UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________________________

FORM 10-Q

_________________________________________________________________

(Mark One)

☒         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

or

☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 001-38721

_________________________________________________________________

Axonics, Inc.

(Exact name of registrant as specified in its charter)

_________________________________________________________________

Delaware

45-4744083

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

26 Technology Drive

Irvine,

California

92618

(Address of principal executive offices)

(Zip Code)

(949)

396-6322

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of class			Trading symbol			Name of exchange on which registered
Common stock, par value $0.0001 per share			AXNX			Nasdaq Global Select Market

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒     No ☐

    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒    No ☐

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer			☒			Accelerated filer			☐
Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

As of October 27, 2023, 50,662,028 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

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TABLE OF CONTENTS

						Page
			Special Note Regarding Forward-Looking Statements
			PART I—FINANCIAL INFORMATION
Item 1.			Condensed Consolidated Financial Statements (unaudited)			1
			Condensed Consolidated Balance Sheets			1
			Condensed Consolidated Statements of Comprehensive Loss			2
			Condensed Consolidated Statements of Stockholders’ Equity			3
			Condensed Consolidated Statements of Cash Flows			5
			Notes to Condensed Consolidated Financial Statements			6
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			35
Item 4.			Controls and Procedures			36
			PART II—OTHER INFORMATION
Item 1.			Legal Proceedings			38
Item 1A.			Risk Factors			38
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3.			Defaults Upon Senior Securities			38
Item 4.			Mine Safety Disclosures			38
Item 5.			Other Information			38
Item 6.			Exhibits			40
			Signatures			41

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Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about future events, our business, financial condition, results of operations and prospects, our industry and the regulatory environment in which we operate. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, or other comparable terms intended to identify statements about the future. Forward-looking statements include, but are not limited to, statements about:

•unanticipated safety concerns related to the use of our products;

•U.S. Food and Drug Administration (FDA) or other U.S. or foreign regulatory or legal actions or changes affecting us or our industry;

•the results of any ongoing or future legal proceedings, including but not limited to intellectual property, product liability or other litigation against us, our third-party manufacturers or other parties on which we rely or litigation against our general industry;

•any termination or loss of intellectual property rights;

•any voluntary or regulatory mandated product recalls;

•adverse developments concerning our manufacturers or suppliers or any future strategic partnerships;

•reduction or interruption in our supply chain and other possible inventory constraints or challenges;

•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 payments for our products;

•announcements by us or our competitors of significant acquisitions, licenses, strategic partnerships, joint ventures or capital commitments;

•changes in macroeconomic and market conditions and volatility, including impacts related to the continued impact of the COVID-19 pandemic, risk of recession, inflation, supply chain constraints or disruptions and rising interest rates;

•economic and market conditions in general and in the medical technology industry specifically, including the size and growth, if any, of our markets, and the 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; and

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•changes in our capital structure, such as future issuances of securities and the incurrence of additional debt.

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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and discussed more detail in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (SEC). In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking statements. Except as required by law, we undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. You should read this Quarterly Report on Form 10-Q and the documents we file with the SEC, with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Unless the context indicates otherwise, as used in this Quarterly Report on Form 10-Q, the terms “Axonics,” “our company,” “we,” “us” and “our” refer to Axonics, Inc. and our consolidated subsidiaries.

This Quarterly Report on Form 10-Q includes our trademarks and trade names, including, without limitation, Axonics®, Axonics R20™, Axonics F15™ and Bulkamid®, which are our property and are protected under applicable intellectual property laws. This Quarterly Report on Form 10-Q also includes trademarks and trade names that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q appear without the ® and ™ symbols, but those references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

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Part I—Financial Information

Item 1.    Condensed Consolidated Financial Statements (unaudited)

Axonics, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

			September 30,						December 31,
			2023						2022
			(unaudited)
ASSETS
Current assets
Cash and cash equivalents			$	147,323					$	238,846
Short-term investments			197,393						118,365
Accounts receivable, net of allowance for credit losses of $380 and $321 at September 30, 2023 and December 31, 2022, respectively			48,944						44,817
Inventory, net			74,909						55,765
Prepaid expenses and other current assets			6,816						7,282
Total current assets			475,385						465,075
Property and equipment, net			6,556						6,798
Intangible assets, net			80,274						86,253
Other assets			3,245						6,813
Goodwill			95,287						94,414
Total assets			$	660,747					$	659,353
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable			$	14,666					$	9,070
Accrued liabilities			5,962						6,520
Accrued compensation and benefits			12,994						15,495
Operating lease liabilities, current portion			1,971						1,562
Other current liabilities			—						32,600
Total current liabilities			35,593						65,247
Operating lease liabilities, net of current portion			876						7,555
Deferred tax liabilities, net			13,658						16,412
Total liabilities			50,127						89,214
Commitments and contingencies (Note 3)
Stockholders’ equity
Preferred stock, par value $0.0001 per share; 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2023 and December 31, 2022			—						—
Common stock, par value $0.0001, 75,000,000 shares authorized at September 30, 2023 and December 31, 2022; 50,669,203 and 49,546,727 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively			5						5
Additional paid-in capital			1,022,052						969,545
Accumulated deficit			(386,926)						(374,264)
Accumulated other comprehensive loss			(24,511)						(25,147)
Total stockholders’ equity			610,620						570,139
Total liabilities and stockholders’ equity			$	660,747					$	659,353

See accompanying notes to unaudited condensed consolidated financial statements.

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Axonics, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands, except share and per share data)

(unaudited)

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Net revenue			$	93,100					$	70,384					$	256,644					$	187,784
Cost of goods sold			23,996						19,124						64,850						53,086
Gross profit			69,104						51,260						191,794						134,698
Operating expenses
Research and development			8,167						7,936						25,172						26,307
General and administrative			11,778						9,389						34,659						29,974
Sales and marketing			47,544						39,751						134,468						112,195
Amortization of intangible assets			2,302						2,317						6,803						7,112
Acquisition-related costs			—						8,242						2,368						20,447
Acquired in-process research & development			—						—						15,447						—
Total operating expenses			69,791						67,635						218,917						196,035
Loss from operations			(687)						(16,375)						(27,123)						(61,337)
Other income (expense)
Interest and other income			4,271						1,501						12,149						1,904
Interest and other expense			(83)						(1,898)						774						(3,026)
Other income (expense), net			4,188						(397)						12,923						(1,122)
Income (loss) before income tax benefit			3,501						(16,772)						(14,200)						(62,459)
Income tax benefit			(427)						(520)						(1,538)						(2,096)
Net income (loss)			3,928						(16,252)						(12,662)						(60,363)
Foreign currency translation adjustment			(6,185)						(12,057)						636						(29,625)
Comprehensive loss			$	(2,257)					$	(28,309)					$	(12,026)					$	(89,988)
Net income (loss) per share, basic (see Note 1)			$	0.08					$	(0.34)					$	(0.26)					$	(1.31)
Weighted-average shares used to compute basic net income (loss) per share (see Note 1)			49,244,981						47,208,192						48,973,252						46,185,209
Net income (loss) per share, diluted (see Note 1)			$	0.08					$	(0.34)					$	(0.26)					$	(1.31)
Weighted-average shares used to compute diluted net income (loss) per share (see Note 1)			50,086,491						47,208,192						48,973,252						46,185,209

See accompanying notes to unaudited condensed consolidated financial statements.

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Axonics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share data)

(unaudited)

																											Accumulated
															Additional												Other
			Common Stock												Paid-in						Accumulated						Comprehensive
			Shares						Amount						Capital						Deficit						Loss						Total
Balance at December 31, 2022			49,546,727						$	5					$	969,545					$	(374,264)					$	(25,147)					$	570,139
Issuance of common stock for employee stock option exercises for cash			116,452						—						1,930						—						—						1,930
Restricted Shares Award (RSA) issuances and forfeitures for terminations, net and stock-based compensation			247,770						—						7,295						—						—						7,295
Issuance of common stock for vesting of Restricted Stock Units (RSU) and stock-based compensation			199,718						—						3,419						—						—						3,419
Foreign currency translation adjustment			—						—						—						—						3,071						3,071
Net loss			—						—						—						(9,248)						—						(9,248)
Balance at March 31, 2023			50,110,667						5						982,189						(383,512)						(22,076)						576,606
Issuance of common stock for employee stock option exercises for cash			43,229						—						864						—						—						864
RSA issuances and forfeitures for terminations, net and stock-based compensation			42,578						—						7,676						—						—						7,676
Issuance of common stock for vesting of RSU and stock-based compensation			—						—						3,528						—						—						3,528
Issuance of common stock for acquisition of in-process research & development			264,783						—						15,447						—						—						15,447
Foreign currency translation adjustment			—						—						—						—						3,750						3,750
Net loss			—						—						—						(7,342)						—						(7,342)
Balance at June 30, 2023			50,461,257						5						1,009,704						(390,854)						(18,326)						600,529
Issuance of common stock for employee stock option exercises for cash			34,138						—						878						—						—						878
RSA issuances and forfeitures for terminations, net and stock-based compensation			157,558						—						8,678						—						—						8,678
Issuance of common stock for vesting of RSU and stock-based compensation			16,250						—						2,792						—						—						2,792
Foreign currency translation adjustment			—						—						—						—						(6,185)						(6,185)
Net income			—						—						—						3,928						—						3,928
Balance at September 30, 2023			50,669,203						$	5					$	1,022,052					$	(386,926)					$	(24,511)					$	610,620

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																											Accumulated
															Additional												Other
			Common Stock												Paid-in						Accumulated						Comprehensive
			Shares						Amount						Capital						Deficit						Loss						Total
Balance at December 31, 2021			46,330,167						$	5					$	803,559					$	(314,566)					$	(6,560)					$	482,438
Issuance of common stock for employee stock option exercises for cash			91,286						—						1,444						—						—						1,444
RSA issuances and forfeitures for terminations, net and stock-based compensation			312,479						—						5,633						—						—						5,633
Issuance of common stock for vesting of RSU and stock-based compensation			268,930						—						1,505						—						—						1,505
Foreign currency translation adjustment			—						—						—						—						(4,920)						(4,920)
Net loss			—						—						—						(22,668)						—						(22,668)
Balance at March 31, 2022			47,002,862						5						812,141						(337,234)						(11,480)						463,432
Issuance of common stock for employee stock option exercises for cash			35,803						—						480						—						—						480
RSA issuances and forfeitures for terminations, net and stock-based compensation			79,051						—						6,490						—						—						6,490
Issuance of common stock for vesting of RSU and stock-based compensation			—						—						1,415						—						—						1,415
Foreign currency translation adjustment			—						—						—						—						(12,648)						(12,648)
Net loss			—						—						—						(21,443)						—						(21,443)
Balance at June 30, 2022			47,117,716						5						820,526						(358,677)						(24,128)						437,726
Issuance of common stock for employee stock option exercises for cash			220,114						—						3,577						—						—						3,577
RSA issuances and forfeitures for terminations, net and stock-based compensation			129,264						—						6,776						—						—						6,776
Issuance of common stock for vesting of RSU and stock-based compensation			—						—						1,442						—						—						1,442
Follow-on offering - issuance of 2,012,500 shares at $63.85 per share, less closing costs of $192			2,012,500						—						128,306						—						—						128,306
Foreign currency translation adjustment			—						—						—						—						(12,057)						(12,057)
Net loss			—						—						—						(16,252)						—						(16,252)
Balance at September 30, 2022			49,479,594						$	5					$	960,627					$	(374,929)					$	(36,185)					$	549,518

See accompanying notes to unaudited condensed consolidated financial statements.

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Axonics, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

			Nine Months Ended September 30,
			2023						2022
Cash Flows from Operating Activities
Net loss			$	(12,662)					$	(60,363)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization			9,295						8,841
Stock-based compensation			33,388						23,261
Acquired in-process research & development			15,447						—
Provision for (reversal of) allowance of credit losses			59						(57)
Change in fair value of contingent consideration			2,400						20,130
Deferred income taxes and other items, net			(2,688)						(1,630)
Changes in operating assets and liabilities
Accounts receivable			(4,164)						(8,220)
Inventory			(19,326)						6,256
Prepaid expenses and other current assets			(1,814)						1,836
Other assets			(2,326)						98
Accounts payable			5,577						2,517
Accrued liabilities			(623)						1,740
Accrued compensation and benefits			(2,502)						(624)
Lease liabilities			(337)						53
Other liabilities			(27,370)						—
Net cash used in operating activities			(7,646)						(6,162)
Cash Flows from Investing Activities
Purchases of property and equipment			(2,243)						(1,888)
Purchases of short-term investments			(288,914)						(128,436)
Proceeds from sales and maturities of short-term investments			212,175						20,000
Net cash used in investing activities			(78,982)						(110,324)
Cash Flows from Financing Activities
Payment of contingent consideration recognized at acquisition			(7,630)						—
Proceeds from offering of common stock upon follow-on public offering			—						128,498
Payment of common stock offering costs upon follow-on public offering			—						(192)
Proceeds from exercise of stock options			3,672						5,501
Net cash (used in) provided by financing activities			(3,958)						133,807
Effect of exchange rate changes on cash and cash equivalents			(937)						3,132
Net (decrease) increase in cash and cash equivalents			(91,523)						20,453
Cash and cash equivalents, beginning of year			238,846						220,878
Cash and cash equivalents, end of period			$	147,323					$	241,331
Supplemental Disclosure of Cash Flow Information
Cash paid for interest			$	55					$	1
Cash paid for taxes			$	94					$	644
Noncash Investing and Financing Activities
Property and equipment acquired but not yet paid			$	7					$	29
Common stock issuance for acquired in-process research & development			$	15,447					$	—

See accompanying notes to unaudited condensed consolidated financial statements.

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AXONICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Axonics, Inc. (the Company) was incorporated in the state of Delaware on March 2, 2012 under the name American Restorative Medicine, Inc. 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. In August 2013, the Company changed its name to Axonics Modulation Technologies, Inc. In March 2021, the Company changed its name to Axonics, Inc.

The Company is a medical technology company that develops and commercializes innovative and minimally invasive products to treat bladder and bowel dysfunction. The Company has designed and developed both rechargeable (R20) and recharge-free (F15) implantable sacral neuromodulation (SNM) systems, which deliver 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 Company’s products are protected by intellectual property based on Company-generated innovations and patents and other intellectual property licensed from AMF. The Company has regulatory marketing approvals in the United States for all relevant clinical indications. In Europe, Canada, and Australia, the Company has regulatory marketing approvals for most relevant clinical indications. The premarket approval (PMA) application for the Company’s first rechargeable 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 first rechargeable 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 first rechargeable SNM system in the fourth quarter of 2019.

Beginning in February 2021 with the acquisition of Contura Limited, the Company also markets Bulkamid, a urethral bulking agent to treat female stress urinary incontinence (SUI). Beginning in March 2022 with the FDA approval of the Company’s long-lived, recharge-free F15 SNM implantable stimulator, the Company now markets and sells the F15 recharge-free system to customers in the United States in addition to the rechargeable SNM system. The new recharge-free SNM system and Bulkamid are protected by intellectual property based on Company-generated innovations or patents acquired as part of the Contura acquisition.

August 2022 Follow-On Offering

On August 5, 2022, the Company completed a follow-on offering by issuing 2,012,500 shares of common stock, at an offering price of $63.85 per share, inclusive of 262,500 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 $128.3 million, after deducting offering expenses payable by the Company.

Acquisition of in-process research & development (IPR&D) from Radian, LLC

In April 2023, the Company acquired the assets of Radian, LLC (the Seller), for total consideration of the issuance of 264,783 shares of common stock and a potential future milestone payment of up to $2.5 million (the Radian acquisition).

The Company evaluated this acquisition in accordance with Accounting Standards Codification (ASC) 805, Business Combinations, to determine whether the asset acquired met the definition of a business. Included in the IPR&D is the historical know-how, software, formula protocols, designs, and procedures expected to be needed to complete the technology asset and receive regulatory approval. The Company concluded that the IPR&D is an identifiable intangible asset that would be accounted for as a single asset in a business combination. The Company also qualitatively concluded that there is no fair value associated with any other assets included in the acquisition. Therefore, all of the consideration in the transaction was allocated to the IPR&D. As such, the Company concluded that substantially all of the fair value of the gross assets acquired was concentrated in the single IPR&D asset and the set was not a business.

The Company is planning to use the acquired IPR&D technology to provide a solution to make peripheral nerve evaluation lead placement easier, faster, and more accurate. Although the acquired technology may have utility in other medical procedures, future development decisions for the acquired technology will be contingent

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upon the receipt of required regulatory approvals. As such, the acquired technology does not have an alternative future use at the acquisition date. In accordance with ASC 730, Research and Development, the Company concluded the entire purchase price for the asset acquisition was an expense on the acquisition date.

The consideration transferred at closing had an acquisition date fair value of $15.4 million based on a per share value of $58.34 on the acquisition date and was recognized immediately as IPR&D expense in the unaudited condensed consolidated statements of comprehensive loss for the nine months ended September 30, 2023. The potential future milestone payment of $2.5 million, payable in either cash or shares of common stock, will become payable upon the Company receiving from the FDA 510(k) clearance for the acquired IPR&D technology.

Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Axonics Europe, S.A.S., Axonics Modulation Technologies U.K. Limited, Axonics Modulation Technologies Australia Pty Ltd, Axonics Women’s Health Limited, Bulkamid SARL, Axonics GmbH, and Contura, Inc. Intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation and Liquidity

Interim Financial Statements

The unaudited interim condensed consolidated financial statements and related footnote disclosures as of and for the three and nine months ended September 30, 2023 are unaudited, and are not necessarily indicative of the Company’s operating results for a full year. The unaudited interim condensed consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial results for the three and nine months ended September 30, 2023 in accordance with United States generally accepted accounting principles (GAAP), however, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the U.S. Securities and Exchange Commission (SEC) rules and regulations relating to interim financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included within the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (filed with the SEC on March 1, 2023).

Liquidity

The Company began full-scale commercialization of its first r-SNM System in late 2019. The Company has expended significant resources on research and development activities, growing its operations organization and building and training its sales organization.

The Company incurred net losses of $12.7 million and $60.4 million for the nine months ended September 30, 2023 and 2022, respectively, and had an accumulated deficit of $386.9 million as of September 30, 2023 compared to $374.3 million at December 31, 2022. The Company expects to continue to spend a significant amount of its existing resources on sales and marketing activities as the Company continues to invest in commercializing and marketing its products in the United States and internationally.

As of September 30, 2023, the Company had cash, cash equivalents, and short-term investments of $344.7 million compared to $357.2 million at December 31, 2022. The Company expects that its cash, cash equivalents, and short-term investments on hand will be sufficient to fund its operations through at least the next 12 months. The Company funds its operations through a combination of proceeds from public offerings of its common stock and cash receipts from sales of its products. As of September 30, 2023, the Company had no outstanding borrowings.

The Company may need to raise additional financing in the future to facilitate its business operations. If the Company raises additional funds by issuing equity securities, its stockholders could experience dilution. Debt financing, if available, may involve covenants further restricting its operations or its ability to incur additional debt. Any debt financing or additional equity that the Company raises may contain terms that are not favorable to the Company or its stockholders. Additional financing may not be available at all, or in amounts or on terms acceptable to the Company. If the Company is unable to obtain additional financing when needed to satisfy its liquidity requirements, the Company may be required to scale back its operations.

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Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses, and related disclosures of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of this evaluation then form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates, and such differences may be material to the consolidated financial statements. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets, the valuation of deferred income tax assets and liabilities, the valuation of contingent consideration liability, the valuation of stock-based compensation, the product returns reserve, the inventory obsolescence reserve and accounts receivable allowance for credit losses.

Revenue Recognition

Revenue recognized during the nine months ended September 30, 2023 and 2022 relates entirely to the sale of the Company’s products to its customers and distributors.

The Company has revenue arrangements that consist of a single performance obligation. The Company recognizes revenue at the point in time when it transfers control of promised goods to its customers. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods. The amount of revenue that is recognized is based on the transaction price, which represents the invoiced amount and includes estimates of variable consideration such as discounts, where applicable. The Company also sells to distributors and applies the same policies as its revenue arrangements with customers, specifically that revenue is recognized at the point in time when it transfers control of promised goods to its distributors. The Company does not offer rights of return or price protection. The amount of variable consideration included in the transaction price may be constrained and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Payment terms, typically less than three months, do not include a significant financing component. The Company extends credit to its customers and distributors based upon an evaluation of their financial condition and credit history and generally requires no collateral. The Company does not have any contract balances related to product sales. The Company also does not have significant contract acquisition costs related to product sales.

In accordance with Company policy and based on the Company’s historical experience, the allowance for product returns was $0.2 million and $0.2 million at September 30, 2023 and December 31, 2022, respectively, and is recorded as a reduction of gross revenue in its unaudited condensed consolidated statements of comprehensive loss. Damaged or defective products are replaced at no charge under the Company’s standard warranty. For the three and nine months ended September 30, 2023, the replacement costs were minimal and $0.1 million, respectively. For the three and nine months ended September 30, 2022, the replacement costs were minimal and $0.1 million, respectively. The replacement costs are recorded within the sales and marketing expenses in its unaudited condensed consolidated statements of comprehensive loss.

The Company offers its standard warranty to all customers. The Company does not sell any warranties on a standalone basis. The Company’s warranty provides that its products are free of material defects and conform to specifications, and includes an offer to repair, replace or refund the purchase price of defective products. This assurance does not constitute a service and is not considered a separate performance obligation. The Company estimates warranty liabilities at the time of revenue recognition and records it as a charge to sales and marketing expense. The warranty liability as of September 30, 2023 and December 31, 2022 was $0.1 million and $0.1 million, respectively.

Shipping and handling costs incurred for the delivery of goods to customers and distributors are included in cost of goods sold. Amounts billed to customers and distributors for shipping and handling are included in net revenue.

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The following table provides additional information pertaining to net revenue disaggregated by product and geographic market for the three and nine months ended September 30, 2023 and 2022 (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
SNM net revenue
United States			$	72,212					$	55,610					$	198,270					$	147,793
International markets			1,737						1,249						5,025						3,894
			$	73,949					$	56,859					$	203,295					$	151,687
Bulkamid net revenue
United States			$	15,579					$	11,045					$	41,998					$	27,837
International markets			3,572						2,480						11,351						8,260
			$	19,151					$	13,525					$	53,349					$	36,097
Total net revenue			$	93,100					$	70,384					$	256,644					$	187,784

Allowance for Credit Losses

The Company makes estimates of the collectability of accounts receivable in accordance with Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company’s estimate of future credit losses is made by management based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and reasonable forecasted economic trends. Despite the Company’s efforts to minimize credit risk exposure, customers could be adversely affected if future economic and industry trends change in such a manner as to negatively impact their cash flows. As a result, the Company’s future collection experience can differ significantly from historical collection trends. If the Company’s customers experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations and financial condition.

The following table summarizes the changes in our allowance for credit losses (in thousands):

			Nine Months Ended September 30,
			2023						2022
Balance at beginning of period			$	321					$	355
Write-offs			(12)						(74)
Bad debt expense			71						17
Balance at end of period			$	380					$	298

Cash and Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments purchased with a 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. The Company also holds cash in foreign banks that are not federally insured. The Company has not experienced any losses on its deposits of cash and cash equivalents.

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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.

Level 1 investments include U.S. government and agency securities, which are valued based on prices readily available in the active markets in which those securities are traded. Level 2 investments include commercial paper and corporate notes, which is valued on a recurring basis based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets.

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 unaudited condensed consolidated financial statements approximate the fair value for cash and cash equivalents, accounts receivable, and accounts payables, due to their short-term nature.

The purchase price of business acquisitions is primarily allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the excess recorded as goodwill.

The Company’s business combination of Contura Limited involved potential payment of future consideration that was contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. A liability was recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration was remeasured at each reporting period, and the change in fair value was recognized within operating expenses in the consolidated statements of comprehensive loss.

On February 25, 2021, the Company acquired Contura Limited and its Bulkamid product, a urethral bulking agent indicated for the treatment of female SUI. In consideration for the acquisition, the Company paid approximately $141.3 million in cash and issued 1,096,583 shares of our common stock. The agreement also provided that the Company may pay an additional $35 million in the event Bulkamid sales in any consecutive 12-month period exceed $50 million (the Milestone) before December 31, 2024, with payment due within 50 business days following the quarter in which the Milestone has been met.

At March 31, 2023, the Milestone has been met and payment was made during the three months ended June 30, 2023. The fair value of contingent consideration of $32.6 million at December 31, 2022, is reflected in other

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current liabilities in the Company’s unaudited condensed consolidated balance sheets.

The following table summarizes the changes in the fair value of recurring Level 3 fair value measurements during the nine months ended September 30, 2023 and 2022 (in thousands):

			Nine Months Ended September 30,
			2023						2022
Liabilities
Contingent consideration:
Balance at beginning of period			$	32,600					$	10,370
Change in fair value included in earnings (loss)			2,400						20,130
Payment made			(35,000)						—
Balance at end of period			$	—					$	30,500

There were no transfers between Levels 1, 2 or 3 for the periods presented.

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 balance sheet date are considered short-term investments. Those investments in debt securities with maturities greater than 12 months at the balance sheet date 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 (loss) within the unaudited condensed consolidated statements of comprehensive loss. There were no unrealized gains or losses during the three and nine months ended September 30, 2023 and 2022.

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 credit loss allowance 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, accretion and interest income are recognized when earned. Realized gains or losses are included in net loss and are derived using the specific identification method for determining the cost of securities sold.

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The following table presents the fair value hierarchy for those assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 (in thousands):

			Fair Value Measurements at September 30, 2023
Assets:			Level 1						Level 2						Level 3						Total
Commercial paper			$	—					$	140,371					$	—					$	140,371
Corporate notes			—						15,246						—						15,246
U.S. government and agency securities			121,307						—						—						121,307
			$	121,307					$	155,617					$	—					$	276,924

_____________________________________________

(1)    As of September 30, 2023, commercial paper investments of $79.5 million is included in cash and cash equivalents on the unaudited condensed consolidated balance sheets, as the investments had a maturity of three months or less from the date of purchase.

			Fair Value Measurements at December 31, 2022
Assets:			Level 1						Level 2						Level 3						Total
Commercial paper			$	—					$	175,548					$	—					$	175,548
Corporate notes			—						4,675						—						4,675
U.S. government and agency securities			75,212						—						—						75,212
			$	75,212					$	180,223					$	—					$	255,435

_____________________________________________

(1)    As of December 31, 2022, commercial paper investments of $131.1 million, U.S. government and agency securities of $4.0 million, and corporate notes of $2.0 million are included in cash and cash equivalents on the unaudited condensed consolidated balance sheets, as the investments had a maturity of three months or less from the date of purchase.

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The Company holds investments in marketable debt securities that are classified and accounted for as cash equivalents or available-for-sale and are remeasured on a recurring basis. All of the Company’s available-for-sale debt securities are classified on the unaudited condensed consolidated balance sheets as cash equivalents or short-term investments. The following table summarizes the Company’s cash equivalents and investments in available-for-sale debt securities by significant investment category as of September 30, 2023 and December 31, 2022 (in thousands):

			September 30, 2023
			Cost						Unrealized gains						Unrealized losses						Fair value
Cash equivalents:
Commercial paper			$	79,531					$	—					$	—					$	79,531
Corporate notes			—						—						—						—
U.S. government and agency securities			—						—						—						—
Total cash equivalents			$	79,531					$	—					$	—					$	79,531
Short-term investments:
Commercial paper			$	60,840					$	—					$	—					$	60,840
Corporate notes			15,267						2						(23)						15,246
U.S. government and agency securities			121,321						1						(15)						121,307
Total short-term investments			$	197,428					$	3					$	(38)					$	197,393
Total			$	276,959					$	3					$	(38)					$	276,924

			December 31, 2022
			Cost						Unrealized gains						Unrealized losses						Fair value
Cash equivalents:
Commercial paper			$	131,075					$	—					$	—					$	131,075
Corporate notes			2,013						—						—						2,013
U.S. government and agency securities			3,982						—						—						3,982
Total cash equivalents			$	137,070					$	—					$	—					$	137,070
Short-term investments:
Commercial paper			$	44,473					$	—					$	—					$	44,473
Corporate notes			2,664						—						(2)						2,662
U.S. government and agency securities			71,342						6						(118)						71,230
Total short-term investments			$	118,479					$	6					$	(120)					$	118,365
Total			$	255,549					$	6					$	(120)					$	255,435

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 expenses as incurred.

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Products that have been approved by certain regulatory authorities may also be used in clinical programs to assess the safety and efficacy of the products for usage that have not been approved by the FDA or other regulatory authorities. The form of product utilized for both commercial and certain clinical programs that are identical are included as inventory with an “alternative future use” as defined in authoritative guidance. Component materials and purchased products associated with clinical development programs are included in inventory and charged to research and development expenses 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 expenses 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 Company’s SNM systems is subject to strict quality control, certain batches or units of product may no longer meet quality specifications or may expire, which would require adjustments to the Company’s inventory values. The Company also applies judgment related to the results of quality tests that are performed throughout the production process, as well as the understanding of regulatory guidelines, to determine if it is probable that inventory will be saleable. These quality tests are performed throughout the pre- and post-production processes, and the Company continually gathers information regarding product quality for periods after the manufacturing date. The Company’s products currently have a maximum estimated shelf life range of 12 to 36 months and based on sales forecasts, the Company expects to realize the carrying value of the product inventory. In the future, reduced demand, quality issues, or excess supply beyond those anticipated by management may result in a material adjustment to inventory levels, which would be recorded as an increase to cost of sales.

The determination of whether inventory costs will be realizable or not requires estimates by the Company’s management. A critical input in this determination is future expected inventory requirements based on internal sales forecasts. Management then compares these requirements to the expiry dates of inventory on hand. To the extent that inventory is expected to expire prior to being sold, management will write down the value of inventory.

As of September 30, 2023, the Company had $45.1 million, $7.9 million and $21.9 million of finished goods inventory, work-in-process inventory and raw materials inventory, respectively, net of reserves of $0.7 million. As of December 31, 2022, the Company had $30.4 million, $5.7 million and $19.7 million of finished goods inventory, work-in-process inventory and raw materials inventory, respectively, net of reserves of $0.5 million.

Foreign Currency Translation

The functional currencies of the Company’s subsidiaries are currencies other than the U.S. dollar. The Company translates assets and liabilities of the foreign subsidiaries into U.S. dollars at the exchange rate in effect on the balance sheet date. Revenue and expenses of the subsidiaries are translated into U.S. dollars at the average exchange rate during the period. Gains or losses from these translation adjustments are reported as a separate component of stockholders’ equity in accumulated other comprehensive gain or loss until there is a sale or complete or substantially complete liquidation of the Company’s investment in the foreign subsidiary at which time the gains or losses will be realized and included in net income (loss). As of September 30, 2023 and December 31, 2022, all foreign currency translation gains (losses) have been unrealized and included in accumulated other comprehensive loss.

Customer and Vendor Concentration

As of September 30, 2023 and December 31, 2022, there were no customers who accounted for over 10% of the Company’s consolidated accounts receivable. As of September 30, 2023 and December 31, 2022, there were three vendors and one vendor, respectively, who accounted for over 10% of the Company’s consolidated accounts payable. During the three and nine months ended September 30, 2023 and 2022, there were no customers who accounted for over 10% of the Company’s consolidated net revenue. During the three and nine months ended September 30, 2023, there were three vendors and three vendors, respectively, who accounted for over 10% of the Company’s inventory-related purchases. During the three and nine months ended September 30, 2022, there were three vendors and three vendors, respectively, who accounted for over 10% of the Company’s inventory-related purchases.

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Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and seven years. Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the improvements. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations.

Goodwill

Goodwill represents the excess purchase price over the fair values of both tangible and intangible assets acquired less the liabilities assumed. Goodwill is tested for impairment at the reporting unit level by comparing the reporting unit’s carrying amount to the fair value of the reporting unit. The fair values are estimated using an income and discounted cash flow approach. The Company evaluates its goodwill on an annual basis in the fourth quarter or more frequently if it believes indicators of impairment exist. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount or performs an annual impairment test. When tested quantitatively, the Company compares the fair value of the applicable reporting unit with its carrying value. In making this assessment, management relies on a number of factors, including expected future operating results, business plans, economic projections, anticipated future cash flows, business trends and declines in the Company’s market capitalization. The Company estimates the fair value of its reporting unit using a combination of the discounted cash flow and income approaches. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the amount by which the carrying value exceeds the fair value is recognized as an impairment loss. During the nine months ended September 30, 2023 and 2022, the Company did not record any impairment charges related to goodwill.

Intangible Assets

Patent license asset

The intangible asset represents exclusive rights to an additional field-of-use on the patent suite within the License Agreement with AMF. The additional field-of-use was provided in exchange for 50,000 shares of Series A preferred stock, the fair value of which was $1.0 million in 2013. The intangible asset was recorded at its fair value of $1.0 million at the date contributed. In connection with the initial public offering, 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 asset has been fully amortized as of September 30, 2023. For additional information, see Note 7.

Exclusive license asset

The intangible asset represents exclusive rights to existing technologies and development services from Micro Systems Engineering, Inc. pursuant to an agreement entered into on March 2, 2021. The rights and services were provided in exchange for 65,594 shares of common stock, the fair value of which was $3.6 million upon transfer. The intangible asset was recorded at its fair value of $3.3 million at the date of the agreement, with the difference of $0.3 million recorded as a vendor credit in accounts payable in the unaudited condensed consolidated balance sheets. Amortization of this asset is recorded over the four-year term of the agreement on a straight-line basis. The Company recorded expense for the amortization of the exclusive license asset of $0.3 million and $0.7 million during the three and nine months ended September 30, 2023. The Company recorded expense for the amortization of the exclusive license asset of $0.3 million and $0.7 million during the three and nine months ended September 30, 2022. The Company will review the intangible asset for impairment whenever an impairment indicator exists. There have been no intangible asset impairment charges to date. For additional information, see Note 7.

Contura acquisition

The intangible assets represent technology, trade names and trademarks, and customer relationships acquired from Contura on February 25, 2021. The trade names and trademarks have an indefinite life. The straight-line method over the period of estimated benefit is used to amortize technology. ASC 350-30-35-3, General Intangibles other than Goodwill, states that customer relationships generally dissipate at a more rapid rate in the

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earlier periods following a company’s succession to these relationships, with the rate of attrition declining over time. As such, the accelerated method is used to amortize customer relationships. The Company recorded expense for the amortization of Contura acquisition intangible assets of $2.0 million and $6.1 million during the three and nine months ended September 30, 2023, respectively. The Company recorded expense for the amortization of Contura acquisition intangible assets of $2.1 million and $6.4 million during the three and nine months ended September 30, 2022, respectively. The Company reviewed the intangible assets for impairment for this asset group during the nine months ended September 30, 2023. As Bulkamid SARL ceased sales operations and did not recognize revenue during the year ended December 31, 2022, and does not expect to recognize revenue in future periods, the Company wrote off the customer relationships intangible asset of $0.3 million related to this entity during the year ended December 31, 2022. The impairment expense is recorded within the general and administrative expenses in its unaudited condensed consolidated statements of comprehensive loss. For additional information, see Note 7.

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 $0.3 million of impairments of long-lived assets to date.

Indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying amount may be impaired. Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted future cash flow analysis. There have been no impairments to indefinite-lived intangible assets during the nine months ended September 30, 2023.

Leases

In accordance with ASU 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 between operating and finance leases. The aforementioned bright lines are applied consistently to the Company’s entire portfolio of leases.

Operating lease right-of-use (ROU) assets 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 leases do 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 in similar economic environment, based on the information available at commencement date in determining the present value of future payments. The operating lease ROU assets also include 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.

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Research and Development

Research and development costs are charged to operations as incurred. Research and development costs include employee compensation, including stock-based compensation, product development, including testing and engineering, royalty expense, and clinical studies to develop and support the Company’s SNM systems, 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.

Advertising Expense

The Company expenses advertising costs as they are incurred. During the three and nine months ended September 30, 2023, advertising expense totaled $5.2 million and $13.6 million, respectively, and are recorded within the sales and marketing expenses in its unaudited condensed consolidated statements of comprehensive loss. During the three and nine months ended September 30, 2022, advertising expense totaled $6.0 million and $15.5 million, respectively, and are recorded within the sales and marketing expenses in its unaudited condensed 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 net deferred tax assets in certain jurisdictions. The realization of these deferred tax assets is dependent upon the Company’s ability to generate sufficient taxable income in future years. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company evaluates the recoverability of the deferred tax assets annually, and maintains a full valuation allowance on its U.S. net 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.

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 three or 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 three or 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 is 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. If such targets are not met or service is not rendered for the requisite service period, no compensation cost is recognized, and any recognized compensation cost in prior periods will be reversed. 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

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(as of the date of grant). Compensation cost is not adjusted if the market condition is not met, as long as the requisite service is provided.

Net Income (Loss) per Share of Common Stock

Basic net income (loss) per share of common stock is calculated by dividing the net income (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 income (loss) per share is computed by dividing the net income (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 income (loss) per share calculation, common stock options, unvested RSAs and RSUs are considered to be potentially dilutive securities. During the periods the Company has reported a net loss, 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 nine months ended September 30, 2023, there were 2,144,827 potentially dilutive weighted-average shares, respectively, that were not included in the computation of diluted weighted-average shares of common stock and common stock equivalent shares outstanding because their effect would have been antidilutive given the Company’s net loss. For the three and nine months ended September 30, 2022, there were 2,389,761 and 2,401,649 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.

Segment Reporting

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (CODM) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer. The Company has determined it operates in one segment, the development and commercialization of innovative and minimally invasive products to treat bladder and bowel dysfunction. Geographically, the Company sells over 90% of its products to customers in the United States. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.

Recent Accounting Pronouncements

We have reviewed and considered all recent accounting pronouncements that have not yet been adopted and believe there are none that could potentially have a material impact on our business practices, financial condition, results of operations, or disclosures.

Note 2. Property and Equipment, Net

Property and equipment, net consists of the following (in thousands) at:

			September 30,						December 31,
			2023						2022
Equipment			$	2,827					$	2,645
Computer hardware and software			3,463						3,282
Tools and molds			2,225						1,735
Leasehold improvements			4,449						4,449
Furniture and fixtures			1,876						1,810
Construction in progress			1,737						413
			16,577						14,334
Less: accumulated depreciation and amortization			(10,021)						(7,536)
			$	6,556					$	6,798

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Depreciation and amortization expense of property and equipment was $1.0 million and $2.5 million for the three and nine months ended September 30, 2023, respectively. Depreciation and amortization expense of property and equipment was $0.6 million and $1.7 million for the three and nine months ended September 30, 2022, respectively.

Note 3. Commitments and Contingencies

Operating Leases

In August 2014, the Company entered into a five-year operating lease for approximately 12,215 square feet of office space beginning on November 1, 2014, and expiring on October 31, 2019. In June 2019, the lease was amended to extend the expiration date to October 31, 2020. In September 2020, the lease was amended to extend the expiration date to July 31, 2022. In December 2021, the lease was amended to extend the expiration date to January 31, 2028, and in April 2023, the lease was amended to reduce the expiration date to March 31, 2024. Upon the execution of the amendments, which were deemed to be a lease modification, the Company reassessed the lease liability using the incremental borrowing rate for a collateralized asset of the same remaining term at the modification date and adjusted the carrying amount of ROU assets by the amount of the remeasurement of the liability. 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 entered into an operating lease for approximately 25,548 square feet of office space beginning on August 1, 2018, and expiring on October 31, 2027. In April 2023, the lease was amended to reduce the expiration date to December 31, 2024 and in September 2023, the lease was amended to extend the expiration date to July 1, 2025. Upon the execution of the amendment, which was deemed to be a lease modification, the Company reassessed the lease liability using the incremental borrowing rate for a collateralized asset of the same remaining term at the modification date and adjusted the carrying amount of ROU assets by the amount of the remeasurement of the liability. 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. 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. In April 2023, the lease was amended to reduce the expiration date to March 31, 2024 and in September 2023, the lease was amended to extend the expiration date to December 31, 2024. Upon the execution of the amendment, which was deemed to be a lease modification, the Company reassessed the lease liability using the incremental borrowing rate for a collateralized asset of the same remaining term at the modification date and adjusted the carrying amount of ROU assets by the amount of the remeasurement of the liability. The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease. The Company uses these premises as its new principal executive offices and for general office space. The Company is utilizing its other currently-leased spaces 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. The Company has a renewal option to extend the term of the lease for a period of five years beyond the initial term. Under the terms of the lease, the base rent payable with respect to each renewal term will be equal to the prevailing market rental rent as of the commencement of the applicable renewal term. In the event of a default of certain of the Company’s obligations under the lease, the Company’s landlord would have the right to terminate the lease.

In August 2020, the Company entered into a 38-month operating lease for approximately 5,693 square feet of warehouse space beginning on October 15, 2020 and expiring on December 31, 2023. In April 2023, the lease was amended to extend the expiration date to December 31, 2024 and in September 2023, the lease was amended to extend the expiration date to July 1, 2025. Upon the execution of the amendment, which was deemed to be a lease modification, the Company reassessed the lease liability using the incremental borrowing rate for a collateralized

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asset of the same remaining term at the modification date and adjusted the carrying amount of ROU assets by the amount of the remeasurement of the liability. The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease. The Company uses these premises for general warehouse space.

In March 2022, the Company entered into an 18-month operating lease for approximately 3,276 square feet of warehouse space beginning on July 1, 2022 and expiring on December 31, 2023. In April 2023, the lease was amended to extend the expiration date to December 31, 2024 and in September 2023, the lease was amended to extend the expiration date to July 1, 2025. Upon the execution of the amendment, which was deemed to be a lease modification, the Company reassessed the lease liability using the incremental borrowing rate for a collateralized asset of the same remaining term at the modification date and adjusted the carrying amount of ROU assets by the amount of the remeasurement of the liability. The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease. The Company uses these premises for general warehouse space.

In April 2023, the Company entered into a 120-month operating lease for approximately 145,960 square feet of office and warehouse space beginning on April 1, 2024 and expiring on March 31, 2034. The Company will use these premises as its new principal executive offices and for general office, manufacturing, and warehousing space. Under the terms of the lease, the Company is responsible for taxes, insurance, and maintenance expense. The lease contains certain scheduled rent increases. 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. The Company has not taken possession or has been given control of this leased property as of September 30, 2023. Therefore, the Company has not recorded any ROU assets or operating lease liabilities related to this lease.

During the three and nine months ended September 30, 2023, there were no ROU assets obtained in exchange for new operating lease liabilities. During the three and nine months ended September 30, 2022, ROU assets obtained in exchange for new operating lease liabilities were $0.1 million and $0.1 million, respectively. As of September 30, 2023 and December 31, 2022, the ROU assets had a balance of $1.2 million and $6.2 million, respectively. The operating lease ROU assets are included within the Company’s non-current other assets, and lease liabilities are included in current or noncurrent liabilities in the Company’s unaudited condensed consolidated balance sheets. During the three and nine months ended September 30, 2023, cash paid for amounts included in operating lease liabilities was $0.6 million and $1.6 million, respectively. During the three and nine months ended September 30, 2022, cash paid for amounts included in operating lease liabilities was $0.6 million and $1.6 million, respectively. Amortization of the ROU assets was $0.1 million and $0.5 million for the three and nine months ended September 30, 2023, respectively. Amortization of the ROU assets was $0.3 million and $0.8 million for the three and nine months ended September 30, 2022, respectively.

As of September 30, 2023 and December 31, 2022, the weighted-average remaining lease term for the Company’s operating leases was 1.5 years and 4.9 years, respectively. The weighted-average incremental borrowing rate for a collateralized asset of the same remaining term used to determine the present value of the Company’s operating leases’ future payments was 5.8% and 7.1%, respectively.

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Total lease costs for the three and nine months ended September 30, 2023 and 2022 are as follows (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Lease cost
Operating lease cost			$	528					$	542					$	1,616					$	1,590
Short-term lease cost			25						24						70						65
Variable lease cost			167						188						452						445
Amortization of net lease liabilities			(549)						(97)						(1,272)						(281)
Total lease cost			$	171					$	657					$	866					$	1,819

License Agreement

In October 2013, the Company entered into the License Agreement, pursuant to which AMF, a Company stockholder, licensed the Company certain patents and know-how (collectively, the AMF IP) relating to, in relevant part, an implantable pulse generator and related system components in development by AMF as of that date, in addition to any peripheral or auxiliary devices, including all components, that when assembled, comprise such device, excluding certain implantable pulse generators (collectively, the AMF Licensed Products). Under the License Agreement, for each calendar year beginning in 2018, the Company is obligated to pay AMF a royalty on an AMF Licensed Product-by-AMF Licensed Product basis if one of the following conditions applies: (i) one or more valid claims within any of the patents licensed to the Company by AMF covers such AMF Licensed Products or the manufacture of such AMF Licensed Products or (ii) for a period of 12 years from the first commercial sale anywhere in the world of such AMF Licensed Product, in each case. The foregoing royalty is calculated as the greater of (a) 4% of all net revenue derived from the AMF Licensed Products, and (b) the Minimum Royalty, payable quarterly. The Minimum Royalty automatically increases each year after 2018, subject to a maximum amount of $200,000 per year. The Company recorded related royalties of $0.6 million and $1.7 million during the three and nine months ended September 30, 2023, respectively. The Company recorded related royalties of $0.6 million and $2.8 million during the three and nine months ended September 30, 2022, respectively. Royalty expense is included in operating expenses in the unaudited condensed consolidated statements of comprehensive loss. Accrued royalties of $0.6 million and $0.6 million as of September 30, 2023 and December 31, 2022, respectively, are included within accrued liabilities in the Company’s unaudited condensed consolidated balance sheets. Royalty expense is declining because the Company’s F15 recharge-free SNM device is not covered by any AMF patents licensed to the Company and is therefore not an AMF Licensed Product that requires the payment of a royalty to AMF. For additional information, see Legal Matters section below.

Legal Matters

The Company may, from time to time, become a party to legal proceedings. Such matters are subject to many uncertainties and to outcomes of which the financial impacts are not predictable with assurance and that may not be known for extended periods of time. When management has assessed that a loss is probable and an amount can be reasonably estimated, the Company records a liability.

On November 4, 2019, Medtronic, Inc., Medtronic Puerto Rico Operations Co., Medtronic Logistics LLC and Medtronic USA, Inc. (collectively, the Medtronic Affiliates) filed a complaint against the Company in the U.S. District Court for the Central District of California, Case No. 8:19-cv-2115, and amended the complaint on November 26, 2019. The Company refers to this matter as the Medtronic Litigation. The complaint asserts that the Company’s rechargeable 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

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Company believes the allegations are without merit and is vigorously defending itself against them. 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. The Federal Circuit recently reversed the decision of the Patent Trials & Appeals Board of the U.S. Patent & Trademark Office (PTAB) that the tined leads patents asserted against Axonics were valid, finding that the PTAB committed legal error in its analysis. The Federal Circuit remanded the matter to the PTAB for another review consistent with its opinion. Because of this development, the Court has issued a stay on the litigation proceedings, pending the outcome of the proceedings before the PTAB. As a result, the jury trial previously scheduled for August 2023 has been postponed. The Federal Circuit also recently vacated the decision of the PTAB that certain claims of Patent Nos. 8,738,148 and 8,457,758 had not been shown to be invalid and the Federal Circuit remanded these matters for further proceedings for before the PTAB.

On September 18, 2023, the Company commenced an arbitration against AMF with JAMS seeking, among other things, resolution that AMF’s purported attempt to terminate the License Agreement, dated October 1, 2013, was ineffective and that the Company does not owe any royalties to AMF for the Company’s F15 product and did not breach by not paying royalties on its F15 product. AMF responded to the arbitration demand and asserted multiple claims. On October 5, 2023, the Company and AMF entered into an interim agreement while the arbitration proceedings are pending. Pursuant to this interim agreement, the Company agreed to deposit into an escrow account an amount equal to 4% of the net revenues previously received for sales of the Company’s F15 product that are the subject of dispute, which the Company has determined is approximately $13 million from January 1, 2022 through September 30, 2023, with interest, and will continue to deposit the disputed 4% of net revenues of the Company’s F15 product with interest into the escrow account during the pendency of the arbitration proceedings. The Company has paid and, under this interim agreement, will continue to pay 4% royalties on rechargeable products. While the Company believes that AMF’s claims are without merit and intends to vigorously defend against those claims, there can be no assurance as to the outcome of the arbitration.

In addition to the matters described above, the Company is and may continue to be involved in claims, legal proceedings, and investigations arising out of its operations in the normal course of business.

Note 4. Stock-Based Compensation

Stock-based compensation expense included in the Company’s unaudited condensed consolidated statements of comprehensive loss is allocated as follows (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Research and development			$	2,344					$	1,734					$	6,962					$	4,996
General and administrative			3,291						2,052						9,176						5,980
Sales and marketing			5,835						4,432						17,250						12,285
			$	11,470					$	8,218					$	33,388					$	23,261

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Stock Option Activity

The option awards issued under the 2014 Stock Option Plan (the 2014 Plan) and the 2018 Omnibus Incentive Plan (the 2018 Plan) were measured based on fair value. The Company 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. There were no stock option grants for the three and nine months ended September 30, 2023 and 2022.

As of September 30, 2023 and December 31, 2022, there was $0.3 million and $1.8 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 0.8 years and 1.0 year, respectively.

The following table summarizes stock option activity for the nine months ended September 30, 2023 under the 2014 and 2018 Plans (in thousands, except share and per share data):

			Number of Options						Weighted-Average Exercise Price Per Share						Aggregate Intrinsic Value
Outstanding at December 31, 2022			1,046,610						$	18.81
Options exercised			(193,819)						18.94						$	8,116		(1)
Options forfeited			(6,283)						31.99
Outstanding at September 30, 2023			846,508						$	18.68					$	31,792		(2)

_____________________________________________

(1)    Represents the total difference between the Company’s closing stock price at the time of exercise and the stock option exercise price, multiplied by the number of options exercised.

(2)    Represents the total difference between the Company’s closing stock price on the last trading day of the third quarter of 2023 and the stock option exercise price, multiplied by the number of in-the-money options as of September 30, 2023. 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 was 5.4 years and 6.1 years at September 30, 2023 and December 31, 2022, respectively.

Restricted Shares Awards Activity

As of September 30, 2023 and December 31, 2022, there was $57.8 million and $54.0 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 2.1 years and 2.3 years, respectively.

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The following table summarizes restricted shares awards activity for the nine months ended September 30, 2023:

			Number of Restricted Shares Awards						Weighted-Average Fair Value Per Share at Grant Date
Outstanding at December 31, 2022			1,320,866						$	52.23
Restricted shares awards granted			544,391						57.56
Restricted shares awards vested			(462,713)						48.15
Restricted shares awards forfeited			(96,485)						54.80
Outstanding at September 30, 2023			1,306,059						$	55.71

Restricted Stock Units Activity

As of September 30, 2023 and December 31, 2022, there was $6.7 million and $1.3 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 0.8 years, respectively.

The following table summarizes restricted stock units activity for the nine months ended September 30, 2023:

			Number of Restricted Stock Units						Weighted-Average Fair Value Per Share at Grant Date
Outstanding at December 31, 2022			183,418						$	48.74
Restricted stock units granted			286,750						65.44
Restricted stock units vested			(215,968)						50.71
Restricted stock units forfeited			(23,500)						75.07
Outstanding at September 30, 2023			230,700						$	70.20

Note 5. Income Taxes

The following table presents details of the provision for income taxes and effective tax rates (in thousands, except percentages):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Income tax benefit			$(427)						$(520)						$(1,538)						$(2,096)
Effective tax rate			(12.20)%						3.10%						10.83%						3.36%

The Company periodically evaluates whether a portion or all of its deferred tax assets will be recovered. The Company records a valuation allowance against deferred tax assets if and to the extent it is more likely than not that they will not be recovered. In evaluating the need for a valuation allowance, the Company weighs all relevant positive and negative evidence, including among other factors, historical financial performance, forecasts of income over the applicable carryforward periods, and the market environment, with each consideration weighted based on its reliability. The Company continues to maintain a full valuation allowance against its otherwise recognizable U.S. net deferred income tax assets as of September 30, 2023 and December 31, 2022.

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The effective tax rate differs from the statutory U.S. income tax rate due to differing tax rates imposed on income earned in foreign jurisdictions, losses in foreign jurisdictions, and certain nondeductible expenses. The effective tax rate could change significantly from quarter to quarter because of recurring and nonrecurring factors. The provision for income taxes for the nine months ended September 30, 2023 was primarily the result of losses benefited in certain foreign jurisdictions.

At December 31, 2022, the Company had U.S. federal and foreign net operating loss (NOL) carryforwards of approximately $270.3 million and $9.6 million, respectively. U.S. federal NOLs in the amount of $51.5 million will expire between 2033 and 2037 while the remainder will carryover indefinitely. The foreign net operating loss carryforwards have an indefinite carryforward period. The Company had U.S. state NOLs of $254.6 million, which will expire between 2033 and 2042. Interest and penalties related to income tax matters are recorded in income tax expense (benefit) in the condensed consolidated statements of comprehensive loss and the related liability is recorded in accrued liabilities in the condensed consolidated balance sheets, as applicable.

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 of the net operating loss carryforwards was offset by valuation allowance, and there was no impact to tax expense related to the limitation. Based on the study performed in 2022 and 2021, the Company determined that an ownership change did not occur in 2022 and 2021. Future ownership changes could impact the Company’s ability to utilize NOL carryforwards.

Note 6. 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 U.S. employees who meet minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre- or post-tax basis. Contributions to the plan by the Company may be made at the discretion of the board of directors. During the three and nine months ended September 30, 2023, the Company contributions to the plan amounted to $0.7 million and $1.9 million, respectively. During the three and nine months ended September 30, 2022, the Company contributions to the plan amounted to $0.5 million and $1.5 million, respectively.

Note 7. Goodwill and Intangible Assets

The change in the carrying amount of goodwill during the nine months ended September 30, 2023 included the following (in thousands):

December 31, 2022			$	94,414
Foreign currency translation adjustment			873
September 30, 2023			$	95,287

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Intangible assets as of September 30, 2023 included the following (in thousands):

									September 30, 2023
			Weighted-Average Amortization Period						Gross Carrying Amount						Accumulated Amortization						Impairment						Foreign currency translation adjustment						Intangible Assets, Net
Patent license asset			8.71 years						$	1,000					$	(1,000)					$	—					$	—					$	—
Exclusive license asset			4 years						3,300						(2,200)						—						—						1,100
Technology			12 years						81,100						(17,557)						—						(8,514)						55,029
Trade names and trademarks			Indefinite						19,700						—						—						(2,239)						17,461
Customer relationships			12 years						11,400						(3,475)						(287)						(954)						6,684
									$	116,500					$	(24,232)					$	(287)					$	(11,707)					$	80,274

Intangible assets as of December 31, 2022 included the following (in thousands):

									December 31, 2022
			Weighted-Average Amortization Period						Gross Carrying Amount						Accumulated Amortization						Impairment						Foreign currency translation adjustment						Intangible Asset, Net
Patent license asset			8.71 years						$	1,000					$	(1,000)					$	—					$	—					$	—
Exclusive license asset			4 years						3,300						(1,540)						—						—						1,760
Technology			12 years						81,100						(12,496)						—						(9,141)						59,463
Trade names and trademarks			Indefinite						19,700						—						—						(2,398)						17,302
Customer relationships			12 years						11,400						(2,393)						(287)						(992)						7,728
									$	116,500					$	(17,429)					$	(287)					$	(12,531)					$	86,253

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 ended December 31, 2022, as filed with the SEC on March 1, 2023.

Overview

We are a global medical technology company that is developing and commercializing novel products for adults with bladder and bowel dysfunction, including: (i) implantable rechargeable 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).

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SNM Systems

Our newly developed recharge-free SNM system, Axonics F15, received FDA approval in March 2022 and utilizes a primary cell battery with an expected life of 15 years at typical stimulation parameters and over 20 years at lower amplitude settings and offers broad MRI access with 1.5T and 3.0T scanners. The recharge-free implantable neurostimulator (INS) is approximately 10cc in volume, utilizes constant current stimulation, an easy-to-use, intuitive recharge-free patient remote control and other related accessories.

Our newly developed fourth-generation rechargeable SNM system, Axonics R20, is only 5cc in volume and is designed to last 20 or more years in the human body. R20 provides constant current stimulation and offers broad MRI access with 1.5T and 3.0T scanners. R20 utilizes an easy-to-use, intuitive patient remote control and requires recharging for only one hour every 6 to 10 months, which is the longest interval between recharging among rechargeable SNM systems. The R20 received FDA approval in January 2023 and replaces the previous rechargeable SNM system offered by Axonics that was the first to be marketed worldwide.

We began U.S. commercialization in the middle of the fourth quarter of 2019 after receiving FDA premarket approval (PMA) of our first rechargeable SNM system. We also have marketing approvals from regulators in Europe, Canada, and Australia for certain SNM systems for most relevant clinical indications.

SNM therapy has been commercially available in the United States for over 25 years and has been clinically proven to provide a safe, effective, reversible, and long-lasting symptom relief. We believe that our SNM systems offer therapeutic benefits and competitive advantages compared to the InterStim SNM systems offered by Medtronic.

We engineered our SNM systems 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 believe provides a more consistent therapy over time and reduces management of the therapy. Our SNM systems include an easy-to-use wireless patient remote control that does not require recharging or replacement batteries. We also designed and custom built a clinician programmer that guides the implanting physician through lead placement and stimulation programming.

We focus most of our sales and marketing efforts in the United States where reimbursement for SNM therapy is well-established and covered by the vast majority of major U.S. insurers and Medicare.

Urethral Bulking Agent

On February 25, 2021, we acquired Contura Limited (Contura) and its Bulkamid product, a urethral bulking hydrogel indicated for the treatment of female SUI.

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.

Bulkamid received a Conformité Européenne (CE) Mark in 2003 and a PMA from the FDA in 2020 and is sold through a combination of a direct sales force in the United States, Germany, United Kingdom, and the Nordic countries and distributors in certain international markets.

As a next-generation bulking agent, we believe Bulkamid addresses the shortcomings of legacy 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, quick, and easy-to-learn and perform procedure that can be performed 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 by the volume of each injection being 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 clinically validated and generates high rates of patient satisfaction.

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Our Markets

The market for SNM therapy is large and growing and highly underpenetrated, with approximately 19 million women in the United States having moderate to severe UUI or mixed urinary incontinence (MUI) symptoms, which is urinary incontinence related to both urgency and stress. Before treating patients with a third-line therapy such as SNM, physicians are required to prescribe first- and second-line therapies. First-line therapies include behavioral changes such as diet and exercise, and second-line therapies include drug therapy. We believe the SNM market will continue to expand for the foreseeable future driven by increased awareness and education of SNM therapy, greater expectations for quality of life, and improved patient attitudes toward receiving medical attention. In addition, market growth is anticipated due to continued innovation and the introduction of new efficacious and long-lived products for SNM therapy. We believe that this represents a compelling opportunity for our SNM systems to capture market share and grow the market for SNM therapy.

The market for SUI therapy is highly underpenetrated, with approximately 22 million women in the United States having moderate to severe SUI or MUI symptoms. 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 colposuspension. We estimate that of the women who have sought medical treatment, most were offered conservative therapy or opted for no treatment due to a lack of non-invasive treatment options with high efficacy.

While we anticipate expanding into other geographic regions over time, we are primarily focusing on marketing our products in the United States and Europe due to the large overall market size.

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. 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 SNM systems.

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Components of Our Results of Operations

Net Revenue

Revenue during the three and nine months ended September 30, 2023 and 2022 are as follows (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
SNM net revenue
United States			$	72,212					$	55,610					$	198,270					$	147,793
International markets			1,737						1,249						5,025						3,894
			$	73,949					$	56,859					$	203,295					$	151,687
Bulkamid net revenue
United States			$	15,579					$	11,045					$	41,998					$	27,837
International markets			3,572						2,480						11,351						8,260
			$	19,151					$	13,525					$	53,349					$	36,097
Total net revenue			$	93,100					$	70,384					$	256,644					$	187,784

We expect our revenue to fluctuate from quarter to quarter due to a variety of factors, including seasonality. For example, the industry generally experiences lower revenues in the first and third quarters of the year and higher revenues in the fourth quarter. Our revenue has been impacted by these industry trends.

Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of costs of the components of our SNM systems, 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 net 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 net revenue grows. We expect gross margin to vary based on manufacturing costs, regional differences in pricing, and discounts negotiated by customers.

We calculate gross margin as gross profit divided by net 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 SNM systems are introduced, and to a lesser extent, the sales mix between the United States and international markets as our average selling price in the United States is expected to be higher than in international markets 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 as we continue to introduce new products and adopt new manufacturing processes and technologies.

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 SNM systems, 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 new products and expand to new markets. We expect research and development expenses as a percentage of net revenue

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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 and nine months ended September 30, 2023 and 2022 (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Personnel related			$	5,642					$	4,479					$	17,031					$	13,638
Clinical development			336						333						713						871
Contract R&D and manufacturing			1,396						2,328						4,882						8,220
Royalty expense			649						541						1,741						2,776
Other R&D expenses			144						255						805						802
Total R&D expenses			$	8,167					$	7,936					$	25,172					$	26,307

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, travel expenses, and impairment 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. Additionally, we anticipate increased legal expenses associated with our patent infringement litigation with Medtronic and the arbitration with the Alfred Mann Foundation (“AMF”). We expect general and administrative expenses to decrease as a percentage of net revenue primarily as, and to the extent, our net revenue grows.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of employee compensation, including sales personnel commissions and stock-based compensation, direct-to-consumer advertising programs, 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 continue to expand our commercial infrastructure to both drive and support our expected growth in net revenue. However, we expect sales and marketing expenses to decrease as a percentage of net revenue in the long term primarily as, and to the extent, our net 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 intangible assets. We amortize finite lived intangible assets over the period of estimated benefit using the straight-line method.

Acquisition-Related Costs

Acquisition-related costs consist of expenses incurred and changes in contingent consideration related to the Contura acquisition.

Acquired In-Process Research & Development

Acquired in-process research & development consist of expenses incurred related to the Radian acquisition.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest and accretion income earned on cash equivalents and short-term investments, and gains and losses on foreign currency transactions.

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Income Tax Expense (Benefit)

Income tax expense (benefit) primarily consists of losses benefited 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 nine months ended September 30, 2023 and 2022 (in thousands, except percentages):

			Three Months Ended September 30,												Period to Period Change						Nine Months Ended September 30,												Period to Period Change
			2023						2022												2023						2022
Net revenue			$	93,100					$	70,384					$	22,716					$	256,644					$	187,784					$	68,860
Cost of goods sold			23,996						19,124						4,872						64,850						53,086						11,764
Gross profit			69,104						51,260						17,844						191,794						134,698						57,096
Gross Margin			74.2		%				72.8		%										74.7		%				71.7		%
Operating expenses
Research and development			8,167						7,936						231						25,172						26,307						(1,135)
General and administrative			11,778						9,389						2,389						34,659						29,974						4,685
Sales and marketing			47,544						39,751						7,793						134,468						112,195						22,273
Amortization of intangible assets			2,302						2,317						(15)						6,803						7,112						(309)
Acquisition-related costs			—						8,242						(8,242)						2,368						20,447						(18,079)
Acquired in-process research & development			—						—						—						15,447						—						15,447
Total operating expenses			69,791						67,635						2,156						218,917						196,035						22,882
Loss from operations			(687)						(16,375)						15,688						(27,123)						(61,337)						34,214
Other income (expense)
Interest and other income			4,271						1,501						2,770						12,149						1,904						10,245
Interest and other expense			(83)						(1,898)						1,815						774						(3,026)						3,800
Other income (expense), net			4,188						(397)						4,585						12,923						(1,122)						14,045
Income (loss) before income tax benefit			3,501						(16,772)						20,273						(14,200)						(62,459)						48,259
Income tax benefit			(427)						(520)						93						(1,538)						(2,096)						558
Net income (loss)			3,928						(16,252)						20,180						(12,662)						(60,363)						47,701
Foreign currency translation adjustment			(6,185)						(12,057)						5,872						636						(29,625)						30,261
Comprehensive loss			$	(2,257)					$	(28,309)					$	26,052					$	(12,026)					$	(89,988)					$	77,962

 

Comparison of the Three Months Ended September 30, 2023 and 2022

Net Revenue

Net revenue was $93.1 million for the three months ended September 30, 2023, an increase of $22.7 million, or 32.3%, compared to $70.4 million for the three months ended September 30, 2022. Net revenue is primarily derived from the sale of our products to customers in the United States and certain international markets. The increase in net revenue is primarily due to increased sales of our products to new customers in the U.S. and increased sales to our existing customer base. Our expanded SNM product offering and the acquisition of the Bulkamid product in February 2021 have significantly contributed to our expansion of customers and more patients being treated by our existing customers.

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Cost of Goods Sold and Gross Margin

We incurred $24.0 million of cost of goods sold for the three months ended September 30, 2023. We incurred $19.1 million of cost of goods sold for the three months ended September 30, 2022. Gross margin was 74.2% in the three months ended September 30, 2023, compared to 72.8% for the three months ended September 30, 2022. The increase in gross margin is primarily due to higher sales volumes and product mix.

Research and Development Expenses

Research and development expenses increased $0.2 million, or 2.9%, to $8.2 million in the three months ended September 30, 2023, compared to $7.9 million in the three months ended September 30, 2022. The increase in research and development expenses was primarily attributable to an increase of $1.2 million in personnel costs including salaries and wages, stock-based compensation and other employee-related benefits, partially offset by a decrease of $0.9 million in contract R&D and manufacturing costs.

General and Administrative Expenses

General and administrative expenses increased $2.4 million, or 25.5%, to $11.8 million in the three months ended September 30, 2023, compared to $9.4 million in the three months ended September 30, 2022, primarily as a result of an increase of $2.2 million in personnel costs including salaries and wages, stock-based compensation and other employee-related benefits.

Sales and Marketing Expenses

Sales and marketing expenses increased $7.8 million, or 19.6%, to $47.5 million in the three months ended September 30, 2023, compared to $39.8 million in the three months ended September 30, 2022. The increase in sales and marketing expenses was primarily as a result of an increase of $7.0 million related to personnel costs including salaries, wages, sales personnel commissions, stock-based compensation and other employee-related benefits, and an increase of $0.9 million in travel expenses.

Amortization of Intangible Assets

Amortization of intangible assets was $2.3 million in the three months ended September 30, 2023, compared to $2.3 million in the three months ended September 30, 2022. Amortization of intangible assets consisted primarily of technology and customer relationships acquired related to the Contura acquisition.

Acquisition-Related Costs

We recorded no acquisition-related costs in the three months ended September 30, 2023. Acquisition-related costs were $8.2 million in the three months ended September 30, 2022, which related to the change in fair value of contingent consideration.

Acquired In-Process Research & Development

We recorded no acquired in-process research & development costs in the three months ended September 30, 2023 and 2022.

Other Income (Expense), Net

Other income, net was $4.2 million in the three months ended September 30, 2023 consisting primarily of interest income on cash equivalents and short-term investments. Other expense, net was $0.4 million in the three months ended September 30, 2022 consisting primarily of losses on foreign currency transactions, partially offset by interest income on cash equivalents and short-term investments.

Income Tax Benefit

Income tax benefit was $0.4 million for the three months ended September 30, 2023 primarily related to losses in certain foreign jurisdictions. Income tax benefit was $0.5 million for the three months ended September 30, 2022 primarily related to losses in certain foreign jurisdictions.

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Comparison of the Nine Months Ended September 30, 2023 and 2022

Net Revenue

Net revenue was $256.6 million for the nine months ended September 30, 2023, an increase of $68.9 million, or 36.7%, compared to $187.8 million for the nine months ended September 30, 2022. Net revenue is primarily derived from the sale of our products to customers in the United States and certain international markets. The increase in net revenue is primarily due to increased sales of our products to new customers in the U.S. and increased sales to our existing customer base. Our expanded SNM product offering and the acquisition of the Bulkamid product in February 2021 have significantly contributed to our expansion of customers and more patients being treated by our existing customers.

Cost of Goods Sold and Gross Margin

We incurred $64.9 million of cost of goods sold for the nine months ended September 30, 2023. We incurred $53.1 million of cost of goods sold for the nine months ended September 30, 2022. Gross margin was 74.7% in the nine months ended September 30, 2023, compared to 71.7% for the nine months ended September 30, 2022. The increase in gross margin is primarily due to higher sales volumes and product mix.

Research and Development Expenses

Research and development expenses decreased $1.1 million, or 4.3%, to $25.2 million in the nine months ended September 30, 2023, compared to $26.3 million in the nine months ended September 30, 2022. The decrease in research and development expenses was primarily attributable to a decrease of $3.6 million in contract R&D and manufacturing costs, a decrease of $1.0 million in royalty expense due to lower net revenue derived from the AMF Licensed Products, partially offset by an increase of $3.6 million related to personnel costs including salaries, wages, sales personnel commissions, stock-based compensation and other employee-related benefits.

General and Administrative Expenses

General and administrative expenses increased $4.7 million, or 15.6%, to $34.7 million in the nine months ended September 30, 2023, compared to $30.0 million in the nine months ended September 30, 2022, primarily as a result of an increase of $5.1 million in personnel costs including salaries and wages, stock-based compensation and other employee-related benefits, partially offset by a decrease of $0.7 million in legal fees.

Sales and Marketing Expenses

Sales and marketing expenses increased $22.3 million, or 19.9%, to $134.5 million in the nine months ended September 30, 2023, compared to $112.2 million in the nine months ended September 30, 2022. The increase in sales and marketing expenses was attributed to an increase of $21.0 million related to personnel costs including salaries, wages, sales personnel commissions, stock-based compensation and other employee-related benefits.

Amortization of Intangible Assets

Amortization of intangible assets was $6.8 million in the nine months ended September 30, 2023, compared to $7.1 million in the nine months ended September 30, 2022. Amortization of intangible assets consisted primarily of technology and customer relationships acquired related to the Contura acquisition.

Acquisition-Related Costs

Acquisition-related costs were $2.4 million and $20.4 million in the nine months ended September 30, 2023 and 2022, respectively, which related to the change in fair value of contingent consideration.

Acquired In-Process Research & Development

Acquired in-process research & development was $15.4 million for the nine months ended September 30, 2023 which related to the Radian acquisition. We recorded no acquired in-process research & development in the nine months ended September 30, 2022.

Other Income (Expense), Net

Other income, net was $12.9 million in the nine months ended September 30, 2023 consisting primarily of interest income on cash equivalents and short-term investments. Other expense, net was $1.1 million in the nine

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months ended September 30, 2022 consisting primarily of losses on foreign currency transactions, partially offset by interest income on cash equivalents and short-term investments.

Income Tax Benefit

Income tax benefit was $1.5 million for the nine months ended September 30, 2023 primarily related to losses in certain foreign jurisdictions. Income tax benefit was $2.1 million for the nine months ended September 30, 2022 primarily related to losses in certain foreign jurisdictions.

Liquidity and Capital Resources

We only began full-scale commercialization of our first rechargeable 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 spend a significant amount of our resources on sales and marketing activities to commercialize and market our line of SNM systems in the United States.

We incurred net losses of $12.7 million and $60.4 million for the nine months ended September 30, 2023 and 2022, respectively, and had an accumulated deficit of $386.9 million as of September 30, 2023 compared to $374.3 million at December 31, 2022. 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, 2023, we had cash, cash equivalents, and short-term investments of $344.7 million compared to $357.2 million at December 31, 2022. 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 and cash receipts from sales of our products. As of September 30, 2023, we had no outstanding borrowings.

Beyond the next 12 months, our cash requirements will depend primarily on the amount of continued cash receipts from sales of our products, as well as our ability to develop or acquire new products, enter new markets, and compete effectively. We cannot accurately predict our long-term cash requirements at this time. 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.

Contractual Obligations and Cash Requirements

There have been no material changes to our contractual obligations or material cash requirements from those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Cash Flows

The following table presents a summary of our cash flow for the periods indicated (in thousands):

			Nine Months Ended September 30,
			2023						2022
Net cash provided by (used in)
Operating activities			$	(7,646)					$	(6,162)
Investing activities			(78,982)						(110,324)
Financing activities			(3,958)						133,807
Effect of exchange rate changes on cash and cash equivalents			(937)						3,132
Net (decrease) increase in cash and cash equivalents			$	(91,523)					$	20,453

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Net cash used in operating activities

Net cash used in operating activities was $7.6 million for the nine months ended September 30, 2023 and consisted primarily of a net loss of $12.7 million and a decrease from changes in net operating assets of $52.8 million, partially offset by non-cash charges of $57.9 million. Net operating assets consisted primarily of inventory and accounts receivable due to the commercial growth in the United States. Non-cash charges consisted primarily of stock-based compensation and acquired in-process research & development.

Net cash used in operating activities was $6.2 million for the nine months ended September 30, 2022 and consisted primarily of a net loss of $60.4 million, partially offset by non-cash charges of $50.5 million and an increase from changes in net operating assets of $3.7 million. Net operating assets consisted primarily of inventory and accounts receivable due to the commercial growth of our r-SNM System in the United States and the addition of Bulkamid sales. Non-cash charges consisted primarily of stock-based compensation and change in fair value of contingent consideration.

Net cash used in investing activities

Net cash used in investing activities was $79.0 million for the nine months ended September 30, 2023 and consisted of purchases of short-term investments and property and equipment, partially offset by sales and maturities of short-term investments.

Net cash used in investing activities was $110.3 million for the nine months ended September 30, 2022 and consisted of purchases of short-term investments, partially offset by sales and maturities of short-term investments.

Net cash (used in) provided by financing activities

Net cash used in financing activities was $4.0 million for the nine months ended September 30, 2023 and consisted primarily of payment of contingent consideration recognized at acquisition, partially offset by proceeds from exercise of stock options.

Net cash provided by financing activities was $133.8 million for the nine months ended September 30, 2022 and consisted primarily of $128.3 million in net proceeds received in the August 2022 follow-on offering and proceeds from exercise of stock options.

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 ended December 31, 2022, as filed with the SEC on March 1, 2023. 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 ended September 30, 2023.

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 unaudited condensed consolidated financial statements or do not otherwise apply to our operations.

Item 3.    Quantitative and Qualitative Disclosures 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, cash equivalents, and short-term investments of $344.7 million as of September 30, 2023, which came from public offerings of our common stock and cash receipts from our product sales. 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-

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term investments. 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.

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 not effective as of September 30, 2023 due to the material weakness in internal control over financial reporting, as described below.

Material Weakness in Internal Control Over Financial Reporting

Management’s assessment of our internal control over financial reporting as of December 31, 2022 identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We did not maintain appropriately designed information technology general controls in the areas of user access and segregation of duties related to certain information technology systems that support our financial reporting process, including certain controls within inventory and revenue. Additionally, certain manual controls within inventory and revenue that are dependent upon the information derived from the information technology systems are also determined to be ineffective.

Notwithstanding such material weakness in internal control over financial reporting, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that our consolidated financial

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statements present fairly, in all material respects, our financial position, results of our operations and our cash flows for the periods presented in this Quarterly Report, in conformity with GAAP.

Remediation Plan

We have identified steps, as further described below, to remediate the material weakness described in this Item 4 and to enhance our overall control environment. We are committed to ensuring that our internal control over financial reporting are designed and operating effectively. Our remediation process includes, but is not limited to:

•Conducting a comprehensive review and assessment of internal control over financial reporting to include the design of general information technology controls in the area of user access provisioning and monitoring controls to enforce appropriate system access and segregation of duties for systems supporting our internal controls processes and financial reporting; and

•Designing and implementing controls that address the completeness and accuracy of underlying data used in the performance of certain manual controls over accounting transactions and disclosures within revenue and inventory.

We believe that the remediation plan will remediate the material weakness in our internal control over financial reporting surrounding the design of information technology general controls in the areas of user access and segregation of duties related to certain information technology systems that support our financial reporting process. The weakness will not be considered remediated, however, until the applicable controls operate and management has concluded, through testing, that these controls are operating effectively.

As we continue to evaluate and test the remediation plan outlined above, we may also identify additional measures to address the material weakness or modify certain of the remediation procedures described above. We will continue to take steps necessary to remedy the material weakness to reinforce the overall design and capability of our control environment.

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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings.

There have been no material developments in the litigation matters disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 1, 2023, during the quarter ended September 30, 2023, except as follows:

Arbitration with Alfred Mann Foundation

On September 18, 2023, we commenced an arbitration against AMF with JAMS seeking, among other things, resolution that AMF’s purported attempt to terminate the License Agreement, dated October 1, 2013, was ineffective and that we do not owe any royalties to AMF for our F15 product and did not breach by not paying royalties on our F15 product. AMF responded to the arbitration demand and asserted multiple claims. On October 5, 2023, we and AMF entered into an interim agreement while the arbitration proceedings are pending. Pursuant to this interim agreement, we agreed to deposit into an escrow account an amount equal to 4% of the net revenues previously received for sales of our F15 product that are the subject of dispute, which we have determined is approximately $13 million from January 1, 2022 through September 30, 2023, with interest, and will continue to deposit the disputed 4% of net revenues of our F15 product with interest into the escrow account during the pendency of the arbitration proceedings. We have paid and, under this interim agreement, will continue to pay 4% royalties on rechargeable products. While we believe that AMF’s claims are without merit and intend to vigorously defend against those claims, there can be no assurance as to the outcome of the arbitration.

Item 1A. Risk Factors.

You should carefully consider the information described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 1, 2023. There have been no material changes from the risk factors disclosed in our recent SEC filings, including our most recently filed Form 10-K, as referenced above except as follows:

Any termination or loss of significant rights under the License Agreement would materially and adversely affect our development and commercialization of our rechargeable SNM system.

AMF has alleged that Axonics is in material breach of the License Agreement because it is not paying royalties on its F15 product, and AMF has claimed that it has terminated the License Agreement on that basis. The parties are in arbitration to resolve this dispute. Axonics strongly disagrees that it is required to pay royalties on F15 or that AMF has the right to terminate the License Agreement. Axonics has paid and will continue to pay 4% royalties on rechargeable products and pursuant to an interim agreement is escrowing disputed amounts relating to its F15 system. Any effective termination or loss of rights (including exclusivity) under the License Agreement could materially and adversely affect our ability to continue to sell products covered by the License Agreement, which in turn would have a material adverse effect on our business, operating results and prospects.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.    Defaults Upon Senior Securities.

None.

Item 4.    Mine Safety Disclosures.

Not applicable.

Item 5.    Other Information.

On September 15, 2023, Dr. Karen Noblett, our Chief Medical Officer, entered into a trading plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). Ms. Noblett’s plan covers the sale of up to 23,999 shares of our common stock between December 18, 2023 and June 18, 2024. Transactions under the plan are based upon pre-established dates and stock price thresholds.

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On September 15, 2023, Rinda K. Sama, our Chief Operating Officer, entered into a trading plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). Mr. Sama’s plan covers the sale of up to 47,631 shares of our common stock between February 1, 2024 and June 28, 2024. Transactions under the plan are based upon pre-established dates and stock price thresholds.

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Item 6.     Exhibits.

EXHIBIT INDEX

Exhibit Number

Exhibit Title

31.1

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.

31.2

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.

32.1#

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.

32.2#

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.

101.INS**

Inline XBRL Instance Document.

101.SCH**

Inline XBRL Taxonomy Extension Schema Document.

101.CAL**

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB**

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

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Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101).

#			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 Quarterly Report on Form 10-Q), unless the Company 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 Quarterly Report on Form 10-Q 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.

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SIGNATURES

Pursuant to the requirements 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.

			AXONICS, INC.
Date: October 30, 2023			By:						/s/ Raymond W. Cohen
									Raymond W. Cohen
									Chief Executive Officer and Director
									(Principal Executive Officer)
Date: October 30, 2023			By:						/s/ Kari L. Keese
									Kari L. Keese
									Chief Financial Officer
									(Principal Financial and Accounting Officer)

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