UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-K
_________________________________________________________________
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
_________________________________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
26 Technology Drive
Irvine, California
(Address of principal executive
offices)
45-4744083
(I.R.S. Employer
Identification Number)
92618
(Zip Code)
(949) 396-6322
(Registrant’s telephone number,
including area code)
Title of class
Common stock, par value $0.0001 per share
Trading symbol
AXNX
Name of exchange on which registered
Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second
fiscal quarter was approximately $1,135.8 million, based on the closing price of the registrant’s common stock on the Nasdaq Global Select Market of $35.11 per share for such date.
As of February 25, 2021, 41,523,375 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information that is required to be included in Part III of this Annual Report on Form 10-K is incorporated by reference to either a definitive proxy statement or an amendment to
this Annual Report on Form 10-K to be filed by the registrant within 120 days of December 31, 2020. Only those portions of any such definitive proxy statement that are specifically
incorporated by reference herein shall constitute a part of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
PART IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
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Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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:
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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;
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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.
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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 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of Part II of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K, the terms “Axonics,” “our company,” “we,” “us” and “our” refer to
Axonics Modulation Technologies, Inc. and our consolidated subsidiaries.
This Annual Report on Form 10-K 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 Annual Report on Form 10-K also includes trademarks and
trade names that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this Annual Report on Form 10-K
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.
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Risk Factors Summary
PART I
The following is a summary of some of the risks and uncertainties as of the date of the filing of this Annual Report on Form 10-K that could materially adversely
affect our business, financial condition, and/or results of operations. You should read this summary together with the more detailed description of each risk factor
contained below.
The size and future growth in the market for our products has not been established with precision and may be smaller than we estimate and our sales
We have a limited history of manufacturing and assembling our products in commercial quantities and may encounter related problems or delays that
We may seek to grow our business through acquisitions of complementary products or technologies, and the failure to manage acquisitions, or the failure
If the quality and benefits of our products do not meet the expectations of physicians or patients, then our brand and reputation or our business could be
Our r-SNM System was our sole product until we acquired the Bulkamid urethral bulking agent product line on February 25, 2021 and will generate the
We have incurred significant operating losses since inception, and we expect to incur operating losses in the future, and we may not be able to achieve or
We may require additional capital to finance our planned operations, which may not be available to us on acceptable terms or at all.
We compete against other companies, including Medtronic and Boston Scientific, some of which have longer operating histories, more established
Risks Related to Our Business and Strategy
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sustain profitability.
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vast majority of our revenue for the foreseeable future.
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We rely on third parties for the manufacture of our products, some of them as a single source. This reliance increases the risk that we will not have
sufficient quantities of our products or be able to purchase them at an acceptable cost, and reduces our control over the manufacturing process, which could delay,
prevent or impair our development or sales efforts.
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could result in lost revenue.
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products or greater resources than we do, which may prevent us from achieving increased market penetration and improved operating results.
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adversely affected.
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growth may be adversely affected.
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to integrate them with our existing business, could harm our business, financial condition and operating results.
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to support our current business strategies.
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hindered.
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able to maintain adequate product liability insurance.
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disease, COVID-19, could adversely affect our business.
Risks Related to Legal Matters and Government Regulation
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comply with applicable requirements could harm our business.
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grow our business.
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costly investigations, fines or sanctions by regulatory bodies.
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us to recall or withdraw our products from the market.
Unfavorable global economic conditions could adversely affect our business, financial condition, or results.
Our results may be impacted by changes in foreign currency exchange rates.
A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including the outbreak of the novel strain of coronavirus
Our success will depend on our ability to retain senior management and other highly qualified personnel.
If we are unable to achieve and maintain adequate levels of coverage or reimbursement for our products, our commercial success may be severely
Failure to comply with postmarketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and might require
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be
The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in
We may not receive the necessary clearances or approvals for modifications to our products, and failure to do so would adversely affect our ability to
Our operations are subject to extensive laws and government regulation and oversight both in the United States and internationally, and our failure to
Consolidation in the healthcare industry could lead to demands for price concessions, which may affect our ability to sell our products at prices necessary
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We and our suppliers are subject to various federal, state and foreign laws, including anti-corruption laws, fraud and abuse laws, privacy and security
We or any of our suppliers or third-party manufacturers could be forced to recall our products.
Our products may cause or contribute to adverse medical events or serious safety issues, which could have a negative impact on us.
Legislative or regulatory reforms in the United States or Europe may make it more difficult and costly for us to obtain regulatory clearances or approvals,
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or to manufacture, market or distribute our products.
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laws, transparency laws, trade regulations, and “conflict minerals” rules, which, if violated, could subject us to substantial penalties. Additionally, any challenge to
or investigation into our practices under these laws could cause adverse publicity and be costly and thus could harm our business.
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could harm our business, financial condition and results of operations.
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may be expensive and restrict how we do business.
Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system and new medical device regulations in Europe,
Our business involves the use of hazardous materials and our third-party manufacturers must comply with environmental laws and regulations, which
Litigation or other proceedings or third-party claims of intellectual property infringement against us, including the Medtronic Litigation, or any of our
Risks Related to Intellectual Property
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current or future licensors, including AMF, could require us to spend significant time and money and could prevent us from selling our products, or affect our stock
price.
If we or any of our current or future licensors, including AMF, are unable to maintain, obtain or adequately protect our intellectual property rights, we
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may not be able to compete effectively in our market or we could be required to incur significant expenses to enforce or defend our rights or attempt to do the
same.
If we are unable to enforce our intellectual property or protect the confidentiality of our trade secrets or our confidential information, our business or competitive
position could be harmed.
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If we fail to comply with our obligations under our patent licenses with third parties, we could lose license rights that are important to our business.
We are obligated to maintain proper and effective internal controls over financial reporting and any failure to do so may adversely affect investor
We have incurred and will continue to incur significant costs as a result of being a public company, which may adversely affect our business, financial
The trading price of our common stock may be volatile, and purchasers of our common stock could incur substantial losses.
Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other
Risks Related to Our Common Stock
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stockholders.
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condition and results of operations.
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confidence in us, and, as a result, the value of our common stock.
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proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors, officers, employees or agents.
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volume could decline.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Anti-takeover provisions in our certificate of incorporation and bylaws, as well as under Delaware law, could discourage a takeover.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading
Item 1. Business.
Overview
We are a global medical technology company that develops and commercializes products to treat urinary and fecal dysfunction, including: (i) an
implantable sacral neuromodulation (SNM) system to treat urinary urge incontinence (UUI) and urinary urgency frequency (UUF), together referred to as
overactive bladder (OAB), fecal incontinence (FI), and non-obstructive urinary retention (UR); and (ii) a urethral bulking agent to treat female stress urinary
incontinence (SUI).
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SNM System
OAB affects an estimated 87 million adults in the United States and Europe. Another estimated 40 million adults are reported to suffer from FI. SNM
therapy is an effective and durable treatment that has been widely used and reimbursed in Europe and the United States for the past two decades. SNM is the only
OAB treatment with proven clinical superiority to standard medical therapy and OAB patients who receive SNM report significantly higher quality of life than
patients undergoing drug treatment.
We estimate the global SNM market is now approximately $650 million to $700 million and believe it is a growing market that is currently about one to
three percent penetrated. Until we entered the market, it was serviced by Medtronic as a single participant.
We believe our proprietary rechargeable SNM system (r-SNM System), the first rechargeable SNM system marketed worldwide, offers significant
advantages, and is well positioned to capture market share and penetrate and grow this attractive market. Our r-SNM System is designed to last approximately
15 years in the human body, is only 5cc in volume, offers broad MRI access, ease of use, intuitive programmers, and the longest recharging interval among
rechargeable SNM systems.
We began U.S. commercialization of our r-SNM System in the middle of the fourth quarter of 2019 after receiving approval by the U.S. Food and Drug
Administration (FDA). We also have marketing approvals in Europe, Canada, and Australia for all relevant clinical indications.
During 2020 and early 2021, we received six additional FDA approvals for enhancements to our product offering, including a second-generation
rechargeable implantable neurostimulator (INS) with a one-month recharging interval, a new patient remote control with SmartMRI
technology, 3 Tesla MRI
full-body conditional labeling, a second-generation recharging belt, an upgraded programmer and a third-generation INS which gives patients the ability to make
broader stimulation parameter adjustments at home.
TM
We believe that SNM therapy is an effective treatment alternative for patients with bladder and bowel dysfunction whose symptoms have not been
adequately resolved by first and second-line therapies. We believe that approximately two-thirds of patients in the United States with bladder and bowel
dysfunction that are treated with SNM therapy have either UUI alone, UUI in combination with FI or another subtype of OAB. We believe that approximately 85%
of the SNM addressable market for OAB consists of female patients. Anatomical and physiological differences in the lower urinary tract of males and females may
help to explain these variations.
First-line therapies for OAB include behavioral changes such as diet, exercise, timed voiding, pelvic floor exercises, and biofeedback, all of which often
have limited effectiveness. Second-line therapies for OAB consist of drug therapy and medical management, and may be effective; however, the use of medication
can cause undesirable side effects and the effectiveness may decrease over time with prolonged use. First- and second-line therapies comprise the largest segment
of the treatment market for OAB. Patients who fail, or are contraindicated or refractory for, both first- and second-line therapies may be eligible for SNM as a
third-line therapy.
SNM therapy has been commercially available in the United States for over 20 years and has been clinically proven to provide a safe, effective,
reversible, and long-lasting solution. According to a study published in the Journal of Neurourology and Urodynamics, Siegel et al. in 2014, SNM therapy is the
only third-line therapy for OAB that has objectively demonstrated superior efficacy to standard OAB medical therapy. Relative to the other third-line therapies
such as onabotulinumtoxinA (BOTOX) injections and percutaneous tibial nerve stimulation (PTNS) we believe SNM therapy has therapeutic advantages that
include better efficacy and patient compliance.
We believe that our r-SNM System offers similar therapeutic benefits and competitive advantages to the only other currently available SNM technologies,
InterStim II and Interstim Micro, both offered by Medtronic. As a result of our long-lived implantable device, patients implanted with our r-SNM System do not
need to undergo replacement surgery every three to five years, as is the case for patients implanted with InterStim II, potentially reducing the risks of surgery and
associated infections. We believe patients who have historically resisted SNM therapy because of the required multiple surgeries may be more inclined to be
treated by our r-SNM System. Our r-SNM System allows full-body MRI scans and head scans under certain conditions. This full-body MRI feature may allow
more patients to choose SNM therapy to treat their bladder and bowel dysfunction.
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We have designed and developed a proprietary method protected by patents, know-how, and trade secrets that enables us to combine ceramic and titanium
to fabricate the INS enclosure of our r-SNM System. This method enables us to incorporate a significantly smaller battery and recharging coil into our INS, which
enables us to provide a smaller sized implant that is half the weight of InterStim II while offering twice the recharging interval (one month vs. two weeks) as
Interstim Micro. In addition, we engineered the INS to deliver constant-current stimulation, which automatically adjusts stimulation based on changes to
impedance that occur as the implanted lead scars into the body, which we expect will provide a more consistent and reliable therapy over time and reduce patient
and physician management of the therapy. Our r-SNM System also includes an easy-to-use patient remote control. We also designed and custom built a clinician
programmer that guides the implanting physician through electrode placement and stimulation programming.
Our r-SNM System consists of several components and accessories that provide a smoothly integrated, long-lasting, intuitive, and easy-to-use system.
The miniaturized INS is a five cubic centimeter, rechargeable implantable stimulator designed to provide stimulation through a tined four-electrode lead. SNM
therapy generally consists of two phases, an evaluation period, also called the external trial period, which typically lasts a few days to a few weeks, and a
permanent implant for those patients who experience a successful external trial period. The permanent implant procedure typically occurs in a hospital or an
outpatient setting and includes implantation of the INS and, if a temporary lead was used for the external trial period, implantation of the permanent lead. The INS
is inserted through a small incision into a pocket in the subcutaneous fat of the upper buttocks, and the lead body is tunneled to the INS pocket and connected to
the INS. The INS is programmed by, and wirelessly communicates with, the clinician programmer, at a range of up to approximately three feet. The patient has the
ability to adjust stimulation intensity up or down or switch on or off, using a discrete, small, and easy-to-use wireless remote control that communicates with the
device at a range of up to approximately three feet. The INS charges wirelessly for approximately one hour once a month under normal use conditions.
We intend to continue to invest in research and development activities focused on improvements and enhancements to our r-SNM System. Our goals
include expanding the suite of product solutions available for SNM therapy, including a non-rechargeable SNM device that utilizes a primary cell battery.
We focus the significant majority of our sales and marketing efforts in the United States where reimbursement for SNM therapy is well established and
covered by most major U.S. insurers, including Medicare. Additionally, we hire and train sales representatives and clinical specialists with strong backgrounds and
experience in SNM therapy and other neurostimulation applications, and who have existing relationships with urologists and urogynecologists. We are initially
targeting the estimated top 1,000 physicians that represent a majority of the implant volume in the United States. We estimate that approximately 80% of U.S.
implant volume is generated by these 1,000 physicians.
Urethral Bulking Agent
On February 25, 2021, we announced the acquisition of Contura Limited (Contura) and its Bulkamid product, a urethral bulking agent indicated for the
treatment of female SUI. In consideration for the acquisition, we paid approximately $141.3 million in cash and issued 1,096,583 shares of our common stock. We
may pay an additional $35 million in the event Bulkamid sales in any consecutive 12-month period exceed $50 million before December 31, 2024.
As part of the transaction, we entered into a supply agreement with Contura International A/S (Contura International) to manufacture Bulkamid for us
(Manufacturing and Supply Agreement). We have a right to a technology transfer after June 30, 2022 that would enable us to insource the manufacturing of
Bulkamid.
Bulkamid received a CE Mark in 2003 and a PMA from the FDA in 2020 and has been sold through a combination of a direct sales force and distributors,
which we expect to continue under our ownership. The acquisition of Contura is expected to expand our international operations.
SUI is a common condition that afflicts women of all ages, with childbirth as one of the main contributing factors. SUI is caused by weakness in the
pelvic floor, preventing the urethra from closing fully when sudden pressure is put on the bladder. This can allow urine to leak out during normal daily activities
such as coughing, laughing, exercising, or lifting an object. SUI is different from overactive bladder. OAB, which is not related to
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pelvic floor weakness, is treated with drugs, Botox or SNM. Many patients present with both SUI and UUI, referred to as mixed incontinence.
We believe the market for SUI is large and highly underpenetrated, particularly in the United States, with approximately 20 million women suffering from
SUI. Similar to urinary incontinence, the majority of women with SUI are suffering in silence. We estimate that approximately 8.8 million women have sought
medical treatment, most of whom were offered conservative therapy or opted for no treatment due to a lack of non-invasive treatment options with high efficacy.
Similar to SNM, we believe the SUI market is poised for significant and durable growth in the years ahead.
While bulking agents have been on the market for over a decade, the bulking effect of the legacy gels has limitations. This is primarily due to difficulty in
administration and the variability in the volume of gel material injected, resulting in middling satisfaction and relief for patients. Legacy bulking agents contain
microparticles, which according to clinical literature, sometimes induce a chronic inflammatory response. The combination of these factors has led to modest use
of legacy bulking agents and physician preference for an invasive sling procedure to treat women with SUI.
As a next-generation bulking agent, we believe Bulkamid addresses the shortcomings of existing particulate-based bulking agents. It is a unique and
patented non-particulate hydrogel that is injected into the urethral wall to restore the natural closing pressure of the urethra. It is a simple, fast, easy-to-learn and
perform procedure that is minimally invasive and can be performed in minutes in either a physician’s office or an outpatient facility.
Bulkamid is biocompatible, consisting of 97.5% water, and does not induce a chronic inflammatory response. Bulkamid’s bulking effect is aided due to
the fact that the volume, of each injection is predictable, controllable, and precise. Bulkamid retains its bulking characteristics for a number of years, thereby
maintaining efficacy and providing women with long lasting relief of their SUI symptoms. Bulkamid is supported by extensive clinical validation, with over
70,000 women treated to date, and generates high rates of patient satisfaction.
We believe we can leverage our expansive commercial footprint and accelerate Bulkamid’s adoption in the United States. As is the case in certain
European markets, such as the U.K., we believe Bulkamid will quickly become the gold standard in the U.S. for bulking agents and take share from invasive sling
procedures. The new product line further increases our value to physicians as we can now offer customers best-in-class solutions for patients with various types of
OAB and SUI.
Bulkamid is currently sold through a direct salesforce in the U.S., U.K., Germany, France, Nordic countries and through distributors in over 30
international markets around the world. In the United States, there are currently only five sales professionals.
The acquisition of Bulkamid is expected to be accretive to revenue growth, gross margins and operating margins in 2021 and beyond.
Our Success Factors
We believe that continued growth of our company will be driven by the following success factors:
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Large and growing SNM market with established coverage and reimbursement. SNM treatment for OAB, FI, and UR is a well-established therapy.
Since the first FDA-approved SNM device, the InterStim I System, was introduced in 1997, we estimate hundreds of thousands of patients have been
implanted worldwide with such system and its successor InterStim II. In 2018, we believe that approximately 45,000 patients were implanted with SNM
therapy, including an estimated 10,000 patients receiving replacement implants, corresponding to an approximately $650 million to $700 million global
annual addressable SNM market. We estimate the global SNM market is approximately one to three percent penetrated, and we believe that the
introduction of highly differentiated SNM solutions has the potential to grow the market in excess of historical size and growth rates. In addition, because
SNM therapy has been widely used in patients for over 20 years in the United States, which we believe makes up nearly 90% of the sales in the global
SNM market, reimbursement codes and payments are well-established, and the procedure is covered by most major U.S. insurers.
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Long-term solution offering material benefits to patients, physicians, and payors. Our r-SNM System was the first system for SNM therapy with a
rechargeable INS battery that is designed to last approximately 15 years. As a result, our r-SNM System offers several benefits not found in the legacy
competitive device, the InterStim II. First, patients implanted with our r-SNM System do not need to undergo replacement surgery every three to five
years, as is the case for patients implanted with InterStim II, a non-rechargeable system. We believe a rechargeable system significantly improves a
patient’s experience and reduce the risks of surgery and associated infections. In addition, by reducing the number of replacement surgeries, physicians
and facilities can utilize their resources more efficiently. We believe that our technology has the potential to significantly reduce overall costs to the
healthcare system. In 2016, we commissioned a study, which concluded that a rechargeable SNM system with a 15-year battery life could potentially
reduce overall U.S. healthcare costs by up to $12 billion over a 15-year horizon. Our r-SNM System was also the first SNM system to allow full-body
MRI scans under certain conditions.
Significant competitive and functional advantages over other approved SNM devices. We believe that our r-SNM System’s innovative and proprietary
design offers significant competitive and functional advantages over InterStim II and Interstim Micro. We believe that our r-SNM System was the first
system for SNM therapy with a rechargeable INS battery that is designed to last approximately 15 years, as compared to three to five years for patients
implanted with InterStim II. Our proprietary method of combining ceramic and titanium to fabricate the INS enclosure enables us to incorporate a
significantly smaller recharging coil into our INS, which offers benefits such as 60% smaller size and half the weight of InterStim II, enhanced
communication range with the patient programmer, and twice the recharging interval compared to Interstim Micro. In addition, our r-SNM System
employs constant current which automatically adjusts stimulation based on changes to impedance that occur as the implanted lead scars into the body,
which we expect will provide a more consistent and reliable therapy over time and reduce patient and physician management of the therapy. Further, our
r-SNM System is differentiated by significant wireless charging benefits and an easy-to-use patient remote control. Finally, we designed and custom built
a clinician programmer that guides the implanting physician through electrode placement and stimulation programming.
Strong clinical data. We have a body of compelling clinical evidence that demonstrates the safety and effectiveness of our r-SNM System. In our clinical
work to date, we have implanted 180 patients in the United States and Europe. Our ARTISAN-SNM pivotal study evaluated 129 patients with UUI. In the
two-year results, therapy response rate was 88% of all patients initially treated. Our European study, RELAX-OAB, evaluated 51 patients that suffered
from UUF and UUI. The therapeutic response rate at 12 months for the 43 patients who continued with study follow-up was 94% for test responders and
72% for all implanted patients. We intend to follow patients for at least two years for both of our clinical studies. We believe clinical data is important and
will be key to driving broad-based adoption of our r-SNM System.
Substantial sales and clinical field teams. We hire and train sales representatives and clinical specialists with strong backgrounds and experience in SNM
therapy and other neurostimulation applications, and who have existing relationships with urologists and urogynecologists. We anticipate that this
investment in our sales force will enable us to compete effectively and gain market share, as we expect relationships, expertise and patient outcomes will
be important factors in the widespread adoption of our r-SNM System.
A deep understanding of our target market. We formed our company by assembling an experienced team with significant in-depth knowledge of our
target market. From the outset, we spent significant time understanding the unmet needs of patients and physicians through patient field studies and early
engagement of physicians and key opinion leaders. By utilizing this market knowledge and initially focusing solely on SNM, we have been able to
navigate the development and regulatory requirements for our r-SNM System in an efficient manner.
Comprehensive and broad intellectual property portfolio. Our r-SNM System is supported by a nucleus of issued patents and patent applications that we
license from the Alfred E. Mann Foundation for Scientific Research (AMF) pursuant to the License Agreement. In addition to that nucleus, we have
created a substantial portfolio of wholly owned intellectual property, which includes patents, know-how and trade secrets that are embodied by our r-SNM
System. As of December 31, 2020, we own 32 issued U.S. patents and 89 issued foreign patents, and 19 pending U.S. patent applications and 41 pending
foreign patent
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applications. We also license from AMF 30 issued U.S. patents and three pending U.S. patent applications, as well as 65 issued foreign patents and 10
pending foreign patent applications. Issued patents owned or used by us will expire between 2021 and 2040.
Large and underpenetrated SUI market. SUI is a common condition that affects approximately 20 million women. Approximately 16% of adult women
suffer from SUI at some point in their lives. It affects women of all ages but becomes more prevalent with age. It can have a significant impact on daily
life, affecting activities, relationships, and emotional well-being. Many women are not aware of bulking agents and we see the SUI market as poised for
significant and durable growth in the years ahead. We believe that legacy bulking agents have not achieved widespread adoption due to limited efficacy.
Legacy gels contain particulate matter and achieve their bulking effect through an inflammatory response in the patient’s body. In addition, we believe
urethral sling procedures will become less common in treating SUI due to their invasive nature and the potential for adverse events.
Substantial opportunity to capture market share with Bulkamid. We believe Bulkamid is a next-generation technology that has distinct advantages over
legacy bulking agents and urethral sling procedures. Bulkamid is a non-particulate, biocompatible hydrogel whose bulking effect is linked to the volume
of gel injected into the urethral wall, as opposed to competitive bulking agents that achieve bulking through their microparticles and the body’s
inflammatory reaction to the particles. We believe we can increase sales of Bulkamid by raising patient awareness and highlighting its excellent clinical
results. With Bulkamid, we can now offer customers best-in-class solutions for both OAB and SUI. Bulkamid procedures are done by the same physicians
that perform SNM procedures and we expect to leverage our existing relationships to drive adoption of Bulkamid.
Experienced management team. Our senior management team has over 140 years of combined experience in the medical technology industry. They have
a track record of successfully bringing products to market, with significant expertise in development, regulatory approval and commercialization
activities.
•
•
•
Our Strategy
Our goal is to become a global leader in providing effective and long-term solutions to treat urinary and fecal incontinence. To achieve this goal, we are
pursuing the following strategies:
•
•
•
•
Continue to promote awareness of our r-SNM System among healthcare providers. We believe that of the approximately 47,000 physicians addressing
OAB and FI in the United States, only approximately 2,000 are trained to perform, or are actively performing, SNM procedures. In the near-term, we plan
to focus on converting physicians who represent a majority of the implant volume in the United States to switch to our r-SNM System. We intend to help
physicians in their direct-to-patient outreach and are pursuing our own direct-to-patient marketing initiatives. We believe this will expand the number of
patients undergoing SNM procedures.
Continue to develop a commercialization infrastructure with a dedicated direct sales team. We intend to focus the significant majority of our sales and
marketing efforts in the United States since we believe that nearly 90% of the annual global SNM sales are generated in this market. Our priority is to
target high-volume implant centers. To achieve our commercialization goals, we plan to continue to hire and train sales representatives and clinical
specialists, and to provide them with sufficient resources to achieve success.
Continuously innovate to introduce enhanced SNM product offerings and pursue expanded indications. We intend to continue to invest in research and
development activities focused on improvements and enhancements to our r-SNM System. Our goals also include expanding the suite of product
solutions available for SNM therapy, including a non-rechargeable SNM device that utilizes a primary cell battery.
Further penetrate our initial target market by promoting patient and practice awareness. Currently, we estimate that approximately one percent of the
four million OAB and FI patients that make up the annual global addressable SNM market are implanted with an SNM device. We believe that there are
several factors that influence this light penetration of the market. First, although patients may be familiar with SNM as an alternative therapy, patients
who elect not to have the procedure do so because of the limitations of the technology in place when we entered the market, such as the potential for
multiple INS replacement
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surgeries and the large device size. Second, we believe there is a large potential patient population that suffers from OAB and/or FI and is unaware of
third-line therapies such as SNM. We believe that a very low percentage of physician specialists that treat patients with symptoms of OAB and/or FI are
actively performing SNM procedures. We intend to educate physicians that are unfamiliar with or do not utilize SNM therapy on the benefits on SNM
therapy and the advantages of our r-SNM System. We also intend to increase physician and patient awareness through physician engagement, direct
patient outreach, and continued publication of scientific data in peer reviewed journals.
•
Expand our product offerings with complementary products in our market. We believe our acquisition of Bulkamid is highly synergistic and positions
us to become a global leader in urinary incontinence solutions. We expect to leverage our existing commercial footprint of over 220 sales and clinical
specialists in the U.S. and Europe who call on urogynecologists and urologists for SNM, the same physicians who treat SUI. We also believe that
extending our urology platform to offer solutions for both OAB and SUI will enhance our value proposition and drive additional SNM sales. Bulkamid is
a unique, clinically differentiated bulking agent that we believe addresses the shortcomings of existing particulate-based bulking agents while also
offering an alternative to patients who desire to avoid sling surgery and instead opt for a minimally invasive solution. Bulkamid has generated extensive
clinical validation and a strong safety profile, with over 70,000 women treated to date.
Our Markets
We believe our initial target market consists of approximately four million adults in the United States and Europe who suffer from symptoms of either
bladder or bowel dysfunction, who have already failed first and second line therapies and are readily treatable with, and eligible candidates for, SNM therapy.
Specifically, we believe this four million adult market consists of approximately three million adults with symptoms of bladder dysfunction and approximately one
million adults with symptoms of bowel dysfunction within these regions. While we anticipate expanding into other geographic regions over time, such as Canada
and Australia, we are initially focusing on the United States and Europe due to larger overall market size and greater prevalence of bladder and bowel dysfunction.
The market for SNM therapy is large and growing. We believe that the global SNM market is now approximately $650 million to $700 million, which we
believe is comprised of sales of SNM systems for the treatment of UUI, UUF, FI, and UR, and is growing at an approximate rate of 8% year-over-year. We believe
this represents approximately 45,000 patient implants, including an estimated 10,000 patients receiving replacement implants, with nearly 90% of sales in this
market being generated in the United States and approximately 85% of sales revenue coming from new implant volume. Further, we estimate that the global
annual addressable SNM market is presently approximately one to three percent penetrated. We estimate the global annual SNM market will continue to increase
for the foreseeable future driven by increased awareness and education of SNM as a therapy alternative, greater expectations for quality of life, and improved
patient attitudes toward receiving medical attention. In addition, market growth could accelerate due to more than one medical device company being focused on
this market, new innovation for SNM therapy, and other potential products being introduced to physicians and patients. We believe that this represents a
compelling opportunity for our r-SNM System to capture market share and further penetrate and grow the existing market.
The market for SUI therapy is large and highly underpenetrated, with approximately 20 million women suffering from SUI in the United States. The
majority of women with SUI are suffering in silence. We estimate that approximately only 8.8 million women have sought medical treatment, most of whom were
offered conservative therapy or opted for no treatment due to a lack of non-invasive treatment options with high efficacy. Further, we estimate that on an annual
basis, there are 25,000 urethral bulking agent treatments and 125,000 pelvic floor sling surgeries performed.
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Overview of Overactive Bladder
OAB causes a sudden urge to urinate that may be difficult to stop, and could lead to the involuntary leakage of urine. SNM therapy is a well-established
third-line therapy for the treatment of certain patients’ symptoms of OAB, including subtypes UUF and UUI, and UR. Based on phone-based surveys of 5,204
people conducted from November 2000 to January 2001, a study published in 2003 by Stewart WF et al. concluded that of the approximately 244 million adult
population in the United States at that time, approximately 40 million, or roughly 16.5%, exhibited symptoms of OAB. Additionally, based on telephone interviews
of 19,165 people conducted from April 2005 to December 2005, a study published in 2005 by Milsom et al. concluded that of the estimated 391 million adult
population in Europe at that time, approximately 47 million, or roughly 11.8%, exhibited symptoms of OAB.
In the United States and Europe, symptom-specific prevalence varies significantly by gender and age. The graphic below demonstrates OAB prevalence
by gender in the United States and Europe.
Although the study and surveys date back approximately twenty years, we believe these surveys are still representative of the prevalence of OAB in the
United States and Europe. Obesity and diabetes are frequent risk factors associated with OAB and we believe that the increase in this high-risk population is one of
the factors that have driven continued growth in the prevalence of OAB. According to the Center for Disease Control (CDC), 11 states in 2000 had prevalence of
obesity that exceeded 22% and this increased to 36 states that exceeded 26% by 2015. The CDC saw similar conclusions with the increase in diabetes prevalence,
where in 2000, approximately half of the states had a prevalence of less than six percent, and by 2015, 27 states had exceeded nine percent.
While historically many people with symptoms of OAB have gone undiagnosed, we believe this is beginning to change. We believe that improved access
to care, decreased social acceptance of compromised quality of life, and longer life expectancy may all contribute to individuals being more proactive about
acknowledging symptoms of OAB and seeking medical attention. Previously, patients have avoided discussing their symptoms with medical professionals because
of misperceptions such as OAB symptoms being a normal and accepted consequence of aging, and lack of availability of treatments, misguided fear of the
currently available treatments, and general availability of self-management tools, such as pads. In addition, we believe programs such as the Patient Quality
Reporting System (PQRS), which was introduced by the Center for Medicaid and Medicare Services (CMS) in 2013, have helped to improve the frequency of
dialogue around OAB between physicians and their Medicare patients as it includes incentives and penalties for primary care physicians based on various quality
of care metrics, one of which addresses treating UUI symptoms.
The urgency to urinate associated with OAB may be accompanied by a combination of several symptoms, including abnormally frequent urination, or
frequency, that is typically defined as urinating eight or more times per day, involuntary leakage of urine, or incontinence, and the disruption of sleep to wake up
and pass urine, or nocturia. The combination and severity of OAB symptoms varies from person to person. UUF is characterized by the sudden need to urinate
eight or more times per day and, when this symptom is not accompanied by any other symptoms,
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does not include the involuntary leakage of urine. UUI is characterized by the sudden need to urinate accompanied by the involuntary loss of urine, regardless of
frequency. Non-obstructive UR is the inability to empty the bladder without an obstruction, such as prostate enlargement or a stricture.
The prevalence of OAB between women and men is generally similar, however, it varies by subtype. Women are more likely to suffer from UUI than
UUF, although the difference is not substantial. In contrast, men are much more likely to suffer from UUF than UUI. Incidence by age also varies between men
and women, as women often develop UUI at much younger ages than men. UUI symptoms in women ranging in age from 40 to 65 years old are often associated
with childbirth or menopause, while prostate enlargement, which is frequently associated with aging, is a leading cause of UUF symptoms in men. These age and
gender differences are significant because they may impact who seeks treatment for symptoms of OAB. Individuals with UUI are more likely to seek treatment
due to the impact of incontinence on quality of life, and younger individuals are less likely to dismiss symptoms of OAB as an expected and acceptable
consequence of aging. As a result, women are more likely to seek treatment for symptoms of OAB than men.
Symptoms consistent with a diagnosis of OAB can develop due to a variety of underlying causes. When a patient consults a physician for the treatment of
their symptoms related to OAB, the physician will first undertake a differential diagnosis in an attempt to determine the underlying cause of OAB. Underlying
issues that can cause OAB include neurological diseases and injuries, obstructions, bladder abnormalities, and other issues.
If the physician is able to identify an underlying cause of OAB, the physician will then prescribe a care pathway to treat the underlying cause and alleviate
the symptoms. When the physician is unable to identify an underlying cause of OAB symptoms, the patient is considered to have idiopathic OAB. We believe that
these idiopathic patients are some of the best candidates for SNM therapy and where SNM therapy has been clinically proven to alleviate the symptoms associated
with OAB.
In women, the largest group of OAB sufferers are idiopathic, accounting for nearly 50% of the female OAB population. The second largest category is
women with mixed urinary incontinence (MUI), which means a patient has both stress urinary incontinence and UUI, accounting for approximately 40% of the
female OAB population. While all women with idiopathic OAB can be treated with SNM therapy, based on clinical data, we estimate that approximately 40% of
individuals with MUI will be candidates for SNM therapy based on the etiology of their symptoms. Accordingly, we believe that approximately 66% of women
who suffer from OAB are treatable with SNM therapy.
In men, the primary causes of OAB symptoms are obstructive, in particular due to the benign enlargement of the prostate. Obstruction-related OAB
accounts for over 60% of the male OAB population. Because obstruction-related OAB patients can be treated to address the underlying cause of the obstruction,
these men are unlikely to be prescribed OAB medications and are generally not treatable with SNM therapy. Men who are actually diagnosed with idiopathic OAB
only account for five percent of the overall population of male OAB sufferers. However, we believe that because of the prevalence of obstructive OAB in men,
many men who actually suffer from idiopathic OAB (either alone or in conjunction with obstructive OAB) go undiagnosed or misdiagnosed as having solely
obstructive OAB. As a result, we believe that the population of men actually diagnosed with idiopathic OAB is comprised of a disproportionate number of men
who have been prescribed and failed drugs for the treatment of idiopathic OAB, because there is another segment of men who suffer from idiopathic OAB that is
not accounted for in this population. Accordingly, we estimate that approximately 10% of men who suffer from OAB are treatable with SNM therapy.
OAB is associated with a significant economic burden to the society. Direct medical and non-medical costs associated with OAB include the cost of
diagnostics, pharmacological care, routine care, and OAB-related consequences such as urinary tract infections, skin infections, and depression. Further, indirect
costs of OAB include caregiver wages and worker productivity losses resulting either from disability or absenteeism, as well as intangible costs including
the quality-of-life impact and psychological burden. According to a study published in the American Journal of Managed Care in 2009, these OAB costs result in a
total economic burden in the United States that is estimated to be between $24.9 billion and $36.5 billion.
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Overview of Fecal Incontinence
FI is the inability to control bowel function, causing involuntary or accidental leakage from the rectum. Stimulation of the sacral nerves can reduce
incontinence episodes, urgency, and frequency in people suffering from FI, and is an approved therapy for the treatment of FI in the United States and Europe.
Moreover, a significant population of people suffering from FI also exhibit symptoms of OAB. SNM therapy can alleviate symptoms in patients suffering from
either or both OAB and FI. We believe approximately 60% of people with FI exhibit idiopathic symptoms or experience FI as result of obstetric or surgical injury
or other prior trauma, all of which can be treated with SNM therapy.
People with FI experience even greater degrees of embarrassment and decreased quality of life than people with OAB. The total FI population is
estimated to be 40 million adults in the United States and Europe. We believe shifting expectations and attitudes toward medical attention suggest this addressable
market has the potential to expand.
According to the American National Health and Nutrition Examination Survey program of 2005 through 2006, approximately 8.3% of the adult
population in the United States exhibited symptoms of FI. Based on the estimate of the United States population in 2014 of approximately 221 million adults,
approximately 18 million adults in the United States exhibited symptoms of FI. In this survey, FI prevalence was assessed as the occurrence of at least one
incontinence episode during the past month. Weekly episodes were estimated to occur in 2.7% of the population, and daily episodes in 0.9%. In addition, according
to The National Institute for Health and Care Excellence in the United Kingdom, of the approximately 391 million adult population in Europe in 2007, between
1.0% and 10.0% exhibited symptoms of FI. Based on this data, we have assumed that 5.0% of the adult population in Europe at that time, or approximately
20 million people, exhibited symptoms of FI.
Symptoms consistent with a diagnosis of FI can develop due to a variety of underlying causes. When a patient consults a physician for the treatment of
their symptoms related to FI, the physician will first undertake a differential diagnosis in an attempt to determine the underlying cause of FI. Underlying issues that
can cause FI include obstetric injury, inflammatory diseases, prior surgeries, and other issues.
If the physician is able to determine that FI is caused by a clear, underlying disease, such as inflammatory bowel disease, the physician will then prescribe
a care pathway to treat the underlying disease and alleviate the symptoms. Patients with FI caused by past trauma, mainly from obstetric damage, represent the
majority of candidates for treatment of FI with SNM therapy. Additionally, in the absence of an identified underlying cause of FI symptoms, the patient is
considered to have idiopathic FI. These idiopathic patients, who make up 10% of women suffering from FI and 7% of men suffering from FI, are also ideal
candidates for SNM therapy.
Overview of Stress Urinary Incontinence
SUI is a common condition that afflicts women of all ages, with childbirth as one of the main contributing factors. SUI is caused by weakness in the
pelvic floor, preventing the urethra from closing fully when sudden pressure is put on the bladder. This can allow urine to leak out during normal daily activities
such as coughing, laughing, exercising, or lifting an object. The first-line treatment options for SUI begin with lifestyle changes and continence pessaries. SUI
lacks pharmacologic treatments, with patients next advancing to urethral bulking agents, pelvic floor sling surgery or colpsosuspension.
Path to Treatment
Overactive Bladder
In the United States, of the approximately 40 million adult patients with symptoms of OAB, we believe that approximately 15.9 million seek medical
attention, with UUI patients more frequently consulting with a physician. Similarly, in Europe, of the approximately 47 million adult patients with symptoms of
OAB, we believe that approximately 18.7 million seek medical attention. As a result, we believe that the OAB population in the United States and Europe who
seek medical attention for OAB, which we refer to as the managed population in the graphic below, is approximately 34.6 million.
Of the approximately 15.9 million patients who seek medical attention in the United States for the treatment of symptoms of OAB, we believe that
approximately 6.8 million are addressable with SNM therapy. Similarly, in
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Europe, of the approximately 18.7 million patients who seek medical attention for the treatment of symptoms of OAB, we believe that approximately 8.3 million
are addressable with SNM therapy. These amounts are based on our estimates that approximately 66% of women who suffer from OAB have either idiopathic
OAB or MUI treatable with SNM therapy, and 10% of men who suffer from OAB have idiopathic OAB. As a result, we believe that the addressable OAB
population for SNM therapy is 15.1 million patients in the United States and Europe.
Before treating patients with a third-line therapy such as SNM, physicians are required to prescribe first- and second-line therapies. As discussed further
below, first-line therapies include behavioral changes such as diet and exercise, and second-line therapies include drug therapy. In the United States, in order to
secure reimbursement, physicians are required to prescribe, and the patient must fail, or be contraindicated and/or refractory for, up to two second-line drug
therapies before beginning SNM therapy, although the course of treatment and its duration may vary patient-by-patient based on physician judgment.
Of the approximately 6.8 million patients who exhibit symptoms of OAB that are addressable with SNM therapy in the United States, we estimate that
approximately 1.4 million are eligible candidates for SNM therapy. Similarly, of the approximately 8.3 million patients who exhibit symptoms of OAB that are
addressable with SNM therapy in Europe, we estimate that approximately 1.6 million are eligible candidates for SNM therapy. These estimates are based on seven
percent of these approximately 6.8 million patients who exhibit symptoms of OAB that are addressable with SNM therapy who are currently receiving second-line
drug therapies but are not satisfied with the results and are seeking alternative treatment options, and 13% of these approximately 6.8 million patients who exhibit
symptoms of OAB that are addressable with SNM therapy who have failed second-line drug therapies and are seeking alternative treatment options. As a result, we
believe that the addressable population that is readily treatable with and eligible candidates for SNM therapy, which we refer to as addressable and refractory in the
graphic below, is approximately three million patients in the United States and Europe.
The graphic below provides a summary of the calculation of the SNM addressable and refractory population from the overall population of OAB sufferers
in the United States and Europe.
Fecal Incontinence
In the United States and Europe, based on published results from surveys of patients with FI, of the approximately 40 million adults with symptoms of FI,
we believe that approximately five million people seek medical attention, which we refer to as the managed population in the graphic below.
Of the approximately five million people who seek medical attention in the United States and Europe for the treatment of symptoms of FI, we believe that
approximately 1.7 million have failed or are dissatisfied with conservative treatment, which we refer to as the refractory population in the graphic below.
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Of the approximately 1.7 million refractory population, we believe that approximately one million patients do not suffer from FI as a result of a condition
that requires a different treatment path, such as neurological diseases, inflammatory disease and severe anatomical defects, and as such are readily treatable with
and eligible candidates for, SNM therapy, which we refer to as addressable and refractory in the graphic below.
The graphic below provides a summary of the calculation of the SNM addressable and refractory population from the overall population of FI sufferers in
the United States and Europe.
Current Treatments for OAB and Limitations
Patients with OAB follow a care pathway that transitions them, as necessary, through the progressive series of OAB treatment options. The care pathway
directs physicians as to the progression of OAB treatments as follows:
•
•
•
First-line therapy: behavioral changes, including conservative treatment options such as diet, exercise, timed voiding, pelvic floor exercises, and
biofeedback;
Second-line therapy: drug therapy, including two classes of OAB drugs, anti-muscarinics and beta-3 adrenergic agonists, with patients often trying
multiple drugs; and
Third-line therapy: minimally invasive therapy consisting of SNM, BOTOX injections and PTNS.
First- and second-line therapies comprise the largest segment of the treatment market, and medication and other non-implantable treatments are better
known to physicians and hospitals than SNM therapy. According to most U.S. insurance reimbursement programs, patients must try and fail at least two different
medications before considering and being eligible for third-line therapies.
First-Line Therapies
First-line therapies represent conservative treatment options. Physicians may recommend that a patient make behavior modifications, such as drinking less
fluid, training the bladder and/or pelvic muscles through Kegel exercises, among others. Such treatment options are limited in both duration and effectiveness.
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Second-Line Therapies
Second-line therapies consist of medications, which comprise the largest segment of the OAB treatment market, estimated at $3.6 billion in 2017.
Anticholinergics such as Oxybutynin, Vesicare, Detrol, Oxytrol, Enablex, and Sanctura are the most commonly prescribed medications. However, patients often do
not fully comply with their drug prescriptions, due to perceived inefficacy and side effects. Mirabegron is the only available beta-3-adrenergic agonist that targets
the bladder muscles and reduces bladder contractions and was approved in 2012 to treat OAB. Physicians may also prescribe Tricyclic antidepressants such as
Duloxetine and Imipramine, which are not FDA approved to treat the symptoms of OAB, but have been shown to relax the muscles in the bladder and reduce
urgency.
Anti-muscarinic drugs inhibit the activation of muscarinic receptors on the bladder muscle by acetylcholine. Dry mouth is the most bothersome adverse
event associated with antimuscarinic drugs and often a reason for treatment discontinuation. Side effects also include blurred vision, photophobia, tachycardia,
difficulty in urination, hyperthermia, glaucoma, and mental confusion in the elderly.
Beta3-adrenergic agonists are a relatively new drug for OAB that work by relaxing the bladder muscle in the wall of the bladder by stimulating the beta-
3 receptors that are found on the surface of the muscle cells. This relaxation of the bladder muscle helps to increase the capacity of the bladder to hold urine. In
turn, this reduces the need to pass urine. The most common adverse events observed with Mirabegron in clinical trials were hypertension, nasopharyngitis, and
urinary tract infection.
Third-Line Therapies
Sacral Neuromodulation
Historically, SNM therapy has been the most common form of third-line therapy treatment for OAB. InterStim II was approved to treat the symptoms of
OAB by the FDA in 2005, and to treat the symptoms of FI by the FDA in 2011, and its predecessor, InterStim, was approved to treat the symptoms of UUI by the
FDA in 1997 and 1999 for UUF, respectively. These systems have been implanted in hundreds of thousands of patients worldwide, with a majority of all implants
having taken place in the United States. In 2018, approximately 45,000 patients were implanted with these systems, including an estimated 10,000 patients
receiving replacement implants.
BOTOX Injections
BOTOX injections into the bladder muscle were approved for treatment of symptoms of OAB by the FDA in 2013. BOTOX is injected through a
cystoscopic procedure in a clinician’s office or the outpatient surgery setting, and BOTOX treats OAB by blocking the signal from the bladder nerves to the
bladder muscle. Key adverse events include recurrent urinary tract infections and self-catheterization due to inability to void. BOTOX injections are typically
required every six to 12 months to maintain reduction of OAB symptoms. We believe the frequent need for injections and the adverse event profile are deterrents
to initial and long-term preference for BOTOX injections, as evidenced by an approximately 60% rate of cessation of BOTOX injections at three years, according
to a retrospective study by Mohee et al. 2012.
Percutaneous Tibial Nerve Stimulation
PTNS involves in-office placement of an acupuncture needle in a patient’s ankle to deliver electrical stimulation to the tibial nerve. Typically, patients
undergo a 12-week trial period of weekly 60-minute PTNS sessions to evaluate whether the therapy provides significant symptom reduction. After this period,
patients that continue with the therapy typically require monthly treatments to maintain symptom reduction. Adverse events of PTNS are minimal; however, lack
of PTNS efficacy and lack of patient compliance result in PTNS generally providing less long-term effectiveness than SNM and BOTOX injection therapies.
Our r-SNM System
We believe that our proprietary r-SNM System provides a minimally invasive, effective, and long-lasting solution for SNM therapy to treat patients with
bladder and bowel dysfunction. We have marketing approvals in Europe, Canada, and Australia for all relevant clinical indications. Our initial PMA application for
our r-SNM System for the treatment of FI was approved by the FDA on September 6, 2019, and our PMA application for our r-SNM System for the treatment of
OAB and UR was approved by the FDA on November 13, 2019.
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Our r-SNM System includes two implantable components and various external components.
Implantable Components for Patient
• Miniaturized rechargeable INS, which houses the electronics for the device. It is five cubic centimeters and is intended to provide one month of battery
life between charges under normal use conditions.
•
Tined four-electrode lead, which delivers current-controlled stimulation to the targeted sacral nerve. The tines help anchor the lead in its desired position.
Implantable Neurostimulator
External Components for Patient
• Wireless charging device, which allows transcutaneous charging of the INS. The charger uses an easy to understand combination of visual, audio and
haptic indicators to provide information about the charging status. Further, it has the ability to be held into position by an adhesive fixation device or a
reusable and flexible belt, which significantly enhances patient mobility.
• Wireless remote control that communicates with the device at a range of up to approximately three feet, which is a small and easy-to-use device that
allows the patient to adjust stimulation intensity levels and turn on or off stimulation. The remote control includes a light-emitting diode light that
indicates therapy intensity and the status of remaining battery life of the INS.
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The implantable components of our r-SNM System deliver mild electrical pulses to the targeted sacral nerve, most frequently the S3 nerve, in order to
correct the dysfunction by restoring normal communication to and from the brain. The sacral nerves, including the S3 nerve, are located in the pelvic area and are
responsible for controlling urethral sphincters, the bladder and anal sphincter muscles. The image below illustrates the location of the two implantable components
of our r-SNM System, the INS and the four-electrode lead:
Benefits of our r-SNM System
We believe that our innovative and proprietary r-SNM System offers several competitive advantages as compared to the legacy SNM system, InterStim II.
Our device was the first SNM System to offer the following important benefits:
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Long-term solution. The battery is designed to last 15 years, compared to 3-5 years for the non-rechargeable Interstim II.
• Material benefits to physicians and payors. We believe our r-SNM System has the potential to enable physicians and facilities to utilize their resources
more efficiently and significantly reduce overall costs to the healthcare system, due to the need for less replacement surgeries compared to InterStim II.
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Small and lightweight implantable neurostimulator. Our INS is approximately 60% smaller than and half the weight of InterStim II.
• Constant current. Our r-SNM System delivers constant-current stimulation, which automatically adjusts stimulation based on changes to impedance that
occur as the implanted lead scars into the body and we believe provides a more consistent and reliable therapy.
In addition, we believe our r-SNM System offers many additional competitive advantages compared to the InterStim product line, including the InterStim
Micro, our competitor’s new rechargeable device:
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Improved patient experience. Our r-SNM System charges wirelessly and includes a discrete, small and easy-to-use remote control.
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•
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Simplified physician implantation and programming. Our clinician programmer guides the implanting physician through electrode placement and
stimulation programming and enables physicians to access key data from the patient’s INS.
Broad MRI conditions. Our r-SNM System allows for 1.5T and 3T full-body MRI scans under broad conditions. For example, 1.5T full-body MRI scans
can be done in normal operating mode with no additional whole-body specific absorption rate limitation.
• Clinically proven results. Our r-SNM System is the only rechargeable SNM System with clinical data to support its safety and efficacy. Two-year results
from our clinical study show that 93% of patients achieved clinically significant improvements.
Overview of our External Trial System
Our external trial system (ETS) can be used during an evaluation period by a physician to determine if a patient is a good candidate for SNM therapy.
This system includes a disposable external stimulation device, a disposable implantable lead, and a patient remote control. The external stimulation device is
comprised of a temporary, non-rechargeable, current controlled pulse generator. The temporary implantable lead has a single electrode. In addition, our ETS can be
used for a bilateral percutaneous nerve evaluation trial or a tined lead evaluation trial. In July 2018, we received the CE Mark for our ETS, and in September 2019,
we received FDA approval for our ETS.
Overview of our Physician Tools
We provide physicians with a clinician programmer and a surgical tool kit to assist them while implanting our r-SNM System. Our clinician programmer
also allows physicians to connect to a patient’s INS, while the patient is in the physician’s care, to access key therapy data that is stored and maintained on the INS.
Clinician Programmer
We designed and custom built our touchscreen clinician programmer. The INS is programmed by, and wirelessly communicates with the clinician
programmer. This programmer is designed to simplify and assist with electrode placement and stimulation programming experience for physicians. It has a series
of touchscreens with a graphical user interface that provides information to the physician, such as measured data, test stimulation adjustments, and electrode
configurations based on the utilization of proprietary algorithms. Further, it enables the clinician programmer to access any r-SNM INS data and its complete
history. The clinician programmer records and stores all data from the INS and enables a physician to store and retrieve this data electronically.
Clinician Programmer
Surgical Tool Kit
The single-use surgical tool kit provides the physician with the tools necessary for the r-SNM System implant procedure. The tools provided are familiar
for physicians experienced in SNM implants and follow the established surgical techniques for the implant.
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Treatment with our r-SNM System
Patient Selection
SNM therapy is an approved therapy for patients with symptoms of bladder and bowel dysfunction. This therapy is not intended for patients with a
mechanical obstruction such as benign prostatic hyperplasia, a tumor, or urethral stricture. Further, the therapy is not indicated for pregnant women, or pediatric
use.
SNM therapy for bowel dysfunction is indicated for patients who are not candidates for more conservative treatments. The therapy is not indicated for
pregnant women, or pediatric use.
Implantation
Before receiving our r-SNM System, a patient in the United States typically undergoes an external trial period.
External Trial Period
The short external trial procedure, which typically lasts approximately 30 minutes, is generally performed in the office or outpatient setting and typically
involves a percutaneously placed lead, which a physician implants near the targeted sacral nerve using a needle, with the location confirmed utilizing fluoroscopy
and intraoperative muscle responses evoked by test stimulation. The lead is then connected to a temporary, disposable external trial system which provides
stimulation for the therapy. The trial period can last between a few days and several weeks after which the physician evaluates the effectiveness of SNM therapy
through several measures, including bladder or bowel episodes and patient satisfaction. Approximately 60-90% of patients proceed from trial stimulation to
permanent implant depending on the trial type and patient selection.
Permanent Implant
Patients who have undergone a successful external trial period are eligible for a permanent INS implant procedure. The permanent implant procedure
typically occurs in an ambulatory surgical center or hospital outpatient setting, usually lasting under an hour, and includes implantation of the INS and, if a
temporary lead was used for the trial, implantation of the permanent lead. The INS is inserted through a small incision into a pocket in the subcutaneous fat of the
upper buttocks, and the lead body is tunneled to the INS pocket and connected to the INS.
Activation and Programming
Following the implant procedure or within a week thereafter, the patient has their stimulation programmed. Stimulation settings are adjusted to ensure
they are comfortable to the patient. Reprogramming sessions may be necessary to achieve and maintain symptom reduction or to address discomfort. After initial
programming, a patient has the ability to modify the therapy with the patient remote control.
Our Clinical Results and Studies with our r-SNM System
We have a body of compelling clinical evidence that demonstrates the safety, effectiveness, and sustained benefits of our r-SNM System. We have two
clinical studies relating to our r-SNM System, a European study, RELAX-OAB, and a U.S. pivotal study, ARTISAN-SNM.
In June 2018, we completed the enrollment and implantation of 129 patients with UUI for our ARTISAN-SNM pivotal study. As of August 2020, all
patients in our ARTISAN-SNM study reached the two-year post-implant follow-up, resulting in completion of the ARTISAN-SNM study. These patients were
evaluated at 14 centers in the United States and five centers in Europe.
Key highlights of our ARTISAN-SNM pivotal study at two-years are as follows:
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113 of the 121 implanted patients completing the two-year visit, or 93%, were therapy responders. Of the 129 patients initially treated, 88% were
therapy responders at two years (113 out of 129);
93 of the 113 therapy responses, or 82%, had a ≥75% reduction in urgency incontinence episodes; and
94% of patients reported being “satisfied” with the therapy; and
• No serious device-related adverse events have been reported.
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Our European RELAX-OAB study that began in June 2016 evaluated 51 patients at seven sites in Europe that suffered from OAB subtypes UUI and/or
UUF. The 12-month results were published in the peer reviewed Journal of Neurourology and Urodynamics in January 2019. All patients were evaluated to
determine if they were therapy responders, which was defined as showing at least a 50% reduction in the number of average leaks or voids per day or a reduction
to less than eight voids per day, in each case on a three-day bladder diary, at various times post-implant. We are following patients out to two years in this study
and may follow patients out to five years at selected study sites.
Key highlights of our European RELAX-OAB study are as follows:
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The study has completed one-year follow-ups and two-year follow-ups;
Therapy responder rate at 12 months for the 43 patients who continued with study follow-up was 94% for test responders and 72% for all implanted
patients;
• At 12 months, 84% of test responders and 77% of all implanted patients were “very” or “moderately” satisfied with the therapy provided by our r-
SNM System; and
• No serious device-related adverse events have been reported.
To date, we have observed no unanticipated adverse events (AEs) or serious device-related AEs, in any of our clinical studies or the case series. Further,
the safety and effectiveness of SNM therapy when compared to anticholinergic medications was also supported by the InSite study, a prospective, randomized,
multi-center study, published on January 10, 2014 in the Journal of Neurourology and Urodynamics. This study was sponsored by Medtronic and began in 2007
and ended in 2016, after the last patient reached the five-year endpoint.
Our Bulkamid Product
Bulkamid is a urethral bulking agent in the form of a non-particulate hydrogel, consisting of 97.5% water and 2.5% polyacrylamide. Bulkamid is injected
into the soft tissue of the urethra, adding volume to narrow the lumen of the urethra and to support the closing mechanism of the urethra, thus preventing urine
leakage. Urethral bulking does not close the urethra totally; the urethra still opens normally to allow for urination.
Bulkamid achieves its bulking effect by the volume of the gel injected, unlike competitive bulking agents that achieve bulking effect through their micro
particles and the body’s inflammatory reaction to the particles.
The Bulkamid procedure is minimally invasive, with no cuts or incisions necessary, and typically takes around 10 to 15 minutes. It usually is performed in
an outpatient facility or day surgery unit under a local anesthetic and the patient is able to return home the same day. The injections are made into 3 to 4 locations
in the urethral wall; the total volume injected is 1.5 to 2 mL, equivalent to slightly less than half a teaspoon. It is a simple procedure that is easy for physicians to
learn.
The majority of women treated with Bulkamid report dryness or improvement in their symptoms, with many seeing that improvement as soon as they
leave the doctor’s office, hospital or clinic. Whilst experiencing no leakage at all is the most desired outcome of treatment, many women consider a successful
treatment to be a meaningful decrease in the amount and frequency of urine leakage due to stress urinary incontinence such that they are able to go about most of
their daily activities. If relief from symptoms is not sufficient, an additional injection of Bulkamid (a “top-up” injection) can be given to help achieve desired
results.
Patients who undergo Bulkamid treatment are likely to be free from unwanted urinary leakage or at least have significantly fewer episodes of urinary
leakage. In Bulkamid clinical studies, women were asked how effective their treatment was 12 months after their initial injection. Over three quarters of women
reported that their incontinence was either cured or improved and approximately two-thirds of women were dry. Bulkamid clinical studies have also shown that
most of the women treated over 7 years ago still report benefit.
Over 70,000 women with stress urinary incontinence have been treated with Bulkamid across 25 countries over the last 15 years. During that time, a low
number of complications or adverse events have been reported and there have been no reported long-term complications.
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Sales and Marketing
We are primarily focused on commercializing our products in the United States, which accounts for the vast majority of SNM sales worldwide. We have
established a significant commercial infrastructure, with over 220 sales personnel and clinical specialists and we continue to make significant investments to build
our commercial organization to market and support our products. When making hiring decisions for these roles, we prioritize individuals with strong sales
backgrounds and experience in SNM therapy and other neurostimulation applications, and who also have existing relationships with urologists and
urogynecologists. We expect to focus the significant majority of our sales and marketing efforts in the United States where reimbursement for SNM therapy is well
established and covered by most major U.S. insurers, including Medicare.
Through our specialized and dedicated direct sales organization, we are targeting the approximately 2,000 urologists, urogynecologists and colorectal
surgeons who are trained and have experience performing SNM procedures. Our particular focus is on the estimated top 1,000 implanting centers that represent a
majority of the implant volume in the United States. We estimate that approximately 80% of U.S. implant volume is generated by these 1,000 implanting centers.
In order to support our direct sales team, we have approximately 90 clinical support staff as of December 31, 2020. This clinical staff is primarily
responsible for attending implant procedures and assisting the implanting physician with programming the device. Based on our clinical experience to date, we
believe that physicians experienced in SNM therapy require minimal training to start implanting our r-SNM System.
We are promoting broader awareness of SNM therapy for the treatment of OAB among patients and physicians, as well as awareness of the benefits and
advantages of our r-SNM System. We plan to expand our awareness raising activities, including publication of scientific data in peer reviewed journals and
education of physicians who are not familiar with or do not utilize SNM therapy. We may also engage in broad marketing initiatives in jurisdictions where we are
permitted to do so.
Our main commercial priority is the United States where we began commercializing and marketing our r-SNM System and generate revenue from product
sales. In November 2018, we launched a limited commercial effort in Europe, where we currently have five dedicated sales representatives. We do expect to
expend capital resources pursuing commercial operations in Europe, Canada and Australia, where we have marketing approvals for OAB, FI, UR and SUI, but the
amount and timing of which will depend on a variety of factors, including the size of the developed market for SNM therapy and bulking agents, burdens to entry
and other region- and country-specific factors.
The acquisition of Contura leverages our existing commercial footprint of over 220 sales and clinical specialists in the U.S. and Europe that call on
urogynecologists and urologists. Bulkamid is currently sold through a direct salesforce in the U.S., U.K., Germany, France, Nordic countries and in addition,
through distributors in over 30 international markets around the world. In the United States, there are currently five sales professionals.
Third-Party Coverage and Reimbursement
In the United States, we derive revenue from the sale of our products to hospitals and ambulatory surgical centers, which typically bill various third-party
payors, including Medicare, Medicaid, private insurance companies, health maintenance organizations and other healthcare-related organizations. In addition, we
expect that any portion of the costs and fees associated with our r-SNM System that are not covered by these third-party payors, such as deductibles or co-
payments, will be billed directly to the patient by the provider. Third-party payors require physicians and hospitals to identify the product and service for which
they are seeking reimbursement by using Current Procedural Terminology (CPT) codes, which are created and maintained by the American Medical Association
(AMA). As SNM therapy has been widely used in patients for over 20 years in the United States, reimbursement codes and payments are well-established and the
procedure is covered by Medicare, Medicaid and private health insurance plans. Similarly for urethral bulking agent treatments, reimbursement codes and
payments are well-established and the procedure is covered by Medicare, Medicaid and private health insurance plans.
Physician reimbursement under Medicare is generally based on a defined fee schedule (the Physician Fee Schedule), through which payment amounts are
determined by the relative value of the service rendered by the physician. Medicare generally provides reimbursement to hospitals and ambulatory surgical centers
for SNM therapy under the hospital outpatient prospective payment system and the Ambulatory Surgical Center Payment
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System, respectively, which reimburse to the hospital or ambulatory surgical center, as applicable, a bundled amount generally intended to cover all facility costs
related to procedures performed in the outpatient setting. The typical Medicare payment for facility and physician services for an SNM trial and full system
implant ranges from approximately $22,000 to approximately $27,400, which covers the cost for the devices and the implantation procedures.
Our r-SNM System and the associated procedures are eligible for payment under the existing CPT codes typically used for SNM therapy, including CPT
64581 for transforaminal implantation of a lead near the sacral nerve and CPT 64590 for insertion or replacement of a peripheral or gastric neurostimulator, which
includes a neurostimulator for SNM therapy. Reimbursement rates vary based on several factors, including but not limited to the payor, geographic location, the
procedure performed, contract terms, the facility in which the procedure is performed and other factors.
Most large insurers have established coverage policies in place to cover SNM therapy. Certain commercial payors have a patient-by-patient prior
authorization process that must be followed before they will provide reimbursement for SNM therapy. These processes typically involve the treating physician
submitting a form to the payor that provides information about the past treatments provided to the patient that proved ineffective, and the physician’s
recommendation that the patient be treated with SNM therapy. Although the prior authorization process can take several weeks, based on our industry knowledge,
it generally results in positive coverage determination for these patients.
Outside the United States, reimbursement levels vary significantly by country and by region, particularly based on whether the country or region at issue
maintains a single-payor system. SNM therapy is eligible for reimbursement in Canada, Australia and certain countries in Europe. Annual healthcare budgets
generally determine the number of SNM systems that will be paid for by the payor in these single-payor system countries and regions. Reimbursement is obtained
from a variety of sources, including government-sponsored and private health insurance plans, and combinations of both. Some countries or regions may require us
to gather additional clinical data before granting coverage and reimbursement for our r-SNM System.
Research and Development
We intend to continue to invest in research and development activities focused on improvements and enhancements to our r-SNM System to improve
patient outcomes and further expand patient access to our r-SNM therapy. Research and development expenses were approximately $29.2 million, $20.2 million,
and $19.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. Our goals include expanding the suite of product solutions available for
SNM therapy, including a non-rechargeable SNM device that utilizes a primary cell battery.
Manufacturing and Supply
We currently outsource the manufacture of the implantable components of our r-SNM System. We plan to continue with an outsourced manufacturing
arrangement for the foreseeable future. Our contract manufacturers are all recognized in their field for their competency to manufacture the respective portions of
our r-SNM System and have quality systems established that meet FDA requirements. We believe the manufacturers we currently utilize have sufficient capacity to
meet our launch requirements and are able to scale up their capacity relatively quickly with limited capital investment.
We employ a rigorous supplier assessment, qualification, and selection process targeted to suppliers that meet the requirements of the FDA and the
International Organization for Standardization (ISO), and quality standards supported by internal policies and procedures. Our quality assurance process monitors
and maintains supplier performance through qualification and periodic supplier reviews and audits. We are required to maintain ISO 13485 certification for
medical devices sold in the European Economic Area (EEA), which requires, among other items, an implemented quality system that applies to component quality,
supplier control, product design and manufacturing operations.
We inspect, test, and assemble our r-SNM System under strict manufacturing processes supported by internal policies and procedures. We perform our
own final quality control testing of each r-SNM System. However, we do not have complete control over all aspects of the manufacturing process of, and are
dependent on, our contract
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manufacturing partners for compliance with current Good Manufacturing Practice (cGMP) regulations applicable to our r-SNM System.
Our suppliers are managed through our supplier management program that is focused on reducing supply chain risk. Key aspects of this program include
managing component inventory at the supplier, contractual requirements for last time buy opportunities and second sourcing approaches for specific suppliers.
Typically, our outside vendors produce the components to our specifications and in many instances to our designs. Our suppliers are audited periodically by our
quality department to ensure conformity with the specifications, policies and procedures for our devices. In addition, we and our suppliers are subject to periodic
unannounced inspections by U.S. and international regulatory authorities to ensure compliance with quality regulations. We believe that, if necessary, alternative
sources of supply would be available in a relatively short period of time and on commercially reasonable terms.
For our off-the-shelf components, we do not have long-term supply agreements with many of our third-party manufacturers, and we purchase certain
components of our r-SNM System on a purchase order basis. We may be unable to establish any agreements with third-party manufacturers or to do so on
acceptable terms. We do not currently have arrangements in place for redundant supply of certain components of our r-SNM System. If our current third-party
manufacturers cannot perform as agreed, we may be required to replace those manufacturers. Although we believe that there are several potential alternative
manufacturers who could manufacture these components, we may incur added costs and delays in identifying and qualifying any such replacement. We believe our
manufacturing capacity is sufficient to meet global market demand for our r-SNM System for the foreseeable future.
As previously discussed, and pursuant to the Manufacturing and Supply Agreement, Contura International manufactures all of the Bulkamid that we sell.
We have rights to a technology transfer after June 30, 2022 that would enable us to insource the manufacturing of Bulkamid. Under the Manufacturing and Supply
Agreement, Contura International is responsible for obtaining and maintaining all necessary permits, licenses, approvals and authorizations required for the
manufacture and sale of Bulkamid. The Manufacturing and Supply Agreement is subject to certain maximum purchase amounts of Bulkamid, which we believe
are sufficient to meet the projected global demand for Bulkamid.
Competition
We believe our products are designed to offer several needed improvements for patients, physicians, and payors. However, the medical technology
industry is highly competitive, subject to rapid change and significantly affected by new product introductions and other activities of industry participants.
We consider our primary competition to be implantable SNM devices offered by Medtronic. Medtronic’s InterStim II and Interstim Micro are currently
the only other implantable SNM devices approved for commercial sale in the United States by the FDA. We also compete with other third-line treatments, such as
BOTOX injections, a product sold by Allergan plc, PTNS, as well as more invasive surgical treatment options, and drugs for the treatment of OAB and FI. We also
face competition from Boston Scientific for the treatment of SUI with its own competitive hydrogel. In addition, emerging businesses may be in the early stages of
developing additional products or therapies designed to treat OAB, FI or SUI.
We face competition from major medical device companies worldwide, many of which have longer, more established operating histories and significantly
greater financial, technical, marketing, sales, distribution, and other resources. Our overall competitive position is dependent upon a number of factors, including:
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company, product and brand recognition;
history of product use and physician familiarity with products and treatments;
regulatory approvals and approved indications;
product safety, reliability and durability;
INS size, rechargeability and battery life;
full-body MRI scan safety;
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quality and volume of clinical data;
effective marketing to and education of patients, physicians and hospitals;
product ease of use and patient comfort;
physician implantation and programming process;
sales force experience and market access;
product support and service;
technological innovation, product enhancements and speed of innovation;
pricing and revenue strategies;
procedure costs to patients and the overall healthcare system; and
dedicated practice development.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws, and confidentiality and invention assignment agreements, to protect our
intellectual property rights.
We own numerous issued patents and pending patent applications that relate to our r-SNM System and several issued patents and patent applications were
licensed from AMF in 2013 pursuant to the License Agreement. As of December 31, 2020, we own 32 issued U.S. patents and 89 issued foreign patents, and
19 pending U.S. patent applications and 41 pending foreign patent applications. We also license from AMF 30 issued U.S. patents and three pending U.S. patent
applications, as well as 65 issued foreign patents and 10 pending foreign patent applications. Issued patents owned or used by us will expire between 2021 and
2040.
In addition, we own or have rights to trademarks and domains in the United States and select locations internationally that we use in connection with the
operation of our business.
We also rely upon trade secrets, know-how and continuing technological innovation, and may in the future rely upon licensing opportunities, to develop
and maintain our competitive position. We protect our proprietary rights through a variety of methods, including confidentiality agreements and proprietary
information agreements with third party contract manufacturers, suppliers, employees, consultants and others who may have access to proprietary information that
we own or license for use.
AMF License Agreement
On October 1, 2013, we entered into the License Agreement, pursuant to which AMF granted us the AMF IP relating to AMF Licensed Products.
Under the License Agreement, for each calendar year beginning in 2018, we are obligated to pay AMF a royalty on an AMF Licensed Product-by-AMF
Licensed Product basis if one of the following conditions applies: (i) one or more valid claims within any of the patents licensed to us by AMF covers such AMF
Licensed Products or the manufacture of such AMF Licensed Products or (ii) for a period of 12 years from the first commercial sale anywhere in the world of such
AMF Licensed Product, in each case. The foregoing royalty is calculated as the greater of (a) 4% of all net revenue derived from the AMF Licensed Products, and
(b) a minimum annual royalty (the Minimum Royalty), payable quarterly. The Minimum Royalty automatically increases each year, subject to a maximum amount
of $200,000 per year. During the years ended December 31, 2020, 2019, and 2018, we have recorded royalties of $4.4 million, $0.6 million, and $0.1 million,
respectively. We have 60 days to pay AMF the royalty amount due under the License Agreement, and if we fail to pay AMF within such 60-day period, AMF may,
at its election, convert the exclusive license to a non-exclusive license or terminate the License Agreement.
The protection of intellectual property has been and remains a priority for us. For more information, see “Risk Factors—Risks Related to Intellectual
Property.”
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Government Regulation Applicable to Us
Our products and our operations are subject to extensive regulation by the FDA and other federal and state authorities in the United States, including the
United States Department of Justice (DOJ), the Department of Health & Human Services - Office of the Inspector General (HHS-OIG), the United States Federal
Communications Commission (FCC), the Center for Medicare & Medicaid Services (CMS), the Federal Trade Commission (FTC), as well as comparable
authorities in the European Economic Area (EEA), Australia, and Canada. These government authorities continue to highly scrutinize our industry. Our products
are subject to regulation as a medical device under the Federal Food, Drug, and Cosmetic Act (FDCA), as implemented and enforced by the FDA. The FDA
regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing,
recordkeeping, premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution, and import and export
of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the
FDCA.
In addition to U.S. regulations, we are subject to a variety of regulations in the EEA, Australia, and Canada governing clinical studies and the commercial
sales and distribution of our products. We will be required to obtain authorization under appropriate regulatory authorities in countries outside the United States
before commencing clinical studies and to obtain marketing authorization or approval before we can commercialize our product in those countries, whether or not
we have or are required to obtain FDA clearance or approval for a product. The approval process varies from country to country and the time may be longer or
shorter than that required for FDA clearance or approval.
FDA Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k) premarket
notification or PMA approval.
Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or some implantable devices, or devices that have a new
intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of a
PMA. Devices for which there is no predicate device and which therefore are not eligible for 510(k) review but project a low-to-moderate risk may be eligible for
the de novo review process.
Our r-SNM System is a Class III device and as such, we obtained PMA approval to market our device for the treatment of OAB, FI and UR.
In a PMA, the manufacturer must demonstrate that the device is safe and effective. The PMA is typically supported by data from preclinical studies and
human clinical studies. The PMA must also contain a full description of the device and its components, a full description of the methods, facilities and controls
used for manufacturing, and proposed labeling. In addition, the FDA will generally conduct a preapproval inspection of the applicant or its third-party
manufacturers’ or suppliers’ manufacturing facility or facilities to ensure compliance with applicable portions of the Quality Systems Regulation (QSR).
Certain changes to an approved device, such as changes in manufacturing facilities, methods, or quality control procedures, or changes in the design
performance specifications, which may affect the safety or effectiveness of the device, require submission of a PMA supplement. PMA supplements often require
submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered
by the original PMA and may require no clinical data or less extensive clinical data than the original PMA or the convening of an advisory panel. Certain other
changes to an approved device require the submission of a new supplement or PMA, such as when the design change causes a different intended use, mode of
operation, and technical basis of operation, or when the design change is so significant that a new generation of the device will be developed, and the data that
were submitted with the original PMA are not applicable for the change in demonstrating a reasonable assurance of safety and effectiveness.
Postmarket Regulation - United States
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
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establishment, registration and device listing with the FDA;
• QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and
other quality assurance procedures during all aspects of the design and manufacturing process;
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labeling and marketing regulations, which require that promotion is truthful, not misleading, fairly balanced and provide adequate directions for use and
that all claims are substantiated, and also prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling;
the federal Physician Payments Sunshine Act and various state and foreign laws on reporting remunerative relationships with health care providers;
the U.S. Anti-Kickback Statute (and similar state laws) prohibiting, among other things, soliciting, receiving, offering or providing remuneration intended
to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as Medicare or Medicaid. A
person or entity does not have to have actual knowledge of this statute or specific intent to violate it to have committed a violation;
the U.S. False Claims Act (and similar state laws) prohibiting, among other things, knowingly presenting, or causing to be presented, claims for payment
or approval to the federal government that are false or fraudulent, knowingly making a false statement material to an obligation to pay or transmit money
or property to the federal government or knowingly concealing, or knowingly and improperly avoiding or decreasing, an obligation to pay or transmit
money to the federal government. The government may assert that items or services resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the False Claims Act;
clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a
major change in intended use of a cleared device, or approval of a supplement for certain modifications to PMA devices;
• medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death
or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury,
if the malfunction were to recur;
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correction, removal and recall reporting regulations, under which the FDA can order device recalls under certain circumstances and that require
manufacturers report to the FDA voluntary field corrections and product recalls or removals if undertaken to reduce a risk to health or to remedy a
violation of the FDCA that may present a risk to health;
complying with the new federal law and regulations requiring Unique Device Identifiers (UDI), on devices and also requiring the submission of certain
information about each device to the FDA’s Global Unique Device Identification Database (GUDID); and
postmarket surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide
additional safety and effectiveness data for the device.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory
requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:
• warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
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recalls, withdrawals, or administrative detention or seizure of our products or any future product candidates;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
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• withdrawing 510(k) clearances or PMA approvals that have already been granted;
•
•
refusal to permit the export or import of our products or future product candidates; or
criminal prosecution.
In addition, other U.S. federal and state government authorities, including but not limited to the DOJ, HHS-OIG, FCC and CMS, have broad enforcement
powers and can impose various sanctions under the U.S. Anti-Kickback Statute, the U.S. False Claims Act, and various other laws. These sanctions could include
but are not limited to fines, civil penalties, criminal prosecutions, and agreements such as Deferred Prosecution Agreements or Corporate Integrity Agreements,
under which we may be required to establish additional controls to ensure compliance.
Regulation of Medical Devices in the EEA and the U.K.
Medical devices, other than active implantable medical devices (AIMDs), placed on the market in the EEA (which is comprised of the 27 Member States
of the EU plus Norway, Liechtenstein and Iceland) must comply with the essential requirements set out in Annex I of the Directive 93/42/EEC (Medical Devices
Directive).
Separately, active implantable medical devices are governed by Directive 90/385/EEC, also known as the Active Implantable Medical Devices Directive
(AIMD Directive). AIMDs are defined as medical devices that rely on a source of electrical energy or any source of power other than that generated by the body,
which are totally or partially introduced, either surgically or medically, into the human body and intended to remain after the procedure. Our r-SNM System, or our
internal product, qualifies as an AIMD and must therefore comply with the AIMD Directive, more specifically with the essential requirements it sets out at
Annex I.
An overarching essential requirement proscribed under both the AIMD Directive and the Medical Devices Directive is that any device must be designed
and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others. In addition, the
device must achieve the performances intended by the manufacturer and be designed, manufactured and packaged in a suitable manner.
In addition to the essential requirements set out under both the AIMD and Medical Devices Directives, the European Commission has adopted various
standards applicable to medical devices. These include standards governing common requirements, such as sterilization and safety of medical electrical equipment,
and product standards for certain types of medical devices. There are also harmonized standards relating to design and manufacture. While not mandatory,
compliance with these standards is viewed as the easiest way to satisfy the essential requirements, creating a rebuttable presumption that the device satisfies the
essential requirements.
Under the AIMD Directive, manufacturers must demonstrate compliance with the essential requirements laid down in Annex I by undergoing a
conformity assessment procedure. Conformity assessment procedures require an assessment of available clinical evidence, literature data for the product and
postmarket experience in respect of similar products already marketed to ensure and declare that the products in question comply with the standards set out in
Annex I of the AIMD Directive. In addition, a conformity assessment procedure requires the intervention of a Notified Body. Notified Bodies are separate entities
that are authorized or licensed to perform such assessments by the governmental authorities of each EU Member State. Manufacturers of AIMDs must make an
application to a Notified Body for an assessment of its technical dossiers and quality system. Alternatively, manufacturers can seek approval from the Notified
Body that a representative sample of the products it has manufactured satisfies the requirements set out in the AIMD Directive and subsequently ensure and
declare that all of its products conform to the standard of the approved sample. This is also known as “type approval.”
Similar requirements for conformity assessment procedures apply under the Medical Devices Directive, which vary according to the type of medical
device and its classification. We believe that our external device is categorized as a Class IIa device under Annex IX of the Medical Devices Directive. As such,
the conformity assessment procedure requirements for our external device are identical to those detailed above for our internal product under the AIMD Directive.
If satisfied that the AIMD or other medical device conforms to the relevant essential requirements, the Notified Body issues a certificate of conformity,
which the manufacturer uses as a basis for its own declaration of
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conformity (see above). The manufacturer may then apply the Conformité Européenne (CE) mark to the device, which allows the device to be legally placed on
and traded within the market throughout the EEA. Once the product has been placed on the market in the EEA, the manufacturer must comply with requirements
for reporting incidents and field safety corrective actions associated with the product.
In order to demonstrate safety and effectiveness for their AIMDs and other medical devices, manufacturers must conduct clinical investigations in
accordance with the requirements of Annex X to the Medical Devices Directive and Annex 7 to the AIMD Directive, as well as standards (if any) which may be
imposed by national authorities of EEA states in addition to those set out in Annex X to the Medical Devices Directive and Annex 7 to the AIMD Directive (the
Directives). Clinical studies for medical devices usually require the approval of an ethics review board and approval by or notification to the national regulatory
authorities. Both regulators and ethics committees also require the submission of serious adverse event reports during a study and may request a copy of the final
study report.
On April 5, 2017, the European Parliament adopted the Medical Devices Regulation (Regulation 2017/745), which will repeal and replace both AIMD
and Medical Devices Directives. The Medical Devices Regulation is directly applicable in the EEA. This is intended to eliminate current differences in the
regulation of medical devices among EEA countries. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent,
predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting innovation.
Starting January 1, 2021, all medical devices sold in the U.K. must meet new regulatory requirements due to the U.K.’s departure from the European
Union or “Brexit.” Among other things, companies must register their devices with the U.K. Medicines & Healthcare Regulatory Agency (MHRA) and may need
to change their product marking and labeling. In addition, if the company is not based in the U.K., it must appoint a U.K. Responsible Person to register with the
MHRA and assist the company in meeting U.K. regulatory requirements.
United Kingdom’s Vote to Leave the EU (Brexit)
The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to EU markets. Since a significant proportion of the
regulatory framework in the United Kingdom is derived from EU directives and regulations, the referendum could materially change the regulatory regime
applicable to products approved and sold in the United Kingdom. It is possible that there will be greater restrictions on imports and exports between the United
Kingdom and EU countries, increased regulatory complexities, and economic and political uncertainty in the region. Because of the continued uncertainty about
the effects and implementation of Brexit, we cannot quantify or predict with any certainty the likely impact of Brexit or related legislation on our business,
financial condition, and results of operations.
In addition, Brexit will likely affect European and worldwide economic or market conditions, which could lead to instability in global financial markets.
Brexit is likely to lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which EU laws to replace or
replicate. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, financial condition, and results of operations.
Regulation of Medical Devices in Other Jurisdictions
We are subject to regulations and product registration requirements in the EEA countries, Australia, Canada, and other foreign countries in which we may
sell our r-SNM System, including in the areas of:
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design, development, manufacturing and testing;
product standards;
product safety;
product safety reporting;
• marketing, sales and distribution;
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packaging and storage requirements;
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•
•
•
•
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•
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labeling requirements;
content and language of instructions for use;
clinical studies;
record keeping procedures;
advertising and promotion;
recalls and field corrective actions;
postmarket surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;
import and export restrictions;
tariff regulations, duties and tax requirements;
registration for reimbursement; and
necessity of testing performed in country by distributors for licensees.
The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for
licensing a product in a foreign country may differ significantly from FDA requirements.
U.S. Fraud and Abuse and Physician Payment Transparency Laws
Various U.S. federal and state laws restrict our business practices regarding items of value provided to healthcare providers including, without limitation,
the U.S. Anti-Kickback Statute, the U.S. False Claims Act, and the U.S. Physician Payments Sunshine Act.
The U.S. Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration
(including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind to induce or in return for purchasing, leasing, ordering or
arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or
other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value, including cash, in-kind items, meals, travel,
lodging, consulting or research agreements, grants, donations, charitable contributions, free equipment or services, royalty arrangements, stock, stock options, and
the compensation derived through ownership interests.
Recognizing that the U.S. Anti-Kickback Statute is broad and may prohibit many innocuous or beneficial arrangements within the healthcare industry, the
United States Department of Health and Human Services has established various “safe harbors,” that if met in form and substance, will assure medical device
manufacturers, healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback Statute. Although there are a number of
statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn and interpreted
narrowly. Government authorities may claim that our arrangements with physicians, hospitals and other persons or entities do not fully meet the stringent criteria
specified in these safe harbors.
Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce
referrals of federal healthcare covered business, the federal Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual
knowledge of the statute or specific intent in order to have committed a violation. Moreover, government authorities may argue that a claim including items or
services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
Violations of the U.S. Anti-Kickback Statute may result in civil monetary penalties up to $102,522 (in 2019) for each violation, plus up to three times the
remuneration involved. Violations can also result in criminal penalties, including criminal fines of up to $100,000 and imprisonment of up to 10 years. In addition,
violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid.
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Government authorities may contend that we are liable under the U.S. Anti-Kickback Statute because of the intentions or actions of the parties with whom we do
business, if we acted with deliberate ignorance or reckless disregard. The majority of states also have anti-kickback laws that establish similar prohibitions, and in
some cases, may apply more broadly.
The U.S. civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or
fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false record or statement material
to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. The
federal civil False Claims Act also applies to false submissions that cause the government to be paid less than the amount to which it is entitled. Intent to deceive is
not required to establish liability under the civil federal civil False Claims Act, if a person acts with deliberate ignorance or reckless disregard.
In addition, private parties may initiate “qui tam” whistleblower lawsuits against any person or entity under the U.S. civil False Claims Act in the name of
the government and share in the proceeds of any recovery. Penalties for U.S. civil False Claim Act violations include fines ranging from $11,181 to $22,363 for
each false claim, plus up to three times the amount of damages sustained by the federal government. More critically, a violation may provide the basis for
exclusion from federal healthcare programs. The government may further prosecute conduct constituting a false claim under the federal criminal False Claims Act.
The criminal False Claims Act prohibits the making or presenting of a claim to the government knowing such claim to be false, fictitious or fraudulent and, unlike
the federal civil False Claims Act, requires proof of intent to submit a false claim.
Additionally, the U.S. Physician Payments Sunshine Act requires annual reporting of transfers of value to certain healthcare providers by companies
whose products are reimbursable under Medicare, Medicaid or other federal healthcare programs. A manufacturer’s failure to submit timely, accurate and complete
information under the Sunshine Act may result in civil monetary penalties of $11,052 per failure up to an aggregate of $165,786 per year (or up to an aggregate of
$1.105 million per year for “knowing failures”). Certain U.S. states similarly require tracking and reporting of certain transfers of value to healthcare providers and
some mandate implementation of commercial compliance programs or, impose restrictions on device manufacturer marketing practices.
Anti-Bribery and Corruption Laws
Our operations outside the United States are subject to the U.S. Foreign Corrupt Practices Act (FCPA). The FCPA generally prohibits companies and their
intermediaries from engaging in bribery or making prohibited payments to foreign officials for the purpose of obtaining or retaining business or an official
government action. In addition, the FCPA imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which
are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books”
slush funds from which such improper payments can be made. We also are subject to similar anti-corruption or anti-bribery laws in Europe, Australia, and Canada,
and would be subject to such laws in many other countries in which we might choose to do business.
FCC Regulation
Because our r-SNM System includes a wireless radio frequency transmitter and receiver, it is subject to equipment authorization requirements in the
United States. The FCC requires advance clearance of all radio frequency devices before they can be imported into, sold or marketed in the United States. These
clearances ensure that the proposed products comply with FCC radio frequency emission and power level standards and will not cause interference.
Data Privacy and Security Laws
We are also subject to various U.S. federal, state and foreign laws that protect the confidentiality and restrict the use and disclosure of personal
information, such as patient health information.
For example, the U.S. Health Insurance Portability and Accountability Act (HIPAA), as amended by the Health Information Technology for Economic
and Clinical Health Act (HITECH), establishes uniform standards governing the use and disclosure of protected health information (PHI) and requires healthcare
providers, called “covered entities”, to maintain certain safeguards to protect the privacy and security of PHI. HIPAA also requires
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business associates (independent contractors or agents of covered entities that create, receive, maintain, or transmit PHI on behalf of a covered entity) to enter into
business associate agreements with the covered entity. These agreements require the business associate to safeguard the covered entity’s PHI against improper use
and disclosure.
Failure to comply with the HIPAA privacy and security standards can result in civil monetary penalties up to $55,910 per violation, not to exceed
$1.68 million per calendar year for non-compliance of an identical provision, and, in certain circumstances, criminal penalties with fines up to $250,000 per
violation and/or imprisonment.
HIPAA authorizes state attorneys general to file suit on behalf of their residents for violations. Courts can award damages, costs and attorneys’ fees
related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit against us in civil court for
violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits alleging negligence or recklessness in the misuse or breach
of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and their business associates for
compliance with the HIPAA privacy and security standards.
In the EU, we may be subject to various laws relating to our collection, control, processing and other use of personal data (i.e. data relating to an
identifiable individual). We may process personal data of our employees, our customers, and our vendors. These laws include the General Data Protection
Regulation ((EU) 2016/679) (GDPR), the E-Privacy Directive 2002/58/EC and national laws supporting aspects of the GDPR and implementing the E-
Privacy Directive. Each EU Member State has transposed the requirements laid down by the E-Privacy Directive into its own national data privacy regime, while
the GDPR permits EU Member States to implement local legislation to supplement the GDPR, and therefore the laws may differ by jurisdiction, sometimes
significantly. We need to ensure compliance with the rules in each jurisdiction where we are established or are otherwise subject to local privacy laws.
The GDPR became applicable on May 25, 2018, replacing the previous data protection laws issued by each EU member state under the Directive
95/46/EC. Unlike the Directive, the GDPR is directly applicable in each EU Member State, resulting in a more uniform application of data privacy laws across the
EU. Like the previous Directive, the GDPR requires that personal data may only be collected for specified, explicit and legitimate purposes based on legal bases
for processing set out in the GDPR and local laws, and may only be processed in a manner consistent with those purposes. Personal data must be secure, not be
transferred outside of the EEA unless certain steps are taken to ensure an adequate level of protection and must not be kept for longer than necessary for the
purposes of collection. In addition, the GDPR also limits the circumstances and the manner in which we are legally permitted to process that data and transfer that
data outside of the EEA. In particular, in order to process such data, explicit consent to the processing (including any transfer) is usually required from the data
subject (being the person to whom the personal data relates).
The GDPR also imposes onerous accountability obligations requiring data controllers and processors to maintain a record of their data processing. It
requires data controllers to be transparent and disclose to data subjects (in a concise, intelligible and easily accessible form) how their personal information is to be
used, imposes limitations on retention of information, increases requirements pertaining to pseudonymized (i.e., key-coded) data, introduces mandatory data
breach notification requirements and sets higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing
activities. Fines for non-compliance with the GDPR are significant—€20,000,000 or up to 4% of the total worldwide annual turnover of the preceding financial
year, whichever is higher.
We are subject to the supervision of local data protection authorities in those jurisdictions where we are established or otherwise subject to applicable law.
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Healthcare Reform
The United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the
healthcare system in ways that could affect our ability to sell our r-SNM System or any future product candidates profitably. Among policy makers and payors in
the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs,
improving quality or expanding access. Current and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or
lower reimbursement for the procedures associated with the use of our r-SNM System or future product candidates. The cost containment measures that payors and
providers are instituting and the effect of any healthcare reform initiative implemented in the future could impact our revenue from the sale of our r-SNM System
or future product candidates.
The implementation of the Affordable Care Act in the United States, for example, has changed healthcare financing and delivery by both governmental
and private insurers substantially. The Affordable Care Act provided incentives to programs that increase the federal government’s comparative effectiveness
research, and implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers
to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models. Additionally, the Affordable Care Act has
expanded eligibility criteria for Medicaid programs and created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research, along with funding for such research. We do not yet know the full impact that the Affordable Care Act will have on our
business. There have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect additional challenges and
amendments in the future. Most recently, the Tax Cuts and Jobs Acts was enacted, which, among other things, removes penalties for not complying with the
individual mandate to carry health insurance.
We expect additional state and federal healthcare reform measures to be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, which could result in reduced demand for our r-SNM System or future product candidates or additional
pricing pressure.
Impact of COVID-19
The COVID-19 pandemic negatively impacted our sales in 2020, by significantly decreasing and delaying the number of procedures performed using our
r-SNM System, and we expect that the pandemic could continue to negatively impact our business, financial condition and results of operations. Similar to the
general trend in elective and other surgical procedures, the number of procedures performed using our r-SNM System decreased significantly as healthcare
organizations in the United States and globally, including in Europe and Canada, have prioritized the treatment of patients with COVID-19 or have altered their
operations to prepare for and respond to the pandemic. Specifically, substantially all of the procedures using our r-SNM System were postponed or cancelled from
middle of March 2020 through May 2020, but order flow began a gradual recovery in May 2020 and continued to improve in the second half of 2020.
To protect the health of our employees, their families, and our communities, we have restricted access to our offices to personnel who must perform
critical activities that must be completed on-site, limited the number of such personnel that can be present at our facilities at any one time, requested that many of
our employees work remotely, and implemented travel restrictions. These restrictions and precautionary measures have not adversely affected our operations. The
full extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of
the pandemic, and additional protective measures implemented by the governmental authorities, all of which are uncertain and difficult to predict considering the
rapidly evolving landscape. However, if the pandemic continues to evolve into a long-term severe worldwide health crisis, there could be a material adverse effect
on our business, results of operations, financial condition, and cash flows.
Human Capital Resources
As of December 31, 2020, we had 416 employees. Of this total, 9 were employees based outside of the U.S. None of our employees is subject to a
collective bargaining agreement or represented by a trade or labor union. We consider our relationship with our employees to be good.
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Our manufacturing, product development, warehouse and administrative employees are generally located in the same or adjacent facilities, which we
believe contributes to our culture of strong manufacturing, engineering and customer service capabilities.
Company Information
We were incorporated in the State of Delaware in March 2012 under the name “American Restorative Medicine, Inc.” In August 2013, we changed our
name to Axonics Modulation Technologies, Inc. and commenced our operations in late 2013 when we entered into the License Agreement. Our principal executive
offices are located at 26 Technology Drive, Irvine, California 92618 and our telephone number is (949) 396-6322. Our website is www.axonics.com. The
information contained on or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are accessible free
of charge on our website at www.axonics.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC
also maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.
Item 1A. Risk Factors.
Investing in our securities involves a high degree of risk. You should carefully consider the following information about these risks, together with the other
information appearing elsewhere in this Annual Report on Form 10-K, including our consolidated financial statements, the notes thereto and the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of these risks could have a material and
adverse effect on our business, reputation, financial condition, results of operations and future growth prospects, as well as our ability to accomplish our strategic
objectives. Certain statements contained in this section constitute forward-looking statements. See the information included in “Special Note Regarding Forward-
Looking Statements” in this Annual Report on Form 10-K. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations.
Risks Related to Our Business and Strategy
We have incurred significant operating losses since inception, and we expect to incur operating losses in the future, and we may not be able to achieve
or sustain profitability.
We are a medical technology company with a limited commercial operating history. To date, we have invested substantially all of our efforts in the
research and development of, seeking regulatory approval for, and commercialization of our r-SNM System. We are not profitable and have incurred losses each
year since we began our operations in 2013. We have a limited commercial operating history upon which to evaluate our business and prospects. Consequently,
any predictions about our future success, performance or viability may not be as accurate as they could be if we had a longer operating history.
We have not yet derived sufficient revenues to support our operations, as our activities prior to 2020 have consisted primarily of investing in our
commercial operations, developing our technology, and conducting clinical studies. As a result, we have recorded net losses of $54.9 million, $79.9 million, and
$32.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $234.5 million.
To date, we have financed our operations primarily through equity financings.
We expect that our operating expenses will continue to increase as we (i) continue to build our commercial infrastructure, (ii) develop, enhance, and
expand the commercialization of our r-SNM System in the United States, (iii) potentially seek additional FDA regulatory approvals for our r-SNM System or other
future product candidates in the United States, (iv) increase our commercialization efforts internationally and (v) incur additional operational costs associated with
being a public company. As a result, we expect to continue to incur operating losses for the foreseeable future. Our expected future operating losses, combined
with our prior operating losses, may adversely affect the market price of our common stock and our ability to raise capital and continue operations.
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We expect that sales of our r-SNM System will account for a majority of our future revenue. If our r-SNM System does not achieve an adequate level of
acceptance by physicians, health care payors, and patients and does not receive adequate reimbursement from third-party payors, we may not generate sufficient
revenue and we may not be able to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability in subsequent
periods or on an ongoing basis. If we do not achieve or sustain profitability, it will be more difficult for us to finance our business and accomplish our strategic
objectives, either of which would have a material and adverse effect on our business, financial condition and results of operations and cause the market price of our
common stock to decline.
Our r-SNM System currently represents the vast majority of our sales, and we are substantially dependent on the success of our r-SNM System.
Until we acquired the Bulkamid product on February 25, 2021, our r-SNM System was our sole product, and we expect it will drive the vast majority of
our sales for the foreseeable future. As a result, we are substantially dependent on its success. We expect that it will take time for us to increase adoption of our
Bulkamid products. Successfully commercializing medical devices such as ours is a complex and uncertain process. Our commercialization efforts depend on the
efforts of our management and sales team, our third-party manufacturers and suppliers, physicians and hospitals, and general economic conditions, among other
factors, including the following:
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the effectiveness of our marketing and sales efforts in the United States and internationally;
our success in educating physicians and patients about the benefits, administration and use of our products;
the acceptance by physicians and patients of the safety and effectiveness of our products;
our third-party manufacturers’ and suppliers’ ability to manufacture and supply the components of our r-SNM System in a timely manner, in
accordance with our specifications, and in compliance with applicable regulatory requirements, and to remain in good standing with regulatory
agencies;
the availability, perceived advantages, relative cost, relative safety, and relative efficacy of alternative and competing therapies;
our ability to obtain, maintain, and enforce our intellectual property rights in and to our r-SNM System;
the emergence of competing technologies and other adverse market developments, and our need to enhance our products and/or develop new
products to maintain market share in response to such competing technologies or market developments;
our ability to raise additional capital on acceptable terms, or at all, if needed to support the commercialization of our products; and
our ability to achieve and maintain compliance with all regulatory requirements applicable to our products.
We began marketing and selling our r-SNM System in certain limited European markets in 2018 through a limited direct sales force that targets
physicians and hospitals. In the United States, we began marketing and selling our r-SNM System in the fourth quarter of 2019 through our dedicated direct sales
organization. As a result, we have limited experience marketing and selling our r-SNM System.
We hire and train sales representatives and clinical specialists with strong backgrounds and experience in SNM therapy and other neurostimulation
applications, and who have existing relationships with urologists and urogynecologists. However, we expect that our sales force will require lead time in the field
to grow their network of accounts and achieve the productivity levels we expect them to reach in any individual territory. Furthermore, the use of our product will
often require or benefit from direct support from us. If our sales representatives do not achieve the productivity levels we expect them to reach, our revenue will
not grow at the rate we expect and our financial performance will suffer. Also, to the extent any of our sales force is comprised of personnel hired from our
competitor, we may have to wait until applicable non-competition provisions have expired before deploying such
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personnel in restricted territories or incur costs to relocate personnel outside of such territories. This may subject us to allegations that these new hires have been
improperly solicited, or that they have divulged to us proprietary or other confidential information of their former employers. Addressing such allegations would
be costly both in terms of time and resources. Any of these risks may adversely affect our business.
The integration of Contura’s businesses may be more difficult, time-consuming or costly than expected. Synergies and other anticipated benefits may
not be realized within the expected time frames, or at all.
Our ability to realize the anticipated benefits of the acquisition of Contura and its subsidiaries depend, to a large extent, on our ability to integrate the
acquired business in a manner that facilitates growth opportunities and achieves projected standalone revenue growth trends without adversely affecting revenues
and investments in future growth. The failure to meet the challenges involved in combining our and Contura’s businesses and to realize the anticipated benefits
from such combination, including expected synergies, could adversely affect our results of operations. The overall combination of our businesses may also result in
material unanticipated problems, expenses, liabilities, competitive responses, and loss of customer and other business relationships. The difficulties of combining
the operations of the companies include, among others: the diversion of management attention to integration matters; difficulties in integrating operations and
systems; challenges in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the
two companies; difficulties in integrating employees and attracting and retaining key personnel, including talent; challenges in retaining existing, and obtaining
new customers, suppliers, employees and others; difficulties in achieving anticipated cost savings, synergies, business opportunities, financing plans and growth
prospects from the combination; difficulties in managing the expanded operations of a significantly larger and more complex company; challenges in continuing to
develop valuable and widely accepted content and technologies; contingent liabilities that are larger than expected; and potential unknown liabilities, adverse
consequences and unforeseen increased expenses associated with the acquisition of Contura.
Even if our operations are integrated successfully, the full benefits of the acquisition of Contura, including anticipated synergies, cost savings or sales or
growth opportunities, may not be realized, and these benefits may not be achieved within any anticipated time frame or at all. Further, additional unanticipated
costs may be incurred in the integration of our businesses. Many of these factors are outside of our control, and any one of them could result in lower revenues,
higher costs and diversion of management time and energy, which could materially impact our business, financial condition and results of operations.
We rely on third parties for the manufacture of our products. This reliance on third parties increases the risk that we will not have sufficient
quantities of our products or such quantities at an acceptable cost, and reduces our control over the manufacturing process, which could delay, prevent or
impair our development or commercialization efforts.
We currently rely, and expect to continue to rely, on third-party manufacturers for the manufacture of certain components of our products. For our off-the-shelf
components, we do not have long-term supply agreements with many of our third-party manufacturers, and we purchase certain components for our products on a
purchase order basis. We may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to
establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
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the possible failure of the third party to manufacture any such component of our products according to our schedule, or at all, including if our third-
party contractors give greater priority to the supply of other products over ours or otherwise do not satisfactorily perform according to the terms of
the agreements and/or purchase orders between us and them;
the possible termination or nonrenewal of agreements by our third-party contractors at a time that is costly or inconvenient for us;
supplier demands for significant cost increases;
interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations;
the possible breach by the third-party manufacturers of our agreements with them;
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the failure of third-party manufacturers to comply with applicable regulatory requirements;
price fluctuations due to a lack of long-term supply arrangements with our suppliers for key components;
difficulty identifying and qualifying alternative suppliers for components in a timely manner;
the possible failure of the third-party to manufacture any such components of our products according to our specifications; and
the possible misappropriation of our proprietary information, including our trade secrets and know-how.
We do not have complete control over all aspects of the manufacturing process of, and are dependent on, our contract manufacturing partners for
compliance with current Good Manufacturing Practice (cGMP) regulations applicable to our products. Third-party manufacturers may not be able, or fail, to
comply with cGMP regulations or similar regulatory requirements outside of the United States. If our third-party manufacturers cannot successfully manufacture
material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain marketing
approval for their manufacturing facilities.
In addition, we do not have complete control over the ability of our third-party manufacturers to maintain adequate quality control, quality assurance and
qualified personnel. Although we require our third-party suppliers to supply us with components that meet our specifications and comply with applicable
provisions of the FDA’s Quality Regulation System (QSR) and other applicable legal and regulatory requirements in our agreements and contracts, and we perform
incoming inspection, testing or other acceptance activities to ensure the components meet our requirements, there is a risk that our suppliers will not always act
consistent with our best interests, and may not always supply components that meet our requirements or supply components in a timely manner. If the FDA or a
comparable foreign regulatory authority withdraws any such approval they have already procured, we may need to find alternative manufacturing facilities, which
would significantly impact our ability to market our products. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations
could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation,
seizures or recalls, operating restrictions and criminal prosecutions, any of which could significantly and adversely harm our business and results of operations.
Our current and anticipated future dependence upon others for the manufacture of our products may adversely affect our future profit margins and our
ability to commercialize our products on a timely and competitive basis.
Our results of operations could be materially harmed if we are unable to accurately forecast customer demand for our products and manage our
inventory.
To ensure adequate inventory supply, we must forecast inventory needs and place orders with suppliers based on our estimates of future demand for our
products. Our ability to accurately forecast demand for our products could be negatively affected by many factors, including our failure to adequately manage our
expansion efforts, product introductions by competitors, an increase or decrease in customer demand for our products or for products of our competitors, our
failure to accurately forecast customer acceptance of new product enhancements, unanticipated changes in general market conditions or regulatory matters, and
weakening of economic conditions or consumer confidence in future economic conditions.
Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely
affected and could impair the strength of our brand. Similarly, a portion of our inventory could become obsolete or expire, which could have a material and adverse
effect on our earnings and cash flows due to the resulting costs associated with inventory impairment charges and costs required to replace obsolete inventory. Any
of these occurrences could negatively impact our financial performance.
Conversely, if we underestimate customer demand for our products, we may not be able to deliver sufficient products to meet our customers’
requirements, which could result in damage to our reputation and customer relationships. In addition, if we experience a significant increase in demand, additional
supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to
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us, or at all, or suppliers or our third-party manufacturers may not be able to allocate sufficient resources to meet our increased requirements, which could have an
adverse effect on our ability to meet customer demand for our products and our results of operations.
We have a limited history of manufacturing and assembling our products in commercial quantities and may encounter related problems or delays that
could result in lost revenue.
The manufacturing process of our products includes sourcing components from various third-party suppliers, assembly and testing. We must manufacture
and assemble these systems in compliance with regulatory requirements and at an acceptable cost in order to achieve and maintain profitability. We have only a
limited history of manufacturing and assembling our products and, as a result, we may have difficulty manufacturing and assembling this system in sufficient
quantities in a timely manner. To manage our manufacturing and operations with our suppliers, we will need to forecast anticipated product orders and material
requirements to predict our inventory needs from six months to a year in advance and enter into purchase orders on the basis of these requirements. Our limited
manufacturing history may not provide us with enough data to accurately predict future component demand, fluctuations in availability and pricing of commodity
materials of supply, and, to anticipate our costs and supply needs effectively. We may in the future experience delays in obtaining components from suppliers,
which could impede our ability to manufacture and assemble our products on our expected timeline. As a result of this or any other delays, we may encounter
difficulties in production of our products, including problems with quality control and assurance, component supply shortages or surpluses (including with respect
to the ceramic and titanium we use in our products), increased costs, shortages of qualified personnel and difficulties associated with compliance with local, state,
federal and foreign regulatory requirements.
We will need to increase the size of our organization and we may be unable to manage our growth effectively.
We have been growing rapidly in recent periods and have a relatively short history of operating as a commercial company. As of December 31, 2020, we
had 416 employees. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and
commercialization goals.
To achieve our revenue goals, we must successfully increase manufacturing output to meet expected customer demand. In the future, we may experience
difficulties with manufacturing yields, quality control, component supply and shortages of qualified personnel, among other problems. These problems could result
in delays in product availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to generate our revenue. Future
growth will also impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees. In
addition, rapid and significant growth will place a strain on our administrative and operational infrastructure. In order to manage our operations and growth we will
need to continue to improve our operational, compliance and management controls, reporting and information technology systems and financial internal control
procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our operating results and business
could suffer.
In addition, as a public company, we need to support managerial, operational, financial and other resources to manage our operations, commercialize our
products and continue our research and development activities. Our management and personnel, systems and facilities currently in place may not be adequate to
support this future growth, and this growth may place significant strain on us as we grow. Successful growth will also be dependent upon our ability to implement
appropriate financial and management controls. Due to our limited experience in managing a company with substantial growth, we may not be able to effectively
manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may
divert the attention of our management and business development resources. If we fail to manage these challenges effectively, there may be an adverse effect on
our business, financial condition and results of operations.
We may require additional capital to finance our planned operations, which may not be available to us on acceptable terms or at all.
Our operations have consumed substantial amounts of cash since inception, primarily due to our research and development activities, conducting clinical
studies for our products, and building our dedicated direct sales
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organization. Our expenses have also increased substantially in connection with the commercialization of our products in the United States, including hiring
qualified personnel and retaining our sales team. We expect that certain of these activities and the associated expenses will continue. Additional expenditures also
include costs associated with manufacturing and supply, sales and marketing costs, costs and expenses incidental to being a public company, and general
operations. In addition, other unanticipated costs may arise.
As of December 31, 2020, we had cash and cash equivalents of $241.2 million. On February 25, 2021, we announced the acquisition of Contura and its
Bulkamid product. In consideration for the acquisition, we paid approximately $141.3 million in cash and issued 1,096,583 shares of our common stock. We may
pay an additional $35 million in the event Bulkamid sales in any consecutive 12-month period exceed $50 million before December 31, 2024. In connection with
the acquisition of Contura, on February 25, 2021, we entered into a Loan and Security Agreement (the Loan and Security Agreement) with Silicon Valley Bank,
under which we obtained a loan in the principal amount of $75 million pursuant to a term loan advance (the Loan).
Our present and future funding requirements will depend on many factors, including:
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the costs associated with manufacturing, selling, and marketing our products in the United States, as well as internationally, including the cost and
timing of implementing our sales and marketing plan and expanding our manufacturing capabilities;
our ability to retain and compensate the highly qualified personnel necessary to execute our plans;
our ability to effectively market and sell, and achieve sufficient market acceptance and market share for, our products;
the costs to maintain, expand, and defend the scope of our intellectual property portfolio, as well as any other action required in connection with
licensing, preparing, filing, prosecuting, defending, and enforcing any patents or other intellectual property rights, including the Medtronic Litigation
discussed under “Risks Related to Intellectual Property”;
the emergence of competing technologies and other adverse market developments, and our need to enhance our products and/or develop new
products to maintain market share in response to such competing technologies or market developments;
our ability to establish and maintain strategic licensing or other arrangements and the financial terms of such agreements;
the timing, receipt, and amount of license fees and sales of, or royalties on, or future improvements on our products, if any; and
our need to implement additional internal systems and infrastructure, including financial and reporting systems, incidental to being a public company.
We may need to raise additional capital, and if we raise additional capital through public or private equity offerings, the ownership interest of our existing
stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise
additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional
debt or liens, making capital expenditures or declaring dividends. If we raise additional capital through marketing and distribution arrangements or other
collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our r-SNM System,
technologies, future revenue streams or research programs, or grant licenses on terms that may not be favorable to us. If we are unable to obtain adequate financing
when needed and on terms that are acceptable to us, we may have to delay, reduce the scope of or suspend the implementation of our sales and marketing plan and
our ongoing research and development efforts, which would have a material adverse effect on our business, financial condition, and results of operations.
We compete against other companies offering first-, second- and third-line therapies for the treatment of OAB and SUI, including Medtronic and
Boston Scientific, respectively, some of which have longer operating
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histories, more established products or greater resources than we do, which may prevent us from achieving increased market penetration and improved
operating results.
We believe our r-SNM System and our Bulkamid product are designed to offer several needed improvements in the SNM and bulking agent markets for
patients, physicians, and payors. However, the medical technology industry is highly competitive, subject to rapid change and significantly affected by new
product introductions and other activities of industry participants.
We consider our primary competition to be other implantable SNM devices. On SNM, we face competition from major medical device companies
worldwide, including Medtronic, the maker of InterStim II and InterStim Micro. InterStim II and InterStim Micro are currently the only other implantable SNM
devices approved for commercial sale in the United States by the FDA. In August 2020, Medtronic received FDA approval for its Micro product, a rechargeable,
implantable SNM device with a 15-year life in the body that treats the same patient population as Interstim II. This new offering could significantly impact the
competitive landscape and our ability to capture and penetrate market share in the third-line therapy treatment market, and therefore could potentially have a
material adverse effect on our business, financial condition and results of operation.
We also compete with other less invasive third-line treatments for OAB and FI, such as BOTOX injections, a product sold by Allergan plc, PTNS, as well
as more invasive surgical treatment options, and drugs for the treatment of OAB and FI. In addition, emerging businesses may be in the early stages of developing
additional SNM devices or therapies designed to treat OAB or FI. Many of these companies have longer, more established operating histories and significantly
greater financial, technical, marketing, sales, distribution and other resources than we do. We face significant competition in establishing our market share in the
United States and may encounter unforeseen obstacles and competitive challenges in the United States. If one or more device manufacturers successfully develops
a device that is more effective, better tolerated or otherwise results in a better patient experience, or if improvements in other third-line therapies make them more
effective, easier to use or otherwise more attractive than our therapy, our ability to penetrate the third-line segment of the treatment market or maintain market
share could be significantly and adversely affected, which would have a material adverse effect on our business, financial condition and results of operations.
Bulkamid competes with bulking agents offered by Boston Scientific, Coloplast, and Laborie.
Our overall competitive position is dependent upon a number of factors, including:
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company, product, and brand recognition;
history of product use and physician familiarity with products and treatments;
regulatory approvals;
product safety, reliability and durability;
INS size, rechargeability and battery life;
quality and volume of clinical data;
effective marketing to and education of patients, physicians and hospitals;
product ease of use and patient comfort;
physician implantation and programming process;
sales force experience and market access;
product support and service;
technological innovation, product enhancements and speed of innovation;
pricing and revenue strategies;
procedure costs to patients and the overall healthcare system; and
dedicated practice development.
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In addition to existing competitors, other larger and more established companies may acquire or in-license competitive products and could directly
compete with us. These competitors may also try to compete with our products on price both directly, through rebates and promotional programs to high volume
physicians and coupons to patients, and indirectly, through attractive product bundling with complementary products that offer convenience and an effectively
lower price compared to the total price of purchasing each product separately. Larger competitors may also be able to offer greater customer loyalty benefits to
encourage repeat use of their products and finance a sustained global advertising campaign to compete with commercialization efforts of our r-SNM System. Our
competitors may seek to discredit our r-SNM System by challenging our short operating history or relatively limited number of scientific studies and publications.
Additionally, certain of our competitors may challenge our intellectual property, may develop additional competing or superior technologies and processes and
compete more aggressively and sustain that competition over a longer period of time than we could. See “Risks Related to Intellectual Property—Litigation or
other proceedings or third-party claims of intellectual property infringement against us, including the Medtronic Litigation, or any of our current or future
licensors, including AMF, could require us to spend significant time and money and could prevent us from selling our r-SNM System, or affect our stock price.”
Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of
our competitors. As more companies develop new intellectual property in our market, there is the possibility of a competitor acquiring patents or other rights that
may limit our ability to update our technologies and products which may impact demand for our r-SNM System.
We depend on single source suppliers to manufacture certain of our components, sub-assemblies and materials for our r-SNM System, which makes
us vulnerable to supply shortages and price fluctuations that could have a material adverse effect on our business, financial condition and results of
operations.
We rely on single source suppliers in many instances for certain of the components, sub-assemblies and materials for our r-SNM System. These
components, sub-assemblies and materials are critical and there are relatively few alternative sources of supply. We have not qualified or obtained necessary
regulatory approvals for additional suppliers for most of these components, sub-assemblies and materials, and in some instances we do not carry a significant
inventory of these items. While we believe that alternative sources of supply may be available, they may not be available if and when we need them, or alternative
suppliers may not be able to provide the quantity and quality of components and materials that we would need to manufacture our products if our existing suppliers
were unable to satisfy our supply requirements. To utilize other supply sources, we would need to identify and qualify new suppliers to our quality standards and
obtain any additional regulatory approvals required to change suppliers, which could result in manufacturing delays and increase our expenses.
We rely solely on Contura International A/S as a single source supplier to manufacture Bulkamid, and as such, any production or other problems
with Contura International A/S could adversely affect us.
We depend solely upon Contura International for the manufacturing of Bulkamid, pursuant to the Manufacturing and Supply Agreement. Although
alternative suppliers may exist, we are required to purchase Bulkamid exclusively from Contura International under the Manufacturing and Supply Agreement.
Additionally, finding a replacement supplier with the capabilities required to manufacture Bulkamid could take a significant amount of our management’s time and
resources, and no such additional supplier may exist. Further, obtaining the necessary FDA approvals or other qualifications under applicable regulatory
requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of supply and could require the new
manufacturer to bear significant additional costs which may be passed on to us.
In addition, our reliance on Contura International entails additional risks, including reliance on Contura International for regulatory compliance and
quality assurance, the possible breach of the Manufacturing and Supply Agreement by Contura International, and the possible termination of the Manufacturing
and Supply Agreement at a time that is costly or inconvenient for us. Our failure, or the failure of Contura International, to comply with applicable regulations
could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation,
seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of Bulkamid. Our
dependence on Contura Limited also subjects us to all of the risks related to Contura Limited’s business, which are all generally beyond our control. Contura
Limited’s ability to perform its obligations under the Manufacturing
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and Supply Agreement is dependent on Contura Limited’s operational and financial health, which could be negatively impacted by several factors, including
changes in the economic and political and legislative conditions.
Any termination or loss of significant rights under the License Agreement would materially and adversely affect our development and
commercialization of our r-SNM System.
On October 1, 2013, we entered into the License Agreement, pursuant to which AMF granted us the AMF IP relating to AMF Licensed Products.
If AMF terminates the License Agreement under certain circumstances, we may be required to pay damages to AMF and AMF may have the right to terminate
the license. In addition, if we do not have sufficient funds available to meet our payment obligations, AMF could terminate the License Agreement. Any
termination or loss of rights (including exclusivity) under the License Agreement would materially and adversely affect our ability to develop and commercialize
our r-SNM System, which in turn would have a material adverse effect on our business, operating results and prospects.
If we are not successful in converting physicians and patients to our products, our business will not succeed.
Our success depends substantially on our r-SNM System, which was our sole product until we acquired the Bulkamid product on February 25, 2021. We
expect our r-SNM System will drive the vast majority of our sales for the foreseeable future. If our r-SNM System is not successful at a level sufficient to generate
a profit and we are unable to develop additional products or compelling enhancements to our r-SNM System to generate additional profit, our business will not
succeed.
For over 20 years, physicians and patients relied on the only other approved SNM therapy offered by Medtronic, InterStim II and its predecessor,
InterStim I. As our r-SNM System is a new product in the SNM market, our primary strategy to penetrate the market and grow our revenue is to drive physician
and patient awareness of the material benefits of our r-SNM System. Physicians and patients may choose not to adopt our r-SNM System for a number of reasons,
including:
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familiarity with InterStim II or preference for Interstim Micro or any new device for the treatment of SNM that Medtronic could develop and
commercialize in the future;
lack of experience with our r-SNM System and with SNM as a treatment alternative;
our inability to convince key opinion leaders to provide recommendations regarding our r-SNM System, or to convince physicians and patients that it
is an attractive alternative to InterStim II, Interstim Micro and other third-line therapies such as BOTOX injections and PTNS;
perceived or actual benefits of InterStim II or Interstim Micro;
perceived inadequacy of evidence supporting the clinical benefits or cost-effectiveness of our r-SNM System over existing alternatives;
inability to charge our r-SNM System or preference for a non-rechargeable device, such as InterStim II;
• marketing and other efforts by Medtronic targeting physicians, including those with whom they have long-term relationships; and
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ineffectiveness of our sales and marketing efforts for our r-SNM System.
In addition, patients may choose not to adopt SNM therapy as a potential therapy if, among other potential reasons, their anatomy would not allow for
effective treatment with our r-SNM System, they are reluctant to receive an implantable device as opposed to an alternative, non-implantable treatment, or they are
worried about potential adverse effects of SNM therapy, such as infection, discomfort from the stimulation, or soreness or weakness.
We also expect to conduct direct-to-patient marketing efforts to drive patient awareness of SNM therapy in general and our r-SNM System in particular.
We intend to educate patients on the availability of SNM therapy as a treatment for the symptoms of OAB and FI in an effort to promote dialogue between patients
and physicians about the existence of these symptoms in the first instance. We believe that educating healthcare providers and patients
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about the clinical merits and patient benefits of our r-SNM System as a treatment for OAB will be key elements driving adoption of our r-SNM System. However,
some physicians may have prior history with or a preference for other treatment options. Moreover, our efforts to educate the medical community and patients on
the benefits of our r-SNM System will require significant resources and we may never be successful. If healthcare providers and patients do not adopt our r-SNM
System, and our r-SNM System does not achieve broad market acceptance, our ability to execute our growth strategy will be impaired, and our business and future
prospects may be adversely affected.
Our long-term growth substantially depends, in part, on our ability to enhance our products, and if we fail to do so we may be unable to compete
effectively.
It is important to our business and our long-term growth that we continue to enhance our r-SNM System. We intend to continue to invest in research and
development activities focused on improvements and enhancements to our r-SNM System. Our goals include expanding the suite of product solutions available for
SNM therapy, including a non-rechargeable SNM device that utilizes a primary-cell battery.
Developing enhancements to our r-SNM System can be expensive and time-consuming and could divert management’s attention away from the
commercialization of our r-SNM System and divert financial resources from other operations. The success of any new product enhancements will depend on
several factors, including our ability to:
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properly identify and anticipate physician and patient needs, and develop new product enhancements to meet those needs;
demonstrate, if required, the safety and effectiveness of new enhancements to our r-SNM System with data from preclinical studies and clinical
studies;
obtain, and obtain in a timely manner, the necessary regulatory clearances or approvals for new enhancements to our r-SNM System, or product
modifications for our r-SNM System;
avoid infringing upon the intellectual property rights of third-parties;
be fully FDA-compliant with marketing of new devices or modified products;
address competitive counter moves advanced by Medtronic to secure and maintain customers;
develop an effective and dedicated sales and marketing team to provide adequate education and training to potential users of our r-SNM System; and
receive adequate coverage and reimbursement for procedures performed with our r-SNM System.
If we are not successful in commercializing our r-SNM System and developing and commercializing new product enhancements, our ability to achieve
and maintain market share and increase our revenue may be impaired, which could have a material adverse effect on our business, financial condition and results
of operations.
If the quality of our products do not meet the expectations of physicians or patients, then our brand and reputation or our business could be adversely
affected.
In the course of conducting our business, we must adequately address quality issues that may arise with our products, including defects in third-party
components included in our products. Although we have established internal procedures designed to minimize risks that may arise from quality issues, we may not
be able to eliminate or mitigate occurrences of these issues and associated liabilities. In addition, even in the absence of quality issues, we may be subject to claims
and liability if the performance of our products do not meet the expectations of physicians or patients. For example, the anticipated battery life of our products will
vary based on usage and therapy settings. The battery is designed to last for approximately 15 years, but it may be shorter if a patient’s required therapy results in
the device being used in excess of normal use conditions or if other physical battery failures occur. If the quality of our products do not meet the expectations of
physicians or patients, then our brand and reputation with those physicians or patients, and our business, financial condition and results of operations, could be
adversely affected.
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The size and future growth in the market for SNM therapy and urethral bulking agents has not been established with precision and may be smaller
than we estimate. If our estimates and projections overestimate the size of this market, our sales growth may be adversely affected.
Our estimates of the size and future growth in the market for SNM therapy and urethral bulking agents, including the number of people in the United
States and Europe who suffer from symptoms of either bladder or bowel dysfunction and who are readily treatable with and eligible candidates for our therapy, is
based on a number of internal and third-party studies, reports and estimates. In addition, our internal estimates are based in large part on current treatment patterns
by healthcare providers using our therapy and our belief that the incidence of bladder and bowel dysfunction in the United States, Europe and worldwide is
increasing. While we believe these factors have historically provided and may continue to provide us with effective tools in estimating the total market for our
therapy and our r-SNM System, these estimates may not be correct and the conditions supporting our estimates may change at any time, thereby reducing the
predictive accuracy of these underlying factors. The actual numbers of people with bladder or bowel dysfunction who are readily treatable with and eligible
candidates for our therapy, and the actual demand for our products or competitive products, could differ materially from our projections if our assumptions are
incorrect. As a result, our estimates of the size and future growth in the market for our products may prove to be incorrect. If the actual number of people with
bladder or bowel dysfunction who would benefit from our products and the size and future growth in the market for our products is smaller than we have
estimated, it may impair our projected sales growth and have an adverse impact on our business.
We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third-parties that may not result
in the development of commercially viable products or product improvements or the generation of significant future revenues.
In the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, partnerships or
other arrangements to develop new products or product improvements and to pursue new markets. Proposing, negotiating and implementing collaborations, in-
licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process. Other companies, including those with
substantially greater financial, marketing, sales, technology or other business resources, may compete with us for these opportunities or arrangements. We may not
identify, secure, or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited
institutional knowledge and experience with respect to these business development activities, and we may also not realize the anticipated benefits of any such
transaction or arrangement. In particular, these collaborations may not result in the development of products that achieve commercial success or viable product
improvements or result in significant revenues and could be terminated prior to developing any products.
Additionally, we may not be in a position to exercise sole decision making authority regarding the transaction or arrangement, which could create the
potential risk of creating impasses on decisions, and our future collaborators may have economic or business interests or goals that are, or that may become,
inconsistent with our business interests or goals. It is possible that conflicts may arise with our collaborators, such as conflicts concerning the achievement of
performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations or the ownership or control of
intellectual property developed during the collaboration. If any conflicts arise with any future collaborators, they may act in their self-interest, which may be
adverse to our best interest, and they may breach their obligations to us. In addition, we may have limited control over the amount and timing of resources that any
future collaborators devote to our or their future products. Disputes between us and our collaborators may result in litigation or arbitration which would increase
our expenses and divert the attention of our management. Further, these transactions and arrangements will be contractual in nature and will generally be
terminable under the terms of the applicable agreements and, in such event, we may not continue to have rights to the products relating to such transaction or
arrangement or may need to purchase such rights at a premium.
If we enter into in-bound intellectual property license agreements, we may not be able to fully protect the licensed intellectual property rights or maintain
those licenses. Future licensors could retain the right to prosecute and defend the intellectual property rights licensed to us, in which case we would depend on the
ability of our licensors to obtain, maintain and enforce intellectual property protection for the licensed intellectual property. These licensors may determine not to
pursue litigation against other companies or may pursue such litigation less
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aggressively than we would. Further, entering into such license agreements could impose various diligence, commercialization, royalty or other obligations on us.
Future licensors may allege that we have breached our license agreement with them, and accordingly seek to terminate our license, which could adversely affect
our competitive business position and harm our business prospects.
We may seek to grow our business through acquisitions of complementary products or technologies, and the failure to manage acquisitions, or the
failure to integrate them with our existing business, could harm our business, financial condition and operating results.
From time to time, we may consider opportunities to acquire other companies, products or technologies that may enhance our product platform or
technology, expand the breadth of our markets or customer base, or advance our business strategies. Potential acquisitions involve numerous risks, including:
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problems assimilating the acquired products or technologies;
issues maintaining uniform standards, procedures, controls and policies;
unanticipated costs associated with acquisitions;
diversion of management’s attention from our existing business;
risks associated with entering new markets in which we have limited or no experience;
increased legal and accounting costs relating to the acquisitions or compliance with regulatory matters; and
unanticipated or undisclosed liabilities of any target.
We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully complete any such acquisitions on
favorable terms or at all, or whether we will be able to successfully integrate any acquired products or technologies. Our potential inability to integrate any
acquired products or technologies effectively, particularly our acquisition of Bulkamid, may adversely affect our business, operating results and financial
condition. We have a robust and detailed integration plan for Bulkamid and believe that our extensive diligence and planning will result in a smooth integration,
but we may face various challenges in effectively integrating this product into our company and we may not be able to overcome these challenges.
Potential complications from our products or future enhancements to our products may not be revealed by our clinical experience.
Based on our experience, complications from use of our r-SNM System may include infection, pain at site, lead migration or fracture, and the body’s
rejection of the implant. Complications of the use of Bulkamid include temporary pain, delayed urination, painful urination, and/or urinary tract infections. If
unanticipated side-effects result from the use of our products, we could be subject to liability and our device would not be widely adopted. Long-term use may
result in unanticipated complications, even after the device is removed. Additionally, while the INS battery for our r-SNM System is designed to last
approximately 15 years, we have not tested the battery in an actual implant in the body for that period and the battery may not last that long under normal or
atypical use conditions. If implants in people reveal that our battery fails before its designed 15-year life, physicians and patients may lose confidence in our r-
SNM System, which may materially harm our reputation and our business.
If we fail to receive access to hospital facilities, our sales may decrease.
In the United States, in order for physicians to use our products, we expect that the hospital facilities where these physicians treat patients will typically
require us to enter into purchasing contracts. This process can be lengthy and time-consuming and require extensive negotiations and management time. In the
European Union (EU) certain institutions may require us to engage in a contract bidding process in the event that such institutions are considering making purchase
commitments that exceed specified cost thresholds, which vary by jurisdiction. These processes are only open at certain periods of time, and we may not be
successful in the bidding process. If we do not receive access to hospital facilities via these contracting processes or otherwise, or if we are unable to secure
contracts or tender successful bids, our sales may decrease and our operating results may be harmed. Furthermore, we may expend significant effort in these time-
consuming processes and still may not obtain a purchase contract from such hospitals.
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Performance issues, service interruptions or price increases by shipping carriers could adversely affect our business and harm our reputation and
ability to provide our products on a timely basis.
Expedited, reliable shipping will be essential to our operations. We intend to rely heavily on providers of transport services for reliable and secure point-
to-point transport of our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss,
damage or destruction of our products, it would be costly to replace our products in a timely manner and such occurrences may damage our reputation and lead to
decreased demand for our products and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our
operating margins and results of operations. Similarly, strikes, severe weather, natural disasters or other service interruptions affecting delivery services we use
would adversely affect our ability to process orders for our products on a timely basis.
Our employees, consultants, and other commercial partners may engage in misconduct or other improper activities, including non-compliance with
regulatory standards and requirements.
We are exposed to the risk that our employees, consultants, and other commercial partners and business associates may engage in fraudulent or illegal
activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA
and non-U.S. regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards,
healthcare fraud and abuse laws and regulations in the United States and internationally or laws that require the true, complete and accurate reporting of financial
information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to
extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict
or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is
not always possible to identify and deter misconduct by our employees, consultants and other third parties, and the precautions we take to detect and prevent this
activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits
stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or
asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative
penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages,
reputational harm, diminished profits and future earnings, and curtailment of operations, any of which could adversely affect our ability to operate our business and
our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal
fees and reputational harm, and divert the attention of management in defending ourselves against any of these claims or investigations.
Consolidation in the healthcare industry or group purchasing organizations could lead to demands for price concessions, which may affect our ability
to sell our products at prices necessary to support our current business strategies.
Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators, regulators
and third-party payors. Cost reform has triggered a consolidation trend in the healthcare industry to aggregate purchasing power, which may create more requests
for price concessions in the future. Additionally, group purchasing organizations, independent delivery networks and large single accounts may continue to use
their market power to consolidate purchasing decisions for hospitals and ambulatory surgery centers (ASCs). We expect that market demand, government
regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further
business consolidations and alliances among our future customers, which may exert further downward pressure on the prices of our products.
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To successfully market and sell our products in markets outside of the United States, we must address many international business risks with which
we have limited experience, and failure to manage these risks may adversely affect our operating results and financial condition.
We have sales and operations both inside and outside the United States, including a limited sales and marketing organization outside the United States.
Our international sales strategy is to increase our presence in Europe, Canada, and Australia, which have established and favorable reimbursement. With the
purchase of Contura, we will greatly expand our international operations through its direct sales force and distribution agreements. International sales and
operations are subject to a number of risks, including:
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difficulties in staffing and managing our international sales, marketing, and other operations;
increased competition as a result of more products and procedures receiving regulatory approval or otherwise being free to market in internationally;
longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
reduced or varied protection for intellectual property rights in some countries;
export restrictions, trade regulations, and foreign tax laws;
fluctuations in foreign currency exchange rates;
foreign certification and regulatory clearance or approval requirements;
difficulties in developing effective marketing campaigns in unfamiliar foreign countries;
customs clearance and shipping delays;
political, social, and economic instability internationally, terrorist attacks, and security concerns in general;
preference for locally manufactured products;
potentially adverse tax consequences, including the complexities of foreign value-added tax, tax inefficiencies related to our corporate structure, and
restrictions on the repatriation of earnings;
the burdens of complying with a wide variety of foreign laws and different legal standards;
increased financial accounting and reporting burdens and complexities; and
FCPA, OFAC, the Bribery Act, each of which is defined below, and other export control, anti-corruption, anti-money laundering and anti-terrorism
laws and regulations.
If one or more of these risks are realized, our ability to expand our operations into international markets could be limited, which could adversely affect our
business, financial condition and results of operations.
Our ability to maintain our competitive position will depend on our ability to retain senior management and other highly qualified personnel.
Our success will depend in part on our continued ability to retain and motivate our highly qualified management, clinical, and other personnel. We are
highly dependent upon our management team, particularly our Chief Executive Officer and member of our board of directors, Raymond W. Cohen, and the other
members of our senior management, and other key personnel. Although we have entered into employment agreements with our executive officers, each of them
may terminate their employment with us at any time. The replacement of any of our key personnel would likely involve significant time and costs and may
significantly delay or prevent the achievement of our business objectives, which could have an adverse effect on our business. In addition, we do not carry any
“key person” insurance policies that could offset potential loss of service under applicable circumstances.
Many of our employees have become or will soon become vested in a meaningful amount of our common stock or common stock options. Our employees
may be more likely to leave us if the shares they own or have the option to purchase have significantly appreciated in value relative to the original purchase price
for the shares, or if the exercise prices of the options that they hold are significantly below the market price of our common stock. Replacement of any employees
who leave our company could involve significant time and costs and may
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significantly delay or prevent the achievement of our business objectives, which could have an adverse effect on our business.
If we are unable to achieve and maintain adequate levels of coverage or reimbursement for our products, our commercial success may be severely
hindered, and in the event insurers require a prior authorization process, such process may not result in positive coverage determination for these patients.
In the United States, we derive most of our revenue from the sale of our products to hospitals and ASCs, which typically bill various third-party payors,
including Medicare, Medicaid, private insurance companies, health maintenance organizations and other healthcare-related organizations. In addition, we expect
that any portion of the costs and fees associated with our products that are not covered by these third-party payors, such as deductibles or co-payments, will be
billed directly to the patient by the provider. Further, certain third-party payors may not cover our products and the related procedures because they may determine
that our products and the related procedures are experimental or investigational. Customers that perform the procedure may be subject to reimbursement claim
denials upon submission of the claim. Customers may also be subject to recovery of overpayments if a third-party payor makes payment for the claim and
subsequently determines that the third-party payor’s coding, billing or coverage policies were not followed. In addition, although most large insurers have
established coverage policies in place to cover SNM and bulking agent therapy, certain commercial payors have a patient-by-patient prior authorization process
that must be followed before they will provide reimbursement for SNM and bulking agent therapy. These processes typically involve the treating physician
submitting a form to the payor that provides information about the past treatments provided to the patient that proved ineffective, and the physician’s
recommendation that the patient be treated with SNM and bulking agent therapy. Although the prior authorization process can take several weeks, based on our
industry knowledge, it generally results in positive coverage determination for these patients, however this process may not result in positive coverage
determination for these patients. Further, any decline in the amount payors are willing to reimburse our target customers could make it difficult for our target
customers to adopt or continue using our products and could create additional pricing pressure for us. If we are forced to lower the price we charge for our
products, our gross margins will decrease, which could have a material adverse effect on our business, financial condition and results of operations and impair our
ability to grow our business.
Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling
healthcare costs. Coverage and reimbursement for procedures using our products can differ significantly from payor to payor. Payors continually review new and
existing technologies for possible coverage and can, without notice, deny or reverse coverage for new or existing products and procedures. Third-party payor
policies may not provide coverage for procedures in which our products are used.
Outside the United States, reimbursement levels vary significantly by country and by region, particularly based on whether the country or region at issue
maintains a single-payor system. SNM therapy is eligible for reimbursement in Canada, Australia, and certain countries in the EU, such as Germany, France, and
the United Kingdom. Annual healthcare budgets generally determine the number of SNM systems that will be paid for by the payor in these single-payor system
countries and regions. Reimbursement is obtained from a variety of sources, including government-sponsored and private health insurance plans, and combinations
of both. Some countries or regions may require us to gather additional clinical data before granting coverage and reimbursement for our products. We intend to
work with payors to obtain coverage and reimbursement approval in countries and regions where it makes economic sense to do so, however, we may not obtain
such coverage, which could have a material adverse effect on our business, financial condition and results of operations and impair our ability to grow our business
internationally.
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not
be able to maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices. This risk
exists even if a device is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign
regulatory authority. Our products are designed to affect, and any future enhancements to our products will be designed to affect, important bodily functions and
processes. Any side effects, manufacturing defects, misuse or abuse associated with our products could result in patient injury or death. The medical technology
industry has historically been subject to
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extensive litigation over product liability claims, and we may face product liability suits. We may be subject to product liability claims if our products cause, or
merely appear to have caused, patient injury or death. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with
components and raw materials, may be the basis for a claim against us. Product liability claims may be brought against us by patients, healthcare providers or
others selling or otherwise coming into contact with our products, among others. If we cannot successfully defend ourselves against product liability claims, we
will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:
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costs of litigation;
distraction of management’s attention from our primary business;
the inability to commercialize our products and develop enhancements to our products;
decreased demand for our products;
damage to our business reputation;
product recalls or withdrawals from the market;
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substantial monetary awards to patients or other claimants; or
loss of sales.
While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any
recall or market withdrawal of our products may delay the supply to our customers and may impact our reputation. We may not be successful in initiating
appropriate market recall or market withdrawal efforts that may be required in the future and these efforts may not have the intended effect of preventing product
malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for
safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have a material adverse effect on our business,
financial condition and results of operations.
Although we have product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and
coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may
not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms or
otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with
respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of
operations.
We bear the risk of warranty claims on our products.
We bear the risk of warranty claims on our products. We may not be successful in claiming recovery under any warranty or indemnity provided to us by
our suppliers or third-party manufacturers in the event of a successful warranty claim against us by a customer or and any recovery from any such supplier or third-
party manufacturer could be inadequate. In addition, warranty claims brought by our customers related to third-party components may arise after our ability to
bring corresponding warranty claims against such suppliers or third-party manufacturers expires, which could result in costs to us.
Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The global financial
crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the global financial crisis,
could result in a variety of risks to our business, including weakened demand for our products, and our ability to raise additional capital when needed on acceptable
terms, if at all. A weak or declining economy could also strain our manufacturers
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or suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our
business.
Failure of a key information technology system, process, or site could have an adverse effect on our business.
We rely extensively on information technology systems to conduct our business. These systems affect, among other things, ordering and managing
materials from suppliers, shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory,
legal or tax requirements, data security, and other processes necessary to manage our business. If our systems are damaged or cease to function properly due to any
number of causes, ranging from catastrophic events to power outages to security breaches, and our business continuity plans do not effectively compensate on a
timely basis, we may experience interruptions in our operations, which could have an adverse effect on our business. Furthermore, any breach in our information
technology systems could lead to the unauthorized access, disclosure and use of non-public information, including information from our patient registry or other
patient information, which is protected by HIPAA and other laws. Any such access, disclosure, or other loss of information could result in legal claims or
proceedings, liability under laws that protect the privacy of personal information, and damage to our reputation.
If our facilities are damaged or become inoperable, we will be unable to continue to research and develop our products and, as a result, there will be
an adverse effect on our business until we are able to secure a new facility and rebuild our inventory.
We perform substantially all of our research and development and back office activity and maintain a substantial portion of our finished goods inventory
for our r-SNM System in Irvine, California. We warehouse a substantially lesser quantity of finished goods in a contract warehousing facility in the Netherlands.
Our facilities, equipment and inventory would be costly to replace and could require substantial lead time to repair or replace. Our facilities, and those of our
contractors, may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, tornadoes, flooding, fire and power outages,
which may render it difficult or impossible for us to perform our research, development and commercialization activities for some period of time. The inability to
perform those activities, combined with the time it may take to rebuild our inventory of finished product, may result in the loss of customers or harm to our
reputation. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our
potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.
Our results may be impacted by changes in foreign currency exchange rates.
As our international sales increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which could expose us to foreign
currency risks, including changes in currency exchange rates. We do not currently engage in any hedging transactions. If we are unable to address these risks and
challenges effectively, our international operations may not be successful and our business could be harmed.
We are subject to anti-bribery, anti-corruption, and anti-money laundering laws, including the U.S. FCPA, as well as export control laws, customs
laws, sanctions laws and other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other
remedial measures and legal expenses, which could adversely affect our business, results of operations and financial condition.
As we grow our international presence and global operations, we will be increasingly exposed to trade and economic sanctions and other restrictions
imposed by the United States, EU, and other governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal
agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic
sanctions laws, export control laws, the FCPA and other federal statutes and regulations, including those established by the OFAC. In addition, the U.K. Bribery
Act of 2010 (the Bribery Act) prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that
“fails to prevent bribery” by anyone associated with the organization can be charged under the Bribery Act unless the organization can establish the defense of
having implemented “adequate procedures” to prevent bribery. Under these laws and regulations, as well as other anti-corruption laws, anti-money laundering
laws, export control laws, customs laws, sanctions laws and other laws governing our operations, various government agencies may require export licenses, may
seek to impose modifications to business practices, including
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cessation of business activities in sanctioned countries or with sanctioned persons or entities and modifications to compliance programs, which may increase
compliance costs, and may subject us to fines, penalties and other sanctions. A violation of these laws or regulations would negatively affect our business, financial
condition and results of operations.
We have implemented policies and procedures designed to ensure compliance by us and our directors, officers, employees, representatives, consultants
and agents with the FCPA, OFAC restrictions, the Bribery Act and other export control, anti-corruption, anti-money-laundering and anti-terrorism laws and
regulations. Our policies and procedures may not be sufficient to ensure that our directors, officers, employees, representatives, consultants and agents have not
engaged and will not engage in conduct for which we may be held responsible, or that our business partners have not engaged and will not engage in conduct that
could materially affect their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA,
OFAC restrictions, the Bribery Act or other export control, anti-corruption, anti-money laundering and anti-terrorism laws or regulations may result in severe
criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our business, financial condition and results of
operations.
Our ability to use our net operating losses and research and development credit carryforwards to offset future taxable income may be subject to
certain limitations.
In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), a corporation that undergoes an “ownership
change,” generally defined as a greater than 50% change by value in its equity ownership over a three-year period, is subject to limitations on its ability to utilize
its pre-change net operating losses (NOLs) and its research and development credit carryforwards to offset future taxable income. Our existing NOLs and research
and development credit carryforwards may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability
to utilize NOLs and research and development credit carryforwards could be further limited by Sections 382 and 383 of the Code. In addition, our ability to deduct
net interest expense may be limited if we have insufficient taxable income for the year during which the interest is incurred, and any carryovers of such disallowed
interest would be subject to the limitation rules similar to those applicable to NOLs and other attributes. Future changes in our stock ownership, some of which
might be beyond our control, could result in an ownership change under Section 382 of the Code. For these reasons, in the event we experience a change of
control, we may not be able to utilize a material portion of the NOLs, research and development credit carryforwards or disallowed interest expense carryovers,
even if we attain profitability.
A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including the outbreak of the novel strain of
coronavirus disease, COVID-19, could adversely affect our business.
If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or worldwide, our business may be adversely affected. In
December 2019, a novel strain of coronavirus, SARS-CoV-2, was identified in Wuhan, China. Since then, SARS-CoV-2, and the resulting disease, COVID-19, has
spread to most countries and all 50 states within the United States. The COVID-19 pandemic has negatively impacted our business, financial condition and results
of operations by significantly decreasing and delaying the number of procedures performed using our r-SNM System, and we expect the pandemic to continue to
negatively impact our business, financial condition and results of operations. Similar to the general trend in elective and other surgical procedures, the number of
procedures performed using our r-SNM System has decreased significantly as healthcare organizations in the United States and globally, including in Europe and
Canada have prioritized the treatment of patients with COVID-19 or have altered their operations to prepare for and respond to the pandemic. For example, in the
United States, governmental authorities have recommended, and in certain cases required, or healthcare providers have decided that elective, specialty and other
procedures and appointments be suspended or canceled to avoid non-essential patient exposure to medical environments and potential infection with COVID-19
and to focus limited resources and personnel capacity toward the treatment of COVID-19 patients. We believe the COVID-19 pandemic has also negatively
impacted the number of OAB, FI and UR diagnoses and patients screened for eligibility for our r-SNM system as hospitals and ambulatory surgery centers focus
on COVID-19 and as patients postpone healthcare visits and treatments. Specifically, substantially all of the procedures using our r-SNM System were postponed
or cancelled from middle of March 2020 through May 2020, but order flow began a gradual recovery in May 2020 and continued to improve in the second half of
2020. Many areas in the United States have since restarted procedures
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with our r-SNM System, but the situation is evolving rapidly and remains uncertain due to recent increases in COVID-19 cases and related hospitalizations. These
measures and challenges will likely continue for the duration of the pandemic, which is uncertain, and will continue to significantly reduce our revenue and
negatively impact our business, financial condition and results of operations while the pandemic continues. Further, once the pandemic subsides, we anticipate
there will be a substantial backlog of patients seeking appointments with physicians and surgeries to be performed at hospitals and ambulatory surgery centers
relating to a variety of medical conditions, and as a result, patients seeking procedures performed using our r-SNM System, may have to navigate limited provider
capacity. We believe this limited provider, hospital and ambulatory surgery center capacity could have a significant adverse effect on our business, financial
condition and results of operations following the end of the pandemic. Additionally, even after it is deemed advisable to resume conducting elective procedures,
some patients may elect not to undergo procedures or delay scheduling procedures to avoid traveling to healthcare facilities due to safety concerns.
Numerous state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and
similar government orders and restrictions for their residents to control the spread of COVID-19. Since March 19, 2020, the governor of California, where our
headquarters are located, has issued several orders related to COVID-19, including “stay at home” orders limiting non-essential activities, travel and business
operations for a period of time. Such orders or restrictions have resulted in reduced operations at our headquarters, modified operations at our manufacturing
facility, work slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby significantly and negatively impacting our
operations. Other disruptions or potential disruptions include restrictions on the ability of our sales representatives, clinical specialists and other personnel to travel
and access customers for training and case support; inability of our suppliers to manufacture components and parts and to deliver these to us on a timely basis, or at
all; disruptions in our production schedule and ability to manufacture and assemble products; inventory shortages or obsolescence; delays in actions of regulatory
bodies; delays in operations at insurance agencies, which may impact timelines for the issuance of insurance coverage policies and local coverage determinations;
delays in clinical trials; diversion of or limitations on employee resources that would otherwise be focused on the operations of our business, including because of
sickness of employees or their families or the desire of employees to avoid contact with groups of people; delays in growing or reductions in our sales
organization, including through delays in hiring, lay-offs, furloughs or other losses of sales representatives or salary and compensation reductions; restrictions in
our ability to ship our products to customers; business adjustments or disruptions of certain third parties, including suppliers, medical institutions and clinical
investigators with whom we conduct business; increase in bad debts due to an adverse impact of the pandemic on our clients’ cash flows and resulting decrease in
collectability of our account receivables; and additional government requirements or other incremental mitigation efforts that may further impact our or our
suppliers’ capacity to manufacture and sell our products. The extent to which the COVID-19 pandemic impacts our business will depend on future developments,
which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and spread of COVID-19 and the
actions to contain COVID-19 or treat its impact, among others.
While the potential economic impact brought by and the duration of any pandemic, epidemic or outbreak of an infectious disease, including COVID-19,
may be difficult to assess or predict, the widespread COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial
markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from
the spread of an infectious disease, including COVID-19, could materially affect our business. Such economic recession could have a material adverse effect on
our long-term business as hospitals curtail and reduce capital and overall spending. In addition, the current economic downturn is resulting in significant job losses
and reductions in disposable income and if patients are unable to obtain or maintain health insurance policies, this may significantly impact their ability to pay for
the procedures utilizing our r-SNM System, further negatively impacting our business, financial condition and results of operations. To the extent the COVID-19
pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described herein, including those
relating to incurring future operating losses, dependence of the r-SNM System, successful commercialization, supply chain and distribution channels.
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Risks Related to Government Regulation
Our operations are subject to extensive government regulation and oversight both in the United States and internationally, and our failure to comply
with applicable requirements could harm our business.
We are subject to extensive, complex, costly and evolving regulation in the United States, the United Kingdom, the EU, Canada and other countries,
including by the FDA and its foreign counterparts. With respect to medical devices, the FDA and foreign regulatory agencies regulate, among other things, design,
development and manufacturing, testing, labeling, content and language of instructions for use and storage, clinical studies, product safety, establishment
registration and device listing, marketing, sales and distribution, premarket clearance and approval, record keeping procedures, advertising and promotion, recalls
and field safety corrective actions, postmarket surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead
to death or serious injury, postmarket approval studies, and product import and export.
The regulations to which we are subject are complex and have become more stringent over time. Regulatory changes could result in restrictions on our
ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. Our failure to comply with all applicable regulations
could jeopardize our ability to sell our products and result in enforcement actions such as warning letters, fines, injunctions, civil penalties, termination of
distribution, recalls or seizures of products, delays in the introduction of products into the market, total or partial suspension of production, refusal to grant
clearances or approvals, withdrawals or suspensions of approvals, prohibitions on sales of our products, and in the most serious cases, criminal penalties.
We are also subject to the periodic scheduled or unscheduled inspection of our facilities, review of production processes, and testing of our products to
confirm that we are in compliance with all applicable regulations. Adverse findings during regulatory inspections may result in costly remediation efforts,
requirements that we complete government mandated clinical studies or government enforcement actions. The manufacturers that we work with are similarly
subject to periodic scheduled or unscheduled inspections of their facilities. Adverse findings during such inspections may impact our inventory and cause
disruptions in product sales.
We may not receive the necessary clearances or approvals for modifications to our products or for future product candidates, and failure to timely
obtain necessary clearances or approvals for modifications to our products or for future product candidates would adversely affect our ability to grow our
business.
As class III medical devices, our products, and our future product candidates, are and will be subject to the most stringent degree of medical device
regulation. The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of medical device products are subject to
extensive regulation by the FDA and other regulatory authorities in the United States and other countries, with regulations differing from country to country. In the
process of obtaining PMA approval, the FDA must determine that a proposed device is safe and effective for its intended use based in part on extensive data,
including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are
deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.
Modifications to products that are approved through a PMA application generally require FDA approval. In addition, a PMA generally requires the
performance of one or more clinical studies. Despite the time, effort and cost, a device or modification may not be approved or cleared by the FDA. Any
modifications to our products that were not previously approved may require us to submit an additional PMA or PMA supplement and obtain FDA approval prior
to implementing the change. If the FDA requires us to go through a lengthier, more rigorous examination, make modifications to the device, or generate additional
data to submit to the FDA, future product introductions or modifications could be delayed or canceled, which could adversely affect our ability to grow our
business.
The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
•
•
inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that the device is safe or effective for its
intended uses;
the disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of clinical studies or the interpretation of
data from pre-clinical studies or clinical studies;
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•
•
•
•
•
serious and unexpected adverse device effects experienced by participants in clinical studies;
the data from pre-clinical studies and clinical studies may be insufficient to support clearance or approval, where required;
inability to demonstrate that the clinical and other benefits of the device outweigh the risks;
the manufacturing process or facilities may not meet applicable requirements; and
the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering
clinical data or regulatory filings insufficient for clearance or approval.
The FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may
impact our ability to modify our products or introduce future products on a timely basis. Such policy or regulatory changes could impose additional requirements
upon us that could delay our ability to obtain approvals, increase the costs of compliance or restrict our ability to maintain approvals once obtained.
In order to sell our products in member countries of the European Economic Area (EEA) (which is composed of the 28 Member States of the EU plus
Norway, Iceland and Liechtenstein), it must comply with the essential requirements of the EU Active Implantable Medical Devices Directive (Council Directive
90/385/EEC) (the AIMD Directive). If any future product candidates are also considered to qualify as an active implantable medical device, or AIMD, under the
AIMD Directive, it too will need to comply with the essential requirements it sets out. Alternatively, if a future product candidate is not considered an AIMD under
the AIMD Directive, it will still be required to comply with the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC). The
Medical Devices Regulations (Regulation 2017/745) are also now in force, as further discussed below.
Compliance with the requirements under either of these Directives and confirmation of compliance by a Notified Body are prerequisites to affixing the
Conformité Européenne (CE) mark to our r-SNM System and any future product candidates. Without a CE mark, medical devices cannot be sold or marketed in
the EEA. To demonstrate that our r-SNM System is compliant with the essential requirements set out under the AIMD Directive, we must undergo a conformity
assessment procedure. This requires an assessment of available clinical evidence, literature data for the product and postmarket experience in respect of similar
products already marketed to ensure and declare that the products in question comply with the standards set out in Annex I of the AIMD Directive. In addition, a
conformity assessment procedure requires the intervention of a Notified Body. Notified Bodies are separate entities that are authorized or licensed to perform such
assessments by the governmental authorities of each EU Member State. Manufacturers of AIMDs must make an application to a Notified Body for an assessment
of its technical dossiers and quality system. Alternatively, manufacturers can seek approval from the Notified Body that a representative sample of the products it
has manufactured satisfies the requirements set out in the AIMD Directive and subsequently ensure and declare that all of its products conform to the standard of
the approved sample. This is also known as “type approval.”
Future product candidates that are not considered AIMDs under the AIMD Directive will still require a conformity assessment procedure. The types of
procedures required are set out in the Medical Devices Directive and will vary according to the type of medical device and its classification. For low-risk medical
devices (Class I non-sterile, non-measuring devices) the manufacturer can issue a Declaration of Conformity based on a self-assessment of the conformity of its
products with the essential requirements of the EU Medical Devices Directive. However, for all other types of medical devices a similar conformity assessment
procedure to that outlined above and in the AIMD Directive will be required, also involving the intervention of a Notified Body.
For our products, future AIMD product candidates and all other future product candidates, the Notified Body issues a certificate of conformity following
successful completion of a conformity assessment procedure conducted in relation to the device and its manufacturer and their conformity with the essential
requirements. This certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of
Conformity.
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As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other
things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must
demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are
minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device
are supported by suitable evidence. If we fail to remain in compliance with the applicable Directives outlined above, we would be unable to continue to affix the
CE mark to our r-SNM System or our external trial system, which would prevent us from selling it within the EEA.
Modifications to our products may require us to obtain new PMA approvals or approvals of a PMA supplement, and if we market modified products
without obtaining necessary approvals, we may be required to cease marketing or recall the modified products until required approvals are obtained.
Certain modifications to a PMA-approved device may require approval of a new PMA or a PMA supplement, or alternatively a notification or other
submission to FDA. We will be responsible for deciding whether a modification requires approval by the FDA. However, the FDA may not agree with our
decisions regarding whether a new PMA or PMA supplement is necessary. We may make modifications to our products that we believe do not require approval of
a new PMA or PMA supplement. If the FDA disagrees with our determination and requires us to submit a new PMA or PMA supplement for modifications to
previously approved products, we may be required to cease marketing or to recall the modified product until we obtain approval, and we may be subject to
significant regulatory fines or penalties. Any delay or failure in obtaining required approvals would adversely affect our ability to introduce enhanced products in a
timely manner, which in turn would harm our future growth.
The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result
in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly
to our business.
The FDA and other regulatory agencies strictly regulate the marketing and promotional claims that are made about approved medical devices, such as our
products. In particular, a product may not be promoted for uses or indications that are not approved by the FDA or other similar regulatory authorities as reflected
in the product’s approved labeling. Physicians could use our products on their patients in a manner that is inconsistent with the approved label. We will train our
marketing personnel and sales representatives to not promote our products for uses outside of FDA-approved indications for use, known as “off-label uses.” We
cannot, however, prevent a physician from using our products off-label when in the physician’s independent professional medical judgment he or she deems it
appropriate. There may be increased risk of injury to patients if physicians attempt to use our products off-label. Furthermore, the use of our products for
indications other than those that may be approved by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could
harm our reputation in the marketplace among physicians and patients.
If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request
that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of a warning letter, an
untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other
federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business
activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative
penalties, damages (including treble damages), fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our
operations.
In addition, physicians may misuse our products or use improper techniques, potentially leading to adverse results, side effects or injury, which may lead
to an increased risk of product liability claims. If our products are misused or used with improper techniques or are determined to cause or contribute to patient
harm, we may become subject to costly litigation by our customers or patients. Product liability claims could divert management’s attention from the
commercialization of our products, be expensive to defend, result in sizeable damage awards against us that may not be covered by insurance, and subject us to
negative publicity resulting in reduced sales of our products.
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The clinical study process required to obtain regulatory approvals is lengthy and expensive with uncertain outcomes. If clinical studies of our
products do not produce results necessary to support regulatory clearance or approval in the United States or elsewhere, we will be unable to expand the
indications for our products and may incur additional costs or experience delays in completing, or ultimately be unable to complete, the commercialization of
our products.
In order to obtain approval for a PMA or PMA supplement for expanded indications, the sponsor must meet the regulatory submission requirements of the
FDA, which in many cases may require a PMA applicant to conduct well-controlled clinical studies designed to assess the safety and effectiveness of the product.
Conducting clinical studies is a complex and expensive process, can take many years, and outcomes are inherently uncertain. We incur substantial expense for, and
devote significant time to, clinical studies but cannot be certain that the trials will ever result in commercial revenue. We may experience significant setbacks in
clinical studies, even after earlier clinical studies showed promising results, and failure can occur at any time during the clinical study process. A device could
malfunction or produce undesirable adverse effects that could cause us or regulatory authorities to interrupt, delay or halt clinical studies. We, the FDA, an
Institutional Review Board (IRB) or another regulatory authority may suspend or terminate clinical studies at any time to avoid exposing trial participants to
unacceptable health risks.
Successful results of pre-clinical studies are not necessarily indicative of future clinical study results, and predecessor clinical study results may not be
replicated in subsequent clinical studies. Additionally, the FDA may disagree with our interpretation of the data from our pre-clinical studies and clinical studies,
or may find the clinical study design, conduct or results inadequate to prove safety or efficacy, and may require us to pursue additional pre-clinical studies or
clinical studies.
In addition, we may estimate and publicly announce the anticipated timing of the accomplishment of various clinical, regulatory and other product
development goals, which are often referred to as milestones. These milestones could include obtaining the right to affix the CE mark to certain products in the
EU, submitting an IDE to the FDA, applying to commence a pivotal clinical study for a new product, enrolling patients in clinical studies, releasing data from
clinical studies, and other clinical and regulatory events. The actual timing of these milestones could vary dramatically compared to our estimates and public
announcements, in some cases for reasons beyond our control.
Clinical studies are necessary to support PMA applications and may be necessary to support PMA supplements for modified versions of our products.
This would require the enrollment of large numbers of suitable subjects, which may be difficult to identify, recruit and maintain as participants in the clinical trial.
Adverse outcomes in the post-approval studies could also result in restrictions or withdrawal of a PMA approval. We may need to conduct additional clinical
studies in the future for the approval of the use of our products in some foreign countries. Clinical testing is difficult to design and implement, can take many
years, can be expensive, and, testing carries uncertain outcomes. The initiation and completion of any of these studies may be prevented, delayed, or halted for
numerous reasons. We may experience a number of events that could adversely affect the costs, timing or successful completion of our clinical studies, including:
• we may be required to submit an IDE application to FDA, which must become effective prior to commencing human clinical studies, and the FDA
may reject our IDE application and notify us that we may not begin investigational trials;
•
•
regulators and other comparable foreign regulatory authorities may disagree as to the design or implementation of our clinical studies;
regulators and/or IRBs, or other reviewing bodies may not authorize us or our investigators to commence a clinical trial, or to conduct or continue a
clinical study at a prospective or specific trial site for various reasons, including safety signals or noncompliance with regulatory requirements;
• we may not reach agreements with prospective contract research organizations (CROs) and clinical study sites, the terms of which can be subject to
extensive negotiation and may vary significantly among different CROs and trial sites;
•
clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical studies
or abandon product development programs;
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•
•
the number of subjects or patients required for clinical studies may be larger than we anticipate, enrollment in these clinical studies may be
insufficient or slower than we anticipate, and the number of clinical studies being conducted at any given time may be high and result in fewer
available patients for any given clinical trial, or patients may drop out of these clinical studies at a higher rate than we anticipate;
our third-party manufacturers, including those conducting clinical studies on our behalf, may fail to comply with regulatory requirements or meet
their contractual obligations to us in a timely manner, or at all;
• we might have to suspend or terminate clinical studies for various reasons, including a finding that the subjects are being exposed to unacceptable
health risks;
• we may have to amend clinical study protocols or conduct additional studies to reflect changes in regulatory requirements or guidance, which we may
be required to submit to an IRB and/or regulatory authorities for re-examination;
the cost of clinical studies may be greater than we anticipate;
clinical sites may not adhere to the clinical protocol or may drop out of a clinical trial;
•
•
• we may be unable to recruit a sufficient number of clinical study sites;
•
•
•
regulators, IRBs, or other reviewing bodies may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party
manufacturers or suppliers of materials for our clinical studies, the materials necessary to conduct clinical studies may be insufficient, inadequate or
not available at an acceptable cost, or we may experience interruptions in supply;
approval policies or regulations of FDA or applicable foreign regulatory agencies may change in a manner rendering our clinical data insufficient for
approval; and
our products or other product candidates may have undesirable side effects or other unexpected characteristics.
Patient enrollment in clinical studies and completion of patient follow-up depend on many factors, including the size of the patient population, the nature
of the trial protocol, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, patient compliance, competing clinical studies and
clinicians’ and patients’ perceptions as to the potential advantages of the product being studied in relation to other available therapies, including any new
treatments that may be approved for the indications we are investigating. For example, patients may be discouraged from enrolling in our clinical studies if the trial
protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of a product, or they may be persuaded to
participate in contemporaneous clinical studies of a competitor’s product. In addition, patients participating in our clinical studies may drop out before completion
of the trial or experience adverse medical events unrelated to the device. Delays in patient enrollment or failure of patients to continue to participate in a clinical
study may delay commencement or completion of the clinical trial, cause an increase in the costs of the clinical trial, or result in the failure of the clinical trial.
Clinical studies must be conducted in accordance with the laws and regulations of the FDA and other applicable regulatory authorities’ legal
requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and IRBs at the medical institutions where the clinical studies
are conducted. In addition, clinical studies must be conducted with supplies of our product produced under cGMP requirements and other regulations.
Furthermore, we rely on clinical study sites to ensure the proper and timely conduct of our clinical studies and we have limited influence over their performance.
We depend on our collaborators and on medical institutions and employees to conduct our clinical studies in compliance with good clinical practice (GCP)
requirements. If our collaborators fail to enroll participants for our clinical studies, fail to conduct the study to GCP standards or are delayed for a significant time
in the execution of trials, including achieving full enrollment, we may be affected by increased costs, program delays or both. In addition, clinical studies that are
conducted in countries outside the United States may result in additional delays and expenses due to increased shipment costs, additional regulatory requirements
and the engagement of non-U.S. resources, and may expose us to risks associated with
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clinical investigators who are unknown to the FDA, and different standards of diagnosis, screening and medical care.
Failure can occur at any stage of clinical testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may
require us, to conduct additional clinical and non-clinical testing in addition to those we have planned. Our failure to adequately demonstrate the safety and
effectiveness of any product we may develop in the future would prevent receipt of regulatory clearance or approval and, ultimately, limit our ability to
commercialize the product.
Failure to comply with postmarketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and might
require us to recall or withdraw our products from the market.
We are subject to ongoing and pervasive regulatory requirements governing, among other things, the manufacture, marketing, advertising, medical device
reporting, sale, promotion, registration, and listing of our products. For example, we are required to submit periodic reports to the FDA as a condition of PMA
approval. These reports include safety and effectiveness information about the device after its approval. Failure to submit such reports, or failure to submit the
reports in a timely manner, could result in enforcement action by the FDA. Following its review of the periodic reports, the FDA might ask for additional
information or initiate further investigation.
Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated
sales. We have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign regulatory authorities have
broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign
regulatory authorities, which may include any of the following sanctions:
•
•
•
•
•
•
untitled letters or warning letters;
fines, injunctions, consent decrees and civil penalties;
recalls, termination of distribution, administrative detention, or seizure of our products;
customer notifications or repair, replacement or refunds;
operating restrictions or partial suspension or total shutdown of production;
delays in or refusal to grant future PMA approvals or foreign regulatory approvals of future product candidates, new intended uses, or modifications
to our existing product;
• withdrawals or suspensions of PMAs or foreign regulatory approvals, resulting in prohibitions on sales of our products;
•
•
FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and
criminal prosecution.
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation,
business, financial condition and results of operations.
Our products must be manufactured in accordance with federal and state regulations, and we or any of our suppliers or third-party manufacturers
could be forced to recall our products or terminate production if we fail to comply with these regulations.
The methods used in, and the facilities used for, the manufacture of our products must comply with the QSR, which is a complex regulatory scheme that
covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage,
distribution, installation, servicing and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and
operations that comply with our quality standards and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or
unannounced inspections of medical device manufacturing facilities, which may include the facilities of subcontractors. Our products are also subject to similar
state regulations and various laws and regulations of foreign countries governing manufacturing.
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Our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our
products or result in it being adulterated or misbranded under the Federal Food, Drug, and Cosmetic Act. In addition, failure to comply with applicable FDA
requirements or later discovery of previously unknown problems with the manufacturing processes for our products could result in, among other things: warning
letters or untitled letters, fines, injunctions or civil penalties, suspension or withdrawal of approvals, seizures or recalls of our products, total or partial suspension
of production or distribution, administrative or judicially imposed sanctions, the FDA’s refusal to grant pending or future clearances or approvals, clinical holds,
refusal to permit the import or export of our products, and criminal prosecution of us or our employees. Any of these actions could significantly and negatively
affect supply of our products. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose
customers and experience reduced sales and increased costs.
If treatment guidelines for OAB, SUI, FI or UR change or the standard of care evolves, we may need to redesign and seek a new marketing
authorization from the FDA for our products.
If treatment guidelines for OAB, SUI, FI or UR change or the standard of care evolves, we may need to redesign our products, or any future product, and
seek new approvals from the FDA. PMA approvals from the FDA are based on current treatment guidelines at the time of the approvals. If treatment guidelines
change so that different treatments become desirable, the clinical utility of our products could be diminished and our business could be adversely affected.
Our products may cause or contribute to adverse medical events or be subject to failures or malfunctions that we are required to report to the FDA,
and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery
of serious safety issues with our products, or a recall of our products, either voluntarily or at the direction of the FDA or another governmental authority,
could have a negative impact on us.
We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive
or become aware of information that reasonably suggests that our products may have caused or contributed to a death or serious injury or malfunctioned in a way
that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we
become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed
timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it
is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take
action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of device
approvals, seizure of our products or delay in clearance or approval of modifications to our products.
The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects
in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a
finding that there is reasonable probability that our products could cause serious injury or death. We may also choose to voluntarily recall our products if any
material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures,
malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations.
Defects or other errors in our products may occur in the future. Depending on the corrective action we take to redress deficiencies or defects, the FDA may require,
or we may decide, that we will need to obtain new approvals for our products before we may market or distribute the corrected device. Seeking such approvals
may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our products, we may
face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary
withdrawals or corrections for our products in the future that we may determine do not require notification of the FDA. If the FDA disagrees with our
determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement
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could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. Any corrective action, whether
voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our
business and may harm our reputation and financial results.
Additionally, if we or others identify undesirable side effects, or other previously unknown problems, caused by our products, a number of potentially
negative consequences could result, including:
•
•
•
•
regulatory authorities may withdraw their approval of the product;
regulatory authorities may require a recall of the product or we may voluntarily recall a product;
regulatory authorities may require the addition of warnings or contraindications in the product labeling, narrowing of the indication in the product
label or issuance of field alerts to physicians and pharmacies;
regulatory authorities may require us to create a guide outlining the risks of such side effects for distribution to patients;
• we may be subject to limitations as to how we promote the product;
• we may be required to change the way the product is administered or modify the product in some other way;
•
•
regulatory authorities may require additional clinical studies or costly post-marketing testing and surveillance to monitor the safety or efficacy of the
product;
sales of the product may decrease significantly;
• we could be sued and held liable for harm caused to patients; and
•
our brand and reputation may suffer.
Any of the above events could prevent us from achieving or maintaining market acceptance of our products and could substantially increase the costs of
commercializing our products. The demand for our products could also be negatively impacted by any adverse effects of a competitor’s product or treatment.
If we do not obtain and maintain international regulatory registrations or approvals for our products, we will be unable to market and sell our
products outside of the United States.
We currently have marketing approvals in the United States, Europe, Canada, and Australia for OAB, FI, and UR. We may in the future seek marketing
approvals in additional countries but do not have current plans to do so. Sales of our r-SNM System outside of the United States will be subject to foreign
regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the United States. While the
regulations of some countries may not impose barriers to marketing and selling our r-SNM System, or only require notification, others require that we obtain the
approval of a specified regulatory body. Complying with foreign regulatory requirements, including obtaining additional registrations or approvals, can be
expensive and time-consuming, and we may not receive regulatory approvals in each country in which we plan to market our r-SNM System or we may be unable
to do so on a timely basis. The time required to obtain registrations or approvals, if required by other countries, may be longer than that required for FDA approval,
and requirements for such registrations, clearances or approvals may significantly differ from FDA requirements. If we modify our r-SNM System, we may need
to apply for additional regulatory approvals before we are permitted to sell the modified product. In addition, we may not continue to meet the quality and safety
standards required to maintain the authorizations that we have received. If we are unable to maintain our authorizations in a particular country, we will no longer
be able to sell the applicable product in that country.
Regulatory approval by the FDA does not ensure registration, clearance or approval by regulatory authorities in other countries, and registration,
clearance or approval by one or more foreign regulatory authorities does not ensure registration, clearance or approval by regulatory authorities in other foreign
countries or by the FDA. However, a failure or delay in obtaining registration or regulatory clearance or approval in one country may have a negative effect on the
regulatory process in others.
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Legislative or regulatory reforms in the United States or Europe may make it more difficult and costly for us to obtain regulatory clearances or
approvals for modifications to our products, or to manufacture, market or distribute our products.
From time to time, legislation is drafted and introduced in U.S. Congress that could significantly change the statutory provisions governing the regulation
of medical devices. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and
products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times, or make it
more difficult to obtain approval for additional indications for, manufacture, market or distribute our products. We cannot determine what effect changes in
regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could,
among other things, require: additional testing prior to obtaining clearance or approval for future product candidates, changes to manufacturing methods, recall,
replacement or discontinuance of future product candidates, or additional record keeping.
On April 5, 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the EU Medical
Devices Directive and the Active Implantable Medical Devices Directive. The Medical Devices Regulations would be directly applicable and are intended to
eliminate current differences in the regulation of medical devices among EEA member states. The Medical Devices Regulation, among other things, is intended to
establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health
while supporting innovation.
The Medical Devices Regulation will only become applicable after the three-year transition period ends on May 26, 2020. Up until this date, conformity
certificates can continue to be issued validly by Notifiable Bodies under the AIMD and Medical Devices Directives. Alternatively, during the three-year transition
period, manufacturers can choose to conform with and have their products certified under the Medical Devices Regulations. Certificates of compliance issued
pursuant to these Directives prior to May 26, 2020 will continue to be valid for up to a period of four years. However, after May 26, 2020, new products placed on
the market may only be certified under the Medical Device Regulations regime. Once applicable, the new regulations will among other things:
•
•
•
•
•
strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the
market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU;
and
strengthened rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts before
they are placed on the market.
These modifications may have an effect on the way we conduct our business in the EEA.
The effects of the withdrawal of the United Kingdom from the EU (Brexit) will depend on any agreements the United Kingdom makes to retain access to
EU markets. Since a significant proportion of the regulatory framework in the United Kingdom is derived from EU directives and regulations, the referendum
could materially change the regulatory regime applicable to products approved and sold in the United Kingdom. It is possible that there will be greater restrictions
on imports and exports between the United Kingdom and EU countries, increased regulatory complexities, and economic and political uncertainty in the region.
Because of the continued uncertainty about the effects and implementation of Brexit, we cannot quantify or predict with any certainty the likely impact of Brexit or
related legislation on our business, financial condition, and results of operations.
Furthermore, Brexit could adversely affect European and worldwide economic or market conditions and could contribute to instability in global financial
markets. Brexit is likely to lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which EU laws to
replace or replicate.
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Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, financial condition, and results of operations.
We are subject to certain federal, state and foreign fraud and abuse laws, health information privacy and security laws and transparency laws, which,
if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse
publicity and be costly to respond to, and thus could harm our business.
There are numerous U.S. federal and state, as well as foreign, laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims and
physician transparency laws. Our business practices and relationships with providers are subject to scrutiny under these laws. We may also be subject to privacy
and security regulation related to patient, customer, employee and other third-party information by both the federal government and the states and foreign
jurisdictions in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate include, but are not limited to:
•
•
•
•
•
the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual or furnishing or arranging
for a good or service, for which payment may be made, in whole or in part, under federal healthcare programs, such as Medicare and Medicaid. A
person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. The U.S.
government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers. Moreover, the government may assert
that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for
purposes of the federal civil False Claims Act. Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $102,522
for each violation, plus up to three times the remuneration involved. Civil penalties for such conduct can further be assessed under the federal False
Claims Act. Violations can also result in criminal penalties, including criminal fines of up to $100,000 and imprisonment of up to 10 years. Similarly,
violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid;
the federal civil and criminal false claims laws and civil monetary penalties laws, including the federal civil False Claims Act, which prohibit, among
other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other
federal healthcare programs that are false or fraudulent. These laws can apply to manufacturers who provide information on coverage, coding, and
reimbursement of their products to persons who bill third-party payers. Private individuals can bring False Claims Act “qui tam” actions, on behalf of
the government and such individuals, commonly known as “whistleblowers,” may share in amounts paid by the entity to the government in fines or
settlement. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties
ranging from $11,181 to $22,363 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other
federal healthcare programs;
the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare
beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by
the government from a particular provider or supplier;
the Health Insurance Portability and Accountability Act of 1996 (HIPAA) which created additional federal criminal statutes that prohibit, among
other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters. Similar to the
federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have
committed a violation;
the federal Physician Sunshine Act under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act, collectively referred to as the Affordable Care Act, which require certain applicable manufacturers of drugs, devices, biologics
and medical supplies
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for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (CHIP) to report annually to the DHHS
Centers for Medicare and Medicaid Services (CMS) information related to payments and other transfers of value to physicians, which is defined
broadly to include other healthcare providers and teaching hospitals, and applicable manufacturers and group purchasing organizations, to report
annually ownership and investment interests held by physicians and their immediate family members. Applicable manufacturers are required to
submit annual reports to CMS. Failure to submit required information may result in civil monetary penalties of $11,052 per failure up to an aggregate
of $165,786 per year (or up to an aggregate of $1.105 million per year for “knowing failures”), for all payments, transfers of value or ownership or
investment interests that are not timely, accurately, and completely reported in an annual submission, and may result in liability under other federal
laws or regulations;
• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH Act) and their respective
implementing regulations, which impose requirements on certain covered healthcare providers, health plans and healthcare clearinghouses as well as
their business associates that perform services for them that involve individually identifiable health information, relating to the privacy, security and
transmission of individually identifiable health information without appropriate authorization, including mandatory contractual terms as well as
directly applicable privacy and security standards and requirements. Failure to comply with the HIPAA privacy and security standards can result in
civil monetary penalties up to $55,910 per violation, not to exceed $1.68 million per calendar year for non-compliance of an identical provision, and,
in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. State attorneys general can also bring a civil
action to enjoin a HIPAA violation or to obtain statutory damages on behalf of residents of his or her state;
•
analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items
or services reimbursed by any third-party payor, including commercial insurers or patients; state laws that require device companies to comply with
the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict
payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report
information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; consumer
protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm customers, foreign and state
laws, including the EU General Data Protection Regulation, governing the privacy and security of health information in certain circumstances, many
of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; and
•
state laws related to insurance fraud in the case of claims involving private insurers.
These laws and regulations, among other things, constrain our business, marketing and other promotional activities by limiting the kinds of financial
arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of our products. Due to the breadth of these laws, the
narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, it is possible that some of our
current or future practices might be challenged under one or more of these laws.
To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between
healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry.
Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these
investigations, healthcare providers and entities may have to agree to additional compliance and reporting requirements as part of a consent decree or corporate
integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. Even an unsuccessful
challenge or investigation into our practices could cause adverse publicity, and responding to any such challenge or investigation would be costly and divert the
attention of our management. If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare
regulations that
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apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, exclusion from participation in government
healthcare programs, such as Medicare and Medicaid, imprisonment, contractual damages, reputational harm, disgorgement and the curtailment or restructuring of
our operations.
We may be subject to, or may in the future become subject to, U.S. federal and state, and foreign laws and regulations imposing obligations on how
we collect, store and process personal information. Our actual or perceived failure to comply with such obligations could harm our business. Ensuring
compliance with such laws could also impair our efforts to maintain and expand our customer base, and thereby decrease our revenue.
As described above, in the conduct of our business, we may at times process personal data, including health-related personal data. The U.S. federal
government and various states have adopted or proposed laws, regulations, guidelines and rules for the collection, distribution, use and storage of personal
information of individuals. We may also be subject to U.S. federal rules, regulations and guidance concerning data security for medical devices, including guidance
from the FDA. State privacy and security laws vary from state to state and, in some cases, can impose more restrictive requirements than U.S. federal law. Where
state laws are more protective, we must comply with the stricter provisions. In addition to fines and penalties that may be imposed for failure to comply with state
law, some states also provide for private rights of action to individuals for misuse of personal information.
The EU also has laws and regulations dealing with the collection, use and processing of personal data obtained from individuals in the EU, which are
often more restrictive than those in the United States and which restrict transfers of personal data to the United States unless certain requirements are met. These
obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other requirements or our
practices. In addition, these rules are constantly under scrutiny. For example, following a decision of the Court of Justice of the European Union in October 2015,
transferring personal data to U.S. companies that had certified as members of the U.S. Safe Harbor Scheme was declared invalid. In July 2016 the European
Commission adopted the U.S.-EU Privacy Shield Framework which replaces the Safe Harbor Scheme. However, this framework is under review and there is
currently litigation challenging other EU mechanisms for adequate data transfers (i.e., the standard contractual clauses). It is uncertain whether the Privacy Shield
Framework and/or the standard contractual clauses will be similarly invalidated by the European courts. We rely on a mixture of mechanisms to transfer personal
data from our EU business to the U.S., and could be impacted by changes in law as a result of a future review of these transfer mechanisms by European regulators
under the EU General Data Protection Regulation 2016/679 (the GDPR), which came into effect on May 25, 2018, as well as current challenges to these
mechanisms in the European courts.
Any actual or perceived failure by us or the third parties with whom we work to comply with privacy or security laws, policies, legal obligations or
industry standards, or any security incident that results in the unauthorized release or transfer of personally identifiable information, may result in governmental
enforcement actions and investigations including by European Data Protection Authorities and U.S. federal and state regulatory authorities, fines and penalties,
litigation and/or adverse publicity, including by consumer advocacy groups, and could cause our customers, their patients and other healthcare professionals to lose
trust in us, which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
The laws in the EU are under constant reform. Since May 25, 2018, we have been subject to the requirements of the GDPR because we are processing
personal data in the EU and/or offering goods to, or monitoring the behavior of, individuals in the EU. The GDPR implements more stringent administrative
requirements for controllers and processors of personal data, including, for example, shortened timelines for data breach notifications, limitations on retention of
information, increased requirements pertaining to health data and pseudonymized (i.e., key-coded) data, additional obligations when we contract with service
providers, and more robust rights for individuals over their personal data. The GDPR provides that EU member states may make their own further laws and
regulations limiting the processing of genetic, biometric or health data, which could limit our ability to use and share personal data or could cause our costs to
increase, and harm our business and financial condition. If we do not comply with our obligations under the GDPR, we could be exposed to significant fines of up
to €20,000,000 or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher.
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Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system, could harm our business, financial condition
and results of operations.
In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. In March 2010, the Affordable Care
Act was enacted in the United States, which made a number of substantial changes in the way healthcare is financed by both governmental and private insurers.
Among other ways in which it may affect our business, the Affordable Care Act:
•
•
•
established a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an
effort to coordinate and develop such research;
implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers
to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and
expanded the eligibility criteria for Medicaid programs.
We do not yet know the full impact that the Affordable Care Act will have on our business. The taxes imposed by the Affordable Care Act and the
expansion in the government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursement by payors for our products, and/or
reduced medical procedure volumes, all of which may have a material adverse effect on our business, financial condition and results of operations. The federal
government may take further action regarding the Affordable Care Act, including, but not limited to, repeal or replacement. Most recently, the TCJA was enacted,
which, among other things, removes penalties for not complying with the individual mandate to carry health insurance. Additionally, all or a portion of the
Affordable Care Act and related subsequent legislation may be modified, repealed or otherwise invalidated through judicial challenge, which could result in lower
numbers of insured individuals, reduced coverage for insured individuals and adversely affect our business.
We expect additional state and federal healthcare policies and reform measures to be adopted in the future, any of which could limit reimbursement for
healthcare products and services or otherwise result in reduced demand for our products, or additional pricing pressure, and have a material adverse effect on our
industry generally and on our customers. Any changes of, or uncertainty with respect to, future coverage or reimbursement rates could affect demand for our
products, which in turn could impact our ability to successfully commercialize our products and could have a material adverse effect on our business, financial
condition and results of operations.
Our business involves the use of hazardous materials and our third-party manufacturers must comply with environmental laws and regulations,
which may be expensive and restrict how we do business.
Our third-party manufacturers’ activities may involve the controlled storage, use and disposal of hazardous materials. Our manufacturers are subject to
federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We
currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials. Although we believe the safety procedures of
our manufacturers for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot
eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or
federal or other applicable authorities may curtail our manufacturers’ use of these materials and interrupt their business operations which could adversely affect our
business.
Compliance with securities rules relating to “conflict minerals” may require us and our suppliers to incur substantial expense and may result in
disclosure by us that certain minerals used in products we manufacture or contract to manufacture are not “DRC conflict free.”
Because we manufacture or contract to manufacture a product that contains titanium, we may be required under rules promulgated by the SEC governing
disclosure of the use of “conflict minerals” (tin, tungsten, tantalum and gold) to determine whether those minerals are necessary to the functionality or production
of our r-SNM System and, if so, conduct a country of origin inquiry with respect to all such minerals. If any such minerals may have originated in the Democratic
Republic of the Congo (DRC) or any of its adjoining countries, or covered countries, then we must conduct diligence on the source and chain of custody of those
conflict minerals to determine if they originated in one of the covered countries and, if so, whether they financed or benefited armed groups in the covered
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countries. Disclosures relating to the products that may contain conflict minerals, the country of origin of those minerals and whether they are “DRC conflict free”
must be provided in a Form SD (and accompanying conflict minerals report, if required, to disclose the diligence undertaken by us in sourcing the minerals and our
conclusions relating to such diligence). If we are required to submit a conflict minerals report, that report must be audited by an independent auditor pursuant to
existing government auditing standards. Compliance with this disclosure rule may be very time-consuming for our management and personnel (as well as time-
consuming for our suppliers) and could involve the expenditure of significant amounts of money by us and them. Disclosures mandated by this rule, which can be
perceived by the market to be “negative,” may cause customers to refuse to purchase our r-SNM System. The cost of compliance with the rule could adversely
affect our results of operations.
Risks Related to Intellectual Property
Litigation or other proceedings or third-party claims of intellectual property infringement against us, including the Medtronic Litigation, or any of
our current or future licensors, including AMF, could require us to spend significant time and money and could prevent us from selling our products, or affect
our stock price.
Our commercial success will depend in part on our ability to avoid infringement of the proprietary rights of third parties. To the extent that our
commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in
related or resulting know-how and inventions. Our competitors in both the United States and internationally, many of which have substantially greater resources,
and, may have made substantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in the future apply for and
obtain, patents that will prevent, limit or otherwise interfere with our ability to make, use and sell our products. We do not always conduct independent reviews of
patents issued to third parties. Because we have not conducted a formal freedom to operate analysis for patents related to our products, we may not be aware of
issued patents that a third party might assert are infringed by one of our current or future product candidates, which could materially impair our ability to
commercialize our products. Even in the event that we conduct a formal freedom to operate analysis, patent searches to determine whether our products infringe
patents held by third parties are inherently uncertain and such searches cannot assure that all relevant patents are identified. In addition, patent applications in the
United States and elsewhere can be pending for many years before issuance, or unintentionally abandoned patents or applications can be revived, so there may be
applications for other patents now pending or recently revived patents of which we are unaware that our products may infringe. There may also be patent
applications that have been filed but not published that, when issued as patents, could be asserted against us. There is a substantial amount of litigation, both within
and outside the United States, involving patent and other intellectual property rights in the technology and medical device industries, including patent infringement
lawsuits, interferences, oppositions and inter partes reexamination or review proceedings before the U.S. Patent and Trademark Office. Numerous U.S. and foreign
issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our products or will develop future
product candidates. As the technology and medical device industries expand and more patents are issued, the risk continues, or possibly increases, that our
products may be subject to claims of infringement of the patent rights of third parties.
Third parties may assert that we, or any of our current or future licensors, including AMF, are employing their proprietary technology without
authorization. For example, 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 us 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. We refer to this matter as the Medtronic Litigation. The complaint asserts that our 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 we have infringed and are infringing the Medtronic Patents, (ii) damages, including treble damages for willful
infringement, (iii) a permanent injunction preventing us from infringing the Medtronic Patents, (iv) attorneys’ fees, and (v) costs and expenses. We believe the
allegations are without merit and are vigorously defending ourselves against them. Given the early stage of the Medtronic Litigation, we are unable to predict the
likelihood of success of the claims of the Medtronic Affiliates against us or to quantify any risk of loss. The Medtronic Litigation could last for an extended period
of time and require us to dedicate significant financial resources and management resources to our defense.
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An adverse ruling against us could materially and adversely affect our business, financial position, results of operations or cash flows and could also result in
reputational harm. Even if we are 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, we 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 us. In September 2020, the USPTO decided that it will
accept or “institute” the IPR process for six of the seven patents, finding that we had demonstrated a reasonable likelihood that at least one, if not all, of the claims
of these six patents are invalid. We are currently in the IPR discovery process. The USPTO will usually render a decision on the validity of contested patents
within twelve months of instituting the review. We 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. Our motion was granted by the court on May 8, 2020.
Defense of any of the above claims, including the Medtronic Litigation, would require us to dedicate substantial time and resources, which time and
resources could otherwise be used by us toward the maintenance of our own intellectual property and the commercialization of our products, or by any of our
current or future licensors for operational upkeep and manufacturing of our products.
The legal threshold for initiating litigation or contested proceedings may be low, so that even lawsuits or proceedings with a low probability of success
might be initiated. Litigation and contested proceedings can also be expensive and time-consuming, and our adversaries in these proceedings may have the ability
to dedicate substantially greater resources to prosecuting these legal actions than we can. We may also occasionally use these proceedings to challenge the patent
rights of others.
Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential
intellectual property litigation also could force us to do one or more of the following:
•
•
•
•
•
•
•
stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property;
lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our
intellectual property rights against others;
incur significant legal expenses;
pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing;
pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing;
redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive, or infeasible; and
attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms, or at all, or, from
third parties whom may attempt to license rights that they have or do not have.
Any litigation or claim against us or AMF, even those without merit, may cause us to incur substantial costs, and, could place a significant strain on our
financial resources, divert the attention of management from commercialization of our r-SNM System, or harm our reputation. If we or AMF are found to infringe
the intellectual property rights of third parties, we could be required to pay substantial damages (which may be increased up to three times of awarded damages)
and/or substantial royalties and could be prevented from selling our infringing products unless we obtain a license or are able to redesign our r-SNM System to
avoid infringement. Any such license may not be available on reasonable terms, if at all, and we may not be able to redesign the infringing product in a way that
would not infringe the intellectual property rights of others. We could encounter delays in product introductions while we attempt to develop alternative methods
or products. If we fail to obtain any required licenses, or make any necessary changes to our r-SNM System, including future technologies, we may have to
withdraw our r-SNM System from the market or may be unable to commercialize our r-SNM System.
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In addition, third parties may assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly
litigation on behalf of our customers or indemnify our customers for any costs associated with their own initiation or defense of infringement claims, regardless of
the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or may be
required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to
stop using our products.
If we or any of our current or future licensors, including AMF, are unable to maintain, obtain or adequately protect our intellectual property rights,
we may not be able to compete effectively in our market or we could be required to incur significant expenses to enforce or defend our rights or attempt to do
the same.
Our commercial success depends in part on ours and any of our current or future licensors’, including AMF’s, success in obtaining, maintaining and
protecting patents, trademarks, trade secrets and other intellectual property rights and proprietary technology in the United States and elsewhere. If we or any of
our current or future licensors, including AMF, do not adequately protect our respective intellectual property and proprietary technology, competitors may be able
to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.
Our intellectual property coverage includes protection provided by patents and other intellectual property licensed through the License Agreement with
AMF. We rely on AMF to maintain the patents and otherwise protect the intellectual property we license from them. If in the future we no longer have rights to one
or more of these licensed patents or other licensed intellectual property, our intellectual property coverage may be compromised, which in turn could affect our
ability to protect our r-SNM System and defend it against competitors.
We own numerous issued patents and pending patent applications that relate to our products and several issued patents and patent applications were
licensed from AMF in 2013 pursuant to the License Agreement. As of December 31, 2020, we own 32 issued U.S. patents and 89 issued foreign patents, and
19 pending U.S. patent applications and 41 pending foreign patent applications. We also license from AMF 30 issued U.S. patents and three pending U.S. patent
applications, as well as 65 issued foreign patents and 10 pending foreign patent applications. Issued patents owned or used by us will expire between 2021 and
2040.
Our patents may not have, and any of our pending patent applications that mature into issued patents may not include, claims with a scope sufficient to
adequately protect our products, or any additional features we develop for our products or any new products. Other parties may have developed technologies that
may be related to or competitive with our products, and, may have filed, or may file, patent applications, and, may have received, or may receive patents, that
overlap or conflict with our patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent
position. The patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and therefore, the
scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed
unenforceable, invalidated or circumvented. Proceedings challenging our patents could result in either loss of the patent, or denial of the patent application or loss
or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we
may own may not provide any protection against competitors. Furthermore, an adverse decision may result in a third party receiving a patent right sought by us,
which in turn could affect our ability to commercialize our products.
Though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us
with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors could purchase our products and attempt to
replicate some or all of the competitive advantages we derive from our development efforts, circumvent or design around our patents, or develop and obtain patent
protection for more effective technologies, designs or methods. We may be unable to prevent the unauthorized disclosure or use of our technical knowledge or
trade secrets by consultants, suppliers, vendors, former employees and current employees. In addition, third parties may create new products or methods that
achieve similar results without infringing upon patents we own. If these developments were to occur, it could have an adverse effect on our sales or market
position. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter
significant problems in protecting our proprietary rights in these countries.
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Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the
components that are used in their products. In addition, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential
competitor’s product. We may not prevail in some, or any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be
commercially meaningful. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and could divert
the attention of our management and key personnel from our business operations.
In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly.
Such proceedings could also provoke third parties to assert claims against us, including that some, or all, of the claims in one or more of our patents are invalid or
otherwise unenforceable. If any of our patents covering our products are invalidated or found unenforceable, or, if a court found that valid, enforceable patents held
by third parties covered our products, our competitive position could be harmed, or, we could be required to incur significant expenses to enforce or defend our
rights.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
•
•
our patents, or our pending patent applications, if issued, will include claims having a scope sufficient to protect our products;
any of our pending patent applications will issue as patents;
• we will be able to successfully commercialize our products on a substantial scale before our relevant patents have expired;
• we were the first to make, or file for patent protection of, the inventions covered by each of our patents and pending patent applications, as is dictated
by the applicable national patent laws in effect at the time of a patent application being filed;
• we were the first to file patent applications for these inventions, where such rules are applicable;
•
•
•
others will not develop similar or alternative technologies that do not infringe our patents;
any of our patents will be found to ultimately be valid and enforceable;
any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive
advantages or will not be challenged by third parties;
• we will develop additional proprietary technologies or products that are separately patentable; or
•
our commercial activities or products will not infringe upon the patents of others.
In addition, we rely in part upon unpatented trade secrets, unpatented know-how, and continuing technological innovation which may not yet, or may
never be, patented, to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and
consultants. We also have agreements with our employees and consultants that obligate them to assign their inventions to us. It is possible that technology relevant
to our business will be independently developed by a person that is not a party to such an agreement. In addition, if the employees and consultants who are parties
to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our
trade secrets through such breaches or violations. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property
owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Further, our trade secrets could otherwise
become known or be independently discovered by our competitors, which would harm our business.
We are reliant on the ability of AMF, as licensor of certain intellectual property contained in our products, and may be reliant on, future licensors to
maintain their intellectual property and protect their intellectual property against misappropriation, infringement or other violation. In some instances, we may not
have primary control over AMF’s, or our other future licensors’, patent prosecution activities. With respect to licensed patents that were issued to our licensors, or
patents that may issue on patent applications, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or
invalidated. As a licensee, we are reliant on AMF to defend any third-party claims or consent to our defending them on their behalf. Our licensors may not
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defend or prosecute such actions as vigorously or in the manner that we would have if entitled to do so, and we will be subject to any judgment or settlement
resulting from such actions and our business could be adversely affected.
If we are unable to protect the confidentiality of our trade secrets, our business or competitive position could be harmed.
In addition to patent protection, we also rely upon other non-patent protection, such as: trademark, or, trade secret protection, as well as confidentiality
agreements with our employees, consultants, vendors, and third parties, to protect our confidential and proprietary information. Despite the existence of such
confidentiality agreements, or other contractual restrictions, we may not be able to prevent the unauthorized disclosure or use of our confidential proprietary
information or trade secrets by employees, consultants, vendors, and third parties. In addition to contractual measures, we try to protect the confidential nature of
our proprietary information using commonly accepted physical and technological security measures. Such measures may not, for example, in the case of
misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security
measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and, recourse we take against
such misconduct may not provide an adequate remedy to fully protect our interests. Unauthorized parties may also attempt to copy or reverse engineer certain
aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed, or misappropriated a trade secret, can be difficult, expensive
and time-consuming, and, the outcome is unpredictable. Even though we use commonly accepted security measures, trade secret violations are often a matter of
state law, and the criteria for protection of trade secrets can vary among different jurisdictions. Furthermore, the laws of foreign countries may not protect our trade
secrets effectively or to the same extent as the laws of the United States. In addition, trade secrets may be independently developed by others in a manner that
could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if
any such information was independently developed by a competitor, our business and competitive position could be harmed.
We may be unable to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have
encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. If we face similar challenges with respect
to material intellectual property matters, this could make it difficult for us to stop infringement of our foreign patents or our other intellectual property rights. For
example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit
the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no
benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes.
Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
Litigation may be necessary in the future to enforce our intellectual property rights or protect our trade secrets or other proprietary information, which is
an expensive and time-consuming process with uncertain outcomes. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial
costs and divert our efforts and attention from the commercialization of our products. Accordingly, our efforts to protect our intellectual property rights in such
countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to
obtain adequate protection for our technology and the enforcement of our intellectual property.
Third parties may assert ownership or commercial rights to inventions we develop.
Third parties may, in the future, make claims challenging the inventorship or ownership of our intellectual property. In addition, we may face claims by
third parties that our agreements with employees, contractors or consultants obligating them to assign intellectual property to us are ineffective or in conflict with
prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will
develop and interfere with our ability to capture the commercial value of such intellectual property. Litigation may be necessary to resolve an ownership dispute,
and if we are not successful, we may be
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precluded from using certain intellectual property or we may lose our rights in that intellectual property. Either outcome could harm our business and competitive
position.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of
third parties.
We employ individuals who previously worked with other companies, including our competitors or potential competitors. We may be subject to claims
that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information, including trade
secrets or other proprietary information, of former employers or other third parties. We may also be subject to claims that former employers or other third parties
have an ownership interest in our patents. Litigation may be necessary to defend against these claims. We may not be successful in defending these claims, and
even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees. Any litigation or the threat thereof
may adversely affect our ability to hire employees and we may lose valuable intellectual property rights if we fail in defending any such claims. A loss of key
personnel or their work product could diminish or prevent our ability to commercialize our products, which could have an adverse effect on our business, results of
operations and financial condition.
Recent changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or
defense of our issued patents. The Leahy-Smith America Invents Act (the AIA) includes a number of significant changes to U.S. patent law. These include
provisions that affect the way patent applications are prosecuted and also affect patent litigation. The U.S. Patent and Trademark Office recently developed new
regulations and procedures to govern administration of the AIA, and many of the substantive changes to patent law associated with the AIA, and in particular, the
first to file provisions, which became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if that inventor
is not the first to file an application for patenting that invention, even if such inventor was the first to invent such invention. Accordingly, it is not clear what, if
any, impact the AIA will have on the operation of our business.
The AIA could also increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the AIA provides
that an administrative tribunal known as the Patent Trial and Appeals Board (PTAB) provides a venue for challenging the validity of patents at a cost that is much
lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the PTAB proceedings will have on
the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of
many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the
likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.
If we fail to comply with our obligations under our patent licenses with third parties, we could lose license rights that are important to our business.
We are a party to the License Agreement with AMF and we may be a party to future license agreements. One or more of our licensors may allege that we
have breached our license agreement with them, and accordingly seek to terminate our license. If successful, this could result in our loss of the right to use the
licensed intellectual property, which could adversely affect our ability to commercialize our products, as well as harm our competitive business position and our
business prospects. In particular, the License Agreement imposes various development, royalty, insurance and other obligations on us. If we fail to comply with
these obligations or otherwise materially breach the License Agreement, AMF may have the right to terminate the License Agreement, in which event we would
not be able to market our products. In addition, any claims asserted against us by AMF may be costly and time-consuming, divert the attention of key personnel
from business operations or otherwise have a material adverse effect on our business.
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Risks Related to Our Common Stock
The trading price of our common stock may be volatile, and purchasers of our common stock could incur substantial losses.
Our stock price may be volatile. The stock market in general and the market for medical technology companies in particular have experienced extreme
volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many
factors, some of which are beyond our control, including:
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the impact of worldwide pandemics on voluntary surgical procedures;
unanticipated safety concerns related to the use of our products;
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 rights under the License Agreement;
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 products or for any future enhancements to our products;
adverse results from or delays in clinical studies of our products;
our ability to successfully integrate acquired operations into our ongoing business;
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 products;
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;
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quarterly variations in our results of operations or those of our competitors;
changes in financial estimates or guidance, including our ability to meet our future revenue and operating profit or loss estimates or guidance;
the public’s reaction to our earnings releases, other public announcements and filings with the SEC;
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;
news reports relating to trends, concerns and other issues in the market or industry;
operating and stock performance of other companies that investors deem comparable to us and overall performance of the equity markets;
additions or departures of key personnel;
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changes in our capital structure, such as future issuances of securities and the incurrence of additional debt;
changes in accounting standards, policies, guidelines, interpretations or principles;
the results of any future legal proceedings; and
other factors described in this “Risk Factors” section.
In addition, in the past, stockholders have initiated class action lawsuits against companies following periods of volatility in the market prices of these
companies’ common stock. Such litigation, if instituted against us, regardless of the merit or ultimate results of such litigation, could cause us to incur substantial
costs and divert management’s attention and resources.
Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other
stockholders.
Based on the beneficial ownership of our common stock as of December 31, 2020, our officers, directors and principal stockholders each holding more
than 5% of our common stock, collectively, controlled approximately 25% of our outstanding common stock. As a result, these stockholders, if they act together,
could exercise significant control over the management and affairs of our company and most matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. The interests of these stockholders may not be the same as or may even conflict with your interests.
For example, these stockholders could attempt to delay or prevent a change in control of our company, even if such change in control would benefit our other
stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets,
and might affect the prevailing market price of our common stock due to investors’ perceptions that conflicts of interest may exist or arise. As a result, this
concentration of ownership may not be in the best interests of our other stockholders.
We have incurred and will continue to incur significant costs as a result of being a public company, which may adversely affect our business,
financial condition and results of operations.
We have incurred and will continue to incur significant costs associated with corporate governance requirements that are applicable to us as a public
company, including rules and regulations of the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the
Securities Exchange Act of 1934 (the Exchange Act), as well as the listing requirements of Nasdaq. These rules and regulations are expected to significantly
increase our accounting, legal and financial compliance costs and make some activities more time-consuming. We also expect these rules and regulations to make
it more expensive for us to maintain our directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons
to serve on our board of directors or as executive officers. Accordingly, increases in costs incurred as a result of becoming a publicly traded company may
adversely affect our business, financial condition and results of operations.
We are obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of
these internal controls may adversely affect investor confidence in us, and, as a result, the value of our common stock.
To comply with the requirements of being a public company, we are required to maintain internal control over financial reporting and to report any
material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal
control over financial reporting and provide a management report on internal control over financial reporting. Further, the Sarbanes-Oxley Act also requires that
our internal control over financial reporting be attested to by our independent registered public accounting firm.
If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements
may be materially misstated. The process of designing and implementing the internal control over financial reporting required to comply with this obligation is
time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the
requirements of Section 404 in a timely manner, if we are unable to assert that our internal control
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over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal
control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common
stock could be adversely affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other
regulatory authorities, which could require additional financial and management resources. In addition, if we are unable to continue to meet these requirements, we
may be unable to remain listed on Nasdaq.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are continuing to refine our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or
submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of
the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our
securities.
Stockholders may, from time to time, engage in proxy solicitations or advance stockholder proposals, or otherwise attempt to effect changes and assert
influence on our board of directors and management. Activist campaigns that contest or conflict with our strategic direction or seek changes in the composition of
our board of directors could have an adverse effect on our operating results and financial condition. A proxy contest would require us to incur significant legal and
advisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by our board of directors and
management, diverting their attention from the pursuit of our business strategy. Any perceived uncertainties as to our future direction and control, our ability to
execute on our strategy, or changes to the composition of our board of directors or senior management team arising from a proxy contest could lead to the
perception of a change in the direction of our business or instability which may result in the loss of potential business opportunities, make it more difficult to
pursue our strategic initiatives, or limit our ability to attract and retain qualified personnel and business partners, any of which could adversely affect our business
and operating results. If individuals are ultimately elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively
implement our business strategy and create additional value for our stockholders. We may choose to initiate, or may become subject to, litigation as a result of
the proxy contest or matters arising from the proxy contest, which would serve as a further distraction to our board of directors and management and would require
us to incur significant additional costs. In addition, actions such as those described above could cause significant fluctuations in our stock price based upon
temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Anti-takeover provisions in our certificate of incorporation and bylaws, as well as under Delaware law, could discourage a takeover.
Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that
stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also
limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In
addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for
stockholders to replace or remove members of our board of directors. Because our board of directors is responsible for appointing the members of our
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management team, these provisions could in turn affect any attempt by our stockholders to replace or remove current members of our management team. These
include the following provisions that:
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permit our board of directors to issue shares of preferred stock, with any rights, preferences and privileges as they may designate, without stockholder
approval, which could be used to dilute the ownership of a hostile bidder significantly;
provide that the authorized number of directors may be changed only by resolution of our board of directors and that a director may only be removed
with or without cause by the affirmative vote of the holders of at least 66 2/3% of our voting stock;
provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a
majority of directors then in office, even if less than a quorum;
require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by
written consent;
provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a
meeting of stockholders must provide notice in writing in a timely manner and also specify requirements as to the form and content of a stockholder’s
notice, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or
otherwise attempting to obtain control of our company;
prohibit cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; and
provide that special meetings of our stockholders may be called only by the Chair of the board, our Chief Executive Officer or by our board of
directors pursuant to a resolution adopted by a majority of the total number of authorized directors, which may delay the ability of our stockholders to
force consideration by our company of a take-over proposal or to take certain corporate actions, including the removal of directors.
In addition, Section 203 of the Delaware General Corporation Law (DGCL) which generally prohibits a Delaware corporation from engaging in any of a
broad range of business combinations with an interested stockholder who owns in excess of 15% of our outstanding voting stock from merging or combining with
us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or
combination is approved in a prescribed manner. This provision could have the effect of delaying or preventing a change in control of our company, whether or not
it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or
merging with us.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions
and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us
or our directors, officers, employees or agents.
Our certificate of incorporation provides that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be
the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any
of our directors, officers, employees or agents to us or our stockholders, any action asserting a claim arising pursuant to any provision of the DGCL, our certificate
of incorporation or our bylaws, any action asserting a claim that is governed by the internal affairs doctrine and the resolution of any complaint asserting a cause of
action arising under the Securities Act, in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as
defendants therein and the claim not being one which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery or for which the
Court of Chancery does not have subject matter jurisdiction.
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Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to
these provisions of our certificate of incorporation. These choice of forum provisions may limit our stockholders’ ability to bring a claim in a judicial forum that
they find favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and our directors, officers,
employees and agents even though an action, if successful, might benefit our stockholders. Stockholders who do bring a claim in the Court of Chancery could face
additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery may also reach different
judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the
action, and such judgments or results may be more favorable to us than to our stockholders. Alternatively, if a court were to find these provisions of our certificate
of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs
associated with resolving such matters in other jurisdictions, which could have a material adverse effect on our business, financial condition or results of
operations.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and
trading volume could decline.
The trading market for our common stock will rely in part on the research and reports that securities or industry analysts publish about us and our
business. If one or more of the analysts who cover us downgrades our common stock or issues other unfavorable commentary or research the price of our common
stock may decline. If one or more analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which
in turn could cause the trading price or trading volume of our common stock to decline and could result in the loss of all or part of your investment in us.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
In August 2014, we 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.
In November 2017, we 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. We have a renewal option to extend the term
of the lease for a period of five years beyond the initial term.
In June 2019, we 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. We use these premises as our new principal executive offices and for general office space. We intend to utilize our other currently-leased spaces
through the lease expiration dates to conduct the training of our sales team and for manufacturing purposes.
In August 2020, we 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.
For additional information, see Note 4 to the Consolidated Financial Statements in Part II, Item 8 of this Report.
Item 3. Legal Proceedings.
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 us 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. We refer to this matter as the Medtronic Litigation. The complaint asserts that our 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
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(collectively, the Medtronic Patents). The Medtronic Litigation requests customary remedies for patent infringement, including (i) a judgment that we have
infringed and are infringing the Medtronic Patents, (ii) damages, including treble damages for willful infringement, (iii) a permanent injunction preventing us from
infringing the Medtronic Patents, (iv) attorneys’ fees, and (v) costs and expenses. We believe the allegations are without merit and are vigorously defending
ourselves against them. Given the early stage of the Medtronic Litigation, we are unable to predict the likelihood of success of the claims of the Medtronic
Affiliates against us or to quantify any risk of loss. The Medtronic Litigation could last for an extended period of time and require us to dedicate significant
financial resources and management resources to our defense. An adverse ruling against us could materially and adversely affect our business, financial position,
results of operations or cash flows and could also result in reputational harm. Even if we are 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, we 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 us. In September 2020, the USPTO decided that it will
accept or “institute” the IPR process for six of the seven patents, finding that we had demonstrated a reasonable likelihood that at least one, if not all, of the claims
of these six patents are invalid. We are currently in the IPR discovery process. The USPTO will usually render a decision on the validity of contested patents
within twelve months of instituting the review. We 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. Our motion was granted by the court on May 8, 2020.
In addition to the Medtronic Litigation, we are and may continue to be involved in claims, legal proceedings, and investigations arising out of our
operations in the normal course of business.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Common Stock
PART II
Our common stock has been publicly traded on the Nasdaq Global Select Market under the symbol “AXNX” since October 31, 2018. Prior to that date, there
was no public market for our common stock.
Holders of Record
At February 25, 2021, there were approximately 310 stockholders of record of our common stock. The actual number of stockholders is greater than this number
of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of
holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividends
We have never declared or paid cash dividends on our common stock. Because we currently intend to retain all future earnings to finance future growth, we do
not anticipate paying any cash dividends in the near future. In addition, pursuant to the Loan Agreement with Silicon Valley Bank, we are prohibited from paying
cash dividends without the prior written consent of Silicon Valley Bank.
Recent Sales of Unregistered Securities
Except as previously disclosed in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, we had no sales of unregistered equity securities
during fiscal year 2020.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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Performance Graph
The following graph illustrates a comparison of the total cumulative stockholder return on our common stock since October 31, 2018, which is the date our
common stock first began trading on the Nasdaq Global Select Market, to two indices: the Standard & Poor’s (S&P) 500 Stock Index and the S&P Healthcare
Equipment Index. The stockholder return shown in the graph below is not necessarily indicative of future performance, and we do not make or endorse any
predictions as to future stockholder returns. This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities
Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
$100 investment in stock or index
Axonics Modulation Technologies, Inc. (AXNX)
S&P 500 Index
S&P 500 Health Care Equipment Index
Item 6. Selected Financial Data.
Not applicable.
October 31, 2018
December 31, 2018
December 31, 2019
$
$
$
100.00 $
100.00 $
100.00 $
100.87 $
92.44 $
90.96 $
184.98 $
119.14 $
111.33 $
December 31, 2020
326.37
137.63
147.89
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a global medical technology company that develops and commercializes products to treat urinary and fecal dysfunction, including: (i) an
implantable SNM to treat UUI and UUF, together referred to as OAB, as well as FI, and non-obstructive UR; and (ii) a urethral bulking agent to treat female SUI.
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OAB affects an estimated 87 million adults in the United States and Europe. Another estimated 40 million adults are reported to suffer from FI. SNM therapy is
an effective and durable treatment that has been widely used and reimbursed in Europe and the United States for the past two decades. SNM is the only OAB
treatment with proven clinical superiority to standard medical therapy and OAB patients who receive SNM report significantly higher quality of life than patients
undergoing drug treatment.
We estimate the global SNM market is now approximately $650 million to $700 million and believe it is a growing market that is currently about one to
three percent penetrated. Until we entered the market, it was serviced by Medtronic as a single participant.
We believe our proprietary r-SNM System, the first rechargeable SNM system marketed worldwide, offers significant advantages, and is well positioned
to capture market share and penetrate and grow this attractive market. Our r-SNM System is designed to last approximately 15 years in the human body, is only
5cc in volume, offers broad MRI access, ease of use, intuitive programmers, and the longest recharging interval among rechargeable SNM systems.
We have marketing approvals in Europe, Canada, and Australia for all relevant clinical indications and initiated limited commercial efforts in England, the
Netherlands and Canada in late 2018. Revenue in 2020 from international operations in the Netherlands, England, Canada, Switzerland, Norway and Germany,
was approximately $4.0 million.
Our initial PMA application for our r-SNM System for the treatment of FI was approved by the FDA on September 6, 2019, and our PMA application for
our r-SNM System for the treatment of OAB and UR was approved by the FDA on November 13, 2019.
We are primarily focused on commercializing our products in the United States, which accounts for the vast majority of SNM sales worldwide. We have
established a significant commercial infrastructure, with over 220 sales personnel and clinical specialists and we continue to make significant investments to build
our commercial organization to market and support our products. When making hiring decisions for these roles, we prioritize individuals with strong sales
backgrounds and experience in SNM therapy and other neurostimulation applications, and who also have existing relationships with urologists and
urogynecologists.
Revenue in 2020 from accounts located across the United States was approximately $107.5 million.
In January 2020, the FDA approved an enhanced, second-generation programmer for our r-SNM System under a PMA supplement. The new
programmer features, among other things, a predictive programming algorithm that translates intra-operative responses and suggests how to program the patient
for optimum therapy, thereby reducing the need to adjust post-implant therapy.
In April 2020, the FDA approved a second-generation INS for our r-SNM System under a PMA supplement. The second-generation INS extends the
recharge interval for patients to only once a month for about one hour and for some patients, up to once every two months. The second-generation INS began
shipping to customers in the U.S. during the third quarter of 2020.
In June 2020, the FDA approved a new wireless patient remote control with SmartMRI™ technology for our r-SNM System under a PMA supplement.
The new remote control simplifies the process by which patients can receive a full-body magnetic resonance imaging (MRI). An MRI technician can perform a
simple check using a patient’s remote control immediately prior to an MRI, avoiding the need for the patient to visit their implanting physician’s office or
involving our personnel.
In July 2020, the FDA approved 3T full-body MRI conditional labeling for our r-SNM System under a PMA supplement. With this incremental approval,
our r-SNM System is MRI compatible for both 1.5T and 3T full-body scans.
In September 2020, Health Canada approved a second-generation rechargeable INS for our r-SNM System, which the Company began shipping upon
approval.
In February 2021, the FDA approved a third-generation INS for our r-SNM System under a PMA supplement. The third-generation INS upgrades the
embedded software in the INS and the functionality of the patient remote control. These modifications give patients the ability to make broader stimulation
parameter
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adjustments at home, including selecting a second therapy program that was set post-operatively based on interoperative findings.
Our ability to generate revenue and become profitable will depend on our ability to continue to successfully commercialize our r-SNM System and any
product enhancements we may advance in the future. We expect to derive future revenue by increasing patient and physician awareness of our r-SNM System. If
we are unable to accomplish any of these objectives, it could have a significant negative impact on our future revenue. If we fail to generate sufficient revenue in
the future, our business, results of operations, financial condition, cash flows, and future prospects would be materially and adversely affected.
We also intend to continue to make investments in research and development efforts to develop improvements and enhancements to our r-SNM System.
In the United States, the cost required to treat each patient is reimbursed through various third-party payors, such as commercial payors and government
agencies. Most large insurers have established coverage policies in place to cover SNM therapy. Certain commercial payors have a patient-by-patient prior
authorization process that must be followed before they will provide reimbursement for SNM therapy. Outside the United States, reimbursement levels vary
significantly by country and by region, particularly based on whether the country or region at issue maintains a single-payor system. SNM therapy is eligible for
reimbursement in Canada, Australia, and certain countries in Europe, such as Germany, France, and the United Kingdom. Annual healthcare budgets generally
determine the number of SNM systems that will be paid for by the payor in these single-payor system countries and regions.
We currently outsource the manufacture of the implantable components of our r-SNM System. We plan to continue with an outsourced manufacturing
arrangement for the foreseeable future. Our contract manufacturers are all recognized in their field for their competency to manufacture the respective portions of
our r-SNM System and have quality systems established that meet FDA requirements. We believe the manufacturers we currently utilize have sufficient capacity to
meet our launch requirements and are able to scale up their capacity relatively quickly with limited capital investment.
Prior to obtaining FDA approval, we devoted substantially all of our resources to research and development activities related to our r-SNM System,
including clinical and regulatory initiatives to obtain marketing approvals. We expect to spend a significant amount of our resources on sales and marketing
activities as we commercialize and market our r-SNM System in the United States.
We incurred net losses of $54.9 million, $79.9 million, and $32.5 million for the years ended December 31, 2020, 2019, and 2018, respectively, and had
an accumulated deficit of $234.5 million as of December 31, 2020 compared to $179.6 million at December 31, 2019. As of December 31, 2020, we had available
cash and cash equivalents of approximately $241.2 million, current liabilities of approximately $45.7 million, and long-term liabilities of approximately $9.2
million.
Prior to our initial public offering (IPO), we financed our operations primarily through preferred stock financings and amounts borrowed under a Loan
and Security Agreement, dated February 6, 2018, between us and Silicon Valley Bank (the Loan Agreement). Through our IPO in November 2018, an offering
completed in November 2019 and an offering completed in May 2020, we received aggregate gross proceeds of approximately $405.1 million. We have invested
heavily in product development and continuous improvement to our r-SNM System. We have also made significant investments in clinical studies to demonstrate
the safety and effectiveness of our r-SNM System and to support regulatory submissions. Because of these and other factors, we expect to continue to incur net
losses for the next few years and we may require additional funding, which may include future equity and debt financings. Adequate funding may not be available
to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material and adverse effect on our
business, financial condition, and results of operations.
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Initial Public Offering
On November 2, 2018, we completed our 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 our common stock issued upon the exercise by the underwriters of their option to purchase additional shares. The gross proceeds from the IPO
were $138.0 million and the net proceeds were approximately $126.0 million, after deducting underwriting discounts, commissions and estimated offering
expenses payable by us. In connection with the IPO, our outstanding shares of convertible preferred stock were automatically converted into an aggregate of
15,813,297 shares of common stock, and our 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.
November 2019 Follow-On Offering
On November 22, 2019, we 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 our common stock issued upon the exercise by the underwriters of their option to purchase additional shares. The gross proceeds to
us from this follow-on offering were $117.6 million and the net proceeds were approximately $110.4 million, after deducting underwriting discounts, commissions
and offering expenses payable by us.
May 2020 Follow-On Offering
On May 12, 2020, we completed a follow-on offering by issuing 4,600,000 shares of common stock, at an offering price of $32.50 per share, inclusive of
600,000 shares of our common stock issued upon the exercise by the underwriters of their option to purchase additional shares. The gross proceeds to us from this
follow-on offering were $149.5 million and the net proceeds were approximately $140.5 million, after deducting underwriting discounts, commissions and offering
expenses payable by us.
Impact of COVID-19
The COVID-19 pandemic negatively impacted our sales, primarily in the second quarter of 2020, by significantly decreasing and delaying the number of
procedures performed using our r-SNM System, and we expect that the pandemic could negatively impact our business, financial condition and results of
operations. Similar to the general trend in elective and other surgical procedures, the number of procedures performed using our r-SNM System decreased
significantly as healthcare organizations in the United States and globally, including in Europe and Canada, have prioritized the treatment of patients with COVID-
19 or have altered their operations to prepare for and respond to the pandemic. Specifically, substantially all of the procedures using our r-SNM System were
postponed or cancelled from middle of March 2020 through May 2020, but order flow began a gradual recovery in May 2020 and continued to improve in the
second half of 2020.
To protect the health of our employees, their families, and our communities, we have restricted access to our offices to personnel who must perform
critical activities that must be completed on-site, limited the number of such personnel that can be present at our facilities at any one time, requested that many of
our employees work remotely, and implemented strict travel restrictions. These restrictions and precautionary measures have not adversely affected our operations.
The full extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and
intensity of the pandemic, and additional protective measures implemented by the governmental authorities, all of which are uncertain and difficult to predict
considering the rapidly evolving landscape. However, if the pandemic continues to evolve into a long-term severe worldwide health crisis, there could be a
material adverse effect on our business, results of operations, financial condition, and cash flows.
AMF License Agreement
On October 1, 2013, we entered into the License Agreement, pursuant to which AMF granted us the AMF IP relating to AMF Licensed Products.
Under the License Agreement, for each calendar year beginning in 2018, we are obligated to pay AMF a royalty on an AMF Licensed Product-by-AMF
Licensed Product basis if one of the following conditions applies: (i) one or more valid claims within any of the patents licensed to us by AMF covers such AMF
Licensed Products or the manufacture of such AMF Licensed Products or (ii) for a period of 12 years from the first commercial sale
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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 automatically increases each year, subject to a maximum
amount of $200,000 per year. During the years ended December 31, 2020, 2019, and 2018, we have recorded royalties of $4.4 million, $0.6 million, and $0.1
million, respectively. We have 60 days to pay AMF the royalty amount due under the License Agreement, and if we fail to pay AMF within such 60-day period,
AMF may, at its election, convert the exclusive license to a non-exclusive license or terminate the License Agreement.
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Components of Our Results of Operations
Net Revenue
Revenue in 2020 from U.S. operations was $107.5 million.
Revenue in 2020 from international operations in the Netherlands, England, Canada, Switzerland, Norway and Germany, was approximately $4.0 million.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of acquisition costs of the components of our r-SNM System, third-party contract labor costs, overhead costs, as
well as distribution-related expenses such as logistics and shipping costs. The overhead costs include the cost of material procurement and operations supervision
and management personnel. We expect overhead costs as a percentage of revenue to decrease as our sales volume increases. Cost of goods sold also include other
expenses such as scrap and inventory obsolescence. We expect cost of goods sold to increase in absolute dollars primarily as, and to the extent, our revenue grows.
We expect gross margin to vary based on regional differences in pricing and discounts negotiated by customers.
We calculate gross margin as gross profit divided by revenue. We expect future gross margin will be affected by a variety of factors, including
manufacturing costs, the average selling price of our r-SNM System, the implementation of cost-reduction strategies, inventory obsolescence costs, which may
occur when new generations of our r-SNM System are introduced, and to a lesser extent, the sales mix between the United States, Canada, Europe and Australia as
our average selling price in the United States is expected to be higher than in Canada, Europe and Australia and foreign currency exchange rates. Our gross margin
may increase over the long term to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers,
thereby reducing our per unit costs. Additionally, our gross margin may fluctuate from quarter to quarter due to seasonality.
Research and Development Expenses
Research and development expenses consist primarily of employee compensation, including stock-based compensation, product development, including
testing and engineering, and clinical studies to develop and support our r-SNM System, including clinical study management and monitoring, payments to clinical
investigators, and data management. Other research and development expenses include consulting and advisory fees, royalty expense, travel expenses, and
equipment-related expenses and other miscellaneous office and facilities expenses related to research and development programs. Research and development costs
are expensed as incurred. We expect to continue incurring research and development expenses in the future as we develop next generation versions of our r-SNM
System and expand to new markets. We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing
of initiating new product development efforts and new clinical development activities.
The following table summarizes our research and development expenses by functional area for the years ended December 31, 2020, 2019, and 2018 (in
thousands):
Personnel related
Clinical development
Contract fabrication and manufacturing
Contract R&D and consulting
Other R&D expenses
Total R&D expenses
2020
Years Ended December 31,
2019
2018
$
$
$
12,176
501
6,159
8,810
1,524
$
11,917
1,401
642
4,847
1,374
29,170 $
20,181 $
8,452
4,572
3,572
1,713
1,093
19,402
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General and Administrative Expenses
General and administrative expenses consist primarily of employee compensation, including stock-based compensation, and spending related to finance,
information technology, human resource functions, consulting, legal, and professional service fees. Other general and administrative expenses include director and
officer insurance premiums, investor relations costs, office-related expenses, facilities and equipment rentals, bad debt expense, and travel expenses. We expect our
general and administrative expenses will significantly increase in absolute dollars as we increase our headcount and expand administrative personnel to support our
growth and operations as a public company including finance personnel and information technology services. Additionally, we anticipate increased legal expenses
associated with our patent infringement litigation with Medtronic. These expenses will further increase as we no longer qualify as an “emerging growth company”
under the Jumpstart Our Business Startups (JOBS) Act, which requires us to comply with certain reporting requirements effective December 31, 2020. We expect
general and administrative expenses to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee compensation, including stock-based compensation, trade shows, booth exhibition costs, and
the related travel for these events. Other sales and marketing expenses include consulting and advisory fees. We expect sales and marketing expenses to continue to
increase in absolute dollars as we expand our commercial infrastructure to both drive and support our expected growth in revenue. However, we expect sales and
marketing expenses to decrease as a percentage of revenue in the long term primarily as, and to the extent, our revenue grows.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income earned on cash equivalents and short-term investments, net of interest expense payable
under the Loan Agreement with Silicon Valley Bank.
Income Tax Expense
Income tax expense consists of state income taxes in California. We maintain a full valuation allowance for deferred tax assets including net operating
loss carryforwards and research and development credits and other tax credits.
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Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
The following table shows our results of operations for the years ended December 31, 2020 and 2019 (in thousands, except percentages):
Net revenue
Cost of goods sold
Gross profit
Gross Margin
Operating Expenses
Research and development
General and administrative
Sales and marketing
Total operating expenses
Loss from operations
Other Income (Expense)
Interest income
Loss on disposal of property and equipment
Interest and other expense
Other income (expense), net
Loss before income tax expense
Income tax expense
Net loss
Foreign currency translation adjustment
Comprehensive loss
Net Revenue
Years Ended December 31,
2020
2019
Period to Period
Change
$
111,535
44,444
67,091
60.2 %
$
13,820
6,490
7,330
53.0 %
29,170
25,551
66,130
120,851
(53,760)
761
(41)
(1,874)
(1,154)
(54,914)
1
(54,915)
(3)
(54,918)
$
20,181
19,076
48,672
87,929
(80,599)
2,974
—
(2,309)
665
(79,934)
1
(79,935)
(12)
(79,947)
$
97,715
37,954
59,761
8,989
6,475
17,458
32,922
26,839
(2,213)
(41)
435
(1,819)
25,020
—
25,020
9
25,029
$
$
Net revenue was $111.5 million in fiscal year 2020 and was derived from the sale of our r-SNM Systems to customers in the United States, Europe and
Canada. Net revenue was $13.8 million in fiscal year 2019 and was derived from the sale of our r-SNM Systems to customers in the United States, Europe and
Canada. The increase in net revenue is primarily due to the commercial launch in the United States in the fourth quarter of 2019, partially offset by a decrease in
sales in Europe and Canada as related to the COVID-19 pandemic.
Cost of Goods Sold and Gross Margin
We incurred $44.4 million of cost of goods sold in fiscal year 2020, compared to $6.5 million in fiscal year 2019. Gross margin was 60.2% in fiscal year
2020, compared to 53.0% gross margin in fiscal year 2019. The increase in gross margin is primarily due to higher sales volume as well as the commercial launch
in the United States in the fourth quarter of 2019, which has higher average sales prices.
Research and Development Expenses
Research and development expenses increased $9.0 million, or 44.5%, to $29.2 million in fiscal year 2020, compared to $20.2 million in fiscal year 2019.
The increase in research and development expenses was primarily attributable to an increase of $5.5 million in contract fabrication and manufacturing costs related
to product development projects and an increase of $4.0 million in contract research and development and consulting expenses,
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partially offset by $0.9 million decrease in clinical development costs to demonstrate the safety and effectiveness of our r-SNM System and to support regulatory
submissions.
General and Administrative Expenses
General and administrative expenses increased $6.5 million, or 33.9%, to $25.6 million in fiscal year 2020, compared to $19.1 million in fiscal year 2019,
primarily as a result of an increase of $2.4 million in personnel costs including salaries and wages, stock-based compensation and other employee-related benefits,
an increase of $1.9 million in legal and consulting costs, and an increase of $1.0 million in rent expense.
Sales and Marketing Expenses
Sales and marketing expenses increased $17.5 million, or 35.9%, to $66.1 million in fiscal year 2020, compared to $48.7 million in fiscal year 2019. The
increase in sales and marketing expenses was primarily due to an increase of $19.8 million related to personnel costs including salaries and wages, stock-based
compensation and other employee-related benefits, partially offset by a decrease of $2.3 million in travel expenses.
Other Income (Expense), Net
Other expense, net was $1.2 million in fiscal year 2020, consisting primarily of interest expense incurred related to the Loan Agreement with Silicon
Valley Bank, partially offset by interest income earned on cash equivalents. Other income, net was $0.7 million in fiscal year 2019, consisting primarily of interest
income earned on cash equivalents and short-term investments, partially offset by interest expense incurred related to the Loan Agreement with Silicon Valley
Bank
Income Tax Expense
Income tax expense was minimal in fiscal year 2020 and 2019.
Liquidity and Capital Resources
We only began full-scale commercialization of our r-SNM System in late 2019. We have expended significant resources on research and development
activities, growing our operations organization and building and training our sales organization.
We incurred net losses of $54.9 million, $79.9 million, and $32.5 million for the years ended December 31, 2020, 2019, and 2018, respectively, and had
an accumulated deficit of $234.5 million as of December 31, 2020 compared to $179.6 million at December 31, 2019. We expect to continue to spend a significant
amount of our existing resources on sales and marketing activities as we continue to commercialize and market our products in the United States and
internationally.
As of December 31, 2020, we had cash and cash equivalents of $241.2 million compared to cash, cash equivalents and short-term investments of $183.7
million at December 31, 2019. We expect that our cash, cash equivalents and short-term investments on hand will be sufficient to fund our operations through at
least the next 12 months. We fund our operations through a combination of proceeds from public offerings of our common stock, cash receipts from sales of our r-
SNM System and proceeds from our Loan Agreement with Silicon Valley Bank. As of December 31, 2020, we had $21.5 million in outstanding borrowings, as
discussed below under “Indebtedness,” which were repaid in January 2021.
In connection with the acquisition of Contura, on February 25, 2021, we entered into the Loan and Security Agreement with Silicon Valley Bank, as the
administrative agent and collateral agent for the lenders, under which we obtained a loan in the principal amount of $75 million pursuant to the Loan. The Loan
under the Loan and Security Agreement matures on February 1, 2024 (the Maturity Date), unless earlier accelerated upon an event of default. The Loan bears
interest at a floating per annum rate equal to the greater of (a) 9.00% and (b) 5.75% above the current prime rate, with only interest due and payable monthly until
September 1, 2022, at which time interest and principal will be due and payable monthly in equal monthly payments. The Loan and Security Agreement also sets
out that the Loan is subject to a final payment fee equal to 6.00% of the aggregate principal amount of the Loan.
We may prepay amounts outstanding under the Loan and Security Agreement at any time with 5 days prior written notice to Silicon Valley Bank. In the
event that we elect to prepay the Loan prior to the Maturity Date, we are required to pay a fee in the amount of (a) 2.00% of the outstanding principal balance if
such prepayment occurs
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prior to February 25, 2022 or (b) 1.00% of the outstanding principal balance if such prepayment occurs on or after February 25, 2022.
The Loan and Security Agreement contains customary covenants that include, among others, covenants that limit our and our subsidiaries’ ability to
dispose of assets, conduct mergers or acquisitions, incur indebtedness, incur certain liens, pay dividends or make distributions on our capital stock, make certain
investments, and enter into certain affiliate transactions, in each case subject to customary exceptions for a credit facility of this size and type.
The Loan and Security Agreement contains customary events of default that include, among others, non-payment defaults, covenant defaults, a default in
the event a material adverse change occurs, defaults in the event our assets are attached or we are enjoined from doing business, bankruptcy and insolvency
defaults, cross-defaults to certain other material indebtedness, material judgment defaults, and inaccuracy of representations and warranties. The occurrence of an
event of default could result in an increase to the applicable interest rate of 5.00%, acceleration of and present occurrence of the Maturity Date, and the consequent
obligation for us to repay in full in cash all amounts outstanding under the Loan and Security Agreement, and a right by the lenders to exercise all remedies
available under the Loan and Security Agreement and related agreements, including the right to dispose of the collateral as permitted under applicable law.
We may need to raise additional financing in the future to facilitate our business operations. If we raise additional funds by issuing equity securities, our
stockholders could experience dilution. Debt financing, if available, may involve covenants further restricting our operations or our ability to incur additional debt.
Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available
at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing when needed to satisfy our liquidity requirements, we may be
required to scale back our operations.
Cash Flows
The following table presents a summary of our cash flow for the periods indicated (in thousands):
Net cash provided by (used in)
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Net cash used in operating activities
2020
Years Ended December 31,
2019
2018
$
$
(83,742) $
9,654
144,190
(3)
70,099 $
(83,454) $
45,287
110,955
(12)
72,776 $
(31,370)
(60,050)
165,342
(14)
73,908
Net cash used in operating activities was $83.7 million in fiscal year 2020 and consisted primarily of a net loss of $54.9 million, a decrease from changes
in net operating assets of $47.0 million, partially offset by non-cash charges of $18.2 million. Net operating assets consisted primarily of inventory to support the
commercial launch of our r-SNM System in the United States. Non-cash charges consisted primarily of stock-based compensation.
Net cash used in operating activities was $83.5 million in fiscal year 2019 and consisted primarily of a net loss of $79.9 million, a decrease in net
operating assets of $14.4 million, partially offset by non-cash charges of $10.9 million. Net operating assets consisted primarily of inventory to support the
commercial launch of our r-SNM System in the United States. Non-cash charges consisted primarily of stock-based compensation.
Net cash used in operating activities was $31.4 million in fiscal year 2018 and consisted primarily of a net loss of $32.5 million, a decrease in net
operating assets of $2.9 million, partially offset by non-cash charges of $4.0 million. Net operating assets consisted primarily of inventory to support the planned
launch of our commercial
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operations. Non-cash charges consisted primarily of forgiveness of receivables for stock subscriptions, depreciation and amortization, and stock-based
compensation.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was $9.7 million in fiscal year 2020 and consisted primarily of sales and maturities of short-term investments,
partially offset by purchases of property and equipment. Not included is the approximately $141.3 million in cash paid and 1,096,583 shares of our common stock
issued from the acquisition of Contura and its Bulkamid product.
Net cash provided by investing activities was $45.3 million in fiscal year 2019 and consisted primarily of sales and maturities of short-term investments,
partially offset by purchases of short-term investments.
Net cash used in investing activities was $60.1 million in fiscal year 2018 and consisted primarily of purchases and sales of short-term investments.
Net cash provided by financing activities
Net cash provided by financing activities was $144.2 million in fiscal year 2020 and consisted primarily of $140.5 million in net proceeds received in the
follow-on offering. Not included is the $75 million in proceeds from the Loan and Security Agreement.
Net cash provided by financing activities was $111.0 million in fiscal year 2019 and consisted primarily of $110.4 million in net proceeds received in the
follow-on offering.
Net cash provided by financing activities was $165.3 million in fiscal year 2018 and consisted primarily of $126.0 million in net proceeds received in the
IPO, $20.0 million of proceeds from our Term Loan with Silicon Valley Bank, and $20.1 million of proceeds from the issuance of shares of our Series C preferred
stock.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future
material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
Our principal contractual obligations consist of payments due under the Loan Agreement, including interest and principal payments and the final
payment. The following table sets out, as of December 31, 2020, our contractual obligations due by period (in thousands):
Operating Lease Obligations
Purchase Obligations
Other Long-Term Liabilities
Long-term Debt
(4)
(2)
(1)
(3)
Total
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
$
$
13,141 $
30,116
2,525
21,797
67,579 $
1,945 $
30,116
150
21,797
54,008 $
3,708 $
—
375
—
4,083 $
3,626 $
—
400
—
4,026 $
3,862
—
1,600
—
5,462
(1) Our principal office is currently located at 26 Technology Drive, Irvine, California 92618, where we lease approximately 25,548 square feet of office space
under a lease that terminates on October 31, 2027. In addition, we maintain offices at 15326 Alton Parkway, Irvine, California 92618, where we lease
approximately 32,621 square feet of office space under a lease that terminates on January 31, 2028, and at 7575 Irvine Center Drive, Suite 200, Irvine,
California 92618, where we lease approximately 12,215 square feet of space, and where we conduct the training of our sales team, under a lease that
terminates on July 31, 2022.
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(2) Purchase obligations represent open purchase orders primarily for component materials and third-party contract labor costs at the end of the fiscal year. These
purchase orders can be impacted by various factors, including the timing of issuing orders, the timing of the shipment of orders, and currency fluctuations.
(3) Represents the Minimum Royalty due under the License Agreement.
(4) Includes interest payments at the prime rate plus 1.75%, prepayment fees, and the minimum final payment, consisting of a 7.5% premium principal amount
paid off under the Loan Agreement, all of which were repaid in full in January 2021. Fees or payments under the Loan and Security Agreement are not
included.
From time to time we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims, including the
License Agreement, the Loan Agreement, the Loan and Security Agreement and certain real estate leases, supply purchase agreements, and agreements with
directors and officers. The terms of such obligations vary by contract and in most instances a maximum dollar amount is not explicitly stated therein. Generally,
amounts under these contracts cannot be reasonably estimated until a specific claim is asserted, thus no liabilities have been recorded for these obligations on our
balance sheets for any of the periods presented.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires
our management to make estimates and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our
estimates on historical experience and on various other assumptions that we believe 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 our consolidated financial statements.
While our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this Annual
Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal
of our financial condition and results of operations and require our most difficult, subjective and complex judgments.
Revenue Recognition
Revenue recognized during the years ended December 31, 2020, 2019, and 2018 relates entirely to the sale of our r-SNM System.
We have revenue arrangements that consist of a single performance obligation. We recognize 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. We do 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 our customers and do not include a significant financing
component. We extend credit to our customers based upon an evaluation of the customer’s financial condition and credit history and generally require no collateral.
We do not have any contract balances related to product sales. We also do not have significant contract acquisition costs related to product sales.
Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold. Amounts billed to customers for shipping
and handling are included in net revenue.
Allowance for Doubtful Accounts
We make estimates of the collectability of accounts receivable. Upon adoption of ASU 2016-13, we did not recognize an adjustment to the beginning
balance of retained earnings as the impact from adoption was not material. Our 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 our 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
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flows. The full effects of COVID-19 on our clients are highly uncertain and cannot be predicted. As a result, our future collection experience can differ
significantly from historical collection trends. If our clients experience a negative impact on their cash flows, it could have a material adverse effect on our results
of operations and financial condition.
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 our assumptions and valuation techniques used to measure assets and liabilities at fair value. The inputs
require significant management judgment or estimation.
Our 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 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 our term
loan, which is described below, approximates fair value, considering the interest rates are based on the prime interest rate.
Investment Securities
We classify our 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. Our 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 consolidated statement of comprehensive income (loss).
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).
Inventory, Net
Inventories are stated at the lower of cost or net realizable value, with cost computed on a first-in, first-out basis. We reduce 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.
We capitalize inventory produced for commercial sale. We capitalize manufacturing costs as inventory following both the receipt of regulatory approval
from regulatory bodies and our intent to commercialize. Costs associated with developmental products prior to satisfying our inventory capitalization criteria are
charged to research and development expense as incurred.
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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 us.
We analyze 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 our inventory values. We also apply 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 we continually gather 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 36 months and,
based on sales forecasts, we expect 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 our 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.
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 our 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. We 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
We review our 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 no such impairments of long-lived assets to date.
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Leases
In accordance with ASU No. 2016-02, “Leases (Topic 842)”, components of a lease should be split into three categories: lease components, non-lease
components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be
allocated based on the respective relative fair values to the lease components and non-lease components. Entities may elect not to separate lease and non-lease
components. Rather, entities would account for each lease component and related non-lease component together as a single lease component. We have 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. We apply the bright line
thresholds referenced in Topic 842 to assist in evaluating leases for appropriate classification. The aforementioned bright lines are applied consistently to our 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 our lease does not provide an implicit rate, we use our 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 we 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.
Income Taxes
We account 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. We have deferred tax assets. The realization of these deferred tax assets is dependent upon our 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. We evaluate the recoverability of the deferred tax assets annually, and maintain a full valuation allowance on our deferred tax
assets. We recognize 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. We are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of
income are reported as earned by our U.S. and foreign entities and are taxed accordingly. In the normal course of business, we are 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. Our policy is to recognize interest and penalties related to unrecognized tax benefits, if
any, in income tax expense.
Stock-Based Compensation
We measure 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 recognize 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. We use 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.
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We also grant shares of performance-based restricted stock units that typically vest after one year only if we have also achieved certain performance
objectives as defined and approved by our 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, we also grant market-based
restricted stock units that have combined market conditions and service conditions for vesting, for which we use the Monte Carlo valuation model to value equity
awards (as of the date of grant).
Recent Accounting Pronouncements
For recent accounting pronouncements, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, of Notes to Consolidated
Financial Statements in Part II, Item 8 of this Annual Report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate risk, foreign currency exchange rate risk
and inflation risk as follows:
Interest Rate Risk
We had cash and cash equivalents of $241.2 million as of December 31, 2020, which came from IPO and follow-on offerings of our common stock and
debt financing arrangements. The goals of our investment policy are liquidity and capital preservation and we do not enter into investments for trading or
speculative purposes. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to
the short term nature of our cash, cash equivalents and short-term investments. Additionally, the interest rate for borrowings under the Loan and Security
Agreement is variable. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our
consolidated financial statements. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.
Foreign Currency Exchange Rate Risk
As we expand internationally our results of operations and cash flows may become increasingly subject to fluctuations due to changes in foreign currency
exchange rates. All of our revenue is denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located,
which is primarily in the United States. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables would not
have been material for the periods presented. As our operations in countries outside of the United States grow, our results of operations and cash flows may be
subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any
material foreign currency hedging contracts although we may do so in the future.
Inflation Risk
Inflationary factors, such as increases in our cost of goods sold and selling and operating expenses, may adversely affect our operating results. Although
we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an
adverse effect on our ability to maintain and increase our gross margin and sales and marketing and operating expenses as a percentage of our revenue if the selling
prices of our products do not increase as much as or more than these increased costs.
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Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Axonics Modulation Technologies, Inc.
Irvine, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Axonics Modulation Technologies, Inc. (the “Company”) as of December 31, 2020 and 2019,
the related consolidated statements of comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2020, the consolidated statement of mezzanine equity for the year ended December 31, 2018, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal
control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical
audit matter or on the accounts or disclosures to which it relates.
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Income Taxes
As described in Notes 1 and 8 to the consolidated financial statements, the Company’s accounting for income taxes requires the recognition of deferred tax assets,
liabilities, and valuation reserves for the expected future tax consequences of events that have been included in the consolidated financial statements. The
Company operates in multiple countries, which requires specialized knowledge of the income tax laws in various federal, state and foreign jurisdictions. In
addition, the Company has significant net operating loss carryforwards that may be limited under Section 382 of the Internal Revenue Code.
We identified the accounting for certain components of income taxes, including transfer pricing and the realizability of net operating loss carryforwards as a
critical audit matter. Our determination results from the specialized skill and knowledge required to properly account for income taxes, including the development
of complex assumptions used in the transfer pricing study and related determinations and the significant amount of management judgement necessary to evaluate
the realizability of net operating loss carryforwards. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit
effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
• Utilizing personnel with specialized skill and knowledge in transfer pricing to assist in evaluating the reasonableness of the Company’s assumptions,
inputs and methods used in the transfer pricing studies related to inter-company transactions.
• Utilizing personnel with specialized skill and knowledge in federal, state and foreign jurisdiction income taxes to assist in evaluating the reasonableness
of the assumptions used in the assessment of the realizability of the net operating loss carryforwards considering Section 382 of the Internal Revenue
Code.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2018.
Costa Mesa, California
March 1, 2021
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Axonics Modulation Technologies, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31,
2020
2019
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $465 and $75 at December 31, 2020 and 2019, respectively
Inventory, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible asset, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Accrued liabilities
Accrued compensation and benefits
Operating lease liability, current portion
Debt, net of unamortized debt issuance costs, current portion
Total current liabilities
Operating lease liability, net of current portion
Debt, net of unamortized debt issuance costs, net of current portion
Total liabilities
Stockholders’ Equity
Preferred stock, par value $0.0001 per share; 10,000,000 shares authorized, no shares issued and outstanding at December 31, 2020 and
2019
Common stock, par value $0.0001 per share, 50,000,000 shares authorized at December 31, 2020 and 2019; 39,931,030 and 34,110,995
shares issued and outstanding at December 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
$
$
$
$
241,181 $
—
18,270
63,060
5,435
327,946
6,328
196
7,736
342,206 $
10,660 $
6,684
5,948
1,280
21,110
45,682
9,154
—
54,836
—
4
522,296
(234,499)
(431)
287,370
342,206 $
171,082
12,592
7,879
15,659
4,468
211,680
3,047
311
4,784
219,822
5,882
2,174
3,375
602
—
12,033
4,450
20,336
36,819
—
3
363,012
(179,584)
(428)
183,003
219,822
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Net revenue
Cost of goods sold
Gross profit
Operating Expenses
Research and development
General and administrative
Sales and marketing
Total operating expenses
Loss from operations
Other Income (Expense)
Interest income
Loss on disposal of property and equipment
Interest and other expense
Other income (expense), net
Loss before income tax expense
Income tax expense
Net loss
Foreign currency translation adjustment
Comprehensive loss
Axonics Modulation Technologies, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands, except share and per share data)
2020
Years Ended December 31,
2019
2018
111,535 $
44,444
67,091
29,170
25,551
66,130
120,851
(53,760)
761
(41)
(1,874)
(1,154)
(54,914)
1
(54,915)
(3)
(54,918) $
13,820 $
6,490
7,330
20,181
19,076
48,672
87,929
(80,599)
2,974
—
(2,309)
665
(79,934)
1
(79,935)
(12)
(79,947) $
707
356
351
19,402
9,362
3,724
32,488
(32,137)
998
—
(1,343)
(345)
(32,482)
1
(32,483)
(14)
(32,497)
(1.48) $
36,981,335
(2.80) $
28,567,302
(4.64)
6,997,777
$
$
$
Net loss per share, basic and diluted (see Note 1)
Weighted-average shares used to compute basic and diluted net loss per share (see Note 1)
See accompanying notes to consolidated financial statements.
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Balance at
December 31, 2017
Issuance of
Series C
Preferred Stock
at $9.00 per
share for cash,
net of issuance
costs of $199
Conversion of
preferred stock
to common
stock
Balance at
December 31, 2018
Axonics Modulation Technologies, Inc.
Consolidated Statements of Mezzanine Equity
(in thousands, except share and per share data)
Series A
Preferred Stock
Series B-1
Preferred Stock
Series B-2
Preferred Stock
Series C
Preferred Stock
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Noncontrolling
Interests
Total
719,500 $
14,021
1,925,302 $
13,757
2,213,794 $
17,572
1,898,213 $
16,877 $
31,066 $
93,293
—
—
—
—
—
—
2,233,333
19,899
—
19,899
(719,500)
(14,021)
(1,925,302)
(13,757)
(2,213,794)
(17,572)
(4,131,546)
(36,776)
(31,066)
(113,192)
— $
—
— $
—
— $
—
— $
— $
— $
—
See accompanying notes to consolidated financial statements.
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Axonics Modulation Technologies, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except share and per share data)
Balance at December 31, 2017
2,776,583 $
— $
2,900 $
(1,753) $
(67,166) $
(402) $
(66,421)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Stock
Subscriptions
Receivable
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Issuance of common stock for employee
stock option exercises for promissory notes
Issuance of common stock for employee
stock option exercises for cash
Warrants for common stock
Repurchase of common stock
Forgiveness of stock subscriptions
receivable
Conversion of preferred stock to common
stock
Initial public offering - issuance of
9,200,000 shares at $15.00 per share, less
closing costs of $11,951
Stock-based compensation
Foreign currency translation adjustment
Net loss
Balance at December 31, 2018
Issuance of common stock for employee stock
option exercises for cash
Restricted Shares Award (RSA) issuances and
forfeitures for terminations, net and stock-
based compensation
Issuance of common stock for vesting of
Restricted Stock Units (RSU) and stock-based
compensation
Follow-on offering - issuance of 5,345,000
shares at $22.00 per share, less closing costs
of $7,141
Issuance of common stock for warrant
exercise
Foreign currency translation adjustment
Net loss
Balance at December 31, 2019
Issuance of common stock for employee stock
option exercises for cash
RSA issuances and forfeitures for
terminations, net and stock-based
compensation
Issuance of common stock for vesting of RSU
and stock-based compensation
Follow-on offering - issuance of 4,600,000
shares at $32.50 per share, less closing costs
of $9,013
Foreign currency translation adjustment
Net loss
48,720
7,120
—
(38,786)
—
15,813,297
9,200,000
—
—
—
27,806,934
281,744
613,717
—
5,345,000
63,600
—
—
34,110,995
767,792
405,907
46,336
4,600,000
—
—
—
—
—
—
—
2
1
—
—
—
3
—
—
—
—
—
—
—
3
—
—
—
1
—
—
Balance at December 31, 2020
39,931,030 $
4 $
71
9
986
(473)
—
113,190
126,048
606
—
—
243,337
506
7,655
1,065
110,449
—
—
—
363,012
3,703
11,792
3,303
(71)
—
—
—
1,824
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(32,483)
(99,649)
—
—
—
—
—
—
(79,935)
(179,584)
—
—
—
—
—
—
—
—
—
—
—
(14)
—
(416)
—
—
—
—
—
(12)
—
(428)
—
—
—
—
9
986
(473)
1,824
113,192
126,049
606
(14)
(32,483)
143,275
506
7,655
1,065
110,449
—
(12)
(79,935)
183,003
3,703
11,792
3,303
140,486
—
—
522,296 $
—
—
—
— $
—
—
(54,915)
(234,499) $
—
(3)
—
(431) $
140,487
(3)
(54,915)
287,370
See accompanying notes to consolidated financial statements.
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Axonics Modulation Technologies, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Cash Flows from Operating Activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
2020
Years Ended December 31,
2019
2018
$
(54,915) $
(79,935) $
(32,483)
Depreciation and amortization
Loss on disposal of property and equipment
Stock-based compensation
Amortization of debt issuance costs
Provision for doubtful accounts
Forgiveness of stock subscriptions receivable
Change in fair value of warrants
Other items
Changes in operating assets and liabilities
Accounts receivable
Inventory
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued liabilities
Accrued compensation and benefits
Lease liability
Net cash used in operating activities
Cash Flows from Investing Activities
Purchases of property and equipment
Purchases of short-term investments
Proceeds from sales and maturities of short-term investments
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities
Payment of debt issuance costs
Proceeds from debt
Proceeds from exercise of stock options
Proceeds from issuance of common stock upon follow-on public offering
Payment of common stock issuance costs upon follow-on public offering
Proceeds from issuance of common stock upon initial public offering
Payment of common stock issuance costs upon initial public offering
Proceeds from issuance of preferred stock and noncontrolling interest
Payment of preferred stock issuance costs
Repurchase of common stock
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental Disclosure of Cash Flow Information
Cash paid for interest
Cash paid for taxes
Noncash Investing and Financing Activities
Common stock issuance on stock option exercises for promissory notes
Warrants issued as debt issuance costs
Accrued loan fees as debt issuance costs
Forgiveness of stock subscriptions receivable
1,741
41
15,095
774
390
—
—
165
(10,781)
(47,353)
(863)
(90)
4,778
4,193
2,573
510
(83,742)
(2,938)
—
12,592
9,654
—
—
3,703
149,500
(9,013)
—
—
—
—
—
144,190
(3)
70,099
171,082
241,181 $
1,102 $
1 $
— $
— $
— $
— $
1,191
—
8,720
873
75
—
—
—
(7,527)
(11,986)
(752)
(299)
2,446
1,155
2,711
(126)
(83,454)
(1,339)
(36,404)
83,030
45,287
—
—
506
117,590
(7,141)
—
—
—
—
—
110,955
(12)
72,776
98,306
171,082 $
1,436 $
1 $
— $
— $
— $
— $
946
—
606
338
—
1,824
254
—
(427)
(2,255)
(3,009)
65
1,820
846
214
(109)
(31,370)
(1,228)
(78,122)
19,300
(60,050)
(142)
20,000
9
—
—
138,000
(11,951)
20,098
(199)
(473)
165,342
(14)
73,908
24,398
98,306
751
1
71
733
1,500
1,824
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
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AXONICS MODULATION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
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 6).
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 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
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
(GAAP). Certain prior year reported amounts have been reclassified to conform with the 2020 presentation.
Stock Split and Charter Amendment
In October 2018, the board of directors and certain stockholders of the Company approved an amendment to the Company’s Certificate of Incorporation
to (i) increase the authorized shares of common stock from 17,500,000 to 20,500,000, (ii) effect a 1.2-for-1 forward stock split of the Company’s common stock
and (iii) define a “Qualified IPO” to include a per share price equal to at least $12.00 (as adjusted for stock splits, combinations, stock dividends, recapitalizations
and the like). All shares of common stock, stock options, and per share information presented in the consolidated financial statements have been adjusted to reflect
the stock split on a retroactive basis for all periods presented. Any fractional shares that resulted from the stock split were rounded up to the nearest whole share.
There was no change in the par value of the Company’s common stock. The ratios by which shares of preferred stock are convertible into shares of common stock
have been adjusted to reflect the effects of the forward stock split.
In November 2018, the board of directors and certain stockholders of the Company approved an amendment to the Company’s Certificate of
Incorporation to increase the authorized shares of common stock from 20,500,000 to 50,000,000 and authorize 10,000,000 shares of preferred stock.
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 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
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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.
Revenue Recognition
Revenue recognized during the years ended December 31, 2020, 2019, and 2018 relates entirely to the sale of our r-SNM System.
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
December 31, 2020 and 2019, respectively. Damaged or defective products are replaced at no charge under the Company’s standard warranty. For the years ended
December 31, 2020, 2019, and 2018, the replacement costs were $0.1 million, minimal, and zero, respectively.
Shipping and handling costs incurred for the delivery of goods to customers are included in cost of goods sold. Amounts billed to customers for shipping
and handling are included in net revenue.
The following table provides additional information pertaining to net revenue disaggregated by geographic market for the years ended December 31,
2020, 2019, and 2018 (in thousands):
United States
International markets
Total net revenue
Allowance for Doubtful Accounts
2020
Years Ended December 31,
2019
2018
$
$
107,542 $
3,993
111,535 $
8,376 $
5,444
13,820 $
—
707
707
The Company makes estimates of the collectability of accounts receivable. Upon adoption of ASU 2016-13, the Company did not recognize an
adjustment to the beginning balance of retained earnings as the impact from adoption was not material. The Company’s estimate of future losses is made by
management based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and reasonable
forecasted economic trends. Despite the Company’s efforts to minimize credit risk exposure, clients could be adversely affected if future economic and industry
trends, including those related to COVID-19, change in such a manner as to negatively impact their cash flows. The full effects of COVID-19 on the Company’s
clients are highly uncertain and cannot be predicted. As a result, the Company’s future collection experience can differ significantly from historical collection
trends. If the Company’s clients experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations
and financial condition.
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The following table summarizes the changes in our allowance for doubtful accounts (in thousands):
Balance at beginning of period
Bad debt expense
Balance at end of period
Cash and Cash Equivalents
2020
Years Ended December 31,
2019
2018
$
$
75
390
465
$
$
—
75
75
$
$
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 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 consolidated statement of comprehensive income
(loss). There were no unrealized gains or losses during the years ended December 31, 2020, 2019, and 2018.
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
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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 December 31, 2020. The following table presents the fair value hierarchy for those assets
measured at fair value on a recurring basis as of December 31, 2019 (in thousands):
Assets:
Commercial paper
Corporate notes
U.S. government and agency securities
Foreign Currency Translation
Fair Value Measurements at December 31, 2019
Level 1
Level 2
Level 3
Total
$
$
— $
2,018
3,379
5,397 $
7,195 $
—
—
7,195 $
— $
—
—
— $
7,195
2,018
3,379
12,592
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 December 31, 2020 and 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 December 31, 2020 and 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.
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
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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 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 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, on hand net of minimal reserves. 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.
Customer and Vendor Concentration
As of December 31, 2020 and 2019, there were no customers who accounted for over 10% of the Company’s consolidated accounts receivable. As of
December 31, 2020 and 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. 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 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.
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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 years ended December 31, 2020, 2019, and 2018, advertising expense totaled
$2.9 million, $2.6 million and $1.1 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 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 years ended December 31, 2020, 2019, and 2018, there were 2,300,982, 1,737,430, and 9,192,127 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.
Recently Adopted 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. 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 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
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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 effective for the Company as of January 1, 2020. The
adoption of this guidance did not have an impact on the Company’s consolidated financial statements or related disclosures
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 is the Company’s first quarter of fiscal year 2021, with early adoption permitted. The adoption of this guidance is not
expected to have an impact on the Company’s consolidated financial statements or related disclosures.
Note 2. Property and Equipment
Property and equipment, net consists of the following (in thousands) at:
Research and development equipment
Computer hardware and software
Tools and molds
Leasehold improvements
Furniture and fixtures
Construction in progress
Less: accumulated depreciation and amortization
December 31,
2020
2019
$
$
1,205 $
2,286
1,404
3,759
1,360
129
10,143
(3,815)
6,328 $
1,086
1,418
1,303
1,500
624
176
6,107
(3,060)
3,047
Depreciation and amortization expense of property and equipment was $1.6 million, $1.1 million, and $0.8 million for the years ended December 31,
2020, 2019, and 2018, respectively.
Note 3. 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 intangible
asset was recorded at its fair value of $1.0 million at the date contributed in 2013, which is the gross carrying amount of the intangible asset at December 31, 2020
and 2019. Accumulated amortization of the intangible asset is $0.8 million and $0.7 million at December 31, 2020 and 2019, respectively. The Company recorded
expense for the amortization of intangible assets of $0.1 million during the years ended December 31, 2020, 2019, and 2018. The estimated future amortization
expense as of December 31, 2020, is as follows (in thousands):
2021
2022
Note 4. Commitments and Contingencies
Operating Leases
$
$
115
81
196
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
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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
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 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-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 uses these premises for general warehouse space.
During the years ended December 31, 2020, 2019, and 2018, ROU assets obtained in exchange for new operating lease liabilities were $3.8 million, $1.5
million, and $3.3 million, respectively. As of December 31, 2020 and 2019, the ROU asset has a balance of $7.1 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 consolidated balance sheets. During the years ended December 31, 2020, 2019, and 2018, cash paid for amounts included in operating lease liabilities
were $1.5 million, $0.9 million, and $0.5 million, respectively. Amortization of the ROU asset was $0.9 million, $0.4 million, and $0.2 million for the years ended
December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020 and 2019, the weighted-average remaining lease term for the Company’s operating
leases were 6.6 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 6.7% and 7.25%, respectively.
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Total lease cost for the years ended December 31, 2020, 2019, and 2018 are as follows (in thousands):
Lease cost
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
2020
December 31,
2019
2018
$
$
1,991 $
95
179
2,265 $
1,031 $
177
138
1,346 $
Maturities of operating lease liabilities as of December 31, 2020, are as follows (in thousands):
2021
2022
2023
2024
2025
Thereafter
Less: imputed interest
Less: operating lease liability, current portion
Operating lease liability, net of current portion
License Agreement
$
$
518
154
6
678
1,945
1,905
1,803
1,776
1,850
3,862
13,141
(2,707)
10,434
(1,280)
9,154
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 $111.5 million, $13.8 million, and $0.7
million during the years ended December 31, 2020, 2019, and 2018, respectively, and recorded related royalties of $4.4 million, $0.6 million, and $0.1 million
during the years ended December 31, 2020, 2019, and 2018, respectively. Royalty expense is included in operating expenses in the consolidated statements of
comprehensive loss. Accrued royalty of $1.4 million and $0.4 million as of December 31, 2020 and 2019, respectively, is included within accrued liabilities on the
Company’s 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
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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 Company is currently in the IPR discovery process. The USPTO will usually render a
decision on the validity of contested patents within twelve months of instituting the review. The Company filed a motion to stay the proceedings before the United
States District Court for the Central District of California pending resolution of the IPR process. The Company’s motion was granted by the court on May 8, 2020.
In addition to the Medtronic Litigation, the Company is and may continue to be involved in claims, legal proceedings, and investigations arising out of its
operations in the normal course of business.
Note 5. 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 pre-market approval (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%.
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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 6 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.
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 accrued 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 December 31, 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:
Debt, principal
Accrued loan fees
Debt, total
Less: unamortized debt issuance costs
Debt, net of unamortized debt issuance costs
December 31,
2020
2019
$
$
20,000 $
1,500
21,500
(390)
21,110 $
20,000
1,500
21,500
(1,164)
20,336
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Expected future principal payments for the term loan as of December 31, 2020, are as follows (in thousands):
2021
$
$
21,500
21,500
All obligations under the Term Loan, including accrued interest, prepayment fees, and the minimum final payment, consisting of a 7.5% premium
principal amount, were repaid in full in January 2021 (see Note 11).
Note 6. Stockholders’ Equity
Preferred Stock
Prior to the IPO, the Company had outstanding 12,219,315 shares of convertible preferred stock. Upon closing of the Company’s IPO on October 31,
2018, all shares of outstanding convertible preferred stock were automatically converted to 15,813,297 shares of the Company’s common stock. As of
December 31, 2020, the Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share.
Common Stock
The following summarizes the rights of holders of our common stock:
Voting
The holders of our common stock are entitled to one vote per share. The number of authorized shares of common stock may be increased or decreased
(but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of our capital stock entitled
to vote, irrespective of the provisions of Section 242(b)(2) of the DGCL.
Dividends
Subject to preferences that may be applicable to the holders of outstanding shares of preferred stock and subject to applicable law, dividends may be
declared and paid on the holders of our common stock when and as determined by our board of directors out of assets legally available for dividends.
As a Delaware corporation, the Company will be subject to certain restrictions on dividends under the DGCL. Generally, a Delaware corporation may
only pay dividends either out of “surplus” or out of the current or the immediately preceding year’s net profits. Surplus is defined as the excess, if any, at any given
time, of the total assets of a corporation over its total liabilities and statutory capital. The value of a corporation’s assets can be measured in a number of ways and
may not necessarily equal their book value.
Liquidation Rights
Upon our voluntary or involuntary liquidation, dissolution or winding up, after satisfaction of all our liabilities and the payment of any liquidation
preference of any outstanding preferred stock, the holders of shares of common stock will be entitled to share in all of our assets legally remaining for distribution
after payment of all debt and other liabilities, subject to preferences that may be applicable to the holders of outstanding shares of preferred stock.
Redemption Rights
There are no redemption or sinking fund provisions applicable to our common stock.
Preemptive Rights and Conversion Rights
There are no preemptive or conversion rights applicable to our common stock.
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Stock-Based Compensation Expense
Stock-based compensation expense included in the Company’s consolidated statements of comprehensive loss is allocated as follows (in thousands):
Research and development
General and administrative
Sales and marketing
Stock Option Activity
2014 Stock Option Plan
2020
Years Ended December 31,
2019
2018
$
$
3,457 $
5,852
5,786
15,095 $
1,725 $
3,950
3,045
8,720 $
197
361
48
606
In 2014, the Company established its 2014 Stock Option Plan (the 2014 Plan), which provides for the granting of stock options to employees, directors,
and consultants of the Company. As of December 31, 2020 and 2019, a total of 3,131,624 and 3,156,295 shares have been reserved for issuance under the 2014
Plan, respectively. As of December 31, 2020 and 2019, there were no shares available for grant under the 2014 Plan. The 2018 Omnibus Incentive Plan was
adopted upon our IPO and replaced the 2014 Stock Option Plan for future grants.
2018 Omnibus Incentive Plan
On October 18, 2018, the Company adopted the 2018 Omnibus Incentive Plan (the 2018 Plan), under which the Company may grant cash and equity
incentive awards to eligible service providers in order to attract, motivate and retain the talent for which it competes. The 2018 Plan provides for awards based on
shares of the Company’s common stock. Subject to adjustment by the Company’s board of directors, the total number of shares authorized to be awarded under the
2018 Plan may not exceed 4,562,317. As of December 31, 2020 and 2019, there were 1,678,326 and 1,965,500 shares available for grant under the 2018 Plan,
respectively.
The Company had shares of common stock reserved for future issuance as follows at:
Options outstanding under the 2014 Plan
Options and restricted stock-based awards outstanding under the 2018 Plan
Options and restricted stock-based awards remaining under the 2018 Plan for future issuance
December 31,
2020
2019
501,598
2,477,929
1,678,326
4,657,853
1,126,140
2,560,232
1,965,500
5,651,872
The fair value of each stock option is measured as of the date of grant, and compensation expense is recognized over the period during which the recipient
renders the required services to the Company (typically the vesting period). Stock-based compensation expense recognized is based on the estimated number of
stock options that are expected to ultimately become exercisable. 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.
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The option awards issued under the 2014 and 2018 Plans 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:
Expected term (in years)
Stock volatility
Risk-free interest rate
Dividend rate
2020
6.05
72.01%
1.37%
—
Years Ended December 31,
2019
5.07 - 6.16
70.02% - 77.52%
1.42% - 2.56%
—
2018
5.00 - 6.96
68.04% - 77.03%
2.26% - 3.07%
—
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 $18.56, $13.79, and $3.62 for the years ended December 31, 2020, 2019, and 2018 respectively.
As of December 31, 2020 and 2019, there was $11.6 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 2.4 years and 3.2 years, respectively.
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The following table summarizes stock option activity under the 2014 and 2018 Plans (in thousands, except share and per share data):
Outstanding at December 31, 2017
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2018
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2019
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2020
Options exercisable at December 31, 2020
_____________________________________________
Number of Options
Weighted-Average
Exercise Price Per Share Aggregate Intrinsic Value
903,857 $
668,380
(55,840)
(2,050)
1,514,347
1,671,044
(281,744)
(56,546)
2,847,101
5,000
(767,792)
(129,066)
1,955,243 $
906,457 $
1.18
3.55
1.47 $
1.23
2.22
21.28
1.79 $
13.43
13.22
29.03
5.05 $
20.20
16.01 $
14.30 $
23
(1)
7,386
(1)
25,066
(1)
66,302
(2)
32,287
(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 2020 and the stock option exercise price, multiplied by the number of
in-the-money options as of December 31, 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 7.7 years and 7.6 years at December 31, 2020 and 2019,
respectively.
Restricted Shares Awards Activity
As of December 31, 2020 and 2019, there was $22.6 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 3.3 years and 3.3 years, respectively.
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The following table summarizes restricted shares awards activity:
Outstanding at December 31, 2017
Restricted shares awards granted
Outstanding at December 31, 2018
Restricted shares awards granted
Restricted shares awards vested
Restricted shares awards forfeited
Outstanding at December 31, 2019
Restricted shares awards granted
Restricted shares awards vested
Restricted shares awards forfeited
Outstanding at December 31, 2020
Restricted Stock Units Activity
Number of Restricted
Shares Awards
Weighted-Average
Fair Value Per Share
at Grant Date
— $
50,000
50,000
580,667
(27,551)
(16,950)
586,166
502,500
(174,890)
(96,593)
817,183 $
—
14.48
14.48
24.08
18.80
21.09
23.59
37.68
23.29
28.83
31.70
As of December 31, 2020 and 2019, there was $1.2 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:
Outstanding at December 31, 2018
Restricted stock units granted
Outstanding at December 31, 2019
Restricted stock units granted
Restricted stock units vested
Restricted stock units forfeited
Outstanding at December 31, 2020
Stock Subscriptions Receivable
Number of Restricted
Stock Units
Weighted-Average
Fair Value Per Share
at Grant Date
— $
248,104
248,104
8,000
(46,336)
(2,667)
207,101 $
—
21.48
21.48
29.03
14.19
14.19
23.49
As of December 31, 2017 and throughout 2018, several members of management of the Company exercised stock options covering 1,685,597 shares of
common stock, in exchange for promissory notes with a principal balance of $1.8 million. These promissory notes bore interest at a rate of 4.5% per annum and
were due in full in 2020 to 2022. The promissory notes could have become due earlier if the shares of common stock received from the option exercises are sold,
the employee terminates employment with the Company, or pursuant to other provisions specified in the notes. The notes were secured by the shares of common
stock received from the option exercises. On October 4, 2018, the Company entered into agreements with each noteholder to terminate each of their respective
promissory notes and to forgive all respective obligations for payment thereof in connection with the Company’s IPO. As a result, on October 4, 2018, the
Company forgave all outstanding stock subscriptions receivable referenced above in the aggregate amount of $1.8 million plus accrued interest, which amount was
recorded as compensation expense.
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Stock Warrants
In February 2018, in connection with the Company’s entry into the Loan Agreement (as defined below), the Company issued warrants to Silicon Valley
Bank and Life Science Loans II, LLC, its counterparty. Each warrant entitles the holder thereof to purchase up to 33,333 shares of the Series C Preferred Stock at
an exercise price of $9.00 per share. Initially, each warrant was exercisable for 16,667 shares of Series C Preferred Stock. In connection with the Term Loan
Amendment in October 2018, the Company drew on Tranche B and C, and an additional 16,666 shares became exercisable under each warrant. Each warrant will
expire on February 6, 2028. In connection with the IPO, 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 at an exercise price of $7.50 per share.
In 2018 and prior to the IPO, warrants to purchase 66,666 shares of the Company’s Series C Preferred Stock were outstanding and are considered
liabilities, the value of which was recorded in current liabilities and was adjusted to fair value at each reporting period with the change reflected in the statements
of comprehensive loss. The fair value of the warrants in 2018 at grant date and prior to the IPO approximated $1.0 million using the Black-Scholes option pricing
model with the following assumptions: expected life of 10 years, risk-free interest rate of 2.5% and stock volatility of 68.5%. The values of the warrants are
accounted for as deferred loan costs and amortized to interest expense on an effective interest method. In connection with the Company’s IPO, the conversion of
preferred stock into common stock, and the conversion of the warrants to purchase Series C preferred stock into warrants to purchase common stock, the warrant
liability of $1.0 million was reclassified to additional paid-in-capital. The change in fair value of the warrants in 2018 prior to their conversion to permanent equity
totaled $0.3 million, which is recorded in interest and other expense.
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 its 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 its 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 December 31, 2020.
Note 7. Noncontrolling Interest
For less-than-wholly-owned consolidated subsidiaries, noncontrolling interest is the portion of equity not attributable, directly or indirectly, to the
Company. The Company evaluates whether noncontrolling interests possess any redemption features outside of the Company’s control. If such features are
determined to exist, the noncontrolling interests are presented outside of permanent equity on our consolidated balance sheets within mezzanine equity.
Prior to the Company’s IPO, the Company’s noncontrolling interest related to the portion of Axonics Europe S.A.S. not owned by the Company. The
Company presented noncontrolling interest as mezzanine equity on the consolidated balance sheet at December 31, 2017 due to the Share Exchange Agreement
that provided the holders of the equity in Axonics Europe S.A.S. (excluding the Company) the unilateral right to exchange its equity interest in Axonics Europe
S.A.S. for Preferred Stock of the Company at any time. The Company’s Preferred Stock was presented as mezzanine equity at December 31, 2017, and as such, the
rights under the Share Exchange Agreement required the noncontrolling interest to be presented as mezzanine equity as well.
Prior to the Company’s IPO, the comprehensive loss attributable to the noncontrolling interest in Axonics Europe S.A.S. were absorbed by the Company
since the investors are protected from any losses in this entity due to the conversion right. Changes in amounts attributable to the redeemable noncontrolling
interest were presented in the Company’s consolidated statements of mezzanine equity during the year ended December 31, 2017.
118
Table of Contents
In conjunction with the Company’s IPO, the interests held by the other investors in Axonics Europe S.A.S. were converted into a fixed number of shares
of the Company’s preferred stock pursuant to the terms of the Share Exchange Agreement. These preferred stock shares were then automatically converted into
4,221,715 shares of common stock, and as such, Axonics Europe S.A.S. is the Company’s wholly-owned subsidiary at December 31, 2018.
Note 8. Income Taxes
The Company’s effective tax rate of approximately 0% differs from the federal statutory tax rate due primarily to providing a full valuation allowance on
deferred tax assets.
119
Table of Contents
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets are as follows (in thousands) as of:
Compensation accruals
Depreciation and amortization
Lease liability
Net operating loss carryforwards
Other
Total deferred tax assets
Less: valuation allowance
Total net deferred tax assets
December 31,
2020
2019
$
$
592 $
145
901
59,176
4,438
65,252
(65,252)
— $
404
48
252
41,564
3,752
46,020
(46,020)
—
At December 31, 2020, the Company had federal and California net operating loss (NOL) carryforwards of approximately $213.5 million. Pursuant to
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Internal Revenue Code), use of the Company’s NOL carryforwards may be limited if
the Company experiences a cumulative change in ownership of greater than 50% in a rolling three-year period. The Company performed an analysis of changes in
ownership for purposes of these Internal Revenue Code sections. Based on the study performed in 2020, the Company determined that an ownership change
occurred in 2014, 2018 and 2019. The total reduction to the net operating loss carryforwards and R&D credit was $12.2 million and $1.5 million, respectively. The
total reduction of the net operating loss carryforwards was offset by valuation allowance, and there was no impact to tax expense related to the limitation. Future
ownership changes could impact the Company’s ability to utilize NOL carryforwards. The Company has recorded a full valuation allowance against its otherwise
recognizable deferred income tax assets as of December 31, 2020 and 2019. The Company has determined, after evaluating all positive and negative historical and
prospective evidence, that it is more likely than not that the deferred income tax assets will not be realized. The valuation allowance increased by $19.2 million for
the year ended December 31, 2020, from $46.0 million to $65.3 million. During fiscal year 2020, we corrected the prior year balance of deferred tax assets relating
to tax loss carryforwards as well as the valuation allowance related to those assets by an equal and offsetting amount. As a result, the tax loss carryforwards and
valuation allowance previously reported as of December 31, 2019 have both been decreased in the table above by $3.9 million and corresponding revisions have
been made to the prior year tax benefit reconciliation. These immaterial adjustments to the disclosures had no effect on the consolidated balance sheets, statements
of operations and cash flows for any periods presented. The Company’s NOL carryforwards were generated from domestic operations. The federal NOLs from the
2013-2017 tax years will expire between 2033 and 2037 and NOLs from 2018-2020 will carryover indefinitely. The state NOLs will expire between 2033 and
2039. Under California Assembly Bill 85, effective June 29, 2020, net operating loss deductions were suspended for tax years beginning in 2020, 2021, and 2022
and the carry forward periods of any net operating losses not utilized due to such suspension were extended. The Company applies the provisions of FASB
Accounting Standards Codification (ASC 740-10), “Accounting for Uncertainty in Income Taxes.” ASC 740-10 prescribes a comprehensive model for the
recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on a
tax return. The Company had unrecognized tax benefits of $2.5 million and none as of December 31, 2020 and 2019, respectively, of which $2.5 million and none,
respectively, if recognized would not affect the annual effective tax rate as these unrecognized tax benefits would increase deferred tax assets which would be
subject to a full valuation allowance. The Company does not believe that the amount of unrecognized tax benefits will change significantly in the next 12 months.
There were no interest or penalties to be recognized for the tax years ended December 31, 2020, 2019, and 2018.
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A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows (in thousands):
Balance at December 31, 2019 and 2018
Deductions based on tax positions related to prior years
Additions based on tax positions related to the current year
Balance at December 31, 2020
$
$
The reconciliation between the Company’s effective tax rate and the statutory tax rate is as follows:
Tax at statutory federal rate
State tax, net of federal benefit
Excess tax benefits related to stock-based compensation
Section 382 Limitation
R&D tax credit 100% reserve
Change in valuation allowance
Other
Effective tax rate
CARES Act
2020
Years Ended December 31,
2019
2018
21.0 %
7.0 %
10.3 %
— %
(4.5)%
(36.8)%
3.0 %
— %
21.0 %
7.0 %
(1.0)%
(5.0)%
— %
(21.5)%
(0.5)%
— %
—
—
2,491
2,491
21.0 %
7.0 %
(0.4)%
— %
— %
(27.4)%
(0.2)%
— %
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 9. 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 years ended December 31, 2020, 2019, and 2018, the Company
contributions to the plan amounted to $1.6 million, $1.1 million, and $0.3 million, respectively.
Note 10. Related Party Transactions
The Company has a License Agreement and corresponding royalties incurred with AMF, which is also a stockholder of the Company. For additional
information, see Note 4.
The 2014 Plan allowed for certain members of management to purchase vested options and unvested options (subject to repurchase rights) through a full
recourse promissory note and stock pledge agreement. The promissory notes outstanding were recorded as “Stock subscriptions receivable” in the accompanying
consolidated balance sheet. On October 4, 2018, the Company entered into agreements with certain officers and directors to terminate each of their respective
promissory notes and to forgive all respective obligations for payment thereof in connection with the Company’s IPO. As a result, on October 4, 2018, the
Company forgave all outstanding stock subscriptions receivable referenced above in the aggregate amount of $1.8 million plus accrued interest, which amount was
recorded as compensation expense.
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Table of Contents
Note 11. Subsequent Events
Pay-off of Loan Agreement Maturing December 2021
In January 2021, the principal amount, accrued interest, accrued loan fees, and prepayment fees related to the Term Loan were paid in full. The
unamortized debt issuance costs of $0.4 million as of December 31, 2020 will be expensed and recognized as interest expense during the three months ending
March 31, 2021.
Acquisition of Contura Limited
In February 2021, the Company acquired London-based Contura Limited (Contura) and its flagship product, Bulkamid, for total consideration of
$200 million in cash and stock, and a potential future milestone payment of $35 million. Total upfront consideration is comprised of approximately $141.3 million
paid in cash and the issuance of 1,096,583 shares of stock. The Company also entered into a manufacturing agreement for the supply of the Bulkamid hydrogel.
The Company has rights to a technology transfer after June 30, 2022 that would enable the Company to insource the manufacturing of Bulkamid. The initial
accounting for the business combination, including the estimated fair value of assets and liabilities acquired, is incomplete as a result of the timing of the
acquisition.
Loan and Security Agreement with Silicon Valley Bank
In February 2021, the Company entered into a $75 million term loan with Silicon Valley Bank (the Loan) maturing February 2024. The Loan provides for
monthly interest payments through August 2022, and monthly principal and interest payments from September 2022 through maturity. Outstanding principal
balances under the Loan bear interest at the greater of (i) prime rate plus 5.75% or (ii) 9.00%. The Company will be required to make a final payment equal to the
original principal amount multiplied by 6.00%.
122
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible
controls and procedures relative to their costs.
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of December 31, 2020, the end of the
period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level as of December 31, 2020.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-
15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has conducted, with the participation of our Principal Executive Officer and our Principal Accounting Officer, an assessment, including
testing of the effectiveness, of our internal control over financial reporting as of December 31, 2020. Management’s assessment of internal control over financial
reporting was conducted using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control —
Integrated Framework (2013 Framework). Based on its assessment, management has concluded that our internal control over financial reporting was effective as
of December 31, 2020. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by BDO USA, LLP,
an independent registered public accounting firm, as stated in its report which is included in “Item 8. Financial Statements and Supplementary Data” in this Annual
Report on Form 10-K.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
most recent fiscal quarter covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
123
Table of Contents
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Axonics Modulation Technologies, Inc.
Irvine, California
Opinion on Internal Control over Financial Reporting
We have audited Axonics Modulation Technologies, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance
sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of comprehensive loss, stockholders’ equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2020, the consolidated statement of mezzanine equity for the year ended December 31, 2018,
and the related notes and our report dated March 1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Item 9A Controls and Procedures. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Costa Mesa, California
March 1, 2021
124
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Item 9B. Other Information.
None.
125
Table of Contents
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item 10 is incorporated herein by reference to our definitive proxy statement to be filed within 120 days of December 31,
2020 and delivered to stockholders in connection with our 2021 annual meeting of stockholders.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated herein by reference to our definitive proxy statement to be filed within 120 days of December 31,
2020 and delivered to stockholders in connection with our 2021 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 is incorporated herein by reference to our definitive proxy statement to be filed within 120 days of December 31,
2020 and delivered to stockholders in connection with our 2021 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated herein by reference to our definitive proxy statement to be filed within 120 days of December 31,
2020 and delivered to stockholders in connection with our 2021 annual meeting of stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is incorporated herein by reference to our definitive proxy statement to be filed within 120 days of December 31,
2020 and delivered to stockholders in connection with our 2021 annual meeting of stockholders.
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements:
PART IV
Reference is made to the Index to consolidated financial statements of Axonics Modulation Technologies, Inc. under Item 8 of Part II hereof.
2. Financial Statement Schedule:
All schedules are omitted because they are not applicable or the amounts are immaterial or the required information is presented in the consolidated financial
statements and notes thereto in Part II, Item 8 above.
3. Exhibits:
EXHIBIT INDEX
Incorporated by Reference
Exhibit Number
Exhibit Title
Form
File No.
Exhibit
Filing Date
Filed Herewith (X)
3.1
3.2
4.1
Amended and Restated Certificate of
Incorporation.
Amended and Restated Bylaws.
Specimen certificate evidencing shares of
common stock of the Registrant.
8-K
8-K
S-1
001-38721
001-38721
333-227732
3.1
3.2
4.1
11/05/2018
11/05/2018
10/5/2018
126
Table of Contents
4.2
4.3
4.4
10.1+
10.2+
10.3+
10.4+
10.5+#
10.6+#
10.7
10.8
10.9
10.10
10.11
10.12
X
Fourth Amended and Restated Investors’
Rights Agreement, dated March 29, 2018,
by and among the Registrant and the
Investors party thereto.
Amendment to Fourth Amended and
Restated Investors’ Rights Agreement,
dated October 17, 2018, by and among the
Registrant and the Investors party thereto.
Description of Securities.
2018 Omnibus Incentive Plan.
Form of Option Award Agreement under
2018 Omnibus Incentive Plan.
Form of Restricted Shares Award
Agreement under 2018 Omnibus Incentive
Plan.
Form of RSU Award Agreement under
2018 Omnibus Incentive Plan.
Form of Debt Forgiveness Agreement and
Cancellation of Note (Tax Withholding-
Shares).
Form of Debt Forgiveness Agreement and
Cancellation of Note (Tax Withholding-
Cash).
Loan and Security Agreement, dated
February 6, 2018, by and between Silicon
Valley Bank.
Amendment to Loan and Security
Agreement, dated October 22, 2018, by and
between Silicon Valley Bank and the
Registrant.
Second Amendment to Loan and Security
Agreement, dated as of December 30, 2019,
by and between Axonics Modulation
Technologies, Inc. and Silicon Valley Bank.
Lease, dated November 30, 2017, by and
between The Irvine Company LLC and the
Registrant.
First Amendment to Lease, dated April 12,
2018, by and between The Irvine Company
LLC and the Registrant.
Second Amendment to Lease, dated
July 11, 2018, by and between The Irvine
Company LLC and the Registrant.
S-1
333-227732
4.2
10/5/2018
S-1/A
333-227732
S-1/A
333-227732
S-1/A
333-227732
S-1/A
333-227732
S-1/A
333-227732
4.3
10.8
10.9
10.10
10.11
10/22/2018
10/22/2018
10/22/2018
10/22/2018
10/22/2018
S-1
S-1
S-1
333-227732
10.28
10/5/2018
333-227732
10.29
10/5/2018
333-227732
10.16
10/5/2018
S-1/A
333-227732
10.31
10/22/2018
8-K
001-38721
1.1
1/2/2020
S-1
S-1
S-1
333-227732
10.13
10/5/2018
333-227732
10.14
10/5/2018
333-227732
10.15
10/5/2018
127
Table of Contents
10.13
10.14+
10.15+
10.16+
10.17
10.18
10.19
10.20
10.21
21.1
23.1
31.1
Third Amendment to Lease, dated June 28,
2019, by and between The Irvine Company
LLC and Axonics Modulation
Technologies, Inc.
Executive Employment Agreement, dated
June 5, 2019, by and between Raymond W.
Cohen and the Registrant.
Executive Employment Agreement, dated
June 5, 2019, by and between Dan L.
Dearen and the Registrant.
Executive Employment Agreement, dated
June 5, 2019, by and between Rinda Sama
and the Registrant.
License Agreement, dated October 1, 2013,
by and between the Alfred E. Mann
Foundation for Scientific Research and the
Registrant.
First Amendment to License Agreement,
dated February 19, 2014, by and between
the Alfred E. Mann Foundation for
Scientific Research and the Registrant.
Second Amendment to License Agreement,
dated February 25, 2014, by and between
the Alfred E. Mann Foundation for
Scientific Research and the Registrant.
Side Letter, dated October 1, 2013, by and
between the Alfred E. Mann Foundation for
Scientific Research and the Registrant.
Form of Indemnification Agreement by and
between the Registrant and its directors and
officers.
List of Subsidiaries.
Consent of Independent Registered Public
Accounting Firm.
Certification of Principal Executive Officer
pursuant to Rule 13a-14(a) or Rule 15d-
14(a) of the Securities Exchange Act of
1934, as amended.
8-K
001-38721
10-Q
001-38721
10-Q
001-38721
10-Q
001-38721
10.1
10.2
10.3
10.4
7/12/2019
8/5/2019
8/5/2019
8/5/2019
S-1
333-227732
10.1
10/5/2018
S-1
333-227732
10.2
10/5/2018
S-1
S-1
333-227732
10.3
10/5/2018
333-227732
10.4
10/5/2018
S-1/A
333-227732
10.12
10/22/2018
128
X
X
X
Table of Contents
31.2
32.1#
32.2#
101.INS**
101.SCH**
101.CAL**
101.DEF**
101.LAB**
101.PRE**
Certification of Principal Financial Officer
pursuant to Rule 13a-14(a) or Rule 15d-
14(a) of the Securities Exchange Act of
1934, as amended.
Certifications of Principal Executive Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certifications of Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
XBRL Instance Document.
XBRL Taxonomy Extension Schema
Document.
XBRL Taxonomy Extension Calculation
Linkbase Document.
XBRL Taxonomy Extension Definition
Linkbase Document.
XBRL Taxonomy Extension Label
Linkbase Document.
XBRL Taxonomy Extension Presentation
Linkbase Document.
Indicates management contract or
compensatory plan.
+
The information in Exhibits 32.1 and 32.2
shall not be deemed “filed” for purposes of
Section 18 of the Exchange Act, or otherwise
subject to the liabilities of that section, nor
shall it be deemed incorporated by reference
in any filing under the Securities Act or the
Exchange Act (including this Annual Report
on Form 10-K), unless the Registrant
specifically incorporates the foregoing
information into those documents by
reference.
In accordance with Rule 402 of Regulation S-
T, this interactive data file is deemed not filed
or part of this Annual Report on Form 10-K
for purposes of Sections 11 or 12 of the
Securities Act or Section 18 of the Exchange
Act and otherwise is not subject to liability
under these sections.
#
**
129
X
X
X
X
X
X
X
X
X
Table of Contents
Item 16. Form 10-K Summary.
None.
130
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 1, 2021
AXONICS MODULATION TECHNOLOGIES, INC.
By:
/s/ Raymond W. Cohen
Raymond W. Cohen
Chief Executive Officer and Director
131
Table of Contents
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints each of Raymond W. Cohen and Dan L. Dearen as his attorney-in-fact, with full power of
substitution, for him in any and all capacities, to sign any amendments to this Form 10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each attorney-in-fact, or his substitute, may do or
case to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date: March 1, 2021
Date: March 1, 2021
Date: March 1, 2021
Date: March 1, 2021
Date: March 1, 2021
Date: March 1, 2021
Date: March 1, 2021
/s/ Raymond W. Cohen
Raymond W. Cohen
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Dan L. Dearen
Dan L. Dearen
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Michael H. Carrel
Michael H. Carrel
Chairman of the Board and Director
/s/ Jane E. Kiernan
Jane E. Kiernan
Director
/s/ Robert E. McNamara
Robert E. McNamara
Director
/s/ Nancy Snyderman, M.D., FACS
Nancy Snyderman, M.D., FACS
Director
/s/ David M. Demski
David M. Demski
Director
By:
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132
Exhibit 4.4
Description of the Registrant's Securities Registered Under Section 12 of the Securities Exchange Act of 1934
The following is a description of the capital stock of Axonics Modulation Technologies, Inc. Our common stock, par value $0.0001 per share, is registered under
Section 12 of the Securities Exchange Act of 1934, as amended, while our preferred stock, par value $0.0001 per share, is not so registered. This description does
not describe every aspect of our capital stock and is subject to, and qualified in its entirety by reference to, the provisions of our Amended and Restated Certificate
of Incorporation and our Amended and Restated Bylaws, each as currently in effect, each of which is incorporated by reference as an exhibit to our Annual Report
on Form 10-K for the fiscal year ended December 31, 2019, to which this Description of Capital Stock is filed as an exhibit. References to “we,” “our,” and “us”
refer to Axonics Modulation Technologies, Inc. and its consolidated subsidiaries.
Authorized Capital Stock
Our authorized capital stock consists of 50,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value
$0.0001 per share.
Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the trading symbol “AXNX.” The transfer agent and registrar for our common stock is
Computershare Trust Company, N.A.
The following summarizes the rights of holders of our common stock:
Voting
The holders of our common stock are entitled to one vote per share. The number of authorized shares of common stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of our capital stock entitled to vote,
irrespective of the provisions of Section 242(b)(2) of the Delaware General Corporation Law (“DGCL”).
Dividends
Subject to preferences that may be applicable to the holders of outstanding shares of preferred stock and subject to applicable law, dividends may be declared
and paid on of our common stock when and as determined by our board of directors out of assets legally available for dividends.
As a Delaware corporation, we are subject to certain restrictions on dividends under the DGCL. Generally, a Delaware corporation may only pay dividends
either out of “surplus” or out of the current or the immediately preceding year’s net profits. Surplus is defined as the excess, if any, at any given time, of the total
assets of a corporation over its total liabilities and statutory capital. The value of a corporation’s assets can be measured in a number of ways and may not
necessarily equal their book value.
Liquidation Rights
Upon our voluntary or involuntary liquidation, dissolution or winding up, after satisfaction of all our liabilities and the payment of any liquidation preference of
any outstanding preferred stock, the holders of shares of common stock will be entitled to share in all of our assets legally remaining for distribution after payment
of all debt and other liabilities, subject to preferences that may be applicable to the holders of outstanding shares of preferred stock.
Redemption Rights
There are no redemption or sinking fund provisions applicable to our common stock.
Preemptive Rights and Conversion Rights
There are no preemptive or conversion rights applicable to our common stock.
Registration Rights
We are party to a Fourth Amended and Restated Investors’ Rights Agreement, dated March 29, 2018, as amended on October 17, 2018, along with certain
holders of our capital stock and certain of our directors (or, in some cases, entities affiliated therewith) (the “Rights Agreement”).
The Rights Agreement grants the parties thereto certain registration rights in respect of “registrable securities” held by them, which securities include (i) shares
of our common stock issued or issuable upon conversion of shares of our preferred stock, (ii) shares of our common stock issued as a dividend or other distribution
with respect to the shares in the foregoing clause (i), and (iii) shares of our common stock held by Alfred E. Mann Foundation for Scientific Research as of the
date of the
Rights Agreement. The registration of shares of our common stock pursuant to the exercise of these registration rights would enable the holders thereof to sell such
shares without restriction under the Securities Act of 1933, as amended, or the Securities Act, when the applicable registration statement is declared effective.
Under the Rights Agreement, we generally are required to pay all registration expenses, other than underwriting discounts and commissions, relating to any
demand, Form S-3 or piggyback registration by the holders of registrable securities, subject to certain limitations. The Rights Agreement also includes customary
indemnification and procedural terms.
Demand Registration Rights
The holders of more than 30% of the registrable securities then outstanding may request that we file a registration statement on Form S-1 registering all or a
portion of their registrable securities. Under specified circumstances, we have the right to defer filing of a requested registration statement for a period of not more
than 90 days, which right may not be exercised more than once during any twelve-month period. These registration rights are subject to additional conditions and
limitations, including the right of the underwriters of any underwritten offering to limit the number of shares included in any such registration under certain
circumstances, and our right to decline to effect such registration if the holders requesting holders propose to sell registrable securities at an aggregate price to the
public of less than $10.0 million.
Form S-3 Registration Rights
If we are eligible to file a registration statement on Form S-3, the holders of the registrable securities then outstanding have the right to request that we file
additional unlimited registration statements for such holders on Form S-3. Under specified circumstances, we have the right to defer filing of a requested
registration statement for a period of not more than 90 days, which right may not be exercised more than once during any twelve-month period. These registration
rights are subject to additional conditions and limitations, including the right of the underwriters of any underwritten offering to limit the number of shares
included in any such registration under certain circumstances, and our right to decline to effect such registration if the holders requesting holders propose to sell
registrable securities at an aggregate price to the public of less than $1.0 million.
Piggyback Registration Rights
Whenever we propose to file a registration statement, including pursuant to holders’ demand registration rights, under the Securities Act, other than with respect
to a registration related to employee benefit or similar plans, conversion of debt securities, corporate reorganizations or other transactions under Rule 145 under the
Securities Act, or registrations on any forms which do not include substantially the same information as would be required to be included in a registration
statement covering the sale of registrable securities, the holders of registrable securities are entitled to notice of the registration and have the right to request that
we include their registrable securities in such registration, subject to certain limitations. We and the underwriters of any underwritten offering will have the right to
limit the number of shares having registration rights to be included in the registration statement.
Expiration of Registration Rights
The registration rights under the Rights Agreement will expire upon the earlier of (i) November 2, 2023 and (ii) with respect to each holder following the
closing of our initial public offering, at such time as such holder holds registrable securities constituting less than one percent of our outstanding voting stock if all
of such holder’s registrable securities may immediately be sold under Rule 144 of the Securities Act during any 90-day period.
Anti-Takeover Effects of Provisions of our Certificate of Incorporation, Bylaws, and Delaware Law
Delaware Anti-Takeover Law
We are subject to Section 203 of the DGCL (“Section 203”). Section 203 generally prohibits a public Delaware corporation from engaging in a “business
combination” with an “interested stockholder” for a period of three years following the time that such stockholder became an interested stockholder, unless:
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prior to such time the board of directors of the corporation approved either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock
outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (i) by persons who are directors and also
officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
at or subsequent to such time the business combination is approved by the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
In general, Section 203 defines a business combination to include:
•
•
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any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;
subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested
stockholder;
subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through
the corporation.
In general, Section 203 defines an interested stockholder as any entity (other than the corporation and any direct or indirect majority-owned subsidiary of the
corporation) or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with, associated with
or controlling or controlled by such entity or person.
Certificate of Incorporation and Bylaws
The following provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws may make a change in control of our
company more difficult and could delay, defer or prevent a tender offer or other takeover attempt that a stockholder might consider to be in its best interest,
including takeover attempts that might result in the payment of a premium to stockholders over the market price for their shares. These provisions also may
promote the continuity of our management by making it more difficult for a person to remove or change the incumbent members of our board of directors.
Authorized but Unissued Shares; Undesignated Preferred Stock. The authorized but unissued shares of our common stock will be available for future issuance
without stockholder approval, subject to applicable law and the Nasdaq Marketplace Rules. These additional shares may be used for a variety of corporate
purposes, including future public offerings to raise additional capital, acquisitions, and employee benefit plans. In addition, our board of directors may authorize,
without stockholder approval, the issuance of undesignated preferred stock with voting rights or other rights or preferences designated from time to time by our
board of directors (including the right to approve an acquisition or other change in our control). The existence of authorized but unissued shares of common stock
or preferred stock may enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer,
proxy contest or otherwise.
Election and Removal of Directors. The exact number of directors will be fixed from time to time only by a resolution adopted by a majority of the total number
of authorized directors, whether or not there exists any vacancies in previously authorized directorships. Our board of directors consists of eight members. Our
Amended and Restated Certificate of Incorporation provides that directors may be removed with or without cause and only by the affirmative vote of holders of at
least 66 2/3% of our then outstanding voting stock.
Director Vacancies. Our Amended and Restated Certificate of Incorporation authorizes only our board of directors to fill vacant directorships.
No Cumulative Voting. Our Amended and Restated Certificate of Incorporation provides that stockholders do not have the right to cumulate votes in the election
of directors (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors
standing for election, if they should so choose).
Special Meetings of Stockholders. Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide that special meetings of
our stockholders may only be called by the Chair of the board, our Chief Executive Officer or by our board of directors pursuant to a resolution adopted by a
majority of the total number of authorized directors, whether or not there exist any vacancies in previously authorized directorships.
Advance Notice Procedures for Director Nominations. Our Amended and Restated Bylaws establish advance notice procedures for stockholders seeking to
nominate candidates for election as directors at an annual or special meeting of stockholders. Although our Amended and Restated Bylaws do not give the board of
directors the power to approve or disapprove stockholder nominations of candidates to be elected at an annual meeting, our Amended and Restated Bylaws may
have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or deter a potential acquiror
from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us.
Action by Written Consent. Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide that any action required or
permitted to be taken by the stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in
writing in lieu of a meeting of such stockholders, subject to the rights of the holders of any series of preferred stock.
Amending Our Certificate of Incorporation and Bylaws. Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws may be
amended by the affirmative vote of the holders of at least 66 2/3% of the voting power of our then-outstanding capital stock entitled to vote thereon.
Exclusive Jurisdiction. Our Amended and Restated Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative
forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any
action asserting a claim of breach of duty by any of our current or former directors or officers, or our stockholders in such capacity, any action asserting a claim
arising pursuant to the DGCL, or any action asserting a claim governed by the internal affairs doctrine. In addition, our Amended and Restated Certificate of
Incorporation provides that, unless we consent in writing to the selection of an alternative forum, the U.S. District Court for the District of Delaware shall be the
exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. However, in light of the decision issued by the
Court of Chancery in Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL, invalidating provisions in the certificates of incorporation of Delaware corporations that
purport to limit to federal court the forum in which a stockholder may bring a claim under the Securities Act, we do not currently intend to enforce the foregoing
federal forum selection provision unless the Sciabacucchi decision is appealed and the Delaware Supreme Court reverses the Chancery Court’s decision. If the
decision is not appealed or if the Delaware Supreme Court affirms the Chancery Court’s decision, then we will seek approval by our stockholders to amend our
Amended and Restated Certificate of Incorporation at our next regularly scheduled annual meeting of stockholders to remove the federal forum selection
provision.
Conflicts of Interest
Delaware law permits corporations to adopt provisions renouncing any interest or expectancy in certain opportunities that are presented to the corporation or its
officers, directors or stockholders. Our Amended and Restated Certificate of Incorporation, to the maximum extent permitted from time to time by Delaware law,
renounces any interest or expectancy that we have in, or right to be offered an opportunity to participate in, specified business opportunities that are from time to
time presented to our officers, directors or stockholders or their respective affiliates, other than those officers, directors, stockholders or affiliates who are our
employees. Our Amended and Restated Certificate of Incorporation provides that, to the fullest extent permitted by law, no director who is not employed by us or
his or her affiliates will have any duty to refrain from (i) engaging in a corporate opportunity in the same or similar lines of business in which we or our affiliates
now engage or propose to engage or (ii) otherwise competing with us or our affiliates. In addition, to the fullest extent permitted by law, in the event that any non-
employee director acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for itself or himself or its or
his affiliates or for us or our affiliates, such person will have no duty to communicate or offer such transaction or business opportunity to us or any of our affiliates
and they may take any such opportunity for themselves or offer it to another person or entity. Our Amended and Restated Certificate of Incorporation does not
renounce our interest in any business opportunity that is expressly offered to a non-employee director solely in his or her capacity as a director of our company. To
the fullest extent permitted by law, no business opportunity will be deemed to be a potential corporate opportunity for us unless we would be permitted to
undertake the opportunity under our Amended and Restated Certificate of Incorporation, we have sufficient financial resources to undertake the opportunity and
the opportunity would be in line with our business.
Limitations on Liability and Indemnification Matters
Our Amended and Restated Certificate of Incorporation contains provisions that limit the personal liability of our directors for monetary damages to the fullest
extent permitted by the DGCL. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of
fiduciary duties as directors, except liability for any of the following: (i) breach of the director’s duty of loyalty to us or our stockholders; (ii) an act or omission
not in good faith or that involves intentional misconduct or a knowing violation of law; (iii) unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL; or (iv) a transaction from which the director derives an improper personal benefit.
Our Amended and Restated Bylaws provide that we must indemnify our directors and other officers, and may indemnify our employees or agents, to the
maximum extent permitted by Section 145 of the DGCL.
We have entered into separate indemnification agreements with our directors and executive officers, in addition to the indemnification provided for in our
Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws. These indemnification agreements may require us, among other things, to
indemnify our directors and officers for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or officer in any
action or proceeding arising out of his or her service as one of our directors or officers, or any of our subsidiaries or any other company
or enterprise to which the person provides services at our request. We believe that these provisions in our Amended and Restated Certificate of Incorporation,
Amended and Restated Bylaws and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
The limitation of liability and indemnification provisions set forth in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative
litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. To the extent we pay the costs of settlement or
a damage award against any director or officer pursuant to these indemnification provisions, our stockholders’ investment may be harmed.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”), may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
List of Subsidiaries of
Axonics Modulation Technologies, Inc.
Exhibit 21.1
Name of Subsidiary
Axonics Europe, S.A.S.
Axonics Modulation Technologies, U.K. Limited
Axonics Modulation Technologies Australia Pty Ltd
Jurisdiction of Incorporation or Organization
France
England and Wales
Australia
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
Axonics Modulation Technologies, Inc.
Irvine, California
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-234546) and Form S-8 (No.333-228170) of Axonics
Modulation Technologies, Inc. of our reports dated March 1, 2021, relating to the consolidated financial statements and the effectiveness of Axonics Modulation
Technologies, Inc.’s internal control over financial reporting, which appears in this Form 10-K.
/s/ BDO USA, LLP
Costa Mesa, California
March 1, 2021
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.1
I, Raymond W. Cohen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Axonics Modulation Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 1, 2021
By:
/s/ Raymond W. Cohen
Raymond W. Cohen
Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.2
I, Dan L. Dearen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Axonics Modulation Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 1, 2021
By:
/s/ Dan L. Dearen
Dan L. Dearen
President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Axonics Modulation Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2020 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 1, 2021
By:
/s/ Raymond W. Cohen
Raymond W. Cohen
Chief Executive Officer and Director
(Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to Axonics Modulation Technologies, Inc. and will be retained by Axonics
Modulation Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Axonics Modulation Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2020 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 1, 2021
By:
/s/ Dan L. Dearen
Dan L. Dearen
President and Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been provided to Axonics Modulation Technologies, Inc. and will be retained by Axonics
Modulation Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.