GLAUKOS Corp (GKOS)

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 our audited consolidated financial statements and related notes included in 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 pharmaceutical and medical technology company focused on developing novel, dropless platform therapies and commercializing associated products for the treatment of glaucoma, corneal disorders, and retinal disease. We first developed Micro-Invasive Glaucoma Surgery (MIGS) as an alternative to the traditional glaucoma treatment paradigm, launching our first MIGS device commercially in 2012. In 2024, we commenced commercial launch activities for iDose TR, an intracameral procedural pharmaceutical implant designed to continuously deliver therapeutic levels of a proprietary formulation of travoprost inside the eye for extended periods of time. We also offer commercially a proprietary bio-activated pharmaceutical therapy for the treatment of a rare corneal disorder, keratoconus, that was approved by the United States (U.S.) Food and Drug Administration (FDA) in 2016. Beyond our approved products, we continue to develop and advance a robust pipeline of novel, dropless platform technologies designed to advance the standard of care and improve outcomes for patients suffering from chronic eye diseases.

Financial Overview

The most important financial indicators that we use to assess our business are net sales, gross margin, operating expenses, and cash on hand.

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Please see Results of Operations and Liquidity and Capital Resources below for a detailed discussion of each of the above items including analysis of the fluctuations from year to year.

We incurred net losses of $146.4 million, $134.7 million and $99.2 million for the years ended December 31, 2024, December 31, 2023, and December 31, 2022, respectively and as of December 31, 2024, we had an accumulated deficit of $745.4 million.

Recent Developments

Convertible Notes and Capped Call Unwind

In June 2020, we issued $287.5 million in aggregate principal amount of Convertible Notes pursuant to an indenture dated June 11, 2020, between us and Wells Fargo Bank, National Association, as trustee (the Indenture), in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. The Convertible Notes were senior unsecured obligations and bore 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. In connection

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with issuing the Convertible Notes, we received $242.2 million in proceeds, after deducting fees and offering expenses and paying the cost of the capped call transactions described below.

In June 2024 we executed a Convertible Notes Exchange whereby certain investors exchanged $230.0 million in aggregate principal of Convertible Notes held for an aggregate of 4,253,423 shares of our common stock, leaving $57.5 million aggregate principal of remaining Convertible Notes outstanding. Then on October 4, 2024, we issued a notice of redemption (the Redemption Notice) for all remaining $57.5 million aggregate principal outstanding of the Convertible Notes to be redeemed on December 16, 2024 (the Redemption Date) for the principal amount together with accrued and unpaid interest. The Redemption Notice triggered a right to conversion by holders, at their election, into shares of our common stock (Common Stock) pursuant to physical settlement at any time prior to the Redemption Date. The conversion rate for the Convertible Notes was 17.8269 shares of Common Stock per $1,000 principal amount, plus additional shares of 0.3501 per $1,000 principal amount, thus totaling 18.1770 shares of Common Stock per $1,000 principal amount surrendered for conversion thereunder.

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Between the issuance of the Redemption Notice and the Redemption Date, holders of Convertible Notes totaling approximately $57.4 million of outstanding principal amount elected to convert, resulting in the issuance of 1,044,066 shares of our common stock. On December 16, 2024, the remaining approximately $0.1 million of outstanding principal amount was redeemed, along with accrued and unpaid interest, for cash.

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On December 2, 2024, we entered into unwind agreements with certain financial institutions (Option Counterparties) relating to a portion of the capped call transactions (Capped Call Unwind Agreements) that we previously entered into with such Option Counterparties in connection with the issuance of our Convertible Notes. The Capped Call Unwind Agreements relate to a portion of capped call transactions corresponding to fifty percent of the number of shares of our common stock initially underlying the Convertible Notes. Pursuant to the Capped Call Unwind Agreements, the Option Counterparties delivered to us approximately $53.2 million, which amount was determined based upon the volume-weighted average price per share of our common stock during the averaging period from December 3, 2024 through December 5, 2024.

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Strategic Transactions

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On March 7, 2024, we issued $5.0 million of our common stock and paid approximately $5.1 million in cash in connection with the acquisition of 100% of the outstanding equity interests in a clinical stage biopharma company (the Seller) focused on developing novel therapeutics for rare ophthalmic diseases, including all related patents and patent applications, technology and know-how. Under the terms of the agreement, if these proprietary technologies are commercialized, we may have to make potential payments of up to $51.0 million upon the achievement of certain event-based development milestones, potential payments of up to $150.0 million upon the achievement of certain commercial sales-based milestones should annual net sales of a licensed product eventually exceed various levels, and up to a low double digit royalty on net sales.

Effective March 17, 2023, we entered into a sales agreement (Sales Agreement) with Celanese Canada ULC (Celanese) under which Celanese will make available and supply us certain raw materials used to create a nanoporous membrane utilized in the iDose TR, and authorized us to reference its Drug Master File (DMF) with respect to such raw materials, which is required for us to commercialize iDose TR. The term of the Sales Agreement is four years after the iDose TR launch date in February 2024. In exchange for the ability to obtain future raw materials and the rights related to the DMF, we are subject to minimum compensation payments over four years of $6.3 million and potential additional royalties based on a percentage of sales of the iDose TR product. We recognized an intangible asset related to the minimum compensation payments at fair value of $5.2 million upon the date of acquisition, which was determined to be the iDose TR launch date. The $5.2 million is included in Intangible assets, net on the consolidated balance sheets and will be amortized to cost of sales over its useful life of four years, which is the initial term of the Sales Agreement. A member of the Celanese board of directors also sits on our board of directors.

Market and Business Update

Impact of the Current Global Economic Environment

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During the last twelve months, global and regional economies have experienced, in connection with ongoing macroeconomic conditions, inflation, supply shortages or delays, changes in supply and demand, foreign exchange rate fluctuations and other conditions that have led to disruptions in commerce and pricing stability. Additionally, some of our vendors are continuing to experience supply challenges, both in the acquisition of raw materials as well as due to labor shortages and other disruptions. These challenges have occasionally led to longer lead times and delays of certain components needed for the manufacture of our products, in some cases requiring us to find alternative sources for materials. As a result of these supply chain challenges and ongoing inflationary pressures, we have experienced higher costs for certain components and raw materials. While these supply challenges have generally stabilized over the course of 2024, if these supply issues persist or worsen in the future, they could impact our ability to ship some of our products to our customers, or bring some of our pipeline products to market, in a timely manner. We expect some supply challenges and higher costs of certain components and raw materials to continue throughout 2025. Additionally, while the U.S. government has recently made statements and taken certain actions that have created significant uncertainty about the future relationship between the U.S. and various other countries with respect to trade policies, treaties, government regulations and tariffs, we believe our exposure to such potential policies, tariffs and restrictions is limited as we do not source a material amount of our raw materials and product components from countries other than the U.S.

Additionally, the effects of foreign currency fluctuations were most notably experienced in our international glaucoma business. Our annual growth rate of net sales for the year ended December 31, 2024 was negatively affected by approximately 185 basis points, primarily related to the Japanese Yen. For the year ended December 31, 2023, net sales of our international glaucoma business were negatively impacted by approximately 145 basis points, primarily related to the Japanese Yen.

Developments Impacting Reimbursement Rates and Coverage

In the U.S., healthcare providers use separate billing codes to report the provision of medical procedures and use of supplies to third-party payors, such as government programs or private insurance, and seek reimbursement for all or a portion of those costs. Physician fee payment rates for products covered by temporary Current Procedural Terminology (CPT) codes, such as our iStent infinite and iDose TR products, are set by the multi-state, regional contractors, or Medicare Administrative Contractors (MACs), of which there are currently seven, that are responsible for administering Medicare claims. MACs have in the past, and may in the future, change coverage terms, and there can be no assurance that coverage and adequate reimbursement will be obtained from, or maintained by, the MACs.

In October and November 2023, five of the seven MACs released final local coverage determinations (LCDs) confirming reimbursement coverage of the standalone procedure utilizing the iStent infinite, which received FDA clearance in August 2022, and non-coverage for certain procedures, including the ophthalmic canaloplasty procedure utilizing our iPRIME product. These LCDs also indicated that surgical MIGS procedures should not be performed in combination with other MIGS or surgical glaucoma procedures. In December 2023, prior to their respective effective dates, those five MACs rescinded the final LCDs and determined there would be no change in the current status of coverage for MIGS. In April 2024, five of the seven MACs released draft LCDs that would confirm reimbursement coverage of the standalone procedure utilizing the iStent infinite, which received FDA clearance in August 2022, and that would confirm non-coverage for surgical MIGS procedures in combination with other surgical MIGS procedures (but did not prohibit coverage for use of a procedural pharmaceutical such as our iDose TR, in combination with surgical MIGS procedures). These draft LCDs were finalized in November 2024 and took effect on November 17, 2024. The other two MACs have taken preliminary steps to assess coverage of iStent infinite through temporary local coverage article (LCA) updates. In the case of these two MACs, coverage of the iStent infinite is currently determined on a case-by-case basis.

On April 2, 2024, CMS assigned a unique, permanent Healthcare Common Procedure Coding System J-code for iDose TR indicated for the reduction of intraocular pressure in patients with open-angle glaucoma or ocular hypertension. The new J-code for iDose TR, J7355, became effective July 1, 2024. J-codes are used by U.S. government and commercial payers, as well as surgeons, to streamline the billing and reimbursement process for procedural pharmaceuticals administered by a healthcare professional, such as iDose TR, along with other certain treatments. In addition to the J-code, on March 21, 2024, CMS assigned the CPT codes that are designed to be used to cover the procedural component of iDose TR, 0660T and 0661T, to ambulatory payment classification 5492 (Level 2 Intraocular

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Procedures), retroactively effective as of January 1, 2024. The professional fees associated with an iDose TR procedure have been published by three of the seven MACs.

On January 1, 2025, the U.S. Centers for Medicare & Medicaid Services’ (CMS’) final rules on 2025 Medicare physician fee and facility fee payment rates (2025 Final Rule) became effective. The 2025 Final Rule did not materially modify the 2024 Medicare physician fee and facility fee payment rates with respect to physician fee and facility fee payment rates for procedures using our iStent family of products in conjunction with cataract surgery, which 2024 payment rates contained significant increases in the facility fee rates for ASCs and hospitals that perform iStent infinite procedures in a standalone setting under its temporary Category III CPT code.

We estimate that approximately 80% of procedures utilizing our iStent family of products in the U.S. are performed in the ASC setting and the remaining estimated 20% of procedures are performed in the hospital.

Business Outlook

CMS physician fee payment rate decreases have disrupted traditional customer ordering patterns and may have resulted in certain of our customers’ utilization of competitive products, which may have reduced U.S. Glaucoma sales volumes of our iStent family of products used in conjunction with cataract surgery in each of the three years ended December 31, 2024, December 31, 2023 and December 31, 2022. Our corneal health sales have experienced sporadic headwinds in recent years due to U.S. commercial payer volatility. We believe investments in our market access organization were successful in reducing volatility during the years ended December 31, 2024 and December 31, 2023, although we cannot predict whether such success will continue.

In addition to the foregoing, we commercialized certain of our products for several years in the U.S. with few or no direct competitors. Other competitive products have now become available in the U.S. and globally that have impacted and may continue to impact adoption of or demand for our products. We are also aware of similar products being developed by third parties that could enter the market and increase the competitive pressures we face. These other products could achieve greater commercial acceptance or demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our products, which could adversely impact our net sales.

Components of Results of Operations

Net Sales

Our net sales are generated primarily from sales of our iStent family of products to customers, Photrexa and other associated drug formulations, our proprietary bioactivation systems and royalty income. We also began commercializing iDose TR in a controlled manner in February 2024. Customers are primarily comprised of ambulatory surgery centers, hospitals and physician private practices, with independent distributors being used in certain international locations where we currently do not have a direct commercial presence. We currently operate in one operating and reportable segment and our primary business activity is the development and commercialization of therapies across several end markets within ophthalmology.

We sell the majority of our products through a direct sales organization in the United States. Internationally, we sell our products primarily through direct sales subsidiaries 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.

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, which includes estimates of reductions to revenue for commercial and governmental rebates owed, variable consideration for product returns and warranty replacements and other discounts and incentives.

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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 family of products and iDose TR at our facilities in San Clemente, California and our KXL systems at our manufacturing facility in Burlington, Massachusetts. We contract with third-party manufacturers in the U.S. and Germany to produce our Photrexa and other associated drug formulations. We currently intend to maintain our manufacturing facilities at our San Clemente and Burlington locations for the foreseeable future.

Due to the relatively low production volumes of our iStent family of products, iDose TR and our KXL 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.

In 2022, cost of sales included a charge equal to a low single-digit percentage of worldwide net sales of certain 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 related to a group of our U.S. patents (the Patent Rights). This ongoing product payment obligation changed as patent coverage on certain products has lapsed, and terminated entirely on the date the last of the Patent Rights expires, which was December 29, 2022. For the year ended December 31, 2022, we recorded approximately $3.1 million in cost of sales in connection with the product payment obligation.

Cost of sales has included amortization of the $252.2 million developed technology intangible assets recorded as a result of our acquisition of Avedro, Inc (Avedro) and our Celanese Agreement. For the year ended December 31, 2024, the amortization expense was $22.2 million and for each of the years ended December 31, 2023, December 31, 2022, the amortization expense was $22.1 million.

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 pricing, or conversely, higher product costs. Our gross margin will also be affected by manufacturing or supply chain disruptions or inefficiencies that we may experience as we attempt to manufacture our products on a larger scale, manufacture new products and change our manufacturing capacity, processes or output. Additionally, our gross margin will continue to be affected by amortization of Avedro developed technology and Celanese Agreement intangible assets, the impact of rebates associated with government and commercial programs and by royalty expenses on current or future products associated with various licensing agreements. Our gross margin in future periods may also be impacted by other factors adversely affecting our net sales in future periods such as the impact of government pricing programs and reductions of payment rates for certain of our products and related services and inflationary pressures.

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, sales, marketing, market access, financial, legal, and other 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 associated with our global enterprise systems and information systems; and allocated facility expenses.

SG&A expenses also include amortization of the $14.1 million customer relationships intangible assets recorded as a result of our acquisition of Avedro, Inc. (Avedro). Amortization expense was $2.5 million for the year ended December 31, 2024, and $2.8 million for each of the years ended December 31, 2023 and December 31, 2022.

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We expect SG&A expenses to continue to grow as we increase our infrastructures for our global sales and marketing functions, commercial support organizations, and general administration departments. We also expect other non-employee‐related costs, including sales and marketing program activities for new products, market access efforts, outside services, accounting services 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 research and development (R&D) activities primarily consist of new product development projects, pre-clinical studies, Investigational New Drug studies, and 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; in-licenses, including event-based milestones; and the costs of conducting clinical studies, which include payments to investigational sites and investigators, clinical research organizations, consultants, and other outside technical services; and the costs of materials, supplies and travel. We expense R&D costs as they are incurred. We expect our R&D expenses to continue to increase as we initiate and advance our development programs, including our expanding pharmaceutical development efforts and clinical trials across the glaucoma, corneal health and retinal disease spectrums.

Costs for our clinical development programs include expenses for all activities necessary for obtaining regulatory approvals. Our research programs vary significantly for each current and future product candidate and completion dates are difficult to predict. As a result, while we expect our R&D costs to continue to increase for the foreseeable future, we cannot estimate with any degree of certainty the timing or the amount of 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, the availability of funding resources, 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.

Acquired In-Process Research and Development

Our acquired in-process research and development (IPR&D) expenses generally relate to acquisitions of technologies that management determines are not a business combination and do not have any alternative future uses. Future costs to develop these assets are expensed as R&D when incurred. We may have ongoing milestone and royalty payment obligations depending on the success, development, regulatory approval and commercialization of the proprietary technologies we have acquired.

Our IPR&D for the years ended December 31, 2024, December 31, 2023 and December 31, 2022 totaled $14.2 million, $5.0 million and $10.0 million, respectively, relating to one-time upfront payments and stock issuances associated with our exclusive licensing agreements with various third-parties, whereby we were granted the exclusive, worldwide licenses for certain technologies that are in development.

We may have ongoing milestone and royalty payment obligations depending on the success, development regulatory approval and commercialization of the proprietary technologies we have acquired.

Non-Operating Expense, Net

Non-operating expense, net primarily consists of charges associated with our Convertible Note exchange, interest expense associated with our finance lease for our Aliso 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.

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Income Taxes

Our tax provision is primarily comprised of state and foreign income taxes offset by release of uncertain tax positions for which the statute of limitations has expired. Our net deferred tax liability of $6.9 million at December 31, 2024 primarily represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets. We continue to provide a full 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 a more likely than not threshold.

Results of Operations

For discussion related to the results of operations and changes in financial condition for the year ended December 31, 2023 compared to the year ended December 31, 2022 refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2023 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on February 23, 2024

Comparison of Years Ended December 31, 2024 and December 31, 2023

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Net Sales

Net sales for the years ended December 31, 2024 and December 31, 2023 were $383.5 million and $314.7 million, respectively, reflecting an increase of $68.8 million or 22%.

Net sales of glaucoma products in the United States were $199.6 million and $151.5 million for the years ended December 31, 2024 and December 31, 2023, respectively, increasing by approximately 32%. This increase is primarily due to the introduction of iDose TR as well as higher volumes sold of our iStent family of products due to higher demand, primarily iStent infinite.

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International sales of glaucoma products for the years ended December 31, 2024 and December 31, 2023 were $103.7 million and $85.6 million, respectively, increasing by approximately 21%. The increase in international sales reflects continued broad-based growing volume in many key international markets for glaucoma procedures, primarily France, Japan, the United Kingdom and Australia, the dollar-based results of which were slightly affected by unfavorable foreign exchange rates over the course of the year, primarily related to the Japanese Yen, during the year ended December 31, 2024 as compared to the year ended December 31, 2023.

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Net sales of corneal health products were $80.2 million and $77.7 million for the years ended December 31, 2024 and December 31, 2023, respectively, increasing by 3%. Of the approximately $2.5 million increase in net sales generated by our corneal health products, $2.3 million related to an increase in U.S. net sales of Photrexa using direct sales operations, which was positively impacted by higher realized average sales prices of Photrexa along with increases in sales to existing customers and new account starts, mostly offset by accrued rebates related to our participation in the Medicaid Drug Rebate Program (MDRP). Our net sales of iLink devices in the U.S. increased $0.3 million for the year ended December 31, 2024 as compared to the year ended December 31, 2023. Our international corneal health sales decreased $0.1 million from net sales in countries outside the U.S. during the year ending December 31, 2024 as compared to the year ended December 31, 2023.

Cost of Sales

Cost of sales for the years ended December 31, 2024 and December 31, 2023 were $94.0 million and $75.6 million, respectively, reflecting an increase of approximately $18.5 million or 24% that is generally proportionate to the increase in net sales for the corresponding period, offset by certain new product launch manufacturing costs associated with iDose TR along with an inventory write-down charge associated with product line optimizations. Our gross margin was approximately 75% and 76% for the years ended December 31, 2024 and December 31, 2023, respectively.

Selling, General and Administrative Expenses

SG&A expenses for the years ended December 31, 2024 and December 31, 2023 were $261.2 million and $224.1 million, respectively, reflecting an increase of $37.1 million or 17%.

Of the total $37.1 million increase in SG&A expenses for the year ended December 31, 2024 as compared to the year ended December 31, 2023, $19.0 million related to increased compensation and related employee costs, with $3.0 million of the incremental amount related to an increase in stock-based compensation expense, the majority of which was associated with certain performance equity awards that were achieved during the year. The residual increase primarily relates to enhancements of various customer and patient support functions, our business intelligence function, and growth in our commercial infrastructure in glaucoma and corneal health, along with increased travel, meetings and accompanying costs as business activities have expanded.

The remaining increase of $18.1 million primarily relates to discretionary expenses supporting the above personnel growth as well as our ongoing administrative operations, inclusive of information technology, facilities and allocated expenses.

Research and Development Expenses

R&D expenses for the years ended December 31, 2024 and December 31, 2023 were $136.4 million and $138.8 million, respectively, reflecting a decrease of $2.3 million or 2%.

For the year ended December 31, 2024, we incurred $84.6 million in core R&D expenses and $51.8 million in clinical expenses, comprised of $79.9 million in compensation and related employee expenses, $2.0 million of which was related to increased stock-based compensation, with the remaining $56.5 million spent on the continued research and development, clinical studies, regulatory activities, quality assurance, clinical inventory and supplies for surgical glaucoma product candidates and pharmaceutical projects, such as next generation iDose products; Epioxa, a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (also referred to as “epi-on”); and our earlier stage programs for glaucoma, corneal, retinal and other therapeutic investments. For the year ended December 31, 2023, we incurred $86.3 million in core R&D expenses and $52.5 million in clinical expenses, comprised of $77.9 million in compensation and related employee expenses with the remaining $60.9 million spent on the abovementioned programs.

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Acquired In-process Research and Development

During the year ended December 31, 2024 we issued $5.0 million of our common stock, paid approximately $5.1 million in cash, and incurred $1.6 million of contingent consideration in connection with the asset acquisition of 100% of the outstanding equity interests in a clinical stage biopharma company focused on developing novel therapeutics for ophthalmic diseases, including all related patents and patent applications, technology and know-how. Also included in IPR&D for the year ended December 31, 2024 is a $2.5 million payment related to an additional license agreement pursuant to which we obtained an exclusive, worldwide license to develop and commercialize drug products incorporating certain proprietary technology.

IPR&D expenses for the year ended December 31, 2023 related to the issuance of $3.0 million of our common stock for the acquisition of intellectual property rights, as well as a $2.0 million upfront payment related to our exclusive license agreement with Stuart Therapeutics, Inc. License Agreement.

Non-Operating Expense, Net

We had non-operating expense, net of $23.2 million and $5.0 million for the years ended December 31, 2024 and December 31, 2023, respectively. The $18.2 million increase primarily relates to charges associated with our Convertible Note Exchange.

Income Tax Provision

Our effective tax rate for the year ended December 31, 2024 was (0.50)%. For the year ended December 31, 2024 and December 31, 2023, we recorded a provision for income taxes of $0.8 million and $0.9 million, respectively. For the years ended December 31, 2024 and December 31, 2023, our tax provision was primarily comprised of state and foreign income tax expense offset by release of uncertain tax positions for which the statute of limitations has expired.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash, cash equivalents and short-term investments, and generally cash generated from operating, financing and investing activities. Our primary uses of cash have been for commercial activities, acquired in-process research and development, clinical and research and development programs, general and administrative expenses, and capital expenditures.

The following table summarizes our cash and cash equivalents, short-term investments and selected working capital data as of December 31, 2024 and December 31, 2023 (in thousands):

Main Sources of Liquidity

We plan to fund our operations, commitments for capital expenditures and other short and long-term known contractual and other obligations using existing cash and investments and, to the extent available, cash received from commercial operations as well as cash generated from employee stock option exercises.

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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 and 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 future periods.

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

As of December 31, 2024, our cash, cash equivalents and short-term investments totaled approximately $318.9 million and our restricted cash totaled approximately $4.7 million.

Cash Flow used in Operations

For the twelve months ended December 31, 2024, our operating activities used $61.3 million in net cash.

Short-term Liquidity Requirements

Our short-term liquidity requirements primarily consist of regular operating costs, R&D project funding, capital expenditures as we continue the development of our manufacturing facilities and office spaces, operating and financing lease obligations and other firm purchase commitments. As of December 31, 2024, we had net working capital of $374.7 million, which indicates that our current assets are sufficient to cover our short-term liabilities.

Long-term Liquidity Requirements

Our long-term liquidity requirements primarily consist of capital expenditures for the continued development of our manufacturing facilities and office spaces, potential future payments related to our licensing agreements, and firm purchase commitments. As demand grows for our products, we will continue to expand global operations to meet demand through investments in our manufacturing capabilities. In December 2024, we reached an understanding with the city of Huntsville, Alabama to develop a new 200,000 square foot R&D and manufacturing facility. We expect construction to begin in 2026.

Material Cash Requirements

The following table summarizes our material cash requirements, including commitments for capital expenditures and known contractual and other obligations as of December 31, 2024, and the amount required to satisfy those requirements in future periods.

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After funding the current operations of our commercial activities, the first planned use of our cash flow from operations is to provide capital funding for our R&D and clinical activities. In addition to investing in R&D and clinical activities, we expect to utilize cash for various capital expenditures. We have made and expect to continue to make significant investments in our global sales force, marketing programs, market access, research and development activities, clinical studies, facilities and general and administrative infrastructure.

We believe that cash from operating, financing and investing activities, together with our cash and investment balances, will be sufficient to meet ongoing operations, capital expenditures, commitments, working capital requirements and other known contractual and other obligations and satisfy our liquidity requirements for at least the next 12 months and the foreseeable future.

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Cash Flows

Our historical cash outflows have primarily been associated with cash used for operating activities such as the expansion of our commercial 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 and improve our manufacturing efficiency and for overall facility expansion.

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

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At December 31, 2024, 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 years ended December 31, 2024 and December 31, 2023 our operating activities used $61.3 million and $57.8 million, respectively.

For the year ended December 31, 2024, our net cash used in operating activities reflected our net loss of $146.4 million, adjusted for non-cash items of $120.1 million, primarily consisting of stock-based compensation expense of $50.2 million, depreciation of $10.9 million, inducement expense related to Convertible Notes Exchange of $17.4 million, amortization of intangible assets of $24.7 million, non-cash lease expense of $4.3 million, amortization of debt issuance costs of $0.7 million, amortization of premium of $4.0 million, a write-down charge of $4.4 million associated with product line optimizations that was recorded against inventory and prepaid assets and other assets, and IPR&D acquired through issuance of common stock of $5.0 million. Additionally, changes in operating assets and liabilities resulted in a net use of cash of $39.5 million, which resulted primarily from increases in accounts receivable of $22.0 million, mostly because extended payment terms have been offered as part of our iDose TR commercial launch during 2024, increases in inventory of $18.8 million, an increase in other assets of $2.1 million, partially offset by decreases in prepaids and other current assets of $3.3 million.

For the year ended December 31, 2023, our net cash used in operating activities reflected our net loss of $134.7 million, adjusted for non-cash items of $87.0 million, primarily consisting of stock-based compensation expense of $43.5 million, depreciation of $8.7 million, amortization of intangible assets of $24.9 million, amortization of lease right-of-use assets of $4.3 million, and amortization of debt issuance costs of $1.4 million, accretion of discount $1.7 million and IPR&D acquired through issuance of common stock of $3.0 million. Additionally, changes in operating assets and liabilities resulted in a net use of $10.1 million, which resulted primarily from increases in inventory of $4.8 million, increases in accounts receivable of $3.8 million, increase in other assets of $1.9 million and increases in prepaids and other current assets of $0.9 million, offset by increases in accounts payable and accrued liabilities of $1.3 million.

Investing Activities

In the years ended December 31, 2024 and December 31, 2023, our investing activities provided cash of $47.8 million and $14.1 million, respectively.

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In the year ended December 31, 2024, we used approximately $190.0 million for purchases of short-term investments and approximately $6.3 million for purchases of property and equipment, primarily related to our facilities in Aliso Viejo, California; and San Clemente, California. We also received cash of approximately $247.2 million from sales and maturities of short-term investments and used approximately $3.2 million related to investments in company-owned life insurance.

In the year ended December 31, 2023, we used approximately $265.6 million for purchases of short-term investments, approximately $20.2 million for purchases of property and equipment, primarily related to our facilities in Aliso Viejo, California; Burlington, Massachusetts; and San Clemente, California; and approximately $3.2 million related to investments in company-owned life insurance, and we received cash of approximately $303.1 million from sales and maturities of short-term investments.

We expect levels of our capital expenditures to be higher in 2025 than in 2024 as we upgrade certain manufacturing facilities and continue investing in R&D equipment needed to advance our product pipeline.

Financing Activities

In the years ended December 31, 2024 and December 31, 2023, our financing activities provided $91.5 million and $15.0 million of net cash, respectively.

In the year ended December 31, 2024, we received $53.2 million related to our Capped Call Unwind Agreements, $46.8 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $6.6 million for payment of employee taxes related to restricted stock unit vestings. Additionally, we paid $0.9 million in principal on our finance lease.

In the year ended December 31, 2023, we received $19.0 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $3.3 million for payment of employee taxes related to restricted stock unit vestings. Additionally, we paid $0.7 million in principal on our finance lease.

We do not have any off-balance sheet arrangements.

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 below and in the Notes to our consolidated financial statements in Part II, Item 8 in this Annual Report on Form 10-K, we believe the following accounting policy 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

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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 that reduce revenue, which includes estimates of volume-based rebates, rebates for government pricing programs, variable consideration for certain product returns and warranty replacements, and other discounts and incentives that reduce revenue.

We only recognize revenue when it is probable that we will collect the consideration we are entitled to in exchange for the goods transferred to a customer. This requires management to perform an assessment related to the probability of collecting the consideration. The assessment can contain judgment when it is performed for customers with declining credit conditions or those with no history or a limited history of product sales with us.

We offer volume-based rebate agreements to certain customers and, if earned by the customer, we provide a rebate (in the form of a credit memo) at the contract’s conclusion. 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.

Non-volume-based rebates consist primarily of rebates for government pricing programs, which were estimated using the expected value method, based upon a range of possible outcomes for the estimated number of actual claims invoices we expect to receive. We apply this estimate to the respective period’s sales to determine the rebate accrual and related expense. This estimate is evaluated regularly to ensure that the historical trends are as current as practicable. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue.

We regularly monitor our rebate programs to ensure the rebate allowance is fairly stated. Our rebate allowance is included in accrued liabilities in the consolidated balance sheets.

Additionally, we have performance obligations related to certain customers’ right to a future discount on single dose pharmaceutical purchases in the U.S., as well as voluntary patient assistance programs to provide financial assistance to qualified patients. Each of these performance obligations is expected to be recognized when the customer or patient elects to utilize the discount, which is generally within one year. The impact of these programs on revenue were not material for the periods presented.

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.

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 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 our audited consolidated financial statements and related notes included in 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 pharmaceutical and medical technology company focused on developing novel, dropless platform therapies and commercializing associated products for the treatment of glaucoma, corneal disorders, and retinal disease. We first developed Micro-Invasive Glaucoma Surgery (MIGS) as an alternative to the traditional glaucoma treatment paradigm, launching our first MIGS device commercially in 2012. We also offer commercially a proprietary bio-activated pharmaceutical therapy for the treatment of a rare corneal disorder, keratoconus, that was approved by the FDA in 2016. We received U.S. Food and Drug Administration (FDA) approval in December 2023 for our first procedural pharmaceutical product, the iDose TR. We are developing a portfolio of platforms to support ongoing pharmaceutical and medical device innovations. Products and product candidates for each of these platforms are designed to advance the standard of care through better treatment options across the areas of glaucoma, 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.

Financial Overview

The most important financial indicators that we use to assess our business are net sales, gross margin, operating expenses, and cash on hand.

​

Please see Results of Operations and Liquidity and Capital Resources below for a detailed discussion of each of the above items including analysis of the fluctuations from year to year.

We incurred net losses of $134.7 million, $99.2 million and $49.6 million for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, respectively and as of December 31, 2023, we had an accumulated deficit of $599.1 million.

Recent Developments

On December 13, 2023, we received U.S. FDA approval for the iDose TR indicated for the reduction of intraocular pressure (IOP) in patients with open-angle glaucoma or ocular hypertension. iDose TR is an intracameral procedural pharmaceutical therapy designed to continuously deliver therapeutic levels of a proprietary formulation of travoprost inside the eye for extended periods of time. We plan to begin commercializing iDose TR in the first quarter of 2024.

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On October 16, 2023, we entered into an Exclusive License Agreement (Stuart License Agreement) with Stuart Therapeutics, Inc. (Stuart), pursuant to which Stuart granted us an exclusive, worldwide license to develop and commercialize products incorporating certain of its owned or controlled technologies, including its ST-113 drug compound, that may be utilized to provide neuroprotection in glaucoma. Pursuant to the terms of the Stuart License Agreement, we made a one-time upfront payment of $2.0 million to Stuart. As of December 31, 2023, the Stuart technologies are all early stage (i.e., pre-clinical). Therefore, depending on the success of the development, regulatory approval and commercialization of the proprietary technologies which is unknown at this time, we may have ongoing clinical and regulatory milestone payments of up to $15.0 million as well as commercial milestone payments of up to $310.0 million, should all contractual milestone events be achieved and annual net sales of a licensed product meet or exceed $2.0 billion. Additionally, we may have royalty payment obligations, based on a single-digit percentage of annual net sales.

On July 17, 2023, we entered into a collaboration and marketing agreement (Collaboration and Marketing Agreement) with Radius XR, Inc. (Radius), in which we became the exclusive sales agent to market, promote and solicit orders for the Radius XR™ wearable patient engagement and diagnostic system within the United States. Pursuant to the Collaboration and Marketing Agreement, we earn commission payments based on sales of Radius products resulting from our marketing and promotion efforts. In connection with the Collaboration and Marketing Agreement, we entered into a convertible promissory note (Convertible Promissory Note) pursuant to which we agreed to fund Radius up to $5.0 million, based upon the occurrence of certain potential future events. The Convertible Promissory Note bears interest on the outstanding principal at the rate of 5.0% per annum, and the outstanding principal and interest is convertible into preferred stock or capital stock in Radius under certain circumstances. As of December 31, 2023, $2.8 million is outstanding under the Convertible Promissory Notes.

On May 16, 2023, we issued $3.0 million of our common stock in connection with the acquisition of intellectual property rights regarding certain formulations and methods for treating an ophthalmic disorder, including all related patents and patent applications, technology and know-how. We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business. We may have ongoing milestone payments based on achieving certain clinical and regulatory milestones depending on the success of the development and approval of the proprietary technologies. Additionally, if these proprietary technologies are commercialized, we may also have single digit royalty payment and commercial milestone obligations that are determined based upon annual net sales thresholds.

Market and Business Update

Impact of the Current Global Economic Environment

During the last twelve months, global and regional economies, the markets we serve and financial markets have experienced significant volatility, including the impact of the macroeconomic environment, specifically inflation, supply shortages or delays, changes in supply and demand, bank failures, foreign exchange rate fluctuations and other conditions which have led to disruptions in commerce and pricing stability. While the specific impact of these factors is not readily determinable, in the past twelve months we have not experienced a material financial statement impact or business disruptions as a result of these negative macroeconomic and geopolitical trends. The duration and scope of these conditions cannot be predicted and therefore, it is uncertain what long-term impacts these economic pressures may have on our business.

For us specifically, some of our vendors are continuing to experience supply challenges, both in the acquisition of raw materials as well as due to labor shortages and other disruptions. As a result of these supply chain challenges and due to current inflationary pressures, we have experienced higher costs for certain components and raw materials. We expect some supply challenges and higher costs to continue into 2024. These challenges have occasionally led to longer lead times and delays of certain components needed for the manufacture of our products, in some cases requiring us to find alternative sources for materials. In the latter part of 2023, these supply challenges generally stabilized; however, if these supply issues persist or worsen in the future, they could impact our ability to ship some of our products to our customers, or bring some of our pipeline products to market, in a timely manner.

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Additionally, the effects of foreign currency fluctuations were most notably experienced in our international glaucoma business. Our annual growth rate of net sales for the year ended December 31, 2023 was negatively affected by approximately 145 basis points, primarily related to the Japanese Yen. For the year ended December 31, 2022, net sales of our international glaucoma business were negatively impacted by approximately 960 basis points, primarily related to the Euro and Japanese Yen.

Developments Impacting Reimbursement Rates and Coverage

In the U.S., healthcare providers use separate billing codes to report the provision of medical procedures and use of supplies to third-party payors, such as government programs or private insurance, and seek reimbursement for all or a portion of those costs. Physician fee payment rates for products covered by temporary Current Procedural Terminology (CPT) codes are set by the multi-state, regional contractors, or Medicare Administrative Contractors (MACs), of which there are currently seven, that are responsible for administering Medicare claims. MACs have in the past, and may in the future, change coverage terms, and there can be no assurance that coverage and adequate reimbursement will be obtained from, or maintained by, the MACs.

The U.S. Centers for Medicare & Medicaid Services (CMS) final rules for 2022 Medicare physician fee payment rates for services furnished in both the ambulatory surgery center (ASC) and hospital outpatient settings (2022 Final Rule) took effect on January 1, 2022. Compared to the reimbursement rates in effect for 2021, the 2022 Final Rule contained a significantly lower physician fee related to the implantation of trabecular bypass stents, such as our iStent family of products, in conjunction with cataract surgery. The CMS final rule for 2023 Medicare physician fee payment rates (2023 Final Rule) that took effect on January 1, 2023 did not materially modify the 2022 Final Rule for procedures using our iStent family of products. The significant reduction of the physician fee had a negative impact on procedural iStent family product volumes, in conjunction with cataract surgery in 2022 and 2023.

In June 2023, five of the seven MACs published proposed local coverage determinations (LCDs) that included reimbursement coverage of iStent infinite, which received FDA clearance in August 2022. The proposed LCDs released by the five MACs also contained additional rules that would result in certain ophthalmic goniotomy and canaloplasty procedures being categorized as investigational and therefore not covered or reimbursed by Medicare. In October and November 2023, the five MACs released final LCDs, confirming reimbursement coverage of the standalone procedure utilizing the iStent infinite and non-coverage for certain procedures, including the ophthalmic canaloplasty procedure utilizing our iPRIME product. Further, the final LCDs indicated that surgical MIGS procedures should not be performed in combination with other MIGS or surgical glaucoma procedures. In December 2023, prior to their respective effective dates, the five MACs rescinded the final LCDs and determined there would be no change in the current status of coverage for MIGS. The other two MACs have taken preliminary steps to assess coverage of iStent infinite through temporary local coverage article (LCA) updates. In the case of each of these seven MACs, coverage of the iStent infinite is determined on a case-by-case basis.

On November 1, 2023, CMS published its final rules on 2024 Medicare physician fee and facility fee payment rates (2024 Final Rule), which took effect on January 1, 2024. The 2024 Final Rule does not materially modify the 2023 rules with respect to physician fee payment rates for procedures using our iStent family of products in conjunction with cataract surgery but does contain increased facility fee rates for such procedures, in both the ASC and hospital settings. In addition, the 2024 Final Rule contained significant increases in the facility fee rates for ASCs and hospitals that perform iStent infinite procedures in a standalone setting under its temporary Category III CPT code.

We estimate that approximately 80% of procedures utilizing our iStent family of products in the U.S. are performed in the ASC setting and the remaining estimated 20% of procedures are performed in the hospital.

Business Outlook

CMS physician fee payment rate decreases have disrupted traditional customer ordering patterns and have resulted in our customers’ trialing and utilization of competitive products, causing reduced U.S. Glaucoma sales volumes of our iStent family of products used in conjunction with cataract surgery in 2022 and, to a lesser extent, in 2023. Our corneal health sales have experienced sporadic headwinds in recent years due to U.S. commercial payer volatility. We believe investments in our market access organization were successful in reducing volatility in 2023, however we are in

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the early stages of these investments and cannot predict whether such success will continue. Additionally, unfavorable foreign exchange rates in certain geographies in which we operate negatively impacted our sales during the first half of 2023 and all of 2022.

In addition to the foregoing, we had commercialized our products for several years in the U.S. with few or no direct competitors. Other competitive products have now become available in the U.S. and globally that have impacted and may continue to impact adoption of or demand for our products. We are also aware of similar products being developed by third parties that could enter the market and increase the competitive pressures we face. These other products could achieve greater commercial acceptance or demonstrate better safety or effectiveness, clinical results, ease of use or lower costs than our products, which could adversely impact our net sales.

Components of Results of Operations

Net Sales

Our net sales are generated primarily from sales of iStent family of products to customers and sales of Photrexa and associated drug formulations as well as KXL systems to customers. Customers are primarily comprised of ambulatory surgery centers, hospitals and physician private practices, with independent distributors being used in certain international locations where we currently do not have a direct commercial presence.

We currently operate in one reportable segment and net sales are generated primarily from sales of our iStent family of products, sales of Photrexa and other associated drug formulations, our proprietary bioactivation systems, and royalty income. 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 the majority of our products through a direct sales organization in the United States. Internationally, we sell our products primarily through direct sales subsidiaries 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 and market access efforts, historically our net sales within a fiscal year have been impacted seasonally, as demand for ophthalmic procedures is typically softer in the first quarter and stronger in the fourth quarter of a given year. However, we note that traditional seasonality patterns were disrupted due to the COVID-19 pandemic in 2021. In 2022 and 2023, we have seen the return of some seasonality patterns; for example, a stronger fourth quarter relative to the rest of the year. However, traditional U.S. revenue patterns were interrupted for us as a result of the CMS reimbursement cuts pursuant to the 2022 Final Rule. CMS physician fee payment rate decreases, which were effective in 2022 and 2023, have disrupted traditional customer ordering patterns and have resulted in our customers’ trialing and utilization of competitive products, causing reduced U.S. Glaucoma sales volumes during 2022 and certain portions of 2023. Our corneal health sales have experienced sporadic headwinds in recent years due to U.S. commercial payer volatility. We believe investments in our market access organization were successful in reducing volatility in 2023, however these investments continue to remain early.

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 family of products and iDose TR at our facilities in San Clemente, California and our KXL systems at our manufacturing facility in Burlington, Massachusetts. We contract with third-party manufacturers in the U.S. and Germany to produce our Photrexa and other associated drug formulations. We currently intend to maintain our manufacturing facilities at our San Clemente and Burlington locations for the foreseeable future.

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Due to the relatively low production volumes of our iStent family of products, iDose TR and our KXL 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.

In 2022 and 2021, cost of sales included a charge equal to a low single-digit percentage of worldwide net sales of certain 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 related to a group of our U.S. patents (the Patent Rights). This ongoing product payment obligation changed as patent coverage on certain products has lapsed, and terminated entirely on the date the last of the Patent Rights expires, which was December 29, 2022. For the years ended December 31, 2022 and December 31, 2021, we recorded approximately $3.1 million and $4.2 million, respectively, in cost of sales in connection with the product payment obligation.

Cost of sales has included amortization of the $252.2 million developed technology intangible assets recorded as a result of our acquisition of Avedro, Inc (Avedro). For each of the years ended December 31, 2023, December 31, 2022 and December 31, 2021, the amortization expense was $22.1 million.

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 pricing, or conversely, higher product costs. Our gross margin will also be affected by manufacturing or supply chain disruptions or inefficiencies that we may experience as we attempt to manufacture our products on a larger scale, manufacture new products and change our manufacturing capacity, processes or output. Additionally, our gross margin will continue to be affected by amortization of Avedro developed technology intangible assets, and by royalty expenses on current or future products associated with various licensing agreements. Our gross margin in future periods may also be impacted by other factors adversely affecting our net sales in future periods such as the impact of government pricing programs and reductions of payment rates for certain of our products and related services and inflationary pressures.

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, sales, marketing, market access, financial, legal, and other 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 associated with our global enterprise systems and information systems; and allocated facility expenses.

We expect SG&A expenses to continue to grow as we increase our global sales and marketing infrastructure and general administration infrastructure. We also expect other non-employee‐related costs, including sales and marketing program activities for new products, market access efforts, outside services and accounting services 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 research and development (R&D) activities primarily consist of new product development projects, pre-clinical studies, IDE and IND studies, and 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; in-licenses, including event-based milestones; and the costs of conducting clinical studies, which include payments to investigational sites and investigators, clinical research organizations, consultants, and other outside technical services; and the costs of materials, supplies and travel. We expense R&D costs as they are incurred. We expect our R&D expenses to continue to increase as we initiate and advance our development programs, including our

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expanding pharmaceutical and surgical development efforts and clinical trials across the glaucoma, corneal health and retinal disease spectrums.

Costs for our clinical development programs include expenses for all activities necessary for obtaining regulatory approvals. Our research programs vary significantly for each current and future product candidate and completion dates are difficult to predict. As a result, while we expect our R&D costs to continue to increase for the foreseeable future, we cannot estimate with any degree of certainty the timing or the amount of 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, the availability of funding resources, 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.

Acquired In-Process Research and Development

Our acquired in-process research and development (IPR&D) expenses generally relate to acquisitions of technologies that management determines do not have any alternative future uses.

Our IPR&D for the years ended December 31, 2023, December 31, 2022 and December 31, 2021 totaled $5.0 million, $10.0 million and $10.0 million, respectively, relating to one-time upfront payments and stock issuances associated with our exclusive licensing agreements with various third-parties, whereby we were granted the exclusive, worldwide licenses for certain technologies that are in development.

We may have ongoing milestone and royalty payment obligations depending on the success, development regulatory approval and commercialization of the proprietary technologies we have acquired.

Litigation-related Settlement

The two $30.0 million cash payments we received pursuant to the terms of a Settlement Agreement with Ivantis, Inc. dated September 14, 2021 (Settlement Agreement) are included in litigation-related settlement as a reduction of operating expenses on the consolidated statements of operations in each respective year.

Non-Operating Expense, Net

Non-operating expense, net primarily consists of interest expense associated with our finance lease for our Aliso Facility and for our 2.75% convertible notes due 2027 (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 provision is primarily comprised of state and foreign income taxes offset by release of uncertain tax positions for which the statute of limitations has expired. Our net deferred tax liability of $7.1 million at December 31, 2023 primarily represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets. We continue to provide a full 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 a more likely than not threshold.

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Results of Operations

For discussion related to the results of operations and changes in financial condition for the year ended December 31, 2022 compared to the year ended December 31, 2021 refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2022 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on February 24, 2023.

Comparison of Years Ended December 31, 2023 and December 31, 2022

Net Sales

Net sales for the years ended December 31, 2023 and December 31, 2022 were $314.7 million and $282.9 million, respectively, reflecting an increase of $31.8 million or 11%.

Net sales of glaucoma products in the United States were $151.5 million and $144.7 million for the years ended December 31, 2023 and December 31, 2022, respectively, increasing by approximately 5%. This increase is primarily due to higher volumes sold of our iStent family of products, including iStent infinite.

International sales of glaucoma products for the years ended December 31, 2023 and December 31, 2022 were $85.6 million and $69.6 million, respectively, increasing by approximately 23%. The increase in international sales reflects broad-based growing volume in many key international markets for glaucoma procedures, the dollar-based results of which were modestly affected by unfavorable foreign exchange rates over the course of the year, primarily related to the Japanese Yen and Australian Dollar, during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Net sales of corneal health products were $77.7 million and $68.6 million for the years ended December 31, 2023 and December 31, 2022, respectively, increasing by 13%. Of the approximately $9.0 million increase in net sales generated by our corneal health products, $10.0 million related to an increase in U.S. net sales of Photrexa using direct sales operations, the majority of which was positively impacted by higher realized average sales prices, as well as continued new account starts, partially offset by $0.5 million decrease in net sales related to U.S. corneal health devices. Our international corneal health sales decreased $0.5 million from net sales in countries outside the U.S. during the year ending December 31, 2023 as compared to the year ending December 31, 2022.

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Cost of Sales

Cost of sales for the years ended December 31, 2023 and December 31, 2022 were $75.6 million and $69.0 million, respectively, reflecting an increase of approximately $6.6 million or 10% that is proportionate to the increase in net sales for the corresponding period. Our gross margin was approximately 76% for each of the years ended December 31, 2023 and December 31, 2022.

Selling, General and Administrative Expenses

SG&A expenses for the years ended December 31, 2023 and December 31, 2022 were $224.1 million and $192.9 million, respectively, reflecting an increase of $31.1 million or 16%.

Of the total $224.1 million, we incurred approximately $138.0 million of costs associated with commercial personnel and discretionary spending during the year ended December 31, 2023 as compared to $125.1 million during the year ended December 31, 2022, primarily due to compensation and related employee expenses associated with growth in our commercial infrastructure in glaucoma and corneal health, along with increased travel, meetings and accompanying costs as business activities have expanded. We also incurred approximately $86.1 million of costs associated with general and administrative personnel and discretionary spending during the year ended December 31, 2023 as compared to $67.8 million during the year ended December 31, 2022, with the change primarily associated with increased expenses related to our ongoing administrative and support functions, inclusive of information technology and allocated facilities expenses. Of the total $30.9 million increase in SG&A expenses for the year ended December 31, 2023 as compared to the year ended December 31, 2022, $13.1 million related to increased compensation and related employee costs, with $1.8 million of the incremental amount related to an increase in stock-based compensation expense.

Research and Development Expenses

R&D expenses for the years ended December 31, 2023 and December 31, 2022 were $138.8 million and $123.3 million, respectively, reflecting an increase of $15.5 million or 13%.

For the year ended December 31, 2023, we incurred $86.3 million in core R&D expenses and $52.5 million in clinical expenses, comprised of $77.7 million in compensation and related employee expenses, $2.8 million of which was related to increased stock-based compensation, with the remaining $61.1 million spent on the continued research and development, clinical studies, regulatory activities, quality assurance, clinical inventory and supplies for surgical glaucoma product candidates and pharmaceutical projects, such as iDose; Epioxa, a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (also referred to as “epi-on”); and our earlier stage programs for glaucoma, corneal, retinal and other therapeutic investments. For the year ended December 31, 2022, we incurred $80.4 million in core R&D expenses and $42.9 million in clinical expenses, comprised of $63.1 million in compensation and related employee expenses with the remaining $60.2 million spent on the abovementioned programs.

Acquired In-process Research and Development

IPR&D expenses for the year ended December 31, 2023 related to the issuance of $3.0 million of our common stock for the acquisition of intellectual property rights, as well as a $2.0 million upfront payment related to our Stuart License Agreement, both of which were previously discussed in Recent Developments above.

IPR&D expenses for the year ended December 31, 2022 totaled $10.0 million related to our iVeena licensing agreement.

Litigation-related Settlement

The $30.0 million cash payment from the Settlement Agreement received during the year ended December 31, 2022 is included in litigation-related settlement as a reduction of operating expenses on the consolidated statements of operations.

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Non-Operating Expense, Net

We had non-operating expense, net of $5.0 million and $16.1 million for the years ended December 31, 2023 and December 31, 2022, respectively. The $11.1 million decrease primarily relates to increased interest income earned on investments and recognition of lower unrealized foreign currency losses due to intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates.

Income Tax Provision

Our effective tax rate for the year ended December 31, 2023 was (0.70)%. For the year ended December 31, 2023 and December 31, 2022, we recorded a provision for income taxes of $0.9 million and $0.8 million, respectively. For the year ended December 31, 2023 our tax provision was primarily comprised of state and foreign income tax expense offset by release of uncertain tax positions for which the statute of limitations has expired. For the year ended December 31, 2022 our tax provision was primarily comprised of state and foreign income tax expense.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash, cash equivalents and short-term investments, and generally cash generated from operating, financing and investing activities. Our primary uses of cash have been for commercial activities, research and development programs, general and administrative expenses, and capital expenditures.

The following table summarizes our cash and cash equivalents, short-term investments and selected working capital data as of December 31, 2023 and December 31, 2022 (in thousands):

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Main Sources of Liquidity

We plan to fund our operations, commitments for capital expenditures and other short and long-term known contractual and other obligations using existing cash and investments and, to the extent available, cash generated from commercial operations as well as cash generated from employee stock option exercises. Included within our existing cash and investments balances are the remaining net proceeds from the Convertible Notes issued in June 2020 (after payment for the related capped call transactions), and the two $30.0 million payments received from Ivantis, Inc. during each of the years ended December 31, 2022 and December 31, 2021, which have been, and are being used for working capital and general corporate purposes.

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

As of December 31, 2023, our cash, cash equivalents and short-term investments totaled approximately $295.4 million and our restricted cash totaled approximately $5.9 million.

Cash Flow used in Operations

For the twelve months ended December 31, 2023, our operating activities used $57.8 million in net cash.

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Senior Convertible Notes

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 8 of the notes to our consolidated financial statements. As of December 31, 2023, none of the conditions allowing holders of the Convertible Notes to convert had been met. These conditions are measured each quarter. For example, 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, 2024, holders of the Convertible Notes would have the right to convert their Convertible Notes during the calendar quarter beginning April 1, 2024. 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. Settling all or a portion of the conversion obligation in cash could adversely affect our liquidity. In addition, even if holders of the Convertible Notes do not elect to convert their Convertible Notes, we may be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current liability rather than long-term liability, which would result in a material reduction of our net working capital.

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 and 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.

Short-term Liquidity Requirements

Our short-term liquidity requirements primarily consist of regular operating costs, interest payments related to our Convertible Notes, R&D project funding, capital expenditures as we continue the development of our manufacturing facilities and office spaces, operating and financing lease obligations and other firm purchase commitments. As of December 31, 2023, we had net working capital of $321.4 million, which indicates that our current assets are sufficient to cover our short-term liabilities.

Long-term Liquidity Requirements

Our long-term liquidity requirements primarily consist of interest and principal payments related to our Convertible Notes, capital expenditures for the continued development of our manufacturing facilities and office spaces, payments in connection with our Promissory Note with Radius, potential future payments related to our licensing agreements, and firm purchase commitments. As demand grows for our products, we will continue to expand global operations to meet demand through investments in our manufacturing capabilities.

Material Cash Requirements

The following table summarizes our material cash requirements, including commitments for capital expenditures and known contractual and other obligations as of December 31, 2023, and the amount required to satisfy those requirements in future periods.

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The Convertible Notes will mature on June 15, 2027, unless earlier converted, redeemed or repurchased in accordance with their terms. In addition to the amounts included in the table above, we will incur material cash

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obligations related to our Convertible Notes, unless we elect to deliver solely shares of our common stock to settle such conversion.

After funding the current operations of our commercial activities, the first planned use of our cash flow from operations is to provide capital funding for our R&D and clinical activities. In addition to investing in R&D and clinical activities, we expect to utilize cash for various capital expenditures. We have made and expect to continue to make significant investments in our global sales force, marketing programs, market access, 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.

We believe that cash from operating, financing and investing activities, together with our cash and investment balances, will be sufficient to meet ongoing operations, capital expenditures, commitments, working capital requirements and other known contractual and other obligations and satisfy our liquidity requirements for at least the next 12 months and the foreseeable future.

Cash Flows

Our historical cash outflows have primarily been associated with cash used for operating activities such as the expansion of our commercial 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 and improve our manufacturing efficiency and for overall facility expansion.

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

At December 31, 2023, 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 years ended December 31, 2023 and December 31, 2022 our operating activities used $57.8 million and $33.1 million, respectively.

For the year ended December 31, 2023, our net cash used in operating activities reflected our net loss of $134.7 million, adjusted for non-cash items of $87.0 million, primarily consisting of stock-based compensation expense of $43.5 million, depreciation of $8.7 million, amortization of intangible assets of $24.9 million, non-cash lease expense of $4.3 million, amortization of debt issuance costs of $1.4 million, accretion of discount of $1.7 million and IPR&D acquired through issuance of common stock of $3.0 million. Additionally, changes in operating assets and liabilities resulted in a net use of cash of $10.1 million, which resulted primarily from increases in inventory of $4.8 million, increases in accounts receivable of $3.8 million, increase in other assets of $1.9 million and increases in prepaids and other current assets of $0.9 million, offset by increases in accounts payable and accrued liabilities of $1.3 million.

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For the year ended December 31, 2022, our net cash used in operating activities reflected our net loss of $99.2 million, which reflected our $30.0 million Settlement Agreement payment received from Ivantis, Inc., adjusted for non-cash items of $79.6 million, primarily consisting of stock-based compensation expense of $38.6 million, depreciation of $6.7 million, amortization of intangible assets of $24.9 million, amortization of lease right-of-use assets of $4.4 million, and amortization of debt issuance costs of $1.4 million. Additionally, changes in operating assets and liabilities were $13.4 million, which resulted primarily from increases in accounts payable and accrued liabilities of $7.2 million, and decreases in other assets of $0.3 million, offset by increases in inventory of $15.5 million, increases in accounts receivable of $3.1 million and increases in prepaids and other current assets of $1.7 million.

Investing Activities

In the years ended December 31, 2023 and December 31, 2022, our investing activities provided cash of $14.1 million and $44.8 million, respectively.

In the year ended December 31, 2023, we used approximately $265.6 million for purchases of short-term investments and approximately $20.2 million for purchases of property and equipment, primarily related to our facilities in San Clemente, California; Aliso Viejo, California; and Burlington, Massachusetts. We also received cash of approximately $303.1 million from sales and maturities of short-term investments and used approximately $3.2 million related to investments in company-owned life insurance.

In the year ended December 31, 2022, we used approximately $59.3 million for purchases of short-term investments, approximately $30.3 million for purchases of property and equipment, primarily related to our facilities in Aliso Viejo, California; Burlington, Massachusetts; and San Clemente, California; and approximately $1.0 million related to investments in company-owned life insurance, and we received cash of approximately $135.2 million from sales and maturities of short-term investments.

We expect levels of our capital expenditures to be modestly lower in 2024 as we wind down expansion activities of our manufacturing facilities.

Financing Activities

In the years ended December 31, 2023 and December 31, 2022, our financing activities provided $15.0 million and $6.3 million of net cash, respectively.

In the year ended December 31, 2023, we received $19.0 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $3.3 million for payment of employee taxes related to restricted stock unit vestings. Additionally, we paid $0.7 million in principal on our finance lease.

In the year ended December 31, 2022, we received $9.2 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $2.7 million for payment of employee taxes related to restricted stock unit vestings. Additionally, we received $0.3 million in proceeds from our tenant improvement allowances of our Aliso Facility and paid $0.5 million in principal on our finance lease.

We do not have any off-balance sheet arrangements.

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

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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 below and in the Notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policy 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 that reduce revenue, which includes estimates of variable consideration for certain product returns and warranty replacements. We only recognize revenue when it is probable that we will collect the consideration we are entitled to in exchange for the goods transferred to a customer. This requires management to perform an assessment related to the probability of collecting the consideration. The assessment can contain judgment when it is performed for customers with declining credit conditions or those with no history or a limited history of product sales with us.

We offer volume-based rebate agreements to certain customers and, if earned by the customer, 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 regularly 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.

Additionally, we have performance obligations related to certain customers’ right to a future discount on single dose pharmaceutical purchases in the U.S., as well as voluntary patient assistance programs to provide financial assistance to qualified patients. Each of these performance obligations is expected to be recognized when the customer or patient elects to utilize the discount, which is generally within one year. The impact of these programs on revenue were not material for the periods presented.

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.

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 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 our audited consolidated financial statements and related notes included in 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 first developed Micro-Invasive Glaucoma Surgery (MIGS) as an alternative to the traditional glaucoma treatment paradigm, launching our first MIGS device commercially in 2012, and continue to develop a portfolio of technologically distinct and leverageable platforms to support ongoing pharmaceutical and medical device innovations. Products or product candidates for each of these platforms are designed to advance the standard of care through better treatment options across the areas of glaucoma, 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.

Impact of the Current Global Economic Environment

Global and regional economies, the markets we serve and financial markets have recently experienced significant volatility including inflation, supply shortages or delays, geopolitical developments, changes in supply and demand, labor shortages and turnover, natural disasters, higher energy costs, health epidemics or pandemics (including the COVID-19 pandemic), currency fluctuations, governmental actions such as mandatory shutdowns, and other conditions which have led to disruptions in commerce and pricing stability. The duration and scope of these conditions cannot be predicted, and therefore, it is uncertain what long-term impacts these economic pressures may have on our business.

While the COVID-19 pandemic materially impacted the global demand for our products, we have seen a general return toward more normalized levels for cataract and keratoconus procedures, with periodic volatility in certain geographies in which we operate, through December 31, 2022. Nevertheless, our business may be impacted by future developments, including any subsequent outbreaks or new variants of the COVID-19 virus, or other future health crises, which may require re-closures or other preventative measures. Additionally, the COVID-19 pandemic has led to widespread staffing shortages, including in ambulatory surgery centers, which has and may continue to impact elective procedures.

Additionally, some of our vendors are continuing to experience supply challenges, both in the acquisition of raw materials as well as due to labor shortages and disruption. As a result of these supply chain challenges and due to current inflationary pressures, we have experienced higher costs for certain components and raw materials. We expect these supply challenges may continue into 2023. These challenges have occasionally led to longer lead times for, and delays and partial or unfulfilled deliveries of certain components needed for the manufacture of our products, in some cases requiring us to find alternative sources for materials. If these delays and partial or unfulfilled deliveries persist, they could impact our ability to ship some of our products to our customers, or bring some of our pipeline products to market, in a timely manner.

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Financial Overview

The most important financial indicators that we use to assess our business are net sales, gross margin, operating expenses, and cash on hand.

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Please see Results of Operations and Liquidity and Capital Resources below for a detailed discussion of each of the above items including analysis of the fluctuations from year to year.

We incurred net losses of $99.2 million, $49.6 million and $120.3 million for the years ended December 31, 2022 and December 31, 2021, and December 31, 2020, respectively and as of December 31, 2022, we had an accumulated deficit of $464.4 million.

Recent Developments

2023 U.S. reimbursement rates

On November 1, 2022, the U.S. Centers for Medicare & Medicaid Services (CMS) published its final rules on 2023 Medicare physician fee and facility fee payment rates (2023 Final Rules) for procedures using our iStent family of products furnished in both the ambulatory surgery center and hospital outpatient settings in conjunction with cataract surgery, as well as the facility fee payment rates, in both hospital and ambulatory surgery center settings, and for standalone insertion of an aqueous drainage device, such as our iStent infinite product. The 2023 Final Rules do not materially modify the Final Rules (as defined below) established for 2022.

iStent infinite

On August 2, 2022, we received 510(k) clearance from the U.S. Food & Drug Administration (FDA) to market the iStent infinite, an implantable device intended to reduce the intraocular pressure of the eye. It is indicated for use in adult patients with primary open-angle glaucoma in whom previous medical and surgical treatment has failed. We began commercial launch activities for this product in the fourth quarter of 2022.

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iLink Epioxa

In November 2022, we made the determination, based upon recommendations from the FDA in recent pre-New Drug Application (NDA) meetings, that we will not submit an NDA for our Epioxa (Epi-On) bio-activated pharmaceutical therapy for the treatment of keratoconus this year, but will instead conduct a second pivotal confirmatory study for this product to support a future NDA submission. We currently estimate that enrollment in this study will commence in the first half of 2023.

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iVeena Exclusive License Agreement

Effective June 9, 2022, we entered into an Exclusive License Agreement (iVeena License Agreement) with iVeena Delivery Systems, Inc. (iVeena), pursuant to which iVeena granted us an exclusive, worldwide license to manufacture and sell products incorporating certain of iVeena’s owned or controlled technologies, including certain chemical compositions, that may be utilized for the treatment of keratoconus. Pursuant to the terms of the iVeena License Agreement, we made a one-time upfront payment to iVeena of $10.0 million. We accounted for the transaction as an asset acquisition as the set of acquired assets did not constitute a business. We may have ongoing milestone and royalty payment obligations depending on the success of the development, approval and commercialization of the proprietary technologies.

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Factors Affecting Our Performance

The CMS final rules for 2022 Medicare physician fee payment rates and 2022 Medicare facility fee payment rates for services furnished in both the ambulatory surgery center and hospital outpatient settings (Final Rules) took effect on January 1, 2022. Compared to the reimbursement rates in effect for 2021, the Final Rules contained a significantly lower physician fee related to the implantation of trabecular bypass stents, such as our iStent family of products, in conjunction with cataract surgery. Conversely, the facility fee schedule related to surgeries that include implantation of trabecular bypass stents, such as our iStent family of products, in conjunction with cataract surgery, slightly decreased reimbursements to an ambulatory surgery center and increased reimbursements to a hospital. Additionally, the Final Rules established facility fee payment rates that were lower than anticipated for standalone insertion of an aqueous drainage device in the ambulatory surgery center and hospital settings, which would be the procedure that such facilities would use with our iStent infinite product. We estimate that approximately 80% of procedures utilizing our trabecular micro-bypass technologies in the U.S. are performed in the ambulatory surgery center setting and the remaining estimated 20% of procedures are performed in the hospital. The significant reduction of the physician fee had a negative impact on 2022 U.S. procedural volumes of our iStent family of products, in conjunction with cataract surgery, which we expect will continue for 2023, adversely affecting our U.S. combo-cataract Glaucoma revenues, gross profit, and net loss, the full extent of which is not known at this time.

We expect our results of operations for 2023 and our near-term performance to reflect increasing competitive dynamics, the impact of the reduced physician fee reimbursement rates contained in the 2023 Final Rules, the continuing disruption resulting from labor and supply shortages and the effects of the macroeconomic environment, the full effects of which are difficult to predict at this time. In addition to the foregoing factors, our operations to date have been, and we believe our future growth and success will be, impacted by the following:

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Further, we have made and expect to continue to make significant investments in our global sales force, marketing programs, research and development (R&D) 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. Our operating expenses have increased significantly following our acquisition of Avedro, Inc. (Avedro), and we have also incurred additional construction costs related to our new facility in Aliso Viejo, California (Aliso Facility), as well as expansions of our existing facilities in San Clemente, California and Burlington, Massachusetts.

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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 our iStent family of products and sales of Photrexa and other associated drug formulations, as well as our proprietary bioactivation systems and royalty income. 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 the majority of our products through a direct sales organization in the United States. Internationally, we sell our products primarily through direct sales subsidiaries in seventeen 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 did not experience the same seasonality pattern in 2021 due in part to the COVID-19 pandemic. In 2022, we saw the return of some seasonality patterns, however traditional U.S. revenue patterns were disrupted as a result of the CMS reimbursement cuts. The effect of COVID-19 and other macroeconomic conditions, including higher interest rates and foreign exchange rate fluctuations, on our commercial performance may continue into future reporting periods. The 2022 CMS physician fee and facility fee rate decreases, which were effective in 2022 and will continue into 2023 have also disrupted traditional U.S. customer ordering patterns and have resulted in our customers’ trialing of competitive products, causing reduced U.S. Glaucoma sales volumes during 2022. Our U.S. Corneal Health sales have experienced modest negative impacts due to sporadic reimbursement challenges. Additionally, unfavorable foreign exchange rates and global COVID dynamics in certain geographies in which we operate have negatively impacted our sales during the year ended December 31, 2022.

In addition to the foregoing, we had commercialized our products for several years in the U.S. with few or no direct competitors. Other competitive products have now become available in the U.S. and globally that have impacted and may continue to impact adoption of or demand for our products. We are also aware of similar products being developed by third parties that could enter the market and increase the competitive pressures we face. These other products could achieve greater commercial acceptance or 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 family of products at our facility in San Clemente, California using components manufactured by third parties. We manufacture our KXL systems at our manufacturing facilities in Burlington, Massachusetts, and we contract with third-party manufacturers in the U.S. and Germany to produce our Photrexa and other associated drug formulations. We currently intend to maintain our manufacturing facilities at our San Clemente and Burlington locations for the foreseeable future.

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

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Cost of sales includes a charge equal to a low single-digit percentage of worldwide net sales of certain 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 related to a group of our U.S. patents (the Patent Rights). This ongoing product payment obligation changed as patent coverage on certain products has lapsed, and terminated entirely on the date the last of the Patent Rights expires, which was December 29, 2022.

Cost of sales includes amortization of the $252.2 million developed technology intangible asset. For each of the years ended December 31, 2022, December 31, 2021 and December 31, 2020, the amortization expense was $22.1 million.

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 or supply chain 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 royalty expenses on current or future products associated with various licensing agreements. Our gross margin in future periods may also be impacted by other factors adversely affecting our net sales in future periods, including the impact of the COVID-19 pandemic, supply chain disruptions, the current macroeconomic environment, including inflationary pressures and fluctuations in foreign currency, and the impact of the reductions on payment rates for certain of our products and related services as a result of the 2023 Final Rules.

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 associated with our global enterprise systems; and allocated facility expenses.

We expect SG&A expenses to continue to grow as we increase our global sales and marketing infrastructure and general administration infrastructure. We also expect other non-employee‐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; in-licenses, including event-based milestones; and the costs of conducting clinical studies, which include payments to investigational sites and investigators, clinical research organizations, consultants, and other outside technical services and the costs of materials, supplies and travel. We expense R&D costs as incurred. We expect our R&D expenses to continue to increase as we initiate and advance our development programs, including our expanding surgical and pharmaceutical development efforts and clinical trials across glaucoma, retinal disease and corneal health.

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, 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

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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, the availability of funding resources, 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

IPR&D expenses for the year ended December 31, 2022 totaled $10.0 million related to our iVeena licensing agreement previously discussed in Recent Developments above.

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Our IPR&D expenses for the year ended December 31, 2021 relate to a $5.0 million upon signing our exclusive licensing agreement with Attillaps Holdings, Inc. and a $5.0 million payment upon signing our exclusive licensing agreement with Intratus, Inc.

Litigation-related Settlement

The $30.0 million cash payments we received pursuant to the terms of a Settlement Agreement dated September 14, 2021 (Settlement Agreement) are included in litigation-related settlement as a reduction of operating expenses on the consolidated statements of operations in each respective year.

Non-Operating Expense, Net

Non-operating expense, net primarily consists of interest expense associated with our finance lease for our Aliso Facility and for our 2.75% convertible notes due 2027 (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 provision is primarily comprised of state and foreign income taxes. Our net deferred tax liability of $7.3 million at December 31, 2022 primarily represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets. We continue to provide a full valuation allowance against our other net deferred tax assets.

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

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Results of Operations

For discussion related to the results of operations and changes in financial condition for the year ended December 31, 2021 compared to the year ended December 31, 2020 refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2021 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on February 28, 2022.

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Comparison of Years Ended December 31, 2022 and December 31, 2021

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NM = Not Meaningful

Net Sales

Our net sales are generated primarily from sales of iStent family of products to customers and sales of Photrexa and associated drug formulations as well as KXL systems to customers. Customers are primarily comprised of ambulatory surgery centers, hospitals and physician private practices, with distributors being used in certain international locations where we currently do not have a direct commercial presence.

Net sales for the years ended December 31, 2022 and December 31, 2021 were $282.9 million and $294.0 million, respectively, reflecting a decrease of $11.1 million or 4%.

Net sales of glaucoma products in the United States were $144.7 million and $170.8 million for the years ended December 31, 2022 and December 31, 2021, respectively, decreasing by approximately 15%. This decrease is primarily due to lower volumes caused by the significantly reduced CMS physicians’ fee that was implemented on January 1, 2022, which has disrupted traditional U.S. customer ordering patterns and has resulted in our customers’ trialing of competitive products. Additionally, sales in the second half of 2021 were positively impacted by abnormally high demand for cataract and glaucoma procedures following the rollout of the COVID-19 vaccines and increasing normalized economic and operating conditions within certain markets in which we operated at that time.

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International sales of glaucoma products for the years ended December 31, 2022 and December 31, 2021 were $69.6 million and $61.2 million, respectively, increasing by approximately 14%. The increase in international sales reflects broad-based growing demand in many key international markets for combined cataract and glaucoma procedures, the dollar-based results of which were substantially affected by unfavorable foreign exchange rates, primarily related to the Euro and Japanese Yen, during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

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Net sales of corneal health products were $68.6 million and $62.0 million for the years ended December 31, 2022 and December 31, 2021, respectively, increasing by 11%. Of the $6.6 million increase in net sales generated by our corneal health products, $5.6 million related to U.S. sales using direct sales operations, which was comprised of an increase of $6.0 million of Photrexa net sales partially offset by reductions of $0.4 million in U.S. capital equipment sales. Additionally, corneal health sales for the year ended December 31, 2022 were positively impacted by higher realized average sales and continued new account starts. Our international corneal health sales increased $1.0 million, in locations where we utilize distributors given we do not have a direct commercial presence.

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Cost of Sales

Cost of sales for the years ended December 31, 2022 and December 31, 2021 were $69.0 million and $66.6 million, respectively, reflecting an increase of approximately $2.4 million or 4%. Our gross margin was approximately 76% for the year ended December 31, 2022 compared to approximately 77% for the year ended December 31, 2021. The variance from the prior year resulted primarily from an increase in the product mix of modestly lower margin products of international market sales and higher material costs due to the inflationary environment.

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Selling, General and Administrative Expenses

SG&A expenses for the years ended December 31, 2022 and December 31, 2021 were $192.9 million and $179.3 million, respectively, reflecting an increase of $13.6 million or 8%.

Of the total $192.9 million, we incurred approximately $125.1 million of costs associated with commercial personnel and discretionary spending during the year ended December 31, 2022 as compared to $112.4 million during the year ended December 31, 2021, with the increase primarily due to compensation and related employee expenses associated with our sales infrastructure in glaucoma and corneal health, along with increased travel, meetings and accompanying costs as business activities have reopened and expanded over the course of the last twelve months. We also incurred approximately $67.8 million of costs associated with general and administrative personnel and discretionary spending during the year ended December 31, 2022 as compared to $63.4 million during the year ended December 31, 2021, associated with our ongoing administrative functions and amortization of our right-of-use asset related to our long-term lease for the Aliso Facility.

Research and Development Expenses

R&D expenses for the years ended December 31, 2022 and December 31, 2021 were $123.3 million and $101.0 million, respectively, reflecting an increase of $22.3 million or 22%.

For the year ended December 31, 2022, we incurred $80.4 million in core R&D expenses and $42.8 million in clinical expenses, comprised of $63.1 million in compensation and related employee expenses with the remaining $60.2 million spent on the continued research and development, clinical studies, regulatory activities, quality assurance, clinical inventory and supplies for surgical glaucoma product candidates and pharmaceutical projects, such as a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (often referred to as “epi-on”), iDose and our earlier stage programs for dry eye, presbyopia, retina and other therapeutic investments. For the year ended December 31, 2021, we incurred $66.6 million in core R&D expenses and $34.4 million in clinical expenses, comprised of $50.1 million in compensation and related employee expenses with the remaining $50.9 million spent on the abovementioned programs.

In-process Research and Development

IPR&D expenses for the year ended December 31, 2022 totaled $10.0 million related to our iVeena licensing agreement previously discussed in Recent Developments above.

IPR&D expenses for the year ended December 31, 2021 related to the amendment of our exclusive licensing agreement with Intratus, Inc. and our exclusive licensing agreement with Attillaps Holdings, Inc. We paid $5.0 million upon signing of each of these agreements.

Litigation-related Settlement

The $30.0 million cash payments from the Settlement Agreement received during each of the years ended December 31, 2022 and December 31, 2021 are included in litigation-related settlement as a reduction of operating expenses on the consolidated statements of operations.

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Non-Operating Expense, Net

We had non-operating expense, net of $16.1 million and $16.4 million for the years ended December 31, 2022 and December 31, 2021, respectively. The change in non-operating expense, net of $0.3 million primarily relates to increased interest income earned on investments, partially offset by recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, unfavorable changes in foreign currency exchange rates and higher interest expense recognized related to the Convertible Notes and to the finance lease for our Aliso Facility.

Income Tax Provision

Our effective tax rate for the year ended December 31, 2022 was (0.78)%. For the year ended December 31, 2022 and December 31, 2021, we recorded a provision for income taxes of $0.8 million and $0.3 million, respectively. For each of the years ended December 31, 2022 and December 31, 2021 our tax provision was primarily comprised of state and foreign income tax expense.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash, cash equivalents and short-term investments, and generally cash generated from operating, financing and investing activities. Our primary uses of cash have been for selling and marketing activities, general and administrative expenses, research and development programs, and capital expenditures.

The following table summarizes our cash and cash equivalents, short-term investments and selected working capital data as of December 31, 2022 and December 31, 2021 (in thousands):

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Main Sources of Liquidity

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We plan to fund our operations, commitments for capital expenditures and other short and long-term known contractual and other obligations using existing cash and investments and, to the extent available, cash generated from commercial operations. Our existing cash and investments include the remaining net proceeds from the Convertible Notes issued in June 2020 (after payment for the related capped call transactions), and the two $30.0 million payments received from Ivantis, Inc. during each of the years ended December 31, 2022 and December 31, 2021, which are being used for working capital and general corporate purposes.

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

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Our cash, cash equivalents and short-term investments totaled approximately $352.7 million and our restricted cash totaled approximately $7.1 million.

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Cash Flow used in Operations

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For the twelve months ended December 31, 2022, our operating activities used $33.1 million in net cash.

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Senior Convertible Notes

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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 8 of the notes to our consolidated financial statements. As of December 31, 2022, none of the conditions allowing holders of the Convertible Notes to convert had been met. These conditions are measured each quarter. For example, 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, 2023, holders of the Convertible Notes would have the right to convert their Convertible Notes during the calendar quarter beginning April 1, 2023. 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. Settling all or a portion of the conversion obligation in cash could adversely affect our liquidity. In addition, even if holders of the Convertible Notes do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

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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 and 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.

Short-term Liquidity Requirements

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Our short-term liquidity requirements primarily consist of regular operating costs, interest payments related to our Convertible Notes, R&D project funding, capital expenditures as we continue the development of our facilities and office spaces, operating and financing lease obligations and other firm purchase commitments. As of December 31, 2022, we had net working capital of $371.5 million, which indicates that our current assets are sufficient to cover our short-term liabilities.

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Long-term Liquidity Requirements

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Our long-term liquidity requirements primarily consist of interest and principal payments related to our Convertible Notes, capital expenditures for the development of our manufacturing facilities and office spaces, and long-term material cash requirements as described below. As demand grows for our products, we will continue to expand global operations to meet demand through investments in our manufacturing capabilities.

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Material Cash Requirements

The following table summarizes our material cash requirements, including commitments for capital expenditures and known contractual and other obligations as of December 31, 2022, and the amount required to satisfy those requirements in future periods.

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The Convertible Notes will mature on June 15, 2027, unless earlier converted, redeemed or repurchased in accordance with their terms. In addition to the amounts included in the table above, we will incur material cash obligations related to our Convertible Notes, unless we elect to deliver solely shares of our common stock to settle such conversion.

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After funding the current operations of our commercial activities, the first planned use of our cash flow from operations is to provide capital funding for our R&D and clinical activities. In addition to investing in R&D and clinical activities, we expect to utilize cash for various capital expenditures including the expansion and enhancement of our facilities. 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.

We believe that cash from operating, financing and investing activities, together with our cash and investment balances, will be sufficient to meet ongoing operations, capital expenditures, commitments, working capital requirements and other known contractual and other obligations and satisfy our liquidity requirements for at least the next 12 months and the foreseeable future.

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:

At December 31, 2022, 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, 2022 our operating activities used $33.1 million and for the year ended December 31, 2021 our operating activities provided $24.7 million.

For the year ended December 31, 2022, our net cash used in operating activities reflected our net loss of $99.2 million, adjusted for non-cash items of $79.6 million, primarily consisting of stock-based compensation expense of $38.6 million, depreciation of $6.7 million, amortization of intangible assets of $24.9 million, amortization of lease right-of-use assets of $4.4 million, and amortization of debt issuance costs of $1.4 million. Additionally, changes in operating assets and liabilities were $13.4 million, which resulted primarily from increases in accounts payable and accrued liabilities of $7.2 million, and decreases in other assets of $0.3 million, offset by increases in inventory of $15.5 million, increases in accounts receivable of $3.1 million and increases in prepaids and other current assets of $1.7 million.

For the year ended December 31, 2021, our net cash used in operating activities reflected our net loss of $49.6 million, adjusted for non-cash items of $70.7 million, primarily consisting of stock-based compensation expense of $30.1 million, depreciation $4.7 million, amortization of intangible assets of $24.9 million, amortization of lease right-

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of-use assets of $4.8 million, and amortization of debt issuance costs of $1.4 million. Additionally, this was partially offset by changes in operating assets and liabilities of $3.6 million, which resulted from increases in accounts payable and accrued liabilities of $12.4 million and decreases in accounts receivable of $1.7 million, partially offset by increases in inventory of $7.7 million and prepaid expenses and other current assets of $3.1 million.

Investing Activities

In the year ended December 31, 2022 our investing activities provided cash of $44.8 million and for the year ended December 31, 2021 net cash from investing activities used approximately $58.2 million.

In the year ended December 31, 2022, we used approximately $59.3 million for purchases of short-term investments, approximately $30.3 million for purchases of property and equipment, primarily related to our facilities in Aliso Viejo, California; Burlington, Massachusetts; and San Clemente, California; and approximately $1.0 million related to investments in company-owned life insurance, and we received cash of approximately $135.2 million from sales and maturities of short-term investments.

In the year ended December 31, 2021, we used approximately $215.3 million for purchases of short-term investments, approximately $47.8 million for purchases of property and equipment, primarily related to our facilities in Aliso Viejo, California and San Clemente, California; and approximately $2.1 million related to investments in company-owned life insurance, and we received cash of approximately $206.9 million from sales and maturities of short-term investments.

We expect to continue our increased levels of capital expenditures into 2023 as we continue expansion of our manufacturing capacity for current and new products, improve our manufacturing efficiency and for overall facility expansion.

Financing Activities

In the years ended December 31, 2022 and December 31, 2021 our financing activities provided $6.3 million and $39.3 million of net cash, respectively.

In the year ended December 31, 2022, we received $9.2 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $2.7 million for payment of employee taxes related to restricted stock unit vestings. Additionally, we received $0.3 million in proceeds from our tenant improvement allowances of our Aliso Facility and paid $0.5 million in principal on our finance lease.

In the year ended December 31, 2021, we received $30.9 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $3.7 million for payment of employee taxes related to restricted stock unit vestings. Additionally, we received $12.7 million in proceeds from our tenant improvement allowances of our Aliso Facility and paid $0.7 million in principal on our finance lease.

We do not have any significant off-balance sheet arrangements or holdings in variable interest entities.

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.

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While our significant accounting policies are more fully described below and 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.

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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 that reduce revenue, which includes estimates of variable consideration for certain product returns and warranty replacements. We only recognize revenue when it is probable that we will collect the consideration we are entitled to in exchange for the goods transferred to a customer. This requires management to perform an assessment related to the probability of collecting the consideration. The assessment can contain judgment when it is performed for customers with declining credit conditions or those with no history or a limited history of product sales with us.

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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.

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Additionally, we have performance obligations related to certain customers’ right to a future discount on single dose pharmaceutical purchases in the U.S., as well as voluntary patient assistance programs to provide financial assistance to qualified patients. Each of these performance obligations is expected to be recognized when the customer or patient elects to utilize the discount, which is generally within one year. The impact of these programs on revenue were not material for the periods presented.

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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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Stock-Based Compensation Expense

Stock-based compensation expense for a stock option award is measured at the date of grant, based on the estimated fair value of the award using the Black-Scholes option pricing model. The estimation of the fair value of each stock-based option grant or issuance on the date of grant is impacted by numerous assumptions by management,

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including but not limited to expected stock price volatility over the term of the awards and the expected term of stock options. Our stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates.

Stock-based compensation expense for a restricted stock unit (RSU) award is measured at the date of grant, based on the fair value of the award which is the closing price of our common stock on the date of grant.

For awards that vest based on service conditions, we use the straight-line method to recognize compensation expense over the respective service period. For awards that contain performance conditions, we determine the appropriate amount to expense based on the probable achievement of performance targets, which requires judgment, and which may include forecasting the achievement of future specified targets. At the date performance conditions are determined to be probable of achievement, we record a cumulative expense catch-up, with remaining expense amortized over the remaining service period. Throughout the performance period, we re-assess the estimated performance and update the number of performance-based awards that we believe will ultimately vest.

If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, we may change the input factors used in determining stock-based compensation expense for future grants. These changes, if any, may materially impact our results of operations in the period such changes are made. Forfeitures are estimated at the time of grant based on historical experience, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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 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 first developed Micro-Invasive Glaucoma Surgery (MIGS) as an alternative to the traditional glaucoma treatment paradigm, launching our first MIGS device commercially in 2012, and have since developed a portfolio of technologically distinct and leverageable platforms to support ongoing pharmaceutical and medical device innovations. Products or product candidates for each of these platforms are designed to advance the standard of care through better treatment options across the areas of glaucoma, corneal disorders such as keratoconus, dry eye and refractive vision correction, and retinal diseases such as neovascular age-related macular degeneration (AMD), diabetic macular edema (DME), and retinal vein occlusion (RVO).

Impact of COVID-19 Pandemic and Current Economic Environment

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While the COVID-19 pandemic and subsequent economic slowdown materially impacted the global demand for our products starting in March 2020, we began to see an early recovery toward more normalized levels for cataract and keratoconus procedures as early as May 2020, a trend that has generally continued, with periodic volatility in certain geographies in which we operate, through December 31, 2021. Most recently the Omicron variant has led to a material increase in diagnosed cases worldwide, creating new government restrictions in select geographies and impacting elective procedures in hospital and ambulatory surgery center sites. Additionally, the COVID-19 pandemic has led to widespread staffing shortages, including in ambulatory surgery centers, which may also impact elective procedures. These trends accelerated at the end of December 2021 and continued through the date herein.

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We 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. While we cannot predict the full impact of COVID-19 on the timing of completion of our clinical trials and the expected regulatory approvals for our pipeline products, our disclosed targeted approval dates anticipate, to our best estimate, such impact.

Additionally, some of our vendors are continuing to experience supply challenges, both in the acquisition of raw materials as well as due to limited headcount resources, and we have experienced higher costs for certain raw materials. These challenges have led to delays and partial or unfulfilled deliveries of certain components needed for the manufacture of our products, in some cases requiring us to find second sources for materials. If these delays and partial or unfulfilled deliveries persist, they could impact our ability to ship some of our products to our customers, or bring some of our pipeline products to market, in a timely manner. We believe that much of these supply challenges stem from the ongoing obstacles presented by COVID-19.

In 2020, when COVID had its greatest financial impact to date, we sought to preserve our cash position by instituting a number of cost saving initiatives, including temporary reductions in discretionary spending and capital expenditures. We temporarily deferred a significant portion of our planned 2020 capital expenditures, particularly those related to facilities expansion and consolidation plans, which were reinstituted as state and local governments began to

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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, 2021, we had cash, cash equivalents, short-term investments, and restricted cash of approximately $423.5 million, compared to $413.9 million as of 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 such as the Delta and Omicron variants, 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.

Financial Overview

The most important financial indicators that we use to assess our business are net sales, gross margin, operating expenses, and cash on hand.

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Please see Results of Operations and Liquidity and Capital Resources below for a detailed discussion of each of the above items including analysis of the fluctuations from year to year.

We incurred net losses of $49.6 million and $120.3 million for the years ended December 31, 2021 and December 31, 2020, respectively and as of December 31, 2021, we had an accumulated deficit of $365.2 million.

Material Changes and Transactions

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.

Recent Developments

2022 U.S. reimbursement rates

On November 2, 2021, the United States (U.S.) Centers for Medicare & Medicaid Services (CMS) published its final rules for 2022 Medicare physician fee payment rates and 2022 Medicare facility fee payment rates for services furnished in both the ambulatory surgery center and hospital outpatient settings (Final Rules). These Final Rules superseded the proposed rates that were issued by CMS in July 2021 which were much lower than the rates issued in the Final Rules. Compared to the 2021 reimbursement rates, the Final Rules contained a new, significantly lower physician fee related to the implantation of trabecular bypass stents, such as our iStent family of products, in conjunction with cataract surgery. Conversely, the facility fee schedule related to surgeries that include implantation of trabecular bypass

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stents, such as our iStent family of products, in conjunction with cataract surgery, slightly decreases reimbursements to an ambulatory surgery center and increases reimbursements to a hospital. We estimate that approximately 80% of procedures utilizing our trabecular micro-bypass technologies in the U.S. are performed in the ambulatory surgery center setting and the remaining estimated 20% of procedures are performed in the hospital. Additionally, the Final Rules established facility fee payment rates that were lower than anticipated for standalone insertion of an aqueous drainage device in the ambulatory surgery center and hospital settings, which would be the procedure that such facilities would use with our iStent infinite product, which is not yet approved by the FDA. These CMS reimbursement rates contained in the Final Rules took effect January 1, 2022.

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U.S. glaucoma volumes were negatively impacted during the third and fourth quarter of 2021 as typical customer ordering patterns were disrupted and trialing of competitive products increased in anticipation of the potential 2022 CMS physician and facility fee reimbursement rate decreases becoming effective as originally proposed in July 2021. The physician fee reimbursement rate as issued in the Final Rules may continue to have an adverse impact on 2022 procedural iStent family product volumes, in conjunction with cataract surgery, as well as on our 2022 U.S. combo-cataract glaucoma revenues, gross profit, and net income, the full extent of which is not known at this time.

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Attillaps License Agreement

On September 20, 2021, we announced that we had entered into a licensing agreement (Attillaps License Agreement) with Attillaps Holdings, Inc. (Attillaps) under which Attillaps granted us a global exclusive license to Attillaps’ proprietary library of investigational pharmaceutical compounds that target the eradication of Demodex mites, which are the root cause of Demodex blepharitis and often associated with meibomian gland dysfunction and related ophthalmic diseases. Under the Attillaps Licensing Agreement, we have the exclusive global right to research, develop, manufacture and commercialize products using certain acetylcholinesterase inhibitors for the treatment of ophthalmic diseases caused by Demodex mites. We paid $5.0 million upon the signing of the Attillaps License Agreement and will have ongoing milestone and royalty payment obligations depending on the success of the development, approval and commercialization of the compounds.

Settlement of Patent Litigation

On September 14, 2021, we entered into a settlement agreement (Settlement Agreement) with Ivantis, Inc. (Ivantis), pursuant to which we and Ivantis agreed to terminate the patent infringement lawsuit we had filed against Ivantis on April 14, 2018 in the U.S. District Court for the Central District of California, Southern Division (the Lawsuit). In the Lawsuit, we alleged that Ivantis’ Hydrus® Microstent device infringes our U.S. Patent Nos. 6,626,858 and 9,827,143. Pursuant to the terms of the Settlement Agreement, Ivantis has made cash payments totaling $60.0 million, $30.0 million of which was paid to us during the year ended December 31, 2021, and $30.0 million of which was paid to us in January 2022.

Additionally, Ivantis will make quarterly royalty payments to us in the amount of 10% of Ivantis’ Hydrus Microstent U.S. sales and any international sales supplied out of the U.S. beginning in the fourth quarter of 2021 through April 26, 2025, subject to a per-unit minimum payment. We and Ivantis have dismissed with prejudice all of our claims against each other in the Lawsuit, which was scheduled for trial beginning on or around September 28, 2021, and in related lawsuits in other forums and jurisdictions. The parties also have agreed to mutual licenses and covenants not to sue the other party for patent infringement relating to Ivantis’ Hydrus Microstent or our micro-stent devices.

Santen License Agreement

On May 18, 2021, we announced that we entered into a new development and commercialization license agreement with Santen Pharmaceutical Co., Ltd. (Santen) for the PreserFlo MicroShunt, superseding the previous collaboration and distribution agreements between the two parties. Under the new agreement, we obtain exclusive commercialization rights for the MicroShunt in the United States, Australia, New Zealand, Canada, Brazil, Mexico and the remainder of Latin America. The new agreement also provides us with control over development activities for the MicroShunt in these same territories, including clinical development and regulatory affairs activities in the United States following a transition period. Santen submitted a premarket approval (PMA) application to the U.S. Food and Drug Administration (FDA) in June 2020 and discussions with the FDA remain ongoing. We did not make any payment in connection with the execution of the license agreement; however, should we be successful in obtaining regulatory

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approval for the PreserFlo MicroShunt, we would be required to pay Santen a milestone payment, followed by royalties and other potential future milestones depending on the success of the commercialization of the product.

Intratus License Amendment

On April 14, 2021, we announced that we had entered into an amended licensing agreement with Intratus, Inc. (Intratus) under which Intratus granted us a global exclusive license to research, develop, manufacture and commercialize Intratus’ patented, non-invasive drug delivery platform for application in the treatment of presbyopia. The addition of presbyopia expands upon the existing agreement between us and Intratus announced on July 22, 2019. The amendment includes a mechanism to further expand the existing agreement to other indications, applying the active pharmaceutical ingredients being advanced by us in glaucoma, corneal disorders and presbyopia to new ophthalmic fields.

Factors Affecting Our Performance

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

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Further, we have made and expect to continue to make significant investments in our global sales force, marketing programs, research and development (R&D) 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. Our operating expenses have increased significantly following our acquisition of Avedro, and we also have incurred additional construction costs related to our new facility in Aliso Viejo, California (Aliso Facility).

We expect 2022 revenues and near-term performance to reflect increasing competitive dynamics, the impact of the reduced physician fee reimbursement rates contained in the CMS Final Rules and the continuing disruption resulting from COVID-19, the full effects of which are difficult to predict at this time.

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.

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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 sales of Photrexa and other associated drug formulations, as well as our proprietary bioactivation systems, to customers and royalty income. 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 the majority of our products through a direct sales organization in the United States. Internationally, we sell our products primarily through direct sales subsidiaries in seventeen 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 2021 due in part to the COVID-19 pandemic and its effect on our commercial performance may continue into future reporting periods. We also believe the 2022 CMS physician fee and facility fee rate decreases, which were finalized in the fourth quarter 2021, have disrupted traditional customer ordering patterns and have resulted in our customers’ trialing of competitive products, causing reduced U.S. Glaucoma sales volumes during our third and fourth quarter of 2021. 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 acceptance or 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 systems at our manufacturing facilities in Burlington, Massachusetts, 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 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 on the date the last of the Patent Rights expires, which is currently expected to be in the fourth quarter of 2022.

Cost of sales has included amortization of the $252.2 million developed technology intangible asset recognized in connection with the Avedro Merger. For each of the years ended December 31, 2021 and December 31, 2020, the amortization expense was $22.1 million, and for the year ended December 31, 2019, the amortization expense was $2.3

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million. Additionally, cost of sales 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, and was fully amortized as of December 31, 2020.

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 or supply chain 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 royalty expenses on current or future products associated with various licensing agreements. Other factors adversely affecting our net sales in future periods, including the impact of the COVID-19 pandemic and any related supply chain issues, and the impact of reductions by CMS in 2022 Medicare payment rates for certain of our products and related services, may also impact our gross profit margins 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.

We expect SG&A expenses to continue to grow as we increase our global sales and marketing infrastructure and general administration infrastructure in the United States. We also expect other nonemployee-related costs, including sales and marketing program activities for new products, outside services and accounting and general legal costs to increase as our overall operations grow. The timing of these increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products, as well as on the timing of any new product launches and other potential business and operational activities.

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 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 intraocular sensor development efforts and clinical trials across glaucoma, retinal disease and corneal health.

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, 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.

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In-process Research and Development

Our in-process research and development (IPR&D) expenses relate to the amendment of our exclusive licensing agreement with Intratus, Inc. and our Attillaps License Agreement. Upfront payments of $5.0 million were made in connection with each of these agreements and were expensed to IPR&D as management determined there were no alternative future uses for the technology acquired.

Litigation-related Settlement

Pursuant to the terms of the Settlement Agreement, Ivantis paid us $30.0 million during the year ended December 31, 2021. The $30.0 million cash payment received during the year ended December 31, 2021 is included in litigation-related settlement as a reduction of operating expenses on the consolidated statements of operations.

Non-Operating (Expense) Income, Net

Non-operating (expense) income, net primarily consists of interest expense associated with our finance lease for our Aliso 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 provision is primarily comprised of state and foreign income taxes. Our net deferred tax liability of $7.3 million at December 31, 2021 represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets. We continue to provide a full valuation allowance against our other net deferred tax assets.

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

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Results of Operations

For discussion related to the results of operations and changes in financial condition for the year ended December 31, 2020 compared to the year ended December 31, 2019 refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2020 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on March 1, 2021.

Comparison of Years Ended December 31, 2021 and December 31, 2020

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NM = Not Meaningful

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Net Sales

Our net sales are generated primarily from sales of iStent products to customers and sales of Photrexa and associated drug formulations as well as KXL systems to customers. Customers are primarily comprised of ambulatory surgery centers, hospitals and physician private practices, with distributors being used in certain international locations where we currently do not have a direct commercial presence.

Net sales for the years ended December 31, 2021 and December 31, 2020 were $294.0 million and $225.0 million, respectively, reflecting an increase of $69.0 million or 31%.

Net sales of glaucoma products in the U.S. were $170.8 million and $133.7 million for the years ended December 31, 2021 and December 31, 2020, respectively, increasing by approximately 28% primarily due to the demand for combined cataract and glaucoma procedures increasing during the year ended December 31, 2021 as compared to the year ended December 31, 2020 given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that generally continued throughout 2021, with periodic demand volatility in certain geographies in which we operate. We also believe the 2022 CMS physician fee and facility fee rate decreases that were proposed in July 2021 disrupted traditional customer ordering patterns and resulted in our customers’ trialing of competitive products.

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International sales of glaucoma products for the years ended December 31, 2021 and December 31, 2020 were $61.2 million and $45.6 million, respectively, increasing by approximately 34%. The increase in international sales reflects growing demand in many key international markets for combined cataract and glaucoma procedures during the year ended December 31, 2021 as compared to the year ended December 31, 2020 given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that generally continued throughout 2021, with periodic demand volatility in certain international geographies in which we operate, and favorable foreign exchange rates compared to the prior year.

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Net sales of corneal health products were $62.0 million and $45.6 million for the years ended December 31, 2021 and December 31, 2020, respectively, increasing by 36%. The $16.4 million increase in net sales generated from our corneal health products was comprised of an increase of approximately $13.6 million in U.S. sales using direct sales operations and an increase of $2.8 million internationally where we utilize distributors given we do not have a direct commercial presence, due to these distributors returning to their more stabilized pre-COVID ordering patterns. The $13.6 million increase in U.S. sales of corneal health products includes an increase of approximately $14.7 million of Photrexa net sales, partially offset by reductions of approximately $1.1 million in U.S. capital equipment sales. Sales of corneal health products in 2020 were negatively impacted by disruption resulting from COVID-19. Demand for corneal health products increased during the year ended December 31, 2021 given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that generally continued throughout 2021. Additionally, corneal health sales for the year ended December 31, 2021 were positively impacted by higher realized average sales and continued new account starts.

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Cost of Sales

Cost of sales for the years ended December 31, 2021 and December 31, 2020 were $66.6 million and $91.7 million, respectively, reflecting a decrease of approximately $25.1 million or 27%. The decrease was primarily comprised of a decrease of approximately $24.7 million related to the acquisition fair market value inventory adjustment rollout that was fully amortized as of December 31, 2020, and a decrease of approximately $2.3 million, net related to the acquisition fair market value inventory adjustment recorded in 2020 in connection with the Avedro Merger that was fully amortized as of December 31, 2020. These decreases were partially offset by normal increases in cost of sales due to higher net sales for the year ended December 31, 2021 as compared to the year ended December 31, 2020. Our gross margin was approximately 77% for the year ended December 31, 2021 compared to approximately 59% for the year ended December 31, 2020. The increased gross margin resulted primarily from the increased net sales during the year ended December 31, 2021 as discussed above, the aforementioned fair market value inventory adjustment and, to a lesser extent, changes in product mix, most notably the inclusion of modestly lower margin products related to international market sales.

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Selling, General and Administrative Expenses

SG&A expenses for the years ended December 31, 2021 and December 31, 2020 were $179.3 million and $171.4 million, respectively, reflecting an increase of $7.9 million or 5%.

Of the total $179.3 million, approximately $102.6 million was comprised of compensation and related employee expenses, with the remaining $76.7 million spent on our marketing programs, advertising, post-approval clinical studies, conferences and congresses, travel expenses, costs associated with obtaining and maintaining our patent portfolio, and professional fees for accounting, auditing, consulting and legal services.

We incurred approximately $112.4 million and $98.2 million in commercial personnel and discretionary spending in the years ended December 31, 2021 and December 31, 2020, respectively, related primarily to existing sales infrastructure in glaucoma and corneal health. We also incurred approximately $66.8 million and $73.1 million of general and administrative personnel and discretionary spending for the years ended December 31, 2021 and December 31, 2020 associated with our ongoing administrative functions and amortization of our right-of-use asset related to our long-term lease for the Aliso Facility.

The above increase in SG&A expenses for the year ended December 31, 2021 was due to a return toward more normalized levels of spending to support increased demand for glaucoma and keratoconus procedures in certain key geographic markets in which we operate, relative to the year ended December 31, 2020, when we incurred temporary reductions in compensation and related employee expenses for our executive team, senior leadership, and many others throughout the company, and reduced professional services expenses as part of cost-savings measures in response to the COVID-19 pandemic. These increases in SG&A expenses during the year ended December 31, 2021 compared to the year ended December 31, 2020 were partially offset by approximately $5.2 million in decreased patent infringement expenses, $6.6 million in decreased stock-based compensation associated with the various stock option and restricted stock awards we granted in connection with the Avedro Merger, $2.2 million in decreased sales tax reserve and a decrease of approximately $1.5 million for costs incurred for restructuring and integration expenses related to the Avedro Merger.

Research and Development Expenses

R&D expenses for the years ended December 31, 2021 and December 31, 2020 were $101.0 million and $85.4 million, respectively, reflecting an increase of $15.6 million or 18%.

We incurred $66.6 million in core R&D expenses and $34.4 million in clinical expenses, comprised of $50.1 million in compensation and related employee expenses with the remaining $50.9 million spent on the continued research and development, clinical studies, regulatory activities, quality assurance, clinical inventory and supplies for surgical glaucoma product candidates and pharmaceutical projects, such as a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (often referred to as “epi-on”), iDose and our earlier stage programs for dry eye, presbyopia, retina and other therapeutic investments.

In-Process Research and Development

IPR&D expenses for the year ended December 31, 2021 related to the amendment of our exclusive licensing agreement with Intratus and our Attillaps License Agreement. We paid $5.0 million upon signing of each of these agreements. There were no IPR&D expenses during the year ended December 31, 2020.

Litigation-related Settlement

The $30.0 million cash payment from the Settlement Agreement received during the year ended December 31, 2021 is included in litigation-related settlement as a reduction of operating expenses on the consolidated statements of operations.

Non-Operating (Expense) Income, Net

We had non-operating expense, net of $16.4 million and $8.8 million for the years ended December 31, 2021 and December 31, 2020, respectively. The increase in non-operating expense, net primarily relates to interest expense

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recognized related to the Convertible Notes and to the finance lease for our Aliso Facility, as well as 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 Provision (Benefit)

Our effective tax rate for the year ended December 31, 2021 was not meaningful. For the year ended December 31, 2021 and December 31, 2020, we recorded a provision/(benefit) for income taxes of $0.3 million and $(12.0) million, respectively. For the year ended December 31, 2021, our tax provision was primarily comprised of state and foreign income taxes. For the year ended December 31, 2020, our tax benefit resulted from the issuance of the Convertible Notes partially offset by state and foreign income taxes.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash, cash equivalents and short-term investments, cash generated from operating, financing and investing activities and proceeds from our senior convertible notes issuance. Our primary uses of cash have been for selling and marketing activities, research and development programs, and capital expenditures.

The following table summarizes our cash and cash equivalents, short-term investments and selected working capital data as of December 31, 2021 and December 31, 2020 (in thousands):

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Main Sources of Liquidity

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We plan to fund our operations, commitments for capital expenditures and other short and long-term known contractual and other obligations using existing cash and investments and, to the extent available, cash generated from commercial operations. Our existing cash and investments include the remaining net proceeds from the Convertible Notes issued in June 2020 (after payment for the related capped call transactions), and the $30.0 million payment by Ivantis during the year ended December 31, 2021, which is being used for working capital and general corporate purposes. See above in the Material Changes and Transaction section of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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Our cash, cash equivalents and short-term investments totaled approximately $414.1 million and our restricted cash totaled approximately $9.4 million.

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Cash Flow from Operations

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For the twelve months ended December 31, 2021, we had positive cash inflows of $24.7 million from operating activities.

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Senior Convertible Notes

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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 8 of the notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. As of December 31, 2021, none of the conditions allowing holders of the Convertible Notes to convert had been met. These conditions are measured each quarter. For example, 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, 2022, holders of the Convertible Notes would have the right to convert their Convertible Notes during the calendar quarter beginning April 1, 2022. 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. Settling all or a portion of the conversion obligation in cash could adversely affect our liquidity. In addition, even if holders of the Convertible Notes do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

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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 and 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.

Short-term Liquidity Requirements

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Our short-term liquidity requirements primarily consist of regular operating costs, interest payments related to our senior convertible notes, funding R&D projects, capital expenditures for the development of our facilities and office spaces as we continue our development of our Aliso Facility, and short-term material cash requirements as described below. As of December 31, 2021, we had net working capital of $422.8 million, which indicates that our current assets are more than enough to cover our short-term liabilities.

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Long-term Liquidity Requirements

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Our long-term liquidity requirements primarily consist of interest and principal payments related to our senior convertible notes, capital expenditures for the development of our manufacturing facilities and office spaces, and long-term material cash requirements as described below. As demand grows for our products, we will continue to expand global operations to meet demand through investments in manufacturing and operations.

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Material Cash Requirements

The following table summarizes our material cash requirements, including commitments for capital expenditures and known contractual and other obligations as of December 31, 2021, and the amount required to satisfy those requirements in future periods.

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After funding the current operations of our commercial activities, the first planned use of our cash flow from operations is to provide capital funding for our R&D and clinical activities. In addition to investing in R&D and clinical activities, we expect to utilize cash for various capital expenditures including the expansion and enhancement of our

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facilities. 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.

We believe that cash from operating, financing and investing activities, together with our cash and investment balances, will be sufficient to meet ongoing operations, capital expenditures, commitments, working capital requirements and other known contractual and other obligations and satisfy our liquidity requirements for at least the next 12 months and the foreseeable future.

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:

At December 31, 2021, 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, 2021 our operating activities provided $24.7 million and for the years ended December 31, 2020 our operating activities used $23.0 million.

For the year ended December 31, 2021, our net cash provided by operating activities reflected our net loss of $49.6 million, adjusted for non-cash items of $70.7 million, primarily consisting of stock-based compensation expense of $30.1 million, depreciation and amortization of $29.7 million, amortization of lease right-of-use assets of $4.8 million, and amortization of debt issuance costs of $1.4 million. This was partially offset by changes in operating assets and liabilities of $3.6 million, which resulted from increases in accounts payable and accrued liabilities and decreases in accounts receivable, partially offset by increases in inventory and prepaids and other current assets.

For the year ended December 31, 2020, our 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.

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Investing Activities

In the year ended December 31, 2021 and December 31, 2020 net cash from investing activities used approximately $58.2 million and $205.1 million, respectively.

In the year ended December 31, 2021, we used approximately $215.3 million for purchases of short-term investments, received proceeds from sales and maturities of short-term investments of $206.9 million and used approximately $2.1 million related to investments in company-owned life insurance.

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.

Cash used for purchases of property and equipment was approximately $47.8 million and $6.9 million for the years ended December 31, 2021 and December 31, 2020, respectively.

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.

Financing Activities

In the years ended December 31, 2021 and December 31, 2020 our financing activities provided $39.3 million and $262.5 million of net cash, respectively.

In the year ended December 31, 2021, we received $30.9 million from the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $3.7 million for payment of employee taxes related to restricted stock unit vestings. Additionally, we received $12.7 million in proceeds from our tenant improvement allowances of our Aliso Facility and paid $0.7 million in principal on our finance lease.

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 addition to the amounts included in the table above, there may be material cash obligations related to our Convertible Notes in the event they become convertible and are converted.

We do not have any significant off-balance sheet arrangements or holdings in variable interest entities.

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.

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While our significant accounting policies are more fully described below and 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.

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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 only recognize revenue when it is probable that we will collect the consideration we are entitled to in exchange for the goods transferred to a customer. This requires management to perform an assessment related to the probability of collecting the consideration. The assessment can contain judgment when it is performed for customers with declining credit conditions or those with no history or a limited history of product sales with us.

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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.

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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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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.

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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. During the year ended December 31, 2021 the Company based the expected volatility on a weighted average of the historical volatility of its common stock and historical volatilities of a peer group of similar companies over the most recent period commensurate with the estimated expected term of the Company’s stock options. During the years ended December 31, 2020 and 2019, the expected volatility assumption was based on historical volatilities of a peer group of similar companies whose share prices were publicly available. The peer group was developed based on companies in the biotechnology industry. 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.

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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