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EX-32.2 - EX-32.2 - GLAUKOS Corpgkos-20170630ex322402d96.htm
EX-32.1 - EX-32.1 - GLAUKOS Corpgkos-20170630ex321ec9dd2.htm
EX-31.2 - EX-31.2 - GLAUKOS Corpgkos-20170630ex31236fc96.htm
EX-31.1 - EX-31.1 - GLAUKOS Corpgkos-20170630ex311c8dd99.htm
EX-10.1 - EX-10.1 - GLAUKOS Corpgkos-20170630ex1010c9310.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

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

 

For the quarterly period ended June 30, 2017

Or

 

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

 

Commission file number: 001-37463 


GLAUKOS CORPORATION

(Exact name of registrant as specified in its charter)


 

 

 

 

 

Delaware

33-0945406

(State or other jurisdiction of
incorporation or organization)

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

 

 

229 Avenida Fabricante

San Clemente, California

92672

(Address of registrant’s principal executive offices)

(Zip Code)

 

(949) 367-9600

(Registrant’s telephone number, including area code)


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

 

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

 

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

 

 

 

 

 

☐ Large accelerated filer

☒ Accelerated filer

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

☐ Smaller reporting company

 

 

☒ Emerging growth company 

 

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

 

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

 

As of August 3, 2017 there were 34,434,009 shares of the registrant’s Common Stock outstanding.

1


 

GLAUKOS CORPORATION

Form 10-Q

For the Quarterly Period Ended June 30, 2017

Table of Contents

 

 

 

 

 

 

 

 

Page

PART I:  FINANCIAL INFORMATION

 

3

Item 1. 

Financial Statements

 

3

 

Condensed Consolidated Balance Sheets

 

3

 

Condensed Consolidated Statements of Operations

 

4

 

Condensed Consolidated Statements of Comprehensive Income

 

5

 

Condensed Consolidated Statements of Cash Flows

 

6

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2. 

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

 

19

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

27

Item 4. 

Controls and Procedures

 

27

 

 

 

 

PART II:  OTHER INFORMATION

 

28

Item 1.  

Legal Proceedings

 

28

Item 1A. 

Risk Factors

 

28

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

Item 3. 

Defaults Upon Senior Securities

 

60

Item 4. 

Mine Safety Disclosures

 

60

Item 5. 

Other Information

 

60

Item 6. 

Exhibits

 

61

 

 

 

 

SIGNATURES 

 

62

 

 

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

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

2


 

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

 

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2017

 

2016

 

 

    

(unaudited)

    

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,370

 

$

6,494

 

Short-term investments

 

 

90,420

 

 

89,268

 

Accounts receivable, net

 

 

16,702

 

 

14,305

 

Inventory, net

 

 

8,382

 

 

6,844

 

Prepaid expenses and other current assets

 

 

2,340

 

 

3,032

 

Restricted cash

 

 

 -

 

 

80

 

Total current assets

 

 

131,214

 

 

120,023

 

Property and equipment, net

 

 

8,724

 

 

7,593

 

Intangible assets, net

 

 

5,029

 

 

6,567

 

Deposits and other assets

 

 

559

 

 

188

 

Total assets

 

$

145,526

 

$

134,371

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

5,974

 

$

2,967

 

Accrued liabilities

 

 

13,061

 

 

13,911

 

Deferred rent

 

 

89

 

 

60

 

Total current liabilities

 

 

19,124

 

 

16,938

 

Other liabilities

 

 

468

 

 

159

 

Total liabilities

 

 

19,592

 

 

17,097

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

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

 

 

 -

 

 

 -

 

Common stock, $0.001 par value; 150,000 shares authorized; 34,461 and 33,971 shares issued and 34,433 and 33,943 shares outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

34

 

 

34

 

Additional paid-in capital

 

 

320,500

 

 

308,815

 

Accumulated other comprehensive income

 

 

46

 

 

648

 

Accumulated deficit

 

 

(194,514)

 

 

(192,091)

 

Less treasury stock (28 shares as of June 30, 2017 and December 31, 2016)

 

 

(132)

 

 

(132)

 

Total stockholders' equity

 

 

125,934

 

 

117,274

 

Total liabilities and stockholders' equity

 

$

145,526

 

$

134,371

 

See accompanying notes to condensed consolidated financial statements.

3


 

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Net sales

 

$

41,285

 

$

28,556

 

$

77,192

 

$

51,648

 

Cost of sales

 

 

5,522

 

 

4,359

 

 

10,702

 

 

7,480

 

Gross profit

 

 

35,763

 

 

24,197

 

 

66,490

 

 

44,168

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

24,675

 

 

15,120

 

 

46,156

 

 

27,408

 

In-process research and development

 

 

5,320

 

 

 -

 

 

5,320

 

 

 -

 

Research and development

 

 

9,633

 

 

6,955

 

 

18,575

 

 

14,017

 

Total operating expenses

 

 

39,628

 

 

22,075

 

 

70,051

 

 

41,425

 

(Loss) income from operations

 

 

(3,865)

 

 

2,122

 

 

(3,561)

 

 

2,743

 

Other income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

598

 

 

286

 

 

1,234

 

 

621

 

Interest and other expense, net

 

 

(12)

 

 

(76)

 

 

(19)

 

 

(178)

 

Change in fair value of stock warrant liability

 

 

 -

 

 

 -

 

 

 -

 

 

43

 

Total other income, net

 

 

586

 

 

210

 

 

1,215

 

 

486

 

(Loss) income before taxes

 

 

(3,279)

 

 

2,332

 

 

(2,346)

 

 

3,229

 

Provision for income taxes

 

 

22

 

 

 -

 

 

77

 

 

 -

 

Net (loss) income

 

$

(3,301)

 

$

2,332

 

$

(2,423)

 

$

3,229

 

Basic net (loss) income per share

 

$

(0.10)

 

$

0.07

 

$

(0.07)

 

$

0.10

 

Diluted net (loss) income per share

 

$

(0.10)

 

$

0.06

 

$

(0.07)

 

$

0.09

 

Weighted average shares used to compute basic net (loss) income per share

 

 

34,322

 

 

32,652

 

 

 34,234

 

 

32,477

 

Weighted average shares used to compute diluted net (loss) income per share

 

 

34,322

 

 

36,182

 

 

34,234

 

 

35,975

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Net (loss) income

 

$

(3,301)

 

$

2,332

 

$

(2,423)

 

$

3,229

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Foreign currency translation adjustments

 

 

(320)

 

 

(149)

 

 

(660)

 

 

(434)

 

  Unrealized gain on short-term investments, net of tax

 

 

18

 

 

58

 

 

58

 

 

326

 

Other comprehensive loss

 

 

(302)

 

 

(91)

 

 

(602)

 

 

(108)

 

Total comprehensive (loss) income

 

$

(3,603)

 

$

2,241

 

$

(3,025)

 

$

3,121

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


 

GLAUKOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2017

    

2016

 

Operating Activities

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,423)

 

$

3,229

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,428

 

 

2,255

 

Loss on disposal of fixed assets

 

 

 5

 

 

 -

 

Stock-based compensation

 

 

7,935

 

 

3,465

 

Unrealized foreign currency gains

 

 

(624)

 

 

(229)

 

Change in fair value of stock warrant liability

 

 

 -

 

 

(43)

 

Amortization of premium on short-term investments

 

 

58

 

 

161

 

Deferred rent

 

 

338

 

 

 2

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(2,289)

 

 

(4,051)

 

Inventory

 

 

(1,368)

 

 

(1,579)

 

Prepaid expenses and other current assets

 

 

721

 

 

(131)

 

Restricted cash

 

 

80

 

 

 -

 

Accounts payable and accrued liabilities

 

 

2,145

 

 

2,028

 

Other assets

 

 

(368)

 

 

(5)

 

Net cash provided by operating activities

 

 

6,638

 

 

5,102

 

Investing activities

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(45,766)

 

 

(35,825)

 

Proceeds from sales and maturities of short-term investments

 

 

44,580

 

 

23,954

 

Purchases of property and equipment

 

 

(2,071)

 

 

(1,219)

 

Net cash used in investing activities

 

 

(3,257)

 

 

(13,090)

 

Financing activities

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

2,782

 

 

2,414

 

Proceeds from exercise of stock warrants

 

 

 -

 

 

50

 

Payments of secured notes

 

 

 -

 

 

(4,410)

 

Share purchases under Employee Stock Purchase Plan

 

 

968

 

 

793

 

Net cash provided by (used in) financing activities

 

 

3,750

 

 

(1,153)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(255)

 

 

(92)

 

Net increase (decrease) in cash and cash equivalents

 

 

6,876

 

 

(9,233)

 

Cash and cash equivalents at beginning of period

 

 

6,494

 

 

21,572

 

Cash and cash equivalents at end of period

 

$

13,370

 

$

12,339

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

 -

 

$

197

 

Taxes paid

 

$

64

 

$

63

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Reduction of liability upon vesting of stock options previously exercised for unvested stock

 

$

 3

 

$

42

 

See accompanying notes to condensed consolidated financial statements.

 

6


 

GLAUKOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1.  Organization and Basis of Presentation

Organization and business

Glaukos Corporation (Glaukos or the Company), incorporated in Delaware on July 14, 1998, is a developer, manufacturer and marketer of medical devices for the treatment of glaucoma. The accompanying condensed consolidated financial statements include the accounts of Glaukos and its wholly owned subsidiaries. All significant intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.

Basis of presentation

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

The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements.  As permitted under those rules, certain footnotes and other financial information that are normally required by GAAP have been condensed or omitted.  In the opinion of management, the unaudited interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for the fair presentation of the Company’s financial information, contained herein.  The condensed consolidated balance sheet at December 31, 2016 has been derived from audited financial statements at that date, but excludes disclosures required by GAAP for complete financial statements.  These interim financial statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s financial statements and accompanying notes for the fiscal year ended December 31, 2016, which are contained in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on March 15, 2017. The results for the period ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other interim period.

Acquisition of IOP Sensor System from DOSE Medical

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

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

DOSE was previously a wholly-owned subsidiary of the Company.  In 2010, it was spun-out as a standalone entity and was accounted for as a consolidated variable interest entity.  In 2015, the Company acquired the iDose product line and related assets from DOSE and upon the acquisition, the Company derecognized DOSE as a consolidated entity in the financial statements. Thomas W. Burns, the Company’s President, Chief Executive and a member of its board of directors, and William J. Link, Ph.D., Chairman of the Company’s board of directors, currently serve on the board of directors of DOSE and certain members of the Company’s management and board of directors hold an equity interest in DOSE.

7


 

Note 2.  Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the six months ended June 30, 2017, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 15, 2017.

Use of estimates

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

Foreign currency translation

The accompanying condensed consolidated financial statements are presented in U.S. dollars. The Company considers the local currency to be the functional currency for its international subsidiaries. Accordingly, their assets and liabilities are translated into U.S. dollars using the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing throughout the periods presented. Currency translation adjustments arising from period to period are charged or credited to accumulated other comprehensive income in stockholders’ equity. For the three month periods ended June 30, 2017 and 2016, the Company reported losses from foreign currency translation adjustments of approximately $0.3 million and $0.1 million, respectively, and for the six month periods ended June 30, 2017 and 2016, the Company reported losses from foreign currency translation adjustments of approximately $0.7 million and $0.4 million, respectively.  Realized gains and losses resulting from foreign currency transactions are included in selling, general and administrative expense in the condensed consolidated statements of operations. For the three month periods ended June 30, 2017 and 2016, the Company reported foreign currency transaction gains (losses) of $95,000 and $(38,000), respectively, and for the six month periods ended June 30, 2017 and 2016, the Company reported foreign currency transaction gains of $112,000 and $23,000, respectively.

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, including gains and losses on intercompany loans, are included in the condensed consolidated statements of operations. For the three month periods ended June 30, 2017 and 2016, the Company reported net foreign currency transaction gains of $0.4 million and $42,000, respectively, and for the six month periods ended June 30, 2017 and 2016, the Company reported net foreign currency transaction gains of $0.7 million and $0.3 million, respectively.

Cash, cash equivalents and short-term investments

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

8


 

balance sheet date. The Company did not have any trading securities or restricted investments at June 30, 2017 or December 31, 2016.

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

Fair value of financial instruments

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

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

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

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

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

Revenue recognition

The Company recognizes revenue from product sales when the following criteria are met: goods are shipped, title and risk of loss has transferred to its customers, persuasive evidence of an arrangement exists and collectability is reasonably assured. Persuasive evidence of an arrangement exists when there is a contractual arrangement in place with the customer. Delivery has occurred when a product is shipped. If persuasive evidence of an arrangement exists and delivery has occurred, the Company determines whether the invoiced amount is fixed or determinable and collectability of the invoiced amount is reasonably assured. The Company assesses whether the invoiced amount is fixed or determinable based on the existing arrangement with the customer, including whether the Company has sufficient history with a customer to reliably estimate the customer’s payment patterns. The Company assesses collectability by evaluating historical cash receipts and individual customer outstanding balances. To the extent all criteria set forth above are not satisfied at the time of shipment, revenue is recognized when cash is received from the customer.

Customers are not granted specific rights of return; however, the Company may permit returns of product from customers if such product is returned in a timely manner and in good condition. The Company provides a warranty on its products for one year from the date of shipment, and any product found to be defective or out of specification will be replaced at no charge during the warranty period. Estimated allowances for sales returns and warranty replacements are recorded at the time of sale of the product and are estimated based upon the historical patterns of product returns matched against sales, and an evaluation of specific factors that may increase the risk of product returns. Product returns and warranty replacements to date have been consistent with amounts reserved or accrued and have not been significant.

Research and development expenses

Major components of research and development expense include personnel costs, preclinical studies, clinical trials and related clinical product manufacturing, materials and supplies, and fees paid to consultants. Research and development costs are expensed as goods are received or services are rendered. Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use are also expensed as incurred.

At each financial reporting date, the Company accrues the estimated costs of clinical study activities performed by third party clinical sites with whom the Company has agreements that provide for fees based upon the quantities of subjects enrolled and clinical evaluation visits that occur over the life of the study. The cost estimates are determined based upon a review of the agreements and data collected by internal and external clinical personnel as to the status of enrollment and subject visits, and are based upon the facts and circumstances known to the Company at each financial

9


 

reporting date. If the actual performance of activities varies from the assumptions used in the cost estimates, the accruals are adjusted accordingly. There have been no material adjustments to the Company’s prior period accrued estimates for clinical trial activities through June 30, 2017.

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. In quarters 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 warrants and stock options outstanding under the Company’s stock option plans. In quarters 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income - basic

 

$

(3,301)

 

$

2,332

 

$

(2,423)

 

$

3,229

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

 

34,322

 

 

32,652

 

 

34,234

 

 

32,477

 

Common stock equivalents from outstanding common stock options

 

 

 -

 

 

3,510

 

 

 -

 

 

3,485

 

Common stock equivalents for ESPP

 

 

 -

 

 

20

 

 

 -

 

 

12

 

Common stock equivalents from outstanding common stock warrants

 

 

 -

 

 

 -

 

 

 -

 

 

 1

 

Weighted average number of common shares outstanding - diluted

 

 

34,322

 

 

36,182

 

 

34,234

 

 

35,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) income per share

 

$

(0.10)

 

$

0.07

 

$

(0.07)

 

$

0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net (loss) income per share

 

$

(0.10)

 

$

0.06

 

$

(0.07)

 

$

0.09

 

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 thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

  

 

    

2017

    

2016

    

2017

    

2016

 

Stock options outstanding

 

5,737

 

2,151

 

5,805

 

2,157

 

ESPP

 

19

 

 -

 

19

 

 -

 

 

 

5,756

 

2,151

 

5,824

 

2,157

 

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance in Accounting Standards Update (ASU) 2014-09 which was codified in Accounting Standards Codification (ASC) 606, Revenue Recognition – Revenue from Contracts with Customers (ASC 606). ASC 606 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, and is principles-based, such that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 

ASU 2015-14 deferred the effective date of ASC 606 to annual reporting periods beginning after December 15, 2017 (including interim periods within those periods) and while early adoption is permitted, the Company plans to adopt ASC 606 on January 1, 2018. Companies are required to apply ASC 606 retrospectively; however, companies may use

10


 

either a full retrospective or a modified retrospective approach when adopting the standard. The Company intends to adopt using the modified retrospective approach, with a cumulative catch-up adjustment to the opening balance sheet of retained earnings at the effective date.

The Company has performed a preliminary analysis and does not believe adoption of the standard will have a material impact on its consolidated financial statements. In the preliminary analysis, the Company has concluded it generally has one performance obligation, the transaction price is not impacted by any variable consideration or other factors noted in ASC 606, and the Company’s performance obligations are generally satisfied when products are shipped. The Company will continue to review variable consideration, potential disclosures, and the method of adoption in order to complete the evaluation of the impact on the consolidated financial statements. In addition, the Company will continue to monitor additional changes, modifications, clarifications or interpretations undertaken by the FASB, which may impact the current conclusions.  The Company expects to complete its assessment process, including finalizing a transition method for adoption, by the end of the fourth quarter of 2017 and expects to complete its implementation process prior to the adoption of this ASU on January 1, 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires management to recognize almost all leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments.  The new standard must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements; however, the Company anticipates recognition of additional assets and corresponding liabilities on its condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which modifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards, and classification in the statement of cash flows.  The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods and the Company adopted ASU 2016-09 in its first quarter 2017. As a result of the prospective adoption of ASU 2016-09 on January 1, 2017, excess tax benefits of $13.1 million were recorded to the Company’s net operating loss carryover resulting in an increase in the Company’s deferred tax assets with an identical increase in the associated valuation allowance.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASC 2016-18), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. ASU 2016-18 will be effective for the Company starting in the first quarter of 2018.  Currently, the Company's restricted cash balance is not significant and the Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements. 

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

11


 

Note 3.  Balance Sheet Details

Short-term investments

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2017

 

 

 

Maturity

 

Amortized cost

 

Unrealized

 

Unrealized

 

Estimated

 

 

    

(in years)

    

or cost

    

gains

    

losses

    

fair value

  

U.S. government bonds

 

1-3

 

$

1,799

 

$

 -

 

$

(12)

 

$

1,787

 

U.S. government agency bonds

 

less than 3

 

 

3,697

 

 

 -

 

 

(12)

 

 

3,685

 

Bank certificates of deposit

 

less than 1

 

 

15,450

 

 

 8

 

 

 -

 

 

15,458

 

Commercial paper

 

less than 1

 

 

8,327

 

 

 1

 

 

 -

 

 

8,328

 

Corporate notes

 

less than 3

 

 

53,435

 

 

20

 

 

(39)

 

 

53,416

 

Asset-backed securities

 

less than 2

 

 

7,747

 

 

 1

 

 

(2)

 

 

7,746

 

 

 

 

 

$

90,455

 

$

30

 

$

(65)

 

$

90,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2016

 

 

 

Maturity

 

Amortized cost

 

Unrealized

 

Unrealized

 

Estimated

 

 

    

(in years)

    

or cost

    

gains

    

losses

    

fair value

 

U.S. government agency bonds

 

1-3

 

$

9,535

 

$

 2

 

$

(22)

 

$

9,515

 

Bank certificates of deposit

 

less than 2

 

 

11,101

 

 

13

 

 

(1)

 

 

11,113

 

Commercial paper

 

less than 1

 

 

17,011

 

 

 1

 

 

(2)

 

 

17,010

 

Corporate notes

 

less than 3

 

 

45,178

 

 

 7

 

 

(61)

 

 

45,124

 

Asset-backed securities

 

less than 2

 

 

6,503

 

 

 3

 

 

 —

 

 

6,506

 

 

 

 

 

$

89,328

 

$

26

 

$

(86)

 

$

89,268

 

Accounts receivable, net

Accounts receivable consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

  

Accounts receivable

 

$

17,196

 

$

14,800

 

Less allowance for doubtful accounts

 

 

(494)

 

 

(495)

 

 

 

$

16,702

 

$

14,305

 

Inventory, net

Inventory consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

  

Finished goods

 

$

3,047

 

$

2,014

 

Work in process

 

 

2,656

 

 

2,105

 

Raw material

 

 

2,679

 

 

2,725

 

 

 

$

8,382

 

$

6,844

 

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2017

    

2016

Accrued contract payments (see Note 5)

 

$

1,025

 

$

823

Accrued sales commissions

 

 

382

 

 

1,641

Accrued clinical study payments

 

 

783

 

 

1,167

Accrued bonuses

 

 

4,863

 

 

6,122

Accrued vacation benefits

 

 

1,731

 

 

1,382

Accrued Employee Stock Purchase Plan deductions

 

 

491

 

 

 4

Other accrued liabilities

 

 

3,786

 

 

2,772

 

 

$

13,061

 

$

13,911

 

 

12


 

Note 4.  Fair Value Measurements

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

The following tables present information about the Company's financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2017

 

 

 

 

 

Quoted prices

 

Significant

 

 

 

 

 

 

 

in active

 

other

 

Significant

 

 

 

 

 

markets for

 

observable

 

unobservable

 

 

June 30, 

 

identical assets

 

inputs

 

inputs

 

    

2017

    

(Level 1)

    

(Level 2)

    

(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (i)

 

$

443

 

$

443

 

$

 -

 

$

 -

U.S. government agency bonds (ii)

 

 

3,686

 

 

 -

 

 

3,686

 

 

 -

U.S. government bonds (ii)

 

 

1,787

 

 

 -

 

 

1,787

 

 

 -

Bank certificates of deposit (ii)

 

 

15,458

 

 

 -

 

 

15,458

 

 

 -

Commercial paper (ii)

 

 

8,328

 

 

 -

 

 

8,328

 

 

 -

Corporate notes (ii)

 

 

53,416

 

 

 -

 

 

53,416

 

 

 -

Asset-backed securities (ii)

 

 

7,745

 

 

 -

 

 

7,745

 

 

 -

 

 

$

90,863

 

$

443

 

$

90,420

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2016

 

 

 

 

 

Quoted prices

 

Significant

 

 

 

 

 

 

 

in active

 

other

 

Significant

 

 

 

 

 

markets for

 

observable

 

unobservable

 

 

December 31, 

 

identical assets

 

inputs

 

inputs

 

    

2016

    

(Level 1)

    

(Level 2)

    

(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (i)

 

$

80

 

$

80

 

$

 -

 

$

 -

U.S. government agency bonds (ii)

 

 

9,515

 

 

 -

 

 

9,515

 

 

 -

Bank certificates of deposit (ii)

 

 

11,113

 

 

 -

 

 

11,113

 

 

 -

Commercial paper (ii)

 

 

17,010

 

 

 -

 

 

17,010

 

 

 -

Corporate notes (ii)

 

 

45,124

 

 

 -

 

 

45,124

 

 

 -

Asset-backed securities (ii)

 

 

6,506

 

 

 -

 

 

6,506

 

 

 -

 

 

$

89,348

 

$

80

 

$

89,268

 

$

 -

(i)

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

(ii)

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

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

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

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

13


 

Note 5.   Intangible Assets

GMP Vision Solutions intangible asset

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

In November 2013, the Company entered into an amended agreement with GMP in which remaining royalties payable to GMP (the Buyout Agreement) were canceled in exchange for the issuance of $17.5 million in promissory notes payable to GMP and a party related to GMP (together, the GMP Note Parties). The Company concluded that the $17.5 million transaction represented the purchase of an intangible asset. The Company estimated a useful life of five years over which the intangible asset is being amortized to cost of sales in the accompanying statements of operations, which amortization period was determined after consideration of the projected outgoing royalty payment stream had the Buyout Agreement not occurred, and the remaining life of the patents obtained in the Original GMP Agreement. After determining that the pattern of future cash flows associated with this intangible asset could not be reliably estimated with a high level of precision, the Company concluded that the intangible asset will be amortized on a straight‑line basis over the estimated useful life. For each of the three month periods ended June 30, 2017 and 2016, the Company recorded amortization expense of $0.9 million and for each of the six month periods ended June 30, 2017 and 2016, the Company recorded amortization expense of $1.8 million related to this intangible asset in cost of sales.

Other intangible assets

In 2015, the Company entered into agreements with two international distributors pursuant to which their distribution rights with the Company were terminated effective as of December 31, 2015.  In 2016 and 2017, the Company entered into agreements with two additional international distributors pursuant to which their distribution rights with the Company were terminated effective as of January 1, 2017 and March 31, 2017, respectively.  As part of the agreements, the distributors agreed to provide certain services to, and not compete with, the Company for one to two years in exchange for payments calculated based on single-digit percentages of the Company’s future revenues in those years in the respective countries that had comprised their territories.  Management recorded the estimated fair value of the non-compete provisions as intangible assets.  As of June 30, 2017, the non-compete intangible assets totaled $0.5 million and will be amortized on a straight-line basis to selling, general and administrative expense over the one to two year periods. For the three month periods ended June 30, 2017 and 2016, the Company recorded amortization expense related to the non-compete provisions of approximately $66,000 and $23,000, respectively, and for the six month periods ended June 30, 2017 and 2016, the Company recorded amortization expense related to the non-compete provisions of approximately $129,000 and $46,000, respectively.

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

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

  

GMP royalty buyout

 

$

17,500

 

$

17,500

 

Non-compete agreements

 

 

524

 

 

243

 

 

 

 

18,024

 

 

17,743

 

Accumulated amortization

 

 

(12,995)

 

 

(11,176)

 

Total

 

$

5,029

 

$

6,567

 

Weighted average amortization period (in months)

 

 

60

 

 

60

 

Estimated amortization expense will be $3.8 million in 2017 and $3.1 million in 2018 related to the above mentioned intangible assets.

 

14


 

Note 6.  Stock-Based Compensation

The Company has four stock-based compensation plans (collectively, the Stock Plans)—the 2001 Stock Option Plan (the 2001 Stock Plan), the 2011 Stock Plan (the 2011 Stock Plan), the 2015 Omnibus Incentive Compensation Plan (the 2015 Stock Plan) and the 2015 Employee Stock Purchase Plan (the ESPP).  The 2015 Stock Plan permits grants of restricted stock units (RSUs).  The Company has historically granted stock options, but the Company began to award RSU grants to certain employees during the three months ended June 30, 2017. RSU awards vest 25% on each of the first, second, third and fourth anniversaries of the grant date.

The following table summarizes stock option and restricted stock activity under the 2001 Stock Plan, 2011 Stock Plan and 2015 Stock Plan (in thousands):

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

Shares

 

 

 

Underlying

 

 

 

Options/

 

 

    

RSUs

  

Outstanding at December 31, 2016

 

5,911

 

Granted

 

1,877

 

Exercised

 

(453)

 

Canceled/forfeited/expired

 

(79)

 

Outstanding at June 30, 2017

 

7,256

 

 

 

 

 

Exercisable at June 30, 2017

 

3,334

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

  

Cost of sales

 

$

141

 

$

44

 

$

270

 

$

82

 

Selling, general and administrative

 

 

3,470

 

 

1,391

 

 

5,784

 

 

2,503

 

Research and development

 

 

1,123

 

 

613

 

 

1,881

 

 

880

 

Total

 

$

4,734

 

$

2,048

 

$

7,935

 

$

3,465

 

Stock-based awards to employees and nonemployees

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

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

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

15


 

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the assumptions noted in the following table.  The weighted average assumpt