S-1/A 1 d609102ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on October 22, 2018.

Registration No. 333-227732

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Axonics Modulation Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware   3841   45-4744083

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

26 Technology Drive

Irvine, California 92618

(949) 396-6322

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Raymond W. Cohen

Chief Executive Officer

Axonics Modulation Technologies, Inc.

26 Technology Drive

Irvine, California 92618

(949) 396-6322

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Michael A. Hedge

K&L Gates LLP

1 Park Plaza

Twelfth Floor

Irvine, California 92614

(949) 253-0900

 

Michael V. Williamson

Senior Vice President and General Counsel

Axonics Modulation Technologies, Inc.

26 Technology Drive

Irvine, California 92618

(949) 396-6322

 

Ilir Mujalovic

Shearman & Sterling LLP

599 Lexington Avenue

New York, New York 10022

(212) 848-4000

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

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 to Section 7(a)(2)(B) of the Securities Act. ☐

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered  

Amount

to be

Registered(1)

 

Proposed

Maximum

Offering Price

Per Share(2)

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Common Stock, $0.0001 par value per share

  7,667,050   $16.00   $122,672,800   $14,868

 

(1)

Includes 1,000,050 shares that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended.

(3)

$10,454.00 was previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated October 22, 2018

PROSPECTUS

6,667,000 Shares

 

 

LOGO

Axonics Modulation Technologies, Inc.

Common Stock

 

 

This is Axonics Modulation Technologies, Inc.’s initial public offering. We are selling 6,667,000 shares of our common stock.

We expect the public offering price to be between $14.00 and $16.00 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the Nasdaq Global Market under the symbol “AXNX.”

We are an “emerging growth company” under the federal securities laws and are subject to reduced public company disclosure standards. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 17 of this prospectus.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $          $    

Underwriting discount(1)

   $          $    

Proceeds, before expenses, to us

   $          $    

 

  (1)

We refer you to “Underwriting” beginning on page 208 for additional information regarding underwriting compensation.

The underwriters may also exercise their option to purchase up to an additional 1,000,050 shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Certain of our existing stockholders that are affiliated with certain of our directors have indicated an interest in purchasing an aggregate of up to approximately $45.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any or all of these stockholders, or any or all of these stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these stockholders as they will on any other shares sold to the public in this offering.

The shares will be ready for delivery on or about                    , 2018.

 

 

 

BofA Merrill Lynch   Morgan Stanley

 

 

 

Wells Fargo Securities   SunTrust Robinson Humphrey

 

 

The date of this prospectus is                , 2018.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     17  

Forward-Looking Statements and Statistical Data

     80  

Use of Proceeds

     82  

Dividend Policy

     83  

Capitalization

     84  

Dilution

     88  

Selected Financial Data

     92  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     94  

Business

     116  

Management

     164  

Executive Compensation

     172  

Certain Relationships and Related Party Transactions

     184  

Principal Stockholders

     191  

Description of Capital Stock

     195  

Shares Eligible for Future Sale

     201  

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Our Common Stock

     204  

Underwriting

     208  

Legal Matters

     216  

Experts

     216  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     216  

Where You Can Find Additional Information

     216  

Index to the Financial Statements

     F-1  

 

 

We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under the circumstances and in the jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

This prospectus includes our trademarks and trade names, including, without limitation, r-SNM® and Axonics SNM System®, which are our property and are protected under applicable intellectual property laws. This prospectus also includes trademarks and trade names that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this prospectus 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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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. Before deciding to invest in shares of our common stock, you should read the entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and the related notes appearing at the end of this prospectus. Unless the context requires otherwise, references in this prospectus to “Axonics,” “our company,” “we,” “us” and “our” refer to Axonics Modulation Technologies, Inc. and our consolidated subsidiaries.

Overview

We are a medical technology company focused on the design, development, and commercialization of innovative and minimally invasive sacral neuromodulation, or SNM, solutions. SNM therapy is primarily used to treat patients with overactive bladder, or OAB, fecal incontinence, or FI, and urinary retention, or UR. Our proprietary rechargeable SNM system, or our r-SNM System, delivers mild electrical pulses to the targeted sacral nerve in order to restore normal communication to and from the brain to reduce the symptoms of OAB, FI, and UR. We believe our proprietary r-SNM System offers significant advantages, including being the first and only rechargeable SNM system that is designed to be 60% smaller than existing technology and to last approximately 15 years. We currently have marketing approvals in Europe, Canada, and Australia for OAB, FI, and UR, and expect to submit a pre-market approval, or PMA, application to the U.S. Food and Drug Administration, or FDA, for urinary urgency incontinence, or UUI, a predominant OAB subtype, during the first quarter of 2019. We believe our r-SNM System has the potential to disrupt and grow the approximately $605 million global SNM market in 2017, which is currently controlled by a single participant.

We are continuing to develop a growing body of compelling clinical evidence that demonstrates the safety, effectiveness, and sustained benefits of our r-SNM System. We have two clinical studies relating to our r-SNM System, a European study, RELAX-OAB, and a U.S. pivotal study, ARTISAN-SNM. In our clinical work to date, we have implanted 180 patients, with an additional 41 patients being treated in our investigator-initiated case series and commercially. In June 2018, we completed the enrollment and implantation of 129 patients with UUI for our ARTISAN-SNM pivotal study. These patients are being evaluated at 14 centers in the United States and five in Europe. Out of 129 patients, 119 were directly implanted without an external trial period. We have determined the study’s primary endpoint to be the percentage of test responders that have a therapeutic response, defined as at least a 50% reduction in the number of urgency leaks per day on a three-day bladder diary at six months post-implant. All patients were evaluated as being “test responders” or “test failures” based on their therapy response at the one-month follow-up. “Test responders” were defined as showing at least a 50% reduction in urgency leaks on a three-day bladder diary at the one-month follow-up. 113 of the 129 patients, or approximately 88%, were determined to be test responders at the one-month follow-up. The remaining 16 of 129 patients, or approximately 12%, were determined to be test failures at the one-month follow-up. We have obtained partial three-month data for this study for 110 patients and 95 test responders. In these partial three-month results, therapy response rate was 96% for test responders and 87% for all patients, and 95% of test responders and 89% of all patients were “very” or “moderately” satisfied with the therapy. We expect that six-month results will be available in the first quarter of 2019. Further, we expect to submit our PMA application to the FDA during the first quarter of 2019. Typically, the PMA review process can take from six to 18 months, with the duration depending on a variety of factors. We plan to continue to collect long-term data out to two years, with the 12-month results anticipated to be available in the third quarter of 2019.

As part of the investigational device exemption, or IDE, approval process for our ARTISAN-SNM pivotal study, the FDA recommended that we should make several modifications to the study design in order for the study to serve as the primary clinical support for a future marketing approval. Although we have not modified



 

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the ARTISAN-SNM pivotal study design to address all of the considerations that the FDA has reiterated, based on the preliminary study results to date, and assuming sufficiently strong results at six months and beyond, we believe we will be able to provide the FDA with reasonable assurance of the safety and effectiveness of our r-SNM System to support its marketing approval.

Our European RELAX-OAB study that began in June 2016 evaluated 51 patients at seven sites in Europe that suffered from OAB subtypes UUI and/or urinary urgency frequency, or UUF. The three-month results were published in the peer-reviewed Journal of Neurourology and Urodynamics in February 2018 and 12-month results have been submitted for publication. All patients were directly implanted and evaluated to determine if they were test responders, which was defined as showing at least a 50% reduction in the number of average leaks or voids per day or a reduction to less than eight voids per day, in each case on a three-day bladder diary, within one month. At three months, results for 48 patients who continued with study follow-up showed a therapeutic response rate of 91% for test responders and 71% for all implanted patients. The therapeutic response rate was sustained at 12 months for the 43 patients who continued with study follow-up, at 94% for test responders and 72% for all implanted patients. During the study, patients experienced clinically meaningful improvements in quality of life, and at 12 months, 84% of test responders and 77% of all patients were “very” or “moderately” satisfied with the therapy provided by our r-SNM System. We are following patients out to two years in this study and may follow patients out to five years at selected study sites.

OAB and FI are dysfunctions, rather than diseases, with a complex group of symptoms that frequently overlap and may be caused by a diverse set of conditions. These dysfunctions affect individuals of both sexes and all ages. OAB causes a sudden urge to urinate that may be difficult to stop, and could lead to the involuntary leakage of urine. In the United States and Europe, based on phone-based surveys, an estimated 87 million adults suffer from OAB. The primary OAB subtypes are UUI and UUF. UUI is the sudden need to urinate accompanied by involuntary leakage of urine, regardless of frequency. UUF is the sudden need to urinate an abnormal number of times, typically more than eight times per day, a measure we believe to be generally accepted among the relevant physician community. FI is the inability to control bowel function that could lead to involuntary leakage from the rectum. In the United States and Europe, an estimated 40 million adults suffer from FI. Symptoms of OAB and FI can have debilitating impacts on social, occupational, and daily activities, which can lead to loss of self-confidence, depression, anxiety, and decreased sexual function and marital satisfaction. Comorbidities, which are generally more prevalent in patients with OAB and FI, may include falls and fractures, urinary tract infections, skin infections, vulvovaginitis, and cardiovascular and central nervous system pathologies. Left untreated, the effects of these dysfunctions impose a significant cost to society and place a high burden on healthcare systems.

First-line therapies for OAB include behavioral changes such as diet, exercise, timed voiding, pelvic floor exercises, and biofeedback, all of which often have limited effectiveness. Second-line therapies for OAB consist of drug therapy and medical management, and may be effective; however, the use of medication can cause undesirable side effects and the effectiveness may decrease over time with prolonged use. First- and second-line therapies comprise the largest segment of the treatment market for OAB, and medication and other non-implantable treatments are better known to physicians and hospitals than SNM therapy. Patients who fail, or are contraindicated or refractory for, both first- and second-line therapies may be eligible for SNM as a third-line therapy. SNM therapy has been commercially available in the United States for over 20 years and has been clinically proven to provide a safe, effective, reversible, and long-lasting solution. According to a study published in Neurourology and Urodynamics, by Siegel et al. in 2014, SNM therapy is the only third-line therapy for OAB that has objectively demonstrated superior efficacy to standard OAB medical therapy. Relative to the other third-line therapies such as onabotulinumtoxinA, or BOTOX, injections and percutaneous tibial nerve stimulation, or PTNS, we believe SNM therapy has therapeutic advantages that include better efficacy and patient compliance.



 

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We believe that our innovative and proprietary r-SNM System offers similar therapeutic benefits and competitive advantages to the only currently available SNM technology, InterStim II System, or InterStim II, offered by Medtronic plc, or Medtronic. We believe that our r-SNM System is the first and only system for SNM therapy with a rechargeable implantable pulse generator, or IPG, battery that is designed to last approximately 15 years. As a result, patients implanted with our r-SNM System do not need to undergo replacement surgery on average every 4.4 years, as is the case for patients implanted with InterStim II, which we believe will significantly improve patient experience and reduce the risks of surgery and associated infections. In addition, we believe patients who have historically resisted SNM therapy because of the required multiple surgeries may be more inclined to be treated by our r-SNM System. Further, by reducing the number of replacement surgeries, physicians and facilities can utilize their resources more efficiently. Finally, our technology has the potential to significantly reduce overall costs to the healthcare system. In 2016, we commissioned a study that concluded that a rechargeable SNM system with a 15-year battery life could potentially reduce overall U.S. healthcare costs by up to $12 billion over a 15-year horizon.

We have designed and developed a proprietary method protected by patents, know-how, and trade secrets that enables us to combine ceramic and titanium for the IPG enclosure of our r-SNM System. This method enables us to incorporate a significantly smaller recharging coil into our IPG, which offers benefits such as 60% smaller size and half the weight of InterStim II and enhanced communication range. In addition, we also engineered our IPG to deliver constant current stimulation, which adapts to the body’s physiological changes, which we expect will provide a more consistent and reliable therapy over time and reduce patient and physician management of the therapy. Further, our r-SNM System offers significant wireless charging benefits and an easy-to-use patient remote control. Finally, we designed and custom built a touchscreen clinician programmer that guides the implanting physician through electrode placement and stimulation programming. We also intend to continue to invest in research and development activities focused on improvements and enhancements to our r-SNM System. Our goals include introducing market differentiating 1.5T/3.0T magnetic resonance imaging, or MRI, full body conditional labelling for our r-SNM System, reducing by half the number of IPG battery recharging sessions required for the IPG to remain charged for one full month, introducing features that would enable us to connect our IPG to an already implanted InterStim II lead, and expanding the suite of product solutions available for SNM therapy over time.

Our r-SNM System consists of several components and accessories that provide a smoothly integrated, long-lasting, intuitive, and easy-to-use system. The miniaturized IPG is a five cubic centimeter, rechargeable implantable stimulator designed to provide stimulation through a tined four-electrode lead. SNM therapy generally consists of two phases, an evaluation period, also called the external trial period, which typically lasts a few days to a few weeks, and a permanent implant for those patients who experience a successful external trial period. The permanent implant procedure typically occurs in a hospital or an outpatient setting and includes implantation of the IPG and, if a temporary lead was used for the external trial period, implantation of the permanent lead. The IPG is inserted through a small incision into a pocket in the subcutaneous fat of the upper buttocks, and the lead body is tunneled to the IPG pocket and connected to the IPG. The IPG is programmed by, and wirelessly communicates with, the clinician programmer, at a range of up to approximately three feet. The patient has the ability to adjust stimulation intensity up or down or switch on or off, using a discrete, small and easy-to-use wireless remote control that communicates with the device at a range of up to approximately three feet. The IPG is wirelessly charged with an interval of approximately one hour once every two weeks under normal use conditions.

We intend to focus the significant majority of our sales and marketing efforts in the United States where reimbursement for SNM therapy is well-established and covered by most major U.S. insurers. We plan to build a specialized and dedicated direct sales organization, which will initially target the estimated 850 physician specialists that represent a majority of the implant volume in the United States. We estimate that approximately 75% of U.S. implant volume is generated by less than 1,000 physicians. In addition, we plan to strategically



 

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expand into international markets. We will initially endeavor to hire a specialty sales force of approximately 60 sales representatives in anticipation of our potentially receiving FDA approval to support the commercial launch of our r-SNM System in the United States. Further, we expect to grow our sales force over time and the number of our sales representatives at commercial launch will vary and may be higher depending on the duration of the PMA review process.

On October 1, 2013, we entered into a license agreement, or the License Agreement, with the Alfred E. Mann Foundation for Scientific Research, or AMF, pursuant to which AMF agreed to license to us certain patents and know-how, which we refer to collectively as 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, altogether which we refer to as, the AMF Licensed Products.

Our Success Factors

We believe that continued growth of our company will be driven by the following success factors:

 

   

Large and growing SNM market with established coverage and reimbursement. SNM treatment for OAB, FI, and UR is a well-established therapy. Since the first FDA-approved SNM device, InterStim I System, was introduced in 1997, over 300,000 patients have been implanted worldwide with such system and its successor InterStim II. In 2017, we believe that approximately 41,000 patients were implanted with SNM therapy, including 11,000 patients undergoing replacement implants, corresponding to an approximately $605 million global SNM market and approximately 8% year-over-year growth. With the global annual addressable SNM market currently estimated to be approximately one percent penetrated, we believe that the introduction of a new and highly differentiated SNM solution has the potential to grow the market in excess of historical rates. In addition, because SNM therapy has been widely used in patients for over 20 years in the United States, which we believe makes up nearly 90% of the sales in the global SNM market, reimbursement codes and payments are well-established and the procedure is covered by most major U.S. insurers.

 

   

Long-term solution offering material benefits to patients, physicians, and payors. We believe that our r-SNM System is the first and only system for SNM therapy with a rechargeable IPG battery that is designed to last approximately 15 years. As a result, patients implanted with our r-SNM System do not need to undergo replacement surgery on average every 4.4 years, as is the case for patients implanted with InterStim II, which is not a rechargeable system. We believe a rechargeable system will significantly improve a patient’s experience and reduce the risks of surgery and associated infections. In addition, by reducing the number of replacement surgeries, physicians and facilities can utilize their resources more efficiently. Finally, we believe that our technology has the potential to significantly reduce overall costs to the healthcare system. In 2016, we commissioned a study that concluded that a rechargeable SNM system with a 15-year battery life could potentially reduce overall U.S. healthcare costs by up to $12 billion over a 15-year horizon.

 

   

Significant competitive and functional advantages over the only approved SNM device. We believe that our r-SNM System’s innovative and proprietary design offers significant competitive and functional advantages over InterStim II. Our proprietary method of combining ceramic and titanium for the IPG enclosure enables us to incorporate a significantly smaller recharging coil into our IPG, which offers benefits such as 60% smaller size and half the weight of InterStim II and enhanced communication range. In addition, our r-SNM System employs constant current, which adapts to the body’s physiological changes, which we expect will provide a more consistent and



 

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reliable therapy over time and reduce patient and physician management of the therapy. Further, our r-SNM System is differentiated by significant wireless charging benefits and an easy-to-use patient remote control. Finally, we designed and custom built a touchscreen clinician programmer that guides the implanting physician through electrode placement and stimulation programming. Our clinician programmer allows physicians to connect to a patient’s IPG, while the patient is in the physician’s care, to access key therapy data that is stored and maintained on the IPG.

 

   

Strong clinical data. We are continuing to develop a growing body of compelling clinical evidence that demonstrates the safety and effectiveness of our r-SNM System. In our clinical work to date, we have implanted 180 patients in the United States and Europe. Our ARTISAN-SNM pivotal study is evaluating 129 patients with UUI. In the partial three-month results, therapy response rate was 96% for test responders and 87% for all patients. We expect that six- and 12-month results will be available in the first quarter of 2019 and the third quarter of 2019, respectively. Our European study, RELAX-OAB, evaluated 51 patients that suffered from UUF and UUI. At three months, results for 48 patients who continued with study follow-up showed a therapeutic response rate of 91% for test responders and 71% for all implanted patients. The therapeutic response rate was sustained at 12 months for the 43 patients who continued with study follow-up, at 94% for test responders and 72% for all implanted patients. We intend to follow patients for at least out to two years for both of our clinical studies. We believe clinical data is important and will be key to driving broad-based adoption of our r-SNM System.

 

   

A deep understanding of our target market with a sole focus on SNM. We formed our company by assembling an experienced team with significant in-depth knowledge of our target market. From the outset, we spent significant time understanding the unmet needs of patients and physicians through patient field studies and early engagement of physicians and key opinion leaders. By utilizing this market knowledge and focusing solely on SNM, we have been able to navigate the development and regulatory requirements for our r-SNM System in an efficient manner. Since we commenced operations in late 2013, we have received marketing approval in Europe, Canada, and Australia for OAB, FI, and UR, and completed the enrollment and implantation of patients in our ARTISAN-SNM pivotal study. This pure-play SNM focus also allows us to efficiently manage our research and development activities to further innovate and enhance our r-SNM System.

 

   

Comprehensive and broad intellectual property portfolio. Our r-SNM System is supported by a nucleus of issued patents and patent applications that we license from AMF pursuant to the License Agreement. In addition to that nucleus, we have created a substantial portfolio of wholly owned intellectual property, which includes patents, know-how and trade secrets that are embodied by our r-SNM System. As of September 30, 2018, we owned 17 issued U.S. patents and 20 issued foreign patents, and 17 pending U.S. patent applications and 59 pending foreign patent applications, and we licensed from AMF 30 issued U.S. patents and 38 issued foreign patents, and four pending U.S. patent applications and 28 pending foreign patent applications.

 

   

Experienced management team. Our senior management team has over 140 years of combined experience in the medical technology industry. They have a track record of successfully bringing products to market, with significant expertise in development, regulatory approval and commercialization activities.



 

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Our Strategy

Our goal is to become a global leader in providing an effective and long-term solution to patients with OAB and FI. To achieve this goal, we are pursuing the following strategies:

 

   

Obtain FDA approval of our r-SNM System;

 

   

Continue to promote awareness of our r-SNM System among healthcare providers;

 

   

Build a commercialization infrastructure with a specialized direct sales and marketing team;

 

   

Continuously innovate to introduce enhanced SNM product offerings and pursue expanded indications; and

 

   

Further penetrate the addressable market by promoting patient and practice awareness.

Our Market

We believe our addressable market consists of approximately four million adults in the United States and Europe who suffer from symptoms of either OAB or FI and who are readily treatable with, and eligible candidates for, SNM therapy. Specifically, we believe this four million adult market consists of approximately three million adults with symptoms of OAB and approximately one million adults with FI within these regions. While we anticipate expanding into other geographic regions over time, such as Canada and Australia, we will initially focus on the United States and Europe due to larger overall market size and greater prevalence of OAB and FI.

The market for SNM therapy is large and growing. We believe that the global SNM market was approximately $605 million in 2017, which we believe is comprised of sales of SNM systems for the treatment of UUI, UUF, FI, and UR, and is growing at an approximate rate of 8% year-over-year. We believe this represents approximately 41,000 patient implants, including 11,000 patients undergoing replacement implants, with nearly 90% of sales in this market being generated in the United States and approximately 85% of sales revenue coming from new implant volume. Further, we estimate that the global annual addressable SNM market is presently approximately one percent penetrated. We estimate the global addressable SNM market will continue to increase for the foreseeable future driven by increased awareness and education of SNM as a therapy alternative, greater expectations for quality of life, and improved patient attitudes toward receiving medical attention. In addition, market growth could accelerate due to more than one medical device company being focused on this market, new innovation for SNM therapy, and other potential products being introduced to physicians and patients. We believe that this represents a compelling opportunity for our r-SNM System to capture market share and further penetrate and grow the existing U.S. market. We have regulatory approvals in Europe, Canada, and Australia for OAB, FI, and UR. We initially intend to pursue regulatory approval in the United States for UUI, a predominant OAB subtype, and we intend to seek regulatory approval for other indications in the United States in the future.

Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

   

We currently depend entirely on the successful and timely regulatory approval from the FDA and commercialization of our r-SNM System, our only product. Our r-SNM System may not receive



 

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FDA regulatory approval or we may be significantly delayed in receiving regulatory approval. Even if we receive regulatory approval, we may not be able to successfully commercialize our r-SNM System.

 

   

The clinical study process required to obtain regulatory approvals is lengthy and expensive with uncertain outcomes. If clinical studies of our r-SNM System do not produce results necessary to support regulatory clearance or approval in the United States or elsewhere, we will be unable to gain regulatory approval for, expand the indications for or commercialize our r-SNM System and may incur additional costs or experience delays in completing, or ultimately be unable to complete, the commercialization of our r-SNM System.

 

   

We have derived minimal revenue from our operations and incurred significant operating losses since inception, we expect to incur operating losses in the future and we may not be able to achieve or sustain profitability.

 

   

Our r-SNM System is currently our sole product and we are completely dependent on the success of our r-SNM System. We have limited experience marketing and selling our r-SNM System, and if we are unable to establish, manage, and maintain sales and marketing capabilities, we will be unable to successfully commercialize our r-SNM System or generate product revenue.

 

   

We are reliant on a single product and if we are not successful in commercializing our r-SNM System our business will not succeed.

 

   

We will require substantial additional capital to finance our planned operations, which may not be available to us on acceptable terms or at all. As a result, we may not be able to implement our planned sales and marketing program to increase the adoption of our r-SNM System.

 

   

We rely on the License Agreement to provide us with rights to use the AMF IP to develop and commercialize the AMF Licensed Products, which are used in our r-SNM System. Any termination or loss of significant rights under the License Agreement would materially and adversely affect our development and commercialization of our r-SNM System.

 

   

We will need to increase the size of our organization and we may be unable to manage our growth effectively.

 

   

We intend to compete against InterStim II and any future commercially available implantable SNM devices by offering material advantages over existing technology. Such advantages may not be readily adopted by the market and we may need to compete based on price or other factors, at which we may be unsuccessful.

 

   

We rely on third parties for the manufacture of our r-SNM System. This reliance on third parties increases the risk that we will not have sufficient quantities of our r-SNM System or such quantities at an acceptable cost, and reduces our control over the manufacturing process, which could delay, prevent or impair our development or commercialization efforts.

 

   

Our r-SNM System and operations are subject to extensive government regulation and oversight both in the United States and internationally, and our failure to comply with applicable requirements could harm our business.

 

   

If we are unable to achieve and maintain adequate levels of coverage or reimbursement for our r-SNM System, our commercial success may be severely hindered, and in the event insurers require



 

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a prior authorization process, such process may not result in positive coverage determination for these patients.

 

   

Any side effects, manufacturing defects, misuse or abuse associated with our r-SNM System could result in patient injury or death.

 

   

The size and future growth in the market for SNM therapy has not been established with precision and may be smaller than we estimate, possibly materially. If our estimates and projections overestimate the size of this market, our sales growth may be adversely affected.

 

   

If we or any of our current or future licensors, including AMF, are unable to maintain, obtain or adequately protect our intellectual property rights, we may not be able to compete effectively in our market or we could be required to incur significant expenses to enforce or defend our rights or attempt to do the same.

Preliminary Financial Results for the Three Months Ended September 30, 2018

We are currently finalizing our financial results for the three months ended September 30, 2018. While complete financial information and operating data are not yet available, set forth below are certain preliminary estimates of the results of operations that we expect to report for our third quarter of 2018. Our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments and other developments that may arise between the date of this prospectus and the time the financial results for our third quarter of 2018 are finalized. All percentage comparisons to the prior year are measured to the midpoint of the range provided below for 2018.

For the three months ended September 30, 2018:

 

   

Net revenue is expected to be approximately $0.2 million, an increase from approximately $0.1 million in the corresponding prior year period. The estimated increase in net revenue is related to the sale of our r-SNM systems to two new customers in Canada and one new customer in Europe.

 

   

Loss from operations is expected to be between $7.5 million and $8.5 million, as compared to $4.5 million in the corresponding prior year period. The estimated increase in loss from operations is due primarily to the increase in general and administrative costs related to this offering and increased compensation, travel and other employee-related expenses related to increased headcount.

 

   

Net loss is expected to be between $7.5 million and $8.5 million, as compared to $4.5 million in the corresponding prior year period. The estimated increase in net loss is due primarily to the factors described above.

As of September 30, 2018, our cash, cash equivalents and short-term investments is expected to be approximately $31.2 million and the principal and interest outstanding under our Loan Agreement, which is defined below, is expected to be approximately $10.1 million.

The estimates above represent the most current information available to management and do not present all necessary information for an understanding of our financial condition as of, and our results of operations for the three months ended, September 30, 2018. We have provided a range for certain of the preliminary results described above primarily because our financial closing procedures for the three months ended September 30, 2018 are not yet complete. As a result, our final results may vary from these preliminary estimates. We currently expect that our final results will be within the ranges or near the approximate amounts described above. It is



 

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possible, however, that our final results will not be within these ranges or near the approximate amounts. These estimates are not necessarily indicative of any future period and should be read together with “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus.

The preliminary financial data included in this prospectus has been prepared by, and is the responsibility of, our management and has not been reviewed or audited by our independent registered public accounting firm. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect to this preliminary data.

Our consolidated financial statements as of and for the three months ended September 30, 2018 will not be available until after this offering is completed.

Recent Developments

In October 2018, we and Silicon Valley Bank entered into an amendment to the Loan Agreement, which is defined below, or the Loan Amendment, in connection with which we requested the full $5.0 million from Tranche B, which is defined below, and the full $5.0 million from Tranche C, which is defined below. We expect to receive the $10.0 million from both tranches prior to the completion of this offering. Pursuant to the Loan Amendment, Silicon Valley Bank has agreed to (i) extend the interest only period from June 30, 2019 to December 31, 2019, without requiring our receipt of a PMA in the United States for our r-SNM System, and (ii) make Tranche C available now instead of January 1, 2019. In addition, pursuant to the Loan Amendment, we are obligated to pay Silicon Valley Bank a fee of $100,000 in the event that we do not (i) consummate this offering with proceeds of no less than $75.0 million, (ii) receive PMA approval in the United States for our r-SNM System, or (iii) receive gross proceeds of at least $40.0 million from the sale of our equity securities, in each case on or prior to June 30, 2019. In addition, as a result of our request of the full $5.0 million from Tranche B and the full $5.0 million from Tranche C, the maturity of the Term Loan has been automatically extended to December 1, 2021. In connection with our request of the full $5.0 million from Tranche B and the full $5.0 million from Tranche C in October 2018, as of the date of this prospectus, each of the two warrants issued pursuant to the Loan Agreement will become exercisable for 33,333 shares of our Series C preferred stock when we borrow the $10.0 million from both tranches. The two warrants to purchase shares of our Series C preferred stock will convert into warrants to purchase 80,000 shares of our common stock in connection with the completion of this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness.”

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies. These provisions include, but are not limited to:

 

   

being permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

   

an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;



 

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reduced disclosure about executive compensation arrangements in our periodic reports, registration statements and proxy statements; and

 

   

exemptions from the requirements to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to take advantage of this transition period. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year following the fifth anniversary of the completion of this offering, (ii) the first fiscal year after our annual gross revenues exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding three-year period, issued more than $1.0 billion in non-convertible debt securities, or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

Corporate Information

We were incorporated in the State of Delaware in March 2012 under the name “American Restorative Medicine, Inc.” In August 2013, we changed our name to Axonics Modulation Technologies, Inc. and commenced our operations in late 2013 when we entered into the License Agreement. Our principal executive offices are located at 26 Technology Drive, Irvine, California 92618 and our telephone number is (949) 396-6322. Our website is www.axonicsmodulation.com. The information contained on or that can be accessed through our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.



 

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THE OFFERING

 

Common stock offered by us

6,667,000 shares.

 

Common stock to be outstanding after this offering

25,305,600 shares (or 26,305,650 shares if the underwriters exercise their option to purchase additional shares in full).

 

Option to purchase additional shares

We have granted the underwriters a 30-day option to purchase up to 1,000,050 additional shares of our common stock at the public offering price less the estimated underwriting discounts and commissions.

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $90.7 million (or approximately $104.6 million if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering to (i) hire sales and clinical support personnel, including a specialty sales force of approximately 60 sales representatives, which we will initially endeavor to hire in anticipation of our potentially receiving FDA approval, to support the commercial launch of our r-SNM System in the United States, and to fund marketing initiatives in United States, Europe and Canada, (ii) to conduct SNM-related research and development activities and to fund the technological enhancement of our r-SNM System, and (iii) the remainder for working capital and general corporate purposes.

 

  See “Use of Proceeds” for more information.

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 17 and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock.

 

Reserved share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5.0% of the shares offered by this prospectus for sale to certain of our directors, officers, employees, business associates and related persons through a reserved share program. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

 

Proposed Nasdaq Global Market symbol

“AXNX.”


 

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The number of shares of our common stock to be outstanding after this offering is based on 18,638,600 shares of common stock outstanding as of June 30, 2018, after giving effect to the conversion of all of our outstanding shares of preferred stock, and excludes as of that date:

 

   

1,425,316 shares of our common stock issuable upon the exercise of outstanding stock options under our 2014 Stock Incentive Plan, as amended, or the 2014 Plan, at a weighted-average exercise price of $1.35 per share;

 

   

37,971 shares of our common stock reserved for future issuance under the 2014 Plan;

 

   

4,540,019 shares of our common stock reserved for future issuance under our 2018 Omnibus Incentive Plan, or the 2018 Plan, which became effective in October 2018; and

 

   

40,001 shares of our common stock issuable upon the exercise of outstanding warrants to purchase shares of our Series C preferred stock, which will convert into warrants to purchase 40,001 shares of our common stock in connection with the completion of this offering, at an exercise price of $7.50 per share.

In addition, the number of shares of our common stock after this offering does not give effect to 39,999 shares of our common stock issuable upon exercise of warrants to purchase shares of our Series C preferred stock, which will convert into warrants to purchase 39,999 shares of our common stock in connection with the completion of this offering, at an exercise price of $7.50 per share, that will become exercisable when we borrow an additional $10.0 million under the Loan Agreement with Silicon Valley Bank. As of the date of this prospectus, we have requested to borrow the additional $10.0 million and we expect to receive it prior to the completion of this offering.

Unless otherwise indicated, all information contained in this prospectus assumes:

 

   

no exercise by the underwriters of their option to purchase up to an additional 1,000,050 shares of our common stock;

 

   

no exercise of the outstanding stock options and warrants described above;

 

   

a 1.2-for-1.0 forward stock split of our common stock effected on October 18, 2018;

 

   

the automatic exchange of an aggregate of 27,229,768 ordinary shares of Axonics Europe, S.A.S., or Axonics Europe, into 310,500 shares of our Series A preferred stock, 604,560 shares of our Series B-1 preferred stock, 323,437 shares of our Series B-2 preferred stock, and 1,990,676 shares of our Series C preferred stock, which we refer to collectively as, the exchanged preferred stock, immediately prior to the completion of this offering as more specifically detailed under “Certain Relationships and Related Party Transactions—Share Exchange Agreement”;

 

   

the automatic conversion of the warrants described above into warrants to purchase shares of our common stock upon the completion of this offering, the result of which will have no impact on our consolidated financial statements;

 

   

the automatic conversion of all outstanding shares of our preferred stock, including all of the shares of the exchanged preferred stock, into 15,813,297 shares of our common stock upon the completion of this offering; and



 

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the filing of our amended and restated certificate of incorporation, or our certificate of incorporation, and the adoption of our amended and restated bylaws, or our bylaws, immediately prior to the completion of this offering.

Certain of our existing stockholders that are affiliated with certain of our directors have indicated an interest in purchasing an aggregate of up to approximately $45.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any or all of these stockholders, or any or all of these stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these stockholders as they will on any other shares sold to the public in this offering.



 

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SUMMARY FINANCIAL DATA

The following tables set forth, for the periods and as of the dates indicated, our summary financial data. Our consolidated statements of comprehensive loss for the years ended December 31, 2016 and 2017 are derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We derived the summary consolidated statements of comprehensive loss for the six months ended June 30, 2017 and 2018, and the summary consolidated balance sheets data as of June 30, 2018, from our unaudited interim consolidated financial statements and related notes that are included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and operating results for such period. Our historical results are not necessarily indicative of the results that may be expected or may actually occur in the future, and our interim results are not necessarily indicative of the expected results for future interim periods or the full year. You should read the following information together with the more detailed information contained in “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

The following table is presented in thousands, except for share and per share data:

 

    

Year Ended December 31,

   

Six Months Ended June 30,

 
    

2016

   

2017

   

2017

   

2018

 
          

(unaudited)

 

Statements of Comprehensive Loss:

        

Net revenue

   $ —     $ 128     $ —     $ 12  

Cost of goods sold

     —       118       —       5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —       10       —       7  

Operating expenses

        

Research and development

   $ 12,510     $ 12,332     $ 5,827     $ 10,721  

General and administrative

     4,457       4,823       2,417       3,071  

Sales and marketing

     517       1,029       399       1,359  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     17,484       18,184       8,643       15,151  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (17,484     (18,174     (8,643     (15,144
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     83       113       36       (108
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (17,401   $ (18,061   $ (8,607   $ (15,252

Foreign currency translation adjustment

     —       588       69       (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (17,401   $ (17,473   $ (8,538   $ (15,255
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted(1)

   $ (7.52   $ (7.04   $ (3.60   $ (5.43
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute basic and diluted net loss per share(1)

     2,313,526       2,564,964       2,389,066       2,811,183  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted(1)(2)(3) (unaudited)

     $ (0.98     $ (0.82
    

 

 

     

 

 

 

Pro forma weighted-average shares used to compute basic and diluted net loss per share(1)(2)(3) (unaudited)

       18,378,261         18,624,480  
    

 

 

     

 

 

 


 

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(1)

See Note 1 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the net loss per share and the number of shares used in the computation of the per share amounts.

 

(2)

The pro forma net loss per share of common stock, basic and diluted, for the year ended December 31, 2017 and the six months ended June 30, 2018 reflects: (i) the automatic exchange of the exchanged preferred stock immediately prior to the completion of this offering, (ii) the automatic conversion of all outstanding shares of our preferred stock, including the exchanged preferred stock, into 15,813,297 shares of our common stock upon completion of this offering, (iii) the automatic conversion of outstanding warrants to purchase shares of our Series C preferred stock into warrants to purchase 40,001 shares of our common stock in connection with the completion of this offering, and the resulting reclassification of such warrants from a current liability to stockholders’ equity (deficit), and (iv) the filing and effectiveness of our certificate of incorporation, which will occur immediately prior to the completion of this offering. Does not reflect (i) $10.0 million in additional borrowings we requested under the Loan Agreement in October 2018, which we expect to receive prior to the completion of this offering, and (ii) the related concurrent issuance of warrants to purchase shares of our Series C preferred stock, which will become exercisable for 39,999 shares of our common stock immediately prior to the closing of this offering at an exercise price of $7.50 per share.

 

(3)

The pro forma net loss per share of common stock, basic and diluted, does not give effect to the issuance of shares of our common stock in this offering nor do they give effect to potential dilutive securities where the impact would be anti-dilutive.

The following table is presented in thousands:

 

     As of June 30, 2018  
     Actual     Pro
Forma(2)
    Pro Forma
as
Adjusted(3)(4)
 
    

(unaudited,

restated)

    (unaudited)     (unaudited)  

Balance Sheets Data(1):

      

Cash, cash equivalents and short-term investments

   $ 39,881     $ 39,881     $ 130,547  

Property and equipment, net

     1,459       1,459       1,459  

Intangible asset, net

     483       483       483  

Total assets

     45,800       45,800       136,466  

Total liabilities

     14,024       13,784       13,784  

Convertible preferred stock

     82,126       —         —    

Noncontrolling interest in Axonics Europe S.A.S.

     31,066       —         —    

Stock subscription receivable(5)

     (1,824     (1,824     (1,824

Accumulated deficit

     (82,418     (82,418     (82,418

Total stockholders’ equity (deficit)

     (81,418     32,015       122,681  

 

(1)

See Note 10 to our consolidated financial statements appearing elsewhere in this prospectus for more information on the restatements of certain of our consolidated financial statements, including our consolidated balance sheets.

 

(2)

Gives effect to: (i) the automatic exchange of the exchanged preferred stock immediately prior to the completion of this offering, (ii) the automatic conversion of all outstanding shares of our preferred stock, including the exchanged preferred stock, into 15,813,297 shares of our common stock upon completion of this offering, (iii) the automatic conversion of outstanding warrants to purchase shares of our Series C preferred stock into warrants to purchase 40,001 shares of our common stock in connection with the



 

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  completion of this offering, and the resulting reclassification of such warrants from a current liability to stockholders’ equity (deficit), and (iv) the filing and effectiveness of our certificate of incorporation, which will occur immediately prior to the completion of this offering. Does not reflect (i) $10.0 million in additional borrowings we requested under the Loan Agreement in October 2018, which we expect to receive prior to the completion of this offering, and (ii) the related concurrent issuance of warrants to purchase shares of our Series C preferred stock, which will become exercisable for 39,999 shares of our common stock immediately prior to the closing of this offering at an exercise price of $7.50 per share.

 

(3)

Reflects, in addition to the pro forma adjustment set forth in footnote 2, the sale of 6,667,000 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(4)

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, cash equivalents and short-term investments, total assets and total stockholders’ equity (deficit) by approximately $6.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price, as set forth on the cover page of this prospectus, would increase (decrease) each of cash, cash equivalents and short-term investments, total assets and total stockholders’ equity (deficit) by approximately $14.0 million, assuming the shares of our common stock offered by this prospectus are sold at the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and will be adjusted based on the actual initial public offering price, the number of shares we sell, and other terms of this offering that will be determined at pricing.

 

(5)

Includes outstanding secured full recourse promissory notes, or promissory notes, as of June 30, 2018, with an aggregate principal balance of $1,782,268.70, that were issued to us by certain of our executive officers and directors in exchange for the exercise of an aggregate of 1,653,196 shares of common stock pursuant to stock option awards. We have entered into debt forgiveness and cancellation of note agreements with certain of our executive officers and directors, including each of our named executive officers, to terminate each of their respective promissory notes and to forgive all respective obligations for payment thereof in connection with this offering. See “Certain Relationships and Related Party Transactions—Loans to Officers and Directors.”



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, including our consolidated financial statements, the notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our common stock. The occurrence of any of the following risks could have a material and adverse effect on our business, reputation, financial condition, results of operations and future growth prospects, as well as our ability to accomplish our strategic objectives. As a result, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and stock price.

Risks Related to Our Business and Strategy

We currently depend entirely on the successful and timely regulatory approval from the FDA and commercialization of our r-SNM System, our only product. Our r-SNM System may not receive FDA regulatory approval or we may be significantly delayed in receiving regulatory approval. Even if we receive regulatory approval, we may not be able to successfully commercialize our r-SNM System.

We currently have only one product, our r-SNM System, and our business presently depends entirely on our ability to obtain regulatory approval from the FDA for our r-SNM System and to successfully commercialize it in a timely manner. We have no other products currently approved for sale and we may never be able to develop marketable products or enhancements to our r-SNM System. We are not permitted to market our r-SNM System in the United States until we receive approval from the FDA. We do not know if or when we will receive such approval or whether we will need to make modifications to our r-SNM System, generate additional data to submit to the FDA, or incur significant additional expenditures to obtain any such approval.

Our near-term prospects, including our ability to finance our company and generate revenue, as well as our future growth, depend entirely on the successful and timely regulatory approval from the FDA and commercialization of our r-SNM System. The regulatory and commercial success of our r-SNM System will depend on a number of factors, including the following:

 

   

whether we are required by the FDA or other similar regulatory authorities to conduct additional clinical studies or to modify the design of our current studies to support the approval of our r-SNM System;

 

   

our success in educating physicians and patients about the benefits, administration and use of our r-SNM System;

 

   

the timely receipt of necessary marketing approvals from the FDA and other similar regulatory authorities;

 

   

achieving and maintaining compliance with all regulatory requirements applicable to our r-SNM System;

 

   

the ability to raise additional capital on acceptable terms, or at all, if needed, to support the commercial launch of our r-SNM System;

 

   

the acceptance by physicians and patients of the safety and effectiveness of our r-SNM System;

 

   

our ability to successfully commercialize our r-SNM System;

 

   

our ability to hire a sufficient number of talented sales representatives to sell our r-SNM System;

 

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the ability of our current manufacturers and any third parties with whom we may contract to manufacture our r-SNM System to remain in good standing with regulatory agencies and develop, validate and maintain commercially viable manufacturing processes that are compliant with applicable requirements; and

 

   

the availability, perceived advantages, relative cost, relative safety and relative efficacy of competing products, such as InterStim II, or competing third-line therapies, such as BOTOX injections and PTNS.

For example, as part of the IDE approval process for our ARTISAN-SNM pivotal study, the FDA recommended that we should make several modifications to the study design in order for the study to serve as the primary clinical support for a future marketing approval. Specifically, despite our responses and supporting documentation that we submitted in support of our study design, the FDA reiterated its previously expressed recommendations that we make the following modifications to our ARTISAN-SNM pivotal study:

 

   

exclude patients with mixed urinary incontinence, or MUI, which means a patient has both stress urinary incontinence and UUI;

 

   

use either a seven-day bladder diary or two separate three-day bladder diaries;

 

   

use a 12-month primary effectiveness endpoint in order to account for the placebo effect and enable assessment of durability of the treatment effect;

 

   

use all patients in whom an implant is attempted, not initial responders after one month, for primary efficacy analysis;

 

   

use multiple imputation to account for missing primary endpoint data;

 

   

revise the protocol to include details on statistical analysis methods for analyzing the primary and secondary endpoints, analysis population, method for handling missing endpoint data and sensitivities and poolability analyses;

 

   

use a two-sided 95% confidence interval; and

 

   

provide further justification for restarting with a new activation date after a lead issue.

In response, we have engaged with the FDA regarding its recommendation, including our latest IDE supplement, which we submitted to the FDA in September 2018 to address certain of its recommendations. As a result, we incorporated a number of recommended study modifications. However, to date we elected not to incorporate several of the recommended modifications based on what we believe are currently accepted urology practice guidelines and the design of previous OAB clinical studies accepted by the FDA. We believe certain of these modifications would have resulted in a study design that increased study site and patient burdens, decreased the feasibility of enrollment or were not clearly supported by available peer-reviewed literature or currently accepted urology practice guidelines. At this point in the study, some of the FDA’s recommendations cannot be implemented. For example, we cannot exclude patients with MUI and we cannot change the three-day bladder diaries taken at baseline to seven-day bladder diaries. On October 19, 2018, the FDA approved our latest IDE supplement and removed certain of its prior study design recommendations. However, the FDA also continues to reiterate several of its recommended study modifications, including exclusion of patients with MUI, use of a seven-day bladder diary or two separate three-day bladder diaries, use of a 12-month primary effectiveness endpoint and use of all patients in whom an implant is attempted, instead of initial responders after one month, for our primary efficacy analysis. See “Business—Our Clinical Results and Studies—ARTISAN-SNM Pivotal Study” for more information.

Although we have not modified the ARTISAN-SNM pivotal study design to address all of the above considerations that the FDA has reiterated, based on the preliminary study results to date, and assuming

 

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sufficiently strong results at six months and beyond, we believe we will be able to provide the FDA with reasonable assurance of the safety and effectiveness of our r-SNM system to support its marketing approval. However, it is possible that the results will not be sufficiently strong or that, in part due to its concerns with our study design, the FDA will not accept the data as reasonable assurance of safety and effectiveness, which would materially and adversely affect our ability to obtain marketing approval of our r-SNM System. If we intend to modify the study design to address any of the above FDA considerations that we have not already addressed, we will be required to obtain FDA approval of an IDE supplement before implementing the changes, which could result in significant delays. The approval requirements for an IDE supplement are generally the same as an original IDE, and they are approved if the FDA does not object within 30 days. We would also be required to get institutional review board, or IRB, approval of the protocol changes if the changes involve the rights, safety, or welfare of the patients, and some investigators may determine that local rules require additional approvals from a local IRB.

The FDA stated its belief that additional modifications were needed for our study design to support marketing approval, and recommended, but did not require, that we modify our study to address the issues described above. Incorporating such modifications may be costly or not possible at this point in the ongoing clinical study or lead to delays in obtaining approval from the FDA, which may be significant and adversely and materially affect our ability to successfully commercialize our r-SNM System. Further, even if we make changes to the study design to address these considerations, the FDA may not approve our r-SNM System.

In addition to our anticipated submission of a PMA based on data from the IDE process, on January 9, 2018, we also submitted to the FDA a premarket approval application, which we refer to as the “literature-based PMA,” in which equivalence to an already FDA approved product is claimed based on the review of technical specifications, published clinical studies, and other information. In our filing, we are claiming equivalence to the only FDA approved SNM device, InterStim II. On May 9, 2018, the FDA responded and requested that we submit additional information to demonstrate that our r-SNM device is sufficiently similar to the InterStim II device referenced in the literature to be able to determine safety and effectiveness from the literature. The FDA’s response also asked us to address a number of other matters, including those related to the electrical safety, electromagnetic compatibility and wireless technology, biocompatibility, and our pre-clinical studies. On October 18, 2018, we responded to the FDA and voluntarily withdrew the literature-based PMA. Subsequent to further consultation with the FDA, which is pending, we will evaluate the merits of submitting a new literature-based PMA application, if at all.

If we do not successfully address the FDA’s suggested considerations or other questions that arise during the FDA review process (including those that arose during the literature-based PMA process) and obtain FDA approval, and for some changes, obtain IRB approval, in a timely manner or at all, we could experience significant delays in obtaining marketing approval from the FDA for our r-SNM System or not obtain approval at all. Even if FDA regulatory approval is obtained, we may never be able to successfully commercialize our r-SNM System.

We have derived minimal revenue from our operations and incurred significant operating losses since inception, we expect to incur operating losses in the future and we may not be able to achieve or sustain profitability.

We are a medical technology company with a limited operating history. To date, we have invested substantially all of our efforts in the research and development of, seeking regulatory approval for, and commercial planning for our r-SNM System. We are not profitable and have incurred losses each year since we began our operations in 2013. We have a limited operating history upon which to evaluate our business and prospects. Consequently, any predictions about our future success, performance or viability may not be as accurate as they could be if we had a longer operating history or an approved product on the market in the United States. To date, we have not obtained regulatory approval for our r-SNM System in the United States or generated meaningful revenue from sales of our r-SNM System outside the United States.

 

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We have not derived meaningful revenue from our operations, as our activities have consisted primarily of developing our technology and conducting clinical studies. As a result, for the years ended December 31, 2016 and 2017, we recorded net losses of $17.4 million and $18.1 million, respectively, and for the six months ended June 30, 2017 and 2018, we recorded net losses of $8.6 million and $15.3 million, respectively. As of June 30, 2018, we had an accumulated deficit of $82.4 million. To date, we have financed our operations primarily through preferred stock financings and amounts borrowed under the Loan Agreement. We have devoted substantially all of our financial resources to research and development activities as well as general and administrative expenses associated with our operations, including clinical and regulatory initiatives to obtain marketing approval.

Following this offering, we expect that our operating expenses will continue to increase as we (i) build our commercial infrastructure, (ii) develop, enhance, seek FDA regulatory approval for, and begin to commercialize, if approved, our r-SNM System in the United States, (iii) increase our commercialization efforts internationally, and (iv) incur additional operational costs associated with being a public company. For example, we intend to hire approximately 60 sales representatives, which we will initially endeavor to hire in anticipation of our potentially receiving FDA approval to support the commercial launch of our r-SNM System in the United States and expect to grow our sales force over time and the number of our sales representatives at commercial launch will vary and may be higher depending on the duration of the PMA review process. If we are delayed in obtaining approval of our r-SNM System by the FDA, we may be required to offer increased compensation to our U.S. sales team in order to retain them, which would further increase our operational costs. As a result, we expect to continue to incur operating losses for the foreseeable future. Our expected future operating losses, combined with our prior operating losses, may adversely affect the market price of our common stock and our ability to raise capital and continue operations.

If approved by the FDA, we expect that sales of our r-SNM System will account for the substantial majority of our future revenue. If our r-SNM System does not achieve an adequate level of acceptance by physicians, health care payors, and patients and does not receive adequate reimbursement from third party payors, we may not generate sufficient revenue and we may not be able to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability in subsequent periods or on an ongoing basis. If we do not achieve or sustain profitability, it will be more difficult for us to finance our business and accomplish our strategic objectives, either of which would have a material and adverse effect on our business, financial condition and results of operations and cause the market price of our common stock to decline.

Our r-SNM System is currently our sole product, and we are completely dependent on the success of our r-SNM System. We have limited experience marketing and selling our r-SNM System, and if we are unable to establish, manage, and maintain sales and marketing capabilities, we will be unable to successfully commercialize our r-SNM System or generate product revenue.

Our r-SNM System is currently our sole product, and we are completely dependent on its success. Successfully commercializing medical devices such as ours is a complex and uncertain process. Our commercialization efforts will depend on the efforts of our management and sales team, our third-party manufacturers and suppliers, physicians and hospitals, and general economic conditions, among other factors, including the following:

 

   

our ability to successfully complete our ARTISAN-SNM pivotal study and to obtain regulatory approval in the United States for our r-SNM System for the treatment of UUI;

 

   

the effectiveness of our marketing and sales efforts in the United States and internationally;

 

   

our third-party manufacturers’ and suppliers’ ability to manufacture and supply the components of our r-SNM System in a timely manner and in accordance with our specifications;

 

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the availability, perceived advantages, relative cost, relative safety, and relative efficacy of alternative and competing therapies;

 

   

our ability to obtain, maintain, and enforce our intellectual property rights in and to our r-SNM System;

 

   

the emergence of competing technologies and other adverse market developments, and our need to enhance our r-SNM System and/or develop new products to maintain market share in response to such competing technologies or market developments;

 

   

our ability to achieve and maintain compliance with all regulatory requirements applicable to our r-SNM System; and

 

   

our ability to successfully conduct additional clinical studies as may be required by the FDA or comparable non-U.S. regulatory authorities to enable our r-SNM System to be approved for additional indications.

We currently have a limited sales and marketing organization outside the United States and we do not have a sales or marketing organization in the United States. We began marketing and selling our r-SNM System in certain limited European markets in 2018. As a result, we have limited experience marketing and selling our r-SNM System. We currently sell our r-SNM System through a limited direct sales force in Europe, that targets physicians and hospitals. As of September 30, 2018, our limited direct sales organization in Europe consisted of four employees.

In order to generate future revenue growth, we plan to expand the size and geographic scope of our sales and marketing organization. Our future success will depend largely on our ability to hire, train, retain and motivate skilled sales, marketing and reimbursement personnel with significant industry experience and technical knowledge of implantable devices and related products. Because the competition for their services is high, we may not be able to hire and retain additional personnel on favorable or commercially reasonable terms, if at all. If we are delayed in obtaining approval of our r-SNM System by the FDA, we may be required to offer increased compensation to our U.S. sales team in order to retain them. However, even if we do that, we may lose members of our sales team who do want or are not able to wait until we obtain approval from the FDA without actively selling our product or earning less than they would otherwise if our product were approved in the United States. Our failure to hire or retain qualified sales, marketing and reimbursement personnel would prevent us from expanding our business and generating revenue.

Once hired, the training process for sales representatives can be lengthy because it requires significant education for new sales representatives to achieve the level of clinical competency with our product expected by physicians. Upon completion of the training, we expect that the sales representatives would require lead time in the field to grow their network of accounts and achieve the productivity levels we expect them to reach in any individual territory. Furthermore, the use of our product will often require or benefit from direct support from us. If we are unable to attract, motivate, develop and retain a sufficient number of qualified sales personnel, and if our sales representatives do not achieve the productivity levels we expect them to reach, our revenue will not grow at the rate we expect and our financial performance will suffer. Also, to the extent we hire personnel from our competitor, we may have to wait until applicable non-competition provisions have expired before deploying such personnel in restricted territories or incur costs to relocate personnel outside of such territories. This may subject us to allegations that these new hires have been improperly solicited, or that they have divulged to us proprietary or other confidential information of their former employers. Addressing such allegations would be costly both in terms of time and resources. Any of these risks may adversely affect our business.

If we are not successful in recruiting sales, marketing and reimbursement personnel or building a sales and marketing infrastructure, we will have difficulty successfully commercializing our r-SNM System, which

 

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would adversely affect our business, operating results and financial condition. If we are not successful in commercializing our r-SNM System, our future product revenue will suffer and we would likely incur significant additional losses. Any factors that adversely impact the commercialization of our r-SNM System will have a negative impact on our business, results of operations and financial condition.

We will require substantial additional capital to finance our planned operations, which may not be available to us on acceptable terms or at all. As a result, we may not be able to implement our planned sales and marketing program to increase the adoption of our r-SNM System.

Our operations have consumed substantial amounts of cash since inception, primarily due to our research and development activities and conducting clinical studies for our r-SNM System. We expect these activities and the associated expenses to continue following this offering. We also expect our expenses to increase substantially in connection with our plan to commercialize our r-SNM System in the United States and internationally. Additional expenditures will also include costs associated with manufacturing and supply, sales and marketing costs, costs and expenses incidental to being a public company, and general operations. In addition, other unanticipated costs may arise.

As of June 30, 2018, we had cash, cash equivalents and short-term investments of $39.9 million. We believe that the net proceeds from this offering, together with our existing cash, cash equivalents and short-term investments, will fund our projected operating expenses and capital expenditure requirements for at least the next 12 months.

Our present and future funding requirements will depend on many factors, including:

 

   

our ability to successfully complete our ARTISAN-SNM pivotal study and to obtain regulatory approval in the United States for our r-SNM System for the treatment of UUI and the associated costs;

 

   

the costs associated with manufacturing, selling, and marketing our r-SNM System for the treatment of UUI in the United States, if approved by the FDA, and for other indications for which we receive regulatory clearance or approval, including the cost and timing of implementing our sales and marketing plan and expanding our manufacturing capabilities;

 

   

our ability to effectively market and sell, and achieve sufficient market acceptance and market share for, our r-SNM System;

 

   

the costs to establish, maintain, expand, and defend the scope of our intellectual property portfolio, as well as any other action required in connection with licensing, preparing, filing, prosecuting, defending, and enforcing any patents or other intellectual property rights;

 

   

the emergence of competing technologies and other adverse market developments, and our need to enhance our r-SNM System and/or develop new products to maintain market share in response to such competing technologies or market developments;

 

   

our ability to establish and maintain strategic licensing or other arrangements and the financial terms of such agreements;

 

   

the time and cost necessary to complete post-market studies that could be required by regulatory authorities or other studies required to obtain clearance for additional indications;

 

   

the timing, receipt, and amount of license fees and sales of, or royalties on, or future improvements on our r-SNM System, if any; and

 

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our need to implement additional internal systems and infrastructure, including financial and reporting systems, incidental to being a public company.

We may need to raise additional capital or alternatively we may seek to raise only equity capital. If we raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or liens, making capital expenditures or declaring dividends. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our r-SNM System, technologies, future revenue streams or research programs, or grant licenses on terms that may not be favorable to us. If we are unable to obtain adequate financing when needed and on terms that are acceptable to us, we may have to delay, reduce the scope of or suspend the implementation of our sales and marketing plan and our ongoing research and development efforts, which would have a material adverse effect on our business, financial condition, and results of operations.

We rely on the License Agreement to provide us with rights to use the AMF IP to develop and commercialize the AMF Licensed Products, which are used in our r-SNM System. Any termination or loss of significant rights under the License Agreement would materially and adversely affect our development and commercialization of our r-SNM System.

On October 1, 2013, we entered into the License Agreement pursuant to which AMF agreed to license to us the AMF IP to develop and commercialize the AMF Licensed Products. Any and all improvements to the AMF IP made by us will be owned by AMF and licensed to us under the License Agreement for purposes of making AMF Licensed Products.

Pursuant to the License Agreement, AMF granted us a royalty-bearing, sublicensable (by written, executed agreements only, subject to the terms of the License Agreement) license, under the AMF IP to make, have made, lease, offer to lease, use, sell, offer for sale, market, promote, advertise, import, research, develop and commercialize the AMF Licensed Products worldwide for the treatment of (i) chronic pain in humans through the application of electrical energy to the nervous system, (ii) inflammatory conditions of the human body through the application of electrical energy to the vagus nerve, a nerve that interfaces with parasympathetic control of the heart, lungs and digestive tract and (iii) urinary and fecal dysfunction in humans through the application of electrical energy anywhere in or on the human body, excluding, in each case, any product or method that involves the placement of electrodes or the administration of electrical stimulation inside the cranial cavity or to the ocular nervous system or the auditory nervous system. We have the right to expand the field of use for the AMF IP to the (i) treatment of any condition (other than inflammatory conditions) in humans through the application of electrical energy to the vagus nerve or anywhere else in the body other than the vagus nerve, and (ii) modulation of digestive process and treatment of digestive conditions in humans through the application of electrical energy anywhere in or on the body, subject to the exclusions described above.

Generally, the license is non-transferable without the prior written consent of AMF, except to an affiliate of our company or in connection with the acquisition of our company (whether by merger, consolidation, sale or otherwise) or the part of our business to which the License Agreement relates, provided that the assignee agrees in writing to be bound to the terms of the License Agreement to which we are bound.

The license is co-exclusive with AMF solely with respect to (i) AMF IP resulting from AMF’s performance of any engineering services rendered under the License Agreement, and (ii) AMF’s right to use AMF IP for non-commercial research, educational and scholarly purposes.

We granted to AMF a royalty-free, worldwide, sublicensable, perpetual, exclusive license to any patent rights controlled by us that arise out of our improvements to the inventions claimed in the AMF IP, or the

 

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Axonics Licensed IP. This license granted by us to AMF explicitly excludes uses of the Axonics Licensed IP that are within the scope of the exclusive license of the AMF IP granted by AMF to us. Such license is irrevocable unless we terminate the License Agreement and AMF does not agree to pay us compensation for such license mutually agreed between us and AMF or determined by arbitration in accordance with the terms of the License Agreement.

In addition, the License Agreement provides AMF with the option, or the AMF Option, to license from us any intellectual property owned by us or otherwise in our control that is related to electrical stimulation of human tissue, separate from the Axonics Licensed IP and AMF IP, on terms that are materially consistent with the terms upon which we license the AMF IP pursuant to the License Agreement, and subject to field of use restrictions that would be determined upon the exercise of the AMF Option. AMF has expressly declined in writing to exercise the AMF Option.

Pursuant to the License Agreement, we are obligated to pay a 4% royalty of all net revenue derived from the AMF Licensed Products if one of the following conditions applies: (i) one or more valid claims within any of the patents licensed to us by AMF covers such AMF Licensed Products or the manufacture of such AMF Licensed Products or (ii) for a period of 12 years from the first commercial sale anywhere in the world of such AMF Licensed Product, in each case, subject to certain adjustments.

In 2017, we sold several of our r-SNM Systems as part of a one-time evaluation agreement with a hospital in Canada. As a result, we generated net revenue of $128,118 and recorded related royalties of $4,972 during the fiscal year ended December 31, 2017. No revenue was generated and no payments were made during the fiscal year ended December 31, 2016. In addition, beginning in 2018, we are required to pay AMF a minimum annual royalty, or the Minimum Royalty, payable quarterly if the royalty due is in excess of the Minimum Royalty, which will automatically increase each calendar year thereafter, subject to a maximum amount of $200,000 per year. We have accrued $37,500 as of June 30, 2018 toward AMF Minimum Royalties.

Under the License Agreement, for each calendar year beginning in 2018, we are obligated to pay AMF the greater of (i) the amount of the 4% royalty referred to above, and (ii) the Minimum Royalty for such calendar year beginning with 2018. We have 60 days to pay AMF this amount, and if we fail to pay AMF within such 60-day period, AMF may, at its election, convert the exclusive license to a non-exclusive license or terminate the License Agreement.

The License Agreement was amended twice in February 2014, once in connection with our Series A preferred stock financing, in order to, among other things, include the field of the treatment of urinary and fecal dysfunction in humans through the application of electrical energy anywhere in or on the human body, within the scope of the licenses granted therein, an option under the License Agreement that required us to pay $1.0 million. In consideration for the inclusion of this field with the scope of the licenses granted in License Agreement, we issued AMF 50,000 shares of our Series A preferred stock.

As of June 30, 2018, AMF holds 888,000 shares of our common stock, 125,000 shares of our Series A preferred stock, and 771,161 shares of our Series B-1 preferred stock. John Petrovich, a member of our board of directors, is the President, Chief Executive Officer, Senior Vice President of Business Development, and General Counsel of AMF. For additional information about the License Agreement, see “Business—AMF License Agreement.”

The initial term of the License Agreement is from October 1, 2013 to October 1, 2033, and will automatically continue until all patents are no longer in force. Upon completion of the initial term, the license granted pursuant to the License Agreement will be fully paid-up and perpetual except that if we wish to continue to practice any of the patents licensed to us by AMF that remain in force after such initial term, then we will have to continue to pay a reduced royalty for so long as such patent remains in force.

 

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Each party may terminate the License Agreement if the other party commits a material breach of any obligation under the License Agreement and such breach is not cured within 90 days following receipt of notice of such breach from the other party. AMF may terminate the License Agreement upon (i) notice to us in the event we challenge or assist any other person or entity in challenging the patentability, enforceability or validity of any of the AMF patents licensed to us under the License Agreement, subject to certain exceptions including challenges that we are not infringing any such AMF patent, and (ii) upon our filing of or the institution of bankruptcy, reorganization, liquidation or receivership proceedings, or upon an assignment of a substantial portion of our assets for the benefit of creditors, and in the case of involuntary bankruptcy, in the event we consent to such bankruptcy and it is not dismissed within 90 days. Lastly, we may terminate the License Agreement in full for any reason effective upon 60 days written notice to AMF.

In the event of certain termination by AMF, we may be required to pay damages to AMF and AMF may have the right to terminate the license. In addition, if any of the royalties or other cash payments become due under the terms of the License Agreement, we may not have sufficient funds available to meet our payment obligations, which would allow AMF to terminate the License Agreement. Any termination or loss of rights (including exclusivity) under the License Agreement would materially and adversely affect our ability to develop and commercialize our r-SNM System, which in turn would have a material adverse effect on our business, operating results and prospects.

We are reliant on a single product and if we are not successful in commercializing our r-SNM System our business will not succeed.

Our success depends completely on our r-SNM System, which is our sole product. We currently have no other product available for sale. If our r-SNM System is not successful at a level sufficient to generate a profit and we are unable to develop additional products or compelling enhancements to our r-SNM System to generate additional profit, our business will not succeed.

For over 20 years, physicians and patients have relied on the only approved SNM therapy offered by Medtronic plc, or Medtronic, InterStim II and its predecessor, InterStim I. As our r-SNM System will be a new product in the SNM market, our primary strategy to penetrate the market and grow our revenue is to drive physician and patient awareness of the material benefits of our r-SNM System. Physicians and patients may choose not to adopt our r-SNM System for a number of reasons, including:

 

   

familiarity with InterStim II or preference for any new device for the treatment of SNM that Medtronic could develop and commercialize in the future;

 

   

inability to use our r-SNM System on-label for additional unapproved indications;

 

   

lack of experience with our r-SNM System and with SNM as a treatment alternative;

 

   

our inability to convince key opinion leaders to provide recommendations regarding our r-SNM System, or to convince physicians and patients that it is an attractive alternative to InterStim II and other third-line therapies such as BOTOX injections and PTNS;

 

   

perceived or actual benefits of InterStim II;

 

   

perceived inadequacy of evidence supporting the clinical benefits or cost-effectiveness of our r-SNM System over existing alternatives;

 

   

inability to charge our r-SNM System or preference for a non-rechargeable device, such as InterStim II;

 

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marketing and other efforts by Medtronic targeting physicians, including those with whom they have long-term relationships; and

 

   

ineffectiveness of our sales and marketing efforts for our r-SNM System.

In addition, patients may choose not to adopt SNM therapy as a potential therapy if, among other potential reasons, their anatomy would not allow for effective treatment with our r-SNM System, they are reluctant to receive an implantable device as opposed to an alternative, non-implantable treatment, or they are worried about potential adverse effects of SNM therapy, such as infection, discomfort from the stimulation, or soreness or weakness.

We intend to focus the majority of our sales and marketing efforts in the United States where reimbursement for SNM therapy is well established and covered by most major U.S. insurers. We plan to build a specialized and dedicated direct sales organization, which will initially target the estimated 850 physician specialists that represent a majority of the implant volume in the United States. We estimate that approximately 75% of U.S. implant volume is generated by less than 1,000 physicians. In addition, we plan to strategically expand into international markets. We will initially endeavor to hire a specialty sales force of approximately 60 sales representatives in anticipation of our potentially receiving FDA approval to support the commercial launch of our r-SNM System in the United States. Further, we expect to grow our sales force over time and the number of our sales representatives at commercial launch will vary and may be higher depending on the duration of the PMA review process.

We also expect to conduct direct-to-patient marketing efforts to drive patient awareness of SNM therapy in general and our r-SNM System in particular. We believe that approximately 40% of people in the United States and Europe with OAB seek treatment, as they may be embarrassed to talk to their doctor about their symptoms and may even believe that their symptoms are untreatable. We intend to educate patients on the availability of SNM therapy as a treatment for the symptoms of OAB and FI in an effort to promote dialogue between patients and physicians about the existence of these symptoms in the first instance. Simultaneously we intend to educate physicians on the material benefits of our r-SNM System over InterStim II, which include, among others, longer battery life, smaller and lighter IPG, constant current technology, improved patient experience, and simplified physician implantation and programming. We believe that educating healthcare providers and patients about the clinical merits and patient benefits of our r-SNM System as a treatment for OAB will be key elements driving adoption of our r-SNM System. However, some physicians may have prior history with or a preference for other treatment options. Moreover, our efforts to educate the medical community and patients on the benefits of our r-SNM System will require significant resources and we may never be successful. If healthcare providers and patients do not adopt our r-SNM System, and our r-SNM System does not achieve broad market acceptance, our ability to execute our growth strategy will be impaired, and our business and future prospects may be adversely affected.

We will compete against other companies offering first-, second- and third-line therapies for the treatment of OAB, some of which have longer operating histories, more established products or greater resources than we do, which may prevent us from achieving increased market penetration and improved operating results.

The medical technology industry is highly competitive, subject to change and significantly affected by new product introductions and other activities of industry participants. Our competitors have historically dedicated and will continue to dedicate significant resources to promoting their products and developing new products or methods to treat OAB and FI. We consider our primary competition to be implantable SNM devices designed to treat OAB or FI. InterStim II is the only currently implantable SNM device approved for commercialization in the United States by the FDA, is approved for the treatment of UUI and UUF, FI and UR, and, together with its predecessor InterStim I, has been available to and used by physicians for over 20 years. Medtronic, the maker of InterStim II, is a major medical device company that has substantially greater financial,

 

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technical, sales and marketing resources than we do. The global SNM market was estimated to be approximately $605 million in 2017, which we believe is comprised of sales of SNM systems for the treatment of UUI, UUF, FI, and UR, with the United States comprising nearly 90% of the market. Given the size of the existing and potential market in the United States, we expect that as we prepare to initiate our commercial launch in the United States, Medtronic will take aggressive action to protect its current market position, which could include pursuing full body MRI and developing a rechargeable SNM device in the near future or significantly accelerating its existing plans to pursue any of these product initiatives. If Medtronic were to develop a new device that is comparable to, or more competitive than, our r-SNM System in terms of size, battery life, patient and physician ease of operation, cost and other features, the physician and patient community may prefer Medtronic’s new device over ours due to a variety of factors, including familiarity with, and loyalty to, Medtronic. Additionally, we expect that Medtronic will engage in significant marketing and other efforts with physicians, many of whom they have long-term relationships with, to promote InterStim II and any other future SNM device Medtronic could develop and prevent, delay or reduce adoption of our r-SNM System. We believe other businesses, such as Nuvectra, may be in various stages of developing SNM devices designed to treat OAB or FI. If we are successful in obtaining FDA approval for our r-SNM System, we will face significant competition in establishing our market share in the United States and may encounter unforeseen obstacles and competitive challenges in the United States.

We will also compete with other less invasive third-line treatments, such as BOTOX injections and PTNS. In addition, emerging businesses may be in the early stages of developing additional SNM devices or therapies designed to treat OAB or FI. We will also compete with invasive surgical treatment options, such as augmentation cystoplasty, which is a procedure that increases the size of the bladder.

Many of the companies against which we will compete, including Medtronic, may have competitive advantages with respect to primary competitive factors in the market, including:

 

   

greater company, product, and brand recognition;

 

   

more readily accessible sources of additional capital on attractive terms;

 

   

longer history of InterStim II use and physician familiarity with existing products and treatments;

 

   

broader regulatory approvals and more approved indications;

 

   

superior product safety, reliability, and durability;

 

   

better quality and larger volume of clinical data;

 

   

more effective marketing to, and education of, patients, physicians, and hospitals;

 

   

greater patient comfort;

 

   

more sales force experience and greater market access;

 

   

better product support and service;

 

   

more advanced technological innovation, product enhancements, and speed of innovation;

 

   

more effective pricing and revenue strategies;

 

   

lower procedure costs to patients; and

 

   

dedicated practice development.

 

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Our r-SNM System is a third-line therapy for the treatment of OAB in patients who have failed, been contraindicated or refractory for, conservative first- and second-line therapies, such as lifestyle modifications, behavioral changes or medications. First- and second-line therapies comprise the largest segment of the treatment market, and medication and other non-implantable treatments are better known to physicians and hospitals than SNM therapy. We may also face competition from pharmaceutical companies that develop new pharmacological therapies to treat OAB. If one or more device manufacturers successfully develops a device that is more effective, better tolerated or otherwise results in a better patient experience, or if improvements in other third-line therapies make them more effective, easier to use or otherwise more attractive than our therapy, our ability to penetrate the third-line segment of the treatment market or maintain market share could be significantly and adversely affected, which would have a material adverse effect on our business, financial condition and results of operations.

We have not pursued regulatory approval in the United States of our r-SNM System for indications other than for the treatment of UUI, which may limit adoption of our r-SNM System, and if we are unable to obtain approval for indications in addition to our potential approval for UUI, our marketing efforts for our r-SNM System will be limited.

We have not pursued regulatory approval in the United States for our r-SNM System for indications other than for the treatment of UUI. InterStim II is currently approved in the United States for the treatment of UUI, UUF, FI, and UR. Physicians that are familiar with and use InterStim II may not adopt our r-SNM System because they will not be able to use it on-label to treat UUF, FI, or UR. If we are unable to obtain regulatory approval for indications in addition to our potential approval for UUI, our marketing efforts for our r-SNM System and ability to drive adoption among physicians familiar with InterStim II may be severely limited. As a result, we may not generate physician and patient demand or approval of our r-SNM System.

We intend to compete against InterStim II and any future commercially available implantable SNM devices by offering material advantages over existing technology. Such advantages may not be readily adopted by the market and we may need to compete based on price or other factors, at which we may be unsuccessful.

We believe that our r-SNM System’s innovative and proprietary design offers significant competitive and functional advantages over InterStim II. We believe that our r-SNM System is the first and only system for SNM therapy with a rechargeable IPG battery that is designed to last approximately 15 years. As a result, patients implanted with our r-SNM System do not need to undergo replacement surgery on average every 4.4 years, as is the case for patients implanted with the non-rechargeable InterStim II. Our proprietary method of combining ceramic and titanium for the IPG enclosure enables us to incorporate a significantly smaller recharging coil into our IPG, which offers benefits such as 60% smaller size and half the weight of InterStim II and enhanced communication range. In addition, our r-SNM System employs constant current, which adapts to the body’s physiological changes, which we expect will provide a more consistent and reliable therapy over time and reduce patient and physician management of the therapy. Further, our r-SNM System is differentiated by significant wireless charging benefits and an easy-to-use patient remote control. Finally, we designed and custom built a touchscreen clinician programmer that guides the implanting physician through electrode placement and stimulation programming. Our clinician programmer allows physicians to connect to a patient’s IPG, while the patient is in the physician’s care, to access key therapy data that is stored and maintained on the IPG.

However, these advantages may not be perceived as well as we expect by patients and physicians. As a result, we may need to compete on the basis of price or other factors, which may negatively impact market reaction to our r-SNM System. For example, the decreasing prices may cause patients and physicians to perceive our r-SNM System to be of lower quality than InterStim II, which could limit widespread adoption and acceptance of our r-SNM System. Moreover, price competition would also likely render sales of our r-SNM System less profitable. Any of these consequences could adversely affect our business, financial condition and results of operations.

 

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Our long-term growth depends, in part, on our ability to develop and enhance our r-SNM System, and if we fail to do so we may be unable to compete effectively.

It is important to our business and our long-term growth that we continue to develop and enhance our r-SNM System. We intend to continue to invest in research and development activities focused on improvements and enhancements to our r-SNM System. Our goals include introducing market differentiating 1.5T/3.0T MRI full body conditional labelling for our r-SNM System, reducing by half the number of IPG battery recharging sessions required for the IPG to remain charged for one full month, introducing features that would enable us to connect our IPG to an already implanted InterStim II lead, and expanding the suite of product solutions available for SNM therapy over time. Additionally, we intend to pursue regulatory approval for other indications in the United States in the future.

Developing enhancements to our r-SNM System can be expensive and time-consuming and could divert management’s attention away from the commercialization of our r-SNM System and divert financial resources from other operations. The success of any new product enhancements, including approval of our r-SNM System for additional indications, will depend on several factors, including our ability to:

 

   

properly identify and anticipate physician and patient needs, and develop new product enhancements to meet those needs;

 

   

demonstrate, if required, the safety and effectiveness of new enhancements to our r-SNM System, including additional indications, with data from preclinical studies and clinical studies;

 

   

obtain, and obtain in a timely manner, the necessary regulatory clearances or approvals for new enhancements to our r-SNM System, product modifications or expanded indications for our r-SNM System;

 

   

avoid infringing upon the intellectual property rights of third-parties;

 

   

be fully FDA-compliant with marketing of new devices or modified products;

 

   

competitive counter moves advanced by Medtronic to secure and maintain customers;

 

   

develop an effective and dedicated sales and marketing team to provide adequate education and training to potential users of our r-SNM System; and

 

   

receive adequate coverage and reimbursement for procedures performed with our r-SNM System.

If we are not successful in commercializing our r-SNM System, expanding the indications for which it may be approved and developing and commercializing new product enhancements, our ability to achieve and maintain market share and increase our revenue may be impaired, which could have a material adverse effect on our business, financial condition and results of operations.

We will need to increase the size of our organization and we may be unable to manage our growth effectively.

We have been growing rapidly in recent periods and have a relatively short history of operating as a commercial company. As of September 30, 2018, we had 72 employees. We expect to hire and train new personnel as we continue to grow and expand our operations. Primarily, we plan to build a specialized and dedicated direct sales organization. We will initially endeavor to hire a specialty sales force of approximately 60 sales representatives in anticipation of our potentially receiving FDA approval to support the commercial launch of our r-SNM System in the United States. However, we may not be able to hire a sufficient number of sales

 

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representatives to support our U.S. commercial operations in time for commercial launch or at all. Further, we expect to grow our sales force over time. Any failure by us to manage our growth effectively or to hire a sufficient number of sales representatives and the number of our sales representatives at commercial launch will vary and may be higher depending on the duration of the PMA review process, could have an adverse effect on our ability to achieve our development and commercialization goals.

To achieve our revenue goals, we must successfully increase manufacturing output to meet expected customer demand. In the future, we may experience difficulties with manufacturing yields, quality control, component supply and shortages of qualified personnel, among other problems. These problems could result in delays in product availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to generate our revenue. Future growth will also impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees. In addition, rapid and significant growth will place a strain on our administrative and operational infrastructure. In order to manage our operations and growth we will need to continue to improve our operational and management controls, reporting and information technology systems and financial internal control procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our operating results and business could suffer.

In addition, as a public company, we will need to support managerial, operational, financial and other resources to manage our operations, commercialize our r-SNM System and continue our research and development activities. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth, and this growth may place significant strain on us. Successful growth will also be dependent upon our ability to implement appropriate financial and management controls. Due to our limited financial resources and our limited experience in managing a company with anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert the attention of our management and business development resources. If we fail to manage these challenges effectively, there may be an adverse effect on our business, financial condition and results of operations.

If the quality of our r-SNM System does not meet the expectations of physicians or patients, then our brand and reputation or our business could be adversely affected.

In the course of conducting our business, we must adequately address quality issues that may arise with our r-SNM System, including defects in third-party components included in our r-SNM System. Although we have established internal procedures designed to minimize risks that may arise from quality issues, we may not be able to eliminate or mitigate occurrences of these issues and associated liabilities. In addition, even in the absence of quality issues, we may be subject to claims and liability if the performance of our r-SNM System does not meet the expectations of physicians or patients. For example, the anticipated battery life of our r-SNM System will vary based on usage and therapy settings. The battery is designed to last for approximately 15 years, but it may be shorter if a patient’s required therapy results in the device being used in excess of normal use conditions or if other physical battery failures occur. If the quality of our r-SNM System does not meet the expectations of physicians or patients, then our brand and reputation with those physicians or patients, and our business, financial condition and results of operations, could be adversely affected.

The size and future growth in the market for SNM therapy has not been established with precision and may be smaller than we estimate, possibly materially. If our estimates and projections overestimate the size of this market, our sales growth may be adversely affected.

Our estimates of the size and future growth in the market for SNM therapy, including the number of people in the United States and Europe who suffer from symptoms of either OAB or FI and who are readily treatable with and eligible candidates for SNM therapy, is based on a number of internal and third-party studies, reports and estimates. In addition, our internal estimates are based in large part on current treatment patterns by

 

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healthcare providers using SNM therapy and our belief that the incidence of OAB and FI in the United States, Europe and worldwide is increasing. While we believe these factors have historically provided and may continue to provide us with effective tools in estimating the total market for SNM therapy and our r-SNM System, these estimates may not be correct and the conditions supporting our estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. The actual numbers of people with OAB and FI who are readily treatable with and eligible candidates for SNM therapy, and the actual demand for our r-SNM System or competitive products, could differ materially from our projections if our assumptions are incorrect. As a result, our estimates of the size and future growth in the market for our r-SNM System may prove to be incorrect. If the actual number of people with OAB and FI who would benefit from our r-SNM System and the size and future growth in the market for our r-SNM System is smaller than we have estimated, it may impair our projected sales growth and have an adverse impact on our business. Additionally, while we have regulatory approvals in Europe, Canada, and Australia for OAB, FI, and UR, we initially intend to pursue regulatory approval in the United States for UUI, a predominant OAB subtype, and we intend to seek regulatory approval for other indications in the United States in the future.

We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third-parties that may not result in the development of commercially viable products or product improvements or the generation of significant future revenues.

In the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, partnerships or other arrangements to develop new products or product improvements and to pursue new markets. Proposing, negotiating and implementing collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing, sales, technology or other business resources, may compete with us for these opportunities or arrangements. We may not identify, secure, or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited institutional knowledge and experience with respect to these business development activities, and we may also not realize the anticipated benefits of any such transaction or arrangement. In particular, these collaborations may not result in the development of products that achieve commercial success or viable product improvements or result in significant revenues and could be terminated prior to developing any products.

Additionally, we may not be in a position to exercise sole decision making authority regarding the transaction or arrangement, which could create the potential risk of creating impasses on decisions, and our future collaborators may have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise with our collaborators, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations or the ownership or control of intellectual property developed during the collaboration. If any conflicts arise with any future collaborators, they may act in their self-interest, which may be adverse to our best interest, and they may breach their obligations to us. In addition, we may have limited control over the amount and timing of resources that any future collaborators devote to our or their future products. Disputes between us and our collaborators may result in litigation or arbitration which would increase our expenses and divert the attention of our management. Further, these transactions and arrangements will be contractual in nature and will generally be terminable under the terms of the applicable agreements and, in such event, we may not continue to have rights to the products relating to such transaction or arrangement or may need to purchase such rights at a premium.

If we enter into in-bound intellectual property license agreements, we may not be able to fully protect the licensed intellectual property rights or maintain those licenses. Future licensors could retain the right to prosecute and defend the intellectual property rights licensed to us, in which case we would depend on the ability of our licensors to obtain, maintain and enforce intellectual property protection for the licensed intellectual property. These licensors may determine not to pursue litigation against other companies or may pursue such

 

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litigation less aggressively than we would. Further, entering into such license agreements could impose various diligence, commercialization, royalty or other obligations on us. Future licensors may allege that we have breached our license agreement with them, and accordingly seek to terminate our license, which could adversely affect our competitive business position and harm our business prospects.

We may seek to grow our business through acquisitions of complementary products or technologies, and the failure to manage acquisitions, or the failure to integrate them with our existing business, could harm our business, financial condition and operating results.

From time to time, we may consider opportunities to acquire other companies, products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. Potential acquisitions involve numerous risks, including:

 

   

problems assimilating the acquired products or technologies;

 

   

issues maintaining uniform standards, procedures, controls and policies;

 

   

unanticipated costs associated with acquisitions;

 

   

diversion of management’s attention from our existing business;

 

   

risks associated with entering new markets in which we have limited or no experience;

 

   

increased legal and accounting costs relating to the acquisitions or compliance with regulatory matters; and

 

   

unanticipated or undisclosed liabilities of any target.

We have no current commitments with respect to any acquisition. We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired products or technologies. Our potential inability to integrate any acquired products or technologies effectively may adversely affect our business, operating results and financial condition.

The implementation of a new enterprise resource planning system could cause disruption to our business and operations.

We are in the process of implementing a new enterprise resource planning system, or ERP system. This system will integrate our operations, including supply-chain, order entry, manufacturing, inventory and financial reporting, among others. ERP system implementations are complex projects that require significant investment of capital and human resources, the reengineering of many business processes and the attention of many employees who would otherwise be focused on other aspects of our business. Any disruptions, delays or deficiencies in the design and implementation of the improvements to our ERP system may result in potentially much higher costs than anticipated and may adversely affect our ability to develop and launch solutions, fulfill contractual obligations, file reports with the Securities and Exchange Commission, or SEC, in a timely manner or otherwise operate our business and our controls environment. Moreover, despite our security measures, our information technology systems, including the ERP system, are vulnerable to damage or interruption from fires, floods and other natural disasters, terrorist attacks, computer viruses or hackers, power losses and computer system or data network failures, which could result in significant data losses or theft of sensitive or proprietary information. Any of these consequences may harm our business.

 

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Potential complications from our r-SNM System or future enhancements to our r-SNM System may not be revealed by our clinical experience.

Based on our experience, complications from use of our r-SNM System may include infection, pain at site, lead migration or fracture, and the body’s rejection of the implant. However, if unanticipated side-effects result from the use of our r-SNM System, we could be subject to liability and our device would not be widely adopted. Long-term use may result in unanticipated complications, even after the device is removed. Additionally, while the IPG battery for our r-SNM System is designed to last approximately 15 years, we have not tested the battery in an actual implant in the body for that period and the battery may not last that long under normal or atypical use conditions. If implants in people reveal that our battery fails before its designed 15-year life, physicians and patients may lose confidence in our r-SNM System, which may materially harm our reputation and our business.

Our ability to achieve profitability will depend, in part, on our ability to reduce the per unit manufacturing cost of our r-SNM therapy.

Currently, the gross profit generated from the sale of our r-SNM System is not sufficient to cover our operating expenses. To achieve our operating and strategic goals, we need to, among other things, reduce the per unit manufacturing cost of our r-SNM System. This cannot be achieved without increasing the volume of components that we purchase in order to take advantage of volume-based pricing discounts, improve manufacturing efficiency or increase our volume to leverage manufacturing overhead costs. If we are unable to improve manufacturing efficiency and reduce manufacturing overhead costs per unit, our ability to achieve profitability will be severely constrained. Any increase in manufacturing volumes is dependent upon a corresponding increase in sales. The occurrence of one or more factors that negatively impact the manufacturing or sales of our r-SNM System or reduce our manufacturing efficiency may prevent us from achieving our desired reduction in manufacturing costs, which would negatively affect our operating results and may prevent us from attaining profitability.

If we fail to receive access to hospital facilities, our sales may decrease.

In the United States, in order for physicians to use our r-SNM System, we expect that the hospital facilities where these physicians treat patients will typically require us to enter into purchasing contracts. This process can be lengthy and time-consuming and require extensive negotiations and management time. In the European Union, or EU, certain institutions may require us to engage in a contract bidding process in the event that such institutions are considering making purchase commitments that exceed specified cost thresholds, which vary by jurisdiction. These processes are only open at certain periods of time, and we may not be successful in the bidding process. If we do not receive access to hospital facilities via these contracting processes or otherwise, or if we are unable to secure contracts or tender successful bids, our sales may decrease and our operating results may be harmed. Furthermore, we may expend significant effort in these time-consuming processes and still may not obtain a purchase contract from such hospitals.

Our indebtedness to Silicon Valley Bank may limit our flexibility in operating our business and adversely affect our financial health and competitive position, and all of our obligations to Silicon Valley Bank are secured by substantially all of our assets, excluding our intellectual property assets. If we default on these obligations, Silicon Valley Bank could foreclose on our assets.

In February 2018, we entered into the Loan and Security Agreement, or the Loan Agreement, with Silicon Valley Bank providing for a term loan, or the Term Loan. Pursuant to the Loan Agreement, we may request up to $20.0 million in three tranches of term loans, with such drawn obligations maturing on June 1, 2021. We requested $10.0 million from the first tranche, or Tranche A, simultaneously with the entry into the Loan Agreement, which is currently outstanding. We may request an additional $5.0 million, or Tranche B, after the date commencing on the later of (i) the date that we achieve positive three-month results in our

 

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ARTISAN-SNM pivotal study, as confirmed to Silicon Valley Bank by a member of our management team and a member of our board of directors, and (ii) July 1, 2018, and ending on December 31, 2018, and another $5.0 million, or Tranche C, and together with Tranche A and Tranche B, the Tranches, after the date commencing on the later of (i) the date that Silicon Valley Bank receives evidence, in form and substance reasonably satisfactory to Silicon Valley Bank, that we have received our PMA in the United States for our r-SNM System or gross proceeds from the sale of our equity securities of not less than $20.0 million (which condition was satisfied when we issued and sold 2,233,333 shares of our Series C preferred stock in March 2018 for aggregate gross proceeds of $20,099,997), and (ii) January 1, 2019, and ending on March 31, 2019, subject to certain terms and conditions. If either Tranche B or Tranche C is drawn, then the maturity of the Term Loan is automatically extended to December 1, 2021.

The Loan Agreement provides for monthly interest payments through December 31, 2018; provided that, (i) if we request and Silicon Valley Bank funds Tranche B or Tranche C, this interest-only period automatically extends through June 30, 2019, and (ii) if we have received a PMA in the United States for our r-SNM System and we request and Silicon Valley Bank funds Tranche C, the interest-only period automatically extends through December 31, 2019. On the first day of the end of the interest only period, we will be required to repay the Term Loan in equal monthly installments of principal plus interest through maturity. Outstanding principal balances under the Term Loan bear interest at the prime rate plus 1.75%.

In October 2018, we and Silicon Valley Bank entered into an amendment to the Loan Agreement, or the Loan Amendment, in connection with which we requested the full $5.0 million from Tranche B and the full $5.0 million from Tranche C. Pursuant to the Loan Amendment, Silicon Valley Bank has agreed to (i) extend the interest only period from June 30, 2019 to December 31, 2019, without requiring our receipt of a PMA in the United States for our r-SNM System, and (ii) make Tranche C available now instead of January 1, 2019. In addition, pursuant to the Loan Amendment, we are obligated to pay Silicon Valley Bank a fee of $100,000 in the event that we do not (i) consummate this offering, with proceeds of no less than $75.0 million, (ii) receive PMA approval in the United States for our r-SNM System, or (iii) receive gross proceeds of at least $40.0 million from the sale of our equity securities, in each case on or prior to June 30, 2019. In addition, as a result of our request of the full $5.0 million from Tranche B and the full $5.0 million from Tranche C, the maturity of the Term Loan has been automatically extended to December 1, 2021.

We may prepay amounts outstanding under the Term Loan in increments of $5.0 million at any time with 30 days prior written notice to Silicon Valley Bank. However, all prepayments of the Term Loan prior to maturity, whether voluntary or mandatory (acceleration or otherwise), are also subject to the payment of a prepayment fee equal to (i) for a prepayment made on or after the closing date through and including the first anniversary of the closing date, 3.00% of the principal amount of the Term Loan being prepaid, (ii) for a prepayment made after the date which is the first anniversary of the closing date through and including the second anniversary of the closing date, 2.00% of the principal amount of the Term Loan being prepaid, and (iii) for a prepayment made after the date which is the second anniversary of the closing date and before the maturity date, 1.00% of the principal amount of the Term Loan being prepaid. Additionally, on the earliest to occur of (i) the maturity date of the Term Loan, (ii) the acceleration of the Term Loan, or (iii) the prepayment of the Term Loan, we will be required to make a final payment equal to the original principal amount of such Tranche multiplied by 7.50%. We are currently accruing the portion of the final payment calculated based on the amount outstanding under the Term Loan.

All obligations under the Term Loan are secured by a first priority lien on substantially all of our assets, excluding intellectual property assets and more than 65% of the shares of voting capital stock of any of our foreign subsidiaries. We have agreed with Silicon Valley Bank not to encumber our intellectual property assets without its prior written consent unless a security interest in the underlying intellectual property is necessary to have a security interest in the accounts and proceeds that are part of the assets securing the Term Loan, in which case our intellectual property shall automatically be included within the assets securing the Term Loan. As a result, if we default on any of our obligations under the Loan Agreement, Silicon Valley Bank could foreclose on

 

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its security interest and liquidate some or all of the collateral, which would harm our business, financial condition and results of operations and could require us to reduce or cease operations.

In order to service this indebtedness and any additional indebtedness we may incur in the future, we need to generate cash from our operating activities. Our ability to generate cash is subject, in part, to our ability to successfully execute our business strategy, as well as general economic, financial, competitive, regulatory and other factors beyond our control. Our business may not be able to generate sufficient cash flow from operations, and future borrowings or other financings may not be available to us in an amount sufficient to enable us to service our indebtedness and fund our other liquidity needs. To the extent we are required to use cash from operations or the proceeds of any future financing to service our indebtedness instead of funding working capital, capital expenditures or other general corporate purposes, we will be less able to plan for, or react to, changes in our business, industry and in the economy generally. This could place us at a competitive disadvantage compared to our competitors that have less indebtedness.

The Loan Agreement contains certain covenants that limit our ability to engage in certain transactions that may be in our long-term best interest. Subject to certain limited exceptions, these covenants limit our ability to or prohibit us to permit any of our subsidiaries to, as applicable, among other things:

 

   

pay cash dividends on, make any other distributions in respect of, or redeem, retire or repurchase, any shares of our capital stock;

 

   

convey, sell, lease, transfer, assign, or otherwise dispose of all or any part of our business or property;

 

   

effect certain changes in our business, management, ownership or business locations;

 

   

merge or consolidate with, or acquire all or substantially all of the capital stock or property of any other company;

 

   

create, incur, assume, or be liable for any additional indebtedness, or create, incur, allow, or permit to exist any additional liens;

 

   

make certain investments; and

 

   

enter into transactions with our affiliates.

While we have not previously breached and are currently in compliance with the covenants contained in the Loan Agreement, we may breach these covenants in the future. Our ability to comply with these covenants may be affected by events and factors beyond our control. In the event that we breach one or more covenants, Silicon Valley Bank may choose to declare an event of default and require that we immediately repay all amounts outstanding under the Loan Agreement, terminate any commitment to extend further credit and foreclose on the collateral. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

Our results of operations could be materially harmed if we are unable to accurately forecast customer demand for our r-SNM System and manage our inventory.

If our r-SNM System is approved in the United States, to ensure adequate inventory supply, we must forecast inventory needs and place orders with suppliers based on our estimates of future demand for our r-SNM System. If approved in the United States, we anticipate there will be an increased demand for our r-SNM System, and our limited historical experience in foreign markets may not provide us with enough data to accurately predict future demand. Our ability to accurately forecast demand for our r-SNM System could be negatively affected by many factors, including our failure to adequately manage our expansion efforts, product introductions by competitors, an increase or decrease in customer demand for our r-SNM System or for products of our

 

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competitors, our failure to accurately forecast customer acceptance of new product enhancements, unanticipated changes in general market conditions or regulatory matters, and weakening of economic conditions or consumer confidence in future economic conditions.

Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand. Similarly, a portion of our inventory could become obsolete or expire, which could have a material and adverse effect on our earnings and cash flows due to the resulting costs associated with inventory impairment charges and costs required to replace obsolete inventory. Any of these occurrences could negatively impact our financial performance.

Conversely, if we underestimate customer demand for our r-SNM System, we may not be able to deliver sufficient products to meet our customers’ requirements, which could result in damage to our reputation and customer relationships. In addition, if we experience a significant increase in demand, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers or our third-party manufacturers may not be able to allocate sufficient resources to meet our increased requirements, which could have an adverse effect on our ability to meet customer demand for our r-SNM System and our results of operations.

We rely on third parties for the manufacture of our r-SNM System. This reliance on third parties increases the risk that we will not have sufficient quantities of our r-SNM System or such quantities at an acceptable cost, and reduces our control over the manufacturing process, which could delay, prevent, or impair our development or commercialization efforts.

We currently rely, and expect to continue to rely, on third-party manufacturers for the manufacture of certain components of our r-SNM System. For our off-the-shelf components, we do not have long-term supply agreements with many of our third-party manufacturers, and we purchase certain components of our r-SNM System on a purchase order basis. We may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

 

   

the possible failure of the third party to manufacture any such component of our r-SNM System according to our schedule, or at all, including if our third-party contractors give greater priority to the supply of other products over our r-SNM System or otherwise do not satisfactorily perform according to the terms of the agreements and/or purchase orders between us and them;

 

   

the possible termination or nonrenewal of agreements by our third-party contractors at a time that is costly or inconvenient for us;

 

   

the possible breach by the third-party manufacturers of our agreements with them;

 

   

the failure of third-party manufacture to comply with applicable regulatory requirements;

 

   

the possible failure of the third-party to manufacture such component of our r-SNM System according to our specifications; and

 

   

the possible misappropriation of our proprietary information, including our trade secrets and know-how.

We do not have complete control over all aspects of the manufacturing process of, and are dependent on, our contract manufacturing partners for compliance with current Good Manufacturing Practice, or cGMP, regulations applicable to our r-SNM System. Third-party manufacturers may not be able, or fail, to comply with cGMP regulations or similar regulatory requirements outside of the United States. If our third-party manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain marketing approval for their manufacturing facilities.

 

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In addition, we do not have complete control over the ability of our third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority withdraws any such approval they have already procured, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain marketing approval for or market our r-SNM System. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls, operating restrictions and criminal prosecutions, any of which could significantly and adversely harm our business and results of operations.

Any performance failure on the part of our existing or future manufacturers could delay marketing approval. We do not currently have arrangements in place for redundant supply of certain components of our r-SNM System. If our current third-party manufacturers cannot perform as agreed, we may be required to replace those manufacturers. Although we believe that there are several potential alternative manufacturers who could manufacture these components, we may incur added costs and delays in identifying and qualifying any such replacement.

Our current and anticipated future dependence upon others for the manufacture of our r-SNM System may adversely affect our future profit margins and our ability to commercialize our r-SNM System on a timely and competitive basis.

We have a limited history of manufacturing and assembling our r-SNM System in commercial quantities and may encounter related problems or delays that could result in lost revenue.

The manufacturing process of our r-SNM System includes sourcing components from various third-party suppliers, assembly and testing. We must manufacture and assemble these systems in compliance with regulatory requirements and at an acceptable cost in order to achieve and maintain profitability. We have only a limited history of manufacturing and assembling our r-SNM System and, as a result, we may have difficulty manufacturing and assembling this system in sufficient quantities in a timely manner. To manage our manufacturing and operations with our suppliers, we will need to forecast anticipated product orders and material requirements to predict our inventory needs from six months to a year in advance and enter into purchase orders on the basis of these requirements. Our limited manufacturing history may not provide us with enough data to accurately predict future component demand, fluctuations in availability and pricing of commodity materials of supply, and, to anticipate our costs and supply needs effectively. We may in the future experience delays in obtaining components from suppliers, which could impede our ability to manufacture and assemble our r-SNM System on our expected timeline. As a result of this or any other delays, we may encounter difficulties in production of our r-SNM System, including problems with quality control and assurance, component supply shortages or surpluses (including with respect to the ceramic and titanium we use in our r-SNM System), increased costs, shortages of qualified personnel and difficulties associated with compliance with local, state, federal and foreign regulatory requirements.

Performance issues, service interruptions or price increases by shipping carriers could adversely affect our business and harm our reputation and ability to provide our r-SNM System on a timely basis.

Expedited, reliable shipping will be essential to our operations. We intend to rely heavily on providers of transport services for reliable and secure point-to-point transport of our r-SNM System to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of our r-SNM System, it would be costly to replace our r-SNM System in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our r-SNM System and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters or other service interruptions affecting delivery services we use would adversely affect our ability to process orders for our r-SNM System on a timely basis.

 

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Our employees, consultants, and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

We are exposed to the risk that our employees, consultants, and other commercial partners and business associates may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA and non-U.S. regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws and regulations in the United States and internationally or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter misconduct by our employees, consultants and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees and reputational harm, and divert the attention of management in defending ourselves against any of these claims or investigations.

Consolidation in the healthcare industry or group purchasing organizations could lead to demands for price concessions, which may affect our ability to sell our r-SNM System at prices necessary to support our current business strategies.

Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators, regulators and third-party payors. Cost reform has triggered a consolidation trend in the healthcare industry to aggregate purchasing power, which may create more requests for price concessions in the future. Additionally, group purchasing organizations, independent delivery networks and large single accounts may continue to use their market power to consolidate purchasing decisions for hospitals and ambulatory surgery centers, or ASCs. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and alliances among our future customers, which may exert further downward pressure on the prices of our r-SNM System.

To successfully market and sell our r-SNM System in markets outside of the United States, we must address many international business risks with which we have limited experience, and failure to manage these risks may adversely affect our operating results and financial condition.

We currently have a limited sales and marketing organization outside the United States. We expect to have sales and operations both inside and outside the United States. Our strategy is to increase our international presence in Europe, Canada, and Australia that have established and favorable reimbursement. International sales and operations are subject to a number of risks, including:

 

   

difficulties in staffing and managing our international sales, marketing, and other operations;

 

   

increased competition as a result of more products and procedures receiving regulatory approval or otherwise being free to market in internationally;

 

   

longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

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reduced or varied protection for intellectual property rights in some countries;

 

   

export restrictions, trade regulations, and foreign tax laws;

 

   

fluctuations in foreign currency exchange rates;

 

   

foreign certification and regulatory clearance or approval requirements;

 

   

difficulties in developing effective marketing campaigns in unfamiliar foreign countries;

 

   

customs clearance and shipping delays;

 

   

political, social, and economic instability internationally, terrorist attacks, and security concerns in general;

 

   

preference for locally manufactured products;

 

   

potentially adverse tax consequences, including the complexities of foreign value-added tax, tax inefficiencies related to our corporate structure, and restrictions on the repatriation of earnings;

 

   

the burdens of complying with a wide variety of foreign laws and different legal standards;

 

   

increased financial accounting and reporting burdens and complexities; and

 

   

FCPA, OFAC, the Bribery Act, each of which is defined below, and other export control, anti-corruption, anti-money laundering and anti-terrorism laws and regulations.

If one or more of these risks are realized, our ability to expand our operations into international markets could be limited, which could adversely affect our business, financial condition and results of operations.

Our ability to maintain our competitive position will depend on our ability to retain senior management and other highly qualified personnel.

Our success will depend in part on our continued ability to retain and motivate our highly qualified management, clinical, and other personnel. We are highly dependent upon our management team, particularly our Chief Executive Officer and member of our board of directors, Raymond W. Cohen, and the other members of our senior management, and other key personnel. Although we have entered into employment agreements with our executive officers, each of them may terminate their employment with us at any time. The replacement of any of our key personnel would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives, which could have an adverse effect on our business. In addition, we do not carry any “key person” insurance policies that could offset potential loss of service under applicable circumstances.

Many of our employees have become or will soon become vested in a meaningful amount of our common stock or common stock options. Our employees may be more likely to leave us if the shares they own or have the option to purchase have significantly appreciated in value relative to the original purchase price for the shares, or if the exercise prices of the options that they hold are significantly below the market price of our common stock, particularly after the expiration of the lock-up agreements entered into in connection with this offering, as described herein. Replacement of any employees who leave our company could involve significant time and costs and may significantly delay or prevent the achievement of our business objectives, which could have an adverse effect on our business.

 

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If we are unable to achieve and maintain adequate levels of coverage or reimbursement for our r-SNM System, our commercial success may be severely hindered, and in the event insurers require a prior authorization process, such process may not result in positive coverage determination for these patients.

In the United States, we expect to derive nearly all of our revenue from the sale of our r-SNM System to hospitals and ASCs, which typically bill various third-party payors, including Medicare, Medicaid, private insurance companies, health maintenance organizations and other healthcare-related organizations. In addition, we expect that any portion of the costs and fees associated with our r-SNM System that are not covered by these third-party payors, such as deductibles or co-payments, will be billed directly to the patient by the provider. Further, certain third-party payors may not cover our r-SNM System and the related procedures because they may determine that our r-SNM System and the related procedures are experimental or investigational. Customers that perform the procedure may be subject to reimbursement claim denials upon submission of the claim. Customers may also be subject to recovery of overpayments if a third-party payor makes payment for the claim and subsequently determines that the third-party payor’s coding, billing or coverage policies were not followed. In addition, although most large insurers have established coverage policies in place to cover SNM therapy, certain commercial payors have a patient-by-patient prior authorization process that must be followed before they will provide reimbursement for SNM therapy. These processes typically involve the treating physician submitting a form to the payor that provides information about the past treatments provided to the patient that proved ineffective, and the physician’s recommendation that the patient be treated with SNM therapy. Although the prior authorization process can take several weeks, based on our industry knowledge, it generally results in positive coverage determination for these patients, however this process may not result in positive coverage determination for these patients. Further, any decline in the amount payors are willing to reimburse our target customers could make it difficult for our target customers to adopt or continue using our r-SNM System and could create additional pricing pressure for us. If we are forced to lower the price we charge for our r-SNM System, our gross margins will decrease, which could have a material adverse effect on our business, financial condition and results of operations and impair our ability to grow our business.

Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. Coverage and reimbursement for procedures using our r-SNM System can differ significantly from payor to payor. Payors continually review new and existing technologies for possible coverage and can, without notice, deny or reverse coverage for new or existing products and procedures. Third-party payor policies may not provide coverage for procedures in which our r-SNM System is used.

Outside the United States, reimbursement levels vary significantly by country and by region, particularly based on whether the country or region at issue maintains a single-payor system. SNM therapy is eligible for reimbursement in Canada, Australia, and certain countries in the EU, such as Germany, France, and the United Kingdom. Annual healthcare budgets generally determine the number of SNM systems that will be paid for by the payor in these single-payor system countries and regions. Reimbursement is obtained from a variety of sources, including government-sponsored and private health insurance plans, and combinations of both. Some countries or regions may require us to gather additional clinical data before granting coverage and reimbursement for our r-SNM System. We intend to work with payors to obtain coverage and reimbursement approval in countries and regions where it makes economic sense to do so, however, we may not obtain such coverage, which could have a material adverse effect on our business, financial condition and results of operations and impair our ability to grow our business internationally.

Third-party payors and physicians who do not cover or use our r-SNM System may require additional clinical data prior to adopting or maintaining coverage of our r-SNM System.

Our success depends on third-party payors and physician acceptance of our r-SNM System as an effective treatment option for patients with OAB. If third-party payors or physicians do not find our body of published clinical evidence and data compelling or wish to wait for additional studies, they may choose not to use or provide coverage and reimbursement for our r-SNM System.

 

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In addition, certain physicians, hospitals, ASCs and third-party payors may prefer to see longer-term safety and effectiveness data than we have produced or may be able to produce. Any data that we or others may generate in the future may not be consistent with that observed in our existing clinical studies.

We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.

Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices. This risk exists even if a device is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our r-SNM System is designed to affect, and any future enhancements to our r-SNM System will be designed to affect, important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our r-SNM System could result in patient injury or death. The medical technology industry has historically been subject to extensive litigation over product liability claims, and we may face product liability suits. We may be subject to product liability claims if our r-SNM System causes, or merely appears to have caused, patient injury or death. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with components and raw materials, may be the basis for a claim against us. Product liability claims may be brought against us by patients, healthcare providers or others selling or otherwise coming into contact with our r-SNM System, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

   

costs of litigation;

 

   

distraction of management’s attention from our primary business;

 

   

the inability to commercialize our r-SNM System and develop enhancements to our r-SNM System;

 

   

decreased demand for our r-SNM System;

 

   

damage to our business reputation;

 

   

product recalls or withdrawals from the market;

 

   

withdrawal of clinical study participants;

 

   

substantial monetary awards to patients or other claimants; or

 

   

loss of sales.

While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our r-SNM System may delay the supply to our customers and may impact our reputation. We may not be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future and these efforts may not have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our r-SNM System, either of which could have a material adverse effect on our business, financial condition and results of operations.

Although we have product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms or otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations.

 

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We bear the risk of warranty claims on our r-SNM System.

We bear the risk of warranty claims on our r-SNM System. We may not be successful in claiming recovery under any warranty or indemnity provided to us by our suppliers or third-party manufacturers in the event of a successful warranty claim against us by a customer or and any recovery from any such supplier or third-party manufacturer could be inadequate. In addition, warranty claims brought by our customers related to third-party components may arise after our ability to bring corresponding warranty claims against such suppliers or third-party manufacturers expires, which could result in costs to us.

Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the global financial crisis, could result in a variety of risks to our business, including weakened demand for our r-SNM System, and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our manufacturers or suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the economic climate and financial market conditions could adversely affect our business.

Failure of a key information technology system, process, or site could have an adverse effect on our business.

We rely extensively on information technology systems to conduct our business. These systems affect, among other things, ordering and managing materials from suppliers, shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, data security, and other processes necessary to manage our business. If our systems are damaged or cease to function properly due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our business continuity plans do not effectively compensate on a timely basis, we may experience interruptions in our operations, which could have an adverse effect on our business. Furthermore, any breach in our information technology systems could lead to the unauthorized access, disclosure and use of non-public information, including information from our patient registry or other patient information, which is protected by HIPAA, as defined below, and other laws. Any such access, disclosure, or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and damage to our reputation.

If our facilities are damaged or become inoperable, we will be unable to continue to research and develop our r-SNM System and, as a result, there will be an adverse effect on our business until we are able to secure a new facility and rebuild our inventory.

We perform substantially all of our research and development and back office activity and maintain a substantial portion of our finished goods inventory in a single location in Irvine, California. We warehouse a substantially lesser quantity of finished goods in a contract warehousing facility in the Netherlands. Our facilities, equipment and inventory would be costly to replace and could require substantial lead time to repair or replace. Our facilities, and those of our contractors, may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, tornadoes, flooding, fire and power outages, which may render it difficult or impossible for us to perform our research, development and commercialization activities for some period of time. The inability to perform those activities, combined with the time it may take to rebuild our inventory of finished product, may result in the loss of customers or harm to our reputation. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.

 

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Our results may be impacted by changes in foreign currency exchange rates.

If our international sales increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which could expose us to foreign currency risks, including changes in currency exchange rates. We do not currently engage in any hedging transactions. If we are unable to address these risks and challenges effectively, our international operations may not be successful and our business could be harmed.

We are subject to anti-bribery, anti-corruption, and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, as well as export control laws, customs laws, sanctions laws and other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures and legal expenses, which could adversely affect our business, results of operations and financial condition.

As we grow our international presence and global operations, we will be increasingly exposed to trade and economic sanctions and other restrictions imposed by the United States, EU, and other governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export control laws, the U.S. Foreign Corrupt Practices Act, or the FCPA, and other federal statutes and regulations, including those established by the Office of Foreign Assets Control, or OFAC. In addition, the U.K. Bribery Act of 2010, or the Bribery Act, prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that “fails to prevent bribery” by anyone associated with the organization can be charged under the Bribery Act unless the organization can establish the defense of having implemented “adequate procedures” to prevent bribery. Under these laws and regulations, as well as other anti-corruption laws, anti-money laundering laws, export control laws, customs laws, sanctions laws and other laws governing our operations, various government agencies may require export licenses, may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities and modifications to compliance programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions. A violation of these laws or regulations would negatively affect our business, financial condition and results of operations.

We are in the process of implementing policies and procedures designed to ensure compliance by us and our directors, officers, employees, representatives, consultants and agents with the FCPA, OFAC restrictions, the Bribery Act and other export control, anti-corruption, anti-money-laundering and anti-terrorism laws and regulations. Our policies and procedures may not be sufficient to ensure that our directors, officers, employees, representatives, consultants and agents have not engaged and will not engage in conduct for which we may be held responsible, or that our business partners have not engaged and will not engage in conduct that could materially affect their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, OFAC restrictions, the Bribery Act or other export control, anti-corruption, anti-money laundering and anti-terrorism laws or regulations may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our business, financial condition and results of operations.

Our ability to use our net operating losses and research and development credit carryforwards to offset future taxable income may be subject to certain limitations.

In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change,” generally defined as a greater than 50% change by value in its equity ownership over a three-year period, is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, and its research and development credit carryforwards to offset future taxable income. Our existing NOLs and research and development credit carryforwards may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs and research

 

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and development credit carryforwards could be further limited by Sections 382 and 383 of the Code. In addition, our ability to deduct net interest expense may be limited if we have insufficient taxable income for the year during which the interest is incurred, and any carryovers of such disallowed interest would be subject to the limitation rules similar to those applicable to NOLs and other attributes. Future changes in our stock ownership, some of which might be beyond our control, could result in an ownership change under Section 382 of the Code. For these reasons, in the event we experience a change of control, we may not be able to utilize a material portion of the NOLs, research and development credit carryforwards or disallowed interest expense carryovers, even if we attain profitability.

U.S. federal income tax reform could adversely affect us or our stockholders.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the TCJA, was signed into law, significantly reforming the Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, puts into effect the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and credits. We continue to examine the impact the TCJA may have on our business. We are in the process of evaluating the effect of the TCJA on our projection of minimal cash taxes or to our net operating losses. The estimated impact of the TCJA is based on our management’s current knowledge and assumptions and recognized impacts could be materially different from current estimates based on our actual results and our further analysis of the new law. The impact of the TCJA on holders of our common stock remains uncertain and could be adverse. There remains significant uncertainty as to the impact of the TCJA on us and on any investment in our common stock. We urge the purchasers of our common stock in this offering to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.

Risks Related to Government Regulation

Our r-SNM System and operations are subject to extensive government regulation and oversight both in the United States and internationally, and our failure to comply with applicable requirements could harm our business.

We and our r-SNM System are subject to extensive, complex, costly and evolving regulation in the United States, the EU, Canada and other countries, including by the FDA and its foreign counterparts. With respect to medical devices, the FDA and foreign regulatory agencies regulate, among other things, design, development and manufacturing, testing, labeling, content and language of instructions for use and storage, clinical studies, product safety, establishment registration and device listing, marketing, sales and distribution, pre-market clearance and approval, record keeping procedures, advertising and promotion, recalls and field safety corrective actions, post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury, post-market approval studies, and product import and export.

The regulations to which we are subject are complex and have become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. Our failure to comply with all applicable regulations could jeopardize our ability to sell our r-SNM System and result in enforcement actions such as warning letters, fines, injunctions, civil penalties, termination of distribution, recalls or seizures of products, delays in the introduction of products into the market, total or partial suspension of production, refusal to grant clearances or approvals, withdrawals or suspensions of approvals, prohibitions on sales of our r-SNM System, and in the most serious cases, criminal penalties.

In the event our r-SNM System receives regulatory approval in the United States, we will remain subject to the periodic scheduled or unscheduled inspection of our facilities, review of production processes, and testing

 

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of our r-SNM System to confirm that we are in compliance with all applicable regulations. Adverse findings during regulatory inspections may result in costly remediation efforts, requirements that we complete government mandated clinical studies or government enforcement actions.

If we experience delays in obtaining approval or if we fail to obtain approval of our r-SNM System or expanded indications, the commercial prospects for our r-SNM System may be harmed and our ability to generate revenue will be materially impaired.

We may not receive the necessary clearances or approvals for our r-SNM System or expanded indications, and failure to timely obtain necessary clearances or approvals for our r-SNM System or expanded indications would adversely affect our ability to grow our business.

As an active-implantable device, our r-SNM System is subject to the most stringent degree of medical device regulation. The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of medical device products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, with regulations differing from country to country. In the process of obtaining PMA approval, which is required for our r-SNM System, the FDA must determine that a proposed device is safe and effective for its intended use based in part on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. In addition, if we were to pursue regulatory approvals for additional indications for our r-SNM System, we would be required to conduct additional clinical studies or pre-clinical studies to support such indications, which would be time-consuming and expensive, and may produce results that do not support such regulatory approvals.

Modifications to products that are approved through a PMA application generally require FDA approval. In addition, a PMA generally requires the performance of one or more clinical studies. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Typically, the PMA review process can take from six to 18 months, with the duration depending on a variety of factors.

In 2016, our r-SNM System received regulatory approval in Europe and Canada, and in 2018 in Australia, for the treatment of OAB, FI, and UR. We have not obtained regulatory approval of our r-SNM System in the United States. In 2017, the FDA granted us an IDE allowing us to conduct a pivotal study designed to demonstrate the safety and effectiveness of our r-SNM System for the treatment of UUI in order to obtain FDA approval in the United States through the PMA pathway. Any delay or failure to obtain necessary regulatory approvals for our r-SNM System could harm our business. Furthermore, even if we are granted regulatory approvals, they may include significant limitations on the indicated use for our r-SNM System, which may limit the market for the device.

If our r-SNM System is approved in the United States through the PMA pathway, any modification to or additional indications for our r-SNM System that were not previously approved may require us to submit an additional PMA or PMA supplement and obtain FDA approval prior to implementing the change. If the FDA requires us to go through a lengthier, more rigorous examination, make modifications to the device, generate additional data to submit to the FDA or additional indications for approved products than we had expected, product introductions or modifications could be delayed or canceled, which could adversely affect our ability to grow our business.

The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

 

   

our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that our r-SNM System is safe or effective for its intended uses;

 

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the disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our clinical studies or the interpretation of data from pre-clinical studies or clinical studies;

 

   

serious and unexpected adverse device effects experienced by participants in our clinical studies;

 

   

the data from our pre-clinical studies and clinical studies may be insufficient to support clearance or approval, where required;

 

   

our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;

 

   

the manufacturing process or facilities we use may not meet applicable requirements; and

 

   

the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval.

For example, as part of the IDE approval process for our ARTISAN-SNM pivotal study, the FDA recommended that we should make several modifications to the study design in order for the study to serve as the primary clinical support for a future marketing approval. Specifically, despite our responses and supporting documentation that we submitted in support of our study design, the FDA reiterated its previously expressed recommendations that we make the following modifications to our ARTISAN-SNM pivotal study:

 

   

exclude patients with MUI;

 

   

use either a seven-day bladder diary or two separate three-day bladder diaries;

 

   

use a 12-month primary effectiveness endpoint in order to account for the placebo effect and enable assessment of durability of the treatment effect;

 

   

use all patients in whom an implant is attempted, not initial responders after one month, for primary efficacy analysis;

 

   

use multiple imputation to account for missing primary endpoint data;

 

   

revise the protocol to include details on statistical analysis methods for analyzing the primary and secondary endpoints, analysis population, method for handling missing endpoint data and sensitivities and poolability analyses;

 

   

use a two-sided 95% confidence interval; and

 

   

provide further justification for restarting with a new activation date after a lead issue.

In response, we have engaged with the FDA regarding its recommendation, including our latest IDE supplement, which we submitted to the FDA in September 2018 to address certain of its recommendations. As a result, we incorporated a number of recommended study modifications. However, to date we elected not to incorporate several of the recommended modifications based on what we believe are currently accepted urology practice guidelines and the design of previous OAB clinical studies accepted by the FDA. We believe certain of these modifications would have resulted in a study design that increased study site and patient burdens, decreased the feasibility of enrollment or were not clearly supported by available peer-reviewed literature or currently accepted urology practice guidelines. At this point in the study, some of the FDA’s recommendations cannot be implemented. For example, we cannot exclude patients with MUI and we cannot change the three-day bladder

 

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diaries taken at baseline to seven-day bladder diaries. On October 19, 2018, the FDA approved our latest IDE supplement and removed certain of its prior study design recommendations. However, the FDA also continues to reiterate several of its recommended study modifications, including exclusion of patients with MUI, use of a seven-day bladder diary or two separate three-day bladder diaries, use of a 12-month primary effectiveness endpoint and use of all patients in whom an implant is attempted, instead of initial responders after one month, for our primary efficacy analysis. See “Business—Our Clinical Results and Studies—ARTISAN-SNM Pivotal Study” for more information.

Although we have not modified the ARTISAN-SNM pivotal study design to address all of the above considerations that the FDA has reiterated, based on the preliminary study results to date, and assuming sufficiently strong study results at six months and beyond, we believe we will be able to provide the FDA with reasonable assurance of the safety and effectiveness of our r-SNM system to support its marketing approval. However, it is possible that the results will not be sufficiently strong or that, in part due to its concerns with our study design, the FDA will not accept the data as reasonable assurance of safety and effectiveness, which would materially and adversely affect our ability to obtain marketing approval of our r-SNM System. If we intend to modify the study design to address any of the above FDA considerations that we have not already addressed, we will be required to obtain FDA approval of an IDE supplement before implementing the changes, which could result in significant delays. The approval requirements for an IDE supplement are generally the same as an original IDE, and they are approved if the FDA does not object within 30 days. We would also be required to get IRB approval of the protocol changes if the changes involve the rights, safety, or welfare of the patients, and some investigators may determine that local rules require additional approvals from a local IRB.

The FDA stated its belief that additional modifications were needed for our study design to support marketing approval, and recommended, but did not require, that we modify our study to address the issues described above. Incorporating such modifications may be costly or not possible at this point in the ongoing clinical study or lead to delays in obtaining approval from the FDA, which may be significant and adversely and materially affect our ability to successfully commercialize our r-SNM System. Further, even if we make changes to the study design to address these considerations, the FDA may not approve our r-SNM System.

In addition to our anticipated submission of a PMA based on data from the IDE process, on January 9, 2018, we also submitted to the FDA a premarket approval application, which we refer to as the “literature-based PMA,” in which equivalence to an already FDA approved product is claimed based on the review of technical specifications, published clinical studies, and other information. In our filing, we are claiming equivalence to the only FDA approved SNM device, InterStim II. On May 9, 2018, the FDA responded and requested that we submit additional information to demonstrate that our r-SNM device is sufficiently similar to the InterStim II device referenced in the literature to be able to determine safety and effectiveness from the literature. The FDA’s response also asked us to address a number of other matters, including those related to the electrical safety, electromagnetic compatibility and wireless technology, biocompatibility, and our pre-clinical studies. On October 18, 2018, we responded to the FDA and voluntarily withdrew the literature-based PMA. Subsequent to further consultation with the FDA, which is pending, we will evaluate the merits of submitting a new literature-based PMA application, if at all.

In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval of our r-SNM System or impact our ability to modify or seek additional indications for our r-SNM System on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain approvals, increase the costs of compliance or restrict our ability to maintain approvals once obtained. For example, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012, and the FDA Reauthorization Act, enacted in 2017, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance and approval. Some of these proposals and reforms could

 

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impose additional regulatory requirements upon us that could delay our ability to obtain approvals, increase the costs of compliance or restrict our ability to maintain approvals once obtained.

In order to sell our r-SNM System in member countries of the European Economic Area, or EEA (which is composed of the 28 Member States of the EU plus Norway, Iceland and Liechtenstein), it must comply with the essential requirements of the EU Active Implantable Medical Devices Directive (Council Directive 90/385/EEC), or the AIMD Directive. If any future product candidates are also considered to qualify as an active implantable medical device, or AIMD, under the AIMD Directive, it too will need to comply with the essential requirements it sets out. Alternatively, if a future product candidate is not considered an AIMD under the AIMD Directive, it will still be required to comply with the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC). The Medical Devices Regulations (Regulation 2017/745) are also now in force, as further discussed below.

Compliance with the requirements under either of these Directives and confirmation by a Notifiable Body that this is the case is a prerequisite to be able to affix the Conformité Européene, or CE, mark to our r-SNM System and any future product candidates. Without a CE mark, medical devices cannot be sold or marketed in the EEA. To demonstrate that our r-SNM System is compliant with the essential requirements set out under the AIMD Directive, we must undergo a conformity assessment procedure. This requires an assessment of available clinical evidence, literature data for the product and post-market experience in respect of similar products already marketed to ensure and declare that the products in question comply with the standards set out in Annex I of the AIMD Directive. In addition, a conformity assessment procedure requires the intervention of a Notified Body. Notified Bodies are separate entities that are authorized or licensed to perform such assessments by the governmental authorities of each EU Member State. Manufacturers of AIMDs must make an application to a Notified Body for an assessment of its technical dossiers and quality system. Alternatively, manufacturers can seek approval from the Notified Body that a representative sample of the products it has manufactured satisfies the requirements set out in the AIMD Directive and subsequently ensure and declare that all of its products conform to the standard of the approved sample. This is also known as “type approval.”

Future product candidates that are not considered AIMDs under the AIMD Directive will still require a conformity assessment procedure. The types of procedures required are set out in the Medical Devices Directive and will vary according to the type of medical device and its classification. For low-risk medical devices (Class I non-sterile, non-measuring devices) the manufacturer can issue a Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the EU Medical Devices Directive. However, for all other types of medical devices a similar conformity assessment procedure to that outlined above and in the AIMD Directive will be required, also involving the intervention of a Notified Body.

For our r-SNM System, future AIMD product candidates and all other future product candidates, the Notified Body issues a certificate of conformity following successful completion of a conformity assessment procedure conducted in relation to the device and its manufacturer and their conformity with the essential requirements. This certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity.

As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable evidence. If we fail to remain in compliance with the applicable Directives outlined above, we would be unable to continue to affix the CE mark to our r-SNM System or our external trial system, which would prevent us from selling it within the EEA.

 

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Modifications to our r-SNM System may require us to obtain new PMA approvals or approvals of a PMA supplement, and if we market modified products without obtaining necessary approvals, we may be required to cease marketing or recall the modified products until required approvals are obtained.

Certain modifications to a PMA-approved device may require approval of a new PMA or a PMA supplement, or alternatively a notification or other submission to FDA. We will be responsible for deciding whether a modification requires approval by the FDA. However, the FDA may not agree with our decisions regarding whether a new PMA or PMA supplement is necessary. We may make modifications to our r-SNM System that we believe do not require approval of a new PMA or PMA supplement. If the FDA disagrees with our determination and requires us to submit a new PMA or PMA supplement for modifications to previously approved products, we may be required to cease marketing or to recall the modified product until we obtain approval, and we may be subject to significant regulatory fines or penalties. Any delay or failure in obtaining required approvals would adversely affect our ability to introduce enhanced products in a timely manner, which in turn would harm our future growth.

The misuse or off-label use of our r-SNM System, if approved by the FDA, may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.

The FDA and other regulatory agencies strictly regulate the marketing and promotional claims that are made about approved medical devices, such as our r-SNM System, if approved by the FDA. In particular, a product may not be promoted for uses or indications that are not approved by the FDA or other similar regulatory authorities as reflected in the product’s approved labeling. If we receive approval for our r-SNM System in the United States for the treatment of UUI, physicians could use our r-SNM System on their patients in a manner that is inconsistent with the approved label, including the treatment of other indications. If approved, we will train our marketing personnel and sales representatives to not promote our r-SNM System for uses outside of FDA-approved indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using our r-SNM System off-label when in the physician’s independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use our r-SNM System off-label. Furthermore, the use of our r-SNM System for indications other than those that may be approved by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients. In addition, physicians have experience using the Medtronic system, which is approved for several indications, including UUI, UUF, FI, and UR. If physicians adopt our r-SNM System, for which we have not pursued regulatory approval in the United States for indications other than for the treatment of UUI, physicians could use our r-SNM System off-label for additional unapproved indications based in part on their familiarity with the Medtronic system.

If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of a warning letter, an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages (including treble damages), fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.

In addition, physicians may misuse our r-SNM System or use improper techniques, potentially leading to adverse results, side effects or injury, which may lead to an increased risk of product liability claims. If our r-SNM System is approved, and subsequently misused or used with improper techniques or is determined to cause or contribute to patient harm, we may become subject to costly litigation by our customers or patients.

 

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Product liability claims could divert management’s attention from the commercialization of our r-SNM System, be expensive to defend, result in sizeable damage awards against us that may not be covered by insurance, and subject us to negative publicity resulting in reduced sales of our r-SNM System.

The clinical study process required to obtain regulatory approvals is lengthy and expensive with uncertain outcomes. If clinical studies of our r-SNM System do not produce results necessary to support regulatory clearance or approval in the United States or elsewhere, we will be unable to gain regulatory approval for, expand the indications for or commercialize our r-SNM System and may incur additional costs or experience delays in completing, or ultimately be unable to complete, the commercialization of our r-SNM System.

To date, we have not obtained PMA approval for our r-SNM System. In order to obtain PMA approval for a device, the sponsor must meet the regulatory submission requirements of the FDA, which in many cases may require a PMA applicant to conduct well-controlled clinical studies designed to assess the safety and effectiveness of the product. Conducting clinical studies is a complex and expensive process, can take many years, and outcomes are inherently uncertain. We incur substantial expense for, and devote significant time to, clinical studies but cannot be certain that the trials will ever result in commercial revenue. We may experience significant setbacks in clinical studies, even after earlier clinical studies showed promising results, and failure can occur at any time during the clinical study process. Any of our products, including our r-SNM System, could malfunction or produce undesirable adverse effects that could cause us or regulatory authorities to interrupt, delay or halt clinical studies. We, the FDA, or another regulatory authority may suspend or terminate clinical studies at any time to avoid exposing trial participants to unacceptable health risks.

We completed enrollment of our ARTISAN-SNM pivotal study in June 2018 in support of our PMA for our r-SNM System. We expect to submit our PMA application to the FDA for UUI, a predominant OAB subtype, during the first quarter of 2019. If this study produces unfavorable results or the FDA requires additional data, we may have to conduct additional clinical studies, which would be costly and time-consuming, and our business would be adversely affected.

As discussed above, as part of the IDE approval process for our ARTISAN-SNM pivotal study, despite our responses and supporting documentation that we submitted in support of our study design, the FDA reiterated its previously expressed recommendations that we should make several modifications to the study design in order for the study to serve as the clinical support for a future marketing approval.

In response, we have engaged with the FDA regarding its recommendation, including our latest IDE supplement, which we submitted to the FDA in September 2018 to address certain of its recommendations. As a result, we incorporated a number of recommended study modifications. However, to date we elected not to incorporate several of the recommended modifications based on what we believe are currently accepted urology practice guidelines and the design of previous OAB clinical studies accepted by the FDA. We believe certain of these modifications would have resulted in a study design that increased study site and patient burdens, decreased the feasibility of enrollment or were not clearly supported by available peer-reviewed literature or currently accepted urology practice guidelines. At this point in the study, some of the FDA’s recommendations cannot be implemented. For example, we cannot exclude patients with MUI and we cannot change the three-day bladder diaries taken at baseline to seven-day bladder diaries. On October 19, 2018, the FDA approved our latest IDE supplement and removed certain of its prior study design recommendations. However, the FDA also continues to reiterate several of its recommended study modifications, including exclusion of patients with MUI, use of a seven-day bladder diary or two separate three-day bladder diaries, use of a 12-month primary effectiveness endpoint and use of all patients in whom an implant is attempted, instead of initial responders after one month, for our primary efficacy analysis. See “Business—Our Clinical Results and Studies—ARTISAN-SNM Pivotal Study” for more information.

Although we have not modified the ARTISAN-SNM pivotal study design to address all of its reiterated considerations with the FDA, based on the preliminary study results to date, and assuming sufficiently strong

 

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study results at six months and beyond, we believe we will be able to provide the FDA with reasonable assurance of the safety and effectiveness of our r-SNM system to support its marketing approval. However, it is possible that the results will not be sufficiently strong or that, in part due to its concerns with our study design, the FDA will not accept the data as reasonable assurance of safety and effectiveness, which would materially and adversely affect our ability to obtain marketing approval of our r-SNM System. If we intend to modify the study design to address those FDA considerations that we have not already addressed, we will be required to obtain FDA approval of an IDE supplement before implementing the changes, which could result in significant delays. The approval requirements for an IDE supplement are generally the same as an original IDE, and they are approved if the FDA does not object within 30 days. We would also be required to get IRB approval of the protocol changes if the changes involve the rights, safety, or welfare of the patients, and some investigators may determine that local rules require additional approvals from a local IRB.

In addition to our anticipated submission of a PMA based on data from the IDE process, on January 9, 2018, we also submitted to the FDA a premarket approval application, which we refer to as the “literature-based PMA,” in which equivalence to an already FDA approved product is claimed based on the review of technical specifications, published clinical studies, and other information. In our filing, we are claiming equivalence to the only FDA approved SNM device, InterStim II. On May 9, 2018, the FDA responded and requested that we submit additional information to demonstrate that our r-SNM device is sufficiently similar to the InterStim II device referenced in the literature to be able to determine safety and effectiveness from the literature. The FDA’s response also asked us to address a number of other matters, including those related to the electrical safety, electromagnetic compatibility and wireless technology, biocompatibility, and our pre-clinical studies. On October 18, 2018, we responded to the FDA and voluntarily withdrew the literature-based PMA. Subsequent to further consultation with the FDA, which is pending, we will evaluate the merits of submitting a new literature-based PMA application, if at all.

The FDA stated its belief that additional modifications were needed for our study design to support marketing approval, and recommended, but did not require, that we modify our study to address the issues previously described. Incorporating such modifications may be costly or not possible at this point in the ongoing clinical study or lead to delays in obtaining approval from the FDA, which may be significant and adversely and materially affect our ability to successfully commercialize our r-SNM System. Further, even if we make changes to the study design to address these considerations, the FDA may not approve our r-SNM System.

Successful results of pre-clinical studies are not necessarily indicative of future clinical study results, and predecessor clinical study results may not be replicated in subsequent clinical studies. Additionally, the FDA may disagree with our interpretation of the data from our pre-clinical studies and clinical studies, or may find the clinical study design, conduct or results inadequate to prove safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical studies, which could further delay the clearance or approval of our r-SNM System. The data we collect from our pre-clinical studies and clinical studies may not be sufficient to support FDA clearance or approval, and if we are unable to demonstrate the safety and effectiveness of our r-SNM System in our clinical studies, we will be unable to obtain regulatory clearance or approval to market our r-SNM System.

In addition, we may estimate and publicly announce the anticipated timing of the accomplishment of various clinical, regulatory and other product development goals, which are often referred to as milestones. These milestones could include obtaining the right to affix the CE mark to certain products in the EU, submitting an IDE to the FDA, applying to commence a pivotal clinical study for a new product, enrolling patients in clinical studies, releasing data from clinical studies, and other clinical and regulatory events. The actual timing of these milestones could vary dramatically compared to our estimates and public announcements, in some cases for reasons beyond our control. We may not meet our projected milestones and if we do not meet these milestones as publicly announced, the commercialization of our r-SNM System may be delayed and, as a result, our stock price may decline.

 

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Clinical studies are necessary to support PMA applications and may be necessary to support PMA supplements for modified versions of, or additional indications for, our r-SNM System. This would require the enrollment of large numbers of suitable subjects, which may be difficult to identify, recruit and maintain as participants in the clinical trial. Adverse outcomes in the post-approval studies could also result in restrictions or withdrawal of approval of a PMA. We will likely need to conduct additional clinical studies in the future to support new indications for our r-SNM System or for approvals or clearances, or for the approval of the use of our r-SNM System in some foreign countries. Clinical testing is difficult to design and implement, can take many years, can be expensive, and, testing carries uncertain outcomes. The initiation and completion of any of these studies may be prevented, delayed, or halted for numerous reasons. We may experience a number of events that could adversely affect the costs, timing or successful completion of our clinical studies, including:

 

   

we may be required to submit an IDE application to FDA, which must become effective prior to commencing human clinical studies, and the FDA may reject our IDE application and notify us that we may not begin investigational trials;

 

   

regulators and other comparable foreign regulatory authorities may disagree as to the design or implementation of our clinical studies;

 

   

regulators and/or IRBs, or other reviewing bodies may not authorize us or our investigators to commence a clinical trial, or to conduct or continue a clinical study at a prospective or specific trial site;

 

   

we may not reach agreements with prospective contract research organizations, or CROs, and clinical study sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

   

clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical studies or abandon product development programs;

 

   

the number of subjects or patients required for clinical studies may be larger than we anticipate, enrollment in these clinical studies may be insufficient or slower than we anticipate, and the number of clinical studies being conducted at any given time may be high and result in fewer available patients for any given clinical trial, or patients may drop out of these clinical studies at a higher rate than we anticipate;

 

   

our third-party manufacturers, including those conducting clinical studies on our behalf, may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

   

we might have to suspend or terminate clinical studies for various reasons, including a finding that the subjects are being exposed to unacceptable health risks;

 

   

we may have to amend clinical study protocols or conduct additional studies to reflect changes in regulatory requirements or guidance, which we may be required to submit to an IRB and/or regulatory authorities for re-examination;

 

   

regulators or other parties may require or recommend that we or our investigators suspend or terminate clinical research for various reasons, including safety signals or noncompliance with regulatory requirements;

 

   

the cost of clinical studies may be greater than we anticipate;

 

   

clinical sites may not adhere to the clinical protocol or may drop out of a clinical trial;

 

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we may be unable to recruit a sufficient number of clinical study sites;

 

   

regulators, IRBs, or other reviewing bodies may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party manufacturers or suppliers of materials for our clinical studies, the materials necessary to conduct clinical studies may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply;

 

   

approval policies or regulations of FDA or applicable foreign regulatory agencies may change in a manner rendering our clinical data insufficient for approval; and

 

   

our r-SNM System may have undesirable side effects or other unexpected characteristics.

Patient enrollment in clinical studies and completion of patient follow-up depend on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, patient compliance, competing clinical studies and clinicians’ and patients’ perceptions as to the potential advantages of the product being studied in relation to other available therapies, including any new treatments that may be approved for the indications we are investigating. For example, patients may be discouraged from enrolling in our clinical studies if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of a product, or they may be persuaded to participate in contemporaneous clinical studies of a competitor’s product. In addition, patients participating in our clinical studies may drop out before completion of the trial or experience adverse medical events unrelated to our r-SNM System. Delays in patient enrollment or failure of patients to continue to participate in a clinical study may delay commencement or completion of the clinical trial, cause an increase in the costs of the clinical trial, or result in the failure of the clinical trial.

Clinical studies must be conducted in accordance with the laws and regulations of the FDA and other applicable regulatory authorities’ legal requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and IRBs at the medical institutions where the clinical studies are conducted. In addition, clinical studies must be conducted with supplies of our product produced under cGMP requirements and other regulations. Furthermore, we rely on clinical study sites to ensure the proper and timely conduct of our clinical studies and we have limited influence over their performance. We depend on our collaborators and on medical institutions and employees to conduct our clinical studies in compliance with good clinical practice, or GCP, requirements. If our collaborators fail to enroll participants for our clinical studies, fail to conduct the study to GCP standards or are delayed for a significant time in the execution of trials, including achieving full enrollment, we may be affected by increased costs, program delays or both. In addition, clinical studies that are conducted in countries outside the United States may result in additional delays and expenses due to increased shipment costs, additional regulatory requirements and the engagement of non-U.S. resources, and may expose us to risks associated with clinical investigators who are unknown to the FDA, and different standards of diagnosis, screening and medical care.

Failure can occur at any stage of clinical testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical testing in addition to those we have planned. Our failure to adequately demonstrate the safety and effectiveness of our r-SNM System or any product we may develop in the future would prevent receipt of regulatory clearance or approval and, ultimately, the commercialization of the product or indication for use. Even if our r-SNM System is cleared or approved in the United States, commercialization of our r-SNM System in foreign countries requires approval by regulatory authorities in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical studies. Any of these occurrences could have an adverse effect on our business, financial condition and results of operations.

 

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If our r-SNM System is approved by the FDA, failure to comply with post-marketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and might require us to recall or withdraw our r-SNM System from the market.

If we obtain FDA approval for our r-SNM System, we will be subject to ongoing and pervasive regulatory requirements governing, among other things, the manufacture, marketing, advertising, medical device reporting, sale, promotion, registration, and listing of our r-SNM System. For example, if our r-SNM System is approved, we will be required to submit periodic reports to the FDA as a condition of PMA approval. These reports include safety and effectiveness information about the device after its approval. Failure to submit such reports, or failure to submit the reports in a timely manner, could result in enforcement action by the FDA. Following its review of the periodic reports, the FDA might ask for additional information or initiate further investigation.

In addition, in order to obtain PMA approval for our r-SNM System, we may be to subject to several conditions of approval, including a post-market long-term study and extended follow-up of the pre-market study cohort. Any failure to comply with the conditions of approval could result in the failure to obtain PMA approval or delay or withdrawal of PMA approval and the inability to market the device. Failure to conduct the required studies in accordance with IRB and informed consent requirements, or adverse findings in these studies, could also be grounds for failure to obtain PMA approval or delay or withdrawal of PMA approval.

Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. Even if we obtain the proper regulatory approval to market our r-SNM System, we will have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities, which may include any of the following sanctions:

 

   

untitled letters or warning letters;

 

   

fines, injunctions, consent decrees and civil penalties;

 

   

recalls, termination of distribution, administrative detention, or seizure of our r-SNM System;

 

   

customer notifications or repair, replacement or refunds;

 

   

operating restrictions or partial suspension or total shutdown of production;

 

   

delays in or refusal to grant our request for PMA approval of our r-SNM System and any future PMA approvals or foreign regulatory approvals of future product candidates, new intended uses, or modifications to our existing product;

 

   

withdrawals or suspensions of PMAs or foreign regulatory approvals, resulting in prohibitions on sales of our r-SNM System;

 

   

FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and

 

   

criminal prosecution.

Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and results of operations.

 

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Our r-SNM System must be manufactured in accordance with federal and state regulations, and we or any of our suppliers or third-party manufacturers could be forced to recall our r-SNM System or terminate production if we fail to comply with these regulations.

The methods used in, and the facilities used for, the manufacture of our r-SNM System must comply with the FDA’s Quality System Regulation, or QSR, which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may include the facilities of subcontractors. Our r-SNM System will also be subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing.

Our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our r-SNM System, if approved. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with the manufacturing processes for our r-SNM System could result in, among other things: warning letters or untitled letters, fines, injunctions or civil penalties, suspension or withdrawal of approvals, seizures or recalls of our r-SNM System, total or partial suspension of production or distribution, administrative or judicially imposed sanctions, the FDA’s refusal to grant pending or future clearances or approvals for our product, clinical holds, refusal to permit the import or export of our r-SNM System, and criminal prosecution of us or our employees. Any of these actions could significantly and negatively affect supply of our r-SNM System. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose customers and experience reduced sales and increased costs.

If our r-SNM System is approved by the FDA and treatment guidelines for OAB subtype UUI later change or the standard of care evolves, we may need to redesign and seek new a marketing authorization from the FDA for our r-SNM System.

If our r-SNM System is approved by the FDA for OAB subtype UUI and treatment guidelines for UUI change or the standard of care evolves, we may need to redesign our r-SNM System, or any future product, and seek new approvals from the FDA. PMA approvals from the FDA are based on current treatment guidelines at the time of the approvals. If treatment guidelines change so that different treatments become desirable, the clinical utility of our r-SNM System could be diminished and our business could be adversely affected.

If approved, our r-SNM System may cause or contribute to adverse medical events or be subject to failures or malfunctions that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our r-SNM System, or a recall of our r-SNM System, either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.

If our r-SNM System is approved by the FDA, we will be subject to the FDA’s medical device reporting regulations and similar foreign regulations, which will require us to report to the FDA when we receive or become aware of information that reasonably suggests that our r-SNM System may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal

 

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prosecution, imposition of civil monetary penalties, revocation of device approvals, seizure of our r-SNM System or delay in clearance or approval of modifications to our r-SNM System.

The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that our r-SNM System could cause serious injury or death. We may also choose to voluntarily recall our r-SNM System if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Defects or other errors in our r-SNM System may occur in the future. Depending on the corrective action we take to redress deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new approvals for our r-SNM System before we may market or distribute the corrected device. Seeking such approvals may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our r-SNM System, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.

Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary withdrawals or corrections for our r-SNM System in the future that we may determine do not require notification of the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.

Additionally, if we or others identify undesirable side effects, or other previously unknown problems, caused by our r-SNM System after obtaining regulatory approval in the United States or other jurisdictions, a number of potentially negative consequences could result, including:

 

   

regulatory authorities may withdraw their approval of the product;

 

   

regulatory authorities may require a recall of the product or we may voluntarily recall a product;

 

   

regulatory authorities may require the addition of warnings or contraindications in the product labeling, narrowing of the indication in the product label or issuance of field alerts to physicians and pharmacies;

 

   

regulatory authorities may require us to create a guide outlining the risks of such side effects for distribution to patients;

 

   

we may be subject to limitations as to how we promote the product;

 

   

we may be required to change the way the product is administered or modify the product in some other way;

 

   

regulatory authorities may require additional clinical studies or costly post-marketing testing and surveillance to monitor the safety or efficacy of the product;

 

   

sales of the product may decrease significantly;

 

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we could be sued and held liable for harm caused to patients; and

 

   

our brand and reputation may suffer.

Any of the above events could prevent us from achieving or maintaining market acceptance of our r-SNM System and could substantially increase the costs of commercializing our r-SNM System. The demand for our r-SNM System could also be negatively impacted by any adverse effects of a competitor’s product or treatment.

If we do not obtain and maintain international regulatory registrations or approvals for our r-SNM System, we will be unable to market and sell our r-SNM System outside of the United States.

We currently have marketing approvals in Europe, Canada, and Australia for OAB, FI, and UR. We may in the future seek marketing approvals in additional countries but do not have current plans to do so. Sales of our r-SNM System outside of the United States will be subject to foreign regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the United States. While the regulations of some countries may not impose barriers to marketing and selling our r-SNM System, or only require notification, others require that we obtain the approval of a specified regulatory body. Complying with foreign regulatory requirements, including obtaining additional registrations or approvals, can be expensive and time-consuming, and we may not receive regulatory approvals in each country in which we plan to market our r-SNM System or we may be unable to do so on a timely basis. The time required to obtain registrations or approvals, if required by other countries, may be longer than that required for FDA approval, and requirements for such registrations, clearances or approvals may significantly differ from FDA requirements. If we modify our r-SNM System, we may need to apply for additional regulatory approvals before we are permitted to sell the modified product. In addition, we may not continue to meet the quality and safety standards required to maintain the authorizations that we have received. If we are unable to maintain our authorizations in a particular country, we will no longer be able to sell the applicable product in that country.

Regulatory approval by the FDA does not ensure registration, clearance or approval by regulatory authorities in other countries, and registration, clearance or approval by one or more foreign regulatory authorities does not ensure registration, clearance or approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining registration or regulatory clearance or approval in one country may have a negative effect on the regulatory process in others.

Legislative or regulatory reforms in the United States or Europe may make it more difficult and costly for us to obtain regulatory clearances or approvals for our r-SNM System, or to manufacture, market or distribute our r-SNM System after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in U.S. Congress that could significantly change the statutory provisions governing the regulation of medical devices. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our r-SNM System. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of or make it more difficult to obtain approval for, manufacture, market or distribute our r-SNM System. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require: additional testing prior to obtaining clearance or approval for future product candidates, changes to manufacturing methods, recall, replacement or discontinuance of future product candidates, or additional record keeping.

On April 5, 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the EU Medical Devices Directive and the Active Implantable Medical Devices Directive. The Medical Devices Regulations would be directly applicable and are intended to eliminate

 

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current differences in the regulation of medical devices among EEA member states. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting innovation.

The Medical Devices Regulation will only become applicable after the three-year transition period ends on May 26, 2020. Up until this date, conformity certificates can continue to be issued validly by Notifiable Bodies under the AIMD and Medical Devices Directives. Alternatively, during the three-year transition period, manufacturers can choose to conform with and have their products certified under the Medical Devices Regulations. Certificates of compliance issued pursuant to these Directives prior to May 26, 2020 will continue to be valid for up to a period of four years. However, after May 26, 2020, new products placed on the market may only be certified under the Medical Device Regulations regime. Once applicable, the new regulations will among other things:

 

   

strengthen the rules on placing devices on the market and reinforce surveillance once they are available;

 

   

establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;

 

   

improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;

 

   

set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and

 

   

strengthened rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts before they are placed on the market.

These modifications may have an effect on the way we conduct our business in the EEA.

In addition, the withdrawal of the United Kingdom from the EU, or Brexit, will take effect either on the effective date of the withdrawal agreement or, in the absence of an agreement, two years after the United Kingdom provided its notice of withdrawal. The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to EU markets either during a transitional period or more permanently. Since a significant proportion of the regulatory framework in the United Kingdom is derived from EU directives and regulations, the referendum could materially change the regulatory regime applicable to products approved and sold in the United Kingdom. It is possible that there will be greater restrictions on imports and exports between the United Kingdom and EU countries, increased regulatory complexities, and economic and political uncertainty in the region. Because of the continued uncertainty about the effects, implementation, or potential repeal of Brexit, we cannot quantify or predict with any certainty the likely impact of Brexit or related legislation on our business, financial condition, and results of operations.

Furthermore, Brexit could adversely affect European and worldwide economic or market conditions and could contribute to instability in global financial markets. Brexit is likely to lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which EU laws to replace or replicate. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, financial condition, and results of operations.

 

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We are subject to certain federal, state and foreign fraud and abuse laws, health information privacy and security laws and transparency laws, which, if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.

There are numerous U.S. federal and state, as well as foreign, laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims and physician transparency laws. Our business practices and relationships with providers are subject to scrutiny under these laws. We may also be subject to privacy and security regulation related to patient, customer, employee and other third-party information by both the federal government and the states and foreign jurisdictions in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate include, but are not limited to:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual or furnishing or arranging for a good or service, for which payment may be made, in whole or in part, under federal healthcare programs, such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. The U.S. government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers. Moreover, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $74,792 for each violation, plus up to three times the remuneration involved. Civil penalties for such conduct can further be assessed under the federal False Claims Act. Violations can also result in criminal penalties, including criminal fines of up to $100,000 and imprisonment of up to 10 years. Similarly, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid;

 

   

the federal civil and criminal false claims laws and civil monetary penalties laws, including the federal civil False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal healthcare programs that are false or fraudulent. These laws can apply to manufacturers who provide information on coverage, coding, and reimbursement of their products to persons who bill third-party payers. Private individuals can bring False Claims Act “qui tam” actions, on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties ranging from $11,181 to $22,363 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;

 

   

the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;

 

   

the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

   

the federal Physician Sunshine Act under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the

 

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Affordable Care Act, which require certain applicable manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, or CHIP, to report annually to the DHHS Centers for Medicare and Medicaid Services, or CMS, information related to payments and other transfers of value to physicians, which is defined broadly to include other healthcare providers and teaching hospitals, and applicable manufacturers and group purchasing organizations, to report annually ownership and investment interests held by physicians and their immediate family members. Applicable manufacturers are required to submit annual reports to CMS. Failure to submit required information may result in civil monetary penalties of $11,052 per failure up to an aggregate of $165,786 per year (or up to an aggregate of $1.105 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely, accurately, and completely reported in an annual submission, and may result in liability under other federal laws or regulations;

 

   

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH Act, and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health plans and healthcare clearinghouses as well as their business associates that perform services for them that involve individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization, including mandatory contractual terms as well as directly applicable privacy and security standards and requirements. Failure to comply with the HIPAA privacy and security standards can result in civil monetary penalties up to $55,910 per violation, not to exceed $1.68 million per calendar year for non-compliance of an identical provision, and, in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. State attorneys general can also bring a civil action to enjoin a HIPAA violation or to obtain statutory damages on behalf of residents of his or her state;

 

   

analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers or patients; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm customers, foreign and state laws, including the EU General Data Protection Regulation, governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; and

 

   

state laws related to insurance fraud in the case of claims involving private insurers.

These laws and regulations, among other things, constrain our business, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of our r-SNM System. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.

To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to

 

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a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity, and responding to any such challenge or investigation would be costly and divert the attention of our management. If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, imprisonment, contractual damages, reputational harm, disgorgement and the curtailment or restructuring of our operations.

We may be subject to, or may in the future become subject to, U.S. federal and state, and foreign laws and regulations imposing obligations on how we collect, store and process personal information. Our actual or perceived failure to comply with such obligations could harm our business. Ensuring compliance with such laws could also impair our efforts to maintain and expand our customer base, and thereby decrease our revenue.

As described above, in the conduct of our business, we may at times process personal data, including health-related personal data. The U.S. federal government and various states have adopted or proposed laws, regulations, guidelines and rules for the collection, distribution, use and storage of personal information of individuals. We may also be subject to U.S. federal rules, regulations and guidance concerning data security for medical devices, including guidance from the FDA. State privacy and security laws vary from state to state and, in some cases, can impose more restrictive requirements than U.S. federal law. Where state laws are more protective, we must comply with the stricter provisions. In addition to fines and penalties that may be imposed for failure to comply with state law, some states also provide for private rights of action to individuals for misuse of personal information.

The EU also has laws and regulations dealing with the collection, use and processing of personal data obtained from individuals in the EU, which are often more restrictive than those in the United States and which restrict transfers of personal data to the United States unless certain requirements are met. These obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other requirements or our practices. In addition, these rules are constantly under scrutiny. For example, following a decision of the Court of Justice of the European Union in October 2015, transferring personal data to U.S. companies that had certified as members of the U.S. Safe Harbor Scheme was declared invalid. In July 2016 the European Commission adopted the U.S.-EU Privacy Shield Framework which replaces the Safe Harbor Scheme. However, this framework is under review and there is currently litigation challenging other EU mechanisms for adequate data transfers (i.e., the standard contractual clauses). It is uncertain whether the Privacy Shield Framework and/or the standard contractual clauses will be similarly invalidated by the European courts. We rely on a mixture of mechanisms to transfer personal data from our EU business to the U.S., and could be impacted by changes in law as a result of a future review of these transfer mechanisms by European regulators under the EU General Data Protection Regulation 2016/679, or the GDPR, which came into effect on May 25, 2018, as well as current challenges to these mechanisms in the European courts.

Any actual or perceived failure by us or the third parties with whom we work to comply with privacy or security laws, policies, legal obligations or industry standards, or any security incident that results in the unauthorized release or transfer of personally identifiable information, may result in governmental enforcement actions and investigations including by European Data Protection Authorities and U.S. federal and state regulatory authorities, fines and penalties, litigation and/or adverse publicity, including by consumer advocacy groups, and could cause our customers, their patients and other healthcare professionals to lose trust in us, which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.

 

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The laws in the EU are under constant reform. Since May 25, 2018, we have been subject to the requirements of the GDPR because we are processing personal data in the EU and/or offering goods to, or monitoring the behavior of, individuals in the EU. The GDPR implements more stringent administrative requirements for controllers and processors of personal data, including, for example, shortened timelines for data breach notifications, limitations on retention of information, increased requirements pertaining to health data and pseudonymized (i.e., key-coded) data, additional obligations when we contract with service providers, and more robust rights for individuals over their personal data. The GDPR provides that EU member states may make their own further laws and regulations limiting the processing of genetic, biometric or health data, which could limit our ability to use and share personal data or could cause our costs to increase, and harm our business and financial condition. If we do not comply with our obligations under the GDPR, we could be exposed to significant fines of up to €20,000,000 or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher.

Our failure to obtain necessary U.S. Federal Communications Commission, or FCC, authorizations, and comply with applicable FCC regulations, could impair our ability to commercialize our r-SNM System in the United States.

Because our r-SNM System includes a wireless radio frequency transmitter and receiver, it is subject to equipment authorization requirements in the United States. The FCC requires advance clearance of all radio frequency devices before they can be imported, sold or marketed in the United States. These clearances ensure that the proposed products comply with FCC radio frequency emission and power level standards and will not cause interference. We intend to submit an equipment certification application for non-experimental use to the FCC for our r-SNM System. Our r-SNM System has not received FCC approval for non-experimental use, and it could take several months to receive such approval. If FCC approval is obtained, it will be based on the current system design and specifications. Any modifications to our r-SNM System may require new or further FCC approval before we are permitted to market and sell a modified system, and it could take several months to obtain such new or modified approval. FCC approval has no impact on whether we will receive PMA approval.

In addition, applicable FCC requirements will restrict us to a particular band of frequencies for transmitting data in support of specific diagnostic or therapeutic functions. Failure to comply with all applicable restrictions on the use of such frequencies, or unforeseeable difficulties with the use of such frequencies, could impede our ability to commercialize our r-SNM System and could subject us to fines, penalties and other sanctions. In addition, any change to our transmission frequency following receipt of FCC approval may require us to obtain additional, or modified, regulatory approvals, which would be costly and time-consuming.

Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system, could harm our business, financial condition and results of operations.

In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. In March 2010, the Affordable Care Act was enacted in the United States, which made a number of substantial changes in the way healthcare is financed by both governmental and private insurers. Among other ways in which it may affect our business, the Affordable Care Act:

 

   

imposed an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions (described in more detail below), although the effective rate paid may be lower. Through a series of legislative amendments, the tax was suspended for 2016 through 2019. Absent further legislative action, the device excise tax will be reinstated on medical device sales starting January 1, 2020;

 

   

established a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research;

 

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implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and

 

   

expanded the eligibility criteria for Medicaid programs.

We do not yet know the full impact that the Affordable Care Act will have on our business. The taxes imposed by the Affordable Care Act and the expansion in the government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursement by payors for our r-SNM System, and/or reduced medical procedure volumes, all of which may have a material adverse effect on our business, financial condition and results of operations. The federal government may take further action regarding the Affordable Care Act, including, but not limited to, repeal or replacement. Most recently, the TCJA was enacted, which, among other things, removes penalties for not complying with the individual mandate to carry health insurance. Additionally, all or a portion of the Affordable Care Act and related subsequent legislation may be modified, repealed or otherwise invalidated through judicial challenge, which could result in lower numbers of insured individuals, reduced coverage for insured individuals and adversely affect our business.

We expect additional state and federal healthcare policies and reform measures to be adopted in the future, any of which could limit reimbursement for healthcare products and services or otherwise result in reduced demand for our r-SNM System, or additional pricing pressure, and have a material adverse effect on our industry generally and on our customers. Any changes of, or uncertainty with respect to, future coverage or reimbursement rates could affect demand for our r-SNM System, which in turn could impact our ability to successfully commercialize our r-SNM System and could have a material adverse effect on our business, financial condition and results of operations.

Our business involves the use of hazardous materials and our third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.

Our third-party manufacturers’ activities may involve the controlled storage, use and disposal of hazardous materials. Our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials. Although we believe the safety procedures of our manufacturers for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our manufacturers’ use of these materials and interrupt their business operations which could adversely affect our business.

Compliance with securities rules relating to “conflict minerals” may require us and our suppliers to incur substantial expense and may result in disclosure by us that certain minerals used in products we manufacture or contract to manufacture are not “DRC conflict free.”

Because we manufacture or contract to manufacture a product that contains titanium, we may be required under rules promulgated by the SEC governing disclosure of the use of “conflict minerals” (tin, tungsten, tantalum and gold) to determine whether those minerals are necessary to the functionality or production of our r-SNM System and, if so, conduct a country of origin inquiry with respect to all such minerals. If any such minerals may have originated in the Democratic Republic of the Congo, or DRC, or any of its adjoining countries, or covered countries, then we must conduct diligence on the source and chain of custody of those conflict minerals to determine if they originated in one of the covered countries and, if so, whether they financed or benefited armed groups in the covered countries. Disclosures relating to the products that may contain conflict minerals, the country of origin of those minerals and whether they are “DRC conflict free” must be provided in a

 

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Form SD (and accompanying conflict minerals report, if required, to disclose the diligence undertaken by us in sourcing the minerals and our conclusions relating to such diligence). If we are required to submit a conflict minerals report, that report must be audited by an independent auditor pursuant to existing government auditing standards. Compliance with this disclosure rule may be very time-consuming for our management and personnel (as well as time-consuming for our suppliers) and could involve the expenditure of significant amounts of money by us and them. Disclosures mandated by this rule, which can be perceived by the market to be “negative,” may cause customers to refuse to purchase our r-SNM System. The cost of compliance with the rule could adversely affect our results of operations.

Risks Related to Intellectual Property

If we or any of our current or future licensors, including AMF, are unable to maintain, obtain or adequately protect our intellectual property rights, we may not be able to compete effectively in our market or we could be required to incur significant expenses to enforce or defend our rights or attempt to do the same.

Our commercial success depends in part on ours and any of our current or future licensors’, including AMF’s, success in obtaining, maintaining and protecting patents, trademarks, trade secrets and other intellectual property rights and proprietary technology in the United States and elsewhere. If we or any of our current or future licensors, including AMF, do not adequately protect our respective intellectual property and proprietary technology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

Our intellectual property coverage includes protection provided by patents and other intellectual property licensed through the License Agreement with AMF. We rely on AMF to maintain the patents and otherwise protect the intellectual property we license from them. If in the future we no longer have rights to one or more of these licensed patents or other licensed intellectual property, our intellectual property coverage may be compromised, which in turn could affect our ability to protect our r-SNM System and defend it against competitors.

We own numerous issued patents and pending patent applications that relate to our r-SNM System and several issued patents and patent applications were licensed from AMF in 2013 pursuant to the License Agreement. As of September 30, 2018, we owned 17 issued U.S. patents and 20 issued foreign patents, and 17 pending U.S. patent applications and 59 pending foreign patent applications, and we licensed from AMF 30 issued U.S. patents and 38 issued foreign patents, and four pending U.S. patent applications and 28 pending foreign patent applications.

Our patents may not have, and any of our pending patent applications that mature into issued patents may not include, claims with a scope sufficient to adequately protect our r-SNM System, or any additional features we develop for our r-SNM System or any new products. Other parties may have developed technologies that may be related to or competitive with our r-SNM System, and, may have filed, or may file, patent applications, and, may have received, or may receive patents, that overlap or conflict with our patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent position. The patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and therefore, the scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented. Proceedings challenging our patents could result in either loss of the patent, or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own may not provide any protection against competitors. Furthermore, an adverse decision may result in a third party receiving a patent right sought by us, which in turn could affect our ability to commercialize our r-SNM System.

Though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive

 

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advantages against competitors with similar products. Competitors could purchase our r-SNM System and attempt to replicate some or all of the competitive advantages we derive from our development efforts, circumvent or design around our patents, or develop and obtain patent protection for more effective technologies, designs or methods. We may be unable to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, suppliers, vendors, former employees and current employees. In addition, third parties may create new products or methods that achieve similar results without infringing upon patents we own. If these developments were to occur, it could have an adverse effect on our sales or market position. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries.

Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components that are used in their products. In addition, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. We may not prevail in some, or any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations.

In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some, or all, of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering our r-SNM System are invalidated or found unenforceable, or, if a court found that valid, enforceable patents held by third parties covered our r-SNM System, our competitive position could be harmed, or, we could be required to incur significant expenses to enforce or defend our rights.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

   

any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our r-SNM System;

 

   

any of our pending patent applications will issue as patents;

 

   

we will be able to successfully commercialize our r-SNM System on a substantial scale, if approved, before our relevant patents have expired;

 

   

we were the first to make, or file for patent protection of, the inventions covered by each of our patents and pending patent applications, as is dictated by the applicable national patent laws in effect at the time of a patent application being filed;

 

   

we were the first to file patent applications for these inventions, where such rules are applicable;

 

   

others will not develop similar or alternative technologies that do not infringe our patents;

 

   

any of our patents will be found to ultimately be valid and enforceable;

 

   

any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

   

we will develop additional proprietary technologies or products that are separately patentable; or

 

   

our commercial activities or products will not infringe upon the patents of others.

 

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In addition, we rely in part upon unpatented trade secrets, unpatented know-how, and continuing technological innovation which may not yet, or may never be, patented, to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and consultants. We also have agreements with our employees and consultants that obligate them to assign their inventions to us. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. In addition, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Further, our trade secrets could otherwise become known or be independently discovered by our competitors, which would harm our business.

We are reliant on the ability of AMF, as licensor of certain intellectual property contained in our r-SNM System, and may be reliant on, future licensors to maintain their intellectual property and protect their intellectual property against misappropriation, infringement or other violation. In some instances, we may not have primary control over AMF’s, or our other future licensors’, patent prosecution activities. With respect to licensed patents that were issued to our licensors, or patents that may issue on patent applications, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. As a licensee, we are reliant on AMF to defend any third-party claims or consent to our defending them on their behalf. Our licensors may not defend or prosecute such actions as vigorously or in the manner that we would have if entitled to do so, and we will be subject to any judgment or settlement resulting from such actions and our business could be adversely affected.

Litigation or other proceedings or third-party claims of intellectual property infringement against us or any of our current or future licensors, including AMF, could require us to spend significant time and money and could prevent us from selling our r-SNM System, or affect our stock price.

Our commercial success will depend in part on our ability to avoid infringement of the proprietary rights of third parties. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Our competitors in both the United States and internationally, many of which have substantially greater resources, and, may have made substantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make, use and sell our r-SNM System. We do not always conduct independent reviews of patents issued to third parties. In addition, patent applications in the United States and elsewhere can be pending for many years before issuance, or unintentionally abandoned patents or applications can be revived, so there may be applications for other patents now pending or recently revived patents of which we are unaware that our r-SNM System may infringe. There may also be patent applications that have been filed but not published that, when issued as patents, could be asserted against us. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the technology and medical device industries, including patent infringement lawsuits, interferences, oppositions and inter partes reexamination or review proceedings before the U.S. Patent and Trademark Office. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our r-SNM System or will develop future product candidates. As the technology and medical device industries expand and more patents are issued, the risk continues, or possibly increases, that our r-SNM System may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we, or any of our current or future licensors, including AMF, are employing their proprietary technology without authorization. If any third-party patents were held by a court of competent jurisdiction to cover our r-SNM System, the holders of any such patents may be able to block our

 

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ability to commercialize our product unless we obtain a license under the applicable patents, or until such patents expire. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our methods of use, the holders of any such patent may be able to block our ability to develop and commercialize the applicable product unless we obtain a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all.

In addition to claims of patent infringement, third parties may bring claims against us, or AMF, asserting misappropriation of proprietary technology or other information in the development, manufacture and commercialization of our r-SNM System. Defense of such a claim would require dedicated time and resources, which time and resources could otherwise be used by us toward the maintenance of our own intellectual property and the development and commercialization of our r-SNM System, or by any of our current or future licensors for operational upkeep and manufacturing of our r-SNM System.

The legal threshold for initiating litigation or contested proceedings may be low, so that even lawsuits or proceedings with a low probability of success might be initiated. Litigation and contested proceedings can also be expensive and time-consuming, and our adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can. We may also occasionally use these proceedings to challenge the patent rights of others.

Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

 

   

stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property;

 

   

lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights against others;

 

   

incur significant legal expenses;

 

   

pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing;

 

   

pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing;

 

   

redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive, or infeasible; and

 

   

attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms, or at all, or, from third parties whom may attempt to license rights that they have or do not have.

Any litigation or claim against us or AMF, even those without merit, may cause us to incur substantial costs, and, could place a significant strain on our financial resources, divert the attention of management from commercialization of our r-SNM System, or harm our reputation. If we or AMF are found to infringe the intellectual property rights of third parties, we could be required to pay substantial damages (which may be increased up to three times of awarded damages) and/or substantial royalties and could be prevented from selling our infringing products unless we obtain a license or are able to redesign our r-SNM System to avoid infringement. Any such license may not be available on reasonable terms, if at all, and we may not be able to redesign the infringing product in a way that would not infringe the intellectual property rights of others. We

 

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could encounter delays in product introductions while we attempt to develop alternative methods or products. If we fail to obtain any required licenses, or make any necessary changes to our r-SNM System, including future technologies, we may have to withdraw our r-SNM System from the market or may be unable to commercialize our r-SNM System.

In addition, third parties may assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers or indemnify our customers for any costs associated with their own initiation or defense of infringement claims, regardless of the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our r-SNM System.

If we are unable to protect the confidentiality of our trade secrets, our business or competitive position could be harmed.

In addition to patent protection, we also rely upon other non-patent protection, such as: trademark, or, trade secret protection, as well as confidentiality agreements with our employees, consultants, vendors, and third parties, to protect our confidential and proprietary information. Despite the existence of such confidentiality agreements, or other contractual restrictions, we may not be able to prevent the unauthorized disclosure or use of our confidential proprietary information or trade secrets by employees, consultants, vendors, and third parties. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using commonly accepted physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and, recourse we take against such misconduct may not provide an adequate remedy to fully protect our interests. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our r-SNM System that we consider proprietary. Enforcing a claim that a party illegally disclosed, or misappropriated a trade secret, can be difficult, expensive and time-consuming, and, the outcome is unpredictable. Even though we use commonly accepted security measures, trade secret violations are often a matter of state law, and the criteria for protection of trade secrets can vary among different jurisdictions. Furthermore, the laws of foreign countries may not protect our trade secrets effectively or to the same extent as the laws of the United States. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our business and competitive position could be harmed.

We may be unable to enforce our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. If we face similar challenges in respect of material intellectual property matters, this could make it difficult for us to stop infringement of our foreign patents or our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Litigation may be necessary in the future to enforce our intellectual property rights or protect our trade secrets or other proprietary information, which is an expensive and time-consuming process with uncertain

 

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outcomes. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from the commercialization of our r-SNM System. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.

Third parties may assert ownership or commercial rights to inventions we develop.

Third parties may, in the future, make claims challenging the inventorship or ownership of our intellectual property. In addition, we may face claims by third parties that our agreements with employees, contractors or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such intellectual property. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property or we may lose our rights in that intellectual property. Either outcome could harm our business and competitive position.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We employ individuals who previously worked with other companies, including our competitors or potential competitors. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information, including trade secrets or other proprietary information, of former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. We may not be successful in defending these claims, and even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees. Any litigation or the threat thereof may adversely affect our ability to hire employees and we may lose valuable intellectual property rights if we fail in defending any such claims. A loss of key personnel or their work product could diminish or prevent our ability to commercialize our r-SNM System, which could have an adverse effect on our business, results of operations and financial condition.

Recent changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith America Invents Act, or the AIA, includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also affect patent litigation. The U.S. Patent and Trademark Office recently developed new regulations and procedures to govern administration of the AIA, and many of the substantive changes to patent law associated with the AIA, and in particular, the first to file provisions, which became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if that inventor is not the first to file an application for patenting that invention, even if such inventor was the first to invent such invention. Accordingly, it is not clear what, if any, impact the AIA will have on the operation of our business.

The AIA could also increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the AIA provides that an administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, provides a venue for challenging the validity of patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging

 

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patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.

If we fail to comply with our obligations under our patent licenses with third parties, we could lose license rights that are important to our business.

We are a party to the License Agreement with AMF and we may be a party to future license agreements. One or more of our licensors may allege that we have breached our license agreement with them, and accordingly seek to terminate our license. If successful, this could result in our loss of the right to use the licensed intellectual property, which could adversely affect our ability to commercialize our r-SNM System, as well as harm our competitive business position and our business prospects. In particular, the License Agreement imposes various development, royalty, insurance and other obligations on us. If we fail to comply with these obligations or otherwise materially breach the License Agreement, AMF may have the right to terminate the License Agreement, in which event we would not be able to develop or market our r-SNM System. In addition, any claims asserted against us by AMF may be costly and time-consuming, divert the attention of key personnel from business operations or otherwise have a material adverse effect on our business.

Risks Related to this Offering and Our Common Stock

There has been no prior public market for our common stock and an active trading market may never develop or be sustained.

Prior to this offering, there has been no public market for our common stock. An active trading market for our shares may never develop or be sustained following this offering. If an active trading market for our common stock does not develop, it may be difficult for you to sell the shares that you purchase in this offering without depressing the market price for the common stock or to sell your shares at all. The initial public offering price for our common stock will be determined through negotiations between us and the underwriters, and may bear no relationship to the price at which the common stock will trade upon the closing of this offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. In addition, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

The trading price of our common stock is likely to be volatile, and purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for medical technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price and may not realize any return on their investment. The market price for our common stock may be influenced by many factors, some of which are beyond our control, including:

 

   

announcements of regulatory approval or disapproval of our r-SNM System and any future enhancements to our r-SNM System;

 

   

adverse results from or delays in clinical studies of our r-SNM System;

 

   

unanticipated safety concerns related to the use of our r-SNM System;

 

   

FDA or other U.S. or foreign regulatory or legal actions or changes affecting us or our industry;

 

   

any termination or loss of rights under the License Agreement;

 

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any voluntary or regulatory mandated product recalls;

 

   

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

 

   

introductions and announcements of new technologies by us, any commercialization partners or our competitors, and the timing of these introductions and announcements;

 

   

variations in our financial results or those of companies that are perceived to be similar to us;

 

   

success or failure of competitive products or therapies in the SNM market;

 

   

changes in the structure of healthcare payment of our r-SNM System;

 

   

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

 

   

market conditions in the medical technology industry and issuance of securities analysts’ reports or recommendations;

 

   

quarterly variations in our results of operations or those of our future competitors;

 

   

changes in financial estimates or guidance, including our ability to meet our future revenue and operating profit or loss estimates or guidance;

 

   

the public’s reaction to our earnings releases, other public announcements and filings with the SEC;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

sales of substantial amounts of our stock by directors, officers or significant stockholders, or the expectation that such sales might occur;

 

   

general economic, industry and market conditions, including the size and growth, if any, of the market;

 

   

news reports relating to trends, concerns and other issues in the market or industry;

 

   

operating and stock performance of other companies that investors deem comparable to us and overall performance of the equity markets;

 

   

additions or departures of key personnel;

 

   

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;

 

   

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

 

   

changes in accounting standards, policies, guidelines, interpretations or principles; and

 

   

other factors described in this “Risk Factors” section.

 

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In addition, in the past, stockholders have initiated class action lawsuits against companies following periods of volatility in the market prices of these companies’ common stock. Such litigation, if instituted against us, regardless of the merit or ultimate results of such litigation, could cause us to incur substantial costs and divert management’s attention and resources.

We are an “emerging growth company” and the reduced reporting requirements available to “emerging growth companies” could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we remain an emerging growth company, we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies. These provisions include, but are not limited to:

 

   

being permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

   

an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;

 

   

reduced disclosure about executive compensation arrangements in our periodic reports, registration statements and proxy statements; and

 

   

exemptions from the requirements to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

To the extent we take advantage of any of these exemptions, the information that we provide stockholders may be different than what is available with respect to other public companies.

Investors could find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our trading price may be more volatile.

We have elected to take advantage of the JOBS Act provision which allows us to delay implementing new accounting standards, and our consolidated financial statements may not be directly comparable to other public companies.

Pursuant to the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements and the reported results of operations contained therein may not be directly comparable to those of other public companies.

Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.

Based on the beneficial ownership of our common stock as of June 30, 2018, following this offering, our officers, directors and principal stockholders each holding more than 5% of our common stock, collectively, will control approximately 62.3% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to control the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The

 

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interests of these stockholders may not be the same as or may even conflict with your interests. For example, these stockholders could attempt to delay or prevent a change in control of our company, even if such change in control would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets, and might affect the prevailing market price of our common stock due to investors’ perceptions that conflicts of interest may exist or arise. As a result, this concentration of ownership may not be in the best interests of our other stockholders. Certain of our existing stockholders that are affiliated with certain of our directors have indicated an interest in purchasing an aggregate of up to approximately $45.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any or all of these stockholders, or any or all of these stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these stockholders as they will on any other shares sold to the public in this offering. The foregoing discussion does not give effect to any potential purchases by these stockholders in this offering.

Because the initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The initial public offering price will be substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate dilution of $10.17 per share, based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and our pro forma as adjusted net tangible book value per share as of June 30, 2018. To the extent outstanding stock options or warrants to purchase shares of our common stock are exercised, new investors may incur further dilution.

Future sales of our common stock, or the perception that such sales may occur, could depress the market price of our common stock.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that these sales may occur, could result in a decrease in the market price of our common stock. Immediately after this offering, we will have outstanding 25,305,600 shares of common stock, based on the number of shares common stock outstanding as of June 30, 2018, after giving effect to the automatic conversion of all outstanding shares of our preferred stock into shares of our common stock immediately prior to the closing of this offering. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates or existing stockholders. Of the remaining shares, 18,576,632 shares are currently restricted as a result of securities laws or 180-day lock-up agreements (which may be waived with or without notice by Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC) but will be able to be sold beginning 180 days after this offering, unless held by one of our affiliates, in which case the resale of those securities will be subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended, or the Securities Act. We, our directors, executive officers, and substantially all of our other existing equityholders have agreed that, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC, we and they will not, subject to certain exceptions and extensions, during the period ending 180-days after the date of this prospectus, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock or publicly disclose the intention to do any of the foregoing. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC may in their discretion and at any time without notice release all or any portion of the shares of our common stock subject to the lock-up.

 

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In addition, following this offering, holders of an aggregate of up to 16,701,297 shares of our common stock, including shares of our common stock issuable upon the conversion of the shares of our preferred stock immediately prior to the closing of this offering, will have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders as described in the section entitled “Description of Capital Stock—Registration Rights.” In addition, we intend to file one or more registration statements with the SEC covering shares of our common stock available for future issuance under the 2014 Plan, 2018 Plan and any future equity incentive plans. Upon effectiveness of such registration statements, any shares subsequently issued under such plans will be eligible for sale in the public market, except to the extent that they are restricted by the lock-up agreements referred to above and subject to compliance with Rule 144 in the case of our affiliates. Sales of a large number of the shares issued under these plans in the public market could have an adverse effect on the market price of our common stock.

Our management will have broad discretion over the actual amounts and timing of the expenditure of the proceeds of this offering and might not apply the proceeds in ways that enhance our operating results or increase the value of your investment.

We intend to allocate the net proceeds from this offering as follows: (i) approximately $30.0 million to hire sales and clinical support personnel, including a specialty sales force of approximately 60 sales representatives, which we will initially endeavor to hire in anticipation of our potentially receiving FDA approval, to support the commercial launch of our r-SNM System in the United States, and to fund marketing initiatives in United States, Europe and Canada, (ii) approximately $25.0 million to conduct SNM-related research and development activities, consisting of expanding the suite of product solutions available for SNM therapy over time and to fund the technological enhancement of our r-SNM System, including, but not limited to, 1.5T/3.0T MRI full body conditional labelling for our r-SNM System, a reduction by half in the number of IPG battery recharging sessions required for the IPG to remain charged for one full month, and features that would enable us to connect our IPG to an already implanted InterStim II lead, and (iii) the remainder for working capital and general corporate purposes. Our management will have broad discretion over the actual amounts and timing of the expenditure of the net proceeds from this offering within those categories, and accordingly, investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds, with only limited information concerning management’s specific intentions. Our management might not apply the proceeds in ways that enhance our operating results or increase the value of your investment. We may pursue commercialization strategies, clinical studies, regulatory approvals or collaborations that do not result in an increase in the market value of our common stock and that may increase our losses. Our failure to allocate and spend the net proceeds from this offering effectively could harm our business, financial condition and results of operations. Pending our use of the net proceeds from this offering, we may invest the net proceeds in a variety of capital preservation investments, including short and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

We will incur significant costs as a result of being a public company, which may adversely affect our business, financial condition and results of operations.

Upon completion of this offering, we expect to incur significant costs associated with corporate governance requirements that will become applicable to us as a public company, including rules and regulations of the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Securities Exchange Act of 1934, or the Exchange Act, as well as the listing requirements, or the Nasdaq Marketplace Rules, of the Nasdaq Global Market, or Nasdaq. These rules and regulations are expected to significantly increase our accounting, legal and financial compliance costs and make some activities more time-consuming. We also expect these rules and regulations to make it more expensive for us to maintain our directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Accordingly, increases in costs incurred as a result of becoming a publicly traded company may adversely affect our business, financial condition and results of operations.

 

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As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in us, and, as a result, the value of our common stock.

To comply with the requirements of being a public company, we will need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act, is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls when we become subject to this requirement could negatively affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our operating results, cause us to fail to meet our reporting obligations or result in a restatement of our prior period financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our common stock could decline. In addition, if we are unable to continue to meet these requirements, we may be unable to remain listed on Nasdaq.

Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company,” as defined in the JOBS Act, depending on whether we choose to rely on certain exemptions set forth in the JOBS Act.

We have identified material weaknesses in our internal control over financial reporting, which resulted in the restatement of our consolidated financial statements. If we do not remediate the material weaknesses in our internal control over financial reporting, we may not be able to accurately report our financial results or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in the market price of our common stock.

Effective internal control over financial reporting is necessary for us to provide reliable financial reports in a timely manner. In connection with the audits of our financial statements for the years ended December 31, 2017 and 2016, we concluded that there were material weaknesses in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses that we identified related to the accounting and reporting of complex financial instruments and consolidation matters, which resulted in the restatement of our consolidated financial statements for the years ended December 31, 2016 and 2017 and for the six-months ended June 30, 2018 as further described in Note 10 to our consolidated financial statements included elsewhere in this prospectus. A lack of adequate staffing levels resulted in insufficient time spent on review and approval of certain information used to prepare our consolidated financial statements and the maintenance of effective controls to adequately monitor and review significant transactions for financial statement completeness and accuracy.

We are taking steps to remediate the material weaknesses in our internal control over financial reporting, including engaging in a review of our processes and procedures, enhancing training of our personnel,

 

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implementing new accounting processes and control procedures and identifying gaps in our skills base and expertise of the staff required to meet the financial reporting requirements of a public company. We plan to hire additional accounting personnel who are certified public accountants, which will enable us to better address the accounting for complex financial instruments or consolidation matters or other complex accounting matters that may occur in the future. Although we plan to complete the above remediation process and associated evaluation and testing as quickly as possible, we may not be able to do so and our initiatives may prove not to be successful. Our remediation efforts may not remediate our material weaknesses in a timely manner, or at all, or prevent restatements of our financial statements in the future. If we are unable to successfully remediate our material weaknesses, or identify any future significant deficiencies or material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports, and the market price of our common stock may decline as a result.

Our management and independent registered public accounting firm did not perform an evaluation of our internal control over financial reporting during any period in accordance with the provisions of Sarbanes-Oxley Act. Had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of Sarbanes-Oxley Act, additional control deficiencies amounting to material weaknesses may have been identified. As a result of becoming a public company, we will be required, under Section 404(a) of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ended December 31, 2019. We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404(a) of Sarbanes-Oxley Act. We may not be able to complete our evaluation, testing or any required remediation in a timely fashion. If we fail to comply with Section 404(a) or to remedy these material weaknesses or identify new material weaknesses by the time we have to issue that report, we will not be able to certify that our internal controls over financial reporting are effective, which may cause investors to lose confidence in our financial statements, and the trading price of our common stock may decline. If we fail to remedy any material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our common stock may suffer.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon the closing of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. We are continuing to refine our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our securities.

Stockholders may, from time to time, engage in proxy solicitations or advance stockholder proposals, or otherwise attempt to effect changes and assert influence on our board of directors and management. Activist campaigns that contest or conflict with our strategic direction or seek changes in the composition of our board of

 

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directors could have an adverse effect on our operating results and financial condition. A proxy contest would require us to incur significant legal and advisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by our board of directors and management, diverting their attention from the pursuit of our business strategy. Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy, or changes to the composition of our board of directors or senior management team arising from a proxy contest could lead to the perception of a change in the direction of our business or instability which may result in the loss of potential business opportunities, make it more difficult to pursue our strategic initiatives, or limit our ability to attract and retain qualified personnel and business partners, any of which could adversely affect our business and operating results. If individuals are ultimately elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders. We may choose to initiate, or may become subject to, litigation as a result of the proxy contest or matters arising from the proxy contest, which would serve as a further distraction to our board of directors and management and would require us to incur significant additional costs. In addition, actions such as those described above could cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

Anti-takeover provisions in our certificate of incorporation and bylaws, as well as under Delaware law, could discourage a takeover.

Provisions in our certificate of incorporation and our bylaws that will become effective upon the completion of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace or remove current members of our management team. These include the following provisions that:

 

   

permit our board of directors to issue shares of preferred stock, with any rights, preferences and privileges as they may designate, without stockholder approval, which could be used to dilute the ownership of a hostile bidder significantly;

 

   

provide that the authorized number of directors may be changed only by resolution of our board of directors and that a director may only be removed with or without cause by the affirmative vote of the holders of at least 66 2/3% of our voting stock;

 

   

provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

 

   

require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;

 

   

provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner and also specify requirements as to the form and content of a stockholder’s notice, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company;

 

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prohibit cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; and

 

   

provide that special meetings of our stockholders may be called only by the Chair of the board, our Chief Executive Officer or by our board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors, which may delay the ability of our stockholders to force consideration by our company of a take-over proposal or to take certain corporate actions, including the removal of directors.

In addition, Section 203 of the Delaware General Corporation Law, or the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. This provision could have the effect of delaying or preventing a change in control of our company, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

Our certificate of incorporation that will become effective upon the completion of this offering provides that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws or any action asserting a claim that is governed by the internal affairs doctrine, in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein and the claim not being one which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery or for which the Court of Chancery does not have subject matter jurisdiction. In addition, unless we consent in writing to the selection of an alternative forum, the U.S. District Court for the District of Delaware shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our certificate of incorporation. This choice of forum provision may limit our stockholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and our directors, officers, employees and agents even though an action, if successful, might benefit our stockholders. Stockholders who do bring a claim in the Court of Chancery could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. Alternatively, if a court were to find this provision of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material adverse effect on our business, financial condition or results of operations.

 

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We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.

We have never declared or paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. In addition, pursuant to the Loan Agreement with Silicon Valley Bank, we are prohibited from paying cash dividends without the prior written consent of Silicon Valley Bank and future debt instruments may materially restrict our ability to pay dividends on our common stock. If we do not pay dividends, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

If a trading market for our common stock develops, the trading market will depend in part on the research and reports that securities or industry analysts publish about us and our business. We do not currently have and may never obtain research coverage by securities and industry analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with us or our industry, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. Analysts may elect not to provide research coverage of our common stock after the closing of this offering, and such lack of research coverage may adversely affect the market price of our common stock. In the event we obtain analyst coverage, we will not have any control of the analysts or the content and opinions included in their reports. The price of our common stock could decline if one or more analysts downgrade our common stock or issue inaccurate or unfavorable commentary or research about our business. If one or more analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which in turn could cause the trading price or trading volume of our common stock to decline and could result in the loss of all or part of your investment in us.

 

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FORWARD-LOOKING STATEMENTS AND STATISTICAL DATA

Special Note Regarding Forward-Looking Statements

This prospectus contains forward-looking statements 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:

 

   

our ability to obtain and maintain regulatory approvals of our r-SNM System;

 

   

our ability to successfully commercialize our r-SNM System in the United States, if approved, and internationally;

 

   

commercial success, ability to capture market share and market acceptance of our r-SNM System;

 

   

our ability to enhance our r-SNM System and expand what our r-SNM System is indicated for;

 

   

our ability to achieve and maintain adequate levels of coverage or reimbursement for our r-SNM System;

 

   

our ability to build our own sales and marketing capabilities, or seek collaborative partners, to commercialize our r-SNM System;

 

   

our ability to accurately forecast customer demand for our r-SNM System and manage our inventory;

 

   

our ability to retain our senior management and hire other highly qualified personnel, including a sales force;

 

   

developments and projections relating to our competitors and our industry, including competing products and therapies for the treatment of OAB;

 

   

the accuracy of our estimates regarding expenses, future revenue and needs for additional financing;

 

   

FDA or other United States or foreign regulatory actions affecting us or the healthcare industry generally, including healthcare reform measures in the United States and international markets;

 

   

the timing or likelihood of regulatory filings and approvals or clearances;

 

   

any supplier shortages related to our r-SNM System or its components and any manufacturing disruptions which may impact our inventory supply as we expand our business;

 

   

our ability to establish and maintain intellectual property protection for our r-SNM System or avoid claims of infringement of third party intellectual property;

 

   

the volatility of the trading price of our common stock; and

 

   

our use of the net proceeds from this offering.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions described under the section entitled “Risk Factors” and elsewhere in this prospectus. We also operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or

 

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implied by, any forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances described in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements contained in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, the future results, levels of activity, performance, events, circumstances or achievements reflected in the forward-looking statements may never be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement on Form S-1, of which this prospectus is a part, 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.

Statistical Data

We obtained the industry, statistical and market data, including our general expectations, market position and market opportunity, in this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. All of the market data used in this prospectus involves a number of assumptions and limitations. While we believe that the information from these industry publications, surveys and studies is reliable, the industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of important factors, including those described in the section entitled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $90.7 million (or approximately $104.6 million if the underwriters’ option to purchase additional shares is exercised in full) from the sale of the shares of common stock offered by us in this offering, based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $6.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by $14.0 million, assuming the shares of our common stock offered by this prospectus are sold at the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to fund the commercial launch of our r-SNM System in the United States, if approved by the FDA. We intend to use the net proceeds from this offering as follows:

 

   

approximately $30.0 million to hire sales and clinical support personnel, including a specialty sales force of approximately 60 sales representatives, which we will initially endeavor to hire in anticipation of our potentially receiving FDA approval, to support the commercial launch of our r-SNM System in the United States, and to fund marketing initiatives in United States, Europe and Canada;

 

   

approximately $25.0 million to conduct SNM-related research and development activities, consisting of expanding the suite of product solutions available for SNM therapy over time and to fund the technological enhancement of our r-SNM System, including, but not limited to, 1.5T/3.0T MRI full body conditional labelling for our r-SNM System, a reduction by half in the number of IPG battery recharging sessions required for the IPG to remain charged for one full month, and features that would enable us to connect our IPG to an already implanted InterStim II lead; and

 

   

the remainder for working capital and general corporate purposes.

As of the date of this prospectus, we cannot estimate with certainty the amount of net proceeds to be used for the purposes described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Pending the uses described above, we plan to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments or other securities.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and we do not currently intend to pay any cash dividends on our capital stock for the foreseeable future. We intend to retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In addition, pursuant to the Loan Agreement with Silicon Valley Bank, we are prohibited from paying cash dividends without the prior written consent of Silicon Valley Bank and future debt instruments may materially restrict our ability to pay dividends on our common stock. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, tax considerations, legal or contractual restrictions, business prospects, the requirements of current or then-existing debt instruments, general economic conditions and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of June 30, 2018:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to: (i) the automatic exchange of the exchanged preferred stock immediately prior to the completion of this offering, (ii) the automatic conversion of all outstanding shares of our preferred stock, including the exchanged preferred stock, into 15,813,297 shares of our common stock upon completion of this offering, (iii) the automatic conversion of outstanding warrants to purchase shares of our Series C preferred stock into warrants to purchase 40,001 shares of our common stock in connection with the completion of this offering, and the resulting reclassification of such warrants from a current liability to stockholders’ equity (deficit), and (iv) the filing and effectiveness of our certificate of incorporation, which will occur immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis to give further effect to our issuance and sale of 6,667,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering is subject to adjustment based on the initial public offering price of our common stock and other terms of this offering determined at pricing. You should read the following table in conjunction with “Use of Proceeds,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other financial information contained in this prospectus, including the consolidated financial statements and related notes included elsewhere in this prospectus.

 

    

As of June 30, 2018

 
    

Actual(1)

   

Pro Forma

   

Pro Forma
As
Adjusted(2)

 
     (unaudited,
restated)
    (unaudited)     (unaudited)  
     (in thousands, except share and per
share data)
 

Cash, cash equivalents and short-term investments

   $ 39,881     $ 39,881     $ 130,547  
  

 

 

   

 

 

   

 

 

 
      

Debt, net(3)

   $ 8,985     $ 8,985     $ 8,985  

Mezzanine equity:

      

Series A Convertible Preferred Stock, par value $0.0001 per share, 1,030,000 shares authorized, 719,500 shares issued and outstanding, actual, no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     14,021       —         —    

Series B-1 Convertible Preferred Stock, par value $0.0001 per share, 2,529,862 shares authorized, 1,925,302 shares issued and outstanding, actual, no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     13,757       —         —    

Series B-2 Convertible Preferred Stock, par value $0.0001 per share, 2,537,231 shares authorized, 2,213,794 shares issued and outstanding, actual, no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     17,572       —         —    

Series C Convertible Preferred Stock, par value $0.0001 per share, 6,188,888 shares authorized, 4,131,546 shares issued and outstanding, actual, no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     36,776       —         —    

Noncontrolling interest in Axonics Europe S.A.S.

     31,066       —         —    

Stockholders’ equity (deficit):

      

Common Stock, par value $0.0001 per share, 17,500,000 shares authorized, 2,825,303 shares issued and outstanding, actual; 50,000,000 shares authorized, 18,638,600 shares issued and outstanding, pro forma; 50,000,000 shares authorized, 25,305,600 shares issued and outstanding, pro forma as adjusted

     0       2       3  

Preferred Stock, par value $0.0001 per share; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     —         —         —    

Additional paid-in capital

     3,230       116,661       207,326  

Stock subscription receivable(4)

     (1,824     (1,824     (1,824

Accumulated deficit

     (82,418     (82,418     (82,418

Accumulated other comprehensive loss

     (406     (406     (406
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (81,418     32,015       122,681  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 40,759     $ 41,000     $ 131,666  
  

 

 

   

 

 

   

 

 

 

 

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(1)

See Note 10 to our consolidated financial statements appearing elsewhere in this prospectus for more information on the restatements of certain of our financial statements.

 

(2)

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, cash equivalents and short-term investments, total assets and total stockholders’ equity (deficit) by approximately $6.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price, as set forth on the cover page of this prospectus, would increase (decrease) each of cash, cash equivalents and short-term investments, total assets and total stockholders’ equity (deficit) by approximately $14.0 million, assuming the shares of our common stock offered by this prospectus are sold at the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(3)

Represents gross proceeds from the Term Loan of $10.0 million, net of unamortized debt issuance costs of $1,015,098. Does not reflect (i) $10.0 million in additional borrowings we requested under the Loan Agreement in October 2018, which we expect to receive prior to the closing of this offering, and (ii) the related concurrent issuance of warrants to purchase shares of our Series C preferred stock, which will become exercisable for 39,999 shares of our common stock immediately prior to the closing of this offering at an exercise price of $7.50 per share.

 

(4)

Includes outstanding promissory notes as of June 30, 2018, with an aggregate principal balance of $1,782,268.70, that were issued to us by certain of our executive officers and directors in exchange for the exercise of an aggregate of 1,653,196 shares of common stock pursuant to stock option awards. We have entered into debt forgiveness and cancellation of note agreements with certain of our executive officers and directors, including each of our named executive officers, to terminate each of their respective promissory notes and to forgive all respective obligations for payment thereof in connection with this offering. See “Certain Relationships and Related Party Transactions—Loans to Officers and Directors.”

The number of shares of common stock shown as issued and outstanding in the table excludes, as of June 30, 2018:

 

   

1,425,316 shares of our common stock issuable upon the exercise of outstanding stock options under the 2014 Plan, at a weighted-average exercise price of $1.35 per share;

 

   

37,971 shares of our common stock reserved for future issuance under the 2014 Plan;

 

   

4,540,019 shares of our common stock reserved for future issuance under the 2018 Plan, which became effective in October 2018; and

 

   

40,001 shares of our common stock issuable upon the exercise of outstanding warrants to purchase shares of our Series C preferred stock, which will convert into warrants to purchase 40,001 shares of our common stock in connection with the closing of this offering, at an exercise price of $7.50 per share.

In addition, the number of shares of our common stock after this offering does not give effect to 39,999 shares of our common stock issuable upon exercise of warrants to purchase shares of our Series C preferred stock, which will convert into warrants to purchase 39,999 shares of our common stock in connection with the completion of this offering, at an exercise price of $7.50 per share, that will become exercisable when we borrow an additional $10.0 million under the Loan Agreement with Silicon Valley Bank. As of the date of this prospectus, we have requested to borrow the additional $10.0 million and we expect to receive it prior to the completion of this offering.

 

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The number of shares of preferred stock shown as issued and outstanding in the table excludes, as of June 30, 2018:

 

   

310,500 shares of our Series A preferred stock issuable upon the exchange of shares of Axonics Europe, which will automatically occur immediately prior to the completion of this offering in accordance with the Share Exchange Agreement;

 

   

604,560 shares of our Series B-1 preferred stock issuable upon the exchange of shares of Axonics Europe, which will automatically occur immediately prior to the completion of this offering in accordance with the Share Exchange Agreement;

 

   

323,437 shares of our Series B-2 preferred stock issuable upon the exchange of shares of Axonics Europe, which will automatically occur immediately prior to the completion of this offering in accordance with the Share Exchange Agreement; and

 

   

1,990,676 shares of our Series C preferred stock issuable upon the exchange of shares of Axonics Europe, which will automatically occur immediately prior to the completion of this offering in accordance with the Share Exchange Agreement.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

Our historical net tangible book value is the amount of our total tangible assets less our liabilities. Our historical net tangible book value per share is our historical net tangible book value divided by the number of shares of common stock outstanding as of June 30, 2018. Our historical net tangible book value as of June 30, 2018 was approximately $31.29 million or $11.08 per share of common stock.

Our pro forma net tangible book value as of June 30, 2018 was $31.53 million, or $1.69 per share of common stock. Pro forma net tangible book value per share represents our net tangible book value divided by the number of shares of our common stock outstanding as of June 30, 2018, after giving effect to (i) the automatic exchange of the exchanged preferred stock immediately prior to the completion of this offering, (ii) the automatic conversion of all outstanding shares of our preferred stock, including the exchanged preferred stock, into 15,813,297 shares of our common stock upon completion of this offering, and (iii) the automatic conversion of outstanding warrants to purchase shares of our Series C preferred stock into warrants to purchase 40,001 shares of our common stock in connection with the completion of this offering, and the resulting reclassification of such warrants from a current liability to stockholders’ equity (deficit).

After giving further effect to our sale of 6,667,000 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2018 would have been approximately $122.20 million, or approximately $4.83 per share. This amount represents an immediate increase in pro forma net tangible book value of $3.14 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $10.17 per share to new investors purchasing shares of our common stock in this offering. We determine dilution by subtracting our pro forma as adjusted net tangible book value per share after this offering from the amount of cash per common share paid by new investors in this offering.

The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $ 15.00  

Historical net tangible book value per share as of June 30, 2018

   $ 11.08    

Decrease in pro forma net tangible book value

     (9.39  
  

 

 

   

Pro forma net tangible book value per share as of June 30, 2018, before giving effect to
this offering

     1.69    

Increase in pro forma net tangible book value per share attributable to new investors
participating in this offering

     3.14    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

       4.83  
    

 

 

 

Dilution in pro forma net tangible book value per share to investors purchasing in
this offering

     $ 10.17  
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $0.25 per share and the dilution in pro forma net tangible book value (deficit) per share to investors purchasing in this offering by approximately $0.75 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a 1.0 million share increase in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net

 

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tangible book value (deficit) per share after this offering by approximately $0.35 and decrease the dilution in pro forma net tangible book value (deficit) per share to investors purchasing in this offering by approximately $0.35, assuming the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A 1.0 million share decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value (deficit) per share after this offering by $0.38 and increase the dilution in pro forma net tangible book value (deficit) per share to investors purchasing in this offering by approximately $0.38 per share, assuming the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise in full their option to purchase 1,000,050 additional shares of our common stock in this offering, the pro forma as adjusted net tangible book value per share after this offering would be $5.18, the increase in pro forma net tangible book value per share attributable to new investors would be $3.49 and the dilution per share to new investors would be $9.82, in each case assuming an initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

The following table summarizes, as of June 30, 2018, on the pro forma as adjusted basis described above, the difference between our existing stockholders and the investors purchasing in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share paid to us, based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration
(in thousands)
    Average
Price
Per Share
 
     Number      Percent     Amount      Percent  

Existing stockholders

     18,638,600        73.65   $ 114,247        53.32   $ 6.13  

New investors

     6,667,000        26.35   $ 100,005        46.68   $ 15.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     25,305,600        100.00   $ 214,252        100.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

In addition, the following table summarizes, as of June 30, 2018, on the pro forma as adjusted basis described above, the difference between our existing stockholders (assuming all of the options and warrants outstanding as of June 30, 2018 described below are exercised) and the investors purchasing in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share paid to us, based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration
(in thousands)
    Average
Price
Per Share
 
     Number      Percent     Amount      Percent  

Existing stockholders

     20,103,917        75.10   $ 116,466        53.80   $ 5.79  

New investors

     6,667,000        24.90   $ 100,005        46.20   $ 15.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     26,770,917        100.00   $ 216,471        100.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price, the number of shares we sell and other terms of this offering that will be determined at pricing.

If the underwriters exercise their option to purchase additional shares of our common stock in full, the total consideration paid by new investors and the average price per share paid by new investors would be approximately

 

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$115.0 million and $15.00 per share, respectively, in each case assuming an initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors and the average price per share paid by new investors by $6.67 million and $1.00 per share, respectively. An increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the total consideration paid by new investors by $15.00 million.

To the extent any of the outstanding options or warrants described below are exercised, new options are issued or we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering. If all of the outstanding options and warrants described below were exercised, our pro forma net tangible book value at June 30, 2018, before giving effect to the issuance and sale of shares of our common stock in this offering, would have been approximately $33.75 million, or $1.68 per share of common stock. After giving further effect to our sale of 6,667,000 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2018 would have been approximately $124.42 million, or approximately $4.65 per share, causing dilution to new investors of approximately $10.35 per share.

The foregoing tables are based on the number of shares of our common stock outstanding as of June 30, 2018, after giving effect to the conversion of all of our outstanding shares of preferred stock, and exclude:

 

   

1,425,316 shares of our common stock issuable upon the exercise of outstanding stock options under the 2014 Plan, at a weighted-average exercise price of $1.35 per share;

 

   

37,971 shares of our common stock reserved for future issuance under the 2014 Plan;

 

   

4,540,019 shares of our common stock reserved for future issuance under the 2018 Plan, which became effective in October 2018; and

 

   

40,001 shares of our common stock issuable upon the exercise of outstanding warrants to purchase shares of our Series C preferred stock, which will convert into warrants to purchase 40,001 shares of our common stock in connection with the closing of this offering, at an exercise price of $7.50 per share.

In addition, the number of shares of our common stock after this offering does not give effect to 39,999 shares of our common stock issuable upon exercise of warrants to purchase shares of our Series C preferred stock, which will convert into warrants to purchase 39,999 shares of our common stock in connection with the completion of this offering, at an exercise price of $7.50 per share, that will become exercisable when we borrow an additional $10.0 million under the Loan Agreement with Silicon Valley Bank. As of the date of this prospectus, we have requested to borrow the additional $10.0 million and we expect to receive it prior to the completion of this offering.

Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any outstanding stock options are exercised, new stock options are issued under the 2014 Plan or 2018 Plan, or we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors purchasing in this offering.

 

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Certain of our existing stockholders that are affiliated with certain of our directors have indicated an interest in purchasing an aggregate of up to approximately $45.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any or all of these stockholders, or any or all of these stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these stockholders as they will on any other shares sold to the public in this offering. The foregoing discussion does not give effect to any potential purchases by these stockholders in this offering.

 

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SELECTED FINANCIAL DATA

The following tables contain selected portions of our financial data. We derived our selected consolidated statements of comprehensive loss for the years ended December 31, 2016 and 2017, and our selected consolidated balance sheets data as of December 31, 2016 and 2017, from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We derived our selected consolidated statements of comprehensive loss for the six months ended June 30, 2017 and 2018, and our selected consolidated balance sheets data as of June 30, 2018, from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. We have prepared this unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and operating results for such period. Our historical results are not necessarily indicative of the results that may be expected or may actually occur in the future, and our interim results are not necessarily indicative of the expected results for future interim periods or the full year. The selected financial data should be read together with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The following table is presented in thousands, except for share and per share data:

    

Year Ended December 31,

   

Six Months Ended June 30,

 
    

2016

   

2017

   

2017

   

2018

 
           (unaudited)  

Statements of Comprehensive Loss:

        

Net revenue

   $ —     $ 128     $ —     $ 12  

Cost of goods sold

     —       118       —       5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —       10       —       7  

Operating expenses

    

Research and development

   $ 12,510     $ 12,332     $ 5,827     $ 10,721  

General and administrative

     4,457       4,823       2,417       3,071  

Sales and marketing

     517       1,029       399       1,359  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     17,484       18,184       8,643       15,151  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (17,484     (18,174     (8,643     (15,144
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     83       113       36       (108
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (17,401   $ (18,061   $ (8,607   $ (15,252

Foreign currency translation adjustment

     —       588       69       (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (17,401   $ (17,473   $ (8,538   $ (15,255
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted(1)

   $ (7.52   $ (7.04   $ (3.60   $ (5.43
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute basic and diluted net loss per share(1)

     2,313,526       2,564,964       2,389,066       2,811,183  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted(1)(2)(3) (unaudited)

     $ (0.98     $ (0.82
    

 

 

     

 

 

 

Pro forma weighted-average shares used to compute basic and diluted net loss per share(1)(2)(3) (unaudited)

       18,378,261         18,624,480  
    

 

 

     

 

 

 

 

(1)

See Note 1 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the basic and diluted net loss per common share and the shares used in the computation of the per share amounts.

 

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(2)

The pro forma net loss per share of common stock, basic and diluted, for the year ended December 31, 2017 and the six months ended June 30, 2018 reflects: (i) the automatic exchange of the exchanged preferred stock immediately prior to the completion of this offering, (ii) the automatic conversion of all outstanding shares of our preferred stock, including the exchanged preferred stock, into 15,813,297 shares of our common stock upon completion of this offering, (iii) the automatic conversion of outstanding warrants to purchase shares of our Series C preferred stock into warrants to purchase 40,001 shares of our common stock in connection with the completion of this offering, and the resulting reclassification of such warrants from a current liability to stockholders’ equity (deficit), and (iv) the filing and effectiveness of our certificate of incorporation, which will occur immediately prior to the completion of this offering. Does not reflect (i) $10.0 million in additional borrowings we requested under the Loan Agreement in October 2018, which we expect to receive prior to the closing of this offering, and (ii) the related concurrent issuance of warrants to purchase shares of our Series C preferred stock, which will become exercisable for 39,999 shares of our common stock immediately prior to the closing of this offering at an exercise price of $7.50 per share.

 

(3)

The pro forma net loss per share of common stock, basic and diluted, does not give effect to the issuance of shares from the proposed initial public offering nor do they give effect to potential dilutive securities where the impact would be anti-dilutive.

The following table is presented in thousands:

 

    

As of December 31,

    

As of
June 30,
2018

 
    

2016

    

2017

 
     (restated)       (unaudited,
restated)
 

Balance Sheets Data:(1)

        

Cash, cash equivalents and short-term investments

   $ 8,209      $ 24,398      $ 39,881  

Property and equipment, net

     1,167        1,530        1,459  

Intangible asset, net

     656        541        483  

Total assets

     10,856        29,412        45,800  

Total liabilities

     1,787        2,540        14,024  

Convertible preferred stock

     45,350        62,226        82,126  

Noncontrolling interest in Axonics Europe S.A.S.

     13,150        31,066        31,066  

Additional paid-in capital

     1,843        2,900        3,230  

Stock subscription receivable(2)

     (1,178      (1,753      (1,824

Accumulated deficit

     (49,105      (67,166      (82,418

Total stockholders’ deficit

     (49,431      (66,421      (81,418

 

(1)

See Note 10 to our consolidated financial statements appearing elsewhere in this prospectus for more information on the restatements of certain of our financial statements, including our consolidated balance sheets.

(2)

Includes outstanding promissory notes as of June 30, 2018, with an aggregate principal balance of $1,782,268.70, that were issued to us by certain of our executive officers and directors in exchange for the exercise of an aggregate of 1,653,196 shares of common stock pursuant to stock option awards. We have entered into debt forgiveness and cancellation of note agreements with certain of our executive officers and directors, including each of our named executive officers, to terminate each of their respective promissory notes and to forgive all respective obligations for payment thereof in connection with this offering. See “Certain Relationships and Related Party Transactions—Loans to Officers and Directors.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis gives effect to the restatement of our consolidated financial statements as described in Note 10 to our consolidated financial statements included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Forward-Looking Statements and Statistical Data” in this prospectus.

Overview

We are a medical technology company focused on the design, development, and commercialization of innovative and minimally invasive SNM solutions. SNM therapy is primarily used to treat patients with OAB, FI, and UR. Our r-SNM System delivers mild electrical pulses to the targeted sacral nerve in order to restore normal communication to and from the brain to reduce the symptoms of OAB, FI, and UR. We believe our proprietary r-SNM System offers significant advantages, including being the first and only rechargeable SNM system that is designed to be 60% smaller than existing technology and to last approximately 15 years. We currently have marketing approvals in Europe, Canada, and Australia for OAB, FI, and UR, and expect to submit a PMA application to the FDA for UUI, a predominant OAB subtype, during the first quarter of 2019. We believe our r-SNM System has the potential to disrupt and grow the approximately $605 million global SNM market in 2017, which is currently controlled by a single participant.

Since we commenced operations in late 2013, we have generated minimal revenue, as our activities have consisted primarily of developing our r-SNM System, conducting our RELAX-OAB post-market clinical follow up study in Europe and our ARTISAN-SNM pivotal study in the United States and Europe, and filing for regulatory approvals. In the future, if our r-SNM System is approved in the United States, we expect to generate revenue from product sales. Our ability to generate revenue and become profitable will depend on our ability to successfully commercialize our r-SNM System and any product enhancements we may advance in the future. Although we have begun limited commercial activities in Europe, our main priority is the United States where we expect to begin to commercialize and market our r-SNM System and generate revenue from product sales if and when approved by the FDA. We plan to establish a significant commercial infrastructure in anticipation of potential FDA approval of our r-SNM System. We expect to derive future revenue by increasing patient and physician awareness of our r-SNM System, hiring our own dedicated salesforce, and obtaining additional regulatory approvals. In addition, we plan to strategically expand into favorable international markets. If we are unable to accomplish any of these objectives, it could have a significant negative impact on our future revenue. If we fail to generate revenue in the future, our business, results of operations, financial condition, cash flows, and future prospects would be materially and adversely affected.

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 the EU, such as Germany, France, and the United Kingdom. Annual healthcare budgets generally determine the number of SNM systems that will be paid for by the payor in these single-payor system countries and regions.

 

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We currently outsource the manufacture of all components of our r-SNM System. We plan to continue with an outsourced manufacturing arrangement for the foreseeable future. We believe that our contract manufacturers are recognized in their field for their competency to manufacture the respective portions of our r-SNM System and have quality systems established that meet FDA requirements. We believe the manufacturers we currently utilize have sufficient capacity to meet our launch requirements and are able to scale up their capacity relatively quickly with limited capital investment.

We have devoted substantially all of our resources to research and development activities related to our r-SNM System, including clinical and regulatory initiatives to obtain marketing approvals. In anticipation of potential FDA approval, we expect to spend a significant amount of our existing resources on sales and marketing activities as we begin to commercialize and market our r-SNM System in the United States. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. We incurred net losses of $17.4 million, $18.1 million, and $15.3 million for the years ended December 31, 2016 and 2017 and the six months ended June 30, 2018, respectively, and had an accumulated deficit of $82.4 million as of June 30, 2018. As of June 30, 2018, we had available cash, cash equivalents and short-term investments of approximately $39.9 million, current liabilities of approximately $5.0 million, and long-term liabilities of approximately $9.0 million.

To date, we have financed our operations primarily through preferred stock financings and amounts borrowed under the Loan Agreement with Silicon Valley Bank. We have invested heavily in product development and continuous improvement to our r-SNM System. We have also made significant investments in clinical studies to demonstrate the safety and effectiveness of our r-SNM System and to support regulatory submissions. We intend to make significant investments to build our sales and marketing organization by increasing the number of United States and global sales representatives to market our product in markets throughout United States, Canada, Europe, and Australia. We also intend to continue to make investments in research and development efforts to develop our next generation r-SNM System and support our potential future regulatory submissions for expanded labeling and for expansion into additional international markets. Because of these and other factors, we expect to continue to incur net losses for the next few years and we expect to require additional funding, which may include future equity and debt financings. Adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material and adverse effect on our business, financial condition, and results of operations.

AMF License Agreement

On October 1, 2013, we entered into the License Agreement pursuant to which AMF agreed to license to us the AMF IP to develop and commercialize the AMF Licensed Products. Any and all improvements to the AMF IP made by us will be owned by AMF and licensed to us under the License Agreement for purposes of making AMF Licensed Products.

The initial term of the License Agreement is from October 1, 2013 to October 1, 2033, and will automatically continue until all patents are no longer in force. Upon completion of the initial term, the license granted pursuant to the License Agreement will be fully paid-up and perpetual except that if we wish to continue to practice any of the patents licensed to us by AMF that remain in force after such initial term, then we will have to continue to pay a reduced royalty for so long as such patent remains in force.

The license is co-exclusive with AMF solely with respect to (i) AMF IP resulting from AMF’s performance of any engineering services rendered under the License Agreement, and (ii) AMF’s right to use AMF IP for non-commercial research, educational and scholarly purposes.

We granted to AMF a royalty-free, worldwide, sublicensable, perpetual, exclusive license to any patent rights controlled by us that arise out of our improvements to the inventions claimed in the AMF IP, or the

 

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Axonics Licensed IP. This license granted by us to AMF explicitly excludes uses of the Axonics Licensed IP that are within the scope of the exclusive license of the AMF IP granted by AMF to us. Such license is irrevocable unless we terminate the License Agreement and AMF does not agree to pay us compensation for such license mutually agreed between us and AMF or determined by arbitration in accordance with the terms of the License Agreement.

In addition, the License Agreement provides AMF with the option, or the AMF Option, to license from us any intellectual property developed and owned by us or otherwise in our control, that is related to electrical stimulation of human tissue, separate from the Axonics Licensed IP and AMF IP, on terms that are materially consistent with the terms upon which we license the AMF IP pursuant to the License Agreement, and subject to field of use restrictions that would be determined upon the exercise of the AMF Option. AMF has expressly declined in writing to exercise the AMF Option.

Pursuant to the License Agreement, we are obligated to pay a 4% royalty of all net revenue derived from the AMF Licensed Products if one of the following conditions applies: (i) one or more valid claims within any of the patents licensed to us by AMF covers such AMF Licensed Products or the manufacture of such AMF Licensed Products or (ii) for a period of 12 years from the first commercial sale anywhere in the world of such AMF Licensed Product, in each case, subject to certain adjustments.

In 2017, we sold several of our r-SNM Systems as part of a one-time evaluation agreement with a hospital in Canada. As a result, we generated net revenue of $128,118 and recorded related royalties of $4,972 during the fiscal year ended December 31, 2017. No revenue was generated and no payments were made during the fiscal year ended December 31, 2016. In addition, beginning in 2018, we are required to pay AMF a minimum annual royalty, or the Minimum Royalty, payable quarterly if the royalty due is in excess of the Minimum Royalty, which will automatically increase each calendar year thereafter, subject to a maximum amount of $200,000 per year. We have accrued $37,500 as of June 30, 2018 toward AMF Minimum Royalties. Under the License Agreement, for each calendar year beginning in 2018, we are obligated to pay AMF the greater of (i) the amount of the 4% royalty referred to above, and (ii) the Minimum Royalty for such calendar year beginning with 2018. We have 60 days to pay AMF this amount, and if we fail to pay AMF within such 60-day period, AMF may, at its election, convert the exclusive license to a non-exclusive license or terminate the License Agreement.

The License Agreement was amended twice in February 2014, once in connection with our Series A preferred stock financing, in order to, among other things, include the field of the treatment of urinary and fecal dysfunction in humans through the application of electrical energy anywhere in or on the human body, within the scope of the licenses granted therein, an option under the License Agreement that required us to pay $1.0 million. In consideration for the inclusion of this field with the scope of the licenses granted in License Agreement, we issued AMF 50,000 shares of our Series A preferred stock.

As of June 30, 2018, AMF holds 888,000 shares of our common stock, 125,000 shares of our Series A preferred stock, and 771,161 shares of our Series B-1 preferred stock. John Petrovich, a member of our board of directors, is the President, Chief Executive Officer, Senior Vice President of Business Development, and General Counsel of AMF.

For additional information about the License Agreement, see “Business—AMF License Agreement.”

Components of Our Results of Operations

Net Revenue

Since we commenced operations in late 2013, we have generated minimal revenue, as our activities have consisted primarily of developing our r-SNM System, conducting our RELAX-OAB post-market clinical

 

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follow up study in Europe and our ARTISAN-SNM pivotal study in the United States and Europe, and filing for regulatory approvals. In the future, if our r-SNM System is approved in the United States, we expect to generate revenue from product sales. Our ability to generate revenue and become profitable will depend on our ability to successfully commercialize our r-SNM System and any product enhancements we may advance in the future. Although we have begun limited commercial activities in Europe, our main priority is the United States where we expect to begin to commercialize and market our r-SNM System and generate revenue from product sales if and when approved by the FDA. We plan to establish a significant commercial infrastructure in anticipation of potential FDA approval of our r-SNM System. We expect to derive future revenue by increasing patient and physician awareness of our r-SNM System, hiring our own dedicated salesforce, and obtaining additional regulatory approvals. In addition, we plan to strategically expand into favorable international markets. If we are unable to accomplish any of these objectives, it could have a significant negative impact on our future revenue. If we fail to generate revenue in the future, our business, results of operations, financial condition, cash flows, and future prospects would be materially and adversely affected.

Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of acquisition costs of the components of our r-SNM System, third-party contract labor costs, overhead costs, as well as distribution-related expenses such as logistics and shipping costs, net of costs charged to customers. The overhead costs include the cost of material procurement and operations supervision and management personnel. We expect overhead costs as a percentage of revenue to decrease as our sales volume increases, if our product is approved in the United States. In the future, our cost of goods sold will include expenses associated with our payment of royalties to AMF when we exceed the Minimum Royalty threshold, as well as scrap and inventory obsolescence. The Minimum Royalty amounts are currently included in research and development expenses. We expect cost of goods sold to increase in absolute dollars primarily as, and to the extent, our revenue grows. We expect gross margin to vary based on regional differences in pricing and discounts negotiated by customers.

We calculate gross margin as gross profit divided by revenue. Revenues have been insignificant to date with prices based on evaluation agreements with one-time discounts offered. We expect future gross margin will be affected by a variety of factors, including manufacturing costs, the average selling price of our r-SNM System, the implementation of cost-reduction strategies, inventory obsolescence costs, which may occur when new generations of our r-SNM System are introduced, and to a lesser extent, the sales mix between the United States, Canada, Europe and Australia as our average selling price in the United States is expected to be higher than in Canada, Europe and Australia. Our gross margin may increase over the long term to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers, thereby reducing our per unit costs. Additionally, our gross margin may fluctuate from quarter to quarter due to seasonality.

Research and Development Expenses

The largest component of our total operating expenses has historically been research and development expenses. Research and development expenses consist primarily of employee compensation, including stock-based compensation, product development, including testing and engineering, and clinical studies to develop and support our r-SNM System, including clinical study management and monitoring, payments to clinical investigators, and data management. Other research and development expenses include consulting and advisory fees, 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 research and development expenses to increase in the future as we develop next generation versions of our r-SNM System and continue to expand our clinical studies to potentially add additional indications and expand to new markets. We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts and new clinical development activities.

 

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The following table summarizes our research and development expenses by functional area for the years ended December 31, 2017 and 2016:

 

    

Years Ended
December 31,

 
    

2017

    

2016

 
     (in thousands)  

Personnel related

   $ 6,031      $ 4,536  

Contract fabrication and manufacturing

     2,159        3,083  

Contract R&D and consulting

     1,829        2,747  

Clinical development

     1,562        1,470  

Other R&D expenses

     751        674  
  

 

 

    

 

 

 

Total R&D expenses

   $ 12,332      $ 12,510  
  

 

 

    

 

 

 

The following table summarizes our research and development expenses by functional area for the six months ended June 30, 2018 and 2017:

 

    

Six Months Ended

June 30,

 
    

2018

    

2017

 
     (in thousands)
(unaudited)
 

Personnel related

   $ 3,784      $ 2,871  

Clinical development

     2,882        659  

Contract fabrication and manufacturing

     2,393        1,223  

Contract R&D and consulting

     1,114        735  

Other R&D expenses

     548        339  
  

 

 

    

 

 

 

Total R&D expenses

   $ 10,721      $ 5,827  
  

 

 

    

 

 

 

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 office-related expenses, facilities and equipment rentals, and travel expenses. We expect our general and administrative expenses will significantly increase in absolute dollars as we increase our headcount and expand administrative personnel to support our growth and operations as a public company including finance personnel and information technology services. Additionally, we anticipate increased expenses related to audit, legal, and tax-related services associated with maintaining compliance with regulations, exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs associated with being a public company. These expenses may further increase when we no longer qualify as an “emerging growth company” under the JOBS Act, which will require us to comply with certain reporting requirements from which we are currently exempt. We expect general and administrative expenses to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of trade shows, booth exhibition costs, and the related travel for these events. Other sales and marketing expenses include consulting and advisory fees, market access personnel and employee compensation including stock-based compensation. In anticipation of potential FDA approval, we expect sales and marketing expenses to continue to increase in absolute dollars as we expand our commercial infrastructure to both drive and support our expected growth in revenue. In particular, we plan to hire

 

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approximately 60 sales representatives, which we will initially endeavor to hire in anticipation of our potentially receiving FDA approval to support the potential commercial launch in the United States, which will significantly increase our sales and marketing expense. However, we expect sales and marketing expenses to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income earned on cash equivalents and short-term investments, net of interest expense payable under the Loan Agreement with Silicon Valley Bank, and loss on disposal of property and equipment. Other income (expenses, net also includes net unrealized mark-to-market gains (losses) on our preferred stock warrant liabilities.

Income Tax Expense

Income tax expense consists of state income taxes in California. We maintain a full valuation allowance for deferred tax assets including net operating loss carryforwards and research and development credits and other tax credits.

Results of Operations

Comparison of the Six Months Ended June 30, 2018 and 2017

The following table shows our results of operations for the six months ended June 30, 2018 and 2017:

 

    

Six Months Ended

        June 30,         

   

Period to Period

        Change         

 
    

2018

   

2017

       
    

(in thousands)

(unaudited)

       

Net revenue

   $ 12     $ —     $ 12  

Cost of goods sold

     5       —       5  
  

 

 

   

 

 

   

 

 

 

Gross profit

     7       —       7  

Gross Margin

     56.3 %      —    

Operating Expenses

      

Research and development

     10,721       5,827       4,894  

General and administrative

     3,071       2,417       654  

Sales and marketing

     1,359       399       960  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     15,151       8,643       6,508  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (15,144     (8,643     (6,501

Other Income (Expense)

      

Interest income

     276       42       234  

Other expense

     (383     (5     (378
  

 

 

   

 

 

   

 

 

 

Other income (expense), net

     (107     37       (144

Loss before income tax expense

     (15,251     (8,606     (6,645

Income tax expense

     1       1       —  
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (15,252   $ (8,607   $ (6,645
  

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment

     (3     69       (72
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (15,255   $ (8,538   $ (6,717
  

 

 

   

 

 

   

 

 

 

 

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Net Revenue

Net revenue was minimal for the six months ended June 30, 2018 and was derived from the sale of one r-SNM System to a customer in the United Kingdom. We recorded no revenue for the six months ended June 30, 2017.

Cost of Goods Sold and Gross Margin

Due to the sale referenced above, we incurred minimal cost of goods sold for the six months ended June 30, 2018. We recorded no cost of goods sold for the six months ended June 30, 2017. Gross margin was 56.3% in the six months ended June 30, 2018, compared to no gross margin in the six months ended June 30, 2017.

Research and Development Expenses

Research and development expenses increased $4.9 million, or 84.0%, to $10.7 million in the six months ended June 30, 2018 compared to $5.8 million in the six months ended June 30, 2017. The increase in research and development expenses was primarily attributable to an increase of $2.2 million in clinical development costs to demonstrate the safety and effectiveness of our r-SNM System and to support regulatory submissions, an increase of $1.2 million in contract fabrication and manufacturing costs, an increase of $0.9 million in personnel costs, and an increase of $0.4 million in contract research and development and consulting expenses.

General and Administrative Expenses

General and administrative expenses increased $0.7 million, or 27.0%, to $3.1 million in the six months ended June 30, 2018, compared to $2.4 million in the six months ended June 30, 2017, primarily as a result of an increase of $0.5 million related to personnel costs and an increase of $0.1 million in consulting costs.

Sales and Marketing Expenses

Sales and marketing expenses increased $1.0 million, or 241.1%, to $1.4 million in the six months ended June 30, 2018, compared to $0.4 million in the six months ended June 30, 2017. The increase in sales and marketing expenses was primarily due to an increase of $0.6 million related to personnel costs, an increase of $0.2 million related to expenses for conferences and tradeshows, and an increase of $0.1 million in consulting costs.

Other Income (Expense), Net

Other expense, net was $0.1 million in the six months ended June 30, 2018, consisting primarily of interest expense incurred related to the Loan Agreement with Silicon Valley Bank, partially offset by interest income earned on cash equivalents and short-term investments. Other income, net was minimal in the six months ended June 30, 2017.

Income Tax Expense

Income tax expense was minimal in the six months ended June 30, 2018 and 2017.

 

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Fiscal Year Ended December 31, 2017 Compared to Fiscal Year Ended December 31, 2016

The following table shows our results of operations for the fiscal year ended December 31, 2017 and 2016:

 

    

Year Ended

December 31,

   

Period to Period

        Change         

 
    

2017

   

2016

       
    

(in thousands)

       

Net revenue

   $ 128     $ —     $ 128  

Cost of goods sold

     118       —       118  
  

 

 

   

 

 

   

 

 

 

Gross profit

     10       —       10  

Gross Margin

     7.9 %      —    

Operating Expenses

      

Research and development

     12,332       12,510       (178

General and administrative

     4,823       4,457       366  

Sales and marketing

     1,029       517       512  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     18,184       17,484       700  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (18,174     (17,484     (690

Other Income (Expense)

      

Interest income

     201       84       117  

Loss on disposal of property and equipment

     (65     —       (65

Other expense

     (22     —       (22
  

 

 

   

 

 

   

 

 

 

Other income, net

     114       84       30  

Loss before income tax expense

     (18,060     (17,400     (660

Income tax expense

     1       1       —  
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (18,061   $ (17,401   $ (660

Foreign currency translation adjustment

     588       —       588  
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (17,473   $ (17,401   $ (72
  

 

 

   

 

 

   

 

 

 

Net Revenue

To date, we have generated minimal revenue. In fiscal year 2017, we sold several of our r-SNM Systems as part of a one-time evaluation agreement with a hospital in Canada, resulting in net revenue of $0.1 million compared to no revenue in fiscal year 2016. This evaluation agreement represented a one-time professional courtesy supply for the hospital due to product shortfall, of which we supplied at discounted prices. We have no continuing or accruing obligations under the evaluation agreement and therefore have not generated revenue in fiscal year 2018 under such agreement. We did not sell our r-SNM System in any other region in fiscal year 2017.

Cost of Goods Sold and Gross Margin

The sale to a hospital in Canada referenced above resulted in cost of goods sold of $0.1 million in fiscal year 2017 compared to no cost of goods sold in fiscal year 2016. Gross margin was 7.9% in fiscal year 2017 compared to no gross margin in fiscal year 2016.

Research and Development Expenses

Research and development expenses decreased $0.2 million, or 1.4%, to $12.3 million in fiscal year 2017 compared to $12.5 million in fiscal year 2016. The decrease in research and development expenses was primarily attributable to a decrease of $0.9 million in contract fabrication and manufacturing expenses as we

 

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obtained European regulatory approval and began capitalizing inventory in fiscal year 2017, a decrease of $0.9 million in contract research and development and consulting expenses, partially offset by an increase of $1.5 million in personnel costs due primarily to headcount increases, and to a lesser extent, compensation increases.

General and Administrative Expenses

General and administrative expenses increased $0.4 million, or 8.2%, to $4.8 million in fiscal year 2017 compared to $4.5 million in fiscal year 2016, primarily as a result of an increase of $0.2 million related to personnel costs and $0.2 million in travel expenses.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.5 million, or 99.6%, to $1.0 million in fiscal year 2017 compared to $0.5 million in fiscal year 2016. The increase in sales and marketing expenses was primarily due to an increase of $0.4 million related to travel expenses for our U.S. and European sales personnel to attend conferences and tradeshows.

Other Income, Net

Other income, net remained relatively consistent at $0.1 million in fiscal year 2017 compared to fiscal year 2016.

Income Tax Expense

Income tax expense was minimal in fiscal year 2017 and 2016.

Seasonality

We expect that any revenue we may generate could fluctuate from quarter to quarter as a result of timing and seasonality. We anticipate mild seasonality based on national holiday patterns specific to certain nations. These seasonal variations are difficult to predict accurately, may vary amongst different markets, and at times may be entirely unpredictable. In addition to the above factors, in the United States, it is possible that we may experience seasonality based on patients’ annual deductibility. In Europe, we may be required to engage in a contract bidding process in order to sell our r-SNM System, which processes are only open at certain periods of time, and we may not be successful in the bidding process. In addition, it is possible that we may experience variations in demand for our product in the first fiscal quarter of each year in Europe, following publication of new coverage status and changes in hospital budgets pertaining to allocation of funds to purchase products such as our r-SNM System.

Liquidity and Capital Resources

Since we commenced operations in late 2013, we have devoted substantially all of our resources to research and development activities related to our r-SNM System, including clinical and regulatory initiatives to obtain marketing approvals. Additionally, to date, we have generated minimal revenue from product sales and have never been profitable. While we have received regulatory approval in Europe, Canada, and Australia for OAB, FI, and UR, our main commercial priority is the United States where we expect to begin to commercialize and market our r-SNM System initially for the treatment of UUI, a predominant OAB subtype, and generate revenue from product sales if and when approved by the FDA. In addition to the United States, we expect to expend capital resources pursuing commercial operations in Europe, Canada, and Australia, the amount and timing of which will depend on a variety of factors, including the size of the developed market for SNM therapy, burdens to entry in any such country or region, and other factors specific to certain respective countries and regions.

 

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We incurred net losses of $17.4 million, $18.1 million, and $15.3 million for the years ended December 31, 2016 and 2017 and the six months ended June 30, 2018, respectively, and had an accumulated deficit of $82.4 million as of June 30, 2018. In anticipation of potential FDA approval, we expect to spend a significant amount of our existing resources on sales and marketing activities as we begin to commercialize and market our r-SNM System in the United States. In particular, we plan to hire approximately 60 sales representatives, which we will initially endeavor to hire in anticipation of our potentially receiving FDA approval to support the potential commercial launch in the United States, which will significantly increase our sales and marketing expense.

As of June 30, 2018, we had cash, cash equivalents and short-term investments of $39.9 million and an accumulated deficit of $82.4 million. Through June 30, 2018, we raised an aggregate of $114.2 million in gross proceeds from private placements of our preferred stock. As of December 31, 2017, we had cash and cash equivalents of $24.4 million and an accumulated deficit of $67.2 million. Our primary sources of capital to date have been from preferred stock financings and amounts borrowed under the Loan Agreement with Silicon Valley Bank. In February 2018, we received $10.0 million from Tranche A of the Term Loan simultaneously with our entry in the Loan Agreement. As of June 30, 2018, we had $10.0 million in outstanding borrowings under the Term Loan and an ability to borrow an aggregate of $10.0 million in Tranche B and Tranche C. In October 2018, we requested the full $5.0 million from Tranche B and the full $5.0 million from Tranche C, as discussed below under “—Indebtedness.” We believe that our existing cash resources will be sufficient to meet our forecasted requirements for operating liquidity, capital expenditure and debt repayments for at least the next 12 months. If these sources are insufficient to satisfy our liquidity requirements, however, we may seek to sell additional equity, increase the availability under the Loan Agreement or enter into an additional loan agreement. If we raise additional funds by issuing equity securities, our stockholders would 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 delay the development, commercialization and marketing of our r-SNM System.

Cash Flows

The following table presents a summary of our cash flow for the periods indicated:

 

    

Year Ended

December 31,

   

Six Months

Ended June 30,

 
    

2017

   

2016

   

2018

   

2017

 
     (in thousands)  
                 (unaudited)  

Net cash provided by (used in)

        

Operating activities

   $ (18,174   $ (17,336   $ (13,972   $ (8,424

Investing activities

     (1,039     (292     (15,451     (250

Financing activities

     34,814       1,625       29,758       19,923  

Effect of exchange rate changes on cash and cash equivalents

     588             (3     69  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 16,189     $ (16,003   $ 332     $ 11,318  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

Net cash used in operating activities was $18.2 million in fiscal year 2017 and consisted primarily of a net loss of $18.1 million, a decrease in net operating assets of $1.4 million, partially offset by non-cash charges of $1.3 million. Net operating assets consisted primarily of inventory to support the planned launch of our commercial operations. Non-cash charges consisted primarily of depreciation and amortization and stock-based compensation.

 

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Net cash used in operating activities was $17.3 million in fiscal year 2016 and consisted primarily of a net loss of $17.4 million, a decrease in net operating assets of $0.9 million, partially offset by non-cash charges of $1.0 million. Net operating assets consisted primarily of accounts payable as vendor purchases were paid. Non-cash charges consisted primarily of depreciation and amortization and stock-based compensation.

Net cash used in operating activities was $14.0 million for the six months ended June 30, 2018 and consisted primarily of a net loss of $15.3 million, partially offset by non-cash charges of $0.8 million and an increase in net operating assets of $0.5 million. Net operating assets consisted primarily of inventory to support the planned launch of our commercial operations. Non-cash charges consisted primarily of depreciation and amortization and stock-based compensation.

Net cash used in operating activities was $8.4 million for the six months ended June 30, 2017 and consisted primarily of a net loss of $8.6 million, a decrease in net operating assets of $0.3 million, partially offset by non-cash charges of $0.5 million. Net operating assets consisted primarily of accounts payable due to timing of payments. Non-cash charges consisted primarily of depreciation and amortization and stock-based compensation.

Net cash used in investing activities

Net cash used in investing activities was $1.0 million in fiscal year 2017 and consisted of purchases of property and equipment. Net cash used in investing activities in fiscal year 2016 was $0.3 million and also consisted of purchases of property and equipment. Net cash used in investing activities was $15.5 million for the six months ended June 30, 2018 and consisted of purchases of short-term investments and property and equipment. Net cash used in investing activities was $0.3 million for the six months ended June 30, 2017 and consisted of purchases of property and equipment.

Net cash provided by financing activities

Net cash provided by financing activities was $34.8 million in fiscal year 2017 and consisted primarily of $35.0 million of proceeds from the issuance and sale of our Series C preferred stock.

Net cash provided by financing activities was $1.6 million in 2016 and consisted of proceeds from the issuance and sale of our Series B-2 preferred stock.

Net cash provided by financing activities was $29.8 million for the six months ended June 30, 2018 and consisted primarily of $20.1 million of proceeds from the issuance of shares of our Series C preferred stock and $10.0 million of proceeds from our Term Loan with Silicon Valley Bank.

Net cash provided by financing activities was $19.9 million for the six months ended June 30, 2017 and consisted primarily of proceeds from the issuance of shares of our Series C preferred stock.

Indebtedness

In February 2018, we entered into the Loan Agreement with Silicon Valley Bank providing for the Term Loan. Pursuant to the Loan Agreement, we may request up to $20.0 million in three tranches of term loans and such drawn obligations mature on June 1, 2021. We requested $10.0 million from Tranche A simultaneously with the entry into the Loan Agreement, which is currently outstanding. We may request Tranche B of an additional $5.0 million after the date commencing on the later of (i) the date that we achieve positive three months results in our ARTISAN-SNM pivotal study, as confirmed to Silicon Valley Bank by a member of our management team and a member of our board of directors, and (ii) July 1, 2018, and ending on December 31, 2018, and Tranche C, for an additional $5.0 million after the date commencing on the later of (i) the date that Silicon Valley Bank receives evidence, in form and substance reasonably satisfactory to Silicon Valley Bank, that we have received

 

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our PMA in the United States for our r-SNM System or gross proceeds from the sale of our equity securities of not less than $20.0 million (which condition was satisfied when we issued and sold 2,233,333 shares of our Series C preferred stock in March 2018 for aggregate gross proceeds of $20,099,997), and (ii) January 1, 2019, and ending on March 31, 2019, subject to certain terms and conditions. If either Tranche B or Tranche C is requested, then the maturity of the Term Loan is automatically extended to December 1, 2021.

The Loan Agreement provides for monthly interest payments through December 31, 2018; provided that, (i) if we request and Silicon Valley Bank funds Tranche B or Tranche C, this interest-only period automatically extends through June 30, 2019, and (ii) we have received a PMA in the United States for our r-SNM System and we request and Silicon Valley Bank funds Tranche C, the interest-only period automatically extends through December 31, 2019. On the first day of the end of the interest only period, we will be required to repay the Term Loan in equal monthly installments of principal plus interest through maturity. Outstanding principal balances under the Term Loan bear interest at the prime rate plus 1.75%.

In October 2018, we and Silicon Valley Bank entered into an amendment to the Loan Agreement, or the Loan Amendment, in connection with which we requested the full $5.0 million from Tranche B and the full $5.0 million from Tranche C. We expect to receive the $10.0 million from both tranches prior to the completion of this offering. Pursuant to the Loan Amendment, Silicon Valley Bank has agreed to (i) extend the interest only period from June 30, 2019 to December 31, 2019, without requiring our receipt of a PMA in the United States for our r-SNM System, and (ii) make Tranche C available now instead of January 1, 2019. In addition, pursuant to the Loan Amendment, we are obligated to pay Silicon Valley Bank a fee of $100,000 in the event that we do not (i) consummate this offering, with proceeds of no less than $75.0 million , (ii) receive PMA approval in the United States for our r-SNM System, or (iii) receive gross proceeds of at least $40.0 million from the sale of our equity securities, in each case on or prior to June 30, 2019. In addition, as a result of our request of the full $5.0 million from Tranche B and the full $5.0 million from Tranche C, the maturity of the Term Loan has been automatically extended to December 1, 2021.

We may prepay amounts outstanding under the Term Loan in increments of $5.0 million at any time with 30 days prior written notice to Silicon Valley Bank. However, all prepayments of the Term Loan prior to maturity, whether voluntary or mandatory (acceleration or otherwise), shall also be subject to the payment of a prepayment fee equal to (i) for a prepayment made on or after the closing date through and including the first anniversary of the closing date, 3.00% of the principal amount of the Term Loan being prepaid, (ii) for a prepayment made after the date which is the first anniversary of the closing date through and including the second anniversary of the closing date, 2.00% of the principal amount of the Term Loan being prepaid, and (iii) for a prepayment made after the date which is the second anniversary of the closing date and before the maturity date, 1.00% of the principal amount of the Term Loan being prepaid. Additionally, on the earliest to occur of (i) the maturity date of the Term Loan, (ii) the acceleration of the Term Loan, or (iii) the prepayment of the Term Loan, we will be required to make a final payment equal to the original principal amount of such Tranche multiplied by 7.50%. We are currently accruing the portion of the final payment calculated based on the amount drawn under the Term Loan.

All obligations under the Term Loan are secured by a first priority lien on substantially all of our assets, excluding intellectual property assets and more than 65% of the shares of voting capital stock of any of our foreign subsidiaries. We have agreed with Silicon Valley Bank not to encumber our intellectual property assets without its prior written consent unless a security interest in the underlying intellectual property is necessary to have a security interest in the accounts and proceeds that are part of the assets securing the Term Loan, in which case our intellectual property shall automatically be included within the assets securing the Term Loan.

The Loan Agreement contains certain covenants that limit our ability to engage in certain transactions that may be in our long-term best interest. Subject to certain limited exceptions, these covenants limit our ability to or prohibit us to permit any of our subsidiaries to, as applicable, among other things:

 

   

pay cash dividends on, make any other distributions in respect of, or redeem, retire or repurchase, any shares of our capital stock;

 

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convey, sell, lease, transfer, assign, or otherwise dispose of all or any part of our business or property;

 

   

effect certain changes in our business, management, ownership or business locations;

 

   

merge or consolidate with, or acquire all or substantially all of the capital stock or property of any other company;

 

   

create, incur, assume, or be liable for any additional indebtedness, or create, incur, allow, or permit to exist any additional liens;

 

   

make certain investments; and

 

   

enter into transactions with our affiliates.

While we have not previously breached and are currently in compliance with the covenants contained in the Loan Agreement, we may breach these covenants in the future. Our ability to comply with these covenants may be affected by events and factors beyond our control. In the event that we breach one or more covenants, Silicon Valley Bank may choose to declare an event of default and require that we immediately repay all amounts outstanding under the applicable loan agreement, terminate any commitment to extend further credit and foreclose on the collateral. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations. An event of default includes, but is not limited to, the following: if we fail to make any payment under the Loan Agreement when due, if we fail or neglect to perform certain obligations under the Loan Agreement, if we violate certain covenants under the Loan Agreement, if certain material adverse changes occur, if we are unable to pay our debts as they become due or otherwise become insolvent, or if we begin an insolvency proceeding.

In addition, we issued warrants to Silicon Valley Bank and Life Science Loans II, LLC, its counterparty. Each warrant entitles the holder thereof to purchase up to 33,333 shares of our Series C preferred stock at an exercise price of $9.00 per share. Initially, each warrant is exercisable for 16,667 shares of our Series C preferred stock. Upon drawing the full $5.0 million from Tranche B, an additional 8,333 shares will be exercisable under each warrant and upon drawing the full $5.0 million from Tranche C, an additional 8,333 shares will be exercisable under each warrant. Each warrant will expire on February 6, 2028. In connection with the completion of this offering, each warrant will convert into warrants to purchase shares of our common stock in accordance with its terms.

We have no further indebtedness arrangements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Related Party Transactions

Information concerning related party transactions is set forth in the section captioned “Certain Relationships and Related Party Transactions.”

 

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Contractual Obligations

Our principal contractual obligations consist of the operating lease for our headquarters and certain purchase obligations and other liabilities. The following table sets out, as of December 31, 2017, our contractual obligations due by period (in thousands):

 

    

Payments due by period

 
    

Total

    

Less than 1

year

    

1-3 years

    

3-5 years

    

More than 5

years

 

Operating Lease Obligations(1)

   $ 396      $ 213      $ 183      $ —      $ —  

Purchase Obligations(2)

     3,418        3,418        —          

Other Long-Term Liabilities(3)

     2,825        75        225        325        2,200  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,639      $ 3,706      $ 408      $ 325      $ 2,200  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In February 2018, we entered into the Loan Agreement. The amounts below reflect the obligations under the Loan Agreement, including interest and principal payments and the final payment payable under the Loan Agreement.

The following table sets out, as of June 30, 2018, our contractual obligations due by period (in thousands):

 

    

Payments due by period

 
    

Total

    

Less than 1

      year      

    

1-3 years

    

3-5 years

    

More than 5

years

 

Operating Lease Obligations(1)

   $ 290      $ 217      $ 73      $ —        $ —    

Purchase Obligations(2)

     3,475        3,475        —          —       

Other Long-Term Liabilities(3)

     2,788        88        250        350        2,100  

Long-term Debt(4)

     12,000        2,535        9,465        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,553      $ 6,315      $ 9,788      $ 350      $ 2,100  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Our principal office is currently located at 26 Technology Drive, Irvine, California 92618, where we lease approximately 25,548 square feet of office space under a lease that terminates on August 13, 2025, or the new lease. In addition, we maintain offices at 7575 Irvine Center Drive, Suite 200, Irvine, California 92618, where we lease approximately 12,215 square feet of space, and where we intend to conduct the training of our sales team, under a lease that terminates on October 31, 2019, or the 7575 Irvine Center lease. As of December 31, 2017 and June 30, 2018, only the 7575 Irvine Center lease was effective. In July 2018, the lease agreement for the new lease was amended to remove the contingency on the termination of the 7575 Irvine Center lease, and the new lease inception date will be the date of occupancy, or in August 2018. The aggregate base rent due over the initial term under the terms of the new lease is approximately $5.3 million (without giving effect to certain rent abatement terms). We will also be responsible for the payment of additional rent to cover certain costs, taxes, and insurance. Based on the estimated monthly additional rent for 2018 as set forth in the new lease, we estimate that the additional rent during the initial term will be approximately $3.8 million. We also expect to pay approximately $0.5 million for leasehold improvements, net of the tenant improvement allowance provided in the new lease of approximately $0.8 million.

 

(2)

Purchase obligations represent open purchase orders for component materials and third-party contract labor costs at the end of the fiscal year. These purchase orders can be impacted by various factors, including the timing of issuing orders, the timing of the shipment of orders, and currency fluctuations.

 

(3)

Represents the Minimum Royalty due under the License Agreement beginning in 2018.

 

(4)

Includes interest payments and the minimum final payment, consisting of a 7.5% premium principal amount paid off under the Loan Agreement, assuming maturity at June 30, 2021 and assuming the principal balance

 

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  remains the same. Does not give effect to $10.0 million of additional borrowings under the Loan Agreement in October 2018 or the extended maturity date of December 1, 2021 pursuant to the Loan Amendment.

The tables above do not include our lease obligations under the new lease. Payments under the new lease were contingent on the termination of the 7575 Irvine Center lease until that lease was amended in July 2018. The 7575 Irvine Center lease did not terminate as of December 31, 2017, and as a result, we had no lease obligations under the new lease as of June 30, 2018. The new lease inception date is deemed to be the date of the lease amendment, or July 11, 2018, and lease commencement is August 13, 2018. For the new lease, as of September 30, 2018, (i) our total operating lease obligations are $5,188, (ii) our payments due in the less than one year are $664, (iii) our payments due in one to three years are $1,421, (iv) our payments due in three to five years are $1,554, and (v) our payments due in more than five years are $1,549, in each case, presented in thousands.

From time to time we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims, including the License Agreement, the Loan Agreement and certain real estate leases, supply purchase agreements, and agreements with directors and officers. The terms of such obligations vary by contract and in most instances a maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted, thus no liabilities have been recorded for these obligations on our balance sheets for any of the periods presented.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires our management to make estimates and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes included elsewhere in this prospectus. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and supportable under the circumstances. The results of this evaluation then form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and such differences may be material to our consolidated financial statements.

While our significant accounting policies are more fully described in note 1 to our consolidated financial statements included elsewhere in this prospectus, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments.

Revenue Recognition

Since we commenced operations in late 2013, we have recognized minimal revenue. Although we have begun limited commercial activities in the EU, our main priority is the United States where we expect to begin to commercialize and market our r-SNM System and generate revenue from product sales if and when approved by the FDA. In addition, we plan to strategically expand into favorable international markets. If we are unable to accomplish any of these objectives, it could have a significant negative impact on our future revenue. If we fail to generate revenue in the future, our business, results of operations, financial condition, cash flows and future prospects would be materially and adversely affected.

Revenue recognized during the year ended December 31, 2017 relates entirely to the sale of our r-SNM System to one customer in Canada. We recognized revenue in 2017 when title and risk of loss pass to customers, which is typically when the customer takes possession of the product, when persuasive evidence of an arrangement exists there are no further obligations yet to be performed, pricing is fixed or determinable, and collection is reasonably assured. Effective January 1, 2018, we adopted the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers. We recognize revenue in 2018 when promised goods

 

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or services are transferred to customers in an amount that reflects the consideration which an entity expects to receive in exchange for those goods or services. Revenue recognized during the six months ended June 30, 2018, relates entirely to the sale of our r-SNM System to a customer in the United Kingdom.

We make reasonable assumptions regarding the future collectability of amounts receivable from customers to determine whether the revenue recognition criteria have been met. Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between a seller and a customer are not recorded as revenue. In general, our standard terms and conditions of sale do not allow for product returns. We expense shipping and handling costs as incurred and include them in the cost of goods sold. In those cases where shipping and handling costs are billed to customers, we classify the amounts billed as a component of cost of goods sold.

Inventory

Inventory is stated at the lower of cost or net realizable value, with cost computed on a first-in, first-out basis.

We capitalize inventory produced for commercial sale. Costs associated with developmental products that do not satisfy our inventory capitalization criteria are charged to research and development expense as incurred.

Products that have been approved by certain regulatory authorities are also used in clinical programs to assess the safety and effectiveness 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 clinical programs is identical and, as a result, the inventory has an “alternative future use” as defined in authoritative guidance. Component materials and purchased products associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes and, therefore, does not have an “alternative future use.”

For products that are under development and have not yet been approved by regulatory authorities, purchased component materials are charged to research and development expense when the inventory ownership transfers to us.

We analyze inventory levels to identify inventory that may expire prior to sale, inventory that has a cost basis in excess of its net realizable value, or inventory in excess of expected sales requirements. Although the manufacturing of our product is subject to strict quality control, certain batches or units of product may no longer meet quality specifications or may expire, which would require adjustments to our inventory values. We also apply judgment related to the results of quality tests that are performed throughout the production process, as well as the understanding of regulatory guidelines, to determine if it is probable that inventory will be saleable. These quality tests are performed throughout the pre- and post-production processes, and we continually gather information regarding product quality for periods after the manufacturing date. Our r-SNM System currently has a maximum estimated shelf life range of 12 to 27 months and, based on sales forecasts, we expect to realize the carrying value of the product inventory. In the future, reduced demand, quality issues, or excess supply beyond those anticipated by management may result in a material adjustment to inventory levels, which would be recorded as an increase to cost of goods sold.

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

 

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Our r-SNM System inventory manufactured prior to regulatory approval by European and Canadian regulatory bodies consisted of component materials and work-in-process inventory, which was expensed as research and development costs as incurred and was combined with other research and development expenses. While management tracked the quantities of individual product lots, it did not track pre-regulatory approval manufacturing costs and, therefore, the manufacturing cost of our r-SNM System component materials and work-in-process inventory produced prior to regulatory approval is not reasonably determinable. However, based on management’s expectations for future manufacturing costs to produce our r-SNM System inventory, management estimates that approximately $0.5 million of commercial r-SNM System inventory was expensed prior to regulatory approval.

We began capitalizing our r-SNM System manufacturing costs as inventory following both the receipt of regulatory approval from the European and Canadian regulatory bodies and our decision to begin to commercialize, which occurred in fiscal year 2017. As of June 30, 2018, we had $0.6 million and $1.3 million of finished goods inventory and component materials inventory, respectively, on hand. As of June 30, 2018, we had minimal work-in-process inventory on hand.

The aggregate selling price of reduced-cost finished goods inventory on hand may be affected by a number of factors including, but not limited to, market demand, future pricing of the product, competition, and reimbursement by government and other payers. At this time, our management cannot reasonably estimate the timing and rate of consumption of reduced-cost component materials and work-in-progress inventory, or the timing of sales of finished goods manufactured with this inventory. The time period over which reduced-cost finished goods inventory is consumed will depend on a number of factors, including the amount of future r-SNM System sales, the ultimate use of this inventory in either commercial sales, clinical development or other research activities, and the ability to utilize inventory prior to its expiration date.

Intangible Asset

The intangible asset represents exclusive rights to an additional field-of-use on the patent suite within the License Agreement. The additional field-of-use was provided in exchange for 50,000 shares of our Series A preferred stock, the fair value of which was $1.0 million at the time of the exchange. The intangible asset was recorded at its fair value of $1.0 million at the date contributed. Amortization of this asset is recorded over the shorter of the patent or legal life on a straight-line basis. The weighted-average amortization period is 8.71 years. We will review the intangible asset for impairment whenever an impairment indicator exists. There have been no intangible asset impairment charges to date.

Impairment of Long-Lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net cash flows that the assets are expected to generate. If said assets are considered to be impaired, the impairment that would be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. There have been no such impairments of long-lived assets to date.

Research and Development

Research and development costs are charged to operations as incurred. Research and development costs include salary and personnel-related costs, costs of clinical studies and testing, supplies and materials, and outside consultant costs. Costs of clinical studies and testing include fees paid to hospitals and physicians for the enrollment and treatment of patients, related product manufacturing expenses for the products used in the studies, fees paid to contract research organizations, or CROs, other consultants, and other outside expenses.

 

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Our research and development team focuses on our r-SNM System, including our clinical studies, as well as evaluations of improvements and enhancements to our r-SNM System. For the years ended December 31, 2016 and 2017 and six months ended June 30, 2018, we incurred research and development expenses of $12.5 million, $12.3 million and $10.7 million, respectively.

Income Taxes

We account for income taxes using the asset and liability method to compute the difference between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. We have deferred tax assets. The realization of these deferred tax assets may be dependent upon our ability to generate sufficient taxable income in future years. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. We evaluate the recoverability of the deferred tax assets annually.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We have determined that it has no uncertain tax positions.

Stock-Based Compensation

We maintain an equity incentive plan to provide long-term incentives for employees and certain advisors and consultants. The plan allows for the issuance of nonstatutory and incentive stock options to employees and nonstatutory stock options to consultants and non-employee directors.

We measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize compensation cost over the requisite service period (typically the vesting period), which is generally four years. We account for equity instruments issued to non-employees based on the fair value of the award, which is periodically re-measured as they vest over the performance period. The related expense is recognized over the performance period.

We estimate the fair value of stock options using the Black-Scholes option pricing model. We use the value of our common stock to determine the fair value of restricted shares.

The Black-Scholes option pricing model requires the input of certain subjective assumptions, including (i) the expected share price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate, and (iv) the expected dividend yield. Due to the lack of a public market for the trading of our common stock and a lack of company-specific historical and implied volatility data, we have based the estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. Similarities with such companies include being at the stage of product development and focused on the medical technology industry. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. We use the simplified method, which is the average of the final vesting tranche date and the contractual term, to calculate the expected term for options granted to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. For options granted to non-employees, we utilize the contractual term of the arrangement as the basis for the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. We use an assumed dividend yield of zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

Valuation of Common Stock

Given the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate

 

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of the fair value of our common stock, including: our financial and operating history; recent equity financings and the related valuations; the estimated present value of our future cash flows; industry information such as market size and growth; market capitalization of comparable companies and the estimated value of transactions such companies have engaged in; the rights, preferences and privileges of our preferred stock relative to those of our common stock; equity market conditions affecting comparable public companies; the lack of marketability of our common stock; and macroeconomic conditions. In addition, our board of directors also considered valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Estimates of fair value are sensitive to such factors.

For valuations after the completion of this offering, our board of directors will determine the fair value of each share of common stock based on the closing price of our common stock as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

Leases

We determine if an arrangement is a lease at inception and includes operating leases on our consolidated balance sheets. The operating lease right-of-use, or ROU, asset is included within our other non-current assets, and lease liabilities are included in current or noncurrent liabilities on our consolidated balance sheets.

Operating lease ROU asset and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when we are reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Internal Controls and Procedures

In connection with the audits of our consolidated financial statements for the years ended December 31, 2017 and 2016, we concluded that there were material weaknesses in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses that we identified related to accounting and reporting for complex financial instruments and consolidation matters, which resulted in the restatement of our consolidated financial statements for the years ended December 31, 2016 and 2017 and for the six-months ended June 30, 2018 as further described in Note 10 to our consolidated financial statements included elsewhere in this prospectus. A lack of adequate staffing levels resulted in insufficient time spent on review and approval of certain information used to prepare our consolidated financial statements and the maintenance of effective controls to adequately monitor and review significant transactions for financial statement completeness and accuracy. These control deficiencies, although varying in severity, contributed to the material weaknesses in the control environment. If one or more material weaknesses persist or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

We are taking steps to remediate the material weakness in our internal control over financial reporting, including the implementation of new accounting processes and control procedures and the identification of gaps in our skills base and expertise of the staff required to meet the financial reporting requirements of a public company. We plan to hire additional accounting personnel who are certified public accountants, which will enable us better address the accounting for complex financial instruments or consolidation matters or other complex accounting matters that may occur in the future.

 

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We will be required, pursuant to Section 404(a) of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the year following our first annual report required to be filed with the SEC. This assessment will need to include disclosure of any material weaknesses identified by management over our internal control over financial reporting. However, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” if we take advantage of the exemptions contained in the JOBS Act.

We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing or any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are designed and operating effectively, which could result in a loss of investor confidence in the accuracy and completeness of our financial reports. This could cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC. See “Risk Factors—Risks Related to this Offering and Our Common Stock—We have identified material weaknesses in our internal control over financial reporting which resulted in the restatement of our consolidated financial statements. If we do not remediate the material weaknesses in our internal control over financial reporting, we may not be able to accurately report our financial results or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in the market price of our common stock.”

Recent Accounting Pronouncements

In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard is intended to clarify the principles of recognizing revenue and create common revenue recognition guidance between GAAP and International Financial Reporting Standards. The standard also requires expanded disclosures surrounding revenue recognition. During fiscal year 2016, the FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. We early adopted this guidance effective January 1, 2018 using the modified retrospective method. The adoption of this guidance did not have a material impact on our consolidated financial statements or related disclosures.

In February 2016, the FASB issued a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize assets and liabilities related to long-term leases that were classified as operating leases under previous guidance in its balance sheet. An asset would be recognized related to the right to use the underlying asset and a liability would be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. We adopted this guidance effective January 1, 2018. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. Adoption of the standard required us to restate certain previously reported results, including the recognition of additional ROU assets and lease liabilities for operating leases. We recorded an ROU asset of approximately $0.2 million, $0.1 million, and $0.1 million on our consolidated balance sheets at December 31, 2016, December 31, 2017, and June 30, 2018, respectively. We also recorded a lease liability of approximately $0.5 million, $0.3 million, and $0.2 million on our consolidated balance sheets at December 31, 2016, December 31, 2017, and June 30, 2018, respectively. The standard did not have an impact on our consolidated income statements.

In March 2016, the FASB issued authoritative guidance to simplify the accounting for certain aspects of share-based compensation. This guidance addresses the accounting for income tax effects at award settlement, the use of an expected forfeiture rate to estimate award cancellations prior to the vesting date and the presentation of excess tax benefits and shares surrendered for tax withholdings on the statement of cash flows. We adopted

 

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this guidance effective January 1, 2018. This guidance requires all income tax effects of awards (resulting from an increase or decrease in the fair value of an award from grant date to the vesting date) to be recognized in the income statement when the awards vest or are settled which is a change from previous guidance that required such activity to be recorded in paid-in capital within stockholders’ equity. Under this guidance, excess tax benefits are also excluded from the assumed proceeds available to repurchase shares in the computation of diluted earnings (loss) per share. This guidance also eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entities to account for forfeitures as they occur. We made an entity-wide accounting policy election to continue to estimate the number of awards that are expected to vest. The adoption of this guidance did not have a material impact on our consolidated financial statements or related disclosures.

In October 2016, the FASB issued authoritative guidance which amends the accounting for income taxes on intra-entity transfers of assets other than inventory. This guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The income tax consequences on intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. This guidance is effective for fiscal years beginning after December 15, 2017, which was our first quarter of fiscal year 2018, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is permitted at the beginning of a fiscal year. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements or related disclosures.

In May 2017, the FASB issued authoritative guidance that provides clarification on accounting for modifications in share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2017, which was our first quarter of fiscal year 2018, with early adoption permitted. The adoption of this guidance is not expected to have an impact on our consolidated financial statements or related disclosures unless there are modifications to our share-based payment awards.

In June 2018, the FASB issued authoritative guidance that expands guidance on accounting for share-based payment awards, which includes share-based payment transactions for acquiring goods and services from nonemployees and aligns the accounting for share-based payments for employees and non-employees. This guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The guidance should be applied to new awards granted after the date of adoption. The adoption of this guidance is not expected to have an impact on our consolidated financial statements or related disclosures unless there are modifications to our share-based payment awards.

JOBS Act

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include:

 

   

being permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

   

an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;

 

   

reduced disclosure about executive compensation arrangements in our periodic reports, registration statements and proxy statements; and

 

   

exemptions from the requirements to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

 

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We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non- convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different from what you might receive from other public reporting companies in which you hold equity interests.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.

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 $39.9 million as of June 30, 2018, which came from private placements of our preferred stock and debt financing arrangements. The goals of our investment policy are liquidity and capital preservation and we do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short term nature of our cash, cash equivalents and short-term investments. Additionally, the interest rate for borrowings under the Loan Agreement is variable. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.

Foreign Currency Exchange Rate Risk

As we expand internationally our results of operations and cash flows may become increasingly subject to fluctuations due to changes in foreign currency exchange rates. All of our revenue is denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables would not have been material for the periods presented. As our operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future.

Inflation Risk

Inflationary factors, such as increases in our cost of goods sold and selling and operating expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin and sales and marketing and operating expenses as a percentage of our revenue if the selling prices of our r-SNM System do not increase as much as or more than these increased costs.

 

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BUSINESS

Overview

We are a medical technology company focused on the design, development, and commercialization of innovative and minimally invasive sacral neuromodulation, or SNM, solutions. SNM therapy is primarily used to treat patients with overactive bladder, or OAB, fecal incontinence, or FI, and urinary retention, or UR. Our proprietary rechargeable SNM system, or our r-SNM System, delivers mild electrical pulses to the targeted sacral nerve in order to restore normal communication to and from the brain to reduce the symptoms of OAB, FI, and UR. We believe our proprietary r-SNM System offers significant advantages, including being the first and only rechargeable SNM system that is designed to be 60% smaller than existing technology and to last approximately 15 years. We currently have marketing approvals in Europe, Canada, and Australia for OAB, FI, and UR, and expect to submit a pre-market approva