GLAUKOS Corp (GKOS) FY 2023 MD&A

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.

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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 $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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