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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
_________________________________________________________________
(Mark One)
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38721
_________________________________________________________________
Axonics Modulation Technologies, Inc.
(Exact name of registrant as specified in its charter)
_________________________________________________________________
Delaware45-4744083
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
26 Technology Drive
Irvine,California92618
(Address of principal executive offices)(Zip Code)
(949)396-6322
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of classTrading symbolName of exchange on which registered
Common stock, par value $0.0001 per shareAXNXNasdaq 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.  Yes      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).  Yes     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.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 
As of November 2, 2020, 39,809,412 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.



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Page


Table of Contents
Special Note Regarding Forward-Looking Statements
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 proprietary rechargeable sacral neuromodulation (SNM) system (r-SNM System);
U.S. Food and Drug Administration (FDA) or other U.S. or foreign regulatory or legal actions or changes affecting us or our industry;
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;
announcements of regulatory approval or disapproval of our r-SNM and any future enhancements to our r-SNM System;
adverse results from or delays in clinical studies of our r-SNM System;
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 SNM market;
changes in the structure of healthcare payment of our r-SNM System;
announcements by us or our competitors of significant acquisitions, licenses, strategic partnerships, joint ventures or capital commitments;
market conditions in the medical technology industry 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;
general economic, industry and market conditions, including the size and growth, if any, of the market;    
additions or departures of key personnel;
changes in our capital structure, such as future issuances of securities and the incurrence of additional debt;
the results of any ongoing or future legal proceedings; 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.


Table of Contents
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 Modulation Technologies, Inc. and our consolidated subsidiaries.
This Quarterly Report on Form 10-Q includes our trademarks and trade names, including, without limitation, r-SNM® and Axonics SNM System®, which are our property and are protected under applicable intellectual property laws. 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.


Table of Contents
Part IFinancial Information
Item 1.    Condensed Consolidated Financial Statements (unaudited)
Axonics Modulation Technologies, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
September 30,December 31,
20202019
(unaudited)
ASSETS
Current assets
Cash and cash equivalents$269,280 $171,082 
Short-term investments 12,592 
Accounts receivable, net of allowance for doubtful accounts of $465 and $75 at September 30, 2020 and December 31, 2019, respectively
17,650 7,879 
Inventory, net44,308 15,659 
Prepaid expenses and other current assets3,220 4,468 
Total current assets334,458 211,680 
Property and equipment, net5,792 3,047 
Intangible asset, net225 311 
Other assets7,196 4,784 
Total assets$347,671 $219,822 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$9,415 $5,882 
Accrued liabilities5,977 2,174 
Accrued compensation and benefits7,516 3,375 
Operating lease liability, current portion908 602 
Debt, current portion15,000  
Total current liabilities38,816 12,033 
Operating lease liability, net of current portion9,027 4,450 
Debt, net of unamortized debt issuance costs, net of current portion5,930 20,336 
Total liabilities53,773 36,819 
Stockholders’ equity
Preferred stock, par value $0.0001 per share; 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2020 and December 31, 2019
  
Common stock, par value $0.0001, 50,000,000 shares authorized at September 30, 2020 and December 31, 2019; 39,753,638 and 34,110,995 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
4 3 
Additional paid-in capital517,659 363,012 
Accumulated deficit(223,151)(179,584)
Accumulated other comprehensive loss(614)(428)
Total stockholders’ equity293,898 183,003 
Total liabilities and stockholders’ equity$347,671 $219,822 
See accompanying notes to unaudited condensed consolidated financial statements.
1

Table of Contents
Axonics Modulation Technologies, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands, except share and per share data)
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net revenue$35,243 $1,309 $76,752 $3,874 
Cost of goods sold13,434 632 31,792 1,952 
Gross profit21,809 677 44,960 1,922 
Operating Expenses
Research and development7,748 4,855 21,030 13,948 
General and administrative5,773 5,162 18,963 13,539 
Sales and marketing17,057 15,707 47,846 32,371 
Total operating expenses30,578 25,724 87,839 59,858 
Loss from operations(8,769)(25,047)(42,879)(57,936)
Other Income (Expense)
Interest income35 627 742 2,500 
Interest and other expense(434)(586)(1,429)(1,747)
Other income (expense), net(399)41 (687)753 
Loss before income tax expense(9,168)(25,006)(43,566)(57,183)
Income tax expense  1 1 
Net loss(9,168)(25,006)(43,567)(57,184)
Foreign currency translation adjustment99 (112)(186)(165)
Comprehensive loss$(9,069)$(25,118)$(43,753)$(57,349)
Net loss per share, basic and diluted (see Note 1)$(0.24)$(0.89)$(1.20)$(2.05)
Weighted-average shares used to compute basic and diluted net loss per share (see Note 1)38,830,924 28,098,564 36,312,984 27,958,376 
See accompanying notes to unaudited condensed consolidated financial statements.
2

Table of Contents
Axonics Modulation Technologies, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share and per share data)
(unaudited)
Accumulated
AdditionalOther
Common StockPaid-inAccumulatedComprehensive
SharesAmountCapitalDeficitLossTotal
Balance at December 31, 201934,110,995 $3 $363,012 $(179,584)$(428)$183,003 
Issuance of common stock for employee stock option exercises for cash181,456 — 344 — — 344 
Restricted Shares Award (RSA) issuances and forfeitures for terminations, net and stock-based compensation171,875 — 3,039 — — 3,039 
Restricted Stock Units (RSU) issuances and forfeitures for terminations, net and stock-based compensation46,336 — 883 — — 883 
Foreign currency translation adjustment— — — — (177)(177)
Net loss— — — (14,616)— (14,616)
Balance at March 31, 202034,510,662 3 367,278 (194,200)(605)172,476 
Issuance of common stock for employee stock option exercises for cash319,680 — 1,008 — — 1,008 
RSA issuances and forfeitures for terminations, net and stock-based compensation32,063 — 2,969 — — 2,969 
RSU issuances and forfeitures for terminations, net and stock-based compensation— — 847 — — 847 
Follow-on offering - issuance of 4,600,000 shares at $32.50 per share, less closing costs of $9,013
4,600,000 1 140,486 — — 140,487 
Foreign currency translation adjustment— — — — (108)(108)
Net loss— — — (19,783)— (19,783)
Balance at June 30, 202039,462,405 4 512,588 (213,983)(713)297,896 
Issuance of common stock for employee stock option exercises for cash164,233 — 1,296 — — 1,296 
RSA issuances and forfeitures for terminations, net and stock-based compensation127,000 — 2,920 — — 2,920 
RSU issuances and forfeitures for terminations, net and stock-based compensation— — 855 — — 855 
Foreign currency translation adjustment— — — — 99 99 
Net loss— — — (9,168)— (9,168)
Balance at September 30, 202039,753,638 $4 $517,659 $(223,151)$(614)$293,898 
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Accumulated
AdditionalOther
Common StockPaid-inAccumulatedComprehensive
SharesAmountCapitalDeficitLossTotal
Balance at December 31, 201827,806,934 $3 $243,337 $(99,649)$(416)$143,275 
Issuance of common stock for employee stock option exercises for cash41,740 — 44 — — 44 
RSA issuances and forfeitures for terminations, net and stock-based compensation352,417 — 977 — — 977 
RSU issuances and forfeitures for terminations, net and stock-based compensation— — 165 — — 165 
Foreign currency translation adjustment— — — — (10)(10)
Net loss— — — (13,117)— (13,117)
Balance at March 31, 201928,201,091 3 244,523 (112,766)(426)131,334 
Issuance of common stock for employee stock option exercises for cash136,164 — 308 — — 308 
RSA issuances and forfeitures for terminations, net and stock-based compensation112,417 — 1,629 — — 1,629 
RSU issuances and forfeitures for terminations, net and stock-based compensation— — 246 — — 246 
Issuance of common stock for warrant exercise31,071 — — — — — 
Foreign currency translation adjustment— — — — (43)(43)
Net loss— — — (19,061)— (19,061)
Balance at June 30, 201928,480,743 3 246,706 (131,827)(469)114,413 
Issuance of common stock for employee stock option exercises for cash82,756 — 111 — — 111 
RSA issuances and forfeitures for terminations, net and stock-based compensation37,883 — 2,534 — — 2,534 
RSU issuances and forfeitures for terminations, net and stock-based compensation— — 248 — — 248 
Issuance of common stock for warrant exercise32,529 — — — — — 
Foreign currency translation adjustment— — — — (112)(112)
Net loss— — — (25,006)— (25,006)
Balance at September 30, 201928,633,911 $3 $249,599 $(156,833)$(581)$92,188 
See accompanying notes to unaudited condensed consolidated financial statements.
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Axonics Modulation Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
20202019
Cash Flows from Operating Activities
Net loss$(43,567)$(57,184)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization1,253 880 
Stock-based compensation11,513 5,799 
Amortization of debt issuance costs594 659 
Provision for doubtful accounts390  
Other items, net142  
Changes in operating assets and liabilities
Accounts receivable(10,161)(527)
Inventory(28,600)(9,030)
Prepaid expenses and other current assets1,352 1,091 
Other assets16 (327)
Accounts payable3,533 796 
Accrued liabilities3,508 532 
Accrued compensation and benefits4,141 2,089 
Lease liability458 (96)
Net cash used in operating activities(55,428)(55,318)
Cash Flows from Investing Activities
Purchases of property and equipment(1,915)(962)
Purchases of short-term investments (35,210)
Proceeds from sales and maturities of short-term investments12,592 69,117 
Net cash provided by investing activities10,677 32,945 
Cash Flows from Financing Activities
Proceeds from issuance of common stock upon follow-on public offering149,500  
Payment of common stock issuance costs upon follow-on public offering(9,013) 
Proceeds from exercise of stock options2,648 463 
Net cash provided by financing activities143,135 463 
Effect of exchange rate changes on cash and cash equivalents(186)(165)
Net increase (decrease) in cash and cash equivalents98,198 (22,075)
Cash and cash equivalents, beginning of year171,082 98,306 
Cash and cash equivalents, end of period$269,280 $76,231 
Supplemental Disclosure of Cash Flow Information
Cash paid for interest$849 $1,097 
Cash paid for taxes$ $1 
See accompanying notes to unaudited condensed consolidated financial statements.

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AXONICS MODULATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Axonics Modulation Technologies, Inc. (the Company), formerly American Restorative Medicine, Inc., was incorporated in the state of Delaware on March 2, 2012. 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. On September 6, 2019, 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) and on November 13, 2019, the PMA application for the r-SNM System for the treatment of OAB and UR was approved by the FDA. 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.
Initial Public Offering
On November 2, 2018, the Company completed its initial public offering (IPO) by issuing 9,200,000 shares of common stock, at an offering price of $15.00 per share, inclusive of 1,200,000 shares of the Company’s common stock issued upon the exercise by the underwriters of their option to purchase additional shares. The net proceeds were approximately $126.0 million, after deducting underwriting discounts, commissions and offering expenses payable by the Company. In connection with the IPO, the Company’s outstanding shares of convertible preferred stock were automatically converted into an aggregate of 15,813,297 shares of common stock, and the Company’s outstanding warrants to purchase shares of Series C convertible preferred stock were automatically converted into warrants to purchase up to an aggregate of 80,000 shares of common stock (see Note 5).
November 2019 Follow-On Offering
On November 22, 2019, the Company completed a follow-on offering by issuing 5,345,000 shares of common stock, at an offering price of $22.00 per share, inclusive of 750,000 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 $110.4 million, after deducting underwriting discounts, commissions and offering expenses payable by the Company.
May 2020 Follow-On Offering
On May 12, 2020, the Company 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 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 $140.5 million, after deducting underwriting discounts, commissions and offering expenses payable by the Company.
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 and Axonics Modulation Technologies Australia Pty Ltd. Intercompany accounts and transactions have been eliminated in consolidation.
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Basis of Presentation
    Interim Financial Statements
The interim condensed consolidated financial statements and related footnote disclosures as of and for the three and nine months ended September 30, 2020 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 and nine months ended September 30, 2020 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, 2019 (filed with the SEC on March 4, 2020).
COVID-19
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.
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.
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Revenue Recognition
Revenue recognized during the three and nine months ended September 30, 2020 and 2019 relates entirely to the sale of our r-SNM System. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 “Revenue from Contracts with Customers” (ASU 2014-09) as Accounting Standards Codification (ASC) Topic 606. The objective of Topic 606 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC.
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 $0.3 million and zero at September 30, 2020 and December 31, 2019, respectively. Damaged or defective products are replaced at no charge under the Company’s standard warranty. For the nine months ended September 30, 2020, the replacement costs were $0.1 million. For the three months ended September 30, 2020 and three and nine months ended September 30, 2019, the replacement costs were minimal.
The following table provides additional information pertaining to net revenue disaggregated by geographic market for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
United States$34,139 $ $73,833 $ 
International markets1,104 1,309 2,919 3,874 
Total net revenue$35,243 $1,309 $76,752 $3,874 
Allowance for Doubtful Accounts
The Company makes estimates of the collectability of accounts receivable. In doing so, the Company analyzes historical bad debt trends, customer credit worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. 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.
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Cash and Cash Equivalents
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.
Fair Value of Financial Instruments
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.
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 no unrealized gains or losses during the three and nine months ended September 30, 2020 and 2019.
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.
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The following table presents the fair value hierarchy for those assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 (in thousands):
Fair Value Measurements at September 30, 2020
Assets:Level 1Level 2Level 3Total
Commercial paper$ $ $ $ 
Corporate notes    
U.S. government and agency securities    
$ $ $ $ 
Fair Value Measurements at December 31, 2019
Assets:Level 1Level 2Level 3Total
Commercial paper$ $7,195 $ $7,195 
Corporate notes2,018   2,018 
U.S. government and agency securities3,379   3,379 
$5,397 $7,195 $ $12,592 
Foreign Currency Translation
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 September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019. Foreign currency transaction gains and losses are included in results of operations and have not been significant for the periods presented.
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 are also 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 is identical and, as a result, the inventory has 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.
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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 12 to 27 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 September 30, 2020, the Company had $23.0 million, $6.1 million and $15.2 million of finished goods inventory, work-in-process inventory and raw materials inventory, respectively, on hand net of reserves that were minimal. As of December 31, 2019, the Company had $7.0 million, $1.5 million and $7.2 million of finished goods inventory, work-in-process inventory and raw materials inventory, respectively, on hand net of reserves of $0.1 million.
Vendor Concentration
As of September 30, 2020 and December 31, 2019, there was one and no vendor, respectively, who accounted for over 10% of the Company’s consolidated accounts payable.
Property and Equipment
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 seven 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.
Intangible 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 50,000 shares of Series A preferred stock, the fair value of which was $1.0 million in 2013. The intangible asset was recorded at its fair value of $1.0 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 8.71 years. Accumulated amortization of the intangible asset is $0.8 million and $0.7 million at September 30, 2020 and December 31, 2019, respectively. The Company recorded expense for the amortization of intangible assets of $0.1 million during the nine months ended September 30, 2020 and 2019. The amortization of the intangible asset was minimal during the three months ended September 30, 2020 and 2019. The Company will review the intangible asset for impairment whenever an impairment indicator exists. There have been no intangible asset impairment charges to date.
Impairment of Long-Lived Assets
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
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the assets exceeds the projected discounted future net cash flows arising from the asset. There have been no such impairments of long-lived assets to date.
Leases
Effective January 1, 2018, the Company early adopted ASU No. 2016-02, “Leases (Topic 842)”, the comprehensive new lease standard issued by the FASB. The most significant impact was the recognition of right-of-use (ROU) assets and lease liabilities for operating leases. The Company determines if an arrangement is a lease at inception and includes operating leases on the Company’s consolidated balance sheets. 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.
The Company has made certain policy elections to apply to its leases executed post-adoption, or subsequent to January 1, 2018. In accordance with 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 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. As of September 30, 2020 and December 31, 2019, the weighted-average remaining lease terms for the Company’s operating leases were 7.2 years and 7.8 years, respectively. The weighted-average discount rate used to determine the present value of the Company’s operating leases’ future payments was 6.9% and 7.25% as of September 30, 2020 and December 31, 2019, respectively (see Note 3 regarding leases).
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.
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 has determined that it has no uncertain tax positions.
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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 four 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 four years.
The Company also grants shares of performance-based restricted stock units that typically vest after one year only if the Company has also achieved certain performance objectives as defined and approved by the Company’s board of directors. Performance awards are 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).
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 and nine months ended September 30, 2020, there were 2,279,353 and 2,251,155 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. For the three and nine months ended September 30, 2019, there were 2,286,802 and 1,812,578 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.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for annual periods beginning after December 15, 2019, which was the Company’s first quarter of fiscal year 2020, with early adoption permitted. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements or related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements and is intended to improve the effectiveness of disclosures, including the consideration of costs and benefits. This guidance is effective for annual periods beginning after December 15, 2019, which was the Company’s first quarter of fiscal year 2020, with early adoption permitted. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements or related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which updates the methodology used to measure current
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expected credit losses (CECL). This guidance applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This guidance replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings (deficit) in the period of adoption. This guidance is expected to be effective for the Company at December 31, 2020, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements or related disclosures as well as the timing of adoption.
Note 2. Property and Equipment
Property and equipment, net consists of the following (in thousands) at:
September 30,December 31,
20202019
Research and development equipment$1,422 $1,086 
Computer hardware and software1,744 1,418 
Tools and molds1,668 1,303 
Leasehold improvements3,749 1,500 
Furniture and fixtures1,331 624 
Construction in progress105 176 
10,019 6,107 
Less: accumulated depreciation and amortization(4,227)(3,060)
$5,792 $3,047 
Depreciation and amortization expense of property and equipment was $0.5 million and $1.2 million for the three and nine months ended September 30, 2020, respectively. Depreciation and amortization expense of property and equipment was $0.3 million and $0.8 million for the three and nine months ended September 30, 2019, respectively.
Note 3. Commitments and Contingencies
Operating Leases
In August 2014, the Company entered into a five-year operating lease for approximately 12,215 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. Upon the execution of the amendment, which was 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 seven-year operating lease for approximately 25,548 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 amendment, which was 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 five 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
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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 eight-year operating lease for approximately 32,621 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 is utilizing 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 five 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 38-month operating lease (the New Lease) for approximately 5,693 square feet of warehouse space beginning on October 15, 2020 and expiring on December 31, 2023 (the Initial Term). The Company intends to use these premises for general warehouse space.
The Company did not control the leased premises under the New Lease before the commencement date. The aggregate base rent due over the Initial Term under the terms of the New Lease is approximately $0.3 million (without giving effect to certain rent abatement terms). The Company is also responsible for the payment of additional rent to cover certain costs, taxes, and insurance (Additional Rent). The estimated Additional Rent during the Initial Term of the New Lease is approximately $0.1 million. The Company also paid minimal amounts for leasehold improvements, net of the minimal tenant improvement allowance provided in the New Lease.
During the three and nine months ended September 30, 2020, ROU assets obtained in exchange for new operating lease liabilities were none and $3.0 million, respectively. During the three and nine months ended September 30, 2019, ROU assets obtained in exchange for new operating lease liabilities were none and $1.5 million, respectively. As of September 30, 2020 and December 31, 2019, the ROU asset has a balance of $6.6 million and $4.2 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 and nine months ended September 30, 2020, cash paid for amounts included in operating lease liabilities were $0.4 million and $1.0 million, respectively. During the three and nine months ended September 30, 2019, cash paid for amounts included in operating lease liabilities were $0.3 million and $0.7 million, respectively. Amortization of the ROU asset was $0.2 million and $0.6 million for the three and nine months ended September 30, 2020, respectively. Amortization of the ROU asset was $0.2 million and $0.3 million for the three and nine months ended September 30, 2019, respectively.
As of September 30, 2020 and December 31, 2019, the weighted-average remaining lease term for the Company’s operating leases were 7.2 years and 7.8 years, respectively. The weighted-average discount rate used to determine the present value of the Company’s operating leases’ future payments was 6.9% and 7.25% as of September 30, 2020 and December 31, 2019, respectively.
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Total lease cost for the three and nine months ended September 30, 2020 and 2019 are as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Lease cost
Operating lease cost$491 $281 $1,472 $761 
Short-term lease cost51 43 119 150 
Variable lease cost65 55 123 98 
Total lease cost$607 $379 $1,714 $1,009 
License Agreement
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 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) the Minimum Royalty, payable quarterly. The Minimum Royalty will automatically increase each year after 2018, subject to a maximum amount of $200,000 per year. The Company generated net revenue of $35.2 million and $76.8 million during the three and nine months ended September 30, 2020, respectively, and recorded related royalties of $1.4 million and $3.0 million during the three and nine months ended September 30, 2020, respectively. The Company generated net revenue of $1.3 million and $3.9 million during the three and nine months ended September 30, 2019, respectively, and recorded related royalties of $0.1 million and $0.2 million during the three and nine months ended September 30, 2019, respectively. Royalty expense is included in operating expenses in the condensed consolidated statements of comprehensive loss. Accrued royalty of $1.4 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively, is included within accrued liabilities on the Company’s condensed consolidated balance sheets.
Legal Matters
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
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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 seven 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 six of the seven patents, finding that Axonics had demonstrated a reasonable likelihood that at least one, if not all, of the claims of these six patents are invalid. 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 involved in claims, legal proceedings, and investigations arising out of its operations in the normal course of business.
Note 4. Long-Term Debt
In February 2018, the Company entered into the Loan and Security Agreement (the Loan Agreement), with Silicon Valley Bank, providing for a term loan (the Term Loan). Pursuant to the Loan Agreement, the Company may request up to $20.0 million in three tranches of term loans with such drawn obligations maturing on June 1, 2021. The Company requested $10.0 million from the first tranche, simultaneously with the entry into the Loan Agreement, which is currently outstanding. The Company may request (a) an additional $5.0 million (Tranche B), after the date commencing on the later of (i) the date that the Company achieves positive three-month results in the Company’s ARTISAN-SNM pivotal study, as confirmed to Silicon Valley Bank by a member of the Company’s management team and a member of its board of directors, and (ii) July 1, 2018, and ending on December 31, 2018 and (b) another $5.0 million (Tranche C), after the date commencing on the later of (i) the date that Silicon Valley Bank receives evidence, in form and substance reasonably satisfactory to Silicon Valley Bank, that the Company has received its PMA in the United States for its r-SNM System or gross proceeds from the sale of its equity securities of not less than $20.0 million, and (ii) January 1, 2019, and ending on March 31, 2019, subject to certain terms and conditions. If either Tranche B or Tranche C is drawn, then the maturity of the Term Loan is automatically extended to December 1, 2021.
The Loan Agreement provides for monthly interest payments through December 31, 2018; provided that, (i) if the Company requests and Silicon Valley Bank funds Tranche B or Tranche C, this interest-only period automatically extends through June 30, 2019, and (ii) if the Company has received a PMA in the United States for its r-SNM System and the Company requests and Silicon Valley Bank funds Tranche C, the interest-only period automatically extends through December 31, 2019. On the first day of the end of the interest-only period, the Company will be required to repay the Term Loan in equal monthly installments of principal plus interest through maturity. Outstanding principal balances under the Term Loan bear interest at the prime rate plus 1.75%.
In October 2018, the Company and Silicon Valley Bank entered into an amendment to the Loan Agreement (the Loan Amendment) in connection with which the Company requested the full $5.0 million from Tranche B and the full $5.0 million from Tranche C. The Company received the $10.0 million from both tranches in October 2018. Pursuant to the Loan Amendment, Silicon Valley Bank agreed to (i) extend the interest only period from June 30, 2019 to December 31, 2019, without requiring the receipt of the Company’s PMA in the United States for the r-SNM System, and (ii) make Tranche C available immediately instead of January 1, 2019. In addition, as a result of the Company’s request of the full $5.0 million from Tranche B and the full $5.0 million from Tranche C, the maturity of the Term Loan has been automatically extended to December 1, 2021. The transaction was accounted for as a debt modification. See Note 5 for discussion regarding stock warrants granted in connection with the Term Loan.
In December 2019, the Company and Silicon Valley Bank entered into a second amendment to the Loan Agreement (the Second Amendment). Pursuant to the Second Amendment, Silicon Valley Bank agreed to extend the interest only period from December 31, 2019 to December 31, 2020. In connection with the Second Amendment, the Company paid Silicon Valley Bank a non-refundable fee of $0.2 million. The transaction was accounted for as a debt modification.
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The Company may prepay amounts outstanding under the Term Loan in increments of $5.0 million at any time with 30 days prior written notice to Silicon Valley Bank. However, all prepayments of the Term Loan prior to maturity, whether voluntary or mandatory (acceleration or otherwise), are also subject to the payment of a prepayment fee equal to (i) for a prepayment made on or after the closing date through and including the first anniversary of the closing date, 3.00% of the principal amount of the Term Loan being prepaid, (ii) for a prepayment made after the date which is the first anniversary of the closing date through and including the second anniversary of the closing date, 2.00% of the principal amount of the Term Loan being prepaid, and (iii) for a prepayment made after the date which is the second anniversary of the closing date and before the maturity date, 1.00% of the principal amount of the Term Loan being prepaid. Additionally, on the earliest to occur of (i) the maturity date of the Term Loan, (ii) the acceleration of the Term Loan, or (iii) the prepayment of the Term Loan, the Company will be required to make a final payment equal to the original principal amount of such tranche multiplied by 7.50%. The Company is currently accruing the portion of the final payment calculated based on the amount outstanding under the Term Loan.
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. As of September 30, 2020, the Company was in compliance with all debt covenant requirements under the Term Loan.
Debt, net of unamortized debt issuance costs, consists of the following (in thousands) at:
September 30,December 31,
20202019
Debt, principal$20,000 $20,000 
Accrued loan fees1,500 1,500 
Debt, total21,500 21,500 
Less: unamortized debt issuance costs(570)(1,164)
Debt, net of unamortized debt issuance costs20,930 20,336 
Less: debt, current portion(15,000) 
Debt, net of unamortized debt issuance costs, net of current portion$5,930 $20,336 
Note 5. Stock-based Compensation
Stock-based compensation expense included in the Company’s unaudited condensed consolidated statements of comprehensive loss is allocated as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Research and development$882 $477 $2,493 $1,170 
General and administrative1,448 1,267 4,726 2,688 
Sales and marketing1,445 1,038 4,294 1,941 
$3,775 $2,782 $11,513 $5,799 
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Stock Option Activity
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:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Expected term (in years)
5.50 - 6.08
6.05
5.07 - 6.16
Stock volatility
71.22% - 73.76%
72.01%
70.02% - 73.76%
Risk-free interest rate
1.42% - 1.87%
1.37%
1.42% - 2.56%
Dividend rate
The Company used the simplified method of determining the expected term of stock options. 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 no stock option grants for the three months ended September 30, 2020. The weighted-average grant date fair value of options granted was $18.56 for the nine months ended September 30, 2020. The weighted-average grant date fair value of options granted was $26.23 and $15.75 for the three and nine months ended September 30, 2019, respectively.
As of September 30, 2020 and December 31, 2019, there was $13.5 million and $19.5 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 2.6 years and 3.2 years, respectively.
The following table summarizes stock option activity for the nine months ended September 30, 2020 under the 2014 and 2018 Plans (in thousands, except share and per share data):
Number of OptionsWeighted-Average Exercise Price Per ShareAggregate Intrinsic Value
Outstanding at December 31, 20192,847,101 $13.22 
Options granted5,000 29.03 
Options exercised(665,369)3.98 $21,467 (1)
Options forfeited(62,766)25.46 
Outstanding at September 30, 20202,123,966 $15.79 $74,867 (2)
_____________________________________________
(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 third quarter of 2020 and the stock option exercise price, multiplied by the number of in-the-money options as of September 30, 2020. The amount of intrinsic value will change based on the fair market value of the Company’s stock.
The weighted-average remaining contractual term of options outstanding and exercisable is 7.8 years and 7.6 years at September 30, 2020 and December 31, 2019, respectively.
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Restricted Shares Awards Activity
As of September 30, 2020 and December 31, 2019, there was $19.8 million and $11.8 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 3.2 years and 3.3 years, respectively.
The following table summarizes restricted shares awards activity for the nine months ended September 30, 2020:
Number of Restricted Shares AwardsWeighted-Average Fair Value Per Share at Grant Date
Outstanding at December 31, 2019586,166 $23.59 
Restricted shares awards granted371,250 34.22 
Restricted shares awards vested(137,609)23.23 
Restricted shares awards forfeited(40,312)25.33 
Outstanding at September 30, 2020779,495 $28.63 
Restricted Stock Units Activity
As of September 30, 2020 and December 31, 2019, there was $1.9 million and $4.3 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 0.9 years and 1.5 years, respectively.
The following table summarizes restricted stock units activity for the nine months ended September 30, 2020:
Number of Restricted Stock UnitsWeighted-Average Fair Value Per Share at Grant Date
Outstanding at December 31, 2019248,104 $21.48 
Restricted stock units granted8,000 29.03 
Restricted stock units vested(46,336)14.19 
Outstanding at September 30, 2020209,768 $23.37 
Warrant Exercise
On July 16, 2019, the Company issued and sold 32,529 shares of its common stock to SVB Financial Group (SVB) in connection with the exercise by SVB of its right to purchase 40,000 shares of common stock under that certain warrant, dated as of February 6, 2018. The exercise price per share was $7.50, and was paid by SVB via forfeiture of shares pursuant to a cashless exercise provision in the warrant. 
On May 29, 2019, the Company issued and sold 31,071 shares of its common stock to Life Science Loans II, LLC (Life Science Loans) in connection with the exercise by Life Science Loans of its right to purchase 40,000 shares of common stock under that certain warrant, dated as of February 6, 2018. The exercise price per share was $7.50, and was paid by Life Science Loans via forfeiture of shares pursuant to a cashless exercise provision in the warrant.
No warrants were outstanding at September 30, 2020.
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Note 6. Income Taxes
The Company used an annual effective tax rate approach to calculate income taxes for the three and nine months ended September 30, 2020 and 2019. The annual effective tax rate of approximately 0% differs from the federal statutory tax rate due primarily to providing a full valuation allowance on net deferred tax assets.
At December 31, 2019, the Company had federal and California net operating loss (NOL) carryforwards of approximately $162.5 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 has not performed an analysis of changes in ownership for purposes of these Internal Revenue Code sections. 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 2018-2019 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 2019, 2020, and 2021 and the carry forward periods of any net operating losses not utilized due to such suspension were extended. At December 31, 2019, the Company also had research and development tax credit carryforwards of approximately $2.0 million, which will expire in 2036 to 2039. Approximately $0.9 million of these research and development tax credit carryforwards are included in prepaid expenses and other current assets on the Company’s consolidated balance sheets at September 30, 2020 and December 31, 2019, as they are expected to be utilized in 2020 as a credit to offset payroll taxes. The remaining amount of research and development tax credit carryforwards are included in net deferred tax assets.
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. Employee 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 and nine months ended September 30, 2020, the Company contributions to the plan amounted to $0.4 million and $1.2 million, respecti