SI-BONE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements and management's discussion and analysis of our financial condition and results of operations in our Annual Report on Form 10-K filed with theSEC onMarch 11, 2020 . Some of the information contained in this discussion and analysis, or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the "Risk Factors" section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied, by these forward-looking statements. Overview We are a medical device company focused on the development of implantable devices used in the surgical treatment of the sacropelvic anatomy. We have pioneered a proprietary minimally invasive surgical implant system, which we call iFuse, to fuse the sacroiliac joint to treat sacroiliac joint dysfunction, which often causes severe lower back pain. Since we introduced iFuse in 2009, as ofJune 30, 2020 , more than 48,000 procedures have been performed by over 2,100 surgeons in theU.S. and 35 other countries. We introduced our second-generation implant, the iFuse-3D, in 2017. This patented titanium implant combines the triangular cross-section of our first-generation iFuse Implant with a proprietary 3D-printed porous surface and fenestrated design. InApril 2019 , we received clearance from theU.S. Food and Drug Administration ("FDA"), to promote the use of our iFuse system with the iFuse Bedrock technique for fusion of the sacroiliac joint in conjunction with multi-level spinal fusion procedures to provide further stabilization and immobilization of the sacroiliac joint. We received CE marking and began marketing our iFuse system for the same indication inEurope inDecember 2019 . InMarch 2020 , we received FDA 510(k) clearance for an expanded indication for the iFuse Implant System to support our trauma program. We market our products primarily with a direct sales force as well as a number of distributors in theU.S. , and with a combination of a direct sales force and distributors in other countries. InOctober 2018 , we completed our initial public offering ("IPO") resulting in net proceeds of$113.4 million after deducting underwriting discounts and commissions and offering expenses. In January andFebruary 2020 , we received a total of$63.0 million of net proceeds, after deducting the underwriting discounts, commissions and offering costs, from our follow-on public offering of our common stock. Impact of COVID-19 Pandemic The COVID-19 pandemic and the resulting economic downturn are affecting business conditions in our industry. The overall demand for our products decreased as a result of the pandemic, which impacted our operating results for the three and six months endedJune 30, 2020 . Many state and local governments in theU.S. and foreign governments issued orders that temporarily precluded elective procedures in order to conserve scarce health system resources in view of the pandemic. The decrease in hospital admission rates and elective surgeries decreases the demand for elective procedures using our iFuse implants. Prior to the spread of COVID-19, we experienced case growth trends consistent with those experienced in the fourth quarter of 2019. Beginning at the end ofFebruary 2020 , we began to see an impact on case volumes inNorthern Italy due to the spread of the virus in theLombardy region, the location of our operation in Gallarate,Italy . Overall, the disruption was not significant through the middle ofMarch 2020 , asItaly represents a small portion of our worldwide sales. Beginning inmid-March 2020 throughApril 2020 , we saw a substantial worldwide reduction in global case volumes due to deferral of elective surgeries as a result of the spread of COVID-19 in theU.S. and acrossEurope . In May andJune 2020 , case volumes began to recover as hospitals and medical centers across theU.S. andEurope resumed performance of elective surgery procedures. We have taken what we believe are all necessary precautions to safeguard our employees, patients, customers, and other stakeholders from COVID-19 pandemic. We are following theCenters for Disease Control and Prevention's guidance and local restrictions. We took actions to support patients, customers, and employees, while maintaining business continuity in response to the COVID-19 pandemic. The majority of our employees who are not related to manufacturing and order fulfillment are currently on a telecommunication work arrangement and have generally been able to successfully work remotely. We restricted non-essential travel to protect the health and safety of our employees, patients, and customers. We modified operations and clinical support starting inMarch 2020 , maintaining streamlined assembly, distribution and related processes in order to continue providing products to our customers. Specific protocols were designed and implemented to minimize contact time among employees working on site. Where healthcare operations were impacted, we supported healthcare providers via telephone and online technologies. Starting inMay 2020 , we began to return to more normalized operations and clinical support as local restrictions were reduced. We also continue to focus on increasing surgeon activity by utilizing a virtual education series for surgeons and mid-level practitioners to continue our training activities. 23 -------------------------------------------------------------------------------- During the quarter, our primary goal was to retain our employees and continue forward with major new product initiatives to protect the long-term prospects of our business. However, we curtailed operating expense in other areas due to limited visibility on the extent and duration of the impact from COVID-19. We took preemptive steps to manage spending, including implementing hiring restrictions, eliminating discretionary spending, reducing executive salaries, reducing capital expenditures, reducing non-essential marketing expenses, and delaying clinical research projects. We will continue to take a thoughtful approach to spending that will help align any return to investments in our business with a return to revenue growth, while managing our net loss and protecting our cash. The extent to which the COVID-19 pandemic impacts our operations is dependent on future developments, which are still highly uncertain and cannot be fully predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken to contain or treat the COVID-19 pandemic. In particular, the spread of the COVID-19 globally is adversely affecting global economies and financial markets which could materially and adversely impact our operations. The existence and further duration of the COVID-19 pandemic may also further exacerbate certain risks as described in "Item 1A - Risk Factors". Recently, certainU.S. states are experiencing increasing trends of COVID-19 infections and hospitalizations. This could result in governments reissuing orders that temporarily preclude elective procedures which may significantly reduce our future revenue and significantly impact our results of operations. We continue to monitor the rapidly evolving situation and guidance from authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these dynamic circumstances, there may be developments outside our control requiring us to adjust our operating plan. We intend to continue to execute on our strategic plans and operational initiatives during the COVID-19 outbreak. However, the uncertainties discussed above may result in delays or modifications to these plans and initiatives. Factors Affecting Results of Operations and Key Performance Indicators We monitor certain key performance indicators that we believe provide us and our investors indications of conditions that may affect results of our operations. Our revenue growth rate and commercial progress is impacted by, among other things, our key performance indicators, including our ability to leverage our sales force, increase surgeon activity, engage key opinion leaders and influence coverage and reimbursements.
Leverage our sales force
We have made significant investments in our sales force since our initial public offering in 2018. We have built a valuable sales team, and we believe they are the key to the recovery that follows the pandemic. As such, we have made it a top priority to support and retain our sales force through this challenging period. However, we have also limited new sales force hiring in the second quarter of 2020 given current uncertainties and are focusing on sales force productivity during this period. As ofJune 30, 2020 , ourU.S. sales force consisted of 62 territory sales managers and 54 clinical support specialists directly employed by us and 37 third-party distributors, compared to 50 territory sales managers and 37 clinical support specialists directly employed by us and 33 third-party distributors as ofJune 30, 2019 . As ofJune 30, 2020 , our international sales force consisted of 20 sales representatives directly employed by us and 31 third-party distributors, compared to 16 sales representatives directly employed by us and 28 third-party distributors as ofJune 30, 2019 . Increase surgeon activity We continue to focus on increasing surgeon activity. Surgeon activity includes both the number of surgeons performing iFuse procedures as well as the number of procedures performed per surgeon. As ofJune 30, 2020 and 2019, in theU.S. , more than 1,500 surgeons and 1,300 surgeons, respectively, have been trained on iFuse and have treated at least one patient. Outside theU.S. , as ofJune 30, 2020 and 2019, more than 600 surgeons and 500 surgeons, respectively, have been trained on iFuse and have treated at least one patient. We will continue to pursue the remainder of the approximately 7,500 target surgeons in theU.S. , as well as international surgeons for training in the future. However, this process has been and will continue to be hampered during the duration of the COVID-19 outbreak. We are utilizing a virtual education series for surgeons and mid-level practitioners to continue our training activities. As restrictions are lifted, we will focus on increasing the number of procedures performed by our active surgeons, converting recently trained surgeons to first case, and converting inactive surgeons to active surgeons. 24 --------------------------------------------------------------------------------
Engage key opinion leaders
We conduct training courses in several academic centers in theU.S. We are seeing interest from key opinion leaders at academic centers in our Bedrock technique. We introduced this technique inJune 2019 for use in the fusion of the sacroiliac joints in conjunction with a multi-segment spinal fusion, or long construct, procedure. The Bedrock technique is based on our proprietary implants, with one implant placed in each sacroiliac joint (for a total of two implants per case) using a posterior approach, through the sacrum, across the sacroiliac joint, and into the ilium. The Bedrock technique is in contrast to placement with our traditional iFuse procedure, whereby three iFuse implants are placed into one sacroiliac joint via a lateral approach through the ilium and into the sacrum. The Bedrock technique is used to increase stability at the base of a long construct, and biomechanical testing has shown iFuse implants in this position reduce sacroiliac joint motion by approximately 30% in conjunction with a long construct. Interest in the Bedrock technique has enabled our field sales representatives to access leading spine surgeons at important academic medical centers in theU.S. Our representatives are often then able to train a broader group of spine surgeons, including residents and fellows in training at the centers, on both the Bedrock technique and minimally invasive sacroiliac fusion. Since the launch of Bedrock, we have conducted more than 45 training courses at academic centers in theU.S. , and more than 200 surgical residents and fellows have been trained. We received CE mark clearance for the promotion of the Bedrock technique inEurope and we launched the promotion of this technique in select European markets. We believe that acceptance of the sacroiliac joint as a pain generator by leading spine surgeons may result in more widespread awareness of sacroiliac joint dysfunction and its role in causing certain types of chronic low back pain. Our ability to engage with key opinion leaders has been impeded by COVID-19. However, we are continuing our activities with key opinion leaders through our virtual education series.
Influence coverage and reimbursement
We made significant progress in both the number of covered lives and the
Medicare physician fee for surgeons performing minimally invasive sacroiliac
fusion in the
•Covered lives - As ofJune 30, 2020 , of theU.S. payors covering 297.8 million lives that reimburse for iFuse, 182.0 million lives are covered by private payors. This includes covered lives by Aetna, which adopted a new new coverage for minimally invasive arthrodesis of the sacroiliac joint for sacroiliac joint syndrome and sacroiliac joint pain, effectiveMay 28, 2020 . Aetna is the third largest commercial health plan in theU.S. with over 22 million members. Currently, the covered lives counts do not include Anthem, which announced inDecember 2019 that they would cover minimally invasive sacroiliac fusion procedures in the event of pelvic girdle trauma only. As ofJune 30, 2019 ,U.S. payors covering 266.0 million lives reimbursed for iFuse, of which 131.0 million were covered by private payors. We track the number ofU.S. covered lives, or individuals whose healthcare is paid for by a private commercial or governmental payor that routinely reimburses for minimally invasive sacroiliac fusion, as a proxy for availability of the procedure within theU.S. healthcare payment system. As ofJune 30, 2020 , 35 U.S. payors have issued positive coverage policies exclusive to iFuse for sacroiliac joint fusion because of the clinical evidence, compared to 33 exclusive coverage policies as ofJune 30, 2019 . These payors have based their exclusive coverage decisions on the quality of our data. Further, as ofJune 30, 2020 and 2019, there were 21 and 18, respectively,U.S. payors that are covering iFuse and other products for sacroiliac joint fusion. We believe that the full impact of each coverage decision grows over time as surgeons gain confidence that they will receive reimbursement for the majority of their diagnosed patients. •Surgeon payment -The Center for Medicare & Medicaid Services announced inNovember 2019 that theU.S. national average physician fee reimbursement for minimally invasive sacroiliac joint fusion increased from$720 , effectiveJanuary 1, 2019 to$915 , effectiveJanuary 1, 2020 . Many private payors set their payment amounts with reference to the Medicare payment, often approximately 10% to 33% higher than the Medicare payment for a procedure. We believe that expanded coverage for minimally invasive sacroiliac fusion and the increase in physician reimbursement for the procedure may enable surgeons to treat more patients diagnosed with sacroiliac joint dysfunction and degeneration with iFuse. 25 -------------------------------------------------------------------------------- Components of Results of Operations Revenue We generate our revenue from sales of iFuse. Revenue from sales of iFuse fluctuate based on volume of cases (procedures performed), discounts, mix of international andU.S. sales, and the number of implants used for a particular patient. Similar to other orthopedic companies, our case volume can vary from quarter to quarter due to a variety of factors including reimbursement, sales force changes, physician activities, and seasonality. In addition, our revenue is impacted by changes in average selling price as we respond to the competitive landscape. Further, revenue results can differ based upon the mix of business betweenU.S. and international sales and mix of our products either delivered at the point of implantation at the hospital or other medical facilities or delivered through distributors or to hospitals where the products were ordered in advance of the procedure. Our revenue from international sales is impacted by fluctuations in foreign currency exchange rates between theU.S. dollar (our reporting currency) and the local currency. The COVID-19 pandemic reduced our expected number of cases in the first and second quarters of 2020 due to local restrictions on elective surgeries. As the pandemic continued in theU.S. andEurope , it had a significant impact on our case volumes beginningmid-March 2020 . The largest impact was felt inApril 2020 , where revenue declined by 84% from the prior year. Given the situation, a considerable number of cases were deferred from mid-March through the end ofApril 2020 . InMay 2020 , case volumes began to recover as hospitals and medical centers across theU.S. andEurope resumed performance of elective surgery procedures, with revenue growth of 6% inMay 2020 compared to the prior year. Case volumes continued to improve inJune 2020 with revenue growth of 42% compared to the prior year. We believe a considerable number of cases performed inMay 2020 andJune 2020 were rescheduled surgeries cancelled in the second half of March through the end ofApril 2020 . As rescheduled procedures diminish, in addition to the heightened risk of further shutdowns in elective procedures and geographic uncertainty, we do not view second quarter 2020 revenue performance as an indicator of future growth. The COVID-19 pandemic significantly disrupted and may continue to disrupt capital markets as well as worldwide economies, leading to a prolonged global economic recession. This could pressure hospital spending, impacting our pricing. Further, the government restrictions to temporarily preclude elective procedures may continue to disrupt scheduled procedures. As a result of these factors, it has made it difficult for us to forecast future iFuse sales. Therefore, we believe that historical revenue trends are not a good indicator of future growth. Cost of Goods Sold, Gross Profit, and Gross Margin We utilize third-party manufacturers for production of iFuse implants and instrument sets. Cost of goods sold consists primarily of costs of the components of iFuse implants and instruments, instrument set depreciation, scrap and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs. Our cost of goods sold has historically increased as case levels increase. Our gross profit and gross margin are affected by factors impacting revenue and cost of goods sold. In addition, our gross margins are typically higher on products we sell directly as compared to products we sell through third-party distributors. As a result, changes in the mix of direct versus distributor sales can directly influence our gross margins. Our operations ran at suboptimal capacity as a result of decreased iFuse demand from worldwide restrictions on elective procedures. Accordingly, certain labor and overhead costs were expensed as incurred which impacted our gross profit and gross margin in the second quarter of 2020. We may experience similar issues in future quarters due to the COVID-19 pandemic. As such, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our overall cost of goods sold, gross profit, and gross margin in the near-term. Operating Expenses Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, sales commissions and other cash and stock-based compensation related expenses. We anticipate operating expenses will continue to increase to support our employees. However, we are currently limiting hiring of staff at this time due to the COVID-19 pandemic. In addition, we have taken steps to reduce variable expenses that are ineffective due to the COVID-19 pandemic. 26 --------------------------------------------------------------------------------
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of salaries, stock-based compensation expense, and other compensation related costs, for personnel employed in sales, marketing, medical affairs, reimbursement and professional education departments. In addition, our sales and marketing expenses include commissions and bonuses, generally based on a percentage of sales, to our senior sales management, direct territory sales managers, territory associate representatives and third-party distributors. Our sales and marketing spending reflected normal business activities intomid-March 2020 . Due to the COVID-19 pandemic, we focused on protecting key investments in our field force while curtailing most other areas of sales and marketing spend during the second quarter of 2020. For example, we guaranteed certain levels of incentive compensation to members of our field sales organization for the second quarter 2020 in order to retain these employees and partially mitigate the impact of the pandemic to their compensation. In contrast, we reduced certain other spending during the COVID-19 pandemic, such as travel and related expenses, regional surgeon training, trade shows, and discretionary marketing. We expect these expenditures will resume as the acuity of the pandemic recedes.
Research and Development Expenses
Our research and development expenses primarily consist of engineering, product development, clinical and regulatory expenses (including clinical study expenses), and consulting services, outside prototyping services, outside research activities, materials, depreciation, and other costs associated with development of our products. Research and development expenses also include related personnel compensation and stock-based compensation expense. We expense research and development costs as they are incurred. Research and development expenses for engineering projects fluctuate with project timing. Based upon our broader set of product development initiatives and the stage of the underlying projects, we expect to continue to make investments in research and development. Clinical study expenses declined during mid-March through April due to hospital postponement of trials as a result of the COVID-19 pandemic. However, most hospitals allowed the resumption of clinical trials starting in May andJune 2020 . As such, we anticipate that research and development expenses will continue to increase in the future.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries, stock-based compensation expense, and other costs for finance, accounting, legal, compliance, and administrative matters. We have taken measures to control discretionary items classified as general and administrative expenses, but expect our general and administrative expenses to return to normal levels as the acuity of the COVID-19 pandemic recedes. General and administrative activities that sustain our business and support our operations as a public company, include but are not limited to: expenses related to compliance with the rules and regulations of theSecurities and Exchange Commission and those of the Nasdaq Global Market on which our securities are traded; additional insurance expenses; investor relations activities; and other administrative and professional services. Interest Income Interest income is primarily related to our investments of excess cash in money market funds and marketable securities.
Interest Expense
Interest expense is primarily related to borrowings, amortization of debt issuance costs and accretion of final fee on our Solar Term Loan. Following the refinancing of our term loan, interest expense also includes the loss on debt extinguishment.
Other Income (Expense), Net
Other income (expense), net consists primarily of net foreign exchange gains and losses on foreign transactions.
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Results of Operations
We manage and operate as one reportable segment. The table below summarizes our
results of operations for the periods presented (percentages are amounts as a
percentage of revenue), which we derived from the accompanying condensed
consolidated financial statements:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Amount % Amount % Amount % Amount %
(in thousands, except for percentages)
Consolidated Statements of Operations Data:
Revenue $ 14,049 100 % $ 16,317 100 % $ 30,870 100 % $ 31,308 100 %
Cost of goods sold 2,117 15 % 1,588 10 % 4,049 13 % 3,114 10 %
Gross profit 11,932 85 % 14,729 90 % 26,821 87 % 28,194 90 %
Operating expenses:
Sales and marketing 15,755 112 % 16,727 103 % 35,036 113 % 32,542 104 %
Research and development 2,165 15 % 1,946 12 % 4,255 14 % 3,629 12 %
General and administrative 4,151 30 % 4,194 26 % 9,551 31 % 8,960 29 %
Total operating expenses 22,071 157 % 22,867 141 % 48,842 158 % 45,131 144 %
Loss from operations (10,139) (72) % (8,138) (51) % (22,021) (71) % (16,937) (54) %
Interest and other income (expense), net:
Interest income 329 2 % 695 4 % 827 3 % 1,439 5 %
Interest expense (2,683) (19) % (1,233) (8) % (3,914) (13) % (2,463) (8) %
Other income (expense), net 21 - % 22 - % (136) - % (38) - %
Net loss $ (12,472) (89) % $ (8,654) (55) % $ (25,244) (81) % $ (17,999) (57) %
We derive the majority of our revenue from sales to customers in the
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Amount % Amount % Amount % Amount %
(in thousands except for percentages)
United States $ 13,221 94 % $ 15,019 92 % $ 28,518 92 % $ 28,469 91 %
International 828 6 % 1,298 8 % 2,352 8 % 2,839 9 %
$ 14,049 100 % $ 16,317 100 % $ 30,870 100 % $ 31,308 100 %
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Comparison of the Three Months Ended
Three Months Ended June 30,
2020 2019 $ Change % Change
(in thousands, except for percentages)
Revenue $ 14,049 $ 16,317 $ (2,268) (14)%
Cost of goods sold 2,117 1,588 529 33%
Gross profit $ 11,932 $ 14,729 $ (2,797) (19)%
Gross margin 85 % 90 %
Revenue. The decrease in revenue for the three months ended June 30, 2020 as
compared to the three months ended June 30, 2019 comprised a decrease of $1.8
million in our U.S. revenue and a decrease of $0.5 million in our international
revenue. The decline in revenue is attributed to a reduction in U.S. and
international case volumes due to restrictions on elective surgeries put in
place by governments to address the COVID-19 pandemic.
Gross Profit and Gross Margin. Gross profit decreased $2.8 million for the three
months ended June 30, 2020 as compared to the three months ended June 30, 2019 ,
driven both by lower revenue and higher cost of goods sold. The gross margin
decreased to 85% for the three months ended June 30, 2020 as compared to 90% for
the three months ended June 30, 2019 primarily due to certain period costs
charged directly to cost of operations of $0.2 million and increases in
inventory write-downs of $0.2 million . Certain period costs were expensed as
incurred during the second quarter of 2020 because our operations ran at
suboptimal capacity due to lower case volumes as a result of the COVID-19
pandemic.
Operating Expenses:
Three Months Ended June 30,
2020 2019 $ Change % Change
(in thousands, except for percentages)
Sales and marketing $ 15,755 $ 16,727 $ (972) (6)%
Research and development 2,165 1,946 219 11%
General and administrative 4,151 4,194 (43) (1)%
Total operating expenses $ 22,071 $ 22,867 $ (796) (3)%
Sales and Marketing Expenses. The decrease in sales and marketing expenses for
the three months ended June 30, 2020 as compared to the three months ended June
30, 2019 was primarily due to decreases in travel and other sales and marketing
related expenses of $2.7 million as a result of the actions taken to curtail
discretionary spending in response to the COVID-19 pandemic. These decreases
were partly offset by an increase of $1.8 million in employee related costs and
stock-based compensation expense driven by increased headcount.
Research and Development Expenses. The increase in research and development
expenses for the three months ended June 30, 2020 compared to the three months
ended June 30, 2019 was primarily due to an increase of $0.4 million in employee
related costs and stock-based compensation expense driven by increased
headcount. The increase was partly offset by a decrease of $0.2 million mainly
due to the decline in clinical study activities while elective procedures were
restricted.
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2020 was relatively flat compared to the three
months ended June 30, 2019 . An increase of $0.8 million in employee related
costs and stock-based compensation expense driven by increased headcount was
offset by the reversal of accrued litigation expense of $0.6 million following
the final settlement of the TCPA class action lawsuit as well as decreases in
other general and administrative expenses of $0.2 million as a result of
curtailment of discretionary spending in response to the COVID-19 pandemic.
29
--------------------------------------------------------------------------------Interest and Other Income (Expense), Net:
Three Months Ended June 30,
2020 2019 $ Change % Change
(in thousands, except for percentages)
Interest income $ 329 $ 695 $ (366) (53)%
Interest expense (2,683) (1,233) (1,450) 118%
Other income, net 21 22 (1) (5)%
Total interest and other expense, net
$ (1,817) 352% Interest Income. The decrease in interest income for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 was mainly due to lower interest earned on our investments in marketable securities, primarily as a result of lower interest rates. Interest Expense. The increase in interest expense for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 was mainly due to the loss on extinguishment of the Pharmakon Term Loan of$1.5 million , partly offset by lower interest associated with the Solar Term Loan. Other Income, Net. Other income, net was relatively flat for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . Comparison of the Six Months EndedJune 30, 2020 andJune 30, 2019 Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin: Six Months Ended June 30, 2020 2019 $ Change % Change (in thousands, except for percentages) Revenue$ 30,870 $ 31,308 $ (438) (1)% Cost of goods sold 4,049 3,114 935 30% Gross profit$ 26,821 $ 28,194 $ (1,373) (5)% Gross margin 87 % 90 % Revenue. The decrease in revenue for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was primarily due to a decrease of$0.5 million in our international sales due to the effects of COVID-19 pandemic. OurU.S. revenue was flat for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . The increasing growth trend of ourU.S. case count prior to the impact of COVID-19 was offset by the decline inU.S. case volumes due to COVID-19. Prior to the impact of COVID-19, we experienced case growth trends consistent with those experienced in the fourth quarter of 2019. The case growth we experienced prior to impact of COVID-19 can be attributed to higher sales force productivity, higher numbers of sales personnel, and increased active surgeons due to improvingU.S. reimbursement coverage. Gross Profit and Gross Margin. Gross profit decreased$1.4 million for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 primarily driven by lower revenue and lower gross margin. The gross margin decreased to 87% for the six months endedJune 30, 2020 as compared to 90% for the six months endedJune 30, 2019 primarily due to certain period costs charged directly to cost of operations of$0.2 million and increases in inventory write-downs of$0.2 million . Certain period costs were expensed as incurred during the second quarter of 2020 because our operations ran at suboptimal capacity due to lower case volumes as a result of the COVID-19 pandemic. 30 --------------------------------------------------------------------------------
Operating Expenses:
Six Months Ended June 30,
2020 2019 $ Change % Change
(in thousands, except for percentages)
Sales and marketing $ 35,036 $ 32,542 $ 2,494 8%
Research and development 4,255 3,629 626 17%
General and administrative 9,551 8,960 591 7%
Total operating expenses $ 48,842 $ 45,131 $ 3,711 8%
Sales and Marketing Expenses. The increase in sales and marketing expenses for
the six months ended June 30, 2020 as compared to the six months ended June 30,
2019 was primarily due to an increase of $5.0 million in employee related costs
and stock-based compensation expense driven by increased headcount. The increase
was partly offset by decreases in travel and other sales and marketing related
expenses of $2.5 million as a result of the actions taken to curtail
discretionary spending in response to the COVID-19 pandemic.
Research and Development Expenses. The increase in research and development
expenses for the six months ended June 30, 2020 as compared to the six months
ended June 30, 2019 was primarily due to increases in employee related costs and
stock-based compensation expense of $0.8 million driven by increased headcount.
The increase was partly offset by a decrease of $0.2 million mainly due to the
decline in clinical study activities while elective procedures were restricted.
General and Administrative Expenses. The increase in general and administrative
expenses for the six months ended June 30, 2020 as compared to the six months
ended June 30, 2019 was primarily due to an increase of $1.1 million in employee
related costs and stock-based compensation expense driven by increased headcount
and $0.2 million public offering costs allocated to sale of common stock by
selling shareholders. The increase was partly offset by the reversal of accrued
litigation expense of $0.6 million in the second quarter of 2020 following the
final settlement of the TCPA class action lawsuit, and a decrease of $0.1
million in other general and administrative expenses as a result of curtailed
discretionary spending in response to the COVID-19 pandemic.
Interest and Other Income (Expense), Net:
Six Months Ended June 30,
2020 2019 $ Change % Change
(in thousands, except for percentages)
Interest income $ 827 $ 1,439 $ (612) (43)%
Interest expense (3,914) (2,463) (1,451) 59%
Other expense, net (136) (38) (98) 258%
Total interest and other expense, net
$ (2,161) 203% Interest Income. The decrease in interest income for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was mainly due to lower interest earned on our investments in marketable securities, primarily as a result of lower interest rates. Interest Expense. The increase in interest expense for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was mainly due to the loss on extinguishment of Pharmakon Term Loan of$1.5 million , partly offset by lower interest associated with the Solar Term Loan. Other Expense, Net. The increase in other expense, net, for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was mainly due to higher foreign exchange losses. 31 -------------------------------------------------------------------------------- Liquidity and Capital Resources As ofJune 30, 2020 , we had cash and marketable securities of$137.7 million compared to$93.1 million as ofDecember 31, 2019 . We have financed our operations through our public offerings, debt financing arrangements, and the sale of our products. As ofJune 30, 2020 andDecember 31, 2019 , we had$39.3 million and$39.2 million outstanding debt, respectively. As ofJune 30, 2020 , we had an accumulated deficit of$220.8 million . During the six months endedJune 30, 2020 , we incurred a net loss of$25.2 million . During the years endedDecember 31, 2019 and 2018, we incurred a net loss of$38.4 million and$17.5 million , respectively, and expect to incur additional losses in the future. We have not achieved positive cash flow from operations to date. Based upon our current operating plan, we believe that our existing cash and marketable securities will enable us to fund our operating expenses and capital expenditure requirements through at least the next 12 months. However, the economic impact of the duration and severity of the COVID-19 pandemic, and our responses thereto (including such actions we have taken or may take in the future as disclosed elsewhere in this Report) pose risk and uncertainties in our future available capital resources. Further, we may face challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to, but not limited to, the following as a result of the COVID-19 pandemic or otherwise: (a) decreases in sales of our products and the uncertainty of future revenues from new products; (b) changes we may make to the business that affect ongoing operating expenses; (c) changes we may make in our business strategy; (d) regulatory developments affecting our existing products; (e) changes we may make in our research and development spending plans; and (f) other items affecting our forecasted level of expenditures and use of cash resources. Term Loan The outstanding debt as ofJune 30, 2020 is related to a term loan pursuant to the Loan and Security Agreement datedMay 29, 2020 , entered into by us withSolar Capital Partners ("Solar"). Pursuant to the Loan and Security Agreement, Solar provided an aggregate principal amount of$40.0 million term loan to us (the "Solar Term Loan"). Prior to Solar Term Loan, our outstanding debt was related to a$40.0 million Term Loan withBiopharma Credit Investments IV Sub LP ("Pharmakon") entered inOctober 2017 (the "Pharmakon Term Loan"). In accordance with the Loan and Security Agreement, we paid in full and terminated the Pharmakon Term Loan, which we accounted for as debt extinguishment in accordance with the accounting standards. As ofJune 30, 2020 andDecember 31, 2019 , there was no amount available that could be borrowed under the credit facilities. The Pharmakon Term Loan included an interest-only period for 35 months throughSeptember 2020 and equal quarterly principal payments plus interest throughDecember 2022 . The Pharmakon Term Loan carried a fixed interest rate of 11.5% and allowed for early prepayment. The prepayment penalty was equal to the remaining interest due if prepaid within the first 30 months, a 2% penalty for months 31-48, and a 1% penalty for months 49-60. The Solar Term Loan bears interest at a rate per annum equal to 9.40% plus the greater of (i) the London Interbank Offered Rate ("LIBOR") or (ii) 0.33%, payable monthly in arrears. LIBOR means the greater of one-month LIBOR (or a comparable replacement rate to be determined by the collateral agent if the LIBOR is no longer available), which rate shall reset monthly. The Solar Term Loan matures in 60 months onJune 1, 2025 ("Maturity Date"), with an interest-only period of 36 months throughJune 2023 , and then repaid in equal monthly principal payments plus interest through maturity date. Pursuant to the Loan and Security Agreement, we may voluntarily prepay the Solar Term Loan, in full or in part, in increments of$10.0 million , for a prepayment premium in an amount equal to 3.0% of the principal if prepaid in year one, 1.25% of the principal if prepaid in year two, and 0.50% of the principal if prepaid if prepaid in year three or later. The prepayment premium will be waived if we voluntarily prepay and refinance the outstanding balance with Solar. The Solar Term Loan is secured by substantially all of our assets. We are also obligated to pay a final fee equal to$1.0 million or 2.5% of the aggregate principal amount of the Solar Term Loan. This final fee shall be due and payable on the earliest of (i) the maturity date, (ii) the acceleration of the loan balance, or (iii) the full prepayment, refinancing, substitution or replacement of Solar Term Loan. The final fee was included within the long-term borrowings and is accreted to interest expense using straight-line method over the life of the term loan. InJuly 2017 , the head of theUnited Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. In addition, theU.S. Federal Reserve , in conjunction with the Alternative Reference Rates Committee, a steering committee composed of largeU.S. financial institutions, is considering replacingU.S. dollar LIBOR with the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements, backed byTreasury securities. Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index Average, an alternative reference rate that is based on transactions, it is unknown whether these alternative reference rates will attain market acceptance as replacements for LIBOR. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any replacement of the LIBOR could have on our business and financial condition cannot yet be determined. 32 -------------------------------------------------------------------------------- Subject to other customary covenants set forth in the Loan and Security Agreement, we are required to maintain unrestricted cash and cash equivalents based on the trailing 12-month net products revenues tested on a monthly basis as follows: (a)$15.0 million if net product revenue is less than$75.0 million ; or (b)$7.5 million if net product revenue is greater than or equal to$75.0 million , but less than$100.0 million (the "minimum liquidity requirement"). We are not subject to minimum liquidity requirement when trailing twelve-month net product revenues exceed$100.0 million . Upon the occurrence of an event of default of certain customary covenants, including the minimum liquidity requirement, as specified in the Loan and Security Agreement, subject to specified cure periods, all amounts owed by us would begin to bear interest at a rate that is 5.0% above the rate effective immediately before the event of default and may be declared immediately due and payable by Solar. As ofJune 30, 2020 , we were in compliance with all debt covenants. Though there are uncertainties surrounding the impact of the COVID-19 pandemic that may impact our future revenue, we believe that we have sufficient cash and cash equivalents to meet the minimum liquidity requirements in the foreseeable succeeding periods. Contractual Obligations The following table summarizes our contractual obligations as ofJune 30, 2020 : Payments Due By Period Less than 1 More than 5 Total year 1-3 years 4-5 years years (in thousands) Principal obligations and final fee on long-term debt (1)$ 41,000 $ - $ -$ 31,667 $ 9,333 Interest obligations (2) 15,990 2,346 7,892 5,550 202 Operating lease obligations 4,648 562 1,985 1,738 363 Purchase obligations 288 288 - - - Total$ 61,926 $ 3,196 $ 9,877 $ 38,955 $ 9,898 (1)Represents the principal obligations and the final fee at maturities of our Solar Term Loan. (2)Represents the future interest obligations on our Solar Term Loan estimated using the fixed interest rate of 9.40% plus LIBOR held constant as ofJune 30, 2020 .
This compared to
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Cash Flows
The following table sets forth the primary sources and uses of cash for each of
the periods presented below:
Six Months Ended June 30,
2020 2019 $ Change
Net cash provided by (used in): (in thousands)
Operating activities $ (17,228) $ (15,474) $ (1,754)
Investing activities 10,060 191 9,869
Financing activities 62,896 1,663 61,233
Effects of exchange rate changes on cash and cash
equivalents 6 (4) 10
Net increase (decrease) in cash and cash
equivalents $ 55,734 Cash Used in Operating Activities Net cash used in operating activities for the six months endedJune 30, 2020 of$17.2 million resulted from cash outflows due to a net loss of$25.2 million , adjusted for$7.9 million of non-cash items, partly offset by cash inflows from changes in operating assets and liabilities of$0.1 million . Net cash used in operating activities for the six months endedJune 30, 2019 of$15.5 million resulted from cash outflows due to a net loss of$18.0 million , adjusted for$3.4 million of non-cash items, and cash outflows from changes in operating assets and liabilities of$0.8 million . The increase in net loss, net of non-cash items for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was mainly due to lower revenue due to the effects of COVID-19 and higher operating expenses from the growth of the business, partly offset by reduction of certain expenses as a result of the actions taken to curtail discretionary spending in response to COVID-19. Cash inflows from changes in operating assets and liabilities for the six months endedJune 30, 2020 were primarily due to lower accounts receivable balance resulting from lower revenue and timing of collections and lower inventory mainly due to the timing of inventory build-up, partly offset by cash outflows due to decreases in operating liabilities resulting from timing of payments. Cash outflows from changes in operating assets and liabilities for the six months endedJune 30, 2019 were primarily due to increases in inventory and accounts receivable from increased case volumes, partly offset by increased operating liabilities due to timing of payments. Cash Provided by Investing Activities Net cash provided by investing activities in the six months endedJune 30, 2020 was$10.1 million compared to$0.2 million in the six months endedJune 30, 2019 . Net cash provided by investing activities for the six months endedJune 30, 2020 consisted of maturities and sales of our marketable securities, net of purchases of$11.3 million , partially offset by purchases of property and equipment of$1.3 million . Net cash provided by investing activities for the six months endedJune 30, 2019 consisted of maturities of our marketable securities, net of purchases of$1.1 million , partially offset by purchases of property and equipment of$0.9 million . Cash Provided by Financing Activities Cash provided by financing activities in the six months endedJune 30, 2020 was$62.9 million compared to$1.7 million in the six months endedJune 30, 2019 . The difference was primarily due to the receipt of the proceeds, net of underwriting discounts, commissions and offering costs of$63.0 million from our follow-on public offering during the first quarter of 2020. Cash provided by financing activities in the six months endedJune 30, 2020 also include proceeds from the issuance of common stock under our stock-based incentive compensation plans of$1.4 million , offset by payments associated with refinancing of our debt of$1.4 million . This compares to the cash provided by financing activities for the six months endedJune 30, 2019 which consisted of proceeds from the issuance of common stock under our stock-based incentive compensation plans of$1.8 million , partly offset by payments of additional IPO related costs of$0.2 million . 34 -------------------------------------------------------------------------------- Critical Accounting Policies, Significant Judgments, and Use of Estimates This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies and estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K filed with theSEC onMarch 11, 2020 . There had been no material changes to these accounting policies. See Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for related discussions on updates on recently issued accounting pronouncements. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Seasonality Our business is affected by seasonal variations. For instance, we have historically experienced lower sales in the summer months and higher sales in the last quarter of the fiscal year. However, taken as a whole, seasonality does not have a material impact on our financial results. JOBS Act Accounting Election InApril 2012 , the JOBS Act was enacted. Section 107(b) of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, are not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Recent Accounting Pronouncements See Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for related discussions on updates on recently issued accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a "smaller reporting company," we are not required to provide the information required by this Item. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission , and that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and Chief Operating Officer and Chief Financial Officer ("COO/CFO"), as appropriate, to allow timely decisions regarding required disclosure. 35
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The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting. Management, with the participation of the CEO and COO/CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this report. Based on this evaluation, our CEO and COO/CFO have concluded that, as ofJune 30, 2020 , our disclosure controls and procedures were effective at the reasonable assurances level. Changes in internal control over financial reporting There were no changes in our internal control over financial reporting during the quarter endedJune 30, 2020 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In response to the COVID-19 pandemic, certain of our employees still continued to work from home during the quarter. Management took measures to ensure that our internal control over financial reporting remained unchanged during this period.
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