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

Impact of COVID-19 Pandemic and Current Economic Environment

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. The World Health Organization declared COVID-19 to be a “pandemic,” spreading across the globe and impacting worldwide economic activity. In the U.S., certain federal, state and local governmental authorities issued stay-at-home and other orders, proclamations and/or directives, including restrictions on elective procedures and therapies, aimed at minimizing the spread of COVID-19. Although some of these governmental restrictions have since been lifted or scaled back, recent surges of COVID-19 have in some cases led, and future surges could lead, to the reinstitution of stay-at-home or other orders and may further result in restrictions being re-implemented in response to efforts to reduce the spread of COVID-19. Even if stay-at-home or other orders are removed, potential patients may elect to stay at home voluntarily. The COVID-19 pandemic and subsequent economic slowdown has materially impacted the global demand for our products, which are used in procedures and therapies that are considered elective. This decrease in demand was most significantly felt in the latter part of the quarter ended March 31, 2020 and the earlier part of the quarter ended June 30, 2020. Beginning in May 2020, we began to see an early recovery toward more normalized levels for cataract and keratoconus procedures, a trend that continued through the quarter ended December 31, 2020. The ultimate impact of the COVID-19 pandemic on our operations going forward is unknown and will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the COVID-19 outbreak, the status of health and safety actions taken to contain its spread, the severity and transmission rates of new variants of COVID-19, the availability, distribution, and efficacy of vaccines for COVID-19, any additional preventative and protective actions that governments, or we, may take, any future surges of COVID-19 that may occur, the dynamics associated with the rollout of the COVID-19 vaccines, and how quickly and to what extent economic and operating conditions normalize within the markets in which we operate. For additional information, see the section titled Risks Related to Our Business within Item 1A. Risk Factors of this Annual Report on Form 10-K.

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We also continue to actively assess the impact of COVID-19 on our clinical trials and other pipeline products. The closure of ophthalmic practices and deferral of elective procedures beginning in the first quarter of 2020 in response to COVID-19 disrupted new patient enrollment in our ongoing clinical trials. This disruption has continued even as facilities have reopened as doctors prioritize their standard procedures over clinical trial enrollment. In particular, patient enrollment for our iDose clinical trials remains impacted, which has delayed our estimated iDose approval timeline, where we now expect a potential FDA approval of this product in 2023.

We have taken a number of steps aimed at minimizing the spread of COVID-19 and protecting our employees, including shifting the majority of our workforce to remote operations, which continues through the date hereof. We have maintained streamlined manufacturing and assembly processes in order to consistently provide product to our customers who depend on us. In addition to other health and safety protocols that follow applicable guidance and regulations, employees involved in such operation-critical processes have been organized into a number of small shifts designed to minimize the time any one individual is required to be onsite.Further, in an effort to identify, and avoid further infection from, asymptomatic cases, we have offered periodic voluntary COVID-19 viral testing to on-site employees.

We have also sought to preserve our cash position by instituting a number of cost saving initiatives, including temporary reductions in discretionary spending and capital expenditures. These actions were designed to preserve jobs and core research and development programs. We also temporarily deferred a significant portion of our planned 2020 capital expenditures, particularly those related to facilities expansion and consolidation plans, although we have started to reinstitute our plans to move forward with the planned capital expenditures as state and local governments began to authorize re-openings. Further, in June 2020, we issued an aggregate principal amount of $287.5 million of 2.75% convertible notes due 2027 (the Convertible Notes), the net proceeds of which will be used for working capital and general corporate purposes. As of December 31, 2020, we had cash, cash equivalents, short-term investments, and restricted cash of approximately $413.9 million, compared to $183.3 million as of December 31, 2019.

On March 27, 2020, the United States enacted the Coronavirus Aid Relief, and Economic Security Act (CARES Act), an emergency economic stimulus package that includes spending and tax relief measures to strengthen the U.S. economy and help fund a nationwide effort to curtail the effects of the COVID-19 pandemic. Some of the more significant provisions which impact the Company include the employee retention credit and payroll tax deferral. We do not expect recent IRS guidance or the CARES Act to have a material impact on our results of operation. For additional information, see the section titled Notes to Consolidated Financial Statements, Note 11, Income Taxes.

Financial Overview

Our net sales were $225.0 million for the year ended December 31, 2020, which was a decrease of $12.0 million from the year ended December 31, 2019. Net sales for the years ended December 31, 2019 and December 31, 2018 were $237.0 million and $181.3 million, respectively. We incurred net losses of $120.3 million for the year ended December 31, 2020, achieved net income of $15.4 million for the year ended December 31, 2019 and we incurred a net loss of $13.0 million for the year ended December 31, 2018. The COVID-19 pandemic and measures intended to reduce its spread had a material impact on our net sales for the year ended December 31, 2020.

As of December 31, 2020, we had an accumulated deficit of $310.1 million.

Material Changes and Transactions

Convertible Senior Notes

In June 2020, we issued $287.5 million in aggregate principal amount of 2.75% Convertible Senior Notes due in 2027 (Convertible Notes) pursuant to an indenture, dated June 11, 2020, between us and Wells Fargo Bank, National Association, as trustee, in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. The Convertible Notes are senior unsecured obligations of ours and bear interest at a rate of 2.75% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The Convertible Notes will mature on June 15, 2027, unless earlier converted, redeemed or

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repurchased in accordance with their terms. In connection with issuing the Convertible Notes, we received $242.2 million in proceeds, after deducting fees and offering expenses and paying the cost of certain capped call transactions. These proceeds will be used for working capital and general corporate purposes.

For additional information, see Note 9, Convertible Senior Notes to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

Acquisition of Avedro, Inc.

On November 21, 2019, we acquired Avedro, Inc. (Avedro), a hybrid ophthalmic pharmaceutical and medical technology company focused on developing therapies designed to treat corneal diseases and disorders and correct refractive conditions, in a stock-for-stock transaction (Avedro Merger). Avedro developed novel bio-activated drug formulations used in combination with proprietary systems for the treatment of progressive keratoconus and corneal ectasia following refractive surgery. The therapy is the first and only minimally invasive anterior segment product offering approved by the FDA shown to halt the progression of keratoconus.

Total consideration for the Avedro Merger was $437.8 million. The consideration consisted of Glaukos common stock valued at $406.8 million issued to replace Avedro common stock, Glaukos shares valued at $0.2 million to replace certain vested Avedro warrants, and $30.8 million of value attributable to the pre-combination services associated with replacement of all Avedro outstanding and unexercised stock option awards and all unvested restricted stock units (Replacement Awards). See Note 2, Note 4, Note 6 and Note 7 to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on our Avedro Merger.

Factors Affecting Our Performance

In addition to the disruption resulting from COVID-19 as discussed above, the full effects of which at this time are difficult to predict, our operations to date have been, and we believe our future growth will be, impacted by the following:

Further, subject to our temporary costs saving initiatives and spending deferrals due to COVID-19, we have made and expect to continue to make significant investments in our global sales force, marketing programs, research and development activities, clinical studies, and general and administrative infrastructure. FDA-approved investigational device exemption (IDE) or investigational new drug (IND) studies and new product development programs in our industry are expensive. We have incurred a significant increase in administrative costs since we began operating as a public company. Our operating expenses have increased significantly following our acquisition of Avedro, and we also expect to incur additional construction costs related to our new facility in Aliso Viejo, California.

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We expect 2021 revenues and near-term performance to reflect competitive dynamics and the continuing disruption resulting from COVID-19, the full effects of which at this time are difficult to predict.

Although we have been profitable for certain periods in our operating history, there can be no assurance that we will be profitable or generate cash from operations in the future.

Components of Results of Operations

Net Sales

We currently operate in one reportable segment and net sales are generated primarily from sales of iStent products and, following the Avedro Merger on November 21, 2019, sales of Photrexa and other associated drug formulations, as well as our proprietary bioactivation systems, to customers. Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services.

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

While net sales may 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, historically our net sales within a fiscal year have been impacted seasonally, as demand for U.S. ophthalmic procedures is typically softer in the first quarter and stronger in the fourth quarter of a given year. However, we have not experienced the same seasonality pattern in 2020 due to the COVID-19 pandemic, and its effect on our commercial performance may continue into future reporting periods. Additionally, for several years we had commercialized our products in the U.S. with few or no direct competitors. Other products have now become available in the U.S. and globally, or are in development by third parties, that have entered or could enter the market and which may affect adoption of or demand for our products. These other products could achieve greater commercial acceptanceor demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our products, which could adversely impact our net sales.

Cost of Sales

Cost of sales reflects the aggregate costs to manufacture our products and includes raw material costs, labor costs, manufacturing overhead expenses and the effect of changes in the balance of reserves for excess and obsolete inventory.

We manufacture our iStent products at our current headquarters in San Clemente, California using components manufactured by third parties. We manufacture our KXL and Mosaic systems at our manufacturing facilities in Burlington, Massachusetts, with some limited manufacturing operations in Dublin, Ireland, and we contract with third-party manufacturers in the U.S. and Germany to produce our Photrexa and other associated drug formulations.

Due to the relatively low production volumes of our iStent products and our KXL and Mosaic systems 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.

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 $0.5 million, which amount became payable to the Regents of the University of California (the University) in connection with our December 2014 agreement with the University (the UC Agreement) related to a group of our U.S. patents (the Patent Rights). This ongoing product payment obligation will change as patent coverage on certain products being to lapse, and will terminate entirely terminate on the date the last of the Patent Rights expires, which is currently expected to be in 2022.

Under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), the 2.3% federal medical device excise tax on U.S. sales of medical devices manufactured by us was suspended from January 1, 2016 to December 31,

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2017, and, pursuant to HR 195 passed on January 22, 2018, was further suspended through December 31, 2019. The federal medical device excise tax was permanently repealed in December 2019.

Beginning in the fourth quarter of 2019, cost of sales has included amortization of the $252.2 million developed technology intangible asset recognized in connection with the Avedro Merger. For the years ended December 31, 2020 and December 31, 2019, the amortization expense was $22.1 million and $2.3 million, respectively. Additionally, beginning in the fourth quarter of 2019, cost of sales has included amortization of the fair market value inventory adjustment recorded in connection with the Avedro Merger, which for the years ended December 31, 2020 and December 31, 2019 was $24.7 million and $4.0 million, respectively.

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 expense related to the UC Agreement and the acquisition fair market value inventory adjustment rollout related to the Avedro Merger.SeeNote 6, Business Combinations to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on our Avedro Merger. The current COVID-19 pandemic may impact our gross profit margins given the potential impact to net sales in future periods.

Selling, General and Administrative

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

The Avedro Merger has resulted in additional integration expenses, restructuring expenses and personnel-related expenses during the year ended December 31, 2019 and additional personnel-related expenses, primarily stock-based compensation during the year ended December 31, 2020. Additionally, SG&A will continue to be impacted by the amortization of certain finite-lived intangible assets acquired as a result of the Avedro Merger, along with Avedro’s normal and recurring SG&A expenses.

We expect SG&A expenses to continue to grow as a result of the Avedro Merger as we increase our global sales and marketing infrastructure and general administration infrastructure in the United States; however, as discussed above under “Impact of COVID-19 Pandemic and Current Economic Environment,” we have sought to preserve our cash position by instituting a number of cost saving initiatives, including temporary reductions in discretionary spending, including variable expense associated with salesperson commissions and marketing, capital expenditures, as well as a temporary salary reduction for many of our employees, which as of the date hereof, have all been reinstated. We have started to reinstitute our plans to move forward with the planned capital expenditures as state and local governments begin to authorize re-openings. We also expect other nonemployee-related costs, including sales and marketing program activities for new products, outside services and accounting and general legal costs to increase as our overall operations grow. The timing of these increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products, as well as on the timing of any new product launches and other potential business and operational activities.

Research and Development

Our R&D activities primarily consist of new product development projects, pre-clinical studies, IDE and IND 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

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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 continue to increase as we initiate and advance our development programs, including our expanding surgical, pharmaceutical and IOP sensor development efforts and clinical trials across glaucoma, retinal disease and corneal health. However as previously noted we have sought to preserve our cash position by instituting a number of cost saving initiatives, including temporary reductions in discretionary spending associated with earlier stage development programs many of which we have begun to allocate funding beginning in the third quarter and throughout the fourth quarter of 2020.

Completion dates and costs for our clinical development programs include seeking regulatory approvals and our research programs 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, subject to our temporary COVID-19 costs saving initiatives, 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. We are not currently able to fully track expenses by product candidate.

In-Process Research and Development

Our in-process research and development (IPR&D) expenses relate to the acquisition of DOSE Medical Corporation (DOSE) in which DOSE became a wholly-owned subsidiary of the Company. DOSE is developing multiple micro-invasive, sustained-released, bioerodible drug delivery platforms designed to be used in the treatment of various retinal diseases, including age-related macular degeneration and diabetic macular edema. Certain DOSE assets were in the development-stage at the time of purchase and were determined to have no alternative future use.

Non-Operating (Expense) Income, Net

Non-operating (expense) income, net primarily consists of interest expense associated with our finance lease for our Aliso Viejo, California facility and for our Convertible Notes, interest income derived from our short-term investments and unrealized gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the U.S. dollar, primarily related to intercompany loans.

Income Taxes

Our tax benefit is comprised of U.S. federal and state income and franchise taxes as well as foreign income taxes. Our current U.S. federal tax benefit results from the carryback of NOLs and R&D tax credits permitted by the CARES Act for the year ended December 31, 2020. Our current state tax provision results from state minimum and franchise taxes for the year ended December 31, 2020. Our current foreign tax provision results from foreign income taxes imposed on profitable operations in our foreign subsidiaries for the year ended December 31, 2020. Our U.S. federal and state deferred tax benefit results from the deferred tax liability recorded in connection with the Convertible Notes which may be used as a source of future taxable income allowing us to record a tax benefit for a portion of our operating losses generated for the year ended December 31, 2020. Our net deferred tax liability of $10.5 million at December 31, 2020 represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets, as well as deferred tax liabilities recorded to additional paid-in capital within the consolidated statement of stockholders’ equity which were not available to offset our deferred tax assets. We continue to provide a valuation allowance against our other net deferred tax assets.

We record reserves for uncertain tax positions where we believe the ability to sustain the tax position does not reach the more likely than not threshold.

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Results of Operations

Comparison of Years Ended December 31, 2020 and December 31, 2019

Year ended

December 31, % Increase

(in thousands) 2020 2019 (decrease)

Statements of operations data:

Operating expenses:

In-process research and development — 3,745 NM

Non-operating (loss) income, net (8,761) 256 NM

NM = Not Meaningful

Net Sales

Net sales for the years ended December 31, 2020 and December 31, 2019 were $225.0 million and $237.0 million, respectively, reflecting a decrease of $12.0 million or 5%.

Net sales of glaucoma products in the United States were $133.7 million and $187.7 million for the years ended December 31, 2020 and December 31, 2019, respectively, decreasing by approximately 28% primarily due to the disruption resulting from COVID-19. We believe competition had also increased entering into 2020, the impact of which is difficult to assess given the COVID-19 disruption. International sales of glaucoma products for the years ended December 31, 2020 and December 31, 2019 were $45.6 million and $43.3 million, respectively, increasing by approximately 5%. The increase in net sales internationally was due to sales expansion in certain of our existing international markets, partially offset by the disruption resulting from COVID-19. Additionally, in the second half of 2020, we launched our next generation iStent inject product, the iStent inject W. Pricing of our glaucoma products in the United States and internationally remained stable and did not provide a significant contribution to the results in 2020. As such, changes in unit volumes were the primary driver of the year over year change.

Net sales of corneal health products were $45.6 million and $6.0 million for the years ended December 31, 2020 and December 31, 2019, respectively, as a result of the full year operations of Avedro during the year ended December 31, 2020 that were not in our operating results for the majority of 2019. The $39.6 million increase in net sales generated from our corneal health products was comprised of an increase of approximately $34.6 million in U.S. sales, including an increase of $31.3 million of Photrexa net sales, using our direct sales operations and an increase of approximately $5.0 million in net sales with distributors being used in certain international locations where we do not have a direct commercial presence. Sales of corneal health products in 2020 were negatively impacted by disruption resulting from COVID-19.

Cost of Sales

Cost of sales for the years ended December 31, 2020 and December 31, 2019 were $91.7 million and $38.6 million, respectively, reflecting an increase of approximately $53.1 million or 138%. The increase was primarily comprised of approximately $24.7 million, net related to the acquisition fair market value inventory adjustment rollout, and $22.1 million related to amortization of certain finite-lived intangible assets acquired, both of which are related to the Avedro Merger. Our gross margin was approximately 59% for the year ended December 31, 2020 compared to

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approximately 84% for the year ended December 31, 2019. The decreased gross margin resulted primarily from the impact of the aforementioned accounting adjustments related to the Avedro Merger and, to a lesser extent, changes in product mix, most notably the inclusion of modestly lower margin products related to the Avedro Merger and international market sales.

Selling, General and Administrative Expenses

SG&A expenses for the years ended December 31, 2020 and December 31, 2019 were $171.4 million and $176.6 million, respectively, reflecting a decrease of $5.2 million or 3%.

We incurred approximately $98.2 million of commercial personnel and discretionary spending in the year ending December 31, 2020 related primarily to existing sales infrastructure in glaucoma, training samples and marketing associated with our global launch of iStent Inject W and expansion of our sales infrastructure and commercial activities in Corneal Health. We also incurred approximately $73.2 million of general and administrative personnel and discretionary spending associated with our ongoing administrative functions, previously disclosed patent litigation and global enterprise systems implementation, and amortization of our right-of-use asset related to our long-term lease in Aliso Viejo, California.

Our results for the year ending December 31, 2020 include approximately $24.6 million in additional SG&A expenses as a result of the full year operations of Avedro that were not in our operating results for the majority of 2019. These expenses were primarily comprised of commercial personnel and discretionary spending of $16.7 million and general and administrative personnel and discretionary spending of $7.9 million.

The above increase in expenses associated with the full year operations of Avedro was offset by reductions in SG&A expenses for the year ended December 31, 2020 primarily consisting of a decrease of approximately $9.4 million in professional services and software systems costs related to our global enterprise systems implementation, decreases of $6.3 million and $3.2 million in transaction expenses and restructuring expenses, respectively, related to our acquisition of Avedro and a decrease of approximately $3.1 million related to our previously disclosed patent litigation. The remaining decrease in expenses of approximately $7.8 million primarily relates to decreased sales and marketing expenses and broader SG&A cost savings related to the COVID-19 pandemic.

Research and Development Expenses

R&D expenses for the years ended December 31, 2020 and December 31, 2019 were $85.4 million and $68.3 million, respectively, reflecting an increase of $17.1 million or 25%.

Our R&D expenses for the year ended December 31, 2020 primarily relate to compensation and related employee expenses and project spending associated with our emerging pipeline of product candidates, including the clinical and development costs associated with iDose TR, iStent Infinite, the continued development of a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (often referred to as iLink epi-on), as well as earlier stage micro-surgical, pharmaceutical, and biosensor projects that span across glaucoma, dry eye, presbyopia, and common retina conditions such as neovascular age-related macular degeneration, diabetic macular edema, and retinal vein occlusion.

Our results for the year ending December 31, 2020 include approximately $19.1 million in additional R&D expenses that were not in our operating results for the majority of 2019. These expenses were primarily comprised of $8.3 million of compensation and related employee expenses and approximately $10.8 million in other core R&D and clinical expenses spent on the continued development of iLink epi-on and other earlier stage technology and therapeutic investments.

The above increase in expenses as a result of the full year operations of Avedro was primarily offset by reductions of R&D spending related to the COVID-19 pandemic of approximately $1.3 million primarily related to decreased personnel and discretionary spending on our earlier stage programs.

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In-Process Research and Development

There were no IPR&D expenses for the year ended December 31, 2020. IPR&D expenses for the year ended December 31, 2019 were $3.7 million, comprised of $2.2 million related to the purchase of certain DOSE assets and $1.5 million related to the upfront payment for our exclusive global licensing agreement with Intratus.

Non-Operating (Expense) Income, Net

We had non-operating expense, net of $8.8 million and $0.3 million of non-operating income, net for the years ended December 31, 2020 and December 31, 2019, respectively. The increase in non-operating expense, net primarily relates to interest expense recognized related to the Convertible and recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates.

Income Tax (Benefit) Provision

Our effective tax rate for the year ended 2020 was not meaningful due to the large deferred tax benefit recorded in connection with the Convertible Notes relative to the amount of our net loss before taxes. For the year ended December 31, 2020 we recorded a (benefit) for income taxes of $(12.0) million which was primarily the result of the deferred tax liability recorded in conjunction with the Convertible Notes as a source of taxable income to benefit the current year losses, partially offset by current U.S. state and foreign income taxes. For the year ended December 31, 2019 we recorded a (benefit) for income taxes of $(65.5) million that was primarily comprised of the U.S. federal and state deferred tax benefit recorded in connection with the Avedro Merger relative to the amount of net loss before taxes, partially offset by current U.S. state and foreign income taxes.

Comparison of Years ended December 31, 2019 and December 31, 2018

Year ended

December 31, % Increase

(in thousands) 2019 2018 (decrease)

Statements of operations data:

Operating expenses:

In-process research and development 3,745 — NM

Non-operating income, net 256 634 (60) %

Income tax (benefit) provision (65,460) 583 NM

NM = Not Meaningful

Net Sales

Net sales for the years ended December 31, 2019 and December 31, 2018 were $237.0 million and $181.3 million, respectively, reflecting an increase of $55.7 million or 31%.

The increase in net sales from our glaucoma products resulted primarily from expansion of U.S. sales of our iStent inject, the withdrawal from the market of a competitive MIGS device in late August 2018, and direct sales operations in our existing international markets. Net sales of glaucoma products in the United States were $187.7 million and $151.7 million for the years ended December 31, 2019 and December 31, 2018, respectively, increasing by 24%. International sales for the years ended December 31, 2019 and December 31, 2018 were $43.3 million and $29.6 million,

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respectively, increasing by 46%. Net sales at our subsidiaries in Australia, Germany, Japan, France and the United Kingdom accounted for the majority of the increase internationally.

The remaining $6.0 million increase in net sales was generated from our corneal health products as a result of our Avedro Merger on November 21, 2019.

Pricing for our products was not a significant contributing factor to the increase in net sales for the year ended December 31, 2019.

Cost of Sales

Cost of sales for the years ended December 31, 2019 and December 31, 2018 were $38.6 million and $25.1 million, respectively, reflecting an increase of approximately $13.5 million or 54%. The increase was driven by growing worldwide volume, with approximately $4.0 million related to the acquisition fair market value inventory adjustment rollout and $2.3 million related to amortization of certain finite-lived intangible assets acquired, both of which are related to the Avedro Merger; offset by a one-time federal medical device excise tax refund benefit of approximately $0.5 million. Our gross margin was approximately 84% for the year ended December 31, 2019 compared to approximately 86% for the year ended December 31, 2018.

Selling, General and Administrative Expenses

SG&A expenses for the years ended December 31, 2019 and December 31, 2018 were $176.6 million and $119.5 million, respectively, reflecting an increase of $57.1 million or 48%.

The acquisition of Avedro represented an increase in SG&A expenses of $19.1 million that were not in our 2018 results. These expenses were primarily comprised of $7.6 million due to stock-based compensation resulting from post-combination services associated with the Replacement Awards, $7.1 million related to legal, financial advisory and other transaction costs associated with the acquisition, and amortization of finite-lived intangible assets acquired of approximately $0.3 million. In connection with the Avedro acquisition, we implemented a restructuring plan in December 2019 that includes an estimated headcount reduction of 40 employees and a reallocation of responsibilities primarily within the SG&A functions. As of December 31, 2019 we have accrued $4.1 million of restructuring plan costs, and we expect to incur a total of approximately $5.6 million in restructuring charges upon completion of the plan, which we expect to be completed in 2021.

We incurred $3.5 million in normal and recurring Avedro SG&A expenses from acquisition date through December 31, 2019 that were not in our 2018 results.

Additionally, the increase in SG&A expenses for the year ended December 31, 2019 primarily consisted of approximately $5.7 million related to our previously-disclosed patent litigation, approximately $10.1 million in professional services and software systems costs related to our global enterprise systems implementation, and $8.3 million in additional compensation and related employee expenses was associated with our growing number of domestic and international employees.

The remaining increase in SG&A expenses was primarily comprised of expenses incurred for training samples related to our U.S. launch of iStent inject, amortization of our right-of-use asset related to our long-term lease in Aliso Viejo, California and non-employee related expenses incurred by our foreign subsidiaries.

Research and Development Expenses

R&D expenses for the years ended December 31, 2019 and December 31, 2018 were $68.3 million and $49.7 million, respectively, reflecting an increase of $18.6 million or 38%. The increase in R&D expenses was primarily the result of approximately $4.8 million in additional compensation and related employee expenses as well as an overall increase of approximately $12.3 million in other core R&D and clinical expenses, including expenses associated with our iDose Travoprost Phase III clinical trials. The acquisition of Avedro also represented an increase of approximately $1.5 million in R&D expenses that were not in our 2018 results.

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In-Process Research and Development

IPR&D expenses for the year ended December 31, 2019 were $3.7 million, comprised of $2.2 million related to the purchase of certain DOSE assets and $1.5 million related to the upfront payment for our exclusive global licensing agreement with Intratus. There were no IPR&D expenses for the year ended December 31, 2018.

Non-Operating Income, Net

We had non-operating income, net of $0.3 million and $0.6 million for the years ended December 31, 2019 and December 31, 2018, respectively. These amounts primarily relate to interest expense associated with the financing lease for our Aliso Viejo, California facility and recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates offset by increases in interest income related to our short-term investments.

Income Tax (Benefit) Provision

Our effective tax rate for the year ended 2019 was not meaningful due to the large deferred tax benefit recorded in connection with the Avedro Merger relative to the amount of our net loss before taxes. For the year ended December 31, 2019 we recorded a (benefit) for income taxes of $(65.5) million which was primarily comprised of the U.S. federal and state deferred tax benefit related to the Avedro Merger. For the year ended December 31, 2018 we recorded a provision for income taxes of $0.6 million that was primarily comprised of current U.S. state and foreign income taxes.

Liquidity and Capital Resources

For the year ended December 31, 2020, we incurred a net loss of $120.3 million and used cash from operations of $23.0 million. As of December 31, 2020, we had an accumulated deficit of approximately $310.1 million. We fund our operations from cash generated from commercial operations and proceeds from exercises of stock options, in addition to utilizing funds from the June 2020 issuance of the Convertible Notes. We have made and expect to continue to make significant investments in our global sales force, marketing programs, research and development activities, clinical studies and general and administrative infrastructure. FDA-approved IDE and IND studies and new product development programs in our industry are expensive. However, due to the COVID-19 economic slowdown, as disclosed above under “Impact of COVID-19 Pandemic and Current Economic Environment”, we have also sought to preserve our cash position by instituting a number of cost saving initiatives, including substantial reductions in discretionary spending and capital expenditures, as well as a temporary salary reduction for many of our employees, which were reinstated in the fourth quarter of 2020.

We have incurred a significant increase in administrative costs since we began operating as a public company. Our operating expenses have increased significantly following our acquisition of Avedro, and we also expect to incur additional construction costs related to our new facility in Aliso Viejo, California.

Our Convertible Notes may be converted at the option of the holders at the times and under the circumstances and at the conversion rate described in Note 9, Convertible Senior Notes. As of December 31, 2020, none of the conditions allowing holders of the Convertible Notes to convert had been met. If our trading price remains above 130% of the conversion price for at least 20 trading days during the 30 consecutive trading-day period ending on, and including, March 31, 2021, holders of the Convertible Notes would have the right to convert their Convertible Notes during the calendar quarter beginning April 1, 2021. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the Indenture. Our current intent is to settle the principal amount of the Convertible Notes in cash upon conversion, with any remaining conversion value being delivered in shares of our common stock.

We plan to fund our operations, capital funding and other liquidity needs using existing cash and investments and, to the extent available, cash generated from commercial operations. Our existing cash and investments includes the remaining net proceeds from the Convertible Notes issued in June 2020 (after payment for the related capped call

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transactions), which we are using for working capital and general corporate purposes. Although we have been profitable for certain periods in our operating history, there can be no assurance that we will be profitable or generate cash from operations. We may seek to obtain additional financing in the future through other debt or equity financings. There can be no assurance that we will be able to obtain additional financing on terms acceptable to us, or at all. We believe that our available cash, cash equivalents, investment balances and interest we earn on these balances and any cash generated from commercial operations will be sufficient to fund our operations and satisfy our liquidity requirements for at least the next 12 months from the date our consolidated financial statements for the year ended December 31, 2020 are made publicly available.

The following table summarizes our cash and cash equivalents, short-term investments and selected working capital data as of December 31, 2020 and December 31, 2019 (in thousands):

December 31, December 31,

Cash Flows

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

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

Year ended

December 31,

Net cash (used in) provided by:

Exchange rate changes (88) (252) 48

At December 31, 2020, our cash and cash equivalents were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity.

Operating Activities

In the year ended December 31, 2020 and December 31, 2019, our operating activities used $23.0 million and $0.4 million of net cash, respectively. In the year ended December 31, 2018 our operating activities generated $18.9 million of net cash.

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For the year ended December 31, 2020, included in net cash used in operating activities reflected our net loss of $120.3 million, adjusted for non-cash items of $100.6 million, primarily consisting of stock-based compensation expense of $46.5 million, depreciation and amortization of $29.4 million, amortization of the inventory fair value adjustment as a result of the Avedro Merger of $24.7 million, amortization of lease right-of-use assets of $5.2 million, the fair value of cash-settled stock options of $3.2 million and a deferred income tax benefit of $12.2 million. This was offset by changes in operating assets and liabilities of $3.2 million, which resulted from decreases in accounts receivable, inventory, and other assets partially offset by decreases in accounts payable and accrued liabilities and increases in prepaid expenses and other assets.

For the year ended December 31, 2019, included in net cash used in operating activities reflected our net income of $15.4 million, adjusted for non-cash items of $7.3 million, primarily consisting of stock-based compensation expense of $36.3 million, depreciation and amortization of $6.3 million, amortization of the inventory fair value adjustment as a result of the Avedro Merger of $4.0 million, amortization of lease right-of-use assets of $3.6 million, the fair value of cash-settled stock options of $3.1 million and a deferred income tax benefit of $66.3 million. This was offset by changes in operating assets and liabilities of $8.5 million, which resulted from increases in accounts receivable, prepaid expenses and other current assets and other assets totaling $9.3 million, offset by increases in accounts payable and accrued liabilities and inventory of $0.8 million.

For the year ended December 31, 2018, included in net cash provided by operating activities reflected our net loss of $13.0 million, adjusted for non-cash items of $35.4 million, primarily consisting of stock-based compensation expense of $25.7 million and depreciation and amortization of $6.3 million. This was partially offset by changes in operating assets and liabilities of $3.6 million, which resulted from increases in accounts receivable, inventory and prepaid expenses and other current assets totaling $6.3 million, offset by increases in accounts payable and accrued liabilities and other assets of $2.7 million.

Investing Activities

In the year ended December 31, 2020 net cash from investing activities used approximately $205.1 million. In the year ended December 31, 2019, net cash from investing activities generated $43.4 million, and in the year ended December 31, 2018, we used approximately $26.4 million.

In the year ended December 31, 2020, we used approximately $301.0 million for purchases of short-term investments, received proceeds from sales and maturities of short-term investments of $104.7 million and used approximately $1.8 million related to investments in company-owned life insurance.

In the year ended December 31, 2019, we used approximately $80.4 million for purchases of short-term investments, received proceeds from sales and maturities of short-term investments of $80.5 million and used approximately $1.6 million related to investments in company-owned life insurance. Additionally, the Avedro Merger resulted in an increase in cash from investing activities of $49.7 million.

In the year ended December 31, 2018, we used approximately $93.7 million for purchases of short-term investments, received proceeds from sales and maturities of short-term investments of $78.9 million and used approximately $1.2 million related to investments in company-owned life insurance.

Cash used for purchases of property and equipment was approximately $6.9 million, $4.7 million and $10.3 million for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, respectively.

Subject to our near-term deferral of certain capital expenditures due to the COVID-19 pandemic, 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, as discussed above.

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Financing Activities

In the year ended December 31, 2020 and December 31, 2018 our financing activities provided $262.5 million and $21.6 million of net cash, respectively, whereas in the year ended December 31, 2019, our financing activities used $9.6 million of net cash.

In the year ended December 31, 2020, we received net cash proceeds of approximately $287.5 million related to our Convertible Notes, used $9.6 million for transaction costs related to the Convertible Notes and used $35.7 million on payment of the capped call transaction related to the Convertible Notes. We received net cash proceeds of approximately $24.2 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $3.9 million for payment of employee taxes related to restricted stock unit vestings.

In the year ended December 31, 2019, we used approximately $22.5 million for payment of debt assumed related to the Avedro Merger, we received net cash proceeds of approximately $18.5 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $5.6 million for payment of employee taxes related to restricted stock unit vestings.

In the year ended December 31, 2018, we received net cash proceeds of approximately $22.2 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $0.6 million for payment of employee taxes related to restricted stock unit vestings.

Contractual Obligations

The following table summarizes our known contractual obligations as of December 31, 2020 and the effect those obligations are expected to have on our liquidity and cash flows in future periods.

Payments due by period

Contractual obligations Less than More than

(in thousands) Total 1 year 1 - 3 years 3 - 5 years 5 years

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in the rules and regulations of the Securities and Exchange Commission. 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.

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Critical Accounting Policies and Significant Estimates

Management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated 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 consolidated 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

We derive our revenue from sales of our products in the United States and internationally. Customers are primarily comprised of ambulatory surgery centers, hospitals and physician private practices, with distributors being used in certain international locations where we do not have a direct commercial presence.

We concluded that one performance obligation exists for the majority of our contracts with customers which is to deliver products in accordance with our normal delivery times. Revenue is recognized when this performance obligation is satisfied, which is the point in time when we consider control of a product to have transferred to the customer. Revenue recognized reflects the consideration to which we expect to be entitled in exchange for those products or services. We have determined the transaction price to be the invoice price, net of adjustments, which includes estimates of variable consideration for certain product returns.

We offer volume-based rebate agreements to certain customers and, in these instances, we provide a rebate (in the form of a credit memo) at the contract’s conclusion, if earned by the customer. In such cases, the transaction price is allocated between our delivery of product and the issuance of a rebate at the contract’s conclusion for the customer to utilize on prospective purchases. The performance obligation to issue a customer’s rebate, if earned, is transferred over time and our method of measuring progress is the output method, whereby the progress is measured by the estimated rebate earned to date over the total rebate estimated to be earned over the contract period. The provision for volume-based rebates is estimated based on customers' contracted rebate programs and the customers’ projected sales levels. We periodically monitor our customer rebate programs to ensure the rebate allowance is fairly stated. Our rebate allowance is included in accrued liabilities in the consolidated balance sheets and estimated rebates accrued were not material during the periods presented.

Additionally, we have a performance obligation related to certain customers’ right to a future discount on single dose pharmaceutical purchases in the U.S., and that performance obligation is expected to be recognized when the customer elects to utilize the discount, which is generally within one year. Additionally, we have a performance obligation related to extended warranty agreements with customers related to our KXL systems.

Customers are not granted specific rights of return; however, we may permit returns of certain products from customers if such product is returned in a timely manner and in good condition. We generally provide a warranty on our products for one year from the date of shipment, and offer an extended warranty for our KXL systems. Any product found to be defective or out of specification will be replaced or serviced at no charge during the warranty period. Estimated allowances for sales returns and warranty replacements are recorded at the time of sale of the product and are estimated based upon the historical patterns of product returns matched against sales, and an evaluation of specific factors that may increase the risk of product returns. Product returns and warranty replacements to date have been consistent with amounts reserved or accrued and have not been significant. If actual results in the future vary from our estimates, we will adjust these estimates which would affect net product revenue and earnings in the period such variances become known.

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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, 2020. 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. Material nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that 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.

Intangible Assets

Intangible assets primarily consist of developed technology, customer relationships, and IPR&D assets related to the Avedro Merger, as well as the buyout of a royalty payment obligation.

Intangible assets with finite-lives include developed technology, customer relationships and the buyout of a royalty payment obligation, which are amortized on a straight-line basis over their estimated useful lives, which range from five to eleven years. We review finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group’s carrying value.

Indefinite-lived intangible assets are comprised of IPR&D assets associated with other applications of Avedro’s corneal remodeling platform, which will not be amortized until technological feasibility is met, but will be assessed for impairment annually.

Please see Note 7, Intangible Assets and Goodwillto the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on our intangible assets.

Goodwill

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment annually in the fourth quarter, or more frequently if events or circumstances indicate the carrying value may no longer be recoverable and that an impairment loss may have occurred. The Company operates as one segment, which is considered to be the sole reporting unit, and therefore goodwill is tested for impairment at the consolidated level. Please see Note 6, Business Combinations and Note 7, Intangible Assets and Goodwillto the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on our goodwill.

Inventory Valuation

Except for inventory acquired in connection with the Avedro Merger, further described in Note 6, Business Combinations to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K, we value inventory at the lower of cost and 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

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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 for stock options is measured at the date of grant, based on the estimated fair value of the award using the Black-Scholes option pricing model.

Stock-based compensation expense for restricted stock units is also measured at the date of grant, based on the closing price of our common stock.

For awards subject to time-based vesting conditions, we recognize stock-based compensation expense over the requisite service period on a straight-line basis, net of estimated forfeitures.

The estimation of the fair value of each stock-based option 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 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 use of different values by management in connection with these assumptions in the Black-Scholes option pricing model could produce substantially different results.

Convertible Senior Notes

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

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

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

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.

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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 us. 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 DATA

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm 56

Consolidated Balance Sheets 58

Consolidated Statements of Operations 59

Consolidated Statements of Comprehensive (Loss) Income 60

Consolidated Statements of Stockholders’ Equity 61

Consolidated Statements of Cash Flows 62

Notes to Consolidated Financial Statements 63

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Glaukos Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Glaukos Corporation (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Revenue from contracts with customers

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2006.

Irvine, California

March 1, 2021

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Glaukos Corporation

Consolidated Balance Sheets

(in thousands, except par values)

December 31,

Assets

Current assets:

Prepaid expenses and other current assets 13,206 7,900

Operating lease right-of-use asset 20,009 15,704

Finance lease right-of-use asset 51,443 54,048

Deposits and other assets 7,207 5,649

Liabilities and stockholders' equity

Current liabilities:

Convertible senior notes 189,416 —

Deferred tax liability, net 10,512 9,632

Commitments and contingencies (Note 13)

Stockholders’ equity:

Accumulated other comprehensive income 1,004 1,330

Total liabilities and stockholders' equity $ 1,005,502 $ 818,400

See accompanying notes to consolidated financial statements.

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Glaukos Corporation

Consolidated Statements of Operations

(in thousands, except per share amounts)

Year ended

December 31,

Operating expenses:

In-process research and development — 3,745 —

Non-operating (expense) income:

Interest expense (14,115) (2,565) —

Other income (expense), net 2,975 (348) (1,618)

Total non-operating (expense) income (8,761) 256 634

Basic net (loss) income per share $ (2.70) $ 0.41 $ (0.37)

Diluted net (loss) income per share $ (2.70) $ 0.37 $ (0.37)

See accompanying notes to consolidated financial statements.

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Glaukos Corporation

Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

Year ended

December 31,

Other comprehensive (loss) income:

Foreign currency translation (loss) gain (691) (65) 1,377

Unrealized gain (loss) on short-term investments 365 657 (48)

Other comprehensive (loss) income (326) 592 1,329

See accompanying notes to consolidated financial statements.

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Glaukos Corporation

Consolidated Statements of Stockholders’ Equity

(in thousands)

Accumulated

Additional other

Shares Amount capital income (loss) deficit Shares Amount equity

Stock-based compensation — — 25,704 — — — — 25,704

Other comprehensive loss — — — 1,329 — — — 1,329

Net loss — — — — (12,951) — — (12,951)

Common stock issued under stock plans 942 1 12,850 — — — — 12,851

Stock-based compensation — — 36,393 — — — — 36,393

Other comprehensive income — — — 592 — — — 592

Stock-based compensation — — 48,641 — — — — 48,641

Other comprehensive loss — — — (326) — — — (326)

See accompanying notes to consolidated financial statements.

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Glaukos Corporation

Consolidated Statements of Cash Flows

(in thousands)

Year ended

December 31,

Operating Activities

Amortization of right-of-use lease assets 5,232 3,557 —

Deferred income tax benefit (12,176) (66,306) —

Loss on disposal of fixed assets 367 430 156

Change in fair value of cash-settled stock options (3,172) 3,088 —

Unrealized foreign currency (gains) losses (1,202) 194 1,647

Amortization of debt discount and deferred financing costs 5,974 — —

Deferred rent and other liabilities 4,538 5,352 1,919

Changes in operating assets and liabilities:

Prepaid expenses and other current assets (5,033) (917) (1,756)

Accounts payable and accrued liabilities (2,683) 779 2,527

Investing activities

Cash acquired due to acquisition — 49,652 —

Purchases of property and equipment (6,935) (4,724) (10,315)

Investment in company-owned life insurance (1,820) (1,608) (1,240)

Financing activities

Proceeds from convertible senior notes 287,500 — —

Payment of convertible senior notes transaction costs (9,614) — —

Payment of debt assumed in the Avedro Merger — (22,496) —

Principal paid on finance lease - — —

Debt assumed in the Avedro Merger $ — $ 22,496 $ —

Supplemental disclosures of cash flow information

Taxes paid, net of refunds $ 484 $ 171 $ 401

Interest paid on convertible senior notes $ 4,041 $ 2 $ —

Other interest paid $ 1,334 $ — $ —

See accompanying notes to consolidated financial statements.

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Glaukos Corporation

Notes to Consolidated Financial Statements

Note 1. Organization and Basis of Presentation

Organization and Business

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

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

Liquidity

For the year ended December 31, 2020, the Company incurred net losses of $120.3 million and used $23.0 million of cash from operations and as of December 31, 2020 had an accumulated deficit of $310.1 million. For the year ended December 31, 2019, the Company achieved net income of $15.4 million, and $0.4 million of cash was used by operating activities. The Company funds its operations from cash generated from commercial operations and proceeds from exercises of stock options, in addition to using the funds from the June 2020 issuance of the Convertible Notes, described more fully in Recent Developments below. Although the Company has been profitable for certain periods in its operating history, there can be no assurance that the Company will be profitable or generate cash from operations.

The Company plans to fund its operations and capital funding needs using existing cash, cash equivalents and investments, and to the extent available, cash generated from commercial operations. The net proceeds from the Convertible Notes issued in June 2020 (after payment for the related capped call transactions) will be used for working capital and general corporate purposes. The Company may seek to obtain additional financing in the future through other debt or 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, 2020, the Company had cash, cash equivalents, restricted cash and short-term investments totaling $413.9 million and net working capital of $419.7 million. 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, 2020.

Recent Developments

Convertible Senior Notes

In June 2020 the Company issued $287.5 million in aggregate principal amount of 2.75% Convertible Senior Notes due in 2027 (Convertible Notes) pursuant to an indenture dated June 11, 2020. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 2.75% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The Convertible Notes will mature on June 15, 2027, unless earlier converted, redeemed or repurchased. The Convertible Notes are convertible into cash, shares of the

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Company’s common stock, or a combination of cash and shares, at the Company’s election. In connection with issuing the Convertible Notes, the Company received $242.2 million in proceeds, after deducting fees and offering expenses and paying the cost of certain capped call transactions. The Company may not redeem the Convertible Notes prior to June 20, 2024 and no sinking fund is provided for the Convertible Notes.

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

Acquisition of Avedro, Inc.

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

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

See Note 4, Fair Value Measurements, Note 6, Business Combinations, Note 7, Intangible Assets and Goodwill and Note 10, Stock-Based Compensation and Note 11, Income Taxes for additional details regarding the impact of the Avedro Merger on the Company’s consolidated financial statements.

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

In March 2020, the World Health Organization declared the outbreak caused by the novel strain of coronavirus (COVID-19) to be a global pandemic. While COVID-19 continues to evolve daily and its ultimate outcome is uncertain, it has caused significant disruption to individuals, governments, businesses, and financial markets. The Company’s

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consolidated financial statements as of and for the year ended December 31, 2020 reflect the Company’s estimates of the impact of the COVID-19 outbreak. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are uncertain, including the duration and severity of the COVID-19 outbreak, the severity and transmission rates of new variants of COVID-19, and the actions taken to contain it or treat COVID-19, including the availability, distribution and efficacy of vaccines for COVID-19, as well as the economic impact on local, regional, national and international customers and markets. As a result, there may be changes to the Company’s estimates regarding the impact of COVID-19 in future periods.

Segments

The Company has one business activity: the development and commercialization of therapies designed to treat glaucoma, corneal disorders and retinal diseases, and operates as one operating segment. The Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company’s chief operating decision-maker (CODM), its Chief Executive Officer, reviews its consolidated operating results for the purpose of allocating resources and evaluating financial performance.

Cash, Cash Equivalents, Restricted Cash and Short-term Investments

The Company invests its excess cash in marketable securities, including money market funds, money market securities, bank certificates of deposits, corporate bonds, corporate commercial paper, municipal bonds, U.S. government bonds and U.S. government agency bonds. For financial reporting purposes, liquid investment instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents are recorded at face value or cost, which approximates fair market value. The Company maintains cash balances in excess of amounts insured by the Federal Deposit Insurance Commission. Investments are stated at fair value as determined by quoted market prices. Investments are considered available for sale and, accordingly, unrealized gains and losses are included in accumulated other comprehensive (loss) income within stockholders’ equity.

The Company’s entire investment portfolio, except for restricted cash, is considered to be available for use in current operations and, accordingly, all such investments are stated at fair value using quoted market prices and classified as current assets, although the stated maturity of individual investments may be one year or more beyond the balance sheet date. The Company did not have any trading securities or restricted investments at December 31, 2020 or December 31, 2019.

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

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that equate to the amount reported in the consolidated statement of cash flows as of December 31, 2020, December 31, 2019 and December 31, 2018 (in thousands):

Year ended

December 31,

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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 the years ended 2020, 2019 and 2018, none of the Company’s customers accounted for more than 10% of revenues.

Accounts Receivable

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

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

Additionally, specific allowance amounts may be established to record the appropriate provision for customers that have a higher probability of non-payment. The Company charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The Company’s allowance for credit losses represents management’s estimate of current expected credit losses and totaled approximately $1.7 million and $1.2 million as of December 31, 2020 and December 31, 2019, respectively, and there were immaterial bad-debt write offs charged during the years ended December 31, 2020 and December 31, 2019.

As of December 31, 2020 the Company evaluated the current and expected future economic and market conditions surrounding the COVID-19 pandemic as it relates to collectability of its accounts receivable and determined the estimate of expected credit losses was not materially impacted. The Company will continue to re-evaluate the estimate of credit losses related to COVID-19 in conjunction with its assessment of expected credit losses in subsequent quarters.

Additionally, no customers accounted for more than 10% of net accounts receivable as of any such date.

Inventory

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

Management evaluates inventory for excess quantities and obsolescence and records an allowance to reduce the carrying value of inventory as determined necessary. During the year ended December 31, 2020, the Company recorded inventory write-off charges and COVID-19 related excess and obsolete reserves.

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Property and Equipment, Net

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.

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 did not record any impairment charges for the year ended December 31, 2020, however recorded impairment charges of $0.4 million during the year ended December 31, 2019. The Company did not record any impairment charges during the year ended December 31, 2018.

Intangible Assets

Intangible assets primarily consist of developed technology, customer relationships, and IPR&D assets related to the Avedro Merger, as well as the buyout of a royalty payment obligation.

Intangible assets with finite-lives include developed technology, customer relationships and the buyout of a royalty payment obligation, which are amortized on a straight-line basis over their estimated useful lives, which range from five to eleven years. The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group’s carrying value. If the affected intangible assets are not recoverable, management estimates the fair value of the assets and would record an impairment loss if the carrying value of the assets exceeds the fair value.

Indefinite-lived intangible assets are comprised of IPR&D assets and are not amortized, but instead tested for impairment until the successful completion and commercialization, or abandonment, of the associated research and development efforts, at which point the IPR&D assets are either amortized over their estimated useful lives, or written-off immediately, as the case may be.

Refer to Note 7, Intangible Assets and Goodwill for more information on the Company’s intangible assets.

Goodwill

Goodwill totaled $66.1 million at December 31, 2020 and December 31, 2019. Goodwill is recorded as a result of business combinations. When the Company determines the carrying value of a reporting unit exceeds its fair value an impairment charge would be recognized and should not exceed the total amount of goodwill allocated to that reporting unit. The Company tests for impairment annually, on October 1 and in addition to that test, regularly assesses if an event has occurred which would require interim impairment testing. The Company considered the current and expected future economic and market conditions surrounding COVID-19 pandemic and during the year did not identify an indication of goodwill impairment due that event. The Company’s annual impairment test did not result in any impairment, and the Company has not identified any indicators of impairment through December 31, 2020.

Refer to Note 6, Business Combinations and Note 7, Intangible Assets and Goodwill for more information on the Company’s goodwill.

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.

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

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

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

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

Leases

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

The Company determines if an arrangement is a lease at inception. As a lessee, right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company estimates the incremental borrowing rate based on its debt, prevailing financial market conditions, peer company credit analyses, and management judgment. Operating lease right-of-use assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The lease terms used to calculate the right-of-use asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as amortization expense on right-of-use lease assets and interest expense using the accelerated interest method of recognition.

Revenue Recognition

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

The Company concluded that one performance obligation exists for the majority of its contracts with customers which is to deliver products in accordance with the Company’s normal delivery times. Revenue is recognized when this performance obligation is satisfied, which is the point in time when the Company considers control of a product to have transferred to the customer. Revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for those products or services. The Company has determined the transaction price to be the invoice price, net of adjustments, which includes estimates of variable consideration for product returns.

The Company offers volume-based rebate agreements to certain customers and, in these instances, the Company provides a rebate (in the form of a credit memo) at the contract’s conclusion, if earned by the customer. In such cases, the transaction price is allocated between the Company’s delivery of product and the issuance of a rebate at the contract’s conclusion for the customer to utilize on prospective purchases. The performance obligation to issue a customer’s rebate, if earned, is transferred over time and the Company’s method of measuring progress is the output method, whereby the progress is measured by the estimated rebate earned to date over the total rebate estimated to be earned over the contract period. The provision for volume-based rebates is estimated based on customers' contracted rebate programs and the customers’ projected sales levels. The Company periodically monitors its customer rebate

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programs to ensure the rebate allowance is fairly stated. The Company’s rebate allowance is included in accrued liabilities in the consolidated balance sheets and estimated rebates accrued were not material during the periods presented.

Additionally, the Company has a performance obligation related to certain customers’ right to a future discount on single dose pharmaceutical purchases in the U.S., and that performance obligation is expected to be recognized when the customer elects to utilize the discount, which is generally within one year. Additionally, the Company has a performance obligation related to its extended warranty agreements with customers related to its KXL systems.

Customers are not granted specific rights of return; however, the Company may permit returns of certain products from customers if such product is returned in a timely manner and in good condition. The Company generally provides a warranty on its products for one year from the date of shipment, and offers an extended warranty for its KXL systems. Any product found to be defective or out of specification will be replaced or serviced at no charge during the warranty period. Estimated allowances for sales returns and warranty replacements are recorded at the time of sale of the product and are estimated based upon the historical patterns of product returns matched against sales, and an evaluation of specific factors that may increase the risk of product returns. Product returns and warranty replacements to date have been consistent with amounts reserved or accrued and have not been significant. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates which would affect net product revenue and earnings in the period such variances become known.

Convertible Senior Notes

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

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, 2020, December 31, 2019 and December 31, 2018 were approximately $1.6 million, $2.5 million and $1.8 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 NOL and tax credit carryovers. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. Management has considered estimated taxable income

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and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Based upon the weight of available evidence, which includes the Company’s historical operating performance and limited potential to utilize tax credit carryforwards, the Company has determined that a portion of its deferred tax assets should be offset by a valuation allowance. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes increases or decreases, respectively, in the period such determination is made.

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

Additionally, the Company follows an accounting standard addressing the accounting for uncertainty in income taxes that prescribes rules for recognition, measurement, and classification in the consolidated 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 unpaid costs of clinical study activities performed during a period by third party clinical sites with whom the Company has agreements that provide for fees based upon the quantities of subjects enrolled and clinical evaluation visits that occur over the life of the study. The cost estimates are determined based upon a review of the agreements and data collected by internal and external clinical personnel as to the status of enrollment and subject visits, and are based upon the facts and circumstances known to the Company at each financial reporting date. If the actual performance of activities varies from the assumptions used in the cost estimates, the accruals are adjusted accordingly. There have been no material adjustments to the Company’s prior period accrued estimates for clinical trial activities through December 31, 2020.

Stock-Based Compensation

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

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

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

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Software Costs

The Company capitalizes certain costs when it is determined that it is probable that the project will be completed, the software will be used to perform the function intended, and the preliminary project stage is completed. These capitalized costs are included in property and equipment, net within the consolidated balance sheets.

Comprehensive (Loss) Income

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

Net (Loss) Income per Share

Basic net (loss) income per share is calculated by dividing the net (loss) income by the weighted average number of common shares that were outstanding for the period, without consideration for common stock equivalents.

For periods when the Company realizes a net loss, no common stock equivalents are included in the calculation of weighted average number of dilutive common stock equivalents as the effect of applying the treasury stock method is considered anti-dilutive.

For periods when the Company realizes net income, diluted net income per share is calculated by dividing the net income by the weighted average number of common shares plus the sum of the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury stock method. Common stock equivalents are comprised of stock options, outstanding and unvested RSUs under the Company’s incentive compensation plans and shares issuable under the Company’s Employee Stock Purchase Plan (ESPP).

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

As of

December 31,

Numerator:

Denominator:

Common stock equivalents for ESPP - 25 -

Basic net income (loss) per share $ (2.70) $ 0.41 $ (0.37)

Diluted net income (loss) per share $ (2.70) $ 0.37 $ (0.37)

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

As of

December 31,

Unvested restricted stock units 526 365 244

Employee stock purchase plan 15 26 3

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13),which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurredlosses to estimate credit losses on certain types of financial instruments, including trade receivables that may result in the earlier recognition of allowancesfor losses. In November 2018, theFASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which provided additional implementationguidance on the previously issued guidance. The Company adopted ASU 2016-13 as of January 1, 2020 using the modified retrospective approach, which replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. Upon adoption, there were no adjustments made to opening retained earnings as of January 1, 2020. As a result of implementing ASU 2016-13, the Company did not recognize any material changes to its allowance for credit losses during the year ended December 31, 2020.

Additionally, for available-for-sale debt securities with unrealized losses, ASU 2016-13 now requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. Given the composition of the Company’s available-for-sale securities, adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements as of December 31, 2020.

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

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (ASU 2018-13), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The guidance expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The Company adopted ASU 2018-13 as of January 1, 2020. Upon adoption and for the year ended December 31, 2020, given the Company does not currently have, and has not historically had transfers between Level 1 and Level 2 instruments, and the Company does not have any Level 3 fair value measurements, the adoption did not have a material impact on the Company’s consolidated financial statement disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15), which clarifies the accounting for implementation costs in cloud computing

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arrangements, and requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as fixed assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract are amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The Company adopted ASU 2018-15 on a prospective basis as of January 1, 2020 and as a result, capitalized certain costs related to its global enterprise systems implementation of approximately $2.3 million, of which $0.4 million was amortized during the year ended December 31, 2020 with a remaining unamortized amount of $1.9 million in prepaid expenses and other current assets on the consolidated balance sheets as of December 31, 2020.

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

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

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies accounting for convertible instruments. The embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASU 2020-06, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021, the Company early adopted ASU 2020-06. The Company is finalizing its analysis of certain assumptions that will be utilized at the transition and expects the effect of adopting ASU 2020-06 will result in a decrease to accumulated deficit, a decrease to additional paid-in capital, and an increase to convertible senior notes. The Company expects that interest expense recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost.

GKOS US Equity

GKOS · 10-K · period ended 2020-12-31

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A.Quantitative and qualitative disclosures about market risk

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GKOS US Equity☆

GKOS · 10-K · period ended 2020-12-31

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A.Quantitative and qualitative disclosures about market risk

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GKOS US Equity