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 products to treat urinary and fecal dysfunction, including: (i) an implantable sacral neuromodulation (SNM) systems to treat urinary urge incontinence (UUI) and urinary urgency frequency (UUF), together referred to as overactive bladder (OAB), as well as fecal incontinence (FI), and non-obstructive urinary retention (UR); and (ii) a urethral bulking agent to treat female stress urinary incontinence (SUI). OAB affects an estimated 87 million adults inthe United States andEurope . 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 inEurope andthe United States for the past two decades. SNM is the only OAB treatment with 24 -------------------------------------------------------------------------------- Table of Contents proven clinical superiority to standard medical therapy and OAB patients who receive SNM report significantly higher quality of life than patients undergoing drug treatment. We estimate the global SNM market is now approximately$650 million to$700 million and believe it is a growing market that is currently about one to three percent penetrated. Until we entered the market, it was serviced by Medtronic as a single participant. We believe our proprietary rechargeable SNM system (r-SNM System), the first rechargeable SNM system marketed worldwide, offers significant advantages, and is well positioned to capture market share and penetrate and grow this attractive market. Our r-SNM System is designed to last approximately 15 years in the human body, is only 5cc in volume, offers broad MRI access, ease of use, intuitive programmers, and the longest recharging interval among rechargeable SNM systems. We have marketing approvals inEurope ,Canada , andAustralia for all relevant clinical indications and initiated limited commercial efforts inEngland ,the Netherlands andCanada in late 2018. Revenue during the three months endedMarch 31, 2021 from international operations inCanada ,Europe , theU.K. , andAustralia , was approximately$2.1 million . 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, with over 240 sales personnel and clinical specialists and we continue to make significant investments to build our commercial organization to market and support our products. When making hiring decisions for these roles, we prioritize individuals with strong sales backgrounds and experience in SNM therapy and other neurostimulation applications, and who also have existing relationships with urologists and urogynecologists. Revenue during the three months endedMarch 31, 2021 from accounts located acrossthe United States was approximately$32.3 million . 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. 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. 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 and by region, particularly based on whether the country or region at issue maintains a single-payor system. SNM therapy is eligible for reimbursement inCanada ,Australia , and certain countries inEurope , such asGermany ,France , 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 and regions. 25 -------------------------------------------------------------------------------- Table of Contents 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 inthe United States . We incurred net losses of$22.5 million and$14.6 million for the three months endedMarch 31, 2021 and 2020, respectively, and had an accumulated deficit of$257.0 million as ofMarch 31, 2021 compared to$234.5 million atDecember 31, 2020 . As ofMarch 31, 2021 , we had available cash and cash equivalents of approximately$131.0 million , current liabilities of approximately$24.0 million , and long-term liabilities of approximately$90.8 million . Prior to our initial public offering (IPO), we financed our operations primarily through preferred stock financings and amounts borrowed under a Loan and Security Agreement, datedFebruary 6, 2018 , between us andSilicon Valley Bank (the Loan Agreement). Through our IPO inNovember 2018 , an offering completed inNovember 2019 and an offering completed inMay 2020 , we received aggregate gross proceeds of approximately$405.1 million . We have invested heavily in product development and continuous improvement to our r-SNM System. We have also made significant investments in clinical studies to demonstrate the safety and effectiveness of our r-SNM System and to support regulatory submissions. Because of these and other factors, we expect to continue to incur net losses for the next few years and we may require additional funding, which may include future equity and debt financings. Adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material and adverse effect on our business, financial condition, and results of operations.May 2020 Follow-On Offering 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. 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 inMay 2020 and continued to improve in the second half of 2020 through the first quarter of 2021. To protect the health of our employees, their families, and our communities, we have restricted access to our offices to personnel who must perform critical activities that must be completed on-site, limited the number of such personnel that can be present at our facilities at any one time, requested that many of our employees work remotely, and implemented strict travel restrictions. These restrictions and precautionary measures have not adversely affected our operations. The full extent of COVID-19's effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and additional protective measures implemented by the governmental authorities, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. However, if the pandemic continues to evolve into a long-term 26 -------------------------------------------------------------------------------- Table of Contents 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 months endedMarch 31, 2021 and 2020, we have recorded royalties of$1.3 million and$1.0 million , respectively. We have 60 days to pay AMF the royalty amount due under the License Agreement, and if we fail to pay AMF within such 60-day period, AMF may, at its election, convert the exclusive license to a non-exclusive license or terminate the License Agreement. Components of Our Results of OperationsNet Revenue Revenue during the three months endedMarch 31, 2021 and 2020 are as follows (in thousands): Three Months Ended March 31, 2021 2020 SNM net revenue United States$ 31,745 $ 25,046 International markets 1,158 1,250$ 32,903 $ 26,296 Bulkamid net revenue United States$ 578 $ - International markets 892 -$ 1,470 $ - Total net revenue$ 34,373 $ 26,296 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 27 -------------------------------------------------------------------------------- Table of Contents 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, and clinical studies to develop and support our r-SNM System, including clinical study management and monitoring, payments to clinical investigators, and data management. Other research and development expenses include consulting and advisory fees, royalty expense, travel expenses, and equipment-related expenses and other miscellaneous office and facilities expenses related to research and development programs. Research and development costs are expensed as incurred. We expect to continue incurring research and development expenses in the future as we develop next generation versions of our r-SNM System and expand to new markets. We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts and new clinical development activities. The following table summarizes our research and development expenses by functional area for the three months endedMarch 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Personnel related$ 4,878 $ 2,486 Clinical development 104 88 Contract fabrication and manufacturing 1,474 865 Contract R&D and consulting 2,667 2,965 Other R&D expenses 246 451 Total R&D expenses$ 9,369 $ 6,855 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 additional reporting requirements effectiveDecember 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 28 -------------------------------------------------------------------------------- Table of Contents revenue. However, we expect sales and marketing expenses to decrease as a percentage of revenue in the long term primarily as, and to the extent, our revenue grows. Amortization of Intangible Assets Amortization of intangible assets consist primarily of amortization expense on patent license asset, manufacturing license asset, technology, and customer relationships. We amortize finite lived intangible assets over the period of estimated benefit using the straight-line method. Indefinite lived intangible assets are tested for impairment annually or whenever events or circumstances indicate that the carrying amount of the asset (asset group) may not be recoverable. If impairment is indicated, we measure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset. Fair value is generally determined using a discounted future cash flow analysis. Acquisition-Related Costs Acquisition-related costs consist of expenses incurred related to the Contura acquisition. Other (Expense) Income, Net Other (expense) income, net consists primarily of interest expense payable under the Loan Agreement withSilicon Valley Bank and other debt arrangements, net of interest income earned on cash equivalents. Income Tax (Benefit) Expense Income tax (benefit) expense consists of income tax benefit from deferred tax assets in our foreign operations, net of state income taxes inCalifornia . We maintain a full valuation allowance for deferred tax assets in our domestic operations, including net operating loss carryforwards and research and development credits and other tax credits. 29 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table shows our results of operations for the three months endedMarch 31, 2021 and 2020 (in thousands, except percentages): Three Months Ended Period to Period March 31, Change 2021 2020 Sacral neuromodulation net revenue$ 32,903 $ 26,296$ 6,607 Bulkamid net revenue 1,470 - 1,470 Total net revenue 34,373 26,296 8,077 Cost of goods sold 13,974 9,895 4,079 Gross profit 20,399 16,401 3,998 Gross Margin 59.3 % 62.4 % Operating Expenses Research and development 9,369 6,855 2,514 General and administrative 6,626 7,653 (1,027) Sales and marketing 20,928 16,569 4,359 Amortization of intangible assets 678 29 649 Acquisition-related costs 4,414 - 4,414 Total operating expenses 42,015 31,106 10,909 Loss from operations (21,616) (14,705) (6,911) Other Income (Expense) Interest income 8 642 (634) Interest and other expense (1,450) (552) (898) Other (expense) income, net (1,442) 90 (1,532) Loss before income tax (benefit) expense (23,058) (14,615) (8,443) Income tax (benefit) expense (555) 1 (556) Net loss (22,503) (14,616) (7,887) Foreign currency translation adjustment (2,202) (177) (2,025) Comprehensive loss$ (24,705) $ (14,793) $ (9,912) Comparison of the Three Months EndedMarch 31, 2021 and 2020 Net Revenue Net revenue was$34.4 million for the three months endedMarch 31, 2021 and was primarily derived from the sale of our r-SNM Systems to customers inthe United States ,Europe andCanada . Net revenue was$26.3 million for the three months endedMarch 31, 2020 and was derived from the sale of our r-SNM System to customers inthe United States ,Europe andCanada . The increase in net revenue is primarily due to increased sales of our r-SNM System as we expanded our customer base in theU.S. and international markets, as well as the addition of$1.5 million in Bulkamid sales. Cost of Goods Sold and Gross Margin We incurred$14.0 million of cost of goods sold for the three months endedMarch 31, 2021 . We incurred$9.9 million of cost of goods sold for the three months endedMarch 31, 2020 . Gross margin was 59.3% in the three months endedMarch 31, 2021 , compared to 62.4% for the three months endedMarch 31, 2020 . The decrease in gross margin is primarily due to lower absorption rates. 30 -------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Research and development expenses increased$2.5 million , or 36.7%, to$9.4 million in the three months endedMarch 31, 2021 , compared to$6.9 million in the three months endedMarch 31, 2020 . The increase in research and development expenses was primarily attributable to an increase of$2.4 million in personnel costs including salaries and wages, stock-based compensation and other employee-related benefits. General and Administrative Expenses General and administrative expenses decreased$1.0 million , or 13.4%, to$6.6 million in the three months endedMarch 31, 2021 , compared to$7.7 million in the three months endedMarch 31, 2020 , primarily as a result of a decrease of$1.0 million in legal and consulting costs, as higher costs were incurred in the three months endedMarch 31, 2020 related to the Medtronic litigation. Sales and Marketing Expenses Sales and marketing expenses increased$4.4 million , or 26.3%, to$20.9 million in the three months endedMarch 31, 2021 , compared to$16.6 million in the three months endedMarch 31, 2020 . The increase in sales and marketing expenses was primarily due to an increase of$3.2 million related to personnel costs including salaries and wages, stock-based compensation and other employee-related benefits and an increase of$1.0 million related to advertising expenses. Amortization of Intangible Assets Amortization of intangible assets increased$0.6 million , or 2,260.1%, to$0.7 million in the three months endedMarch 31, 2021 , compared to minimal amortization of intangible assets in the three months endedMarch 31, 2020 . The increase in amortization of intangible assets was primarily due to an increase of technology and customer relationships acquired related to the Contura acquisition. Acquisition-Related Costs Acquisition-related costs was$4.4 million in the three months endedMarch 31, 2021 related to the Contura acquisition. Other (Expense) Income, Net Other expense, net was$1.4 million in the three months endedMarch 31, 2021 consisting primarily of interest expense incurred related to the Loan Agreement withSilicon Valley Bank . Other income, net was$0.1 million in the three months endedMarch 31, 2020 consisting primarily of interest income earned on cash equivalents and short-term investments, partially offset by interest expense incurred related to the Loan Agreement withSilicon Valley Bank . Income Tax (Benefit) Expense We recorded income tax benefit or the three months endedMarch 31, 2021 primarily related to deferred tax assets generated in our foreign operations related to the Contura acquisition. We recorded minimal income tax expense for the three months endedMarch 31, 2020 . Liquidity and Capital Resources We only began full-scale commercialization of our r-SNM System in late 2019. We have expended significant resources on research and development activities, growing our operations organization and building and training our sales organization. We incurred net losses of$22.5 million and$14.6 million for the three months endedMarch 31, 2021 and 2020, respectively, and had an accumulated deficit of$257.0 million as ofMarch 31, 2021 compared to$234.5 million atDecember 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 inthe United States and internationally. As ofMarch 31, 2021 , we had cash and cash equivalents of$131.0 million compared to$241.2 million atDecember 31, 2020 . We expect that our cash and cash equivalents on hand will be sufficient to fund our operations 31 -------------------------------------------------------------------------------- Table of Contents 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 withSilicon Valley Bank . As ofMarch 31, 2021 , we had$79.6 million in outstanding borrowings, as discussed below under "Indebtedness." We may need to raise additional financing in the future to facilitate our business operations. If we raise additional funds by issuing equity securities, our stockholders could experience dilution. Debt financing, if available, may involve covenants further restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing when needed to satisfy our liquidity requirements, we may be required to scale back our operations. Cash Flows The following table presents a summary of our cash flow for the periods indicated (in thousands): Three Months Ended March 31, 2021 2020 Net cash provided by (used in) Operating activities$ (25,583) $ (23,307) Investing activities (140,864) 11,878 Financing activities 56,215 344 Effect of exchange rate changes on cash and cash equivalents 13
(177)
Net decrease in cash and cash equivalents$ (110,219)
Net cash used in operating activities Net cash used in operating activities was$25.6 million for the three months endedMarch 31, 2021 and consisted primarily of a net loss of$22.5 million and a decrease from changes in net operating assets of$9.4 million , partially offset by non-cash charges of$6.4 million . Net operating assets consisted primarily of inventory due to the commercial growth of our r-SNM System inthe United States . Non-cash charges consisted primarily of stock-based compensation. Net cash used in operating activities was$23.3 million for the three months endedMarch 31, 2020 and consisted primarily of a net loss of$14.6 million and a decrease from changes in net operating assets of$13.7 million , partially offset by non-cash charges of$5.0 million . Net operating assets consisted primarily of accounts receivable and inventory due to the commercial launch of our r-SNM System 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$140.9 million for the three months endedMarch 31, 2021 and consisted primarily of the$140.7 million paid for the acquisition of Contura. Net cash provided by investing activities was$11.9 million for the three months endedMarch 31, 2020 and consisted primarily of sales and maturities of short-term investments, partially offset by purchases of property and equipment. Net cash provided by financing activities Net cash provided by financing activities was$56.2 million for the three months endedMarch 31, 2021 and consisted primarily of$75 million in net proceeds received in the Loan Agreement withSilicon Valley Bank in connection with the Contura acquisition, partially offset by the pay down of$21.5 million of the prior Loan Agreement with Silicon Valley bank. 32 -------------------------------------------------------------------------------- Table of Contents Net cash provided by financing activities was$0.3 million for the three months endedMarch 31, 2020 and consisted of proceeds from exercise of stock options. Indebtedness OnFebruary 25, 2021 , the Company entered into the Loan and Security Agreement withSilicon Valley Bank , as the administrative agent and collateral agent for the lenders, under which the Company obtained a loan in the principal amount of$75 million pursuant to the Loan, which is currently outstanding. The Loan under the Loan and Security Agreement matures onFebruary 1, 2024 , unless earlier accelerated upon an event of default. The Loan bears interest at a floating per annum rate equal to the greater of (a) 9.00% and (b) 5.75% above the current prime rate, with only interest due and payable monthly untilSeptember 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 toSilicon Valley Bank . In the event that we elect to prepay the Loan prior to the Maturity Date, we are required to pay a fee in the amount of (a) 2.00% of the outstanding principal balance if such prepayment occurs prior toFebruary 25, 2022 or (b) 1.00% of the outstanding principal balance if such prepayment occurs on or afterFebruary 25, 2022 . The Loan and Security Agreement contains customary events of default that include, among others, non-payment defaults, covenant defaults, a default in the event a material adverse change occurs, defaults in the event our assets are attached or we are enjoined from doing business, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness, material judgment defaults, and inaccuracy of representations and warranties. The occurrence of an event of default could result in an increase to the applicable interest rate of 5.00%, acceleration of and present occurrence of the Maturity Date, and the consequent obligation for us to repay in full in cash all amounts outstanding under the Loan and Security Agreement, and a right by the lenders to exercise all remedies available under the Loan and Security Agreement and related agreements, including the right to dispose of the collateral as permitted under applicable law. All obligations under the Term Loan are secured by a first priority lien on substantially all of the Company's assets, excluding intellectual property assets and more than 65% of the shares of voting capital stock of any of its foreign subsidiaries. The Company has agreed withSilicon Valley Bank not to encumber its intellectual property assets withoutSilicon Valley Bank's prior written consent unless a security interest in the underlying intellectual property is necessary to have a security interest in the accounts and proceeds that are part of the assets securing the Term Loan, in which case the Company's intellectual property shall automatically be included within the assets securing the Term Loan. The Loan Agreement contains certain covenants that limit our ability to engage in certain transactions that may be in our long-term best interest. Subject to certain limited exceptions, these covenants limit our ability to or prohibit us to permit any of our subsidiaries to, as applicable, among other things: •pay cash dividends on, make any other distributions in respect of, or redeem, retire or repurchase, any shares of our capital stock; •convey, sell, lease, transfer, assign, or otherwise dispose of all or any part of our business or property; •effect certain changes in our business, management, ownership or business locations; •merge or consolidate with, or acquire all or substantially all of the capital stock or property of any other company; •create, incur, assume, or be liable for any additional indebtedness, or create, incur, allow, or permit to exist any additional liens; •make certain investments; and •enter into transactions with our affiliates. As ofMarch 31, 2021 , we were in compliance with all debt covenant requirements under the Term Loan. While we have not previously breached and are currently in compliance with the covenants contained in the Loan Agreement, we may breach these covenants in the future. Our ability to comply with these covenants may be 33 -------------------------------------------------------------------------------- Table of Contents affected by events and factors beyond our control. In the event that we breach one or more covenants,Silicon Valley Bank may choose to declare an event of default and require that we immediately repay all amounts outstanding under the Loan Agreement, terminate any commitment to extend further credit and foreclose on the collateral. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations. We have no further indebtedness arrangements. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as defined by applicable regulations of 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 quarter of fiscal year 2021; there were no other material changes to our long-term contractual obligations as reported in our most recent Annual Report on Form 10-K for the fiscal year 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 three months endedMarch 31, 2021 . Recent Accounting Pronouncements We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, such standards will not have a significant impact on our condensed consolidated financial statements or do not otherwise apply to our operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk. We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate risk, foreign currency exchange rate risk and inflation risk as follows: Interest Rate Risk We had cash and cash equivalents of$131.0 million as ofMarch 31, 2021 , which came from public offerings of our common stock and debt financing arrangements. The goals of our investment policy are liquidity and capital preservation and we do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short term nature of our cash, cash equivalents and short-term investments. Additionally, the interest rate for borrowings under the Loan and Security Agreement is variable. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements. We do not currently engage in hedging transactions to manage our exposure to interest rate risk. Foreign Currency Exchange Rate Risk As we expand internationally our results of operations and cash flows may become increasingly subject to fluctuations due to changes in foreign currency exchange rates. All of our revenue is denominated 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 34 -------------------------------------------------------------------------------- Table of Contents 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 ofMarch 31, 2021 . Changes in internal control over financial reporting There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months endedMarch 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 35
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