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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, 2021
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, 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, 2021, 46,297,344 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 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 our 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.


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, 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.


Table of Contents
Part IFinancial Information
Item 1.    Condensed Consolidated Financial Statements (unaudited)
Axonics, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
September 30,December 31,
20212020
(unaudited)
ASSETS
Current assets
Cash and cash equivalents$228,797 $241,181 
Accounts receivable, net of allowance for doubtful accounts of $385 and $465 at September 30, 2021 and December 31, 2020, respectively
26,641 18,270 
Inventory, net70,358 63,060 
Prepaid expenses and other current assets4,433 5,435 
Total current assets330,229 327,946 
Property and equipment, net6,168 6,328 
Intangible assets, net108,302 196 
Other assets7,041 7,736 
Goodwill109,565  
Total assets$561,305 $342,206 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$10,512 $10,660 
Accrued liabilities6,424 6,684 
Accrued compensation and benefits9,305 5,948 
Operating lease liability, current portion1,401 1,280 
Debt, net of unamortized debt issuance costs, current portion109 21,110 
Total current liabilities27,751 45,682 
Operating lease liability, net of current portion8,152 9,154 
Deferred tax liabilities, net26,432  
Other long-term liabilities8,880  
Total liabilities71,215 54,836 
Stockholders’ equity
Preferred stock, par value $0.0001 per share; 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2021 and December 31, 2020
  
Common stock, par value $0.0001, 50,000,000 shares authorized at September 30, 2021 and December 31, 2020; 46,258,758 and 39,931,030 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
5 4 
Additional paid-in capital796,397 522,296 
Accumulated deficit(299,400)(234,499)
Accumulated other comprehensive loss(6,912)(431)
Total stockholders’ equity490,090 287,370 
Total liabilities and stockholders’ equity$561,305 $342,206 
See accompanying notes to unaudited condensed consolidated financial statements.
1

Table of Contents
Axonics, 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,
2021202020212020
Net revenue$46,913 $35,243 $127,155 $76,752 
Cost of goods sold15,719 13,434 46,828 31,792 
Gross profit31,194 21,809 80,327 44,960 
Operating Expenses
Research and development8,648 7,719 27,115 20,944 
General and administrative8,720 5,773 23,381 18,963 
Sales and marketing28,112 17,057 74,451 47,846 
Amortization of intangible assets2,216 29 5,094 86 
Acquisition-related costs  4,414  
Total operating expenses47,696 30,578 134,455 87,839 
Loss from operations(16,502)(8,769)(54,128)(42,879)
Other Expense
Interest income9 35 24 742 
Interest and other expense(229)(434)(7,528)(1,429)
Other expense, net(220)(399)(7,504)(687)
Loss before income tax expense(16,722)(9,168)(61,632)(43,566)
Income tax expense528  3,269 1 
Net loss(17,250)(9,168)(64,901)(43,567)
Foreign currency translation adjustment(5,138)99 (6,481)(186)
Comprehensive loss$(22,388)$(9,069)$(71,382)$(43,753)
Net loss per share, basic and diluted (see Note 1)$(0.38)$(0.24)$(1.53)$(1.20)
Weighted-average shares used to compute basic and diluted net loss per share (see Note 1)44,848,023 38,830,924 42,436,061 36,312,984 
See accompanying notes to unaudited condensed consolidated financial statements.
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Axonics, 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, 2020
39,931,030 $4 $522,296 $(234,499)$(431)$287,370 
Issuance of common stock for employee stock option exercises for cash206,507 — 2,821 — — 2,821 
Restricted Shares Award (RSA) issuances and forfeitures for terminations, net and stock-based compensation358,300 — 3,809 — — 3,809 
Issuance of common stock for vesting of Restricted Stock Units (RSU) and stock-based compensation169,054 — 1,494 — — 1,494 
Issuance of common stock for acquisition of Contura Limited1,096,583 — 55,728 — — 55,728 
Issuance of common stock for exclusive license asset65,594 — 3,637 — — 3,637 
Foreign currency translation adjustment— — — — (2,202)(2,202)
Net loss— — — (22,503)— (22,503)
Balance at March 31, 2021
41,827,068 4 589,785 (257,002)(2,633)330,154 
Issuance of common stock for employee stock option exercises for cash206,921 — 2,095 — — 2,095 
RSA issuances and forfeitures for terminations, net and stock-based compensation31,975 — 4,381 — — 4,381 
Issuance of common stock for vesting of RSU and stock-based compensation— — 1,946 — — 1,946 
Follow-on offering - issuance of 4,025,000 shares at $50.00 per share, less closing costs of $11,272
4,025,000 1 189,977 — — 189,978 
Foreign currency translation adjustment— — — — 859 859 
Net loss— — — (25,148)— (25,148)
Balance at June 30, 2021
46,090,964 5 788,184 (282,150)(1,774)504,265 
Issuance of common stock for employee stock option exercises for cash86,894 — 1,523 — — 1,523 
RSA issuances and forfeitures for terminations, net and stock-based compensation80,900 — 4,723 — — 4,723 
Issuance of common stock for vesting of RSU and stock-based compensation— — 1,967 — — 1,967 
Foreign currency translation adjustment— — — — (5,138)(5,138)
Net loss— — — (17,250)— (17,250)
Balance at September 30, 2021
46,258,758 $5 $796,397 $(299,400)$(6,912)$490,090 
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Accumulated
AdditionalOther
Common StockPaid-inAccumulatedComprehensive
SharesAmountCapitalDeficitLossTotal
Balance at December 31, 2019
34,110,995 $3 $363,012 $(179,584)$(428)$183,003 
Issuance of common stock for employee stock option exercises for cash181,456 — 344 — — 344 
RSA issuances and forfeitures for terminations, net and stock-based compensation171,875 — 3,039 — — 3,039 
Issuance of common stock for vesting of RSU and stock-based compensation46,336 — 883 — — 883 
Foreign currency translation adjustment— — — — (177)(177)
Net loss— — — (14,616)— (14,616)
Balance at March 31, 2020
34,510,662 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 
Issuance of common stock for vesting of RSU 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, 2020
39,462,405 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 
Issuance of common stock for vesting of RSU and stock-based compensation— — 855 — — 855 
Foreign currency translation adjustment— — — — 99 99 
Net loss— — — (9,168)— (9,168)
Balance at September 30, 2020
39,753,638 $4 $517,659 $(223,151)$(614)$293,898 
See accompanying notes to unaudited condensed consolidated financial statements.
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Axonics, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
20212020
Cash Flows from Operating Activities
Net loss$(64,901)$(43,567)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization6,483 1,253 
Stock-based compensation18,320 11,513 
Amortization of debt issuance costs4,991 594 
Provision for doubtful accounts(92)390 
Deferred income taxes and other items, net4,961 142 
Changes in operating assets and liabilities, net of business acquisition
Accounts receivable(6,669)(10,161)
Inventory(6,671)(28,600)
Prepaid expenses and other current assets1,075 1,352 
Other assets(273)16 
Accounts payable62 3,533 
Accrued liabilities(978)3,508 
Accrued compensation and benefits3,047 4,141 
Lease liability115 458 
Net cash used in operating activities(40,530)(55,428)
Cash Flows from Investing Activities
Purchases of property and equipment(1,177)(1,915)
Acquisition of a business, net of cash acquired(140,741) 
Proceeds from sales and maturities of short-term investments 12,592 
Net cash (used in) provided by investing activities(141,918)10,677 
Cash Flows from Financing Activities
Payment of debt issuance costs(106) 
Proceeds from debt75,000  
Repayment of debt(101,000) 
Proceeds from issuance of common stock upon follow-on public offering201,250 149,500 
Payment of common stock issuance costs upon follow-on public offering(11,272)(9,013)
Proceeds from exercise of stock options6,439 2,648 
Net cash provided by financing activities170,311 143,135 
Effect of exchange rate changes on cash and cash equivalents(247)(186)
Net (decrease) increase in cash and cash equivalents(12,384)98,198 
Cash and cash equivalents, beginning of year241,181 171,082 
Cash and cash equivalents, end of period$228,797 $269,280 
Supplemental Disclosure of Cash Flow Information
Cash paid for interest$2,178 $849 
Cash paid for taxes$1 $ 
Noncash Investing and Financing Activities
Common stock issuance for business acquisition$55,728 $ 
Contingent consideration for business acquisition$7,630 $ 
Common stock issuance for exclusive license asset$3,637 $ 
Accrued loan fees as debt issuance costs$4,500 $ 
See accompanying notes to unaudited condensed consolidated financial statements.
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AXONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1. Nature 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, the Company changed its name to Axonics Modulation Technologies, Inc. In March 2021, the Company changed its 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 develops and commercializes innovative and minimally invasive products to treat urinary and fecal dysfunction. 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. Beginning in February 2021 with the acquisition of Contura Limited, the Company also markets Bulkamid, a urethral bulking agent to treat female stress urinary incontinence (SUI). For more information, see Note 8.
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.
May 2021 Follow-On Offering
On May 14, 2021, the Company completed a follow-on offering by issuing 4,025,000 shares of common stock, at an offering price of $50.00 per share, inclusive of 525,000 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 $190.0 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, 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.
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, 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
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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, 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).
Reclassifications
Certain prior period reported amounts have been reclassified to conform with the current period presentation.
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 and resurgence periods 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 and again in the third quarter of 2021 related to the Delta variant, the Company expects it would materially harm the Company’s revenues and potentially increase the Company’s operating loss. Even as efforts to contain the pandemic have made progress and some restrictions have relaxed, new variants of the virus may continue to cause additional outbreaks. 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, 2021 and 2020 relates entirely to the sale of the Company’s products to its customers and distributors.
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 also sells to distributors and applies the same policies as its revenue arrangements with customers, specifically that revenue is recognized at the point in time when it transfers control of promised goods to its distributors, 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, do not include a significant financing component. The Company extends credit to its customers and distributors based upon an evaluation of the their 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 $0.2 million and $0.3 million at September 30, 2021 and December 31, 2020, respectively. Damaged or defective products are replaced at no charge under the Company’s standard warranty. For the three and nine months ended September 30, 2021, the replacement costs were minimal and $0.2 million, respectively. For the three and nine months ended September 30, 2020, replacement costs were minimal and $0.1 million, respectively.
Shipping and handling costs incurred for the delivery of goods to customers and distributors are included in cost of goods sold. Amounts billed to customers and distributors for shipping and handling are included in net revenue.
The following table provides additional information pertaining to net revenue disaggregated by product and geographic market for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
SNM net revenue
United States$39,147 $34,139 $110,135 $73,833 
International markets922 1,104 3,031 2,919 
$40,069 $35,243 $113,166 $76,752 
Bulkamid net revenue
United States$3,921 $ $6,870 $ 
International markets2,923  7,119  
$6,844 $ $13,989 $ 
Total net revenue$46,913 $35,243 $127,155 $76,752 
Allowance for Doubtful Accounts
The Company makes estimates of the collectability of accounts receivable in accordance with ASU 2016-13. 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, customers could be adversely affected if future economic and industry trends, including those related to COVID-19, change in such a
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manner as to negatively impact their cash flows. The full effects of COVID-19 on the Company’s customers 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 customers 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.
The following table summarizes the changes in our allowance for doubtful accounts (in thousands):
Nine Months Ended
September 30,
20212020
Balance at beginning of period$465 $75 
Write-offs12  
Bad debt expense, net(92)390 
Balance at end of period$385 $465 
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 as the Company’s policy is to place its cash and cash equivalents in highly-rated financial institutions.
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.
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.
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 is estimated using a binary option-based approach with assumptions the Company believes would be made by a market participant. Significant inputs include projected revenues, discount rates, volatility factors and risk-free rates. The Company assesses these assumptions on an ongoing basis as additional data impacting the
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assumptions is obtained and any change in fair value of the contingent consideration is recorded in the consolidated statements of comprehensive loss. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, a change in the assumption used for the projected revenues would result in a directionally similar change to the overall estimate of the contingent consideration. The fair value of contingent consideration of $8.9 million at September 30, 2021 is reflected in other long-term liabilities on the Company’s condensed consolidated balance sheets with the change in fair value of $1.3 million during the three months ended September 30, 2021 reflected in general and administrative expenses in the consolidated statements of comprehensive loss.
The following table summarizes the changes in the fair value of recurring Level 3 fair value measurements during the nine months ended September 30, 2021 (in thousands):
Liabilities
Contingent consideration:
December 31, 2020$ 
February 25, 2021 Acquisition7,630 
Loss on change in fair value included in earnings1,250 
September 30, 2021$8,880 
There were no transfers between Levels 1, 2 or 3 for the periods presented.
Investment Securities
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, 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 Company had no outstanding investment securities as of September 30, 2021 and December 31, 2020.
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. Revenue 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 gain or 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, 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 September 30, 2021 and December 31, 2020.
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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 Company’s products currently have a maximum estimated shelf life range of 12 to 36 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, 2021, the Company had $45.3 million, $9.6 million and $15.5 million of finished goods inventory, work-in-process inventory and raw materials inventory, respectively, net of reserves of $0.3 million. As of December 31, 2020, the Company had $42.1 million, $3.5 million and $17.5 million of finished goods inventory, work-in-process inventory and raw materials inventory, respectively. Reserves were de minimus as of December 31, 2020.
Customer and Vendor Concentration
As of September 30, 2021 and December 31, 2020, there were no customers who accounted for over 10% of the Company’s consolidated accounts receivable. As of September 30, 2021 and December 31, 2020, there was one and one vendor, respectively, who accounted for over 10% of the Company’s consolidated accounts payable.
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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.
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. The Company performs an annual impairment test for goodwill in the fourth quarter of each year. The Company considers qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. During the nine months ended September 30, 2021, the Company did not record any impairment charges related to goodwill.
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 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 this intangible asset is $0.9 million and $0.8 million at September 30, 2021 and December 31, 2020, respectively. The amortization of this intangible asset was $0.1 million during the nine months ended September 30, 2021 and 2020. The amortization of this intangible asset was minimal during the three months ended September 30, 2021 and 2020. The Company will review the intangible asset for impairment whenever an impairment indicator exists. There have been no intangible asset impairment charges to date. For additional information, see Note 9.
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 65,594 shares of common stock, $0.0001 par value, the fair value of which was $3.6 million upon transfer. The intangible asset was recorded at its fair value of $3.3 million at the date of the agreement, with the difference of $0.3 million recorded as a vendor credit in accounts payable in the condensed consolidated balance sheets. Amortization of this asset is recorded over the four-year term of the agreement on a straight-line basis. There was $0.2 million and $0.4 million amortization of this intangible asset recorded during the three and nine months ended September 30, 2021, respectively. The Company will review the intangible asset for impairment whenever an impairment indicator exists. There have been no intangible asset impairment charges to date. For additional information, see Note 9.
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 8 and 9.
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 the assets exceeds the projected discounted future net cash flows arising from the asset. There have been minimal 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.
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.
Advertising Expense
The Company expenses advertising costs as they are incurred. During the three and nine months ended September 30, 2021, advertising expense totaled $2.6 million and $5.5 million, respectively, and are recorded within the sales and marketing expenses in its consolidated statements of comprehensive loss. During the three and nine months ended September 30, 2020, advertising expense totaled $0.8 million and $1.4 million, respectively, and are recorded within the sales and marketing expenses in its consolidated statements of comprehensive loss.
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 U.S. 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 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. 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).
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, 2021, there were 2,459,912 and 2,460,176 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, 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.
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.
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Note 2. Property and Equipment
Property and equipment, net consists of the following (in thousands) at:
September 30,December 31,
20212020
Research and development equipment$1,484 $1,205 
Computer hardware and software2,468 2,286 
Tools and molds1,597 1,404 
Leasehold improvements3,772 3,759 
Furniture and fixtures1,514 1,360 
Construction in progress537 129 
11,372 10,143 
Less: accumulated depreciation and amortization(5,204)(3,815)
$6,168 $6,328 
Depreciation and amortization expense of property and equipment was $0.5 million and $1.4 million for the three and nine months ended September 30, 2021, respectively. 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.
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 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 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 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 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 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 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-
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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 for approximately 5,693 square feet of warehouse space beginning on October 15, 2020 and expiring on December 31, 2023. The Company uses these premises for general warehouse space.
During the three and nine months ended September 30, 2021, ROU assets obtained in exchange for new operating lease liabilities were none and $0.1 million, respectively. 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. As of September 30, 2021 and December 31, 2020, the ROU asset has a balance of $6.4 million and $7.1 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 and nine months ended September 30, 2021, cash paid for amounts included in operating lease liabilities were $0.5 million and $1.5 million, respectively. 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. Amortization of the ROU asset was $0.3 million and $0.8 million for the three and nine months ended September 30, 2021. Amortization of the ROU asset was $0.2 million and $0.6 million for the three and nine months ended September 30, 2020, respectively.
As of September 30, 2021 and December 31, 2020, the weighted-average remaining lease term for the Company’s operating leases were 6.0 years and 6.6 years, respectively. The weighted-average discount rate used to determine the present value of the Company’s operating leases’ future payments was 6.7% as of September 30, 2021 and December 31, 2020.
Total lease cost for the three and nine months ended September 30, 2021 and 2020 are as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Lease cost
Operating lease cost$524 $491 $1,583 $1,472 
Short-term lease cost25 51 77 119 
Variable lease cost54 65 152 123 
Total lease cost$603 $607 $1,812 $1,714 
License Agreement
In October 2013, the Company entered into the License Agreement, pursuant to which AMF, a Company stockholder, 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 SNM revenue of $40.1 million and $113.2 million during the three and nine
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months ended September 30, 2021, respectively, and recorded related royalties of $1.6 million and $4.5 million during the three and nine months ended September 30, 2021, respectively. The Company generated net SNM 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. Royalty expense is included in operating expenses in the condensed consolidated statements of comprehensive loss. Accrued royalty of $1.6 million and $1.4 million as of September 30, 2021 and December 31, 2020, 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 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 the Company had demonstrated a reasonable likelihood that at least one, if not all, of the claims of these six patents are invalid. The USPTO issued decisions on the IPR petitions in September 2021. The USPTO invalidated several claims in the Medtronic patents but declined to invalidate the majority of asserted claims. The Company plans to appeal the decisions on the claims that were not invalidated. Following these IPR decisions, the judge presiding over the litigation in the United States District Court for the Central District of California lifted the stay on litigation proceedings.
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. Long-Term Debt
In June 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 2021, were paid in full. The unamortized debt issuance costs of $4.4 million as of March 31, 2021 was expensed and recognized as interest expense during the three months ended June 30, 2021.
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 $0.4 million as of December 31, 2020 was expensed and recognized as interest expense during the three months ended March 31, 2021.
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Debt, net of unamortized debt issuance costs, consists of the following (in thousands) at:
September 30,December 31,
20212020
Debt, principal$109 $20,000 
Accrued loan fees 1,500 
Debt, total109 21,500 
Less: unamortized debt issuance costs (390)
Debt, net of unamortized debt issuance costs$109 $21,110 
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,
2021202020212020
Research and development$1,549 $882 $4,435 $2,493 
General and administrative2,158 1,448 5,930 4,726 
Sales and marketing2,983 1,445 7,955 4,294 
$6,690 $3,775 $18,320 $11,513 
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,
2021202020212020
Expected term (in years)
5.50
5.46 - 6.00
6.05
Stock volatility
63.49%
63.49%
72.01%
Risk-free interest rate
0.85%
0.53% - 1.16%
1.37%
Dividend rate
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. The weighted-average grant date fair value of options granted was $33.08 and $32.93 for the three and nine months ended September 30, 2021, respectively. The weighted-average grant date fair value of options granted was none and $18.56 for the three and nine months ended September 30, 2020, respectively.
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As of September 30, 2021 and December 31, 2020, there was $8.4 million and $11.6 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 1.8 years and 2.4 years, respectively.
The following table summarizes stock option activity for the nine months ended September 30, 2021 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, 2020
1,955,243 $16.01 
Options granted46,000 58.07 
Options exercised(500,322)12.53 $23,450 (1)
Options forfeited(36,957)24.18 
Outstanding at September 30, 2021
1,463,964 $18.32 $68,475 (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 2021 and the stock option exercise price, multiplied by the number of in-the-money options as of September 30, 2021. 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 7.2 years and 7.7 years at September 30, 2021 and December 31, 2020, respectively.
Restricted Shares Awards Activity
As of September 30, 2021 and December 31, 2020, there was $42.3 million and $22.6 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 3.2 years and 3.3 years, respectively.
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The following table summarizes restricted shares awards activity for the nine months ended September 30, 2021:
Number of Restricted Shares AwardsWeighted-Average Fair Value Per Share at Grant Date
Outstanding at December 31, 2020817,183 $