately prior to the completion of the IPO, and after all unexercised warrants to purchase shares of Series D convertible preferred
stock were net exercised at the IPO price per share, the Company had outstanding 21,736,367 shares of convertible preferred stock which
automatically converted into 21,736,367 shares of the Company’s common stock. The related carrying value of $159.1 million was
reclassified to additional paid-in capital in the period ending June 30, 2015, and no shares of convertible preferred stock were outstanding
thereafter.
The following reflects the composition of convertible preferred stock as of December 31, 2014 (in thousands, except per share amounts):
Series A convertible preferred stock, $0.001 par value; 3,000 shares authorized and 1,200 shares issued and
outstanding at December 31, 2014; liquidation preference of $3,000 at December 31, 2014
Series B convertible preferred stock, $0.001 par value; 5,805 shares authorized and 2,322 shares issued and
outstanding at December 31, 2014; liquidation preference of $12,538 at December 31, 2014
Series C convertible preferred stock, $0.001 par value; 14,750 shares authorized and 5,819 shares issued and
outstanding at December 31, 2014 ; liquidation preference of $40,731 at December 31, 2014
Series D convertible preferred stock, $0.001 par value; 13,844 shares authorized and 5,410 shares issued and
outstanding at December 31, 2014; liquidation preference of $41,387 at December 31, 2014
Series E convertible preferred stock, $0.001 par value; 8,754 shares authorized and 3,501 shares issued and
outstanding at December 31, 2014; liquidation preference of $29,500 at December 31, 2014
Series F convertible preferred stock, $0.001 par value; 8,474 shares authorized and 3,390 shares issued and
outstanding at December 31, 2014; liquidation preference of $30,000 at December 31, 2014
Total
$
$
3,000
12,547
40,836
41,496
29,500
30,000
157,379
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Preferred stock
The Company is authorized to issue 5.0 million shares of its preferred stock. No shares of preferred stock have been issued.
Common stock
Prior to the completion of the Company’s IPO in June 2015, all common stock issued resulted from the founding of the Company and the
exercises of stock options. On June 30, 2015, the Company completed its IPO, selling 6.9 million newly issued shares of common stock at
a price of $18.00 per share. Immediately prior to the closing of the IPO, all unexercised warrants to purchase shares of Series D
convertible preferred stock were net exercised at the IPO price per share, and then all outstanding shares of convertible preferred stock
automatically converted into approximately 21.7 million shares of common stock.
In 2013, the Company repurchased at fair market value and placed into treasury 28,000 shares of its common stock that had been acquired
in connection with the exercise of a stock option.
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
Employee Stock Purchase Plan (the ESPP). The purpose of these plans is to provide incentives to employees, directors and nonemployee
consultants. The Company no longer grants any awards under the 2001 Stock Plan and the 2011 Stock Plan. The maximum term of any
stock options granted under the Stock Plans is 10 years. The options generally vest 25% on the first anniversary of the original vesting
date, with the balance vesting monthly or annually over the remaining three years. Stock options are granted at exercise prices at least
equal to the fair value of the underlying stock at the date of the grant. The ESPP permits eligible employees to purchase shares of the
Company’s common stock, using contributions via payroll deduction of up to 15% of their earnings, at a price per share equal to 85% of
the lower of the stock’s fair market value on the offering date or purchase date. The ESPP is intended to qualify as an “employee stock
purchase plan” under Section 423 of the Internal Revenue Code. As of January 1, 2017, the Company has reserved an aggregate of 7.8
million shares of common stock for issuance under the 2015 Stock Plan, and 1.1 million shares of common stock for issuance under the
ESPP.
Stock options granted pursuant to the 2001 Stock Plan and 2011 Stock Plan permitted optionees to elect to exercise unvested options in
exchange for restricted common stock. All unvested shares issued upon the early exercise of stock options, so long as they remain
unvested, are subject to the Company’s right of repurchase at the optionee’s original exercise price for a 90‑day period beginning on the
date that an optionee’s service with the Company voluntarily or involuntarily terminates. Consistent with authoritative guidance, early
exercises are not considered exercises for accounting purposes. Cash received for the exercise of unvested options is recorded as a
liability, which liability is released to equity at each reporting date as the shares vest. During the years ended December 31, 2016, 2015
and 2014, there were option exercises for 0, 337 and 55,908 unvested shares, respectively. As of December 31, 2016 and 2015, 977 and
16,682 shares, respectively, remained subject to a repurchase right by the Company. As of December 31, 2016 and 2015, the related
liability, which is included in other accrued liabilities in the accompanying consolidated balance sheets, was approximately $4,000 and
$67,000, respectively.
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The following table summarizes stock option activity under the 2001 Stock Plan, 2011 Stock Plan and 2015 Stock Plan (in thousands):
Outstanding at December 31, 2013
Granted
Exercised
Canceled/forfeited/expired
Outstanding at December 31, 2014
Granted
Exercised
Canceled/forfeited/expired
Outstanding at December 31, 2015
Granted
Exercised
Canceled/forfeited/expired
Outstanding at December 31, 2016
Vested and expected to vest at December 31, 2016
Exercisable at December 31, 2016
Number of
shares
underlying
options
(in thousands)
Weighted-
average
exercise price
per share
4,472 $
1,571
(348)
(38)
5,657 $
1,139
(1,022)
(73)
5,701 $
1,979
(1,660)
(109)
5,911 $
5,791 $
2,977 $
2.65
7.13
1.98
4.85
3.93
18.07
1.70
6.56
7.10
21.24
3.65
20.00
12.57
12.44
6.20
Weighted-
average
remaining
contractual
life (in years)
6.2 $
Aggregate
intrinsic
value (in
thousands)
9,299
1,249
6.3 $
16,131
9,174
6.7 $
102,390
42,458
7.3 $
$
$
129,591
127,711
83,636
Intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value of the common stock
for the options that had exercise prices that were lower than the fair value per share of the common stock on the date of exercise.
Valuation and expense recognition of stock‑‑based awards
The Company accounts for the measurement and recognition of compensation expense for all share‑based awards made to the Company’s
employees and nonemployees based on the estimated fair value of the awards.
The following table summarizes the allocation of stock‑based compensation in the accompanying consolidated statements of operations
(in thousands):
Cost of sales
Selling, general & administrative
Research and development
Total
2016
233
6,475
2,078
8,786
$
$
Year ended
December 31,
2014
2015
$
$
251 $
5,773
1,865
7,889 $
38
1,118
374
1,530
The weighted average estimated grant date fair value per share of stock options granted during the years ended December 31, 2016, 2015
and 2014 was $10.81, $9.77 and $4.08, respectively. At December 31, 2016, the total unamortized stock‑based compensation expense of
approximately $23.8 million is to be recognized over the stock options’ remaining vesting terms of approximately 4.0 years (3.0 years on
a weighted average basis). The total fair value of stock options that vested during the years ended December 31, 2016 and 2015 was $5.7
million and $5.2 million, respectively.
In July 2014, the Company granted stock options to purchase an aggregate of 1.2 million shares of common stock, which options contain a
performance condition such that they would only become exercisable in the event that the Company’s
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common stock was listed on a national securities exchange within one year from the date of grant. In accordance with authoritative
guidance, the Company did not record any compensation expense associated with the grants until the performance condition was satisfied
on June 30, 2015. Upon the completion of the IPO on June 30, 2015, the Company immediately recognized cumulative compensation
cost of $3.8 million for the grants as if the method had been applied since the date of grant using the required graded accelerated
attribution method, and the Company will record compensation expense over the remainder of the four‑year vesting period using this
method. Stock options granted subsequent to July 2014 do not contain a performance condition.
The Company uses the Black‑Scholes option‑pricing model to estimate the fair value of stock‑based awards on the date of grant. The
determination of fair value using the Black‑Scholes option‑pricing model is affected by the estimated fair market value per share of the
Company’s common stock as well as assumptions regarding a number of highly complex and subjective variables, including expected
stock price volatility, risk‑free interest rate, expected dividends and expected option life and generally requires significant management
judgment to determine.
Risk‑free interest rate. The risk‑free interest rate is equal to the U.S. Treasury Note interest rate for the comparable term for the expected
option life as of the valuation date. If the expected option life is between the U.S. Treasury Note rates of two published terms, then the
risk‑free interest rate is based on the straight‑line interpolation between the U.S. Treasury Note rates of the two published terms as of the
valuation date.
Expected dividend yield. The expected dividend yield is based on the Company’s history and expectation of dividend payouts. The
Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.
Expected volatility. The Company only recently began to have publicly traded equity and has a limited operating history and a lack of
Company‑specific historical and implied volatility data, and therefore has estimated its stock price volatility based upon an index of the
historical volatilities of a group of comparable publicly‑traded medical device peer companies. The historical volatility data was
computed using the historical daily closing prices for the selected peer companies’ shares during the equivalent period of the calculated
expected term of the Company’s share‑based awards. The Company will continue to apply this process until a sufficient amount of
historical information regarding the volatility of its own stock price becomes available.
Expected term. The Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to
estimate expected term, and therefore it uses the simplified method for estimating the expected term of stock option grants. Under this
approach, the weighted‑average expected term is presumed to be the average of the vesting term and the contractual term of the option.
Fair value of common stock. Historically, and until the June 30, 2015 completion of the Company’s IPO, the fair value of the shares of
common stock underlying the stock options has been the responsibility of and determined by the Company’s Board of Directors. Because
there had been no public market for the Company’s common stock, the Board of Directors determined the fair value of common stock at
the time of grant of the option by considering a number of objective and subjective factors including independent third‑party valuations of
the Company’s common stock, sales prices of convertible preferred stock to unrelated third parties, operating and financial performance,
the lack of liquidity of capital stock and general and industry specific economic outlook, among other factors. Subsequent to the date of
the Company’s IPO in June 2015, the Company has used the daily market prices in the determination of the fair value of its common
stock.
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Stock‑based awards to employees
The weighted‑average assumptions used to estimate the fair value of options granted to employees were as follows:
Year ended
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
2016
1.59 %
0.0 %
52.9 %
6.04
2015
1.77 %
0.0 %
56.0 %
6.07
December 31,
2014
1.91 %
0.0 %
60.7 %
6.07
Forfeiture rate. The Company reduces employee share‑based compensation expense for estimated forfeitures. Forfeitures are estimated at
the time of grant based on historical experience, and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
The weighted‑average per share exercise price of options granted to employees during the years ended December 31, 2016, 2015 and
2014 was $21.24, $17.79 and $7.13, respectively.
Stock‑based awards to nonemployees
The fair values of stock‑based awards made to nonemployees are remeasured at the end of the reporting period using the Black‑Scholes
option pricing model. The expected life for each option is determined based on the time remaining until the expiration of the option as of
the date of remeasurement. Compensation expense for these share‑based awards is determined by applying the recalculated fair values to
the shares that have vested during a period.
Through December 31, 2016, in conjunction with various consulting agreements, the Company issued options to nonemployees to
purchase 891,400 shares of common stock at exercise prices ranging from $0.25 to $25.91 per share. For the years ended December 31,
2016, 2015 and 2014, the Company recorded nonemployee stock‑based compensation expense of $0.8 million, $1.1 million and $0.3
million, respectively.
Common stock reserved for future issuance
Common stock reserved for issuance is as follows (in thousands):
Stock options issued and outstanding—2001 Plan
Stock options issued and outstanding—2011 Plan
Stock options issued and outstanding—2015 Plan
Employee stock purchase plan
Authorized for future stock awards or option grants
As of
December 31,
2016
1,074
2,338
2,499
600
3,673
10,184
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8. Income taxes
United States and foreign income (loss) before income taxes was as follows (in thousands):
United States
Foreign
Total
The provision for income taxes was as follows (in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Provision for income taxes
2016
12,214 $
(7,649)
4,565 $
Year ended December 31,
2014
2015
(13,124)
(36,750) $
(915)
(1,538)
(14,039)
(38,288) $
2016
2015
December 31,
2014
(28) $
71
—
43
—
—
—
—
43 $
— $
33
—
33
—
—
—
—
33 $
—
18
—
18
—
—
—
—
18
$
$
$
$
The tax provision for the noncontrolling interest was $0 in 2015 and 2014; therefore, no tax benefit or expense was allocated to the net
loss attributable to noncontrolling interest.
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The reconciliations of the U.S. federal statutory tax rate to the combined effective tax rate are as follows:
Statutory rate of tax expense
State income taxes, net of federal benefit
Permanent and other items
Deconsolidation of DOSE
Nondeductible offering costs
Research credits
Uncertain tax positions
Change in tax rate
Valuation allowance
Effective tax rate
2016
34.0 %
11.6
17.3
0.0
0.1
(42.6)
20.6
29.3
(69.4)
0.9 %
Year ended
December 31,
2014
34.0 %
3.3
(1.9)
0.0
(2.8)
9.6
(4.7)
(0.5)
(35.7)
1.3 %
2015
34.0 %
3.5
(3.4)
(11.9)
0.0
4.6
(2.3)
(0.2)
(24.4)
(0.1)%
Significant components of the Company’s net deferred tax assets at December 31, 2016 and 2015 are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Tax credits
Depreciation and amortization
Stock-based compensation
Reserves and accruals
Other net
Total deferred tax assets
Valuation allowance
Net deferred tax assets
2016
41,144 $
4,913
16,748
5,310
3,920
233
72,268
(72,268)
— $
December 31,
2015
45,870
3,973
19,472
3,749
2,241
129
75,434
(75,434)
—
$
$
Based on the weight of available evidence, management has established a valuation allowance for all of the deferred tax assets as it is
more likely than not that the deferred tax assets will not be realized. The net change in the valuation allowance was ($3.2) million in
2016.
At December 31, 2016, the Company had approximately $136.8 million, $104.1 million and $7.5 million of net operating loss
carryforwards for federal, state and foreign purposes, respectively, available to offset future taxable income. The federal and state net
operating loss carryforwards begin to expire in 2018 and 2016, respectively. The tax losses in foreign jurisdictions, if not utilized sooner,
will begin to expire no earlier than 2023.
At December 31, 2016, the Company had federal and state research and development credit carryforwards of $5.9 million and
$6.0 million, respectively, which begin to expire in 2021 for federal purposes and carry over indefinitely for state purposes.
Utilization of the net operating loss and tax credit carryforwards will be subject to annual limitations under Sections 382 and 383 of the
Internal Revenue Code of 1986 and similar state provisions due to several ownership changes that have occurred previously or that could
occur in the future. These ownership changes will limit the amount of net operating loss and tax credit carryforwards and other deferred
tax assets that can be utilized to offset future taxable income and tax. In general, all ownership changes as defined by Section 382 result
from transactions increasing ownership of certain stockholders in the stock of the Company by more than 50 percentage points over a
three‑year period. An analysis was performed by the Company which indicated that several ownership changes have occurred in previous
years which created annual limitations on the Company’s ability to utilize net operating loss and tax credit carryforwards. Such
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limitations will result in approximately $0.2 million of tax benefits related to net operating loss and tax credit carryforwards that will
expire unused. Accordingly, the related net operating loss and tax credit carryforwards have been removed from deferred tax assets
accompanied by a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created
by future ownership changes, if any, will not impact the Company’s effective tax rate.
The Company considers all earnings and profits of its foreign subsidiaries to be indefinitely reinvested. Due to losses incurred, there are
no unrecorded income taxes associated with unrepatriated foreign earnings as of December 31, 2016.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2016, 2015 and 2014, excluding interest and
penalties, is as follows (in thousands):
Balance at beginning of the year
Reductions for tax positions—prior years
Additions for tax positions—current year
Balance at end of the year
$
$
2016
4,848 $
(49)
1,148
5,947 $
2015
4,066 $
(284)
1,066
4,848 $
December 31,
2014
3,272
(27)
821
4,066
As of December 31, 2016, there would be no impact on the effective tax rate if the uncertain tax benefits were recognized.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.
There was no accrued interest and penalties associated with uncertain tax positions as of December 31, 2016 and 2015. It is not anticipated
that there will be a significant change in the unrecognized tax benefits over the next 12 months.
Due to the Company’s net operating loss carryforwards, its federal, state and foreign income tax returns are open to examination by the
Internal Revenue Service and state jurisdictions for all years since inception.
9. Employee benefits
The Company sponsors a defined contribution plan pursuant to section 401(k) of the United States Internal Revenue Code that allows
participating employees to contribute up to 100% of their salary, to an annual maximum of $18,000 in 2016 and 2015 ($24,000 in 2016
and 2015 for employees over the age of 50). Through December 31, 2016, the Company has only made “qualified nonelective
contributions” to maintain compliance with IRS regulations. No plan contributions were made by the Company in 2016, 2015 and 2014.
Beginning in 2017, the Company will contribute a $0.50 match for every $1.00 contributed by a participating employee up to 6%, with
such Company contributions becoming vested when participating employees reach the 3-year anniversary from their date of hire, giving
credit for past service.
10. 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 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
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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.
In June 2015, the Company entered into a sublease for an approximately 37,700 square foot facility located in San Clemente, California
effective September 1, 2015, and a five‑year direct lease for the facility that was effective January 1, 2017. In September 2016, the
Company relocated its corporate headquarters and a majority of its manufacturing operations to this facility. Until this facility receives all
final regulatory approvals, some manufacturing operations relating primarily to products sold outside of the United States will remain at
the former Laguna Hills, California location, pursuant to a sublease of that space through March 2017. Once the Company receives all
final regulatory approvals, all manufacturing operations will be consolidated to the San Clemente, California location.
Rent under the direct lease began on January 1, 2017 at approximately $42,000 per month, with rent for the second and third months
abated. The annual rent payments increase beginning on January 1, 2018 at percentages ranging from 2.5% to 3.5%. The direct lease
agreement contains an option to extend the lease for up to two additional three-year periods at market rates. The direct lease landlord
agreed to provide the Company with a tenant improvement allowance on January 1, 2017 in the amount of the cost of any leasehold
improvements, not to exceed $264,000.
The Company’s foreign subsidiaries lease office space totaling less than 2,000 square feet.
The Company recorded deferred rent of $219,000 and $149,000 as of December 31, 2016 and 2015, respectively, in conjunction with its
facilities lease agreements. Rent expense was $1.1 million, $0.6 million and $0.3 million for the years ended December 31, 2016, 2015
and 2014, respectively.
Future minimum payments under the aforementioned noncancelable operating leases for each of the five succeeding years are as follows
(in thousands):
2017
2018
2019
2020
2021
Thereafter
Purchase commitment
$
$
806
641
647
643
659
—
3,396
As of December 31, 2016, the Company had noncancelable, firm purchase commitments with certain vendors totaling approximately
$3.7 million, due within one year. There are no material purchase commitments due beyond one year.
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 Agreement, Glaukos paid the University the sum of $2.7 million in five payments
during 2015, and, beginning with sales on or after January 1, 2015, is required to pay 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 $500,000.
This ongoing product payment terminates on the date that the last of the Patent Rights expires, which is currently expected to be in 2022.
In 2016 and 2015, the Company recorded approximately $2.8 million and $1.8 million in cost of sales respectively, in connection with the
product payment obligation. Under the terms of the UC Agreement, the payments comprising the $2.7 million obligation were due within
60 days of the IPO, and, accordingly, the Company paid the remaining balance due of $1.8 million prior to August 29, 2015.
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11. Variable interest entity
In October 2009, the Company formed a wholly‑owned subsidiary, DOSE Medical Corporation and in April 2010, the Company
distributed all of its shares of common stock of DOSE via a stock dividend to the Company’s stockholders of record as of the close of
business on March 31, 2010. Since its formation, the Company had provided DOSE with a small number of leased employees,
management services and space, all of which had been charged to DOSE and pursuant to written agreements between the parties.
Additionally, the Company had provided DOSE the cash required to fund its operations that, together with accrued interest and charges
for the aforementioned services, the Company had recorded in an intercompany receivable account. Up until the transaction on June 30,
2015 described below, the Company had accounted for DOSE as a variable interest entity in which it had a variable interest in all
reporting periods since the formation of DOSE. Accordingly, the Company’s consolidated financial statements include the accounts of
DOSE, with all intercompany balances eliminated and with the deficit balance of DOSE’s net assets reflected as noncontrolling interest,
up to but excluding June 30, 2015.
On June 30, 2015, the Company completed a transaction initially executed in July 2014, the closing of which was contingent upon the
successful completion of an IPO. Pursuant to the terms of the asset purchase agreement, the Company acquired from DOSE certain assets,
including the iDose product line, in exchange for payment of $15.0 million in cash and the elimination of the $10.9 million intercompany
receivable owed by DOSE to the Company as of the closing date. In addition to the asset purchase agreement, the parties agreed to an
amended and restated patent license agreement and an amended and restated transition services agreement that provides for limited
support from the Company to DOSE for a period of up to three years. Either party can terminate the transition services agreement upon
adequate written notice. Two members of the Company’s board of directors currently serve on the board of directors of DOSE.
The Company reconsidered its relationship with DOSE as a result of the transaction and has determined that the Company is no longer
considered to be the primary beneficiary with the power to direct operations and the right to receive benefits/absorb losses of DOSE;
therefore, upon the close of the transaction, the Company derecognized DOSE and will no longer consider it a consolidated entity in its
financial statements. Accordingly, in the three months ended June 30, 2015, the Company recorded a charge to other expense in the
amount of $25.7 million to reflect the deconsolidation of DOSE’ non‑glaucoma related assets and noncontrolling interest.
Consolidation of DOSE’s results of operations included the following (in thousands):
Selling, general & administrative
Research and development
Interest expense
Net loss of DOSE
2016
Year ended
December 31,
2014
2015
$
$
— $
—
—
— $
105 $
890
85
1,080 $
243
1,557
156
1,956
Consolidation of DOSE’s cash flows included the following (in thousands):
Cash used in operating activities
Cash used in investing activities
Cash provided by financing activities
(Decrease) increase in cash and cash equivalents of DOSE
2016
2015
Year ended
December 31,
2014
— $
—
—
— $
(1,134) $
(33)
1,158
(9) $
(1,271)
(39)
1,315
5
$
$
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12. 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.
Geographic net sales information (in thousands)
2016
2015
Year ended
December 31,
2014
United States
International
Total net sales
$
$
104,995
9,402
114,397
$
$
67,698 $
4,002
71,700 $
42,932
2,655
45,587
Property and equipment, net
As of December 31,
2014
2015
2016
Depreciation and amortization
Year ended December 31,
2014
2015
2016
Capital expenditures
Year ended December 31,
2014
2015
2016
United States
International
Total
$ 7,463 $ 2,012 $ 1,784 $ 4,654 $ 4,180 $ 4,149 $ 6,493 $
130
142
166
68
87
82
56
$ 7,593 $ 2,154 $ 1,950 $ 4,722 $ 4,267 $ 4,231 $ 6,549 $
972 $
62
1,034 $
749
68
817
13. Selected Quarterly Financial Information (Unaudited)
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Income from operations
Total other income (expense), net
Provision for income taxes
Net income
Net income per share
(1)
:
Basic
Diluted
$
March 31,
2016
23,092 $
3,121
19,971
June 30,
2016
28,556 $
4,359
24,197
September 30,
2016
29,577 $
3,886
25,691
Three months ended
December 31,
2016
33,172
4,811
28,361
12,288
7,062
19,350
621
276
—
897 $
15,120
6,955
22,075
2,122
210
—
2,332 $
0.03 $
0.03 $
0.07 $
0.06 $
16,854
7,807
24,661
1,030
269
140
1,159 $
0.03 $
0.03 $
20,494
7,399
27,893
468
(431)
(97)
134
0.00
0.00
$
$
$
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Table of Contents
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Loss from operations
Loss on deconsolidation of DOSE
Total other expense, net
Provision for income taxes
Net loss
Net loss attributable to Glaukos Corporation
Net loss per share, basic and diluted, attributable to Glaukos
Corporation stockholders(1)
Basic
Diluted
$
March 31,
2015
14,666 $
2,794
11,872
June 30,
2015
17,754 $
3,281
14,473
September 30,
2015
19,004 $
3,319
15,685
Three months ended
December 31,
2015
20,276
3,594
16,682
7,816
5,240
13,056
(1,184)
—
(278)
—
(1,462) $
(966) $
12,516
7,339
19,855
(5,382)
(25,685)
(1,445)
—
(32,512) $
(31,928) $
11,237
6,173
17,410
(1,725)
—
(332)
—
(2,057) $
(2,057) $
12,392
6,295
18,687
(2,005)
—
(252)
33
(2,290)
(2,290)
(0.40) $
(0.40) $
(10.96) $
(10.96) $
(0.06) $
(0.07) $
(0.07)
(0.07)
$
$
$
$
(1) Net income or loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per-
share amounts will not necessarily equal the annual per share amount.
14. Subsequent events
In January 2017, the Company entered into an additional lease for an approximately 39,300 square foot facility located adjacent to our San
Clemente, California corporate headquarters. The new lease will become effective April 1, 2017 and expire on December 31, 2021 and
will not have a material effect on the Company’s consolidated financial statements.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROL S 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 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 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 Annual Report on Form 10-K. 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 December 31, 2016.
Management’s Report on Internal Control Over Financial Reporting and Attestation Report of the Registered Public Accounting
Firm
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act to provide reasonable assurance regarding the reliability of our financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that the transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of the end of the
period covered by this Annual Report on Form 10-K based on the framework in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of December 31, 2016.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm as
we are an Emerging Growth Company as of December 31, 2016, as defined in the Jumpstart Our Business Startups Act of 2012, or the
JOBS Act.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act, during our fourth fiscal quarter of 2016 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
111
Table of Contents
Implications of Being an Emerging Growth Company
As a company with less than $1.0 billion in revenue during our last fiscal year, we continue to qualify as an Emerging Growth Company
as defined in the JOBS Act. An Emerging Growth Company may take advantage of specified reduced reporting requirements and is
relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an Emerging Growth
Company:
·
·
·
·
·
we may present only two years of audited financial statements and only two years of related Management’s Discussion &
Analysis of Financial Condition and Results of Operations;
we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal
control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
we are permitted to provide less extensive disclosure about our executive compensation arrangements;
we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute
arrangements; and
we may elect to use an extended transition period for complying with new or revised accounting standards.
We are permitted to take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the
date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as
amended, which such fifth anniversary will occur in 2020. However, if certain events occur prior to the end of such five-year period,
including if we become a large accelerated filer, our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-
convertible debt in any three-year period, we will cease to be an Emerging Growth Company prior to the end of such five-year period.
ITEM 9B. OTHER INFORMATION
On February 15, 2017, we adopted the Glaukos Corporation Nonqualified Deferred Compensation Plan (the “Deferred
Compensation Plan”). The Deferred Compensation Plan permits our management or highly compensated employees, including all of our
executive officers, to elect to defer base salary and annual incentive compensation pursuant to the terms of the Deferred Compensation
Plan.
Amounts deferred under the Deferred Compensation Plan will be credited (or debited) with an investment return determined as if
the deferred amounts were invested in one or more investment funds made available under the Deferred Compensation Plan. The
Company may also make discretionary credits to the accounts of participating employees under the Deferred Compensation Plan, which
employer credits may or may not be subject to a vesting schedule.
Amounts deferred under the Deferred Compensation Plan will become payable upon a participating employee’s separation from
service with the Company, death, disability, a specified in-service distribution date or a change in control of the Company, in each case as
elected by the participating employee in accordance with the terms of the Deferred Compensation Plan. Amounts payable under the
Deferred Compensation Plan may be paid to the participating employee in either a lump-sum or in annual installments to be paid over a
period of up to ten years, in each case as elected by the participating employee in accordance with the terms of the Deferred Compensation
Plan.
The Deferred Compensation Plan is intended to comply with the requirements of Section 409A of the Code.
A copy of the Deferred Compensation Plan, along with its Adoption Agreement, is attached to this Annual Report on Form 10-K
as Exhibit 10.20, and this description of the terms of the Deferred Compensation Plan is subject in all respects to the terms of the Deferred
Compensation Plan.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
We have adopted a written code of business conduct and ethics that applies to our directors, executive officers and employees,
including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing
similar functions. A current copy of the code is posted on the investor section of our web site, www.glaukos.com. To the extent required
by rules adopted by the SEC and NYSE, we intend to promptly disclose future amendments to certain provisions of the code, or waivers
of such provisions granted to executive officers and directors on our web site at www.glaukos.com.
The remaining information required by this Item 10 will be included in our Proxy Statement for the 2017 Annual Meeting of
Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2016, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in our Proxy Statement for the 2017 Annual Meeting of Stockholders,
which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2016, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 12 will be included in our Proxy Statement for the 2017 Annual Meeting of Stockholders,
which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2016, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included in our Proxy Statement for the 2017 Annual Meeting of Stockholders,
which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2016, and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be included in our Proxy Statement for the 2017 Annual Meeting of Stockholders,
which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2016, and is incorporated
herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as part of this Annual Report on Form 10-K:
(1)
Financial Statements
The financial statements included in Part II, Item 8 of this document are filed as part of this Annual Report on Form 10-
K.
(2)
Financial Statement Schedules
Schedules have been omitted because they are not applicable or the amounts are immaterial or the required information is
presented in the financial statements or notes thereto.
(b)
Exhibits
The exhibits listed in the Exhibit Index (following the signatures page of this report) are filed, furnished or incorporated by
reference as part of this Annual Report on Form 10-K.
ITEM 16. FORM 10-K SUMMAR Y
None.
114
Table of Contents
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 March 15, 2017.
SIGNATURES
GLAUKOS CORPORATION
By:
/s/ Thomas W. Burns
Thomas W. Burns
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the
capacities and on the dates indicated.
Signature
/s/ Thomas W. Burns
Thomas W. Burns
/s/ Richard L. Harrison
Richard L. Harrison
/s/ William J. Link
William J. Link, Ph.D.
/s/ Mark J. Foley
Mark J. Foley
/s/ David F. Hoffmeister
David F. Hoffmeister
/s/ Gilbert H. Kliman
Gilbert H. Kliman, M.D.
/s/ Jonathan T. Silverstein
Jonathan T. Silverstein
/s/ Marc A. Stapley
Marc A. Stapley
/s/ Aimee S. Weisner
Aimee S. Weisner
Title
Chief Executive Officer, President and
Director (Principal Executive Officer)
Treasurer and Chief Financial Officer
(Principal Accounting and Financial Officer)
Chairman of the Board
Director
Director
Director
Director
Director
Director
115
Date
March 15 , 2017
March 15 , 2017
March 15 , 2017
March 15 , 2017
March 15 , 2017
March 15 , 2017
March 15 , 2017
March 15 , 2017
March 15 , 2017
Table of Contents
Exhibit
Number
INDEX TO EXHIBITS
Description
3.1
3.2
10.1
10.2
10.3
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
Restated Certificate of Incorporation of the Registrant (incorporated by referenced to Exhibit 3.1 to the Form 8‑K
(File No. 001‑37463) filed on June 30, 2015).
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Form 8‑K (File
No. 001‑37463) filed on June 30, 2015).
Fourth Amended and Restated Investors’ Rights Agreement, dated as of January 25, 2011, by and among the
Registrant and the stockholders named therein (incorporated by reference to Exhibit 10.1 to the Registration
Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Amendment No. 1 to the Fourth Amended and Restated Investors’ Rights Agreement, dated as of January 22, 2013,
by and among the Registrant and the stockholders named therein (incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Amendment No. 2 to the Fourth Amended and Restated Investors’ Rights Agreement, dated as of July 10, 2014, by
and among the Registrant and the stockholders named therein (incorporated by reference to Exhibit 10.3 to the
Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Form of Director and Executive Officer Indemnification Agreement (incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
2001 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S‑1
(No. 333‑204091) filed on May 12, 2015).
Notice of Incentive Stock Option Grant and Stock Option Agreement under the 2001 Stock Option Plan (incorporated
by reference to Exhibit 10.10 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Notice of Non‑Statutory Stock Option Grant and Stock Option Agreement under the 2001 Stock Option Plan
(incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on
May 12, 2015).
2011 Stock Plan (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S‑1
(No. 333‑204091) filed on May 12, 2015).
Form of Notice of Incentive Stock Option Grant and Stock Option Agreement under the 2011 Stock Plan
(incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on
May 12, 2015).
Form of Notice of Non‑Statutory Stock Option Grant and Stock Option Agreement under the 2011 Stock Plan
(incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on
May 12, 2015).
2015 Omnibus Incentive Compensation Plan (incorporated by reference to Exhibit 10.15 to Amendment No. 2 to the
Registration Statement on Form S‑1 (No. 333‑204091) filed on June 15, 2015).
2015 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.16 to Amendment No. 2 to the
Registration Statement on Form S‑1 (No. 333‑204091) filed on June 15, 2015).
Thomas W. Burns Offer Letter dated July 10, 2014 (incorporated by reference to Exhibit 10.17 to the Registration
Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Thomas W. Burns Executive Severance and Change in Control Agreement dated July 10, 2014 (incorporated by
reference to Exhibit 10.18 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Chris M. Calcaterra Offer Letter dated July 10, 2014 (incorporated by reference to Exhibit 10.19 to the Registration
Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
116
Table of Contents
Exhibit
Number
10.16+
10.17+
10.18+
10.19+
10.20*+
10.21
10.22
10.23
10.24
21*
23.1*
31.1*
31.2*
32.1**
32.2**
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
Description
Chris M. Calcaterra Executive Severance and Change in Control Agreement dated July 10, 2014 (incorporated by
reference to Exhibit 10.20 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Richard L. Harrison Offer Letter dated July 10, 2014 (incorporated by reference to Exhibit 10.21 to the Registration
Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Richard L. Harrison Executive Severance and Change in Control Agreement dated July 10, 2014 (incorporated by
reference to Exhibit 10.22 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on May 12, 2015).
Joseph E. Gilliam Offer Letter dated February 3, 2017 (incorporated by reference to Exhibit 99.2 to the to the
Company’s Current Report on Form 8-K (File No. 001-37463) filed on February 3, 2017).
The Executive Nonqualified Excess Plan and the Executive Nonqualified Excess Plan Adoption Agreement.
Asset Purchase Agreement, dated as of July 10, 2014, by and between the Registrant and DOSE Medical Corporation
(incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S‑1 (No. 333‑204091) filed on
May 12, 2015).
Standard Industrial/Commercial Single‑Tenant Lease—Net, dated as of June 8, 2015, by and between the Registrant
and 229 Fabricante, LLC incorporated by reference to Exhibit 10.35 to Amendment No. 2 to the Registration
Statement on Form S‑1 (No. 333‑204091) filed on June 15, 2015).
Amended and Restated Patent License Agreement, by and between the Registrant and DOSE Medical Corporation,
dated as of June 30, 2015 (incorporated by reference to Exhibit 10.1 to the Form 8‑K (File No. 001‑37463) filed on
June 30, 2015).
Amended and Restated Transition Services Agreement, by and between the Registrant and DOSE Medical
Corporation, dated as of June 30, 2015 (incorporated by reference to Exhibit 10.2 to the Form 8‑K (File
No. 001‑37463) filed on June 30, 2015).
Subsidiaries of Glaukos Corporation as of December 31, 2016
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
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
XBRL Instance Document
XBRL Taxonomy Schema Linkbase Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Definition Linkbase Document
XBRL Taxonomy Labels Linkbase Document
XBRL Taxonomy Presentation Linkbase Document
+ Indicates a management contract or compensatory plan or arrangement.
* Filed Herewith.
** Furnished Herewith.
117
THE EXECUTIVE NONQUALIFIED EXCESS PLAN
PLAN DOCUMENT
Exhibit 10.20
THE EXECUTIVE NONQUALIFIED EXCESS PLAN
Section 1. Purpose:
By execution of the Adoption Agreement, the Employer has adopted the Plan set forth herein, and in the Adoption Agreement, to
provide a means by which certain management Employees or Independent Contractors of the Employer may elect to defer receipt of
current Compensation from the Employer in order to provide retirement and other benefits on behalf of such Employees or Independent
Contractors of the Employer, as selected in the Adoption Agreement. The Plan is intended to be a nonqualified deferred compensation
plan that complies with the provisions of Section 409A of the Internal Revenue Code (the "Code"). The Plan is also intended to be an
unfunded plan maintained primarily for the purpose of providing deferred compensation benefits for a select group of management or
highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(l) of the Employee Retirement Income Security Act of 1974
(“ERISA”) and independent contractors. Notwithstanding any other provision of this Plan, this Plan shall be interpreted, operated and
administered in a manner consistent with these intentions.
Section 2. Definitions:
As used in the Plan, including this Section 2, references to one gender shall include the other, unless otherwise indicated by the
context:
2.1 "Active Participant" means, with respect to any day or date, a Participant who is in Service on such day or date;
provided, that a Participant shall cease to be an Active Participant (i) immediately upon a determination by the Committee that the
Participant has ceased to be an Employee or Independent Contractor, or (ii) at the end
1
of the Plan Year that the Committee determines the Participant no longer meets the eligibility requirements of the Plan.
2.2 "Adoption Agreement" means the written agreement pursuant to which the Employer adopts the Plan. The Adoption
Agreement is a part of the Plan as applied to the Employer.
2.3 "Beneficiary" means the person, persons, entity or entities designated or determined pursuant to the provisions of
Section 13 of the Plan.
2.4 "Board" means the Board of Directors of the Company, if the Company is a corporation. If the Company is not a
corporation, "Board" shall mean the Company.
2.5 "Change in Control Event" means an event described in Section 409A(a)(2)(A)(v) of the Code (or any successor
provision thereto) and the regulations thereunder.
2.6 "Committee" means the persons or entity designated in the Adoption Agreement to administer the Plan. If the
Committee designated in the Adoption Agreement is unable to serve, the Employer shall satisfy the duties of the Committee provided for
in Section 9.
2.7 "Company" means the company designated in the Adoption Agreement as such.
2.8 "Compensation" shall have the meaning designated in the Adoption Agreement.
2.9 "Crediting Date" means the date designated in the Adoption Agreement for crediting the amount of any Participant
Deferral Credits or Employer Credits to the Deferred Compensation Account of a Participant.
2
2.10 "Deferred Compensation Account" means the account or accounts maintained with respect to each Participant under
the Plan. The Deferred Compensation Account shall be credited with Participant Deferral Credits and Employer Credits, credited or
debited for deemed investment gains or losses, and adjusted for payments in accordance with the rules and elections in effect under
Section 8. As permitted in the Adoption Agreement, the Deferred Compensation Account of a Participant may consist of one or more
accounts including In-Service or Education Accounts, if applicable. A Participant may elect payment options for each account as
described in Section 7.1 and deemed investments for each account as described in Section 8.2.
2.11 "Disabled or Disability" means Disabled or Disability within the meaning of Section 409A of the Code and the
regulations thereunder. Generally, this means that the Participant is unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous
period of not less than 12 months, or is, by reason of any medically determinable physical or mental impairment which can be expected to
result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a
period of not less than three months under an accident and health plan covering Employees of the Employer.
2.12 “Education Account” is an In-Service Account which will be used by the Participant for educational purposes.
2.13 "Effective Date" shall be the date designated in the Adoption Agreement.
3
2.14 "Employee" means an individual in the Service of the Employer if the relationship between the individual and the
Employer is the legal relationship of employer and employee. An individual shall cease to be an Employee upon the Employee's
Separation from Service.
2.15 "Employer" means the Company, as identified in the Adoption Agreement, and any Participating Employer which
adopts this Plan. An Employer may be a corporation, a limited liability company, a partnership or sole proprietorship.
2.16 "Employer Credits" means the amounts credited to the Participant's Deferred Compensation Account by the Employer
pursuant to the provisions of Section 4.2.
2.17 "Grandfathered Amounts" means, if applicable, the amounts that were deferred under the Plan and were earned and
vested within the meaning of Section 409A of the Code and regulations thereunder as of December 31, 2004. Grandfathered Amounts
shall be subject to the terms designated in the Plan which were in effect as of October 3, 2004.
2.18 "Independent Contractor" means an individual in the Service of the Employer if the relationship between the
individual and the Employer is not the legal relationship of employer and employee. An individual shall cease to be an Independent
Contractor upon the termination of the Independent Contractor's Service. An Independent Contractor shall include a director of the
Employer who is not an Employee.
2.19 "In-Service Account" means a separate account to be kept for each Participant that has elected to take in-service
distributions as described in Section 5.4. The In-Service Account shall be adjusted in the same manner and at the same time as the
4
Deferred Compensation Account under Section 8 and in accordance with the rules and elections in effect under Section 8.
2.20 "Normal Retirement Age" of a Participant means the age designated in the Adoption Agreement.
2.21 "Participant" means with respect to any Plan Year an Employee or Independent Contractor who has been designated
by the Committee as a Participant and who has entered the Plan or who has a Deferred Compensation Account under the Plan; provided
that if the Participant is an Employee, the individual must be a highly compensated or management employee of the Employer within the
meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.
2.22 "Participant Deferral Credits" means the amounts credited to the Participant's Deferred Compensation Account by
the Employer pursuant to the provisions of Section 4.1.
2.23 "Participating Employer" means any trade or business (whether or not incorporated) which adopts this Plan with the
consent of the Company identified in the Adoption Agreement.
2.24 "Participation Agreement" means a written agreement entered into between a Participant and the Employer pursuant
to the provisions of Section 4.1
2.25 "Performance-Based Compensation" means compensation where the amount of, or entitlement to, the compensation
is contingent on the satisfaction of preestablished organizational or individual performance criteria relating to a performance period of at
least twelve months. Organizational or individual performance criteria are considered preestablished if established in writing within 90
days after the
5
commencement of the period of service to which the criteria relates, provided that the outcome is substantially uncertain at the time the
criteria are established. Performance- based compensation may include payments based upon subjective performance criteria as provided
in regulations and administrative guidance promulgated under Section 409A of the Code.
2.26 "Plan" means The Executive Nonqualified Excess Plan, as herein set out and as set out in the Adoption Agreement, or
as duly amended. The name of the Plan as applied to the Employer shall be designated in the Adoption Agreement.
2.27 "Plan-Approved Domestic Relations Order" shall mean a judgment, decree, or order (including the approval of a
settlement agreement) which is:
2.27.1 Issued pursuant to a State's domestic relations law;
2.27.2 Relates to the provision of child support, alimony payments or marital property rights to a Spouse, former Spouse, child
or other dependent of the Participant;
2.27.3 Creates or recognizes the right of a Spouse, former Spouse, child or other dependent of the Participant to receive all or a
portion of the Participant's benefits under the Plan;
2.27.4 Requires payment to such person of their interest in the Participant's benefits in a lump sum payment at a specific
time; and
2.27.5 Meets such other requirements established by the Committee.
2.28 "Plan Year" means the twelve-month period ending on the last day of the month designated in the Adoption
Agreement; provided that the initial Plan Year may have fewer than twelve months.
2.29 "Qualifying Distribution Event" means (i) the Separation from Service of the Participant, (ii) the date the Participant
becomes Disabled, (iii) the death of the Participant, (iv) the time specified by the Participant for an In-Service or Education
6
Distribution, (v) a Change in Control Event, or (vi) an Unforeseeable Emergency, each to the extent provided in Section 5.
2.30 "Seniority Date" shall have the meaning designated in the Adoption Agreement.
2.31 "Separation from Service" or "Separates from Service" means a "separation from service" within the meaning of
Section 409A of the Code.
2.32 "Service" means employment by the Employer as an Employee. For purposes of the Plan, the employment relationship
is treated as continuing intact while the Employee is on military leave, sick leave, or other bona fide leave of absence if the period of such
leave does not exceed six months, or if longer, so long as the Employee's right to reemployment is provided either by statute or contract. If
the Participant is an Independent Contractor, "Service" shall mean the period during which the contractual relationship exists between the
Employer and the Participant. The contractual relationship is not terminated if the Participant anticipates a renewal of the contract or
becomes an Employee.
2.33 "Service Bonus" means any bonus paid to a Participant by the Employer which is not Performance-
Based Compensation.
2.34 "Specified Employee" means an Employee who meets the requirements for key employee treatment under Section
416(i)(l)(A)(i), (ii) or (iii) of the Code (applied in accordance with the regulations thereunder and without regard to Section 416(i)(5) of
the Code) at any time during the twelve month period ending on December 31 of each year (the "identification date"). If the person is a
key employee as of any identification date, the person is treated as a Specified Employee for the twelve-month period
7
beginning on the first day of the fourth month following the identification date. Unless binding corporate action is taken to establish
different rules for determining Specified Employees for all plans of the Company and its controlled group members that are subject to
Section 409A of the Code, the foregoing rules and the other default rules under the regulations of Section 409A of the Code shall apply.
2.35 "Spouse" or ' 'Surviving Spouse" means, except as otherwise provided in the Plan, a person who is the legally married
spouse or surviving spouse of a Participant.
2.36 "Unforeseeable Emergency" means an "unforeseeable emergency" within the meaning of Section 409A of the Code.
2.37 "Years of Service" means each Plan Year of Service completed by the Participant. For vesting purposes, Years of
Service shall be calculated from the date designated in the Adoption Agreement and Service shall be based on service with the Company
and all Participating Employers.
Section 3. Participation:
The Committee in its discretion shall designate each Employee or Independent Contractor who is eligible to participate in the
Plan. A Participant who Separates from Service with the Employer and who later returns to Service will not be an Active Participant under
the Plan except upon satisfaction of such terms and conditions as the Committee shall establish upon the Participant's return to Service,
whether or not the Participant shall have a balance remaining in his Deferred Compensation Account under the Plan on the date of the
return to Service.
Section 4. Credits to Deferred Compensation Account:
4.1 Participant Deferral Credits. To the extent provided in the Adoption
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Agreement, each Active Participant may elect, by entering into a Participation Agreement with the Employer, to defer the receipt of
Compensation from the Employer by a dollar amount or percentage specified in the Participation Agreement. The amount of
Compensation the Participant elects to defer, the Participant Deferral Credit, shall be credited by the Employer to the Deferred
Compensation Account maintained for the Participant pursuant to Section 8. The following special provisions shall apply with respect to
the Participant Deferral Credits of a Participant:
4.1.1 The Employer shall credit to the Participant's Deferred Compensation Account on each Crediting Date an amount equal
to the total Participant Deferral Credit for the period ending on such Crediting Date.
4.1.2 An election pursuant to this Section 4.1 shall be made by the Participant by executing and delivering a Participation
Agreement to the Committee. Except as otherwise provided in this Section 4.1, the Participation Agreement shall become effective with
respect to such Participant as of the first day of January following the date such Participation Agreement is received by the Committee. A
Participant's election may be changed at any time prior to the last permissible date for making the election as permitted in this Section 4.1,
and shall thereafter be irrevocable. Any election of a Participant shall continue in effect for the time period as set forth in the Adoption
Agreement and shall be described as evergreen or non-evergreen as appropriate.
4.1.3 A Participant may execute and deliver a Participation Agreement to the Committee within 30 days after the date the
Participant first becomes eligible to participate in the Plan. After the 30 day period expires, or after any shorter time period as agreed to
by the Participant and the Committee, the latest election made by the Participant during that period becomes irrevocable. Such election
shall then be effective as of the first payroll period commencing following the date the Participation Agreement becomes irrevocable.
Whether a Participant is treated as newly eligible for participation under this Section shall be determined in accordance with Section 409A
of the Code and the regulations thereunder, including (i) rules that treat all elective deferral account balance plans as one plan, and (ii)
rules that treat a previously eligible Employee as newly eligible if his benefits had been previously distributed or if he has been ineligible
for 24 months. For Compensation that is earned based upon a specified performance period (for example, an annual bonus), where a
deferral election is made under this Section but after the beginning of the performance period, the election will only apply to the portion of
the Compensation equal to the total amount of the Compensation for the service period multiplied by the ratio of the number of days
remaining in the performance period after the date the election becomes irrevocable over the total number of days in the
performance period.
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4.1.4 A Participant may unilaterally modify a Participation Agreement (either to terminate, increase or decrease the portion of
his future Compensation which is subject to deferral within the percentage limits set forth in Section 4.1 of the Adoption Agreement) by
providing a written modification of the Participation Agreement to the Committee. The modification shall become effective as of the first
day of January following the date such written modification is received by the Committee, or at such later date as required under Section
409A of the Code.
4.1.5 If the Participant performed services continuously from the later of the beginning of the performance period or the date
upon which the performance criteria are established through the date upon which the Participant makes an initial deferral election, a
Participation Agreement relating to the deferral of Performance-Based Compensation may be executed and delivered to the Committee no
later than the date which is 6 months prior to the end of the performance period, provided that in no event may an election to defer
Performance-Based Compensation be made after such Compensation has become readily ascertainable.
4.1.6 If the Employer has a fiscal year other than the calendar year, Compensation relating to Service in the fiscal year of the
Employer (such as a bonus based on the fiscal year of the Employer), of which no amount is paid or payable during the fiscal year, may be
deferred at the Participant's election if the election to defer is made not later than the close of the Employer's fiscal year next preceding the
first fiscal year in which the Participant performs any services for which such Compensation is payable.
4.1.7 Compensation payable after the last day of the Participant's taxable year solely for services provided during the final
payroll period containing the last day of the Participant's taxable year (i.e., December 31) is treated for purposes of this Section 4.1 as
Compensation for services performed in the subsequent taxable year.
4.1.8 The Committee may from time to time establish policies or rules consistent with the requirements of Section 409A of the
Code to govern the manner in which Participant Deferral Credits may be made.
4.1.9 If a Participant becomes Disabled all currently effective deferral elections for such Participant shall be cancelled. At the
time the participant is no longer Disabled, subsequent elections to defer future compensation will be permitted under this Section 4.
4.1.10 If a Participant applies for and receives a distribution on account of an Unforeseeable Emergency, all currently effective
deferral elections for such Participant shall be cancelled. Subsequent elections to defer future compensation will be permitted under this
Section 4.
4.1.11 If a Participant receives a hardship distribution under Section 1.401(k)- 1(d)(3) of the Code, all currently effective
deferral elections shall be cancelled.
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Subsequent elections to defer future compensation under this Section 4 will not be effective until the later of the beginning of the next
calendar year or six months after the date of the hardship distribution. If the effective date of such an election occurs after the beginning of
the next calendar year, as permitted by the Employer, a Participant may make elections for the next calendar year prior to January 1st of
the next calendar year, but these elections will not become effective until the end of the six month waiting period.
4.2 Employer Credits. If designated by the Employer in the Adoption Agreement, the Employer shall cause the Committee
to credit to the Deferred Compensation Account of each Active Participant an Employer Credit as determined in accordance with the
Adoption Agreement. A Participant must make distribution elections with respect to any Employer Credits credited to his Deferred
Compensation Account by the deadline that would apply under Section 4.1 for distribution elections with respect to Participant Deferral
Credits credited at the same time, on a Participation Agreement that is timely executed and delivered to the Committee pursuant to Section
4.1. If no distribution election is made, vested amounts in the Deferred Compensation Account will be distributed in a lump sum upon the
earliest of any Qualifying Distribution Event limited to Separation from Service, Disability, Death or Change in Control.
4.3 Deferred Compensation Account. All Participant Deferral Credits and Employer Credits shall be credited to the
Deferred Compensation Account of the Participant as provided in Section 8.
Section 5. Qualifying Distribution Events:
5.1 Separation from Service. If the Participant Separates from Service with the Employer, the vested balance in the
Deferred Compensation Account shall be paid to the Participant by the Employer as provided in Section 7. Notwithstanding the foregoing,
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no distribution shall be made earlier than six months after the date of Separation from Service (or, if earlier, the date of death) with respect
to a Participant who as of the date of Separation from Service is a Specified Employee of a corporation the stock in which is traded on an
established securities market or otherwise. Any payments to which such Specified Employee would be entitled during the first six months
following the date of Separation from Service shall be accumulated and paid on the first day of the seventh month following the date of
Separation from Service, and shall be adjusted for deemed investment gain and loss incurred during the six month period.
5.2 Disability. If the Employer designates in the Adoption Agreement that distributions are permitted under the Plan when a
Participant becomes Disabled, and the Participant becomes Disabled while in Service, the vested balance in the Deferred Compensation
Account shall be paid to the Participant by the Employer as provided in Section 7.
5.3 Death. If the Participant dies while in Service, the Employer shall pay a benefit to the Participant's Beneficiary in the
amount designated in the Adoption Agreement. Payment of such benefit shall be made by the Employer as provided in Section 7.
5.4 In-Service or Education Distributions. If the Employer designates in the Adoption Agreement that in-service or
education distributions are permitted under the Plan, a Participant may designate in the Participation Agreement to have a specified
amount credited to the Participant's In-Service or Education Account for in-service or education distributions at the date specified by the
Participant. In no event may an in- service or education distribution of an amount be made before the date that is two years
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after the first day of the year in which any deferral election to such In-Service or Education Account became effective. Notwithstanding
the foregoing, if a Participant incurs a Qualifying Distribution Event prior to the date on which the entire balance in the In-Service or
Education Account has been distributed, then the vested balance in the In- Service or Education Account on the date of the Qualifying
Distribution Event shall be paid as provided under Section 7.1 for payments on such Qualifying Distribution Event.
5.5 Change in Control Event. If the Employer designates in the Adoption Agreement that distributions are permitted under
the Plan upon the occurrence of a Change in Control Event, the Participant may designate in the Participation Agreement to have the
vested balance in the Deferred Compensation Account paid to the Participant upon a Change in Control Event by the Employer as
provided in Section 7.
5.6 Unforeseeable Emergency. If the Employer designates in the Adoption Agreement that distributions are permitted under
the Plan upon the occurrence of an Unforeseeable Emergency event, a distribution from the Deferred Compensation Account may be
made to a Participant in the event of an Unforeseeable Emergency, subject to the following provisions:
5.6.1 A Participant may, at any time prior to his Separation from Service for any reason, make application to the Committee to
receive a distribution in a lump sum of all or a portion of the vested balance in the Deferred Compensation Account (determined as of the
date the distribution, if any, is made under this Section 5.6) because of an Unforeseeable Emergency. A distribution because of an
Unforeseeable Emergency shall not exceed the amount required to satisfy the Unforeseeable Emergency plus amounts necessary to pay
taxes reasonably anticipated as a result of such distribution, after taking into account the extent to which the Unforeseeable Emergency
may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the
extent the liquidation of such assets would not itself cause severe financial hardship) or by stopping current deferrals under the Plan
pursuant to Section 4.1.10.
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5.6.2 The Participant's request for a distribution on account of Unforeseeable Emergency must be made in writing to the
Committee. The request must specify the nature of the financial hardship, the total amount requested to be distributed from the Deferred
Compensation Account, and the total amount of the actual expense incurred or to be incurred on account of the Unforeseeable Emergency.
5.6.3 If a distribution under this Section 5.6 is approved by the Committee, such distribution will be made as soon as
practicable following the date it is approved. The processing of the request shall be completed as soon as practicable from the date on
which the Committee receives the properly completed written request for a distribution on account of an Unforeseeable Emergency. If a
Participant's Separation from Service occurs after a request is approved in accordance with this Section 5.6.3, but prior to distribution of
the full amount approved, the approval of the request shall be automatically null and void and the benefits which the Participant is entitled
to receive under the Plan shall be distributed in accordance with the applicable distribution provisions of the Plan.
5.6.4 The Committee may from time to time adopt additional policies or rules consistent with the requirements of Section
409A of the Code to govern the manner in which such distributions may be made so that the Plan may be conveniently administered.
Section 6. Vesting:
A Participant shall be fully vested in the portion of his Deferred Compensation Account attributable to Participant Deferral
Credits, and all income, gains and losses attributable thereto. A Participant shall become fully vested in the portion of his Deferred
Compensation Account attributable to Employer Credits, and income, gains and losses attributable thereto, in accordance with the vesting
schedule and provisions designated by the Employer in the Adoption Agreement. If a Participant's Deferred Compensation Account is not
fully vested upon Separation from Service, the portion of the Deferred Compensation Account that is not fully vested shall thereupon be
forfeited.
Section 7. Distribution Rules:
7.1 Payment Options. The Employer shall designate in the Adoption Agreement the payment options which may be elected
by the Participant (lump sum, annual installments, or a combination of both). Different payment options may be made
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available for each Qualifying Distribution Event, and different payment options may be available for different types of Separations from
Service, all as designated in the Adoption Agreement. The Participant shall elect in the Participation Agreement the method under which
the vested balance in the Deferred Compensation Account will be distributed from among the designated payment options. The Participant
may at such time elect a different method of payment for each Qualifying Distribution Event as specified in the Adoption Agreement. If
the Participant is permitted by the Employer in the Adoption Agreement to elect different payment options and does not make a valid
election, the vested balance in the Deferred Compensation Account will be distributed as a lump sum upon the Qualifying Distribution
Event.
Notwithstanding the foregoing, if certain Qualifying Distribution Events occur prior to the date on which the vested balance of a
Participant's Deferred Compensation Account is completely paid pursuant to this Section 7.1 following the occurrence of certain initial
Qualifying Distribution Events, the following rules apply:
7.1.1 If the initial Qualifying Distribution Event is a Separation from Service or Disability, and the Participant subsequently
dies, the remaining unpaid vested balance of a Participant's Deferred Compensation Account shall be paid as a lump sum.
7.1.2 If the initial Qualifying Distribution Event is a Change in Control Event, and any subsequent Qualifying Distribution
Event occurs (except an In-Service or Education Distribution described in Section 2.29(iv)), the remaining unpaid vested balance of a
Participant's Deferred Compensation Account shall be paid as provided under Section 7.1 for payments on such subsequent Qualifying
Distribution Event.
7.2 Timing of Payments. Payment shall be made in the manner elected by the Participant and shall commence as soon as
practicable after (but no later than 60 days after) the distribution date specified for the Qualifying Distribution Event. For each payment,
the Committee must specify a date for the Deferred Compensation Account(s)
15
to be valued. In the event the Participant fails to make a valid election of the payment method, the distribution will be made in a single
lump sum payment as soon as practicable after (but no later than 60 days after) the Qualifying Distribution Event. A payment may be
further delayed to the extent permitted in accordance with regulations and guidance under Section 409A of the Code.
7.3 Installment Payments. If the Participant elects to receive installment payments upon a Qualifying Distribution Event,
the payment of each installment shall be made on the anniversary of the date of the first installment payment, and the amount of the
installment shall be adjusted on such anniversary for credits or debits to the Participant's account pursuant to Section 8 of the Plan. Such
adjustment shall be made by dividing the balance in the Deferred Compensation Account on such date by the number of installments
remaining to be paid hereunder; provided that the last installment due under the Plan shall be the entire amount credited to the
Participant's account on the date of payment.
7.4 De Minimis Amounts. Notwithstanding any payment election made by the Participant, if the Employer designates a pre-
determined de minimis amount in the Adoption Agreement, the vested balance in all Deferred Compensation Accounts of the Participant
will be distributed in a single lump sum payment if at the time of a permitted Qualifying Distribution Event the vested balance does not
exceed such pre-determined de minimis amount; provided, however, that such distribution will be made only where the Qualifying
Distribution Event is a Separation from Service, death, Disability (if applicable) or Change in Control Event (if applicable). Such
payment shall be made on or before the later of (i) December 31 of the calendar year in which the Qualifying
16
Distribution Event occurs, or (ii) the date that is 2-1/2 months after the Qualifying Distribution Event occurs. In addition, the Employer
may distribute a Participant's vested balance in all of the Participant’s Deferred Compensation Accounts at any time if the balance does
not exceed the limit in Section 402(g)(1)(B) of the Code and results in the termination of the Participant's entire interest in the Plan as
provided under Section 409A of the Code.
7.5 Subsequent Elections. With the consent of the Committee, a Participant may delay or change the method of payment of
the Deferred Compensation Account subject to the following requirements:
7.5.1 The new election may not take effect until at least 12 months after the date on which the new election is made.
7.5.2 If the new election relates to a payment for a Qualifying Distribution Event other than the death of the Participant, the
Participant becoming Disabled, or an Unforeseeable Emergency, the new election must provide for the deferral of the payment for a
period of at least five years from the date such payment would otherwise have been made.
7.5.3 If the new election relates to a payment from the In-Service or Education Account, the new election must be made at least
12 months prior to the date of the first scheduled payment from such account.
For purposes of this Section 7.5 and Section 7.6, a payment is each separately identified amount to which the Participant is
entitled under the Plan; provided, that entitlement to a series of installment payments is treated as the entitlement to a single payment.
7.6 Acceleration Prohibited. The acceleration of the time or schedule of any payment due under the Plan is prohibited
except as expressly provided in regulations and administrative guidance promulgated under Section 409A of the Code (such as
accelerations for domestic relations orders and employment taxes). It is not an
17
acceleration of the time or schedule of payment if the Employer waives or accelerates the vesting requirements applicable to a benefit
under the Plan.
7.7 Residual Distributions. If calculation of the amount of any credit to a Participant’s Deferred Compensation Account is
not administratively practicable due to events beyond the control of the Employer, payments may be made to the Participant for residual
amounts contributed to or remaining in a Deferred Compensation Account after payments under the provisions of this Section 7 have
commenced or been completed. The residual amount shall be credited to the Deferred Compensation Account when the calculation of the
amount becomes administratively practicable. Examples of residual amounts include, but are not limited to, additional investment returns
credited after payment (due to dividends or pricing changes) or additional contributions made after payment (such as an annual bonus
deferral or an Employer Credit). Payments that would have been made had the residual amount been calculable at the benefit
commencement date shall be made up as soon as practicable after crediting to the Deferred Compensation Account, in no case later than
the end of the year in which calculation of the amount becomes administratively practicable.
7.8 Ineffective Deferrals. If a Participant deferral election under Section 4 to contribute to an In-Service or Education
Account carries over to a subsequent year (an evergreen election) and the deferral election is ineffective (i.e., the distribution election
would cause payment in the current or prior years), the amount deferred will be credited to a Deferred Compensation Account that is not
an In-Service or Education Account. If the Participant only has one account of this type, the amount deferred will be credited to that
account. If the Participant has multiple accounts of this type, and one of the accounts
18
has a lump sum at Separation from Service distribution election, the amount deferred will be credited to that account. If the Participant has
multiple accounts of this type and does not have an account with a lump sum at Separation from Service distribution election, one will be
established with a lump sum at Separation from Service distribution election and the amount deferred will be credited to this account.
Section 8. Accounts; Deemed Investment; Adjustments to Account:
8.1 Accounts. The Committee shall establish a book reserve account, entitled the "Deferred Compensation Account," on
behalf of each Participant. The Committee shall also establish an In-Service or Education Account as a part of the Deferred Compensation
Account of each Participant, if applicable. The amount credited to the Deferred Compensation Account shall be adjusted pursuant to the
provisions of Section 8.3.
8.2 Deemed Investments. The Deferred Compensation Account of a Participant shall be credited with an investment return
determined as if the account were invested in one or more investment funds made available by the Committee. The Participant shall elect
the investment funds in which his Deferred Compensation Account shall be deemed to be invested. Such election shall be made in the
manner prescribed by the Committee and shall take effect upon the entry of the Participant into the Plan. The investment election of the
Participant shall remain in effect until a new election is made by the Participant. In the event the Participant fails for any reason to make
an effective election of the investment return to be credited to his account, the investment return shall be determined by the Committee.
19
8.3 Adjustments to Deferred Compensation Account. With respect to each Participant who has a Deferred Compensation
Account under the Plan, the amount credited to such account shall be adjusted by the following debits and credits, at the times and in the
order stated:
8.3.1 The Deferred Compensation Account shall be debited each business day with the total amount of any payments made
from such account since the last preceding business day to him or for his benefit. Unless otherwise specified by the Employer, each
deemed investment fund will be debited pro-rata based on the value of the investment funds as of the end of the preceding business day.
8.3.2 The Deferred Compensation Account shall be credited on each Crediting Date with the total amount of any Participant
Deferral Credits and Employer Credits to such account since the last preceding Crediting Date.
8.3.3 The Deferred Compensation Account shall be credited or debited on each day securities are traded on a national stock
exchange with the amount of deemed investment gain or loss resulting from the performance of the deemed investment funds elected by
the Participant in accordance with Section 8.2. The amount of such deemed investment gain or loss shall be determined by the Committee
and such determination shall be final and conclusive upon all concerned.
Section 9. Administration by Committee:
9.1 Membership of Committee. If the Committee consists of individuals appointed by the Board, they will serve at the
pleasure of the Board. Any member of the Committee may resign, and his successor, if any, shall be appointed by the Board.
9.2 General Administration . The Committee shall be responsible for the operation and administration of the Plan and for
carrying out its provisions. The Committee shall have the full authority and discretion to make, amend, interpret, and enforce all
appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions, including interpretations
of this Plan, as may arise in connection with this Plan. Any such action taken by the Committee shall be final and conclusive on any
party. To the extent the Committee has been granted discretionary
20
authority under the Plan, the Committee’s prior exercise of such authority shall not obligate it to exercise its authority in a like fashion
thereafter. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by
any actuary, accountant, controller, counsel or other person employed or engaged by the Employer with respect to the Plan. The
Committee may, from time to time, employ agents and delegate to such agents, including Employees of the Employer, such administrative
or other duties as it sees fit.
9.3 Indemnification . To the extent not covered by insurance, the Employer shall indemnify the Committee, each Employee,
officer, director, and agent of the Employer, and all persons formerly serving in such capacities, against any and all liabilities or expenses,
including all legal fees relating thereto, arising in connection with the exercise of their duties and responsibilities with respect to the Plan,
provided however that the Employer shall not indemnify any person for liabilities or expenses due to that person’s own gross negligence
or willful misconduct.
Section 10. Contractual Liability, Trust:
10.1 Contractual Liability. Unless otherwise elected in the Adoption Agreement, the Company shall be obligated to make
all payments hereunder. This obligation shall constitute a contractual liability of the Company to the Participants, and such payments shall
be made from the general funds of the Company. The Company shall not be required to establish or maintain any special or separate fund,
or otherwise to segregate assets to assure that such payments shall be made, and the Participants shall not have any interest in any
particular assets of the Company by reason of its obligations hereunder. To the extent that any person acquires a right to receive payment
from the
21
Company under the Plan, such right shall be no greater than the right of an unsecured creditor of the Company.
10.2 Trust. The Employer may establish a trust to assist it in meeting its obligations under the Plan. Any such trust shall
conform to the requirements of a grantor trust under Revenue Procedures 92-64 and 92-65 and at all times during the continuance of the
trust the principal and income of the trust shall be subject to claims of general creditors of the Employer under federal and state law. The
establishment of such a trust would not be intended to cause Participants to realize current income on amounts contributed thereto, and the
trust would be so interpreted and administered.
Section 11. Allocation of Responsibilities:
The persons responsible for the Plan and the duties and responsibilities allocated to each are as follows:
11.1 Board.
(i) To amend the Plan;
(ii) To appoint and remove members of the Committee; and
(iii) To terminate the Plan as permitted in Section 14.
11.2 Committee.
(i) To designate Participants;
(ii) To interpret the provisions of the Plan and to determine the rights of the Participants under the Plan, except to the extent
otherwise provided in Section 16 relating to claims procedure;
(iii) To administer the Plan in accordance with its terms, except to the extent powers to administer the Plan are specifically
delegated to another person or persons as provided in the Plan;
(iv) To account for the amount credited to the Deferred Compensation Account of a Participant;
(v) To direct the Employer in the payment of benefits;
22
(vi) To file such reports as may be required with the United States Department of Labor, the Internal Revenue Service and any
other government agency to which reports may be required to be submitted from time to time; and
(vii) To administer the claims procedure to the extent provided in Section 16.
Section 12. Benefits Not Assignable; Facility of Payments:
12.1 Benefits Not Assignable. No portion of any benefit credited or paid under the Plan with respect to any Participant shall
be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt so to
anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void, nor shall any portion of such benefit be in
any manner payable to any assignee, receiver or any one trustee, or be liable for his debts, contracts, liabilities, engagements or torts.
12.2 Plan-Approved Domestic Relations Orders. The Committee shall establish procedures for determining whether an
order directed to the Plan is a Plan- Approved Domestic Relations Order. If the Committee determines that an order is a Plan-Approved
Domestic Relations Order, the Committee shall cause the payment of amounts pursuant to or segregate a separate account as provided by
(and to prevent any payment or act which might be inconsistent with) the Plan-Approved Domestic Relations Order notwithstanding
Section 12.1.
12.3 Payments to Minors and Others. If any individual entitled to receive a payment under the Plan shall be physically,
mentally or legally incapable of receiving or acknowledging receipt of such payment, the Committee, upon the receipt of satisfactory
evidence of his incapacity and satisfactory evidence that another person or institution is maintaining him and that no guardian or
committee has been appointed for him, may
23
cause any payment otherwise payable to him to be made to such person or institution so maintaining him. Payment to such person or
institution shall be in full satisfaction of all claims by or through the Participant to the extent of the amount thereof.
Section 13. Beneficiary:
The Participant's Beneficiary shall be the person, persons, entity or entities designated by the Participant on the Beneficiary
designation form provided by and filed with the Committee or its designee. If the Participant does not designate a Beneficiary, the
Beneficiary shall be his Surviving Spouse. If the Participant does not designate a Beneficiary and has no Surviving Spouse, the
Beneficiary shall be the Participant's estate. The designation of a Beneficiary may be changed or revoked only by filing a new Beneficiary
designation form with the Committee or its designee. If a Beneficiary (the "primary Beneficiary") is receiving or is entitled to receive
payments under the Plan and dies before receiving all of the payments due him, the balance to which he is entitled shall be paid to the
contingent Beneficiary, if any, named in the Participant's current Beneficiary designation form. If there is no contingent Beneficiary, the
balance shall be paid to the estate of the primary Beneficiary. Any Beneficiary may disclaim all or any part of any benefit to which such
Beneficiary shall be entitled hereunder by filing a written disclaimer with the Committee before payment of such benefit is to be made.
Such a disclaimer shall be made in a form satisfactory to the Committee and shall be irrevocable when filed. Any benefit
disclaimed shall be payable from the Plan in the same manner as if the Beneficiary who filed the disclaimer had predeceased the
Participant.
Section 14. Amendment and Termination of Plan:
24
The Company may amend any provision of the Plan or terminate the Plan at any time; provided, that in no event shall such
amendment or termination reduce the balance in any Participant's Deferred Compensation Account as of the date of such amendment or
termination, nor shall any such amendment materially adversely affect the Participant relating to the payment of such Deferred
Compensation Account. Notwithstanding the foregoing, the following special provisions shall apply:
14.1 Termination in the Discretion of the Employer. Except as otherwise provided in Sections 14.2, the Company in its
discretion may terminate the Plan and distribute benefits to Participants subject to the following requirements and any others specified
under Section 409A of the Code:
14.1.1 All arrangements sponsored by the Employer that would be aggregated with the Plan under Section 1.409A-l(c) of the
Treasury Regulations are terminated.
14.1.2 No payments other than payments that would be payable under the terms of the Plan if the termination had not occurred
are made within 12 months of the termination date.
14.1.3 All benefits under the Plan are paid within 24 months of the termination
date.
14.1.4 The Employer does not adopt a new arrangement that would be aggregated with the Plan under Section 1.409A-1(c) of
the Treasury Regulations providing for the deferral of compensation at any time within 3 years following the date of termination of
the Plan.
14.1.5 The termination does not occur proximate to a downturn in the financial health of the Employer.
14.2 Termination Upon Change in Control Event. If the Company terminates the Plan within thirty days preceding or
twelve months following a Change in Control Event, the Deferred Compensation Account of each Participant shall become
25
payable to the Participant in a lump sum within twelve months following the date of termination, subject to the requirements of Section
409A of the Code.
Section 15. Communication to Participants:
The Employer shall make a copy of the Plan available for inspection by Participants and their beneficiaries during reasonable
hours at the principal office of the Employer.
Section 16. Claims Procedure:
The following claims procedure shall apply with respect to the Plan:
16.1 Filing of a Claim for Benefits. If a Participant or Beneficiary (the "claimant") believes that he is entitled to benefits
under the Plan which are not being paid to him or which are not being accrued for his benefit, he shall file a written claim therefore with
the Committee.
16.2 Notification to Claimant of Decision. Within 90 days after receipt of a claim by the Committee (or within 180 days if
special circumstances require an extension of time), the Committee shall notify the claimant of the decision with regard to the claim. In
the event of such special circumstances requiring an extension of time, there shall be furnished to the claimant prior to expiration of the
initial 90-day period written notice of the extension, which notice shall set forth the special circumstances and the date by which the
decision shall be furnished. If such claim shall be wholly or partially denied, notice thereof shall be in writing and worded in a manner
calculated to be understood by the claimant, and shall set forth: (i) the specific reason or reasons for the denial; (ii) specific reference to
pertinent provisions of the Plan on which the denial is based; (iii) a description of any additional material or information necessary for the
claimant to perfect
26
the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the procedure for review of the
denial and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under ERISA
following an adverse benefit determination on review. Notwithstanding the foregoing, if the claim relates to a disability determination, the
Committee shall notify the claimant of the decision within 45 days (which may be extended for an additional 30 days if required by
special circumstances).
16.3 Procedure for Review. Within 60 days following receipt by the claimant of notice denying his claim, in whole or in
part, or, if such notice shall not be given, within 60 days following the latest date on which such notice could have been timely given, the
claimant may appeal denial of the claim by filing a written application for review with the Committee. Following such request for review,
the Committee shall fully and fairly review the decision denying the claim. Prior to the decision of the Committee, the claimant shall be
given an opportunity to review pertinent documents and to submit issues and comments in writing.
16.4 Decision on Review. The decision on review of a claim denied in whole or in part by the Committee shall be made in
the following manner:
16.4.1 Within 60 days following receipt by the Committee of the request for review (or within 120 days if special
circumstances require an extension of time), the Committee shall notify the claimant in writing of its decision with regard to the claim. In
the event of such special circumstances requiring an extension of time, written notice of the extension shall be furnished to the claimant
prior to the commencement of the extension. Notwithstanding the foregoing, if the claim relates to a disability determination, the
Committee shall notify the claimant of the decision within 45 days (which may be extended for an additional 45 days if required by
special circumstances).
16.4.2 With respect to a claim that is denied in whole or in part, the decision on review shall set forth specific reasons for the
decision, shall be written in a manner calculated to be understood by the claimant, and shall set forth:
27
(i) the specific reason or reasons for the adverse determination;
(ii) specific reference to pertinent Plan provisions on which the adverse determination is based;
(iii) a statement that the claimant is entitled to receive, upon request and free of charge,
reasonable access to, and copies of, all documents, records, and other information relevant to
the claimant’s claim for benefits; and
(iv) a statement describing any voluntary appeal procedures offered by the Plan and the
claimant’s right to obtain the information about such procedures, as well as a statement of the
claimant’s right to bring an action under ERISA section 502(a).
16.4.3 The decision of the Committee shall be final and conclusive.
16.5 Action by Authorized Representative of Claimant. All actions set forth in this Section 16 to be taken by the claimant
may likewise be taken by a representative of the claimant duly authorized by him to act in his behalf on such matters. The Committee may
require such evidence of the authority to act of any such representative as it may reasonably deem necessary or advisable.
Section 17. Miscellaneous Provisions:
17.1 Set off. The Employer may at any time offset a Participant's Deferred Compensation Account by an amount up to
$5,000 to collect the amount of any loan, cash advance, extension of other credit or other obligation of the Participant to the Employer that
is then due and payable in accordance with the requirements of Section 409A of the Code.
17.2 Notices. Each Participant who is not in Service and each Beneficiary shall be responsible for furnishing the Committee
or its designee with his current address for the mailing of notices and benefit payments. Any notice required or permitted to be given
28
to such Participant or Beneficiary shall be deemed given if directed to such address and mailed by regular United States mail, first class,
postage prepaid. If any check mailed to such address is returned as undeliverable to the addressee, mailing of checks will be suspended
until the Participant or Beneficiary furnishes the proper address. This provision shall not be construed as requiring the mailing of any
notice or notification otherwise permitted to be given by posting or by other publication.
17.3 Lost Distributees. A benefit shall be deemed forfeited if the Committee is unable to locate the Participant or
Beneficiary to whom payment is due by the fifth anniversary of the date payment is to be made or commence; provided, that the deemed
investment rate of return pursuant to Section 8.2 shall cease to be applied to the Participant's account following the first anniversary of
such date; provided further, however, that such benefit shall be reinstated if a valid claim is made by or on behalf of the Participant or
Beneficiary for all or part of the forfeited benefit.
17.4 Reliance on Data. The Employer and the Committee shall have the right to rely on any data provided by the Participant
or by any Beneficiary. Representations of such data shall be binding upon any party seeking to claim a benefit through a Participant, and
the Employer and the Committee shall have no obligation to inquire into the accuracy of any representation made at any time by a
Participant or Beneficiary.
17.5 Headings. The headings and subheadings of the Plan have been inserted for convenience of reference and are to be
ignored in any construction of the provisions hereof.
17.6 Continuation of Employment. The establishment of the Plan shall not be construed as conferring any legal or other
rights upon any Employee or any persons for
29
continuation of employment, nor shall it interfere with the right of the Employer to discharge any Employee or to deal with him without
regard to the effect thereof under the Plan.
17.7 Merger or Consolidation; Assumption of Plan. No Employer shall consolidate or merge into or with another
corporation or entity, or transfer all or substantially all of its assets to another corporation, partnership, trust or other entity (a "Successor
Entity") unless such Successor Entity shall assume the rights, obligations and liabilities of the Employer under the Plan and upon such
assumption, the Successor Entity shall become obligated to perform the terms and conditions of the Plan. Nothing herein shall prohibit the
assumption of the obligations and liabilities of the Employer under the Plan by any Successor Entity.
17.8 Construction. The Employer shall designate in the Adoption Agreement the state according to whose laws the
provisions of the Plan shall be construed and enforced, except to the extent that such laws are superseded by ERISA and the applicable
requirements of the Code.
17.9 Taxes. The Employer or other payor may withhold a benefit payment under the Plan or a Participant's wages, or the
Employer may reduce a Participant's Deferred Compensation Account balance, in order to meet any federal, state, or local or employment
tax withholding obligations with respect to Plan benefits, as permitted under Section 409A of the Code. The Employer or other payor shall
report Plan payments and other Plan-related information to the appropriate governmental agencies as required under applicable laws.
30
NOTE: Execution of this Adoption Agreement creates a legal liability of the Employer with significant tax consequences to the
Employer and Participants. Principal Life Insurance Company disclaims all liability for the legal and tax consequences which
result from the elections made by the Employer in this Adoption Agreement.
Principal Life Insurance Company, Raleigh, NC 27612
A member of the Principal Financial Group®
THE EXECUTIVE NONQUALIFIED EXCESS PLAN
ADOPTION AGREEMENT
THIS AGREEMENT is the adoption by Glaukos Corporation (the "Company") of the Executive Nonqualified Excess Plan
("Plan").
W I T N E S S E T H:
WHEREAS, the Company desires to adopt the Plan as an unfunded, nonqualified deferred compensation plan; and
WHEREAS, the provisions of the Plan are intended to comply with the requirements of Section 409A of the Code and the
regulations thereunder and shall apply to amounts subject to section 409A; and
WHEREAS, the Company has been advised by Principal Life Insurance Company to obtain legal and tax advice from its
professional advisors before adopting the Plan,
NOW, THEREFORE, the Company hereby adopts the Plan in accordance with the terms and conditions set forth in this
Adoption Agreement:
ARTICLE I
Terms used in this Adoption Agreement shall have the same meaning as in the Plan, unless some other meaning is expressly
herein set forth. The Employer hereby represents and warrants that the Plan has been adopted by the Employer upon proper authorization
and the Employer hereby elects to adopt the Plan for the benefit of its Participants as referred to in the Plan. By the execution of this
Adoption Agreement, the Employer hereby agrees to be bound by the terms of the Plan.
ARTICLE II
The Employer hereby makes the following designations or elections for the purpose of the Plan:
2.6 Committee: The duties of the Committee set forth in the Plan shall be satisfied by:
__ (a) Company
XX (b) The administrative committee appointed by the Board to serve at the pleasure of the Board.
__ (c) Board.
__ (d) Other (specify):______________________________________.
2.8 Compensation: The "Compensation" of a Participant shall mean all of a Participant's:
XX (a) Base salary.
XX (b) Service Bonus.
XX Service Bonus earned from 1/1 – 12/31 , paid on or around first quarter of the following Plan Year.
__ Service Bonus earned each calendar quarter, paid on or around the following calendar quarter..
__ Service Bonus with no defined earnings period (e.g.: a “spot bonus”)
XX (c) Performance-Based Compensation earned in a period of 12 months or more.
XX Performance Based Bonus earned from 1/1 – 12/31 , paid on or around first quarter the following
Plan Year and whose elections must be made no later than 6/30 of the Plan Year it is earned.
__ Performance Based Bonus earned from ___________, paid on or around ____________ the
following Plan Year and whose elections must be made no later than _________ of the Plan Year it
is earned.
__ (d) Commissions.
__ (e) Compensation received as an Independent Contractor reportable on Form 1099.
__ (f) Other:
2.9 Crediting Date: The Deferred Compensation Account of a Participant shall be credited as follows:
Participant Deferral Credits at the time designated below:
XX (a) On any business day as specified by the Employer.
__ (b) Each pay day as reported by the Employer.
__ (c) The last business day of each payroll period during the Plan Year.
Employer Credits at the time designated below:
XX (a) On any business day as specified by the Employer.
2
2.13 Effective Date:
XX (a) This is a newly-established Plan, and the Effective Date of the Plan is February 15, 2017 .
2.20 Normal Retirement Age: The Normal Retirement Age of a Participant shall be:
XX (a) Age 65
__ (b) The later of age or the anniversary of the participation commencement date. The participation
commencement date is the first day of the first Plan Year in which the Participant commenced participation
in the Plan.
__ (c) Other: .
2.23 Participating Employer(s): As of the Effective Date, the following Participating Employer(s) are parties to the Plan:
Name of Employer
Glaukos Corporation
2.26 Plan: The name of the Plan is
EIN
33-0945406
Glaukos Corporation Nonqualified Deferred Compensation Plan
2.28 Plan Year: The Plan Year shall end each year on the last day of the month of December.
2.30 Seniority Date: The date on which a Participant has:
__ (a) Attained age__.
__ (b) Completed __ Years of Service from First Date of Service.
__ (c) Attained age __ and completed __ Years of Service from First Date of Service.
XX (d) Not applicable – distribution elections for Separation from Service are not based on Seniority Date
3
4.1 Participant Deferral Credits:
Subject to the limitations in Section 4.1 of the Plan, a Participant may elect to have his Compensation (as selected in Section 2.8 of this Adoption Agreement)
deferred within the annual limits below by the following percentage or amount as designated in writing to the Committee:
XX (a) Base salary:
minimum deferral: _________ %
maximum deferral: 80 %
XX (b) Service Bonus:
XX Service Bonus .
minimum deferral: _________ %
maximum deferral: 80 %
XX (c) Performance-Based Compensation:
XX Performance Based Bonus
minimum deferral: _________ %
maximum deferral: 80 %
__ (d) Commissions:
minimum deferral: _________ %
maximum deferral: _________ %
__ (e) Form 1099 Compensation:
__ (f) Other:
minimum deferral: _________ %
maximum deferral: _________ %
minimum deferral: _________ %
maximum deferral: _________ %
__ (g) Participant deferrals not allowed.
4
4.1.2 Participant Deferral Credits and Employer Credits – Election Period: Participant elections regarding Participant Deferral
Credits and Employer Credits shall be subject to the following effective periods (one must be selected):
XX (a) Evergreen election. An election made by the Participant shall continue in effect for subsequent years until
modified by the Participant as permitted in Section 4.1 and Section 4.2. (This option is not permitted if
source year accounts are elected in Section 5.1)
__ (b) Non-Evergreen election. Any election made by the Participant shall only remain in effect for the current
election period and will then expire. An election for each subsequent year will be required as permitted in
Sections 4.1 and 4.2.
4.2 Employer Credits: Employer Credits will be made in the following manner:
XX (a) Employer Discretionary Credits : The Employer may make discretionary credits to the Deferred
Compensation Account of each Active Participant in an amount determined as follows:
XX (i) An amount determined each Plan Year by the Employer.
__ (ii) Other:______________________________________________.
XX (b) Other Employer Credits : The Employer may make other credits to the Deferred Compensation Account
of each Active Participant in an amount determined as follows:
XX (i) An amount determined each Plan Year by the Employer.
__ (ii) Other: ______________________________________________.
__ (c) Employer Credits not allowed.
5
5.1 Deferred Compensation Account: The Participant is permitted to establish the following accounts:
XX (a) Non-source year account(s). Deferred Compensation Account(s) will not be established on a source
year basis:
__ (i) A Participant may establish only one account to be distributed upon Separation from Service. One
set of payment options for that account is allowed as permitted in Section 7.1. Additional In-Service
or Education accounts may be established as permitted in Section 5.4.
XX (ii) A Participant may establish multiple accounts to be distributed upon Separation from Service. Each
account may have one set of payment options as permitted in Section 7.1 Additional In-Service or
Education accounts may be established as permitted in Section 5.4. If this multiple account option
is elected, the Participant will also be required to elect Separation from Service payment options for
each In- Service or Education account established.
__ (b) Source year account(s): Annual Deferred Compensation Account(s) will be established each year in which
Participant Deferral Credits or Employer Credits are credited to the Participant. Only one account may be
established each year for distribution upon Separation from Service. One set of payment options for that
account is allowed as permitted in Section 7.1. Additional In- Service or Education accounts may be
established for each source year as permitted in Section 5.4. If this option is selected, Evergreen elections as
described in Section 4.1.2 are not permitted.
5.2 Disability of a Participant:
XX (a) A Participant's becoming Disabled shall be a Qualifying Distribution Event and the Deferred Compensation
Account shall be paid by the Employer as provided in Section 7.1.
__ (b) A Participant becoming Disabled shall not be a Qualifying Distribution Event.
5.3 Death of a Participant: If the Participant dies while in Service, the Employer shall pay a benefit to the Beneficiary in an amount
equal to the vested balance in the Deferred Compensation Account of the
Participant determined as of the date payments to the Beneficiary commence, plus:
__ (a) An amount to be determined by the Committee.
XX (b) No additional benefits.
6
5.4 In-Service or Education Distributions: In-Service and Education Accounts are permitted under the Plan:
XX (a) In-Service Accounts are allowed with respect to:
__ Participant Deferral Credits only.
__ Employer Credits only.
XX Participant Deferral and Employer Credits.
In-service distributions may be made in the following manner:
XX Single lump sum payment.
XX Annual installments over a term certain not to exceed 5 years.
Education Accounts are allowed with respect to:
__ Participant Deferral Credits only.
XX Employer Credits only.
__ Participant Deferral and Employer Credits.
Education Accounts distributions may be made in the following manner:
__ Single lump sum payment.
XX Annual installments over a term certain not to exceed 5 years.
If applicable, amounts not vested at the time payments due under this Section cease will be:
__ Forfeited
XX Distributed at Separation from Service if vested at that time
__ (b) No In-Service or Education Distributions permitted.
5.5 Change in Control Event:
XX (a) Participants may elect upon initial enrollment to have accounts distributed upon a Change in Control Event.
__ (b) A Change in Control shall not be a Qualifying Distribution Event.
5.6 Unforeseeable Emergency Event:
XX (a) Participants may apply to have accounts distributed upon an Unforeseeable Emergency event.
__ (b) An Unforeseeable Emergency shall not be a Qualifying Distribution Event
7
6. Vesting: An Active Participant shall be fully vested in the Employer Credits
made to the Deferred Compensation Account upon the first to occur of the following events:
XX (a) Normal Retirement Age.
XX (b) Death.
XX (c) Disability.
XX (d) Change in Control Event
XX (e) Satisfaction of the vesting requirement as specified below:
XX Employer Discretionary Credits:
__ (i) Immediate 100% vesting.
__ (ii) 100% vesting after __ Years of Service.
__ (iii) 100% vesting at age __.
XX (iv) Number of Years
of Service
Vested
Percentage
Less than
1
1
2
3
4
5
6
7
8
9
10 or more
0
25
50
75
100
%
%
%
%
%
%
%
%
%
%
%
For this purpose, Years of Service of a Participant shall be calculated from the date designated below:
XX (1) First day of Service.
__ (2) Effective date of Plan participation.
__ (3) Each Crediting Date. Under this option (3), each Employer Credit shall vest based on the Years of
Service of a Participant from the Crediting Date on which each Employer Discretionary Credit is
made to his or her Deferred Compensation Account.
8
XX Other Employer Credits:
XX (i) Immediate 100% vesting.
__ (ii) 100% vesting after ___ Years of Service.
__ (iii) 100% vesting at age __.
__
(iv) Number of Years
of Service
Vested
Percentage
Less than
1
1
2
3
4
5
6
7
8
9
10 or more
%
%
%
%
%
%
%
%
%
%
%
For this purpose, Years of Service of a Participant shall be calculated from the date designated below:
__ (1) First day of Service.
__ (2) Effective date of Plan participation.
__ (3) Each Crediting Date. Under this option (3), each Employer Credit shall vest based on the Years of
Service of a Participant from the Crediting Date on which each Employer Discretionary Credit is
made to his or her Deferred Compensation Account.
9
7.1 Payment Options: Any benefit payable under the Plan upon a permitted Qualifying Distribution Event may be made to the
Participant or his Beneficiary (as applicable) in any of the following payment
forms, as selected by the Participant in the Participation Agreement:
(a) Separation from Service (Seniority Date is Not Applicable)
XX (i) A lump sum.
XX (ii) Annual installments over a term certain as elected by the Participant not to exceed 10 years.
(b) Separation from Service prior to Seniority Date (If Applicable)
__ (i) A lump sum.
XX (ii) Not Applicable
(c) Separation from Service on or After Seniority Date (If Applicable)
__ (i) A lump sum.
__ (ii) Annual installments over a term certain as elected by the Participant not to exceed ___ years.
XX (iii) Not Applicable
(d) Separation from Service Upon a Change in Control Event
XX (i) A lump sum.
(e) Death
XX (i) A lump sum.
__ (ii) Annual installments over a term certain as elected by the Participant not to exceed ___ years.
(f) Disability
XX (i) A lump sum.
XX (ii) Annual installments over a term certain as elected by the Participant not to exceed 10 years.
__ (iii) Not applicable.
If applicable, amounts not vested at the time payments due under this Section cease will be:
__ Forfeited
__ Distributed at Separation from Service if vested at that time
10
(g) Change in Control Event
XX (i) A lump sum.
__ (ii) Not applicable.
If applicable, amounts not vested at the time payments due under this Section cease will be:
__ Forfeited
__ Distributed at Separation from Service if vested at that time
7.4 De Minimis Amounts.
XX (a) Notwithstanding any payment election made by the Participant, the vested balance in all Deferred
Compensation Account(s) of the Participant will be distributed in a single lump sum payment at the
time designated under the Plan if at the time of a permitted Qualifying Distribution Event that is
either a Separation from Service, death, Disability (if applicable) or Change in Control Event (if
applicable) the vested balance does not exceed $ 100,000 In addition, the Employer may distribute a
Participant's vested balance in all Deferred Compensation Account(s) of the Participant at any time if
the balance does not exceed the limit in Section 402(g)(1)(B) of the Code and results in the
termination of the Participant's entire interest in the Plan
__ (b) There shall be no pre-determined de minimis amount under the Plan; however, the Employer may
distribute a Participant's vested balance at any time if the balance does not exceed the limit in Section
402(g)(1)(B) of the Code and results in the termination of the Participant's entire interest in the Plan.
10.1 Contractual Liability: Liability for payments under the Plan shall be the responsibility of the:
XX (a) Company.
__ (b) Employer or Participating Employer who employed the Participant when amounts were deferred.
14. Amendment and Termination of Plan: Notwithstanding any provision in this Adoption Agreement or the Plan to
the contrary, Section _________ of the Plan shall be amended to read as provided in attached Exhibit ________.
XX There are no amendments to the Plan.
11
17.8 Construction: The provisions of the Plan shall be construed and enforced according to the laws of the State of Delaware ,
except to the extent that such laws are superseded by ERISA and the applicable provisions of the Code.
IN WITNESS WHEREOF, this Agreement has been executed as of the day and year stated below.
Glaukos Corporation
Name of
Employer
/s/ Michele Allegretto
By:
Authorized Person
2-14-17
Date:
12
Exhibit 21
Subsidiary Name
Jurisdiction
Subsidiaries
Glaukos Germany GmbH
Glaukos Japan GK
Glaukos Australia Pty Ltd
Glaukos Canada Inc.
Glaukos France SAS
Glaukos Ireland Limited
Glaukos Netherlands B.V.
Glaukos Produtos Médicos Ltda.
Glaukos Sweden AB
Glaukos UK Limited
Glaukos Singapore PTE. LTD.
Germany
Japan
Australia
Canada
France
Ireland
Netherlands
Brazil
Sweden
England and Wales
Singapore
Exhibit 21
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements:
Consent of Independent Registered Public Accounting Firm
(1) Registration Statement (Form S-8 No. 333-205372), pertaining to the Glaukos Corporation 2015 Omnibus Incentive
Compensation Plan, 2015 Employee Stock Purchase Plan, 2011 Stock Plan, and 2001 Stock Option Plan, and
(2) Registration Statement (Form S-8 No. 333-212106) pertaining to Glaukos Corporation 2015 Omnibus Incentive
Compensation Plan and 2015 Employee Stock Purchase Plan;
of our report dated March 15, 2017, with respect to the consolidated financial statements of Glaukos Corporation included in this Annual
Report (Form 10-K) for the year ended December 31, 2016.
Exhibit 23.1
/s/ Ernst & Young LLP
Irvine, California
March 15, 2017
Exhibit 31.1
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas W. Burns, certify that:
1.
I have reviewed this Annual Report on Form 10‑K of Glaukos Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: March 15, 2017
/s/ Thomas W. Burns
Thomas W. Burns
President and Chief Executive Officer
Exhibit 31.2
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard L. Harrison, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Glaukos Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
e)
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: March 15, 2017
/s/ Richard L. Harrison
Richard L. Harrison
Treasurer and Chief Financial Officer
Exhibit 32.1
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Thomas W. Burns, President and Chief Executive Officer of Glaukos Corporation (the “Company”), certify, pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(i)
(ii)
the Annual Report on Form 10-K of the Company for the year ended December 31, 2016 (the “Report”) fully complies
with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as
amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: March 15, 2017
/s/ Thomas W. Burns
Thomas W. Burns
President and Chief Executive Officer
This certification is being “furnished” with this Report, shall not be deemed “filed” by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the liability under that Section and shall not be deemed to be
incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in
such filing.
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 32.2
I, Richard L. Harrison, Chief Financial Officer of Glaukos Corporation (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(i)
the Annual Report on Form 10‑K of the Company for the year ended December 31, 2016 (the “Report”) fully complies
with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended;
and
(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: March 15, 2017
/s/ Richard L. Harrison
Richard L. Harrison
Treasurer and Chief Financial Officer
This certification is being “furnished” with this Report, shall not be deemed “filed” by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the liability under that Section and shall not be deemed to be
incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in
such filing.