AXONICS, INC. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto, and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , as filed with theSEC onMarch 1, 2021 . Overview We are a global medical technology company that develops and commercializes minimally invasive products to treat urinary and fecal dysfunction, including: (i) an implantable rechargeable sacral neuromodulation (SNM) system to treat urinary urge incontinence (UUI) and urinary urgency frequency (UUF), together referred to as overactive bladder (OAB), as well as fecal incontinence (FI), and non-obstructive urinary retention (UR); and (ii) a urethral bulking agent to treat female stress urinary incontinence (SUI). OAB affects an estimated 87 million adults inthe United States andEurope . Another estimated 40 million adults are reported to suffer from FI and another estimated 20 million women suffer from SUI. SNM therapy is an effective and durable treatment for UUI, UUF, UR and FI that has been widely used and reimbursed inEurope andthe United States for the past two decades. Bulkamid is also an effective and durable 25 -------------------------------------------------------------------------------- Table of Contents treatment for SUI. Bulkamid was approved by the FDA for use inthe United States in early 2020 and is widely reimbursed inthe United States and most international markets. 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 less than 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 15 or more 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 for the r-SNM System inEurope ,Canada , andAustralia for all relevant clinical indications and initiated limited commercial efforts inEngland ,the Netherlands andCanada in late 2018 and subsequently inGermany andSwitzerland . Our initial premarket approval (PMA) application for our r-SNM System for the treatment of FI was approved by theU.S. Food and Drug Administration (FDA) onSeptember 6, 2019 , and our PMA application for our r-SNM System for the treatment of OAB and UR was approved by the FDA onNovember 13, 2019 . We are primarily focused on commercializing our products inthe United States , which accounts for the vast majority of SNM sales worldwide. We have established a significant commercial infrastructure of 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 neurostimulation applications, and who also have existing relationships with urologists and urogynecologists. InFebruary 2021 , the FDA approved a third-generation INS for our r-SNM System under a PMA supplement. The third-generation INS upgrades the embedded software in the INS and the functionality of the patient remote control. These modifications give patients the ability to make broader stimulation parameter adjustments at home, including selecting a second therapy program that was set post-operatively based on interoperative findings. We intend to continue to make investments in research and development efforts to develop enhancements to our r-SNM System. OnFebruary 25, 2021 , we acquiredContura 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 beforeDecember 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 afterJune 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 is sold through a combination of a direct sales force inthe United States and certain European countries and distributors in certain international markets. The acquisition of Contura has expanded our international operations. InMay 2021 , we received a CE Mark approval on our second generation rechargeable INS and wireless patient remote control with SmartMRI™ technology. InMay 2021 , the FDA approved the use of detachable extremity coils for patients undergoing 1.5T and 3.0T MRI scans. In lateJune 2021 , we filed a PMA supplement with the FDA for our newly developed, long-lived, non-rechargeable SNM system. The non-rechargeable INS will utilize a primary cell battery with an expected life of at least 10 years with standard stimulation parameters. The non-rechargeable INS that has been submitted for approval is 11cc in volume, utilizes constant current stimulation and a recharge-free patient remote control, and is expected to be MRI compatible with 1.5T and 3.0T scanners. 26 -------------------------------------------------------------------------------- Table of Contents Our ability to generate revenue and become profitable will depend on our ability to continue to successfully commercialize our products and any product enhancements we may advance in the future. We expect to derive future revenue by increasing patient and physician awareness of our products. 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. Inthe 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. Outsidethe United States , reimbursement levels vary significantly by country, particularly if that country maintains a single-payor system. SNM therapy is eligible for reimbursement inCanada ,Australia , and certain countries inEurope , such asGermany and theUnited 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. We currently outsource the manufacture of certain implantable components of our r-SNM System. 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 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 spend a significant amount of our resources on sales and marketing activities to commercialize and market our r-SNM System inthe United States . We incurred net losses of$64.9 million and$43.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively, and had an accumulated deficit of$299.4 million as ofSeptember 30, 2021 compared to$234.5 million atDecember 31, 2020 . As ofSeptember 30, 2021 , we had available cash and cash equivalents of approximately$228.8 million , current liabilities of approximately$27.8 million , and long-term liabilities of approximately$43.5 million .May 2020 Follow-On Offering OnMay 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.May 2021 Follow-On Offering OnMay 14, 2021 , we completed a follow-on offering by issuing 4,025,000 shares of common stock, at an offering price of$50.00 per share, inclusive of 525,000 shares of 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$201.3 million and the net proceeds were approximately$190.0 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 inthe United States and globally, including inEurope andCanada , 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 ofMarch 2020 throughMay 2020 , but order flow began a gradual recovery in 27 -------------------------------------------------------------------------------- Table of ContentsMay 2020 and continued to improve in the second half of 2020 through the second quarter of 2021. During the third quarter of 2021, certain outpatient elective procedures were again postponed or cancelled related to the COVID-19 pandemic and specifically the Delta variant, which adversely affected our business during the third quarter. 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. Even as efforts to contain the pandemic have made progress and some restrictions have relaxed, new variants of the virus may continue to cause additional outbreaks. 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 OnOctober 1, 2013 , we entered into a license agreement (the License Agreement) with theAlfred E. Mann Foundation for Scientific Research (AMF), pursuant to which AMF licensed us certain patents and know-how (AMF IP ), relating to, in relevant part, an implantable pulse generator and related system components in development by AMF as of that date, in addition to any peripheral or auxiliary devices, including all components, that when assembled, comprise such device, excluding certain implantable pulse generators (AMF Licensed Products). Under the License Agreement, for each calendar year beginning in 2018, we are obligated to pay AMF a royalty on an AMF Licensed Product-by-AMF Licensed Product basis if one of the following conditions applies: (i) one or more valid claims within any of the patents licensed to us by AMF covers such AMF Licensed Products or the manufacture of such AMF Licensed Products or (ii) for a period of 12 years from the first commercial sale anywhere in the world of such AMF Licensed Product, in each case. The foregoing royalty is calculated as the greater of (a) 4% of all net revenue derived from the AMF Licensed Products, and (b) a minimum annual royalty (the Minimum Royalty), payable quarterly. The Minimum Royalty automatically increases each year, subject to a maximum amount of$200,000 per year. During the three and nine months endedSeptember 30, 2021 , we have recorded royalties of$1.6 million and$4.5 million , respectively. During the three and nine months endedSeptember 30, 2020 , we have recorded royalties of$1.4 million and$3.0 million , respectively. We have 60 days to pay AMF the royalty amount due under the License Agreement, and if we fail to pay AMF within such 60-day period, AMF may, at its election, convert the exclusive license to a non-exclusive license or terminate the License Agreement. 28 -------------------------------------------------------------------------------- Table of Contents Components of Our Results of OperationsNet Revenue Revenue during the three and nine months endedSeptember 30, 2021 and 2020 are as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 SNM net revenue United States$ 39,147 $ 34,139 $ 110,135 $ 73,833 International markets 922 1,104 3,031 2,919$ 40,069 $ 35,243 $ 113,166 $ 76,752 Bulkamid net revenue United States$ 3,921 $ -$ 6,870 $ - International markets 2,923 - 7,119 -$ 6,844 $ -$ 13,989 $ - Total net revenue$ 46,913 $ 35,243 $ 127,155 $ 76,752 Cost of Goods Sold and Gross Margin Cost of goods sold consists primarily of costs of the components of our r-SNM System, third-party contract labor costs, overhead costs, Bulkamid product 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 products, 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 betweenthe United States ,Canada ,Europe andAustralia as our average selling price inthe United States is expected to be higher than inCanada ,Europe andAustralia 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, royalty expense, and clinical studies to develop and support our r-SNM System, including clinical study and registry 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. 29 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our research and development expenses by functional area for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Personnel related$ 4,604 $ 3,273 $ 14,338 $ 8,072 Clinical development 287 107 613 292
Contract R&D and manufacturing 1,877 2,692
6,892 8,373
Royalty expense 1,607 1,406 4,520 3,030
Other R&D expenses 273 241 752 1,177
Total R&D expenses $ 8,648 $ 7,719 $ 27,115 $ 20,944
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, changes in fair value of
the contingent consideration, office-related expenses, facilities and equipment
rentals, bad debt expense, and travel expenses. We expect our general and
administrative expenses will significantly increase in absolute dollars as we
increase our headcount and expand administrative personnel to support our growth
and operations as a public company including finance personnel and information
technology services. Additionally, we anticipate increased legal expenses
associated with our patent infringement litigation with Medtronic. These
expenses will further increase as we no longer qualify as an "emerging growth
company" under the Jumpstart Our Business Startups (JOBS) Act, which requires us
to comply with certain additional reporting requirements effective December 31,
2020 . We expect general and administrative expenses to decrease as a percentage
of revenue primarily as, and to the extent, our revenue grows.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee compensation,
including sales personnel commissions and stock-based compensation, trade shows,
booth exhibition costs, and the related travel for these events. Other sales and
marketing expenses include direct-to-consumer promotional programs, consulting,
and advisory fees. We expect sales and marketing expenses to continue to
increase in absolute dollars as we expand our commercial infrastructure to both
drive and support our expected growth in revenue. However, we expect sales and
marketing expenses to decrease as a percentage of revenue in the long term
primarily as, and to the extent, our revenue grows.
Amortization of Intangible Assets
Amortization of intangible assets consist primarily of amortization expense on
patent license asset, manufacturing license asset, technology, and customer
relationships. We amortize finite lived intangible assets over the period of
estimated benefit using the straight-line method. Indefinite lived intangible
assets are tested for impairment annually or whenever events or circumstances
indicate that the carrying amount of the asset (asset group) may not be
recoverable. If impairment is indicated, we measure the amount of the impairment
loss as the amount by which the carrying amount exceeds the fair value of the
asset. Fair value is generally determined using a discounted future cash flow
analysis.
Acquisition-Related Costs
Acquisition-related costs consist of expenses incurred related to the Contura
acquisition.
Other Expense, Net
Other expense, net consists primarily of interest expense payable under the Loan
Agreement with Silicon Valley Bank and other debt arrangements, gains and losses
on foreign currency transactions, net of interest income earned on cash
equivalents.
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Income Tax Expense
Income tax expense primarily consists of a remeasurement of deferred tax
liabilities in our foreign operations, net of losses in certain foreign
jurisdictions. We maintain a full valuation allowance for deferred tax assets in
our domestic operations, including net operating loss carryforwards and research
and development credits.
Results of Operations
The following table shows our results of operations for the three and nine
months ended September 30, 2021 and 2020 (in thousands, except percentages):
Period to Period Period to Period
Three Months Ended September 30, Change Nine Months Ended September 30, Change
2021 2020 2021 2020
Net revenue $ 46,913 $ 35,243 $ 11,670 $ 127,155 $ 76,752 $ 50,403
Cost of goods sold 15,719 13,434 2,285 46,828 31,792 15,036
Gross profit 31,194 21,809 9,385 80,327 44,960 35,367
Gross Margin 66.5 % 61.9 % 63.2 % 58.6 %
Operating Expenses
Research and development 8,648 7,719 929 27,115 20,944 6,171
General and administrative 8,720 5,773 2,947 23,381 18,963 4,418
Sales and marketing 28,112 17,057 11,055 74,451 47,846 26,605
Amortization of intangible assets 2,216 29 2,187 5,094 86 5,008
Acquisition-related costs - - - 4,414 - 4,414
Total operating expenses 47,696 30,578 17,118 134,455 87,839 46,616
Loss from operations (16,502) (8,769) (7,733) (54,128) (42,879) (11,249)
Other Expense
Interest income 9 35 (26) 24 742 (718)
Interest and other expense (229) (434) 205 (7,528) (1,429) (6,099)
Other expense, net (220) (399) 179 (7,504) (687) (6,817)
Loss before income tax expense (16,722) (9,168) (7,554) (61,632) (43,566) (18,066)
Income tax expense 528 - 528 3,269 1 3,268
Net loss (17,250) (9,168) (8,082) (64,901) (43,567) (21,334)
Foreign currency translation adjustment (5,138) 99 (5,237) (6,481) (186) (6,295)
Comprehensive loss $ (22,388) $ (9,069) $ (13,319) $ (71,382) $ (43,753) $ (27,629)
Comparison of the Three Months Ended September 30, 2021 and 2020
Net Revenue
Net revenue was $46.9 million for the three months ended September 30, 2021 and
was primarily derived from the sale of our products to customers in the United
States and certain international markets. Net revenue was $35.2 million for the
three months ended September 30, 2020 and was derived from the sale of our r-SNM
System to customers in the United States , Europe and Canada . The increase in net
revenue is primarily due to the addition of $6.8 million in Bulkamid sales and
increased sales of our r-SNM System as we expanded our customer base in the U.S.
and international markets. Sales during the three months ended September 30,
2021 were negatively impacted by the COVID-19 global pandemic.
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Cost of Goods Sold and Gross Margin
We incurred $15.7 million of cost of goods sold for the three months ended
September 30, 2021 . We incurred $13.4 million of cost of goods sold for the
three months ended September 30, 2020 . Gross margin was 66.5% in the three
months ended September 30, 2021 , compared to 61.9% for the three months ended
September 30, 2020 . The increase in gross margin is primarily due to increased
efficiencies resulting in higher absorption rates.
Research and Development Expenses
Research and development expenses increased $0.9 million , or 12.1%, to $8.6
million in the three months ended September 30, 2021 , compared to $7.7 million
in the three months ended September 30, 2020 . The increase in research and
development expenses was primarily attributable to an increase of $1.3 million
in personnel costs including salaries and wages, stock-based compensation and
other employee-related benefits.
General and Administrative Expenses
General and administrative expenses increased $2.9 million , or 51.0%, to $8.7
million in the three months ended September 30, 2021 , compared to $5.8 million
in the three months ended September 30, 2020 , primarily as a result of an
increase of $1.3 million in the change in fair value of the contingent
consideration, $0.9 million in personnel costs including salaries and wages,
stock-based compensation and other employee-related benefits and an increase of
$0.4 million in legal and consulting costs.
Sales and Marketing Expenses
Sales and marketing expenses increased $11.1 million , or 64.8%, to $28.1 million
in the three months ended September 30, 2021 , compared to $17.1 million in the
three months ended September 30, 2020 . The increase in sales and marketing
expenses was primarily due to an increase of $7.5 million related to personnel
costs including salaries, wages, sales personnel commissions, stock-based
compensation and other employee-related benefits, an increase of $1.8 million
related to direct-to-consumer programs and other advertising expenses, and an
increase of $0.9 million related to travel expenses.
Amortization of Intangible Assets
Amortization of intangible assets increased to $2.2 million in the three months
ended September 30, 2021 , compared to minimal amortization of intangible assets
in the three months ended September 30, 2020 . The increase in amortization of
intangible assets was primarily due to an increase of technology and customer
relationships acquired related to the Contura acquisition.
Acquisition-Related Costs
We recorded no acquisition-related costs for the three months ended September
30, 2021 and 2020.
Other Expense, Net
Other expense, net was $0.2 million in the three months ended September 30, 2021
consisting primarily of losses on foreign currency transactions. Other expense,
net was $0.4 million in the three months ended September 30, 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.
Income Tax Expense
Income tax expense was $0.5 million for the three months ended September 30,
2021 primarily related to the change in deferred tax liabilities generated in
our foreign operations related to the Contura acquisition. We recorded no income
tax expense for the three months ended September 30, 2020 .
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Comparison of the Nine Months Ended September 30, 2021 and 2020
Net Revenue
Net revenue was $127.2 million for the nine months ended September 30, 2021 and
was primarily derived from the sale of our products to customers in the United
States and certain international markets. Net revenue was $76.8 million for the
nine months ended September 30, 2020 and was derived from the sale of our r-SNM
System to customers in the United States , Europe and Canada . The increase in net
revenue is primarily due to increased sales of our r-SNM System as we expanded
our customer base in the U.S. and international markets and the addition of
$14.0 million in Bulkamid sales. Sales during the nine months ended September
30, 2020 were also more severely impacted by the COVID-19 global pandemic, with
the initial restrictions on elective procedures occurring during the second
quarter of 2020.
Cost of Goods Sold and Gross Margin
We incurred $46.8 million of cost of goods sold for the nine months ended
September 30, 2021 . We incurred $31.8 million of cost of goods sold for the nine
months ended September 30, 2020 . Gross margin was 63.2% in the nine months ended
September 30, 2021 , compared to 58.6% for the nine months ended September 30,
2020 . The increase in gross margin is primarily due to increased efficiencies
resulting in higher absorption rates.
Research and Development Expenses
Research and development expenses increased $6.2 million , or 29.3%, to $27.1
million in the nine months ended September 30, 2021 , compared to $20.9 million
in the nine months ended September 30, 2020 . The increase in research and
development expenses was primarily attributable to an increase of $6.3 million
in personnel costs including salaries and wages, stock-based compensation and
other employee-related benefits.
General and Administrative Expenses
General and administrative expenses increased $4.4 million , or 23.3%, to $23.4
million in the nine months ended September 30, 2021 , compared to $19.0 million
in the nine months ended September 30, 2020 , primarily as a result of an
increase of $2.5 million in personnel costs including salaries and wages,
stock-based compensation and other employee-related benefits, an increase of
$1.3 million in the change in fair value of the contingent consideration,
partially offset by a decrease of $0.5 million in bad debt expense.
Sales and Marketing Expenses
Sales and marketing expenses increased $26.6 million , or 55.6%, to $74.5 million
in the nine months ended September 30, 2021 , compared to $47.8 million in the
nine months ended September 30, 2020 . The increase in sales and marketing
expenses was primarily due to an increase of $17.8 million related to personnel
costs including salaries, wages, sales personnel commissions, stock-based
compensation and other employee-related benefits, an increase of $4.1 million
related to direct-to-consumer programs and other advertising expenses, and an
increase of $1.9 million related to travel expenses.
Amortization of Intangible Assets
Amortization of intangible assets increased to $5.1 million in the nine months
ended September 30, 2021 , compared to $0.1 million in the nine months ended
September 30, 2020 . The increase in amortization of intangible assets was
primarily due to an increase of technology and customer relationships acquired
related to the Contura acquisition.
Acquisition-Related Costs
Acquisition-related costs was $4.4 million in the nine months ended September
30, 2021 related to the Contura acquisition.
Other Expense, Net
Other expense, net was $7.5 million in the nine months ended September 30, 2021
consisting primarily of interest expense incurred related to the Loan Agreement
with Silicon Valley Bank . Other expense, net was $0.7 million in the nine months
ended September 30, 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. The
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increase in other expense, net primarily relates to interest on higher
outstanding debt balances during the nine months ended September 30, 2021 and
the related write-off of unamortized debt issuance costs.
Income Tax Expense
Income tax expense was $3.3 million for the nine months ended September 30, 2021
primarily related to the remeasurement of our U.K. deferred tax liabilities due
to an increase in the U.K. income tax rate from 19% to 25% which was enacted
during the second quarter of 2021 and effective April 1, 2023 , net of losses in
certain foreign jurisdictions. We recorded minimal income tax expense for the
nine months ended September 30, 2020 .
Liquidity and Capital Resources
We only began full-scale commercialization of our r-SNM System in late 2019. We
have expended significant resources on research and development activities,
growing our operations organization and building and training our sales
organization.
We incurred net losses of $64.9 million and $43.6 million for the nine months
ended September 30, 2021 and 2020, respectively, and had an accumulated deficit
of $299.4 million as of September 30, 2021 compared to $234.5 million at
December 31, 2020 . We expect to continue to spend a significant amount of our
existing resources on sales and marketing activities as we continue to
commercialize and market our products in the United States and internationally.
As of September 30, 2021 , we had cash and cash equivalents of $228.8 million
compared to $241.2 million at December 31, 2020 . We expect that our cash and
cash equivalents on hand will be sufficient to fund our operations through at
least the next 12 months. We fund our operations through a combination of
proceeds from public offerings of our common stock, cash receipts from sales of
our r-SNM System and proceeds from our Loan Agreement with Silicon Valley Bank .
As of September 30, 2021 , we had $0.1 million in outstanding borrowings.
We may need to raise additional financing in the future to facilitate our
business operations. If we raise additional funds by issuing equity securities,
our stockholders could experience dilution. Debt financing, if available, may
involve covenants further restricting our operations or our ability to incur
additional debt. Any debt financing or additional equity that we raise may
contain terms that are not favorable to us or our stockholders. Additional
financing may not be available at all, or in amounts or on terms acceptable to
us. If we are unable to obtain additional financing when needed to satisfy our
liquidity requirements, we may be required to scale back our operations.
Cash Flows
The following table presents a summary of our cash flow for the periods
indicated (in thousands):
Nine Months Ended
September 30,
2021 2020Net cash provided by (used in)
Operating activities$ (40,530) $ (55,428) Investing activities (141,918) 10,677 Financing activities 170,311 143,135
Effect of exchange rate changes on cash and cash equivalents (247)
(186)
Net (decrease) increase in cash and cash equivalents$ (12,384)
Net cash used in operating activities Net cash used in operating activities was$40.5 million for the nine months endedSeptember 30, 2021 and consisted primarily of a net loss of$64.9 million and a decrease from changes in net operating assets of$10.3 million , partially offset by non-cash charges of$34.7 million . Net operating assets consisted primarily of inventory and accounts receivable due to the commercial growth of our r-SNM System inthe United States and the addition of Bulkamid sales. Non-cash charges consisted primarily of stock-based compensation and depreciation and amortization. 34 -------------------------------------------------------------------------------- Table of Contents Net cash used in operating activities was$55.4 million for the nine months endedSeptember 30, 2020 and consisted primarily of a net loss of$43.6 million and a decrease from changes in net operating assets of$25.8 million , partially offset by non-cash charges of$13.9 million . Net operating assets consisted primarily of accounts receivable and inventory due to the commercial launch of our r-SNM System inthe United States . Non-cash charges consisted primarily of stock-based compensation. Net cash (used in) provided by investing activities Net cash used in investing activities was$141.9 million for the nine months endedSeptember 30, 2021 and consisted primarily of the$140.7 million paid for the acquisition of Contura. Net cash provided by investing activities was$10.7 million for the nine months endedSeptember 30, 2020 and consisted primarily of sales and maturities of short-term investments, partially offset by purchases of property and equipment. Net cash provided by financing activities Net cash provided by financing activities was$170.3 million for the nine months endedSeptember 30, 2021 and consisted primarily of$190.0 million in net proceeds received in theMay 2021 follow-on offering, partially offset by a net debt repayment of$26.0 million . Net cash provided by financing activities was$143.1 million for the nine months endedSeptember 30, 2020 and consisted primarily of$140.5 million in net proceeds received in theMay 2020 follow-on offering. Indebtedness InJune 2021 , the principal amount, accrued interest, accrued loan fees, and prepayment fees related to the term loan under the Loan and Security Agreement withSilicon Valley Bank entered into inFebruary 2021 , were paid in full. The unamortized debt issuance costs of$4.4 million as ofMarch 31, 2021 was expensed and recognized as interest expense during the three months endedJune 30, 2021 . InJanuary 2021 , the principal amount, accrued interest, accrued loan fees, and prepayment fees related to the term loan under the Loan and Security Agreement withSilicon Valley Bank entered into inFebruary 2018 , were paid in full. The unamortized debt issuance costs of$0.4 million as ofDecember 31, 2020 was expensed and recognized as interest expense during the three months endedMarch 31, 2021 . We have no further indebtedness arrangements. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as defined by applicable regulations of theSEC , that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations Refer to the Liquidity and Capital Resources-Indebtedness section above for changes in debt obligations during the first half of fiscal year 2021; there were no other material changes to our long-term contractual obligations as reported in our most recent Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , as filed with theSEC onMarch 1, 2021 Critical Accounting Policies and Estimates Our critical accounting policies and estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , as filed with theSEC onMarch 1, 2021 . We have reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the nine months endedSeptember 30, 2021 . 35 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, such standards will not have a significant impact on our condensed consolidated financial statements or do not otherwise apply to our operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk. We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate risk, foreign currency exchange rate risk and inflation risk as follows: Interest Rate Risk We had cash and cash equivalents of$228.8 million as ofSeptember 30, 2021 , which came from public offerings of our common stock and debt financing arrangements. The goals of our investment policy are liquidity and capital preservation and we do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short term nature of our cash and cash equivalents. 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 inU.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily inthe 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 ofthe United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future. Inflation Risk Inflationary factors, such as increases in our cost of goods sold and selling and operating expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin and sales and marketing and operating expenses as a percentage of our revenue if the selling prices of our products do not increase as much as or more than these increased costs. Item 4. Controls and Procedures. Limitations on effectiveness of controls and procedures In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Evaluation of disclosure controls and procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as ofSeptember 30, 2021 . 36
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Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
three months ended
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