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 10, 2021 . 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 dedicated to solving musculoskeletal disorders of the scropelvic anatomy. We have pioneered a proprietary minimally invasive surgical implant system, which we call iFuse, to fuse the sacroiliac joint and treat sacroiliac joint dysfunction, which often causes severe lower back pain. Since we introduced iFuse in 2009, as ofJune 30, 2021 , more than 55,000 procedures have been performed by over 2,400 surgeons in theU.S. and 36 other countries. Our iFuse Implant System includes a series of patented triangular titanium implants and the instruments we have developed to enable surgeons to perform the procedure. Surgeons place our implants across the sacroiliac joint, either from a lateral approach through the iliac bones into the sacrum, or from a posterior approach through the sacrum and into the iliac bones. Surgeons typically use three iFuse implants to fuse a sacroiliac joint in the lateral procedure, and one iFuse implant in each sacroiliac joint, typically alongside another device crossing the joint and joining to the spinal construct. Our iFuse implants have a triangular cross section that resists twisting or rotation of the implant within the bone in which it is implanted, regardless of the surgical approach and technique used to place the implants. The triangular shape of our implants helps stabilize the joint, and the implants' porous surface enables biologic fixation of the bone onto the implant, or bony ongrowth and ingrowth, that results in fusion. Each titanium iFuse implant has at least three times the strength of a typical eight-millimeter cannulated surgical screw. We hold issued patents on implants with cross-sections of many non-round shapes, including the triangular shape of the iFuse implant. We also hold issued patents for the method of placing those implants across the sacroiliac joint, as well as other parts of the spine and pelvis. We introduced our second-generation implant, the iFuse-3D, in 2017. This patented titanium implant combines the triangular cross-section of the iFuse implant with the proprietary 3D-printed porous surface and fenestrated design. This design also allows the surgeon to fill the implant with ground-up bone before implantation, which some surgeons believe accelerates bone through-growth and biological fixation. iFuse-3D implants have shown positive bony ingrowth, ongrowth and through-growth and in animal studies, whether or not ground-up bone is used. We hold issued patents on 3D-printed triangular implants with fenestrations, or holes, which allow bone to grow into and through the implants. InApril 2019 , we received clearance from theUnited States Food and Drug Administration , or FDA, to promote the use of our iFuse Implant System for fusion of the sacroiliac joint in conjunction with multi-level spinal fusion procedures to provide further stabilization and immobilization of the sacroiliac joint. For this indication, surgeons typically use the posterior approach, through the sacrum and into the iliac bones, which we call the Bedrock technique. We received CE marking and began marketing our iFuse Implant System for this indication and surgical technique 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. InFebruary 2021 , we received clearance from the FDA for iFuse-TORQ, a 3D-printed portfolio of threaded implants designed to meet the needs of pelvic trauma and minimally invasive sacroiliac joint fusion applications. In the pelvic trauma segment, we are targeting an unmet clinical needs for low energy pelvic ring fractures and chronic sacroiliac joint pain after high energy pelvic ring trauma. iFuse-TORQ also provides an opportunity for us to convert competitive screw business for minimally invasive sacroiliac joint fusions. 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 first follow-on public offering of our common stock. InOctober 2020 , we received a total of$71.6 million of net proceeds from our second follow-on offering of our common stock. 21 --------------------------------------------------------------------------------
Impact of the COVID-19 Pandemic
The global COVID-19 pandemic presents significant risks to us and has impacted, and continues to impact our business, operations, and financial results and condition, directly and indirectly, including, without limitation, impacts on the health of our management and employees; our manufacturing, distribution, marketing and sales operations; our research and development activities, including clinical activities; and customer and patient behaviors. Access to many hospitals and other customer sites continues to be impacted by prevalence of COVID-19, which negatively impacts our ability to promote the use of our products with physicians. Additionally, many hospitals and ambulatory surgery centers have in the past suspended and may suspend or continue to suspend in the future, many elective procedures, resulting in a reduced volume of procedures using our products. Our customer behavior is impacted by the prevalence of COVID-19 and changes in the infection rates in the locations where are customers reside. Quarantines, shelter-in-place and similar government orders have also impacted, and may continue to impact, our third-party manufacturers and suppliers, and could in turn adversely impact the availability or cost of materials, which could disrupt our supply chain. We took a variety of steps to address the impact of the COVID-19 pandemic, while attempting to minimize business disruption. Essential staff in operations and limited support functions worked from ourSanta Clara headquarters throughout the pandemic, following appropriate hygiene and social distancing protocols. To reduce risk to our employees and families from potential exposure to COVID-19, other staff in ourSanta Clara headquarters worked from home. We also restricted non-essential travel to protect the health and safety of our employees and customers. StartingJune 15, 2021 , we began the return to work for all headquarter personnel based upon new guidelines from theState of California . We are continuing to monitor the impact of the COVID-19 pandemic on our employees and customers and on the markets in which we operate, and will take further actions that are considered prudent to address the COVID-19 pandemic, while ensuring that we can support our customers and continue to develop our products.
The existence and further duration of the COVID-19 pandemic may also further exacerbate certain risks as described in "Item 1A - Risk Factors".
We cannot currently predict with certainty the full extent to which the COVID-19 pandemic will impact demand for our products in the future, or the impact of the COVID-19 pandemic on our supply chain or other aspects of our business, and such it could have a material adverse effect on our results of operations, financial condition and capital resources. 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 and training, engage key opinion leaders, and leverage broad coverage. 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. We limited new sales force hiring in the second and third quarter of 2020 due to uncertainty from the COVID-19 pandemic and focused on sales force productivity during this period, but resumed hiring of salespeople in the fourth quarter of 2020, expanded the sales team in the first half of 2021 and expect to further expand it in the second half of 2021. As ofJune 30, 2021 , ourU.S. sales force consisted of 74 territory sales managers and 59 clinical support specialists directly employed by us and 48 third-party distributors, compared to 62 territory sales managers and 54 clinical support specialists directly employed by us and 37 third-party distributors as ofJune 30, 2020 . As ofJune 30, 2021 , our international sales force consisted of 21 sales representatives directly employed by us and 30 third-party distributors, compared to 20 sales representatives directly employed by us and 31 third-party distributors as ofJune 30, 2020 . Increase surgeon activity and training Our medical affairs team works closely with our sales team to increase surgeon activity and training. Surgeon activity includes both the number of surgeons performing iFuse procedures as well as the number of procedures performed per surgeon. As ofJune 30, 2021 and 2020, in theU.S. , more than 1,700 surgeons and 1,500 surgeons, respectively, have been trained on our products and have treated at least one patient. Outside theU.S. , as ofJune 30, 2021 and 2020, more than 700 surgeons and 600 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. 22 -------------------------------------------------------------------------------- The COVID-19 outbreak challenged our traditional method of hands-on cadaveric and dry-lab training. Therefore, in addition to utilizing a virtual education series for surgeons and mid-level practitioners for training activities, we began using the SI-BONE SImulator; a portable, radiation-free, haptics and computer-based simulator for training purposes. Starting inJuly 2020 we began deploying the SImulators to cover all US regions and European subsidiaries and had 24 SImulators in our offices and the field as of the date of this report.
Launch new products
Our Bedrock technique is used in the treatment of adult spinal deformity. 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 utilizes our proprietary iFuse Implants, with one implant placed across 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 differs from our traditional iFuse procedure, whereby three iFuse Implants are placed across one sacroiliac joint via a lateral transarticular approach through the ilium and into the sacrum. The Bedrock technique is performed to increase stability at the base of a long construct. Biomechanical testing has shown that iFuse Implants placed in this position reduce sacroiliac joint motion by approximately 30% in conjunction with a long construct. 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. In addition, we received FDA clearance for our new trauma product, iFuse-TORQ, in the first quarter of 2021. iFuse-TORQ is a highly differentiated 3D-printed threaded implant for pelvic trauma and minimally invasive sacroiliac joint fusion applications. Relative to competitive trauma products, iFuse-TORQ is roughly 2 times stronger in bending and requires 10 times the rotational resistance, or torque, to insert due to its porosity and other design features. We believe that this rotational resistance gives surgeons confidence in the strength of mechanical fixation that iFuse-TORQ provides, and that the technological advancements incorporated into iFuse-TORQ represent a significant improvement compared to conventional trauma screws. Furthermore, iFuse-TORQ has a larger surface area for bone ingrowth than competitive trauma products and was specifically designed to allow for osteointegration. The addition of iFuse-TORQ to our product portfolio will allow us to serve a significant unmet need for patients with pelvic trauma, as well as sacroiliac joint dysfunction and degeneration.
Engage key opinion leaders
We conduct training courses in several academic centers in theU.S. and engage key opinion leaders to support our development efforts. Interest in the Bedrock technique among deformity surgeons, including many key opinion leaders, has provided our sales representatives with access to important academic medical centers in theU.S. This enables our representatives to train a broader group of spine surgeons, including residents and fellows at these centers, on both the Bedrock technique and minimally invasive sacroiliac fusion. To date, we have trained residents and fellows in over 130 academic programs in theU.S. , resulting in the training of more than 650 surgical residents and fellows sinceAugust 1, 2018 . Leverage broad coverage We made significant progress in the number of covered lives for minimally invasive sacroiliac fusion in theU.S. With recent coverage decisions by Anthem, Inc. and Centene Corporation, over 300 million people in theU.S. have access to minimally invasive SI joint fusion. As ofJuly 31, 2021 , more than 35 U.S. payors have issued positive coverage policies exclusive to iFuse for sacroiliac joint fusion because of the clinical evidence. Further, as ofJuly 31, 2021 , an additional 21 private payors cover iFuse and other products for sacroiliac joint fusion. Anthem adopted coverage guidelines that are exclusive to our iFuse triangular titanium implants for minimally invasive SI joint fusion which begin taking effect onJuly 30, 2021 . Anthem is the second largest private payor in theU.S. with over 40 million members. EffectiveJuly 3, 2021 , Centene established positive coverage for minimally invasive SI joint fusion. Centene is a major intermediary for both government-sponsored and privately insured health care programs and covers more than 25 million members. 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. 23 -------------------------------------------------------------------------------- Components of Results of Operations Revenue We generate most of 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 and price differences at different medical facilities, such as hospitals and ambulatory surgical centers, or ASCs. 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 has reduced our expected number of cases beginningmid-March 2020 . The largest impact was felt inApril 2020 , when 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 . Starting inMay 2020 , case volumes began to recover as hospitals and medical centers across theU.S. andEurope resumed performance of elective surgery procedures. In the third quarter of 2020, we saw a more normalized revenue growth resulting in a 26% increase compared to the prior year. In the fourth quarter of 2020, we again began to see the deferral of elective surgeries by hospitals, surgeons, and patients in theU.S. and acrossEurope , resulting in only a 12% increase in revenue compared to the prior year. We continued to experience deferral of elective surgeries in January andFebruary 2021 , with a recovery starting inMarch 2021 with the rescheduling of previously cancelled cases. In the first quarter of 2021, we experienced revenue growth of 22% compared to the prior year. We continued to see recovery in elective procedures in the second quarter of 2021, which resulted in revenue growth of 9% compared to the first quarter of 2021. In the second quarter of 2021, we continued to experience month-to-month revenue variability driven by deferral of cases due to surgeons and patients taking advantage of economic reopening to plan vacations earlier in the summer and timing of backlog replenishment due to delay in diagnosis and use of telehealth to manage patients during previous COVID-19 surges. We continue to monitor the impacts of COVID-19 to our product sales in theU.S. and international markets. Cost of Goods Sold, Gross Profit, and Gross Margin We utilize third-party manufacturers for production of our 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. 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 growth. During the second quarter of 2020, we took steps to reduce variable expenses that were ineffective and slowed down hiring due to the impact to our revenue from COVID-19. We returned to more normalized spending levels in the fourth quarter of 2020. We continue to monitor the rapidly evolving situation, but as operations return to normal levels, we intend to make investments to execute our strategic plans and operational initiatives.
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, clinical support specialists
and third-party distributors.
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Our sales and marketing spending reflected normal business activities into
mid-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 and third quarter of 2020. For example, we
guaranteed certain levels of incentive compensation to members of our field
sales organization 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.
In the fourth quarter of 2020, with returning revenue growth and raising of
additional equity, we returned to more normalized spending levels and resumed
hiring of salespeople and expect to continue to expand the sales team into 2021.
We plan to increase investments in our sales force, surgeon training and in
initiatives to increase patient awareness to capture future revenue growth
opportunities.
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 throughApril 2020 due to hospital postponement of trials as a result of the COVID-19 pandemic. However, most hospitals allowed the resumption of clinical trials starting inMay 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, insurance, compliance, and administrative matters. 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.
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,
2021 2020 2021 2020
Amount % Amount % Amount % Amount %
(in thousands, except for percentages)
Consolidated Statements of Operations Data:
Revenue $ 22,194 100 % $ 14,049 100 % $ 42,636 100 % $ 30,870 100 %
Cost of goods sold 2,375 11 % 2,117 15 % 4,575 11 % 4,049 13 %
Gross profit 19,819 89 % 11,932 85 % 38,061 89 % 26,821 87 %
Operating expenses:
Sales and marketing 23,084 104 % 15,755 112 % 44,006 103 % 35,036 113 %
Research and development 3,149 14 % 2,165 15 % 6,104 14 % 4,255 14 %
General and administrative 6,551 30 % 4,151 30 % 12,491 29 % 9,551 31 %
Total operating expenses 32,784 148 % 22,071 157 % 62,601 147 % 48,842 158 %
Loss from operations (12,965) (59) % (10,139) (72) % (24,540) (58) % (22,021) (71) %
Interest and other income (expense), net:
Interest income 46 - % 329 2 % 107 - % 827 3 %
Interest expense (1,075) (5) % (2,683) (19) % (2,139) (5) % (3,914) (13) %
Other income (expense), net 13 - % 21 - % 349 1 % (136) - %
Net loss $ (13,981) (64) % $ (12,472) (89) % $ (26,223) (62) % $ (25,244) (81) %
We derive the majority of our revenue from sales to customers in the
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Amount % Amount % Amount % Amount %
(in thousands except for percentages)
United States $ 20,230 91 % $ 13,221 94 % $ 39,000 91 % $ 28,518 92 %
International 1,964 9 % 828 6 % 3,636 9 % 2,352 8 %
$ 22,194 100 % $ 14,049 100 % $ 42,636 100 % $ 30,870 100 %
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Comparison of the Three Months Ended
Three Months Ended June 30,
2021 2020 $ Change % Change
(in thousands, except for percentages)
Revenue $ 22,194 $ 14,049 $ 8,145 58%
Cost of goods sold 2,375 2,117 258 12%
Gross profit $ 19,819 $ 11,932 $ 7,887 66%
Gross margin 89 % 85 %
Revenue. The increase in revenue for the three months ended June 30, 2021 as
compared to the three months ended June 30, 2020 comprised a $7.0 million
increase in our U.S. revenue and an increase of $1.1 million in our
international revenue. The increase in revenue is due to the increase in
domestic and international case volumes and increased active surgeons due to:
(a) improved U.S. reimbursement coverage and an increase in sales force, and (b)
the revenue of the prior year's corresponding quarter was significantly impacted
as the offices of many health care providers were closed and certain surgeries
and elective medical procedures were deferred, resulting from the social
restrictions and other precautionary measures taken in response to the COVID-19
pandemic.
Gross Profit and Gross Margin. Gross profit increased $7.9 million for the three
months ended June 30, 2021 as compared to the three months ended June 30, 2020 ,
mainly driven by higher revenue. The gross margin increased to 89% for the three
months ended June 30, 2021 as compared to 85% for the three months ended June
30, 2020 primarily due to certain period costs charged directly to cost of
operations of $0.2 million in the second quarter of 2020 as our operations were
running at suboptimal capacity due to the COVID-19 pandemic, as well as lower
inventory write-downs.
Operating Expenses:
Three Months Ended June 30,
2021 2020 $ Change % Change
(in thousands, except for percentages)
Sales and marketing $ 23,084 $ 15,755 $ 7,329 47 %
Research and development 3,149 2,165 984 45 %
General and administrative 6,551 4,151 2,400 58 %
Total operating expenses $ 32,784 $ 22,071 $ 10,713 49 %
Sales and Marketing Expenses. The increase in sales and marketing expenses for
the three months ended June 30, 2021 as compared to the three months ended June
30, 2020 was primarily due to increases in employee related costs, commissions
and stock-based compensation of $3.7 million driven by increased headcount and
higher revenues. As COVID-19 pandemic restrictions eased, we also experienced
higher levels of travel, marketing, training activities, facilities and other
related costs resulting in an increase of $3.6 million .
Research and Development Expenses. The increase in research and development
expenses for the three months ended June 30, 2021 compared to the three months
ended June 30, 2020 was primarily due to an increase of $0.5 million in employee
related costs and stock-based compensation driven by increased headcount and an
increase of $0.5 million in research and development expenses primarily due to
clinical study and research and development activities.
General and Administrative Expenses. The increase in general and administrative
expenses for the three months ended June 30, 2021 compared to the three months
ended June 30, 2020 was primarily due to an increase of $1.2 million in employee
related costs and stock-based compensation driven by increased headcount, a
reversal of $0.6 million accrued litigation expense in second quarter of 2020
following the final settlement of the TCPA class action lawsuit and increase of
$0.6 million in professional service fees and insurance costs as we continue to
grow our business.
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--------------------------------------------------------------------------------Interest and Other Income (Expense), Net:
Three Months Ended June 30,
2021 2020 $ Change % Change
(in thousands, except for percentages)
Interest income $ 46 $ 329 $ (283) (86) %
Interest expense (1,075) (2,683) 1,608 (60) %
Other income (expense), net 13 21 (8) (38) %
Total interest and other expense, net
$ 1,317 (56) % Interest Income. The decrease in interest income for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 was mainly due to lower interest earned on our investments in marketable securities, primarily as a result of lower interest rates. Interest Expense. The decrease in interest expense for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 was primarily due to the loss on extinguishment of the Pharmakon Term Loan of$1.5 million in the 2020 period, as well as lower interest associated with the Solar Term Loan compared to the Pharmakon Term Loan. Other Income (Expense), Net. Other income, net decreased for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 due to foreign currency fluctuations. Comparison of the Six Months EndedJune 30, 2021 andJune 30, 2020 Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin: Six Months Ended June 30, 2021 2020 $ Change % Change (in thousands, except for percentages) Revenue$ 42,636 $ 30,870 $ 11,766 38 % Cost of goods sold 4,575 4,049 526 13 % Gross profit$ 38,061 $ 26,821 $ 11,240 42 % Gross margin 89 % 87 % Revenue. The increase in revenue for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 comprised a$10.5 million increase in ourU.S. revenue and an increase of$1.3 million in our international revenue, mainly due to an increase in case volumes and the impact of the COVID-19 pandemic. In March andApril 2020 , we saw a substantial worldwide reduction in case volumes due to the deferral of elective surgeries. Although we saw cases cancelled in January andFebruary 2021 due to COVID-19, March case volumes benefited from an increase in rescheduled cases fromNovember 2020 toFebruary 2021 . We also attribute case growth to higher sales force productivity, higher numbers of sales personnel, and increased active surgeons due to improvedU.S. reimbursement coverage. Gross Profit and Gross Margin. Gross profit increased$11.2 million for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 , mainly driven by higher revenue. The gross margin increased to 89% for the six months endedJune 30, 2021 as compared to 87% for the six months endedJune 30, 2020 primarily due to certain period costs charged directly to cost of operations of$0.2 million in the second quarter of 2020 as our operations were running at suboptimal capacity due to the COVID-19 pandemic, as well as lower inventory write-downs. 28
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Operating Expenses:
Six Months Ended June 30,
2021 2020 $ Change % Change
(in thousands, except for percentages)
Sales and marketing $ 44,006 $ 35,036 $ 8,970 26 %
Research and development 6,104 4,255 1,849 43 %
General and administrative 12,491 9,551 2,940 31 %
Total operating expenses $ 62,601 $ 48,842 $ 13,759 28 %
Sales and Marketing Expenses. The increase in sales and marketing expenses for
the six months ended June 30, 2021 as compared to the six months ended June 30,
2020 was primarily due to increases in employee related costs, commissions and
stock-based compensation of $5.7 million driven by increased headcount and
higher revenues. As COVID-19 pandemic restrictions eased, we also experienced
higher levels of travel, marketing, training activities, facilities and other
related costs resulting in an increase of $3.2 million .
Research and Development Expenses. The increase in research and development
expenses for the six months ended June 30, 2021 compared to the six months ended
June 30, 2020 was primarily due to an increase of $1.0 million in employee
related costs and stock-based compensation driven by increased headcount and an
increase of $0.8 million in research and development expenses primarily due to
clinical study and research and development activities.
General and Administrative Expenses. The increase in general and administrative
expenses for the six months ended June 30, 2021 compared to the six months ended
June 30, 2020 was primarily due to an increase of $2.3 million in employee
related costs and stock-based compensation driven by increased headcount and an
increase of $0.8 million in professional service fees and insurance costs as we
continue to grow our business. The public offering costs of $0.2 million
associated with the sale of common stock by the selling shareholders in the
first quarter of 2020 did not recur in 2021
Interest and Other Income (Expense), Net:
Six Months Ended June 30,
2021 2020 $ Change % Change
(in thousands, except for percentages)
Interest income $ 107 $ 827 $ (720) (87) %
Interest expense (2,139) (3,914) 1,775 (45) %
Other income (expense), net 349 (136) 485 (357) %
Total interest and other expense, net
$ 1,540 (48) % Interest Income. The decrease in interest income for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 was mainly due to lower interest earned on our investments in marketable securities, primarily as a result of lower interest rates. Interest Expense. The decrease in interest expense for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 was primarily due to the loss on extinguishment of the Pharmakon Term Loan of$1.5 million during the 2021 period, as well as lower interest associated with the Solar Term Loan compared to the Pharmakon Term Loan. Other Income (Expense), Net. Other income, net decreased for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 due to foreign currency fluctuations. 29 -------------------------------------------------------------------------------- Liquidity and Capital Resources As ofJune 30, 2021 , we had cash and marketable securities of$176.6 million compared to$196.4 million as ofDecember 31, 2020 . We have financed our operations through our public offerings, debt financing arrangements, and the sale of our products. As ofJune 30, 2021 andDecember 31, 2020 , we had$39.6 million and$39.5 million , respectively, in outstanding debt. As ofJune 30, 2021 , we had an accumulated deficit of$265.5 million . During the six months endedJune 30, 2021 , we incurred a net loss of$26.2 million . During the years endedDecember 31, 2020 and 2019, we incurred a net loss of$43.7 million and$38.4 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 risks 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, 2021 andDecember 31, 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"). As ofJune 30, 2021 andDecember 31, 2020 , there was no amount available that could be borrowed under the credit facility. The Solar Term Loan bears interest at a rate per annum equal to 9.40% plus London Interbank Offered Rate ("LIBOR"), payable monthly in arrears. LIBOR means the greater of (i) 0.33% or (ii) 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. 30 -------------------------------------------------------------------------------- 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$100.0 million . Upon the occurrence of an event of default of certain customary covenants, including the minimum liquidity requirement, as specified in the Loan and Security Agreement, subject to specified cure periods, all amounts owed by us would begin to bear interest at a rate that is 5.0% above the rate effective immediately before the event of default and may be declared immediately due and payable by Solar. As ofJune 30, 2021 , we were in compliance with all debt covenants. Though there are uncertainties surrounding the impact of the COVID-19 pandemic that may impact our future revenue, we believe that we have sufficient cash and cash equivalents to meet the minimum liquidity requirements in the foreseeable succeeding periods. Contractual Obligations The following table summarizes our contractual obligations as ofJune 30, 2021 : Payments Due By Period Less than 1 More than 5 Total year 1-3 years 4-5 years years (in thousands) Principal obligations and final fee on long-term debt (1)$ 41,000 $ -$ 11,667 $ 29,333 $ - Interest obligations (2) 11,687 1,989 7,602 2,096 - Operating lease obligations 3,997 576 2,086 1,311 24 Purchase obligations 1,750 1,750 - - - Total$ 58,434 $ 4,315 $ 21,355 $ 32,740 $ 24 (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, 2021 .
This compared to
Cash Flows
The following table sets forth the primary sources and uses of cash for each of
the periods presented below:
Six Months Ended
2021 2020 $ Change
Net cash provided by (used in): (in thousands)
Operating activities $ (17,510) $ (17,228) $ (282)
Investing activities 9,449 10,060 (611)
Financing activities 2,817 62,896 (60,079)
Effects of exchange rate changes on cash and cash
equivalents (212) 6 (218)
Net increase (decrease) in cash and cash
equivalents $ (5,456) Cash Used in Operating Activities Net cash used in operating activities for the six months endedJune 30, 2021 of$17.5 million resulted from cash outflows due to a net loss of$26.2 million , adjusted for$10.2 million of non-cash items, partly offset by cash outflows from changes in operating assets and liabilities of$1.5 million . 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, partially offset by cash inflows from changes in operating assets and liabilities of$0.1 million . The decrease in net loss, net of non-cash items for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 was mainly due to the increase in revenue, partly offset by higher operating expenses from the growth of the business. Net cash outflows from changes in operating assets and liabilities for the six months endedJune 30, 2021 were primarily due to higher inventory due to the timing of inventory build-up related to our iFuse-TORQ implants, timing of vendor payments, partly offset by timing of collections of accounts receivable. 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. 31 -------------------------------------------------------------------------------- Cash Provided by Investing Activities Net cash provided by investing activities in the six months endedJune 30, 2021 was$9.4 million compared to$10.1 million in the six months endedJune 30, 2020 . Net cash provided by investing activities for the six months endedJune 30, 2021 consisted of maturities of our marketable securities, net of purchases of$13.6 million , partially offset by purchases of property and equipment of$4.2 million primarily related to individual components in instrument sets as we anticipate increased case volumes. Net cash provided by investing activities for the six months endedJune 30, 2020 consisted of maturities of our marketable securities, net of purchases of$11.3 million , partially offset by purchases of property and equipment of$1.3 million . Cash Provided by Financing Activities Cash provided by financing activities in the six months endedJune 30, 2021 was$2.8 million compared to$62.9 million in the six months endedJune 30, 2020 . Cash provided by financing activities in the six months endedJune 30, 2021 includes proceeds from the issuance of common stock under our stock-based incentive compensation plans of$2.8 million . This compares to the cash provided by financing activities for the six months endedJune 30, 2020 which consisted of proceeds of$63.0 million from our follow-on public offering during the first quarter of 2020, and 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 . 32 -------------------------------------------------------------------------------- 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 10, 2021 . 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. Beginning in 2022 we will no longer be an emerging growth company and therefore will no longer be able to avail ourselves of this exemption. Recent Accounting Pronouncements See Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for related discussions on updates on recently issued accounting pronouncements not yet effective. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a "smaller reporting company," we are not required to provide the information otherwise required by this Item. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities and Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. 33
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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 you that such improvements will be sufficient to provide us with effective internal control over financial reporting. As ofJune 30, 2021 , our management, with the participation of our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), have evaluated our disclosure controls and procedures (as defined in Rules 13a15(e) and 15d15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our CEO and our CFO have concluded that, as ofJune 30, 2021 , our disclosure controls and procedures were effective at the reasonable assurance level. Changes in internal control over financial reporting There were no changes in our internal control over financial reporting during the quarter endedJune 30, 2021 , 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 remotely during the quarter. Management took measures to ensure that our internal control over financial reporting remained unchanged during this period.
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