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6: EX-31.2 Certification -- §302 - SOA'02 HTML 23K
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8: EX-32.2 Certification -- §906 - SOA'02 HTML 21K
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Loss
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Equity
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Accounting Policies
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(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
i26 Technology Drive
iIrvine,
iCalifornia
i92618
(Address
of principal executive offices)
(Zip Code)
i(949)
i396-6322
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of class
Trading symbol
Name of exchange on which registered
iCommon
stock, par value $0.0001 per share
iAXNX
iNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer
☒
Accelerated
filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
As
of May 3, 2021, i41,903,986 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about future events, our business, financial condition, results of operations and prospects, our industry and the regulatory environment in which we operate. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,”“believe,”“could,”“estimate,”“expect,”“intend,”“may,”“plan,”“potential,”“predict,”“project,”“should,”“will,”“would” or the negative of those terms, or other comparable terms intended to identify statements about the future. Forward-looking statements include, but are not limited to, statements about:
•unanticipated safety concerns related to the use of our products;
•U.S. Food and Drug Administration (FDA) or other U.S. or foreign regulatory or legal actions or changes affecting us or our industry;
•the results of any ongoing or future legal proceedings, including but not limited to intellectual property, product liability or other litigation against us, our third-party manufacturers or other parties on which we rely
or litigation against our general industry;
•any termination or loss of intellectual property rights;
•any voluntary or regulatory mandated product recalls;
•adverse developments concerning our manufacturers or suppliers or any future strategic partnerships;
•introductions and announcements of new technologies by us, any commercialization partners or our competitors, and the timing of these introductions and announcements;
•successful integration of acquired operations into out ongoing business;
•announcements of regulatory approval or disapproval of our products
and any future enhancements to our products;
•adverse results from or delays in clinical studies of our products;
•variations in our financial results or those of companies that are perceived to be similar to us;
•success or failure of competitive products or therapies in the markets in which we do business;
•changes in the structure of healthcare payment of our products;
•announcements by us or our competitors of significant acquisitions, licenses, strategic partnerships, joint ventures or capital commitments;
•economic and market conditions in general and in
the medical technology industry, specifically, including the size and growth, if any, of the market, and issuance of securities analysts’ reports or recommendations;
•rumors and market speculation involving us or other companies in our industry;
•sales of substantial amounts of our stock by directors, officers or significant stockholders, or the expectation that such sales might occur;
•additions or departures of key personnel;
•changes in our capital structure, such as future issuances of securities and the incurrence of additional debt; and
•the continued impact of the novel coronavirus (COVID-19) pandemic, and the related responses
of the government and consumers on our business, financial condition and results of operations.
The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 2 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” of Part I and Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (SEC). In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking statements. Except as required by law, we undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. You should read this Quarterly Report on Form 10-Q and the documents we file with the SEC, with the understanding
that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Unless the context indicates otherwise, as used in this Quarterly Report on Form 10-Q, the terms “Axonics,”“our company,”“we,”“us” and “our” refer to Axonics, Inc. and our consolidated subsidiaries.
This Quarterly Report on Form 10-Q includes our trademarks and trade names, including, without limitation, r-SNM®, Axonics SNM System® and Bulkamid®, which are our property and are protected under applicable intellectual property laws. This Quarterly Report on Form
10-Q also includes trademarks and trade names that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q appear without the ® and ™ symbols, but those references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
Accounts
receivable, net of allowance for doubtful accounts of $i412 and $i465 at March 31, 2021 and December 31,
2020, respectively
i21,509
i18,270
Inventory,
net
i71,243
i63,060
Prepaid
expenses and other current assets
i4,658
i5,435
Total
current assets
i228,372
i327,946
Property
and equipment, net
i6,048
i6,328
Intangible
assets, net
i115,023
i196
Other
assets
i8,145
i7,736
Goodwill
i87,382
i—
Total
assets
$
i444,970
$
i342,206
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
$
i11,446
$
i10,660
Accrued
liabilities
i5,868
i6,684
Accrued
compensation and benefits
i5,348
i5,948
Operating
lease liability, current portion
i1,362
i1,280
Debt,
net of unamortized debt issuance costs, current portion
i22
i21,110
Total
current liabilities
i24,046
i45,682
Operating
lease liability, net of current portion
i8,849
i9,154
Debt,
net of unamortized debt issuance costs, net of current portion
i75,171
i—
Other
long-term liabilities
i6,750
i—
Total
liabilities
i114,816
i54,836
Stockholders’
equity
Preferred stock, par value $ii0.0001/
per share; ii10,000,000/ shares authorized,
iiiino///
shares issued and outstanding at March 31, 2021 and December 31, 2020
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. iNature
of Operations and Summary of Significant Accounting Policies
Nature of Operations
Axonics, Inc. (the Company) was incorporated in the state of Delaware on March 2, 2012 under the name American Restorative Medicine, Inc. In August 2013, we changed our name to Axonics Modulation Technologies, Inc. In March 2021, we changed our name to Axonics, Inc. The Company had no operations until October 1, 2013, when the license agreement between Alfred E. Mann Foundation for Scientific Research (AMF) and the Company (the License Agreement)
was entered into. The Company is a medical technology company that has developed and is commercializing innovative and minimally invasive implantable neurostimulation systems. The Company has designed and developed the rechargeable sacral neuromodulation (SNM) system (r-SNM System), which delivers mild electrical pulses to the targeted sacral nerve in order to restore normal communication to and from the brain to reduce the symptoms of overactive bladder (OAB), urinary retention (UR) and fecal incontinence (FI). The r-SNM System is protected by intellectual property based on Company-generated innovations and patents and other intellectual property licensed from AMF. The Company has marketing
approvals in the United States, Europe, Canada, and Australia for all relevant clinical indications. The premarket approval (PMA) application for the r-SNM System for the treatment of FI was approved by the U.S. Food and Drug Administration (FDA) on September 6, 2019, and the PMA application for the r-SNM System for the treatment of OAB and UR was approved by the FDA on November 13, 2019. Accordingly, the Company began U.S. commercialization of its r-SNM System in the fourth quarter of 2019. Prior to the fourth quarter of 2019, the Company derived revenue only from its international operations in select markets including England, the Netherlands and Canada, and its activities
have consisted primarily of developing the r-SNM System, conducting its RELAX-OAB post-market clinical follow-up study in Europe, its ARTISAN-SNM pivotal clinical study in the United States and hiring and training its U.S. commercial team in preparation for the launch of the r-SNM System in the United States.
May 2020 Follow-On Offering
On May 12, 2020, the Company completed a follow-on offering by issuing i4,600,000
shares of common stock, at an offering price of $i32.50 per share, inclusive of i600,000 shares of the
Company’s common stock issued upon the exercise by the underwriters of their option to purchase additional shares. The net proceeds to the Company were approximately $i140.5 million, after deducting underwriting discounts, commissions and offering expenses payable by the Company.
i
Principles
of Consolidation
The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, Axonics Europe, S.A.S., Axonics Modulation Technologies U.K. Limited, Axonics Modulation Technologies Australia Pty Ltd, Axonics Women’s Health Limited, Bulkamid SARL, and Axonics GmbH. Intercompany accounts and transactions have been eliminated in consolidation.
i
Basis
of Presentation
Interim Financial Statements
The interim condensed consolidated financial statements and related footnote disclosures as of and for the three months ended March 31, 2021 are unaudited, and are not necessarily indicative of the Company’s operating results for a full year. The unaudited interim condensed consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial results for the three months ended March 31, 2021 in accordance with United States (U.S.) generally accepted accounting principles
(GAAP), however, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the U.S. Securities and Exchange Commission (SEC) rules and regulations relating to interim financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included within the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (filed with the SEC on March 1, 2021).
The recent COVID-19 outbreak, and the resulting restrictions intended to slow the spread of COVID-19, including stay-at-home orders, business shutdowns and other restrictions, has adversely affected the Company’s business in several ways. The primary impact on the Company’s business was the cancellation or delay of elective procedures in certain areas to allow health care facilities to prioritize the treatment of COVID-19 patients during the initial stages of the pandemic or because patients are avoiding health care facilities that they feel are unsafe. These developments materially reduced the number of procedures using the
Company’s r-SNM System. If governmental authorities recommend that it is deemed advisable for health care facilities to not perform outpatient elective procedures as was the case in late March and April of 2020, the Company expects it would materially harm the Company’s revenues and potentially increase the Company’s operating loss. These challenges will likely continue for the duration of the pandemic and could reduce our revenue and negatively impact our business, financial condition and results of operations while the pandemic continues. If these delays in procedures occur in the future, the Company may have to scale back
its business, including reducing headcount, which could have a negative impact on the Company’s long-term operations. The Company could also experience other negative impacts of the COVID-19 outbreak such as the lack of availability of the Company’s key personnel, temporary closures of the Company’s office or the facilities of the Company’s business partners, customers, third party service providers or other vendors, and the interruption of the Company’s
supply chain, distribution channels, liquidity and capital or financial markets.
Any disruption and volatility in the global capital markets as a result of the pandemic may increase the Company’s cost of capital and adversely affect the Company’s ability to access financing when and on terms that the Company desires. In addition, a recession resulting from the spread of COVID-19 could materially affect the Company’s business, especially if a recession results in higher unemployment causing potential patients to
not have access to health insurance.
The ultimate extent to which the COVID-19 pandemic and its repercussions impact the Company’s business will depend on future developments, which are highly uncertain. However, the foregoing and other continued disruptions to the Company’s business as a result of COVID-19 could result in a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
i
Use
of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses, and related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of this evaluation then form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and such differences may be material to the consolidated
financial statements.
i
Revenue Recognition
Revenue recognized during the three months ended March 31, 2021 and 2020 relates entirely to the sale of our r-SNM System and Bulkamid.
The Company has revenue arrangements that consist of a single performance obligation. The
Company recognizes revenue at the point in time when it transfers control of promised goods to its customers. Revenue is measured as the amount of consideration it expects to receive in exchange for transferring goods. The amount of revenue that is recognized is based on the transaction price, which represents the invoiced amount and includes estimates of variable consideration such as discounts, where applicable. The Company does not offer rights of return or price protection. The amount of variable consideration included in the transaction price may be constrained and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Payment terms, typically less than three
months, are offered to the Company’s customers and do not include a significant financing component. The Company extends credit to its customers based upon an evaluation of the customer’s financial condition and credit history and generally requires no collateral. The Company does not have any contract balances related to product sales. The Company also does not have significant contract acquisition costs related to product sales.
In accordance with Company policy and based on the Company’s historical experience, the allowance for product returns was $i0.2 million and $i0.3
million at March 31, 2021 and December 31, 2020, respectively. Damaged or defective products are replaced at no charge under the Company’s standard warranty. For the three months ended March 31, 2021 and March 31, 2020, the replacement costs were $i0.1
million and minimal, respectively.
Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold. Amounts billed to customers for shipping and handling are included in net revenue.
i
The following table provides additional information pertaining to net revenue disaggregated by geographic market for the three months ended March 31, 2021 and 2020
(in thousands):
The Company makes estimates of the collectability of accounts receivable. Upon adoption of ASU 2016-13 effective January 1, 2020, the Company did not recognize an adjustment to the beginning balance of retained earnings as the impact from adoption was not material. The Company’s estimate of future losses is made by management based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and reasonable forecasted economic trends. Despite the Company’s
efforts to minimize credit risk exposure, clients could be adversely affected if future economic and industry trends, including those related to COVID-19, change in such a manner as to negatively impact their cash flows. The full effects of COVID-19 on the Company’s clients are highly uncertain and cannot be predicted. As a result, the Company’s future collection experience can differ significantly from historical collection trends. If the Company’s clients experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations and financial condition.
i
The
following table summarizes the changes in our allowance for doubtful accounts (in thousands):
Cash equivalents consist of short-term, highly liquid investments purchased with an original maturity of three months or less. Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. At times, the cash and cash equivalent balances may exceed federally insured limits. The Company does not believe that this results in any significant credit risk as the Company’s policy is to place its cash and cash equivalents in highly-rated financial institutions.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•Level
1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs are quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•Level 3: Inputs are unobservable inputs based on the Company’s assumptions and valuation techniques used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.
The Company’s
assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The carrying amounts reported in the condensed consolidated financial statements approximate the fair value for cash and cash equivalents, accounts receivable, accounts payables, and accrued expenses, due to their short-term nature. The carrying amount of the Company’s term loan, which is described below, approximates fair value, considering the interest rates are based on the prime interest rate.
The purchase price of business acquisitions is primarily allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the excess
recorded as goodwill. We utilize Level 3 inputs in the determination of the initial fair value.
Contingent consideration represents contingent milestone, performance and revenue-sharing payment obligations related to acquisitions and is measured at fair value, based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions we believe would be made by a market participant. We assess these assumptions on an ongoing basis as additional data impacting the assumptions is obtained. The fair value of contingent consideration is recorded in business acquisition liabilities on our condensed consolidated balance sheets.
i
Investment
Securities
The Company classifies its investment securities as available-for-sale. Those investments in debt securities with maturities less than 12 months at the date of purchase are considered short-term investments. Those investments in debt securities with maturities greater than 12 months at the date of purchase are considered long-term investments. The Company’s investment securities classified as available-for-sale are recorded at fair value based on the fair value hierarchy (Level 1 and Level 2 inputs in the fair value hierarchy), and consists primarily of commercial paper, corporate notes and U.S. government and agency securities. Unrealized gains or losses, deemed temporary in nature, are reported as other comprehensive income within the condensed
consolidated statement of comprehensive income (loss). There were iino/
unrealized gains or losses during the three months ended March 31, 2021 and 2020.
A decline in the fair value of any security below cost that is deemed other than temporary results in a charge to net income (loss) and the corresponding establishment of a new cost basis for the security. Premiums (discounts) are amortized (accreted) over the life of the related security as an adjustment to yield using the straight-line interest method. Dividend and interest income are recognized when earned. Realized gains or losses are included in net income (loss) and are derived using the specific identification method for determining the cost of securities sold.
The functional currencies of the Company’s subsidiaries are currencies other than the U.S. dollar. The
Company translates assets and liabilities of the foreign subsidiaries into U.S. dollars at the exchange rate in effect on the balance sheet date. Costs and expenses of the subsidiaries are translated into U.S. dollars at the average exchange rate during the period. Gains or losses from these translation adjustments are reported as a separate component of stockholders’ equity in accumulated other comprehensive loss until there is a sale or complete or substantially complete liquidation of the Company’s investment in the foreign subsidiary at which time the gains or losses will be realized and included in net income (loss). As of March 31, 2021 and December 31,
2020, all foreign currency translation gains (losses) have been unrealized and included in accumulated other comprehensive loss. Accumulated other comprehensive loss consists entirely of losses or gains from translation of foreign subsidiaries at March 31, 2021 and December 31, 2020.
i
Inventory, Net
Inventories are stated at the lower of cost or net realizable value, with
cost computed on a first-in, first-out basis. The Company reduces the carrying value of inventories for items that are potentially excess, obsolete, or slow-moving based on changes in customer demand, technology developments, or other economic factors.
The Company capitalizes inventory produced for commercial sale. The Company capitalizes manufacturing costs as inventory following both the receipt of regulatory approval from regulatory bodies and the Company’s intent to commercialize. Costs associated with developmental products prior to satisfying the
Company’s inventory capitalization criteria are charged to research and development expense as incurred.
Products that have been approved by certain regulatory authorities may also be used in clinical programs to assess the safety and efficacy of the products for usage that have not been approved by the FDA or other regulatory authorities. The form of product utilized for both commercial and certain clinical programs that are identical are included as inventory with an “alternative future use” as defined in authoritative guidance. Component materials and purchased products associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes and, therefore, does not have an “alternative future use.”
For
products that are under development and have not yet been approved by regulatory authorities, purchased component materials are charged to research and development expense when the inventory ownership transfers to the Company.
The Company analyzes inventory levels to identify inventory that may expire prior to sale, inventory that has a cost basis in excess of its net realizable value, or inventory in excess of expected sales requirements. Although the manufacturing of the r-SNM System is subject to strict quality control, certain batches or units of product may no longer meet quality specifications or may expire, which would require adjustments to the Company’s inventory
values. The Company also applies judgment related to the results of quality tests that are performed throughout the production process, as well as the understanding of regulatory guidelines, to determine if it is probable that inventory will be saleable. These quality tests are performed throughout the pre- and post-production processes, and the Company continually gathers information regarding product quality for periods after the manufacturing date. The r-SNM System currently has a maximum estimated shelf life range of i12
to i36 months and, based on sales forecasts, the Company expects to realize the carrying value of the product inventory. In the future, reduced demand, quality issues, or excess supply beyond those anticipated by management may result in a material adjustment to inventory levels, which would be recorded as an increase to cost of sales.
The determination of whether or not inventory costs will be realizable requires estimates by the Company’s management.
A critical input in this determination is future expected inventory requirements based on internal sales forecasts. Management then compares these requirements to the expiry dates of inventory on hand. To the extent that inventory is expected to expire prior to being sold, management will write down the value of inventory.
/
As of March 31, 2021, the Company had $i38.9
million, $i13.4 million and $i18.9 million of finished goods inventory, work-in-process inventory and raw materials inventory, respectively.
Reserves were de minimus as of March 31, 2021. As of December 31, 2020, the Company had $i42.1 million, $i3.5
million and $i17.5 million of
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and iseven years. Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the improvements. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain
or loss is reflected in operations.
/i
Goodwill
Goodwill represents the excess purchase price over the fair values of the identifiable assets acquired less the liabilities assumed. Goodwill is tested for impairment at least annually. Goodwill is tested for impairment at the reporting unit level by comparing the reporting unit’s carrying amount to the fair value of the reporting unit. The fair values
are estimated using an income and discounted cash flow approach. We perform our annual impairment test for goodwill in the fourth quarter of each year. We consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. During the three months ended March 31, 2021, we did inot record any impairment charges related to goodwill.
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Intangible
Assets
Patent license asset
The intangible asset represents exclusive rights to an additional field-of-use on the patent suite within the License Agreement with AMF. The additional field-of-use was provided in exchange for i50,000 shares of Series A preferred stock, the fair value of which was $i1.0
million in 2013. The intangible asset was recorded at its fair value of $i1.0 million at the date contributed. In connection with the IPO, such shares of Series A preferred stock were converted into common stock. Amortization of this asset is recorded over the shorter of the patent or legal life on a straight-line basis. The weighted-average amortization period is i8.71
years. Accumulated amortization of this intangible asset is $ii0.8/
million at March 31, 2021 and December 31, 2020. The amortization of this intangible asset was minimal during the three months ended March 31, 2021 and 2020. The Company will review the intangible asset for impairment whenever an impairment indicator exists. There have been ino
intangible asset impairment charges to date. For additional information, see Note 10.
Exclusive license asset
The intangible asset represents exclusive rights of existing technologies and development services from MST entered into on March 2, 2021. The agreement was provided in exchange for i65,594 shares of common stock, $i0.0001
par value, the fair value of which was $i3.6 million upon transfer. The intangible asset was recorded at its fair value of $i3.3 million
at the date of the agreement, with the difference of $i0.3 million recorded as a vendor credit in accounts payable in the condensed consolidated balance sheets. Amortization of this asset is recorded over the ifour-year
term of the agreement on a straight-line basis. There was ino amortization of this intangible asset recorded during the three months ended March 31, 2021. The Company will review the intangible asset for impairment whenever an impairment indicator exists. There have been ino
intangible asset impairment charges to date. For additional information, see Note 10.
Contura acquisition
The intangible assets represent technology, trade names and trademarks, and customer relationships acquired from Contura on February 25, 2021. For additional information, see Notes 9 and 10.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net cash flows that the assets are expected to generate. If said assets are considered to be impaired, the impairment that would be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. There have been ino
such impairments of long-lived assets to date.
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Leases
In accordance with ASU No. 2016-02, “Leases (Topic 842)”, components of a lease should be split into three categories: lease components, non-lease components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be allocated based on the respective relative fair values to
the lease components and non-lease components. Entities may elect not to separate lease and non-lease components. Rather, entities would account for each lease component and related non-lease component together as a single lease component. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets and allocate all of the contract consideration to the lease component only. Topic 842 allows for the use of judgment in determining whether the assumed lease term is for a major part of the remaining economic life of the underlying asset and whether the present value of lease payments represents substantially all of the fair value of the underlying asset. The
Company applies the bright line thresholds referenced in Topic 842 to assist in evaluating leases for appropriate classification. The aforementioned bright lines are applied consistently to the Company’s entire portfolio of leases.
Operating lease ROU asset and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company’s lease does not provide an implicit rate, the Company uses its incremental borrowing rate, which is the rate for a fully collateralized amortizing loan with the same maturity as the lease term, based on the information available at commencement
date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
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Research and Development
Research
and development costs are charged to operations as incurred. Research and development costs include salary and personnel-related costs, costs of clinical studies and testing, supplies and materials, and outside consultant costs.
iAdvertising Expense
The Company expenses advertising costs as they are incurred. During the three months ended March 31, 2021
and 2020, advertising expense totaled $i1.4 million and $i0.4 million, respectively, and are recorded within the sales and marketing expenses in its consolidated
statements of comprehensive loss.
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Income Taxes
The Company accounts for income taxes using the asset and liability method to compute the difference between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. The Company has deferred tax assets. The realization of these deferred tax assets
is dependent upon the Company’s ability to generate sufficient taxable income in future years. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company evaluates the recoverability of the deferred tax assets annually, and maintains a full valuation allowance on its deferred tax assets. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company is subject
to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned by the Company’s U.S. and foreign entities and are taxed accordingly. In the normal course of business, the Company is audited by federal, state and foreign tax authorities, and subject to inquiries from those tax authorities regarding the amount of taxes due. These inquiries may relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company’s policy is to recognize interest and
penalties related to unrecognized tax benefits, if any, in income tax expense.
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Stock-Based Compensation
The Company measures the cost of employee and non-employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes compensation cost over the
requisite service period (typically the vesting period), generally ifour years. Forfeitures are estimated at the time of the grant and revised in subsequent periods to reflect differences between the estimates and the number of shares that actually become exercisable.
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options
(as of the date of grant) that have service conditions for vesting. Stock options and restricted shares awards vest based on service conditions, typically over ifour years.
/
The Company also grants shares of performance-based restricted
stock units that typically vest after ione year only if the Company has also achieved certain performance objectives as defined and approved by the Company’s board of directors. The fair value of performance awards are determined based on the Company’s stock price
at the date of grant and expensed over the performance period based on the probability of achieving the performance objectives. In addition, the Company also grants market-based restricted stock units that have combined market conditions and service conditions for vesting, for which the Company uses the Monte Carlo valuation model to value equity awards (as of the date of grant).
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Net Loss per Share of Common Stock
Basic
net loss per share of common stock is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, convertible preferred stock, common and preferred stock warrants, common stock options, unvested RSAs and RSUs are considered to be potentially dilutive securities. Because the Company has reported a net loss in all periods presented, diluted net loss per share of common stock is the same as basic net loss per share of common stock for those periods.
For
the three months ended March 31, 2021 and 2020, there were i2,488,284 and i2,288,736
potentially dilutive weighted-average shares, respectively, that were not included in the computation of diluted weighted-average shares of common stock and common stock equivalent shares outstanding because their effect would have been antidilutive given the Company’s net loss.
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Recent Accounting Pronouncements
In
December 2019, the FASB issued ASU 2019-12, “Income Taxes—Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of franchise tax, the evaluation of a step-up in the tax basis of goodwill and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. This guidance is effective for annual periods beginning after December 15, 2020, which was the Company’s first quarter of fiscal year 2021, with early adoption permitted. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements or related disclosures.
Depreciation
and amortization expense of property and equipment was $i0.5 million and $i0.4 million for the three months ended March 31,
2021 and 2020, respectively.
Note 3. iCommitments and Contingencies
Operating Leases
In August 2014, the Company entered into a ifive-year
operating lease for approximately i12,215 square feet of office space beginning on November 1, 2014, and expiring on October 31, 2019. In June 2019, the lease was amended to extend the expiration date to October 31, 2020 and in September 2020, the lease was amended to extend the expiration date to July 31, 2022. Upon the execution of the amendments, which were deemed to be a lease modification, the
Company reassessed the lease liability using the discount rate at the modification date and recorded ROU assets for the same amount. The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease. Under the terms of the lease, the Company is responsible for taxes, insurance, and maintenance expense. The lease contains certain scheduled rent increases. Rent expense is recognized on a straight-line basis over the expected lease term.
In November 2017, the Company entered into a iseven-year
operating lease for approximately i25,548 square feet of office space beginning on August 1, 2018, and expiring on August 31, 2025. In June 2019, the lease was amended to extend the expiration date to October 31, 2027. Upon the execution of the amendments, which were deemed to be a lease modification, the Company reassessed the lease liability using the discount rate
at the modification date and recorded ROU assets for the same amount. The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease. Under the terms of the lease, the Company is responsible for taxes, insurance, and maintenance expense. The lease contains certain scheduled rent increases. Rent expense is recognized on a straight-line basis over the expected lease term. The Company has a renewal option to extend the term of the lease for a period of ifive
years beyond the initial term. Under the terms of the lease, the base rent payable with respect to each renewal term will be equal to the prevailing market rental rent as of the commencement of the applicable renewal term. In the event of a default of certain of the Company’s obligations under the lease, the Company’s landlord would have the right to terminate the lease.
In June 2019, the Company entered into an ieight-year
operating lease for approximately i32,621 square feet of office space beginning on January 15, 2020 and expiring on January 31, 2028. The Company uses these premises as its new principal executive offices and for general office space. The Company intends to utilize its other currently-leased spaces through the lease expiration dates
to conduct the training of its sales team and for manufacturing purposes. Under the terms of the lease, the Company is responsible for taxes, insurance, and maintenance expense. The lease contains certain scheduled rent increases. Rent expense is recognized on a straight-line basis over the expected lease term. The Company has a renewal option to extend the term of the lease for a period of ifive years beyond the initial term. Under the terms of the lease, the
base rent payable with respect to each
renewal term will be equal to the prevailing market rental rent as of the commencement of the applicable renewal term. In the event of a default of certain of the Company’s obligations under the lease, the Company’s landlord would have the right to terminate the lease.
In August 2020, the Company entered into a i38-month
operating lease (the New Lease) for approximately i5,693 square feet of warehouse space beginning on October 15, 2020 and expiring on December 31, 2023 (the Initial Term). The Company uses these premises for general warehouse space.
During the three months ended March 31, 2021 and 2020,
ROU assets obtained in exchange for new operating lease liabilities were $i0.1 million and $i3.0
million, respectively. As of March 31, 2021 and December 31, 2020, the ROU asset has a balance of $i6.9 million and $i7.1
million, respectively. The operating lease ROU asset is included within the Company’s other non-current assets, and lease liabilities are included in current or noncurrent liabilities on the Company’s condensed consolidated balance sheets. During the three months ended March 31, 2021 and 2020, cash paid for amounts included in operating lease liabilities were $i0.5
million and $i0.3 million, respectively. Amortization of the ROU asset was $i0.3 million and $i0.2
million for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021 and December 31, 2020, the weighted-average remaining lease term for the Company’s operating leases were i6.4 years and i6.6
years, respectively. The weighted-average discount rate used to determine the present value of the Company’s operating leases’ future payments was ii6.7/%
as of March 31, 2021 and December 31, 2020.
i
Total lease cost for the three months ended March 31, 2021 and 2020 are as follows (in thousands):
In October 2013, the Company entered into the License Agreement, pursuant to which AMF licensed the Company certain patents and know-how (collectively, the AMF IP) relating to, in relevant part, an implantable pulse generator and related system components in development by AMF as of that date, in addition to any peripheral or auxiliary devices, including all components, that when assembled, comprise such device, excluding certain implantable pulse generators (collectively, the AMF Licensed Products). Under the License Agreement, for each calendar year beginning in 2018, the Company is obligated to pay AMF a royalty on an AMF Licensed Product-by-AMF Licensed
Product basis if one of the following conditions applies: (i) one or more valid claims within any of the patents licensed to the Company by AMF covers such AMF Licensed Products or the manufacture of such AMF Licensed Products or (ii) for a period of i12 years from the first commercial sale anywhere in the world of such AMF Licensed Product, in each case. The foregoing royalty is calculated as the greater of (a) i4%
of all net revenue derived from the AMF Licensed Products, and (b) the Minimum Royalty, payable quarterly. The Minimum Royalty will automatically increase each year after 2018, subject to a maximum amount of $i200,000 per year. The Company generated net SNM revenue of $i32.9
million and $i26.3 million during the three months ended March 31, 2021 and 2020, respectively, and recorded related royalties of $i1.3
million and $i1.0 million during the three months ended March 31, 2021 and 2020, respectively. Royalty expense is included in operating expenses in the condensed consolidated statements of comprehensive loss. Accrued royalty of $i1.3
million and $i1.4 million as of March 31, 2021 and December 31, 2020, respectively, is included within accrued liabilities on the Company’s condensed consolidated balance sheets.
On November 4, 2019, Medtronic, Inc., Medtronic Puerto Rico Operations Co., Medtronic Logistics LLC and Medtronic USA, Inc. (collectively, the Medtronic Affiliates) filed an initial complaint against the Company in the United States District Court for the Central District of California, Case No. 8:19-cv-2115, and amended the complaint on November 26, 2019. The Company refers to this matter as the Medtronic Litigation. The complaint asserts that the Company’s r-SNM System infringes U.S. Patent
Nos. 8,036,756, 8,626,314, 9,463,324 and 9,821,112 held by the Medtronic Affiliates, and the amended complaint further includes the additional patents 8,738,148; 8,457,758; and 7,774,069 (collectively, the Medtronic Patents). The Medtronic Litigation requests customary remedies for patent infringement, including (i) a judgment that the Company has infringed and is infringing the Medtronic Patents, (ii) damages, including treble damages for willful infringement, (iii) a permanent injunction preventing the Company from infringing the Medtronic Patents, (iv) attorneys’ fees, and (v) costs and expenses. The Company believes the allegations are without merit and is vigorously defending itself against them. Given the
early stage of the Medtronic Litigation, the Company is unable to predict the likelihood of success of the claims of the Medtronic Affiliates against the Company or to quantify any risk of loss. The Medtronic Litigation could last for an extended period of time and require the Company to dedicate significant financial resources and management resources to its defense. An adverse ruling against the Company could materially and adversely affect its business, financial position, results of operations or cash flows and could also result in reputational harm. Even if the
Company is successful in defending against these claims, the Medtronic Litigation could result in significant costs, delays in future product developments, reputational harm or other collateral consequences.
On March 16, 2020, the Company filed iseven petitions before the United States Patent and Trademark Office (USPTO) requesting inter partes review (IPR)
to contest the validity of each of the Medtronic patents that Medtronic has alleged are being infringed by the Company. In September 2020, the USPTO decided that it will accept or “institute” the IPR process for isix of the iseven
patents, finding that the Company had demonstrated a reasonable likelihood that at least ione, if not all, of the claims of these isix
patents are invalid. The Company is currently in the IPR discovery process. The USPTO will usually render a decision on the validity of contested patents within twelve months of instituting the review. The Company filed a motion to stay the proceedings before the United States District Court for the Central District of California pending resolution of the IPR process. The Company’s motion was granted by the court on May 8, 2020.
In addition to the Medtronic Litigation, the Company is and
may continue to be involved in claims, legal proceedings, and investigations arising out of its operations in the normal course of business.
Note 4. iLong-Term Debt
In January 2021, the principal amount, accrued interest, accrued loan fees, and prepayment fees related to the term loan under the Loan and Security Agreement with Silicon Valley Bank
entered into in February 2018, were paid in full. The unamortized debt issuance costs of $ii0.4/ million
as of December 31, 2020 was expensed and recognized as interest expense during the three months ending March 31, 2021.
On February 25, 2021, the Company entered into the Loan and Security Agreement with Silicon Valley Bank, as the administrative agent and collateral agent for the lenders, under which the Company obtained a loan in the principal amount of $i75
million pursuant to the Loan, which remains outstanding as of March 31, 2021. The Loan under the Loan and Security Agreement matures on February 1, 2024 (the Maturity Date), unless earlier accelerated upon an event of default. The Loan bears interest at a floating per annum rate equal to the greater of (a) i9.00% and (b) i5.75%
above the current prime rate, with only interest due and payable monthly until September 1, 2022, at which time interest and principal will be due and payable monthly in equal monthly payments. The Loan and Security Agreement also sets out that the Loan is subject to a final payment fee equal to i6.00% of the aggregate principal amount of the Loan.
The
Company may prepay amounts outstanding under the Loan and Security Agreement at any time with i5 days prior written notice to Silicon Valley Bank. In the event that the Company elects to prepay the Loan prior to the Maturity Date, the Company is required to pay a fee in the amount of (a) i2.00%
of the outstanding principal balance if such prepayment occurs prior to February 25, 2022 or (b) i1.00% of the outstanding principal balance if such prepayment occurs on or after February 25, 2022. The Company incurred $i4.6 million
in debt issuance costs, which are amortized on an effective interest method through the Maturity Date.
The Loan and Security Agreement contains customary covenants that include, among others, covenants that limit our and our subsidiaries’ ability to dispose of assets, conduct mergers or acquisitions, incur indebtedness, incur certain liens, pay dividends or make distributions on our capital stock, make certain investments, and enter into certain affiliate transactions, in each case subject to customary exceptions for a credit facility of this size and type.
The
Loan and Security Agreement contains customary events of default that include, among others, non-payment defaults, covenant defaults, a default in the event a material adverse change occurs, defaults in the event our assets are attached or we are enjoined from doing business, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness, material judgment defaults, and inaccuracy of representations and warranties. The occurrence of an event of default could result in an increase to the applicable interest rate of i5.00%,
acceleration of and present occurrence of the Maturity Date, and the consequent obligation for us to repay in full in cash all amounts outstanding under the Loan and Security Agreement, and a right by the lenders to exercise all remedies available under the Loan and Security Agreement and related agreements, including the right to dispose of the collateral as permitted under applicable law.
All obligations under the Term Loan are secured by a first priority lien on substantially all of the Company’s assets, excluding intellectual property assets and more than i65%
of the shares of voting capital stock of any of its foreign subsidiaries. The Company has agreed with Silicon Valley Bank not to encumber its intellectual property assets without Silicon Valley Bank’s prior written consent unless a security interest in the underlying intellectual property is necessary to have a security interest in the accounts and proceeds that are part of the assets securing the Term Loan, in which case the Company’s intellectual property shall automatically be included within the assets securing the Term Loan. As of March 31, 2021, the Company was in compliance
with all debt covenant requirements under the Term Loan.
i
Debt, net of unamortized debt issuance costs, consists of the following (in thousands) at:
Less:
debt, net of unamortized debt issuance costs, current portion
(i22)
(i21,110)
Debt,
net of unamortized debt issuance costs, net of current portion
$
i75,171
$
i—
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Note
5. iStock-based Compensation
i
Stock-based
compensation expense included in the Company’s unaudited condensed consolidated statements of comprehensive loss is allocated as follows (in thousands):
The option awards issued under the 2014 Stock Option Plan (the 2014 Plan) and the 2018 Omnibus Incentive Plan (the 2018 Plan) were measured based on fair value. The Company’s fair value calculations were made using the Black-Scholes option pricing model with the following assumptions:
The
Company used the simplified method of determining the expected term of stock options as the Company believes this represents the best estimate of the expected term of a new option. The expected stock price volatility assumption was determined by examining the historical volatilities for industry peers, as the Company did not have sufficient trading history for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumption as more historical data for the Company’s common
stock becomes available. The risk-free interest rate assumption is based on the U.S. Treasury instruments, whose term was consistent with the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The assumptions regarding the expected term of the options and the expected volatility of the stock price are subjective, and these assumptions have a significant effect on the estimated fair value amounts. There were i36,000
stock option grants for the three months ended March 31, 2021. The weighted-average grant date fair value of options granted was $i32.89 and $i18.56
for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021 and December 31, 2020, there was $i11.2 million and $i11.6
million, respectively, of total unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted-average period of approximately i2.3 years and i2.4
years, respectively.
i
The following table summarizes stock option activity for the three months ended March 31, 2021 under the 2014 and 2018 Plans (in thousands, except share and per share data):
(1) Represents
the total difference between the Company’s closing stock price at the time of exercise and the stock option exercise price, multiplied by the number of options exercised.
(2) Represents the total difference between the Company’s closing stock price on the last trading day of the first quarter of 2021 and the stock option exercise price, multiplied by the number of in-the-money options as of March 31, 2021. The amount of intrinsic value will change based on the fair market value of the Company’s stock.
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The
weighted-average remaining contractual term of options outstanding and exercisable is i7.6 years and i7.7
years at March 31, 2021 and December 31, 2020, respectively.
As of March 31, 2021 and December 31, 2020, there was $i39.6
million and $i22.6 million, respectively, of total unrecognized compensation cost related to unvested restricted shares awards that is expected to be recognized over a weighted-average period of approximately i3.5
years and i3.3 years, respectively.
i
The
following table summarizes restricted shares awards activity for the three months ended March 31, 2021:
Number of Restricted Shares Awards
Weighted-Average Fair Value Per Share at Grant Date
As of March 31, 2021 and December 31, 2020, there was $i8.3 million and $i1.2
million, respectively, of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of approximately i1.2 years and i0.9
years, respectively.
i
The following table summarizes restricted stock units activity for the three months ended March 31, 2021:
Number of Restricted
Stock Units
Weighted-Average Fair Value Per Share at Grant Date
The Company accounts for income taxes according to ASC 740, which, among other things, requires the estimation of the annual effective income tax rate for the full year applied to pre-tax income (loss) for each interim period, considering year-to-date amounts and projected results for the full year. The Company periodically evaluates whether a portion or all of its deferred tax assets will be recovered. The Company records a valuation allowance against deferred tax assets if and to the extent it is more likely than not that they will not be recovered. In evaluating the need for a valuation allowance, the
Company weighs all relevant positive and negative evidence, including among other factors, historical financial performance, forecasts of income over the applicable carryforward periods, and the market environment, with each piece weighted based on its reliability. As of March 31, 2021, the Company continues to maintain a full valuation allowance against its U.S. net deferred tax assets.
The effective tax rate differs from the statutory U.S. income tax rate due to differing tax rates imposed on income earned in foreign jurisdictions, losses in foreign jurisdictions, and certain nondeductible expenses. The effective tax rate could change significantly from quarter to quarter because of recurring and nonrecurring factors. The benefit of income taxes for the three months ended March 31,
2021 was primarily attributable to tax benefits related to losses in the U.K.
At December 31, 2020, the Company had federal and California net operating loss (NOL) carryforwards of approximately $i213.5 million. Pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Internal Revenue Code), use of the
Company’s NOL carryforwards may be limited if the Company experiences a cumulative change in ownership of greater than 50% in a rolling three-year period. The Company performed an analysis of changes in ownership for purposes of these Internal Revenue Code sections. Based on the study performed in 2020, the Company determined that an ownership change occurred in 2014, 2018 and 2019. Future ownership changes could impact the Company’s ability to utilize NOL carryforwards. The Company has recorded a full valuation allowance against its otherwise
recognizable deferred income tax assets as of December 31, 2020. The Company has determined, after evaluating all positive and negative historical and prospective evidence, that it is more likely than not that the deferred income tax assets will not be realized. Ownership changes could impact the Company’s ability to utilize NOL carryforwards remaining at an ownership change date. The Company’s NOL carryforwards were generated from domestic operations. The federal NOLs from the 2013-2017 tax years will expire between 2033 and 2037 and NOLs from 2018-2020 will carryover indefinitely. The state NOLs will expire between 2033 and 2039. Under California Assembly Bill
85, effective June 29, 2020, net operating loss deductions were suspended for tax years beginning in 2020, 2021, and 2022 and the carry forward periods of any net operating losses not utilized due to such suspension were extended.
CARES Act
The CARES Act includes provisions to support businesses in the form of loans, grants, and tax changes, among other types of relief. The Company has reviewed the income tax changes included in the CARES Act, which primarily includes the expansion of the carryback period for NOLs, changes to the deduction and limitation on interest, and acceleration of depreciation for Qualified Improvement Property. The Company has analyzed
these changes and does not believe there will be a material effect on the Company’s income tax provision.
Note 7. iEmployee Benefit Plan
The Company sponsors
a defined contribution retirement savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees who meet minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre- or post-tax basis. Contributions to the plan by the Company may be made at the discretion of the board of directors. During the three months ended March 31, 2021 and 2020, the Company contributions to the plan amounted to $i0.4
million and $i0.4 million, respectively.
Note 8. iRelated
Party Transactions
The Company has a License Agreement and corresponding royalties incurred with AMF, which is also a stockholder of the Company. For additional information, see Note 3.
Note 9. iAcquisition
On
February 25, 2021, the Company acquired all issued and outstanding shares of Contura Holdings Limited (Contura) through a Share Purchase Agreement. As a result of the acquisition, the Company acquired a i100% equity interest in Contura in addition to all assets and liabilities outstanding as of the transaction date. Contura
is a manufacturing company which produces basic pharmaceutical products. Assets acquired include Contura’s primary product, Bulkamid, which is a leading women’s health product used in the treatment of stress urinary incontinence. The acquisition provides highly synergistic benefits, leverages the Company’s expansive commercial footprint and gives the Company the opportunity to expand current offerings around the world. The acquisition will allow the Company to provide enhanced value to new and existing customers.
The
Company accounted for the acquisition as a business combination pursuant to ASC 805. In accordance with ASC 805, fair values are assigned to tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date based on the information that was available as of the acquisition date. The Company believes that the information available provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed for the acquisition, however, preliminary measurements of fair value, including, but not limited to, contingent consideration, intangible assets and deferred taxes, are subject to change during the measurement period, and such changes could be material. The Company expects to finalize the valuation and accounting for the acquisition
as soon as practicable, but no later than one year after the acquisition date.
The purchase price consideration for the acquisition totaled $i203.8 million, of which $i141.3 million
was in the form of cash and $i55.7 million was in the form of i1,096,583
shares of the Company’s common stock. An additional payment of $i35 million will be paid to the Sellers if the Company is able to generate $i50 million
in Bulkamid sales within a 12-month period before December 31, 2024. As the additional payment is contingent on future sales, the liability’s preliminary estimate of fair value was assessed to be $i6.8 million. The balance is recorded as a contingent liability in the consolidated balance sheets as of March 31, 2021. The cash consideration paid for the acquisition was funded by existing cash on hand.
The following table presents the purchase price allocation of Contura assets acquired and liabilities assumed, based on their relative fair values, which have been preliminarily assessed as of the February 25, 2021 acquisition date (in thousands):
Preliminary
Purchase Price Allocation
Assets Acquired
Cash and cash equivalents
$
i593
Accounts receivable
i1,688
Inventory
i988
Prepaid
expenses and other current assets
i115
Property and equipment
i52
Other
assets
i108
Intangible assets
i112,200
Total
assets acquired
i115,744
Liabilities Assumed
Accounts payable
i209
Accrued
liabilities
i820
Accrued compensation and benefits
i315
Lease
liability
i86
Debt
i122
Total
liabilities assumed
i1,552
Net assets acquired
i114,192
Purchase
price consideration
i203,812
Goodwill
$
i89,620
/
Intangible
assets
i
Identified intangible assets consist of technology, trade names and trademarks, and customer relationships. The fair value of each is being determined by a valuation specialist and the useful life determination was made by management. Both determinations were made in accordance with ASC 805 and are outlined in the table below:
Fair
Value (in thousands)
Useful Life
Technology
$
i81,100
i12
years
Trade names and trademarks
$
i19,700
Indefinite
Customer relationships
$
i11,400
i12
years
/
Intangible assets were valued using models and approaches best suited for the asset type.
Technology was valued using the Multi-Period Excess Earnings Method (MPEEM), which calculates economic benefits by determining the income attributable to an intangible asset after returns are subtracted for contributory assets. Significant assumptions in the MPEEM include projected revenue growth rates, future margins, royalty rate indication, and tax rate.
Trade names and trademarks were valued using the Relief from Royalty Method. The relief from royalty method is a variant of the discounted cash flow method, which
is a form of the income approach. It is based on the premise that ownership of the intangible asset relieves the need to pay a licensing fee for the ability to use the asset.
Significant assumptions include a discount rate, tax rate, royalty rate indication, long-term growth rate, and implied profit split time period.
Customer relationships were valued using the distributor method. The distributor method was utilized as the asset was determined to be a secondary intangible asset and the Company’s product could be sold through
distributors. Significant assumptions used in the distributor method include projected revenue growth rates, future margins, rate of customer retention, and an appropriate discount rate.
Intangible assets will be amortized based on their useful life. $i0.6 million in amortization expense was recognized during the current quarter in the consolidated statement of comprehensive loss. The unamortized balance as of March 31, 2021 was $i111.6
million. The total weighted-average original amortization period for the acquired finite-lived intangible assets is i12 years.
Goodwill
Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired in a business combination and represents the future economic benefits expected to arise from anticipated synergies and intangible assets acquired that do not qualify for separate recognition, including an assembled
workforce, noncontractual relationships, and other agreements. As an indefinite-lived asset, goodwill is not amortized but rather is subject to impairment testing on at least an annual basis. The Contura acquisition resulted in the preliminary recognition of $i89.6 million of goodwill, which is not expected to be deductible for tax purposes.
Contingent consideration
As part of the transaction, the Company agreed to pay the Sellers $i35
million if Bulkamid sales achieve $i50 million in any 12-month period before December 31, 2024. The preliminary fair value of the estimated contingent consideration was determined by using a binary option-based approach. Significant inputs used in the assessment include the Company’s projected revenue rate, an appropriate
discount rate, volatility, and risk-free rate. The estimated fair value of the contingent consideration was determined to be $i6.8 million.
To the extent that the forecast milestone achievements probabilities have changed and in accordance with ASC 805, the Company does not need to re-assess the fair value measurements.
Transaction-related costs
Acquisition
costs are not included as components of consideration transferred and instead are accounted for as expenses in the period in which the costs are incurred. The Company incurred $i4.4 million of acquisition-related costs in the first quarter of fiscal year 2021. These costs are included in general and administrative expenses in the Company’s condensed
consolidated statements of comprehensive loss.
The following unaudited pro forma financial information presents the condensed consolidated results of operations of the
Company with Contura for the three months ended March 31, 2021 and 2020, respectively, and the year ended December 31, 2020 as if the acquisition had occurred on January 1, 2020 instead of February 25, 2021. Contura’s revenue and net loss for the quarter ended March 31, 2021 were $i2.8 million
and $i0.8 million, respectively, of which $i1.5 million
in revenue and $i0.2 million in net loss was recognized after the February 25, 2021 acquisition date. Revenue and net loss recognized after the acquisition date were recorded within the Company’s condensed consolidated statements of comprehensive loss. The pro forma information
does not necessarily reflect the results of operations that would have occurred had the entities been a single company during the respective periods.
Weighted-average
shares used to compute basic and diluted net loss per share
ii40,284,098/
ii34,736,097/
ii38,077,918/
The
unaudited pro forma financial information above reflects the following pro forma adjustments:
•An adjustment to decrease net loss for the three months ended March 31, 2021 by $i4.4 million to eliminate integration and acquisition related costs incurred by Axonics and Contura and a corresponding increase to net loss for the three months ended March 31, 2020 by $i4.4 million
to give effect to the integration and acquisition of Contura as if it had occurred on January 1, 2020.
/
•An adjustment to increase net loss for the three months ended March 31, 2021 by $i1.3 million
and a corresponding increase to net loss for the three months ended March 31, 2020 by $i1.9 million to reflect amortization of the fair value adjustments for intangible assets as if the assets were acquired January 1, 2020.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 1, 2021.
Overview
We are a global medical technology company that develops and commercializes products to treat urinary and fecal dysfunction, including: (i) an implantable sacral neuromodulation (SNM) systems to treat urinary urge incontinence (UUI) and urinary urgency frequency (UUF), together referred to as overactive bladder (OAB), as well as fecal incontinence (FI), and non-obstructive urinary retention (UR); and (ii) a urethral bulking agent to treat female stress urinary incontinence (SUI).
OAB affects an estimated 87 million adults in the United States and Europe. Another estimated 40 million adults are reported to suffer from FI. SNM therapy is an effective and durable treatment that has been widely used and reimbursed in Europe and the United States for the past two decades. SNM is the only OAB treatment with
proven clinical superiority to standard medical therapy and OAB patients who receive SNM report significantly higher quality of life than patients undergoing drug treatment.
We estimate the global SNM market is now approximately $650 million to $700 million and believe it is a growing market that is currently about one to three percent penetrated. Until we entered the market, it was serviced by Medtronic as a single participant.
We believe our proprietary rechargeable SNM system (r-SNM System), the first rechargeable SNM system marketed worldwide, offers significant advantages, and is well positioned to capture market share and penetrate and grow this attractive market. Our r-SNM System is designed to last approximately 15 years in the human body, is only 5cc in volume, offers broad MRI access, ease of use, intuitive
programmers, and the longest recharging interval among rechargeable SNM systems.
We have marketing approvals in Europe, Canada, and Australia for all relevant clinical indications and initiated limited commercial efforts in England, the Netherlands and Canada in late 2018. Revenue during the three months ended March 31, 2021 from international operations in Canada, Europe, the U.K., and Australia, was approximately $2.1 million.
Our initial premarket approval (PMA) application for our r-SNM System for the treatment of FI was approved by the U.S. Food and Drug Administration (FDA) on September 6, 2019, and our PMA application for our r-SNM System for the treatment of OAB and UR was approved by the FDA on November 13, 2019.
We
are primarily focused on commercializing our products in the United States, which accounts for the vast majority of SNM sales worldwide. We have established a significant commercial infrastructure, with over 240 sales personnel and clinical specialists and we continue to make significant investments to build our commercial organization to market and support our products. When making hiring decisions for these roles, we prioritize individuals with strong sales backgrounds and experience in SNM therapy and other neurostimulation applications, and who also have existing relationships with urologists and urogynecologists.
Revenue during the three months ended March 31, 2021 from accounts located across the United States was approximately $32.3 million.
In February 2021, the FDA approved a third-generation INS for our r-SNM System under
a PMA supplement. The third-generation INS upgrades the embedded software in the INS and the functionality of the patient remote control. These modifications give patients the ability to make broader stimulation parameter adjustments at home, including selecting a second therapy program that was set post-operatively based on interoperative findings.
Our ability to generate revenue and become profitable will depend on our ability to continue to successfully commercialize our r-SNM System and any product enhancements we may advance in the future. We expect to derive future revenue by increasing patient and physician awareness of our r-SNM System. If we are unable to accomplish any of these objectives, it could have a significant negative impact on our future revenue. If we fail to generate sufficient revenue in the future, our business, results of operations, financial condition, cash flows, and future prospects would be materially
and adversely affected.
We also intend to continue to make investments in research and development efforts to develop improvements and enhancements to our r-SNM System.
In the United States, the cost required to treat each patient is reimbursed through various third-party payors, such as commercial payors and government agencies. Most large insurers have established coverage policies in place to cover SNM therapy. Certain commercial payors have a patient-by-patient prior authorization process that must be followed before they will provide reimbursement for SNM therapy. Outside the United States, reimbursement levels vary significantly by country and by region, particularly based on whether the country or region at issue maintains a single-payor system. SNM therapy is eligible for reimbursement in Canada, Australia, and certain countries in Europe, such as Germany, France, and the
United Kingdom. Annual healthcare budgets generally determine the number of SNM systems that will be paid for by the payor in these single-payor system countries and regions.
We currently outsource the manufacture of the implantable components of our r-SNM System. We plan to continue with an outsourced manufacturing arrangement for the foreseeable future. Our contract manufacturers are all recognized in their field for their competency to manufacture the respective portions of our r-SNM System and have quality systems established that meet FDA requirements. We
believe the manufacturers we currently utilize have sufficient capacity to meet our launch requirements and are able to scale up their capacity relatively quickly with limited capital investment.
Prior to obtaining FDA approval, we devoted substantially all of our resources to research and development activities related to our r-SNM System, including clinical and regulatory initiatives to obtain marketing approvals. We expect to spend a significant amount of our resources on sales and marketing activities as we commercialize and market our r-SNM System in the United States.
We incurred net losses of $22.5 million and $14.6 million for the three months ended March 31, 2021 and 2020, respectively, and had an accumulated deficit of $257.0 million as of March 31,
2021 compared to $234.5 million at December 31, 2020. As of March 31, 2021, we had available cash and cash equivalents of approximately $131.0 million, current liabilities of approximately $24.0 million, and long-term liabilities of approximately $90.8 million.
Prior to our initial public offering (IPO), we financed our operations primarily through preferred stock financings and amounts borrowed under a Loan and Security Agreement, dated February 6, 2018, between us and Silicon Valley Bank (the Loan Agreement). Through our IPO in November 2018, an offering completed in November 2019 and an offering completed in May 2020, we received aggregate gross proceeds of approximately $405.1 million. We have invested heavily in product development and continuous improvement to our
r-SNM System. We have also made significant investments in clinical studies to demonstrate the safety and effectiveness of our r-SNM System and to support regulatory submissions. Because of these and other factors, we expect to continue to incur net losses for the next few years and we may require additional funding, which may include future equity and debt financings. Adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material and adverse effect on our business, financial condition, and results of operations.
May 2020 Follow-On Offering
On May 12, 2020, we completed a follow-on offering by issuing 4,600,000 shares of common stock, at an offering price of $32.50 per share, inclusive of 600,000 shares of our common stock issued
upon the exercise by the underwriters of their option to purchase additional shares. The gross proceeds to us from this follow-on offering were $149.5 million and the net proceeds were approximately $140.5 million, after deducting underwriting discounts, commissions and offering expenses payable by us.
Impact of COVID-19
The COVID-19 pandemic negatively impacted our sales, primarily in the second quarter of 2020, by significantly decreasing and delaying the number of procedures performed using our r-SNM System, and we expect that the pandemic could negatively impact our business, financial condition and results of operations. Similar to the general trend in elective and other surgical procedures, the number of procedures performed using our r-SNM System decreased significantly as healthcare organizations in the United States and globally, including in Europe and Canada, have prioritized
the treatment of patients with COVID-19 or have altered their operations to prepare for and respond to the pandemic. Specifically, substantially all of the procedures using our r-SNM System were postponed or cancelled from middle of March 2020 through May 2020, but order flow began a gradual recovery in May 2020 and continued to improve in the second half of 2020 through the first quarter of 2021.
To protect the health of our employees, their families, and our communities, we have restricted access to our offices to personnel who must perform critical activities that must be completed on-site, limited the number of such personnel that can be present at our facilities at any one time, requested that many of our employees work remotely, and implemented strict travel restrictions. These restrictions and precautionary measures have not adversely affected our operations. The full extent of COVID-19’s effect on our operational and
financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and additional protective measures implemented by the governmental authorities, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. However, if the pandemic continues to evolve into a long-term
severe worldwide health crisis, there could be a material adverse effect on our business, results of operations, financial condition, and cash flows.
AMF
License Agreement
On October 1, 2013, we entered into a license agreement (the License Agreement) with the Alfred E. Mann Foundation for Scientific Research (AMF), pursuant to which AMF licensed us certain patents and know-how (AMF IP), relating to, in relevant part, an implantable pulse generator and related system components in development by AMF as of that date, in addition to any peripheral or auxiliary devices, including all components, that when assembled, comprise such device, excluding certain implantable pulse generators (AMF Licensed Products).
Under the License Agreement, for each calendar year beginning in 2018, we are obligated to pay AMF a royalty on an AMF Licensed Product-by-AMF Licensed Product basis if one of the following conditions applies: (i) one or more valid claims within any of the patents licensed to us
by AMF covers such AMF Licensed Products or the manufacture of such AMF Licensed Products or (ii) for a period of 12 years from the first commercial sale anywhere in the world of such AMF Licensed Product, in each case. The foregoing royalty is calculated as the greater of (a) 4% of all net revenue derived from the AMF Licensed Products, and (b) a minimum annual royalty (the Minimum Royalty), payable quarterly. The Minimum Royalty automatically increases each year, subject to a maximum amount of $200,000 per year. During the three months ended March 31, 2021 and 2020, we have recorded royalties of $1.3 million and $1.0 million, respectively. We have 60 days to pay AMF the royalty amount due under the License Agreement, and if we fail to pay AMF within such 60-day period, AMF may, at its election, convert the exclusive license to a non-exclusive license or terminate the
License Agreement.
Components of Our Results of Operations
Net Revenue
Revenue during the three months ended March 31, 2021 and 2020 are as follows (in thousands):
Cost of goods sold consists primarily of acquisition costs of the components of our r-SNM System, third-party contract labor costs, overhead costs, as well as distribution-related expenses such as logistics and shipping costs. The overhead costs include the cost of material procurement and operations supervision and management personnel. We expect overhead
costs as a percentage of revenue to decrease as our sales volume increases. Cost of goods sold also include other expenses such as scrap and inventory obsolescence. We expect cost of goods sold to increase in absolute dollars primarily as, and to the extent, our revenue grows. We expect gross margin to vary based on regional differences in pricing and discounts negotiated by customers.
We calculate gross margin as gross profit divided by revenue. We expect future gross margin will be affected by a variety of factors, including manufacturing costs, the average selling price of our r-SNM System, the
implementation
of cost-reduction strategies, inventory obsolescence costs, which may occur when new generations of our r-SNM System are introduced, and to a lesser extent, the sales mix between the United States, Canada, Europe and Australia as our average selling price in the United States is expected to be higher than in Canada, Europe and Australia and foreign currency exchange rates. Our gross margin may increase over the long term to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers, thereby reducing our per unit costs. Additionally, our gross margin may fluctuate from quarter to quarter due to seasonality.
Research and Development Expenses
Research and development expenses consist primarily of employee compensation, including stock-based
compensation, product development, including testing and engineering, and clinical studies to develop and support our r-SNM System, including clinical study management and monitoring, payments to clinical investigators, and data management. Other research and development expenses include consulting and advisory fees, royalty expense, travel expenses, and equipment-related expenses and other miscellaneous office and facilities expenses related to research and development programs. Research and development costs are expensed as incurred. We expect to continue incurring research and development expenses in the future as we develop next generation versions of our r-SNM System and expand to new markets. We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts and new clinical development activities.
The following table
summarizes our research and development expenses by functional area for the three months ended March 31, 2021 and 2020 (in thousands):
General and administrative expenses consist primarily of employee compensation, including stock-based compensation, and spending related to finance, information technology, human resource functions, consulting, legal, and professional service fees. Other general and administrative expenses include director and officer insurance premiums, investor relations costs, office-related expenses, facilities and equipment rentals, bad debt expense, and travel expenses. We expect our general and administrative expenses will significantly increase in absolute dollars as we increase our headcount and expand administrative personnel to support our growth and operations as a public company including finance personnel and information technology services. Additionally, we anticipate increased legal expenses associated with our patent infringement litigation with Medtronic. These expenses
will further increase as we no longer qualify as an “emerging growth company” under the Jumpstart Our Business Startups (JOBS) Act, which requires us to comply with certain additional reporting requirements effective December 31, 2020. We expect general and administrative expenses to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee compensation, including stock-based compensation, trade shows, booth exhibition costs, and the related travel for these events. Other sales and marketing expenses include consulting and advisory fees. We expect sales and marketing expenses to continue to increase in absolute dollars as we expand our commercial infrastructure to both drive and support
our expected growth in
revenue. However, we expect sales and marketing expenses to decrease as a percentage of revenue in the long term primarily as, and to the extent, our revenue grows.
Amortization of Intangible Assets
Amortization of intangible assets consist primarily of amortization expense on patent license asset, manufacturing license asset, technology, and customer relationships. We amortize finite lived intangible assets over the period of estimated benefit using the straight-line method. Indefinite lived intangible assets are tested for impairment annually
or whenever events or circumstances indicate that the carrying amount of the asset (asset group) may not be recoverable. If impairment is indicated, we measure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset. Fair value is generally determined using a discounted future cash flow analysis.
Acquisition-Related Costs
Acquisition-related costs consist of expenses incurred related to the Contura acquisition.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of interest expense payable under the Loan Agreement with Silicon Valley Bank and other debt arrangements, net of interest income earned on cash equivalents.
Income Tax (Benefit) Expense
Income
tax (benefit) expense consists of income tax benefit from deferred tax assets in our foreign operations, net of state income taxes in California. We maintain a full valuation allowance for deferred tax assets in our domestic operations, including net operating loss carryforwards and research and development credits and other tax credits.
Net revenue was $34.4 million for the three months ended March 31, 2021 and was primarily derived from the sale of our r-SNM Systems to customers in the United States, Europe and Canada. Net revenue was $26.3 million for the three months ended March 31, 2020 and was derived from the sale of our r-SNM System to customers in the United States, Europe and Canada. The increase in net revenue is primarily due to increased sales of our r-SNM System as we expanded our customer base in the U.S. and international markets, as well as the addition of $1.5 million in Bulkamid sales.
Cost
of Goods Sold and Gross Margin
We incurred $14.0 million of cost of goods sold for the three months ended March 31, 2021. We incurred $9.9 million of cost of goods sold for the three months ended March 31, 2020. Gross margin was 59.3% in the three months ended March 31, 2021, compared to 62.4% for the three months ended March 31, 2020. The decrease in gross margin is primarily due to lower absorption rates.
Research and development expenses increased $2.5 million, or 36.7%, to $9.4 million in the three months ended March 31, 2021, compared to $6.9 million in the three months ended March 31, 2020. The increase in research and development expenses was primarily attributable to an increase of $2.4 million in personnel costs including salaries and wages, stock-based compensation and other employee-related benefits.
General and Administrative Expenses
General and administrative expenses decreased $1.0 million, or 13.4%, to $6.6 million in the three months ended March 31, 2021, compared to $7.7 million in the three months ended March
31, 2020, primarily as a result of a decrease of $1.0 million in legal and consulting costs, as higher costs were incurred in the three months ended March 31, 2020 related to the Medtronic litigation.
Sales and Marketing Expenses
Sales and marketing expenses increased $4.4 million, or 26.3%, to $20.9 million in the three months ended March 31, 2021, compared to $16.6 million in the three months ended March 31, 2020. The increase in sales and marketing expenses was primarily due to an increase of $3.2 million related to personnel costs including salaries and wages, stock-based compensation and other employee-related benefits and an increase of $1.0 million related to advertising expenses.
Amortization
of Intangible Assets
Amortization of intangible assets increased $0.6 million, or 2,260.1%, to $0.7 million in the three months ended March 31, 2021, compared to minimal amortization of intangible assets in the three months ended March 31, 2020. The increase in amortization of intangible assets was primarily due to an increase of technology and customer relationships acquired related to the Contura acquisition.
Acquisition-Related Costs
Acquisition-related costs was $4.4 million in the three months ended March 31, 2021 related to the Contura acquisition.
Other (Expense) Income, Net
Other expense, net
was $1.4 million in the three months ended March 31, 2021 consisting primarily of interest expense incurred related to the Loan Agreement with Silicon Valley Bank. Other income, net was $0.1 million in the three months ended March 31, 2020 consisting primarily of interest income earned on cash equivalents and short-term investments, partially offset by interest expense incurred related to the Loan Agreement with Silicon Valley Bank.
Income Tax (Benefit) Expense
We recorded income tax benefit or the three months ended March 31, 2021 primarily related to deferred tax assets generated in our foreign operations related to the Contura acquisition. We recorded minimal income tax expense for the three months ended March
31, 2020.
Liquidity and Capital Resources
We only began full-scale commercialization of our r-SNM System in late 2019. We have expended significant resources on research and development activities, growing our operations organization and building and training our sales organization.
We incurred net losses of $22.5 million and $14.6 million for the three months ended March 31, 2021 and 2020, respectively, and had an accumulated deficit of $257.0 million as of March 31, 2021 compared to $234.5 million at December 31, 2020.
We expect to continue to spend a significant amount of our existing resources on sales and marketing activities as we continue to commercialize and market our products in the United States and internationally.
As of March 31, 2021, we had cash and cash equivalents of $131.0 million compared to $241.2 million at December 31, 2020. We expect that our cash and cash equivalents on hand will be sufficient to fund our operations
through at least the next 12 months. We fund our operations through a combination of proceeds
from public offerings of our common stock, cash receipts from sales of our r-SNM System and proceeds from our Loan Agreement with Silicon Valley Bank. As of March 31, 2021, we had $79.6 million in outstanding borrowings, as discussed below under “Indebtedness.”
We may need to raise additional financing in the future to facilitate our business operations. If we raise additional funds by issuing equity securities, our stockholders could experience dilution. Debt financing, if available, may involve covenants further restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing when needed to satisfy our
liquidity requirements, we may be required to scale back our operations.
Cash Flows
The following table presents a summary of our cash flow for the periods indicated (in thousands):
Effect
of exchange rate changes on cash and cash equivalents
13
(177)
Net decrease in cash and cash equivalents
$
(110,219)
$
(11,262)
Net cash used in operating activities
Net cash used in operating activities was $25.6 million for the three months ended March 31, 2021 and consisted primarily of a net loss of $22.5 million and a decrease from changes
in net operating assets of $9.4 million, partially offset by non-cash charges of $6.4 million. Net operating assets consisted primarily of inventory due to the commercial growth of our r-SNM System in the United States. Non-cash charges consisted primarily of stock-based compensation.
Net cash used in operating activities was $23.3 million for the three months ended March 31, 2020 and consisted primarily of a net loss of $14.6 million and a decrease from changes in net operating assets of $13.7 million, partially offset by non-cash charges of $5.0 million. Net operating assets consisted primarily of accounts receivable and inventory due to the commercial launch of our r-SNM System in the United States. Non-cash charges consisted primarily of stock-based compensation.
Net cash (used in) provided by investing activities
Net
cash used in investing activities was $140.9 million for the three months ended March 31, 2021 and consisted primarily of the $140.7 million paid for the acquisition of Contura.
Net cash provided by investing activities was $11.9 million for the three months ended March 31, 2020 and consisted primarily of sales and maturities of short-term investments, partially offset by purchases of property and equipment.
Net cash provided by financing activities
Net cash provided by financing activities was $56.2 million for the three months ended March 31, 2021 and consisted primarily of $75 million in net proceeds received in the Loan Agreement with Silicon Valley Bank in connection with the Contura
acquisition, partially offset by the pay down of $21.5 million of the prior Loan Agreement with Silicon Valley bank.
Net cash provided by financing activities was $0.3 million for the three months ended March 31, 2020 and consisted of proceeds from exercise of stock options.
Indebtedness
On February 25, 2021, the Company entered into the Loan and Security Agreement with Silicon
Valley Bank, as the administrative agent and collateral agent for the lenders, under which the Company obtained a loan in the principal amount of $75 million pursuant to the Loan, which is currently outstanding. The Loan under the Loan and Security Agreement matures on February 1, 2024, unless earlier accelerated upon an event of default. The Loan bears interest at a floating per annum rate equal to the greater of (a) 9.00% and (b) 5.75% above the current prime rate, with only interest due and payable monthly until September 1, 2022, at which time interest and principal will be due and payable monthly in equal monthly payments. The Loan and Security Agreement also sets out that the Loan is subject to a final payment fee equal to 6.00% of the aggregate principal amount of the Loan.
We
may prepay amounts outstanding under the Loan and Security Agreement at any time with 5 days prior written notice to Silicon Valley Bank. In the event that we elect to prepay the Loan prior to the Maturity Date, we are required to pay a fee in the amount of (a) 2.00% of the outstanding principal balance if such prepayment occurs prior to February 25, 2022 or (b) 1.00% of the outstanding principal balance if such prepayment occurs on or after February 25, 2022.
The Loan and Security Agreement contains customary events of default that include, among others, non-payment defaults, covenant defaults, a default in the event a material adverse change occurs, defaults in the event our assets are attached or we are enjoined from doing business, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness,
material judgment defaults, and inaccuracy of representations and warranties. The occurrence of an event of default could result in an increase to the applicable interest rate of 5.00%, acceleration of and present occurrence of the Maturity Date, and the consequent obligation for us to repay in full in cash all amounts outstanding under the Loan and Security Agreement, and a right by the lenders to exercise all remedies available under the Loan and Security Agreement and related agreements, including the right to dispose of the collateral as permitted under applicable law.
All obligations under the Term Loan are secured by a first priority lien on substantially all of the Company’s assets, excluding intellectual property assets and more than 65% of the shares of voting capital stock of any of its foreign subsidiaries.
The Company has agreed with Silicon Valley Bank not to encumber its intellectual property assets without Silicon Valley Bank’s prior written consent unless a security interest in the underlying intellectual property is necessary to have a security interest in the accounts and proceeds that are part of the assets securing the Term Loan, in which case the Company’s intellectual property shall automatically be included within the assets securing the Term Loan.
The Loan Agreement contains certain covenants that limit our ability to engage in certain transactions that may be in our long-term best interest. Subject to certain limited exceptions, these covenants limit our ability to or prohibit us to permit any of our subsidiaries
to, as applicable, among other things:
•pay cash dividends on, make any other distributions in respect of, or redeem, retire or repurchase, any shares of our capital stock;
•convey, sell, lease, transfer, assign, or otherwise dispose of all or any part of our business or property;
•effect certain changes in our business, management, ownership or business locations;
•merge or consolidate with, or acquire all or substantially all of the capital stock or property of any other company;
•create, incur, assume, or be liable for any additional indebtedness, or create, incur, allow, or permit to exist any additional
liens;
•make certain investments; and
•enter into transactions with our affiliates.
As of March 31, 2021, we were in compliance with all debt covenant requirements under the Term Loan. While we have not previously breached and are currently in compliance with the covenants contained in the Loan Agreement, we may breach these covenants in the future. Our ability to comply with these covenants may be
affected by events and
factors beyond our control. In the event that we breach one or more covenants, Silicon Valley Bank may choose to declare an event of default and require that we immediately repay all amounts outstanding under the Loan Agreement, terminate any commitment to extend further credit and foreclose on the collateral. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
We have no further indebtedness arrangements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition,
results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
Refer to the Liquidity and Capital Resources—Indebtedness section above for changes in debt obligations during the first quarter of fiscal year 2021; there were no other material changes to our long-term contractual obligations as reported in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 1, 2021
Critical Accounting Policies and
Estimates
Our critical accounting policies and estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 1, 2021. We have reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the three months ended March 31, 2021.
Recent Accounting Pronouncements
We have reviewed all
recently issued standards and have determined that, other than as disclosed in Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, such standards will not have a significant impact on our condensed consolidated financial statements or do not otherwise apply to our operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate risk, foreign currency exchange rate risk and inflation risk as follows:
Interest Rate Risk
We had cash and cash equivalents of $131.0 million
as of March 31, 2021, which came from public offerings of our common stock and debt financing arrangements. The goals of our investment policy are liquidity and capital preservation and we do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short term nature of our cash, cash equivalents and short-term investments. Additionally, the interest rate for borrowings under the Loan and Security Agreement is variable. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.
Foreign Currency Exchange Rate Risk
As
we expand internationally our results of operations and cash flows may become increasingly subject to fluctuations due to changes in foreign currency exchange rates. All of our revenue is denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables would not have been material for the periods presented. As our operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign
currency
exchange rates, which could harm our business in the future. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future.
Inflation Risk
Inflationary factors, such as increases in our cost of goods sold and selling and operating expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin and sales and marketing and operating expenses as a percentage of our revenue if the selling prices of our products do not increase as much as or more than these increased costs.
Item
4. Controls and Procedures.
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly
Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2021.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There have been no material developments in the litigation matters disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 1, 2021, during the quarter ended March 31, 2021.
Item 1A. Risk Factors.
You
should carefully consider the information described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 1, 2021. There have been no material changes from the risk factors disclosed in our recent SEC filings, including our most recently filed Form 10-K, as referenced above.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Cover
Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101).
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The information in Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated
by reference in any filing under the Securities Act or the Exchange Act (including this Quarterly Report on Form 10-Q), unless the Company specifically incorporates the foregoing information into those documents by reference.
**
In accordance with Rule 402 of Regulation S-T, this interactive data file is deemed not filed or part of this Quarterly Report on Form 10-Q for purposes of Sections 11 or 12 of the Securities Act or Section 18 of the Exchange Act and otherwise is not subject to liability under these sections.
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Portions of this exhibit have been omitted as the
Company has determined that (i) the omitted information is not material and (ii) the omitted information would likely cause competitive harm if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
