GLAUKOS CORP MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

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 the COVID-19 pandemic and current economic environment

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.

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 we use to evaluate our business are net sales, gross margin, operating expenses and cash.

                                                               December 31,      December 31,
                                                                   2021              2020
Net sales                                                     $      294,011    $      224,959
Gross margin                                                              77 %              59 %
Operating expenses                                            $     

260 256 $256,793
Cash, cash equivalents, short-term investments and restricted cash

                                               $      

423 467 $413,934

Please see Results of Operations and Liquidity and Capital Resources below for a detailed analysis of each of the above items, including an analysis of year-over-year fluctuations.

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

The 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.

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.

Attilaps 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 a patent dispute

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

Modification of the Intratus license

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:

the rate at which we are expanding our global sales and marketing infrastructure, and

? how quickly we can continue to build awareness of our products to

patients and doctors;

? timely approval of new products by regulatory authorities and

indications for use;

our industry is highly competitive and subject to rapid and profound change

? technological, market and product developments. Our success depends on

hand, on our ability to maintain a competitive position in the development of

new products for the treatment of chronic eye diseases;

publications of clinical results by us, our competitors and other third parties

? can have a significant influence on whether, and to what extent, our

   products are used by physicians and the procedures and treatments those
   physicians choose to administer to their patients;

physicians who use our products may not perform procedures during certain

? times of the year, due to the seasonality patterns typical of some of our

procedures, or when they are absent from their practices for various reasons;

? the coverage and reimbursement rates set by CMS and third-party payers for

procedures for using our products;

our ability to achieve commercialized products from the licensing and

? distribution agreements and other partnerships in which we have entered into and

will enter in the future; and

the impact of exchange rate fluctuations, as most of our

? international sales are denominated in the local currency of the country

where we sell our products.


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

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

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Components of operating results

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 overall costs of manufacturing our products and includes raw material costs, labor costs, manufacturing overhead and the effect of changes in the reserve balance 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.

The cost of sales includes the amortization of $252.2 million developed technological intangible asset recognized as part of the Avedro Merger. For each of the completed years December 31, 2021 and December 31, 2020the amortization charge was $22.1 millionand for the year ended December 31, 2019the amortization charge 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 expenses

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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Currently researching 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.

Dispute 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 income (expenses), 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.

We record reservations for uncertain tax positions when we believe that the ability to maintain the tax position does not reach a more likely than not threshold.

Operating results

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 completed exercises December 31, 2021 and December 31, 2020

                                                      Year ended
                                                    December 31,    % Increase
(in thousands)                               2021           2020    (decrease)
Statements of operations data:
Net sales                              $  294,011    $   224,959            31 %
Cost of sales                              66,627         91,719          (27) %
Gross profit                              227,384        133,240            71 %
Operating expenses:
Selling, general and administrative       179,257        171,401             5 %
Research and development                  100,999         85,392            18 %
In-process research and development        10,000              -           

NM

Litigation-related settlement            (30,000)              -           
NM
Total operating expenses                  260,256        256,793             1 %
Loss from operations                     (32,872)      (123,553)          (73) %
Non-operating loss, net                  (16,395)        (8,761)            87 %
Income tax provision (benefit)                326       (11,966)           
NM
Net loss                               $ (49,593)    $ (120,348)          (59) %


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 millionrespectively reflecting an increase in $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.

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.

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.

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

General and administrative expenses for the years ended December 31, 2021 and December 31, 2020 were
$179.3 million and $171.4 millionrespectively reflecting an increase in
$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 costs

R&D expenses for the years ended December 31, 2021 and December 31, 2020 were
$101.0 million and $85.4 millionrespectively reflecting an increase in
$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.

Currently researching 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.

Dispute 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 income (expenses), net

We had non-operating expenses, 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 expenses, net, is mainly related to interest expenses

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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.

Provision for income tax (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.

Cash 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 certain working capital data as at December 31, 2021 and
December 31, 2020 (in thousands):

                              December 31,      December 31,
                                  2021              2020
Cash and cash equivalents    $      100,708    $       96,596
Short-term investments              313,343           307,772
Accounts receivable, net             33,438            36,059
Inventory                            23,011            15,809
Accounts payable                      7,333             4,371
Accrued liabilities                  56,027            45,331
Working capital (1)                 422,766           419,740

(1) Working capital corresponds to total current assets minus the total

    liabilities


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. 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

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

Operating cash flow

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

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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 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.

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 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.

Long-term liquidity requirements

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.

Material cash needs

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.

                                                                                           Payments due by period
                                                         Less than                                      More than
(in thousands)                                Total         1 year      1 - 3 years      3 - 5 years      5 years
Operating and finance lease
obligations                               $ 187,037    $     3,365    $      21,904    $      17,473   $  144,295
Interest payments on Convertible
Senior Notes                                 43,485          7,906           15,813           15,813        3,953
Firm purchase commitments                    28,043         26,172            1,871                -            -
Total                                     $ 258,565    $    37,443    $      39,588    $      33,286   $  148,248


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 flows from operating, financing and investing activities, as well as our cash and investing balances, will be sufficient to meet ongoing operations, capital expenditures, commitments, working capital requirements and other known contractual and other obligations and to meet our liquidity needs for at least the next 12 months and the foreseeable future.

Cash flow

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

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

                                                                             Year ended
                                                                           December 31,
(in thousands)                                                      2021           2020

Net cash provided by (used in):
Operating activities                                          $   24,708    $  (22,988)
Investing activities                                            (58,232)      (205,060)
Financing activities                                              39,260        262,542
Exchange rate changes                                            (1,774)           (88)

Net increase in cash, cash equivalents and restricted cash $3,962 $34,406

AT December 31, 2021, our cash and cash equivalents were held for working capital purposes. We do not make investments for commercial or speculative purposes. Our policy is to invest any cash in excess of our immediate needs in investments designed to preserve the principal balance and provide liquidity.

Operational activities

In the year ended December 31, 2021 our operational activities provided $24.7 million and for the years ended December 31, 2020 our operational 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 flow from investing activities used approximately $58.2 million and $205.1 millionrespectively.

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

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.

Fundraising activities

In the past years December 31, 2021 and December 31, 2020 our fundraising activities provided $39.3 million and $262.5 million 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 significant cash obligations associated with our convertible notes in the event that they become convertible and are converted.

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

Significant Accounting Policies and 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 the sale of our products in United States and internationally. Customers are primarily made up of outpatient surgery centers, hospitals and private medical practices, with distributors used in some international locations where we do not have a direct commercial presence.

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

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.

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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